Late last year, HSBC agreed to pay a record-breaking $1.9 billion fine to regulators following a report of the US Senate Permanent Subcommittee on Investigations (executive summary PDF here) that revealed serious anti-money laundering failures. But even with a whopping fine, the settlement HSBC has reached won’t be enough to stop banks from accepting dirty money. Senior individuals must be held to account.
The scale of HSBC’s transgressions puts its fine into perspective. In 2007 and 2008 alone, HSBC failed to check whether the $7 billion in physical cash it had allowed into the United States from its Mexican affiliate included drugs money. This was despite the fact that its Mexico branch exported more U.S. dollars to the bank’s U.S. branch than any other HSBC affiliate or bigger Mexican banks. Authorities’ concerns that these bulk cash shipments contained illicit funds turned out to be justified. As it later emerged, HSBC had facilitated the laundering of at least $881 million from Mexican and Colombian drug cartels between 2006 and 2010.
Despite the numerous and obvious issues associated with its Mexican operations, HSBC classified the country as “low risk.” In parallel, the bank’s London-based parent company knew about some of the serious anti-money laundering weaknesses at its Mexican affiliate yet did nothing to inform the U.S. branch. With the bank turning a blind eye, drug cartels made little effort to hide their activity. U.S. Assistant Attorney General Lanny Breuer observed, “They would sometimes deposit hundreds of thousands of dollars in cash, in a single day, into a single account, using boxes designed to fit the precise dimensions of the teller windows in HSBC Mexico’s branches.” While this was taking place, some estimate that more than 50,000 people died in drug-related violence in Mexico.
And it wasn’t only drugs money. Clients linked to terrorism and pariah states also used the bank. In one case, HSBC provided nearly $1 billion in U.S. dollar banknotes to a major Saudi Arabian bank in spite of evidence that the bank and some of its owners were linked to financing terrorist organizations, including al-Qaeda.
The Senate report describes how HSBC’s U.S. compliance department stopped the bank from providing these banknotes for nearly two years, but eventually caved in to pressure from personnel at the bank’s U.S. and Middle East affiliates. Through our work at Global Witness, we have seen how this prioritization of profits over compliance is more common than it should be, and regularly leads big banks to look the other way when dirty money is changing hands.
HSBC’s problems can’t be blamed on a few momentary lapses in judgement by low-level compliance officers. Top management received repeated warnings from regulators over the course of a decade, yet failed to clean up the bank. Instead it developed a culture that the chair of the Senate subcommittee tasked with investigating the bank described as “pervasively polluted.”
These flagrant violations of the law were met with little more than a slap on the wrist. Regulators struck a deferred prosecution agreement with HSBC: In other words, the bank escapes being prosecuted in return for agreeing to pay a fine and obey the law in the future. If an ordinary citizen rather than a big corporation were caught breaking the law, such a lax response from law enforcement would be inconceivable.
Similarly, the fine faced by HSBC is the biggest penalty regulators have ever given to a bank. But what does a fine really cost? The $1.9 billion HSBC will have to pay for years of benefitting from wrongdoing represents just 8.5 percent of its pre-tax profits for 2012. Fines paid by Standard Chartered, ING, Credit Suisse and other big banks for violating U.S. sanctions over recent years show a similar pattern. All represent less than 10 percent of one year’s pre-tax profits. More importantly, the problem with fines is that they hurt the banks’ shareholders—either through smaller dividends or reduced investment in the bank’s business—not the bankers who were responsible for breaking the law. It’s a case of “heads I win, tails you lose.” Individual bankers continue to get rich on bonuses while shareholders lose out. Punishments that target the wrong people clearly don’t incentivize behavior change by the bank.
If HSBC can get away with such serious violations of anti-money laundering regulations with relatively few consequences, what is the deterrent to other banks? It’s clear that fines alone won’t stop banks from misbehaving. The risk of being caught is low and the profits to be made from accepting dirty money are large, meaning that it makes financial sense to go ahead with the business. And after all, making such calculations is the bread-and-butter of what a bank is all about. As a result, penalties have become just another cost of doing business.
The 9/11 attacks prompted regulators to tighten U.S. anti-money laundering laws and make it harder for terrorists and others to use the U.S. financial system to fund their activities. But the HSBC investigation highlights just how big the enforcement gaps are. Until something is done to keep banks from accepting dirty money they will continue to act as an entry point to the financial system, undermining other efforts to tackle terrorism, organized crime and the drugs trade.
The senior individuals responsible for banks’ turning a blind eye to compliance failures need to be held accountable. It is this, and this alone, that will make banks take anti-money laundering compliance seriously. At the very least, individual bonuses need to be conditional on a bank’s anti-money laundering compliance, and shareholders need to make sure a senior board member is responsible for this. If serious anti-money laundering violations are discovered, any bonuses awarded should be automatically clawed back.
Senior executives from HSBC’s U.S. branch and London head office pocketed huge amounts in salaries and bonuses between 2003 and 2011. According to company annual reports, the various people who headed up the bank’s U.S. operations earned $20.5 million, while Lord Green earned more than $26 million (£15 million) as CEO and then as Chairman of HSBC Holdings. Both were also given lucrative bonuses in the form of shares. Yet under their leadership HSBC repeatedly failed to fix compliance weaknesses pointed out by regulators, ultimately resulting in the wide-ranging violations uncovered by the Senate investigation.
But if regulators are to really change banks’ behavior, they must go one step further and hold senior individuals legally accountable. Regulators should bar senior bankers from the profession if their bank is caught dealing in dirty money, in the same way doctors and lawyers can be struck off for malpractice.
In the worst cases, senior bankers should face jail. In a crackdown on check-cashing businesses last year for similar anti-money laundering compliance failures, regulators charged a number of individuals with violations of the Bank Secrecy Act and in one case a head manager was sentenced to five years in jail. Why should those running big banks be treated any differently?
Individual accountability would make those who might think their banks are too big to indict think twice. To be clear, prosecuting low-level scapegoats will not bring about the changes in bank behavior that are needed. Regulators must target individuals at the most senior levels—those who are responsible for ensuring that effective systems are in place to prevent their banks from laundering money.
Until senior bankers face real consequences, banks will continue to lurch from one compliance failure to another, while criminals, terrorists, corrupt politicians and others use the United States to launder their dirty money.