HSBC Money-Laundering Controls Aren't Sufficient, U.S. Says

  • Monitor is unable to certify bank's compliance program
  • Bank has made `commendable progress' under oversight

HSBC Holdings Plc continues to struggle in its efforts to improve its anti-money laundering and sanctions violations controls, according to the latest annual review compiled by Michael Cherkasky, the bank’s court-appointed monitor.

After a $1.9 billion fine and more than two years of oversight, HSBC has made “commendable progress” in improving its compliance program, but hasn’t gone far enough to satisfy Cherkasky that it can detect violations, according to a Justice Department summary of the review, filed in federal court on Friday.

"The monitor believes that the bank continues to face significant challenges in implementing an AML and sanctions compliance program that effectively detects and prevents potential financial crime," prosecutors told U.S. District Judge Ann Donnelly in Brooklyn.

Prosecution Agreement

HSBC agreed to submit to the monitor’s oversight as part of a December 2012 deferred-prosecution agreement with the Justice Department. The government required HSBC to improve its in-house controls after investigators found that it allowed billions of dollars to be transferred in violation of U.S. sanctions laws and anti-money-laundering statutes.

"HSBC remains focused on fulfilling its obligations under the DPA and implementing the most effective standards globally to combat financial crime," Rob Sherman, a spokesman for the London-based bank, said in an e-mail.

Cherkasky’s report, which was filed with the Justice Department in January, is the second full-year report card on HSBC’s pledge to fix its compliance problems in a five-year period. In last year’s report, Cherkasky warned that at the rate it was going, HSBC wouldn’t be able to complete its compliance overhaul within that time. The government summary didn’t indicate whether the bank is on track to meet its requirements with half of the deferred-prosecution period left.


Compliance Technology

The monitor repeated a concern raised last year, noting that "one of the most significant impediments" is HSBC’s compliance technology, which he said requires a "great deal of work," according to the summary. He also found deficiencies in the bank’s so-called Know Your Client procedures. Certain affiliates didn’t collect necessary customer information upon opening accounts and didn’t update customer profiles regularly, the summary said.

Still, Cherkasky found HSBC’s most senior officials had instituted a "pro-compliance culture" that provides a "sturdy foundation" to sustain compliance improvement over time.

"HSBC is a big organization that has had huge problems,” said James Cox, a professor at Duke University Law School. “Until you can get the right people in, and right people in right places, it’s not possible to get the kind of change you need.”

The government’s summary of Cherkasky’s latest annual review follows a federal judge’s ruling to make last year’s report public. In January, U.S. District Judge John Gleeson, who was previously overseeing the case, ruled that Cherkasky’s report qualified as a "judicial record" that should be filed publicly.

Gleeson, who stepped down from the bench last month, scrutinized the government’s arrangement with HSBC after concerns were raised in the press that prosecutors may have been too lenient. In 2013, the judge took the unusual step of exercising “supervisory” control over the government’s deferred-prosecution agreement, which allowed the bank to avoid criminal charges for money-laundering control failures.

HSBC has appealed the ruling.

The case is U.S. v. HSBC Bank USA, 12-cr-763, U.S. District Court for the Eastern District of New York (Brooklyn)

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