HSBC Holdings Plc’s failure to implement adequate money-laundering controls in Mexico is among lapses that U.S. Senate investigators will criticize tomorrow, according to two people briefed on the matter.
HSBC bought Grupo Financiero Bital SA in 2002, pumping $800 million into the Mexico City-based bank to meet capital standards. Money-laundering controls were largely absent in HSBC’s operations there in ensuing years, said the people, who requested anonymity because the findings of the Senate’s Permanent Subcommittee on Investigations aren’t yet public.
The compliance failures in Mexico, a nation struggling to rein in drug cartels, as well as unreported Iranian transactions and insufficient attention to U.S. anti-money-laundering rules will be among allegations leveled at HSBC at tomorrow’s hearing, the people said. London-based HSBC, Europe’s largest bank, will be cited as an example of the financial system’s exposure to drug cartels and terrorists hiding cash, according to a statement from the subcommittee.
The hearing, titled “U.S. Vulnerabilities to Money Laundering, Drugs, and Terrorist Financing: HSBC Case History,” will accompany the release of a 400-page committee report, one of the people said. Investigators were interested in the bank’s failure to disclose transactions with firms in Iran, the people said, and the allegations will come a month after ING Groep NV agreed to pay $619 million to settle U.S. charges it falsified financial records and bypassed sanctions on Iran and Cuba.
HSBC should be held accountable “for fixing what went wrong,” Chief Executive Officer Stuart Gulliver said in a July 10 internal memo to employees. “We failed to spot and deal with unacceptable behavior.”
The company adjusted its global compliance policies after the deficiencies surfaced, Gulliver, 53, said in an earlier internal memo obtained by Bloomberg News.
“Too often, we have fallen short of our own expectations and that must change,” Gulliver, who took over as CEO last year, told employees in the April 30 memo. The bank’s compliance programs would follow “a single standard globally that is determined by the highest standard we must apply anywhere,” which will most often be U.S. regulations, he said.
The Senate panel has examined HSBC practices for more than two years, and the people said the bank will be criticized for devoting insufficient resources to anti-money-laundering compliance in its U.S. operations.
A settlement between HSBC and the U.S. Justice Department to resolve a criminal probe into laundering of drug-cartel and other money could be reached within weeks, the Wall Street Journal reported, citing people familiar with the investigation.
“HSBC has been fully cooperating with the PSI and regulatory authorities in the United States in relation to these issues,” Robert Sherman, a New York-based spokesman for the company, said in a statement. The company has “already made significant changes to our organization’s structure,” he said.
Tara Andringa, a spokeswoman for Senator Carl Levin, the Michigan Democrat who leads the panel, declined to comment on specifics of the investigation.
U.S. prosecutors may take criminal or civil enforcement measures involving the bank, HSBC said in February. The lender has more than tripled the size of a U.S. compliance team and said it will exit businesses it sees as too risky.
HSBC’s North American units reached agreements in 2010 with the Office of the Comptroller of the Currency and Federal Reserve to fix what the OCC described as “critical deficiencies” in compliance programs for protecting against money laundering and terrorist financing.
From mid-2006 through mid-2009, the bank didn’t monitor bulk cash transfers and failed to conduct enough due diligence on who moved money through bulk cash or wire transfers, the OCC found. The company had also promised regulators including the Federal Reserve Bank of New York in 2003 to improve its anti-money-laundering performance.
Other banks also have drawn scrutiny for ineffective money-laundering safeguards. In April, Citigroup Inc., the third-largest U.S. bank by assets, agreed to improve its practices after regulators accused the firm of failing to conduct proper due diligence on customers. Wells Fargo & Co.’s Wachovia Bank unit agreed in March 2010 to pay $160 million to resolve a criminal investigation into drug cartels’ use of the bank to launder money through Mexican exchange houses.
“Oh sure, a bit of drug-cartel money here or there is a longstanding compliance problem, but this is different,” Karen Shaw Petrou, a managing partner at Washington-based research firm Federal Financial Analytics, wrote in a July 13 client note about the hearing. She called HSBC’s practices “a wink/nod business model” that showed “a profound lack of controls.”