Drug Cartels and Terrorists are Using Foreign Ties to Gain Access to U.S. Banking

United States authorities are investigating multiple banks for sanction violations and money laundering. HSBC is being made an example to send the message that the Unites States is not going to turn a blind eye to these activities. Standard Charter Bank reached a $340 million settlement with U.S. regulators for violating sanctions by doing $250 billion in transactions with Iran. Germany’s Commerzbank and Royal Bank of Scotland are facing charges of sanction violations. Wells Fargo & Co.’s Wachovia Bank paid a $160 million settlement in 2010. (Staff2)

After its investigation, Mexico fined HSBC a record $27.5 million (over one-half of the Mexico branch’s 2011 profits. (Staff3) “Mexico loses an estimated $50 billion per year – almost 5 percent of its gross domestic product – in illicit money outflows of different types, including money laundering, corruption, and tax evasion, according to Global Financial Integrity, a nonprofit research and advocacy group in Washington, DC.” (Flannery)

Six HSBC executives testified at the hearing, including David Bagley, who announced his resignation as head of group compliance during his testimony. (Hamilton and Voreacos) The U.S. Senate Subcommittee ruled that HSBC was guilty of conducting 25000 transactions totaling $19 billion with Iran between years 2001 and 2007. (Staff2) The Mexico subsidiary helped drug cartels buy planes through laundered money in Cayman Island accounts. HSBC Mexico set up a Cayman Island branch that handled 50 thousand accounts worth $2.1 billion. (Rushe) Although there was a Cayman Island branch on the books, no offices or staff existed. The Senate Subcommittee issued a 335-page report that detailed how the financial institution repeatedly failed to comply with money-laundering regulations and government sanctions, and allowed terrorists and drug lords to filter billions of dollars through the North America branch of the London based company. Additionally, the bank violated U.S. sanctions when it conducted business with Libya, Sudan, Syria, North Korea, Cuba, and Burma. (Hamilton and Voreacos)

HSBC opened more than 2500 bearer share corporations, the majority opened in Miami, Florida, with assets of $2.6 billion that generated $26 million in annual revenues. Bearer share corporations can secretly change ownership, which makes them a great way of laundering funds. (Staff)

HSBC was fined $100,000 in April 2000 for making a transfer that benefitted the Taliban, yet in the years between 2006 and 2010, HSBC shipped $1 billion to Al Rajhi in Saudi Arabia, despite its links to terrorist financing. The investigation showed that HSBC was aware that it was violating U.S. sanctions by doing business with Iran. An outside audit by Deloitte LLP, confirmed that HSBC completed 25,000 transactions involving Iran that totaled over $19 billion. Approximately 1800 of these were u-turn transactions. Until 2008, U.S. regulations permitted banks to conduct u-turn transactions that go through sanctioned countries but do not originate or end in one of those countries. Regulators discovered that banks were falsifying documents to hide where the transactions are beginning and ending in order to bypass regulations. (Hamilton and Voreacos)

HSBC is also under investigation by the U.S. Justice Department, the Manhattan, New York District Attorney, the U. S. Federal Reserve, and the U.S. Treasury. Although HSBC has allocated $700 million for fines, it has been estimated that the fine from the U.S. Senate alone may be as high as $1 billion. HSBC admitted failure to report 39 suspicious transactions and reporting 1729 suspicious transactions after they were completed. (Staff3) “Paul Thurston, chief executive of retail banking and wealth management, who was sent in to try and clear up HSBC’s Mexican banking business in 2007, said he was “horrified” by what he found.” Mr. Thurston also stated the Bank has doubled oversight funding and adopted Global compliance structure. (Rushe)

Only after the head of the Subcommittee, Senator Levin, declared he felt there might be significant reason for regulators to consider revoking HSBC’s charter, the bank’s senior executives promised changes and displayed remorse for their actions, or lack of actions. The head of HSBC’s retail banking and wealth management unit stated that HSBC will close the Mexico unit’s U.S. dollar accounts in the Cayman Islands. (Rushe)

Works Cited

Flannery, Nathaniel Parish. "Could HSBC Face the World's First Billion Dollar Money Laundering Settlement?" 30 September 2012. Forbes. 23 October 2012 <http://www.forbes.com/sites/nathanielparishflannery/2012/09/30/could-hsbc-face-the-worlds-first-billion-dollar-money-laundering-settlement>.

Hamilton, Jesse and David Voreacos. "HSBC Executive Resigns at Senate Money-Laundering Hearing." 23 July 2012. www.businessweek.com. 15 October 2012 <http://www.businessweek.com/printer/articles/287462?type=bloomberg>.

Rush, Dominic. "HSBC 'sorry' for aiding Mexican drugs lords, rogue states and terrorists." 17 July 2012. The Guardian. 23 October 2012 <http://www.guardian.co.uk/business/2012/jul/17/hsbc-executive-resigns-senate>.

Staff. "Senate report: HSBC 'allowed drug money laundering'." 17 July 2012. BBC News Business. 23 October 2012 <http://www.bbc.co.uk/news/business-18866018?print=true>.

Staff3. "Mexico fines HSBC $27.5m for lax money-laundering control." 25 July 2012. BBC News Latin America & Caribbean. 25 October 2012 <http://www.bbc.co.uk/news/world-latin-america-18993476?print=true>.

"Unicredit 'in US Iran sanctions breach investigation'." 26 July 2012. BBC News Business. 23 October 2012 <http://www.bbc.co.uk/news/business-19384702?print=true>.