Compliance Failures Frame HSBC Money-Laundering Risks
For a decade, David Bagley held the position of head of group compliance at HSBC Holdings, a bank that operates in some 80 jurisdictions around the globeincluding in countries the U.S. government considers to pose the greatest money laundering risks in the world. And on Tuesday, amid a U.S. Senate hearing on anti-money laundering failures at the bank, Bagley told lawmakers he was stepping down from his role as HSBC goes about shedding the historical compliance model the bank has outgrown.
As I thought about the structural transformation of the banks compliance function, I recommended to the group that now is the appropriate time for me and the bank for someone new to serve as the head of group compliance, Bagley said.
Bagley, certainly wasnt the only HSBC official to apologize for the findings of the 367-page report authored by the U.S. Senate Permanent Subcommittee on Investigations, which showed how the companys U.S. banking operations provided a conduit for Mexican drug cartels, as well as terrorism financing from countries including Iran. The report cites longstanding, severe deficiencies in HSBCs anti-money laundering controls, a lack of due diligence in taking on high-risk affiliates, and the circumvention of U.S. prohibitions related to terrorism financing.
What went wrong? According to both Bagley and chief legal officer Stuart Levey, the former Treasury under secretary for terrorism and financial intelligence who was hired by HSBC in January, a major problem was that compliance efforts didnt keep up with corporate growth.
With the benefit of hindsight, it is now clear to many of us that the banks business and risk profile grew faster than its infrastructure, Bagley said, according to prepared testimony. We have learned that implementing the kinds of robust policies and practices expected of a global banking leader can take longer than anticipated.
Bagley described the banks former compliance model as a product of historical growth by acquisition, and said that structure was a major factor behind some of the issues being addressed at the hearing.
The old compliance function mirrored HSBCs overall global corporate structurewhich is an international federation of affiliates around the globe, Bagley said. As HSBC acquired more and more banks, the company evolved into one with a small corporate center, while its numerous worldwide affiliates operated with a significant degree of autonomy and varying levels of direct interaction among those affiliates, he said.
Group compliance in London took a backseat to local management at HSBCs global affiliates. As the Head of Group Compliance, my mandate was limited to advising, recommending, and reporting, Bagley stateed. My job was notand I did not have the authority, resources, support, or infrastructureto ensure that all of these global affiliates followed the Groups compliance standards.
Bagley said that model worked until HSBCs growth began to accelerate rapidlycoinciding with an era of increased terrorism and narco-trafficking, along with increased regulatory expectations in the U.S. and other countries. With its roots in a far smaller bank in a very different global banking environment, HSBCs historic model, in retrospect, simply did not keep pace, Bagley stated.
Both Bagley and Levey sketched the contours of HSBCs new compliance model. For the first time, Bagley said, the group compliance function has authority over the compliance departments at every one of the banks affiliates, such that personnel at the affiliates are now accountable to Group Compliance for their conduct.
Under the new model, it is also Group Compliancenot the affiliatesthat oversees nearly 3,500 compliance officers around the world. HSBC has also added staff to the group compliance office in London, and the function is now separate from the legal department. We have split from the legal function and now form a part of a substantially empowered risk function, Bagley said.
Levey said the bank is now placing greater emphasis on information sharing. Key compliance-related information will now be shared horizontally with all Regional and Global Business Compliance Heads, including monthly reports detailing compliances issues in a region or business line, the chief legal officer said, according to his prepared testimony.
He also noted the bank is globalizing the practice of conducting appropriate due diligence on all of our HSBC affiliates.
The Justice Department is currently conducting a criminal investigation into the bank. In the meantime, Senator Carl Levin (D-Michigan), chairman of the subcommittee that investigated HSBCs operations, has said the banks actions should serve as a warning to other financial institutions.
"The end result is that the U.S. affiliate can become a sinkhole of risk for an entire network of bank affiliates and their clients around the world playing fast and loose with U.S. banking rules," Levin said, according to the Wall Street Journal.