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HSBC Agrees to $1.9B Penalty in Money Laundering Probe
New York Law Journal
British bank HSBC has agreed to pay $1.9 billion in forfeitures and penalties, authorities announced in Brooklyn yesterday, but it has avoided criminal prosecution in connection with the laundering of $881 million from narcotics traffickers in Mexico and for allowing prohibited transactions with Libya, Iran, Burma, Sudan and Cuba.
Lanny Breuer, assistant attorney general for the U.S. Justice Department's Criminal Division, said during a press conference at the Eastern District U.S. Attorney's Office that the bank was being held responsible "for a stunning failure of oversight and worse."
In papers filed in Eastern District federal court, HSBC admitted it had violated the Bank Secrecy Act, International Emergency Economic Powers Act and the Trading With the Enemy Act.
The bank entered into a five-year deferred prosecution agreement with the Justice Department and a two-year agreement with the Manhattan District Attorney's Office. The Justice Department and the Manhattan D.A.'s office will share $375 million from the settlement to penalize the bank for acts including removing information from transactions that would have disclosed the bank's dealing with sanctioned foreign nations.
"The record of dysfunction that prevailed in HSBC was simply astonishing," Breuer said at the press conference, noting the $1.256 billion it will return was "by far the largest forfeiture ever in a case involving a bank."
HSBC will also pay $665 million in civil penalties and be forced to implement, or continue efforts already under way, to prevent future problems. For example, the bank has already "clawed back" bonuses for some executives whose job it is to head off money laundering and significantly increased the staff assigned to ensuring compliance with federal regulations.
Eastern District U.S. Attorney Loretta Lynch said at the press conference that HSBC had "cooperated immediately and extensively" with the investigation and its cooperation and remediation efforts were a "significant factor" in deferring criminal prosecution of the bank or its officials.
Breuer faced a number of tough questions on that decision.
He said the Justice Department had to weigh HSBC's cooperation in the probe, the conduct in question and "collateral consequences" of an indictment that might include driving the bank out of business when determining whether to proceed with the criminal case.
"The goal is not to bring HSBC down," said Breuer, adding that the department meant to avoid the loss of jobs and "systemic" harm to the economy.
Observing that the deferred prosecution agreement constituted a "sword of Damocles right over HSBC," Breuer said that "it's a fiction to suggest this is not a robust result." He later said it would be a "disservice" to view the agreement as an indication "anyone was getting a pass here."
Asked whether the agreement foreclosed future criminal cases against individual bankers, Breuer said, "There may be, but there may not be."
HSBC CEO Stuart Gulliver said in a statement: "We accept responsibility for our past mistakes. We have said we are profoundly sorry for them, and we do so again. The HSBC of today is a fundamentally different organization from the one that made those mistakes. Over the last two years, under new senior leadership, we have been taking concrete steps to put right what went wrong and to participate actively with government authorities in bringing to light and addressing these matters."
At least $881 million in drug trafficking proceeds was laundered through HSBC Bank USA, violating the Bank Secrecy Act, U.S. authorities said.
The investigation on the drug trafficking proceeds grew out of a money laundering case in the Eastern District, United States v. Chaparro, 10-cr-54, where the convicted defendants have yet to be sentenced.
That case spurred an investigation by the Department of Homeland Security's El Dorado Task Force, handled in conjunction with the U.S. Attorney's Office. The probe, started in 2008, uncovered drug traffickers depositing large sums of U.S. currency in HSBC Mexico accounts from drug sales in the United States.
A significant amount of laundered trafficking proceeds went through a "Black Market Peso Exchange" and the proceeds ended up in the hands of drug cartels, often in Colombia.
The government also alleges that HSBC intentionally allowed prohibited transactions with Iran, Libya, Sudan and Burma. The bank also facilitated transactions with Cuba in violation of the Trading With the Enemy Act, according to court documents.
Money laundering by banks has become a priority target for U.S. law enforcement. Since 2009, Credit Suisse, Barclays, Lloyds, and ING have all paid large settlements related to allegations that they moved money for people or companies that were on the U.S. sanctions list.
On Dec. 10, the Justice Department and the Manhattan District Attorney's Office announced a deferred prosecution agreement with British bank Standard Chartered for its own practice of "stripping" information to disguise transactions from sanctioned countries or entities (NYLJ, Dec. 11). As part of the Standard Chartered settlement, the bank will pay $327 million in forfeiture and penalties.
The sum is separate from a $340 million civil penalty leveled against Standard Chartered in August by the New York State Department of Financial Services.
In a statement yesterday announcing his office's deferred prosecution agreement with HSBC, Manhattan District Attorney Cyrus Vance Jr. said that "New York is a center of international finance, and those who use our banks as a vehicle for international crime will not be tolerated. My office has entered into Deferred Prosecution Agreements with two different banks in just the past two days, and with six banks over the past four years. Sanctions enforcement is of vital importance to our national security and the integrity of our financial system."
Analysts said the HSBC and Standard Chartered will be able to absorb the cost of the settlements.
According to Shore Capital analyst Gary Greenwood, the penalties are equivalent to around 9 percent of each company's 2012 pretax profits.
"The certainty is clearly welcome and helps to draw a line under the situation," Greenwood said. "In terms of knock-on effects, we think it is likely to lead to higher ongoing compliance costs and perhaps some minor loss of business in the United States, but nothing that will be particularly material to either company."
This article originally appeared in the New York Law Journal.