HSBC's US probe

British banks "shamed" by US regulators

Should more people at the top be held accountable?
Even more to shout about: Occupy protesters outside HSBC's iconic headquarters earlier this year

One of the distinctive features of HSBC’s landmark headquarters in Hong Kong, designed by celebrated British architect Norman Foster, is its lack of visible internal supporting structure. That doesn’t seem too dissimilar to HSBC’s corporate structure given July’s US Senate report claiming the bank was complicit as a conduit for money laundering by Mexican drug cartels and that it failed to turn away clients with alleged ties to terrorism.

Attention is also now focusing on Standard Chartered, another British bank with a strong Asian presence. New York’s department of financial services (DFS) has accused it of hiding $250 billion of transactions with the Iranian government between 2001 and 2010. In particular, it claimed that the bank removed codes that identify Iranian clients from money transfers — a practice called “wire stripping”.

Standard Chartered has issued a robust rejection of the DFS’s case, stating in a press release late on Monday that the bank “does not believe the order by the DFS presents a full and accurate picture of the facts”.

If the accusations against HSBC and Standard Chartered prove to be even partly true, there will be serious issues of accountability and culpability. It would be tough to scapegoat rogue elements, if the activities are found to be pervasive and even harder if there is evidence that senior executives turned a blind eye — or worse, encouraged them.

After a five-year probe, the US investigation into HSBC chaired by Carl Levin, a senator, made seven “findings of fact”: that HSBC had long-standing, severe anti-money laundering deficiencies during the past decade; had taken on high-risk affiliates; circumvented Office of Foreign Assets Control prohibitions; disregarded terrorist links; cleared suspicious bulk travellers’ cheques; offered bearer-share accounts; and allowed problems with anti-money laundering controls to fester.

During most of the period reviewed by the report, Stephen Green was in charge of the bank, becoming chief executive in 2003 and then chairman of HSBC Holdings from 2006 until 2010. Already a peer of the realm, Green has also been a cabinet minister in Britain’s coalition government since 2010, with responsibility for trade and investment.

Green still holds that position, and despite calls by opposition politicians for him to explain himself to the House of Lords, he has declined. Indeed, rather than face awkward questions from parliament, Green preferred to protest his innocence to Sky News.

“I reacted appropriately when issues came up,” he insisted. “I do not believe that I have a case to answer other than in the important sense that as chairman and chief executive I was responsible for what the company did.”

Certainly, no one is suggesting Green was actually the bagman for drug barons and international terrorists, circumventing wire-transfer rules or riding in the armoured trucks moving cash across the Rio Grande.

But, surely it is rather important that as the HSBC boss during this period he should take responsibility and suffer consequences — in a real rather than abstract sense. The failures catalogued by the Senate committee were not incidental to his tenure; they might well later be seen as definitive.

Should Green step down from his government position as contrition for activities that occurred at the bank he ran? In late June, the chairman of Barclays, Marcus Agius, announced his resignation after accepting responsibility for a Libor price-fixing scandal that resulted in trans-Atlantic fines of $453 million. In late July, Nomura Holdings’ CEO Kenichi Watanabe resigned over a widening insider trading scandal as Japan’s top investment bank warned additional cases could come to light. But in both instances, they resigned from the banks at the centre of the controversy.

HSBC’s head of compliance, David Bagley, has resigned from his position, though he told the Senate investigative panel that he will remain at the bank in a new role.

HSBC officials have said that they have already made other changes to compliance roles. In the US, for example, the bank has increased its compliance and anti-money laundering staff to more than 1,000 full-time employees. HSBC noted that additional reforms include scaling back its correspondent banking and embassy banking relationships by closing higher-risk accounts, as well as closing its banknotes business in 2010. In addition, HSBC sent out a group circular in April in which it said that overall it would “adhere to a single standard globally”, which is designed to push affiliates to higher compliance standards.

And HSBC has already set aside $700 million to cover the cost of US regulatory fines regarding the issues, and a further $1.3 billion to compensate customers who were mis-sold payment protection insurance and derivatives products in the UK. The bank may also be subject to civil claims connected to the Libor scandal.

In its interim report released on July 30, HSBC conceded that the penalties in the US could be much higher than estimated.

It said that the “resolution of at least some of these matters is likely to involve the filing of corporate criminal as well as civil charges and the imposition of significant fines and penalties”.

In the past, HSBC noted, the “prosecution of corporate criminal charges in these types of cases has most often been deferred through an agreement with the relevant authorities”.

But, perhaps recognising the unforgiving public mood, it might be preparing for the worst. “The US authorities have substantial discretion, and prior settlements can provide no assurance as to how the US authorities will proceed in these matters,” the bank said.

Senior officers clearly need to be held to account. Culpability cannot simply be assigned to junior managers, branch staff in dusty Mexican towns or under-resourced compliance departments, which are too easily sidelined by the revenue producers.

Douglas Flint, chairman of HSBC, has indicated that some senior managers’ bonuses might be clawed back. One former executive who could face scrutiny is Sandy Flockhart, who headed the Mexican affiliate from 2002, when HSBC bought Grupo Finaciero Bital, until 2007.

His apparently successful stewardship was followed by promotion to chairman of Europe, Middle East, Africa, Latin America and also to chairman of HSBC plc. And in 2008, Flockhart was appointed a CBE in the UK’s New Year’s Honours.

In April 2012, he retired from his executive positions at the bank and in July, a few days before the release of the Senate report, also gave up his non-executive roles due to illness.

HSBC’s chief executive Stuart Gulliver has conceded that the bank’s failure to prevent money laundering in Mexico and the US was “shameful, embarrassing and very painful”.

He repeated that apology when announcing the bank’s interim results on July 30. “The firm clearly lost its way,” he said. “But we have changed.”

Remorse and a promise to behave better in the future are common pleas for mitigation in the dock. But complicity or negligence needs to be fully determined.

¬ Haymarket Media Limited. All rights reserved.
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