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MEXICO MANGO MAFIA : HSBC is paying $2 billion to avoid criminal charges in drug cartel laundering case

Brett Wolf and Aruna Viswanatha, Thomson Reuters

January 21, 2014 12:38

The Justice Department agreed to suspend criminal charges against the world's largest bank and its US subsidiary for five years if the bank agreed to pay the penalty.


Seized cash like the dollars and Mexican pesos pictured here is nothing compared to the multi-billion dollar empire of the Sinaloa cartel, which laundered its money through HSBC. The US has decided not to prosecute the bank, despite its business with drug cartels and other criminal operations. (Ronaldo Schemidt/AFP/Getty Images)

US regulators continue to find weaknesses in the way HSBC Holdings tries to prevent money laundering, according to people familiar with the matter, even after the British bank was forced to pay nearly $2 billion in penalties and invested millions in increasing its compliance.

The deferred prosecution agreement was reached in December 2012 and was approved Monday. 

The settlement was seen as a record amount to resolve charges that the bank failed to stop billions of dollars in drug money from flowing through the bank from Mexico.

Under the terms of the deal, the Justice Department agreed to suspend criminal charges against HSBC and its US subsidiary for five years if the bank agreed to pay the penalty.

When announcing the settlement, HSBC Chief Executive Stuart Gulliver said:
"The HSBC of today is a fundamentally different organization from the one that made those mistakes."

But examiners from the Office of the Comptroller of the Currency have continued to find problems, two people familiar with the matter said. 

They said that the regulator told the bank late last year it has not seen enough improvement in the bank's controls in its correspondent banking business, which processes transactions for financial institutions around the world, including HSBC units.

Sources declined to provide further detail about the nature of the weaknesses. The sources declined to be named because they were not authorized to speak publicly about the internal changes or the communication with regulators.

While none of the people suggested HSBC could face another regulatory or enforcement action at this point, the assessment by the authorities shows how difficult it is for the bank to resolve the issues.

HSBC spokesman Rob Sherman said in a statement: "We continue to make solid progress in addressing AML (anti-money laundering) and sanctions compliance deficiencies, but recognize there's more work to do."

The bank is working to implement globally consistent controls and has hired experienced executives to continue transforming the compliance team and help it to work directly with HSBC bankers, Sherman said.

OCC spokesman Bryan Hubbard declined comment.


In response to the regulator's findings, the bank, which is Europe's largest, has taken steps to speed up its overhaul, the sources said. In the past few months HSBC has hired several new anti-money laundering executives, restructured its compliance department, and is considering the unusual step of cutting off USdollar-clearing access to some foreign affiliates, they said.

HSBC has already pulled out of several high-risk and low-profit business areas and countries, including Panama and other Latin American countries, Reuters previously reported. It retrenched from banking some embassies and consulates last year, and is in the process of cutting off relationships with some small, cash-focused businesses in the United States, such as corner stores.

It is spending about $800 million each year on compliance costs across its operations in 80 countries.

Two top legal officials at the US arm of the bank, anti-money laundering director Alan Schienberg and chief compliance officer Gary Peterson, left in November amid HSBC's compliance overhaul.

Instead of replacing those positions, HSBC is globally restructuring its department that deals with questionable transactions around regional heads of "financial crimes compliance," and hired former Bank of America executive Patty O'Connor earlier this month to fill that role in the United States, according to people familiar with the changes.

The new structure, a brain child of former US Treasury Department official Robert Werner who was appointed head of group financial crimes compliance in December 2012, increases the team's firepower.

Three of O'Connor's direct reports will be executives who deal exclusively with HSBC's anti-money laundering efforts, anti-corruption efforts, and compliance with sanctions laws. That structure is expected to be replicated at HSBC units around the world, the sources said.

HSBC also just hired former JPMorgan executive Jessica Gomel into a new position, global head of financial crime compliance for correspondent banking, and plans to make additional hires in the coming weeks, the sources said.

Gomel's mandate is to police bank-to-bank transactions and all currency clearing activity, sources said.

HSBC's struggles with its correspondent banking controls have been a long-standing issue for the bank. 

A 2010 OCC order flagged the issue as the bank's primary anti-money laundering problem and said HSBC had failed to properly police some high-risk cash transactions of its affiliates.

HSBC operates hundreds of affiliates around the world and its US arm acts as the gateway into the U.S. financial system for this network by processing US dollar-denominated payments.

A US Senate report released in mid-2012 said HSBC failed to assess the money laundering risks associated with affiliates before opening correspondent accounts for them.

The interaction between HSBC's US arm and HSBC affiliates around the world continues to be a concern for the OCC, the sources said. 

In response, the bank has begun advising units that those that fail to implement full anti-money laundering regimes could have their correspondent accounts closed, one of the sources said.

The bank has specifically found problems with transactions coming from its Hong Kong unit, but was unlikely to cut off dollar clearing services for that unit, the source said. 

HSBC has a huge presence in Hong Kong and made around one-third of its profits from there in the first nine months of 2013.

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