US Senate report implicates HSBC involvement in financial crimes

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A man walks past a logo of HSBC Holdings PLC at the bank’s headquarter in Hong Kong. Photo – Vincent Yu/AP

A scathing US Senate report revealed on Tuesday that a ‘pervasively polluted’ culture at HSBC Holdings Plc allowed ‘dodgy clients’ from the world’s most dangerous and secretive corners including Iran, Mexico, the Cayman Islands, Saudi Arabia and Syria, to route shadowy funds.

The British bank, which also calls itself the world’s local bank, has been in the spotlight for nearly a decade due to some of its banking activities. The US Senate probe revealed deep seated problems that engulf both the bank and the Office of the Comptroller of the Currency, a top US bank regulator, accused by the report of failing to properly monitor HSBC.

“The culture at HSBC was pervasively polluted for a long time,” said Senator Carl Levin, chairman of the US Senate Permanent Subcommittee on Investigations, a Congressional watchdog panel.

The report comes at a troubling time for a banking industry reeling from a multi-country probe into the manipulation of global benchmark rates. Last month, rival British bank Barclays Plc agreed to pay a $453 million fine to settle a US-British probe into the rigging of the benchmark interest rate known as the London interbank offered rate, or Libor.

The Senate probe provides a rare look at how HSBC responded when confronted with numerous cases of suspect money flows.

The report was released late on Monday and caps a year-long inquiry that included a review of 1.4 million documents and interviews with 75 HSBC officials and bank regulators. HSBC and OCC officials are scheduled to testify at a hearing on Tuesday.

The US Senate’s committee is expected to grill bank and the regulator during the hearing about how the abuses were allowed to continue, even after the OCC took regulatory action against HSBC in 2010. A Reuters investigative report revealed persistent lapses in the bank’s anti-money laundering compliance since 2010.

In an emailed statement, HSBC said the Senate report had provided “important lessons for the whole industry in seeking to prevent illicit actors entering the global financial system”.

The London-based bank said it is spending more money on compliance and has become more coordinated in policing high-risk transactions.

The report also lambasted the OCC for failing to crack down on the bank despite multiple red flags and allowing money laundering issues “to accumulate into a massive problem”.

Iran ‘Stripping’ Affair

The US Senate findings tracked some of the money coming from Iran that was moved through HSBC, a move which violates US prohibitions on transactions linked to ‘rogue states’.

HSBC affiliates used a method called “stripping”, where references to Iran are deleted from records, to conceal the transactions. The bank’s affiliates disclosed the transactions as transfers between banks without revealing the tie to Iran in what the Senate report called a “cover payment”.

“HSBC failed to take decisive action to confront these affiliates and put an end to the conduct,” the report said.

The findings said, between 2001 and 2007, more than 28,000 transactions were identified by an outside auditor for HSBC that potentially violated laws that prohibit transactions with sanctioned countries. The report said that 25,000 of those involved Iran with a smaller number required additional analysis to determine if violations of US regulations had occurred.

“At the heart of HSBC’s failings was the fact that it served as a hub for smaller financial firms needing access to the global banking system,” the report said.

HSBC issued a statement on Tuesday saying it will apologise for the mistakes committed and will tell the US Senate it sometimes failed to meet standards that regulators and customers expect.

The London-based bank assured it has already taken concrete steps to augment the framework to address these issues and gave what it says ‘absolute commitment to fixing what went wrong’.

Tip of the Iceberg

Part of the failings and lax controls inside HSBC include a failure to properly monitor $15 billion in bulk cash transactions between mid-2006 and mid-2009, easy dismissal of staff and high turnover in the bank’s compliance units, the report disclosed while adding that the bank ignored business risks in countries such as Mexico, a country awash with drug trafficking-related problems.

HSBC’s Mexican operations moved $7 billion into the bank’s US operations between 2007 and 2008. The report said that the British bank was warned by both Mexican and US authorities for dealing with an amount of money that could only have reached such a level ‘if it was tied to illegal narcotics proceeds’.

The bank’s operations in Saudi Arabia also came under the scrutiny of the US Senate, especially its dealings with Al Rajhi Bank, which the report said, has links to financing terrorism. The Senate report – citing US government reports, criminal and civil legal proceedings and media reports – said evidence of those links emerged after the 9/11 attacks on the United States.

The report said HSBC told its affiliates not to do business with the Saudi bank in 2005. However, HSBC officials reversed course within four months, allowing affiliates to decide whether to continue to do business with Al Rajhi.

The Senate findings noted that a Middle Eastern unit of HSBC continued doing business with the bank. The Hong Kong-Shanghai Banking Corporation (HSBC) ultimately stopped helping the Saudi bank handle certain types of transactions, after compliance officials rebuffed other HSBC bankers seeking to maintain ties to Al Rajhi.

“Al Rajhi threatened to yank all of its business with HSBC in late 2006 unless it regained access to using HSBC’s bulk-cash transaction business,” the Senate report revealed adding that HSBC agreed to continue to provide the bank bulk shipments of US dollars until 2010 when HSBC exited entirely the bulk-cash business.

American Ops

The US Senate probed HSBC’s operations in America, which has its main office in New York. HSBC touted its ability to handle US dollar transactions by using the NY unit as a selling point to clients outside the country.

HSBC’s inability to tackle suspect money has been cited as one of the top problems by the US Senate committee report. It blamed the high turnover of top compliance officials for making reforms difficult. Employees were “overwhelmed” by a mounting number of suspect transactions that needed review.

Mexico, a country which is “under siege from drug crime, violence and money laundering,” was the origin of many of the transactions the bank was tied to, the damning report said.

HSBC helped move money for a Mexican foreign-exchange dealer called Casa de Cambio Puebla that served as a hub for laundered proceeds, according to the findings.

Between 2005 and 2007, there was a “growing flood” of US dollars moving between the exchange house and HSBC, setting off red flags inside HSBC. Some bankers said the transfers were legal. One source said the money came from Mexican landscapers working in the United States and routing money back home to their families.

The Senate report revealed HSBC ultimately closed the account in November 2007 after it received a seizure warrant from the Mexican attorney general seeking money tied to the exchange dealer.


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