US authorities defended their decision not to prosecute HSBC for accepting the tainted money of rogue states and drug lords on Tuesday, insisting that a $1.9bn fine for a litany of offences was preferable to the "collateral consequences" of taking the bank to court.
Announcing the record fine at a press conference in New York, assistant attorney general Lanny Breuer said that despite HSBC"s "blatant failure" to implement anti-money laundering controls and its wilful flouting of US sanctions, the consequences of a criminal prosecution would have been dire.
Had the US authorities decided to press criminal charges, HSBC would almost certainly have lost its banking licence in the US, the future of the institution would have been under threat and the entire banking system would have been destabilised.
HSBC, Britain's biggest bank, said it was "profoundly sorry" for what it called "past mistakes" that allowed terrorists and narcotics traffickers to move billions around the financial system and circumvent US banking laws. Breuer said Mexican drug traffickers deposited hundreds of thousands of dollars each day in HSBC accounts.
The bank processed cash for Mexico's Sinaloa cartel, regarded as the most powerful and deadly drug gang in the world, among others. At least $881m in drug trafficking money was laundered throughout HSBC accounts. In order to handle the "staggering amounts of cash", the bank even widened the windows at some branches to allow tellers to accept larger boxes of money.
HSBC also helped rogue states including Libya, Sudan, Burma and Iran to work around US rules banning them from using US financial system in a scheme that went on for decades.
Breuer was pressed on why the US authorities had agreed to a deferred prosecution deal for the bank. He dismissed accusations that prosecutors had not been hard enough and said that the Justice Department had looked at the "collateral consequences" to prosecuting the HSBC or taking away its US banking licence. Such a move could have cost thousands of jobs, he said.
HSBC has already sacked all the senior staff involved in the scandal, and agreed to stringent monitoring – the first time a foreign bank has agreed to such oversight. "In this day and age we have to evaluate that innocent people will face very big consequences if you make a decision," said Breuer. "I don't think anyone is alleging that HSBC was the mastermind of the scheme," he said. Rather it was their "incredibly lax" monitoring that was to blame. "HSBC was a vital player," he said. "But they are not the Sinaloa cartel."
Breuer added that a "sword of Damocles" was now hanging over HSBC and that any future transgressions would have dire consequences for the bank. "HSBC is being held accountable for stunning failures of oversight – and worse, that led the bank to permit narcotics traffickers and others to launder hundreds of millions of dollars through HSBC subsidiaries and to facilitate hundreds of millions more in transactions with sanctioned countries."
In Mexico the bank "severely understaffed" its compliance department and failed to implement an anti-money laundering programme despite evidence of serious risks. A complex scheme known as the black market peso exchange (BMPE) was used to launder the cash.
Cyrus Vance, the Manhattan district attorney, said: "New York is the centre of international finance, and those who use our banks as a vehicle for international crime will not be tolerated."
Stuart Gulliver, the chief executive of HSBC, once again apologised for the scandal. He said: "We accept responsibility for our past mistakes. We have said we are profoundly sorry for them, and we do so again." He insisted HSBC was "a fundamentally different organisation" now.
It is the largest ever fine for such an offence and even greater than the £940m the bank had feared it faced after the allegations first surfaced in the summer in a report by the US Senate.
The fine for HSBC came a day after Standard Chartered paid £415m to US regulators, and as banks such as Royal Bank of Scotland and UBS brace for a wave of fines in coming days for attempting to rig the Libor inter-bank lending rate following the £290m penalty levied on Barclays in June.
As part of the deal, HSBC has undertaken a five-year agreement with the US department of justice under which it will install an independent monitor to assess reformed internal controls. The bank's top executives will defer part of their bonuses for the whole of the five-year period, while bonuses have been clawed back from a number of former and current executives, including those in the US directly involved at the time.
John Coffee, a professor of law at Columbia Law School in New York, said
the fine was consistent with how US regulators have been treating bank infractions in recent years. "These days they rarely sue individuals in any meaningful way when the entity will settle. This is largely a function of resource constraints, but also risk aversion, and a willingness to take the course of least resistance," he said.
Despite the size of the fine, HSBC's shares on the London stock exchange rose by 2.8p to 644p. Last month HSBC announced third-quarter pre-tax profits to $3.5bn (£2.2bn).
Ian Gordon, banks analyst at Investec, said the fine was slightly lower than the $2bn he had been pencilling in to his forecasts. But he said: "HSBC's settlement with the US authorities will include a deferred prosecution agreement with the department of justice of five years' duration. Given HSBC's ongoing US business and other continuing conduct investigations, this sword of Damocles is not without teeth, albeit based on what we know, we are regarding the $1.921bn settlement as de facto 'final'."
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