July 17, 2012 /By EVAN PEREZ and DEVLIN BARRETT/ WSJ
WASHINGTON—Executives of HSBC Holdings PLC ignored warnings for years that the bank's far-flung operations were being used by money-launderers and potential terrorist financiers, according to a Senate investigation.
The findings will be aired Tuesday when senior HSBC officials are scheduled to testify before a Senate subcommittee looking into the matter. In a nearly 400-page report, the subcommittee detailed a regulatory culture at the bank where some officials allegedly engaged in risky behavior in pursuit of profits.
The report said that HSBC did little to clean up operations that should have raised concerns, including its Mexico bank. That bank had a branch in the Cayman Islands with no offices or staff but held 50,000 client accounts and $2.1 billion in 2008, the report said.
The Mexico operation, Senate investigators allege in the report, should have been the global bank's most worrisome in part because it continued doing business with money-changing businesses known as casas de cambio. These businesses were cited by U.S. authorities to be fronts for drug-cartel money laundering, and HSBC conducted business with them years after other big banks cut them off.
HSBC Mexico's top antimoney-laundering official, as he prepared to leave the bank, told an official from HSBC's London compliance office in 2008 that he believed there was "a culture [of] pursuing profits and targets at all costs" and that it "was only a matter of time before the bank faced criminal sanctions," according to the report.
The money-laundering allegations also are at the center of an continuing Justice Department investigation. As previously reported, the bank and U.S. authorities have accelerated talks aimed at a settlement in the matter, according to people familiar with that probe.
Sen. Carl Levin (D., Mich.), whose Senate Permanent Subcommittee on Investigations conducted the probe, said the HSBC culture on regulatory compliance was "pervasively polluted for a long time."
The bank issued a statement Monday saying that HSBC plans to apologize for failing to meeting regulatory and customer standards in the past. HSBC said it recognizes "that our controls could and should have been stronger and more effective in order to spot and deal with unacceptable behavior."
The report also said that key data were stripped from transactions with Iran, North Korea and Sudan to evade U.S. sanctions and U.S. regulations. HSBC executives sought to stop doing business with a Saudi private bank over terrorism-financing concerns, according to Senate investigators, but then reversed themselves.
The Mexico bank, which HSBC acquired in 2002, garners most of the attention of Senate investigators in the report, which was released ahead of the hearing.
The Mexico unit shipped bank notes—up to $4 billion in the peak year of 2008—by car or aircraft to the HSBC bank in the U.S., the Senate report said. U.S. authorities have flagged such volume of bulk cash shipments for scrutiny, in part because drug cartels are believed to use such flows of money to hide illicit proceeds.
Inside HSBC, some of the bank's compliance experts raised alarms about the potential consequences of doing business with risky clients, according to the report. The bank's antimoney-laundering committee, which was supposed to ensure the bank ended business with suspicious clients, instead "rubber stamped" efforts by the Mexico bank to keep client accounts open, the report said.
"What is this, the School of Low Expectations Banking?" one HSBC Latin America compliance official wrote in a blistering complaint about the practices at HSBC Mexico, according to the report. The antimoney-laundering committee "can't keep rubber-stamping unacceptable risks because someone on the business side writes a nice letter.…We have seen this movie before, and it ends badly."
Senate investigators said that despite being one of the world's largest banks with a sprawling operation over 80 countries, HSBC dedicated minimal resources to compliance efforts.
Fewer than 200 employees were charged with monitoring and investigating suspicious transactions that set off internal alerts, Senate investigators said, at one time leading to a backlog of 17,000 transactions awaiting review. One HSBC U.S. compliance official complained at a board meeting about inadequate resources and was fired soon after, according to the report.
HSBC, in its response to the report, highlighted changes it has made recently to its corporate structure to make it easier to control its many foreign affiliates and to its compliance regime. Under new rules ordered in April, the bank is "enforcing a single standard globally determined by the highest regulatory standard we must apply anywhere," HSBC said in its statement.
Beyond Mexico, Senate investigators faulted HSBC for engaging in risky lines of business that took advantage of the bank's U.S. operations and access to U.S. dollars.
Over a decade, HSBC opened more than 2,000 accounts for customers in the name of so-called bearer share corporations, which allows secrecy by assigning ownership to the person with physical possession of the shares, the report said. Often the actual owner of the accounts was unknown.
The accounts in HSBC's Miami office alone were worth an estimated $2.6 billion, congressional investigators found. Multiple internal audits and regulatory examinations faulted the accounts as risky and urged the bank to either take custody of the shares or require corporations to register the shares in the names of the shareholders.
The report also raised alarms about HSBC's business in the Middle East, and said its business relationships with three banks in particular raised "troubling questions'' about the company's vigilance against terrorist financing.
In separate instances, HSBC and officials in its U.S. bank were informed of concerns that one bank official had been named in a list of alleged al Qaeda financial benefactors; that another bank had provided an account to a terrorist organization; and that a third bank was partially owned by terrorist organizations, according to the report.
"Another striking feature of these accounts is the fact that a decision by one HSBC affiliate to terminate a relationship with a bank due to terrorist financing concerns did not always lead other HSBC affiliates to follow suit,'' the report said. When a compliance officer declined to approve one of the accounts, her bosses replaced her, it said.