HSBC’s Multiplying Legal Issues

HSBC’s Multiplying Legal Issues

It went from bad to worse for HSBC last week. The bank added $ 800 million to its reserves to help address potential money-laundering charges. And it is also confronting more trouble after a whistle-blower pointed to questionable accounts at its subsidiary in Jersey, a tax haven.

The issue now is whether HSBC can find a way to settle all the investigations it faces at a reasonable price. That is very much an open question, as regulators in the United States and Britain take a hard look at the bank’s internal compliance program.

In August, HSBC was the subject of an extensive report by the Senate Permanent Subcommittee on Investigations about money laundering problems at its Mexican subsidiary. That case included accusations that HSBC allowed multibillion-dollar bulk cash transactions that might have aided drug cartels. The bank was pushing for a quick resolution of a Justice Department inquiry of those transactions, and set aside $ 700 million to pay any fines and civil penalties.
But HSBC warned that any punishment might be “substantially higher,” and there were already indications that it had not set aside enough money.

In its most recent public filing, the bank disclosed that it had added the $ 800 million to help address the money laundering case as well as inquiries about its compliance with rules that limit dealings with Iran. The move to more than double its reserve position may signal that HSBC has found additional problems in its operations – or had them pointed out by government investigators.

As it did in August, HSBC warned last week that the potential penalties it faces might be substantially greater than its current reserves of $ 1.5 billion. A fine of that size would rank among the heaviest ever paid by a financial institution for violations of banking laws.

Further adding to its woes, a whistle-blower provided to Her Majesty’s Revenue and Customs, Britain’s tax authority, information about more than 8,000 accounts held at HSBC’s subsidiary in Jersey, a well-known island tax haven. According to a report in The Daily Telegraph, the accounts contain about £669 million and several account holders have criminal connections.

While a majority of the accounts are held by British citizens, nearly 4,000 belong to citizens of other countries. One report indicates more than 100 Americans held accounts, so there is a good chance of a new investigation in the United States looking into what HSBC might have done to help shield clients’ assets from tax authorities.

More important, if there is evidence that HSBC permitted its Jersey operation to be used for money laundering, then its problems with the Justice Department will increase substantially.

In describing what happened at its Mexican subsidiary, a bank spokesman said it was “not about HSBC complicity in money laundering. Rather, it’s about lax compliance standards that fell short of regulators’ expectations and our expectations.” The bank says it has cleaned up its Mexican operations and plans to spend more on compliance efforts to prevent money laundering.

But the case involving the Jersey accounts may lead prosecutors to wonder whether HSBC has learned any lessons from its problems elsewhere. If significant money laundering is uncovered in the Jersey operation, the bank’s resolve to prevent such violations will be called into question.
At a minimum, the revelation about the Jersey accounts will slow efforts to settle the money-laundering investigations, while ratcheting up the costs that will be imposed on the bank once it does negotiate a resolution.

Federal prosecutors will need to review the information gathered by British tax authorities to determine whether HSBC’s conduct might have violated United States laws.

That inquiry alone could take months, and the Justice Department is unlikely to conclude the Mexican money laundering investigation until it is reasonably certain it has a complete picture of HSBC’s conduct.

Of greater concern is whether prosecutors can trust HSBC’s promises of future compliance. The bank will probably be required to conduct a broad review of its global operations before prosecutors would be willing to enter into a settlement. The last thing the Justice Department wants is to learn about other problems after it agrees to resolve the case.

One likely cost of any settlement — beyond the significant penalties already anticipated — will be some form of corporate monitor to ensure HSBC has adequate compliance measures in place. Prosecutors will want evidence that HSBC is putting mechanisms in place to compel the bank to follow rules against money laundering, regardless of the cost

In an earlier article about the money-laundering investigation, I noted that the bank’s size meant “the cost of an outside monitor for HSBC would be significant if the government wants someone to keep an eye on the bank’s internal controls.”

HSBC may hope the $ 1.5 billion it has set aside is enough to resolve the money-laundering case, but at this point that sum looks like it will be just the beginning of the financial drain on the bank.


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