HSBC to pay record $1.9 billion settlement

U.S. authorities announced a $1.9 billion fine against British bank HSBC Holdings Tuesday for failed antimoney-laundering controls they said allowed drug proceeds and transactions from sanctioned nations to flow through the U.S. financial system.

But U.S. officials found themselves defending an agreement that didn't charge the institution or any of its executives with criminal conduct.

At a midday news conference at the U.S. attorney's office in Brooklyn, N.Y., federal law enforcement and Treasury authorities, banking regulators and local prosecutors sought to walk a delicate line between describing conduct at the bank that amounted to a "stunning, stunning failure of oversight and worse" while at the same time maintaining that an indictment of the bank would bring too much collateral damage on its employees and counterparties and that there were no executives involved subject to prosecution.

The conduct involved the laundering of at least $881 million in drug proceeds through the U.S. financial system for drug traffickers including Mexico's Sinaloa Cartel and Colombia's Norte del Valle Cartel, as well as the processing of $660 million for banks and other entities in sanctioned nations blacklisted from the U.S. financial system, including Iran, Cuba, Sudan, Libya and Burma.

Authorities said the bank failed to maintain adequate monitoring policies and turned a willful blind eye to the drug money, while actively devising ways to handle sanctioned-nation transactions without setting off alerts.

"I think it is a disservice to suggest anyone is getting a pass here," said Lanny Breuer, assistant attorney general of the U.S. Justice Department's criminal division. "This is a fair, appropriate and very real and thorough resolution."

The Justice Department said HSBC's U.S. bank subsidiary failed to monitor over $670 billion in wire transfers and over $9.4 billion in purchases of physical U.S. dollars from its Mexico unit. HSBC Mexico's lax antimoney-laundering controls won it "the ringing endorsement of money launderers as a place to launder money," U.S. Attorney Loretta Lynch said during the announcement.

Additionally, HSBC omitted names from U.S. dollar-payment messages sent to HSBC Bank USA and other financial institutions located in the U.S. that would have raised red flags about their country of origin, the department said.

In a prepared statement released early Tuesday in London, bank Chief Executive Stuart Gulliver said: "We accept responsibility for our past mistakes." The bank said it has taken action to cure defects in its financial controls, including installing new leadership teams, as well as assisting law enforcement investigations.

The $1.9 billion settlement, which officials hailed as the largest penalty ever under the Bank Secrecy Act, amounts to a fraction of the $138.3 billion in cash on the bank's balance sheet as of September and the $16.9 billion it earned in 2011 net income.

The agreement between the U.S. and HSBC also represents the third time since 2003 the bank has agreed to U.S. orders to cease lax conduct and correct failed policies.

Under the latest agreement, the U.S. and HSBC agreed to defer prosecution in exchange for the fine and the bank's acknowledgment it violated four U.S. laws designed to protect the U.S. financial system, including the Bank Secrecy Act and the Trading with the Enemy Act. The settlement price consists of a forfeiture to the Justice Department of nearly $1.3 billion equal to the amount of illicit transactions, and $665 million in fines to bank regulators and the Federal Reserve.

The agreement also resolves investigations and regulatory actions by all other U.S. agencies that were looking into the matter, including the Treasury Department and the Manhattan district attorney's office. The bank also said it expects to shortly resolve an enforcement action by the U.K. Financial Services Authority.

(Published by WSJ - December 11, 2012)