The U.S. Department of Justice refused to prosecute HSBC in 2012 for laundering Mexican drug money through a Cayman Islands subsidiary and other violations after U.S. officials heard from the U.K. government that doing so could lead to financial contagion and would have serious implications for global financial and economic stability.
A U.S. Congressional report concluded that Attorney General Eric Holder overruled an internal recommendation by the Justice Department’s Asset Forfeiture and Money Laundering Section to prosecute HSBC because of concerns over serious adverse consequences for the financial system.
Instead of facing criminal charges, HSBC entered into a five-year deferred prosecution agreement and paid about $1.92 billion in penalties.
The attorney general caused a stir in 2013 when he told the Senate Judiciary Committee the size of certain financial institutions made them difficult to prosecute because such prosecutions could have a negative impact on the national and world economy.
“I think it has an inhibiting influence – [an] impact on our ability to bring resolutions that I think would be more appropriate,” Mr. Holder testified at the time. He later stepped back his comments, stating they had been misconstrued to suggest that some banks were too big to jail.
The report, prepared by the Republican staff of the Committee on Financial Service, claims the decision not to bring criminal charges against HSBC was heavily influenced by concerns over the financial system and the economy.
It shows how U.K. Chancellor of the Exchequer George Osborne intervened on behalf of HSBC in a Sept. 10, 2012 letter to U.S. Federal Reserve Chairman Ben Bernanke and then-Treasury Secretary Timothy Geithner. In the letter, Minister Osborne highlighted the potential financial stability risks from an enforcement action, in particular for a “systemically important financial institution” like HSBC.
If a criminal conviction would lead to the bank losing its banking license in the U.S., Minister Osborne warned, “questions about HSBC’s continued ability to clear U.S. dollars would risk destabilizing the bank globally, with very serious implications for financial and economic stability, particularly in Europe and Asia.”
The minister further alleged that U.K. banks were unfairly targeted, and that the penalties and fines contemplated at the time were higher than for U.S. banks in similar circumstances.
The U.S. Congressional report also claims the U.K. Financial Services Authority, the financial markets regulator in Britain, “apparently hampered” the investigations into the U.K.-based bank’s conduct and influenced the Department of Justice decision not to prosecute.
In emails, Treasury officials noted the concerns raised by Federal Reserve Governor Dan Tarullo about the U.K. regulator’s role in U.S. enforcement matters and the FSA’s preference for “a light touch approach at industry’s request.”
Anti-money laundering weaknesses
In 2012, a year-long investigation by the U.S. Senate’s Permanent Subcommittee on Investigations revealed major anti-money laundering weaknesses at HSBC. Some of the biggest deficiencies were tied to the Cayman Islands branch of HSBC’s Mexican subsidiary, HBMX.
The Cayman branch, which had no local staff or customers, was operated from Mexico. Internal documents from HSBC showed that certain Cayman accounts had operated for years with deficient anti-money laundering and know your customer information, which, according to a compliance officer at the bank, enabled the “massive misuse by organized crime.”
In one case, HSBC Group’s head of compliance acknowledged significant U.S. dollar remittances from customers at the Cayman branch to “a U.S. company alleged to be involved in the supply of aircraft to drug cartels.”
The bank identified about 2,200 of its 35,000 Cayman Islands U.S. dollar accounts as high risk because of either suspicious activity or due to a lack of information about the account owners. By 2008, average monthly deposits for these high-risk accounts totaled approximately $205 million, the Finance Committee report noted.
In 2013, the Cayman Islands Monetary Authority revoked the class B banking license for the local branch of HSBC Mexico SA.
As a result of the banking group’s anti-money laundering failures, the report said, at least $881 million in drug trafficking proceeds from the Sinaloa Cartel in Mexico and the Norte del Valle Cartel in Colombia were laundered and found their way into the U.S. banking system.
In addition, HSBC Group violated U.S. laws by illegally conducting transactions on behalf of customers in such countries as Cuba, Iran, Libya, Sudan and Burma, which were subject to U.S. sanctions.