Warren Questions U.S. Agencies’ Light Touch on Money-Laundering

U.S. Senator Elizabeth Warren asked regulators how egregiously a bank could break laws before they’d weigh pulling its charter, citing HSBC Holdings Plc services for drug cartels and skirting of sanctions against Iran.

“What does it take?” the Massachusetts Democrat asked a panel of banking regulators testifying at a Senate Banking Committee hearing yesterday. “How many billions of dollars do you have to launder for drug lords and how many economic sanctions do you have to violate before someone will consider shutting down a financial institution like this?”

Comptroller of the Currency Thomas Curry and Federal Reserve Governor Jerome Powell explained that a charter revocation process would depend on a bank being convicted of a crime, for which Powell said the Justice Department has “total authority.” London-based HSBC settled for $1.92 billion in December and promised to fix its operations.

Senator Jeff Merkley, an Oregon Democrat, said the deal -- involving the highest penalty ever assessed by a U.S. banking agency -- “sounds more like the price of doing a very profitable business.”

David S. Cohen, Treasury undersecretary for terrorism and financial intelligence, said the Justice Department asked his agency what the economic impact might be of a criminal prosecution of Europe’s largest bank before eventually deciding not to pursue it. Cohen told the senators his agency couldn’t offer them an answer and he couldn’t speak to the Justice Department’s decision.

Economic Impact

Attorney General Eric Holder said in a March 6 hearing that criminal charges against one of the biggest banks --something that could threaten its existence -- may also endanger the national or global economies. That has “made it difficult for us to prosecute” some of those institutions, Holder said.

With their civil powers, Cohen and Curry both promised to focus more attention on pursuing individual bankers who knowingly violate the Bank Secrecy Act.

“One of the areas where I think we have not been sufficiently aggressive is going after individuals in the institutions,” Cohen said. “That is something that we are committed to pursuing.”

Curry said his agency is also weighing changes to make it easier to eject from the industry bankers who knowingly skirt money-laundering rules.

Officers’ Removal

“We are exploring the possibility of regulatory changes that would enhance our ability to take removal and prohibition actions against bank officers, directors, and employees that engage in violations of the BSA,” Curry said in written testimony.

When HSBC’s lapses are considered with recent actions against JPMorgan Chase & Co., the biggest U.S. bank by assets, and Citigroup Inc., Curry said that the largest firms are revealing weaknesses in the system.

“Banks are much farther along than they were,” James Freis, a former chief of Treasury’s Financial Crimes Enforcement Network who is now a partner at Cleary Gottlieb Steen & Hamilton LLP in Washington, said in an interview before the hearing. “Compliance in the past was considered to be kind of a back-office issue.”

Since its settlement, HSBC has restructured itself to make compliance more of a priority, hiring several former U.S. regulators in senior roles, said Robert Sherman, an HSBC spokesman in New York. The London-based bank has doubled compliance spending to about $500 million from 2010 to 2012, Sherman said.

‘Highest Standards’

“We have taken extensive actions to put in place the highest standards to protect against current and emerging threats,” Sherman said. He declined to comment on yesterday’s hearing except to say the firm is “focused on implementing the agreement with the U.S. government.”

The Bank Secrecy Act was meant to curtail criminals from injecting the proceeds of their crimes into the legitimate financial system. It has since been used as a tool to combat international drug cartels and terrorist groups.

Curry also argued improving the information shared between the government and financial institutions and called for legislation to expand what can be swapped between the firms themselves.

Nine federal agencies monitor the act, said Heather Lowe, counsel and government-affairs director at Global Financial Integrity, a Washington-based group advocating tighter controls on the flow of illicit money. All those agencies leave a lot of potential gaps in communication, she said.

‘Political Will’

“I do wonder whether there’s a political will to actually crack down on this,” she said. Lowe said the dirty money is helping capitalize the financial system, and she said she wonders if its economic value slows down enforcement.

The Office of the Comptroller of the Currency will soon send guidance to banks, building on requirements the agency has been inserting into recent settlements, Curry said in an interview after the hearing. His agency will push concepts to the wider industry such as establishing Bank Secrecy Act compliance officers who can report to a board of directors.

“The issue here has been accountability,” Curry said. “This is to really make it quite clear that the accountability rests at the top of the institution, and that’s the CEO and the board.”

Before it's here, it's on the Bloomberg Terminal.