US Senate investigation links Cayman Islands trust to Syria

An investigation by the United States Senate’s Permanent Subcommittee on Investigations, which pointed to anti-money laundering deficiencies at HSBC in a report and hearing last month, also has linked a Cayman Islands trust managed by HSBC to Syrian businessman Rami Makhlouf, a cousin of Syrian President Bashar al-Assad.

The subcommittee report, titled “US Vulnerabilities to Money Laundering, Drugs and Terrorist Financing: HSBC Case History”, said HSBC opted to continue the business relationship with Mr. Makhlouf, although its compliance officials in Cayman had raised internal concerns.

Mr. Makhlouf, who is said to control large parts of the Syrian economy, maintained an account with HSBC in the Cayman Islands, the report said, and was placed on a special designated nationals list maintained by the US Department of Treasury. The Office of Foreign Asset Control publishes this list of individuals and companies that are either owned or controlled by targeted countries or that are acting on their behalf with the aim of barring US companies from dealing with them.

On 21 February, 2008, Mr. Makhlouf, was placed on the OFAC list for improperly benefitting from and aiding public corruption of Syrian regime officials. “Rami Makhlouf has used intimidation and his close ties to the Assad regime to obtain improper business advantages at the expense of ordinary Syrians,” the then Under Secretary for Terrorism and Financial Intelligence Stuart Levey said at the time.

One week later, compliance staff at HSBC Cayman contacted HSBC in the US to report that HSBC Cayman Islands held a trust relationship with Mr. Makhlouf and to inquire as to “what actions if any HSBC Group has taken in relation to the above mentioned individual.” Mr. Makhlouf together with his father, Mohammad Makhlouf, was the beneficiary of a trust set up by HSBC Cayman and maintained by HSBC in Geneva, according to the report.

The subcommittee cites an e-mail in response to a request for more information by an HSCB compliance officer in the US, in which the head of compliance for HSBC in the Cayman Islands Patricia Dacosta said: “The trust is administered by HSBC Geneva. We raised concerns with this client in August 2007, however, we were assured by [HSBC Global Money Laundering Control Officer] David Ford that the relationship had been reviewed at a group level and a decision had been taken to continue with the relationship.”

The chairman of the subcommittee Senator Carl Levin commented at a hearing in July, “In other words, people at HSBC headquarters made a conscious, knowing decision to maintain an account for the benefit of an international terrorist.”

The senator asked former Under Secretary for Terrorism and Financial Intelligence Stuart Levey, whose administration placed Mr. Makhlouf on the OFAC list and who today is the chief legal officer for HSBC Holdings, how it is “that HSBC Geneva, or its Cayman affiliate, or any affiliate in the HSBC system, could have maintained a trust benefitting a terrorist, or gotten permission from group headquarters to service such an individual?”

“I do think this is the kind of thing that we need to change,” Mr. Levey responded, saying compliance information would be shared from now on internationally within HSBC.

According to the investigation, HSBC in the US ultimately determined that it did not have any connection to Mr. Makhlouf and did not need to report any information to OFAC. An anti-money laundering executive in HSBC’s compliance department in New York wrote in an e-mail: “We have determined that accounts held in HSBC Cayman are not in the jurisdiction of, and are not housed on any systems in the United States. Therefore, we will not be reporting this match.”

Mr. Levin said HSBC in the US knew the account existed, knew that there was a request about this account from OFAC, knew that an HSBC affiliate maintained it but was not going to get this information to OFAC based on this jurisdictional line. HSBC set up international lines to establish and service the trust, protect its assets and to facilitate Makhlouf’s transactions, “yet they rely on that technicality not to report the information to OFAC”, Mr Levin said.

He then continued to ask if the Cayman Islands as “a secrecy jurisdiction” did not allow the reporting to OFAC, would HSBC be bound by Cayman law or by US law?

Mr. Makhlouf’s father, Muhammad Makhlouf, was blacklisted by the US Treasury in December 2011 for his role as financier of the Assad regime in Syria. Both are subject to European Union and US sanctions for facilitating, through their financial ties to the regime, violence against protesters.

The Financial Times reported that HSBC had ultimately ended the relationship Mr. Makhlouf after the OFAC designation.

Asked if and when the relationship with Mr. Makhlouf has ended and what happened to the trust HSBC Cayman issued the statement, “HSBC takes the issue of customer confidentiality seriously and as such is not able to discuss any matters in respect of customers.”
 

1 COMMENT

  1. This is an excellent story by Michael Klein and a timely reminder that Cayman must always pause to consider who our business partners are doing business with. The response by HSBC Cayman is appaling – if only their commitment to not facilitating rape, murder and genocide were as steadfast as their commitment to customer confidentiality.

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