HSBC to pay $1.9bn fine in fraud case

Dec 11 2012 08:27

Hong Kong - HSBC has agreed to pay $1.92bn to settle a multi-year US criminal probe into money-laundering lapses at the British lender, the largest penalty ever paid by a bank.

HSBC admitted to a breakdown of controls and apologised in a statement announcing it had reached a deferred-prosecution agreement with the US Department of Justice, as was first reported by Reuters last week.

"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 organisation from the one that made those mistakes," Said Chief Executive Stuart Gulliver.

"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."

The bank said it expected to also reach a settlement with British watchdog the Financial Services Authority.

US and European banks have now agreed to settlements with US regulators totalling some $5bn in recent years on charges they violated US sanctions and failed to police illicit transactions.

No bank or bank executives, however, have been indicted as prosecutors have instead utilised deferred prosecutions.

HSBC said it would pay $1.921bn, continue to cooperate fully with regulatory and law enforcement authorities and take further action to strengthen its compliance policies and procedures. US prosecutors have agreed to defer or forgo prosecution.

Last month, HSBC told investors it had set aside $1.5bn to cover fines or penalties stemming from the inquiry and warned costs could be significantly higher.

Analyst Jim Antos of Mizuho Securities said the statement on Tuesday indicates an extra $420m for the settlement costs, calling it a "trivial" figure in terms of the company's book value. "But in terms of real cash terms, that's a huge fine to pay," said Antos, who rates HSBC a "buy."

Hong Kong listed shares of HSBC nudged up slightly on Tuesday, adding 25 cents to HK$79.75.

US justice department officials are expected to detail the settlement later on Tuesday.

HSBC's settlement is the latest chapter in an embarrassing period for the bank, the result of a lengthy probe into Europe's biggest bank by US law enforcement agencies as well as a US Senate panel that in July issued a scathing review of HSBC.

Anti- money laundering controls

In its statement, HSBC said it had increased spending on anti-money laundering systems, exited business relationships, and clawed back bonuses for senior executives. It also cited the hiring last January of Stuart Levey, a former top US Treasury Department official, as chief legal officer. 

Under a five-year agreement with the Justice Department, HSBC agreed to have an independent monitor evaluate its progress in improving its compliance. 

HSBC's settlement comes a day after rival British bank Standard Chartered agreed to a $327m settlement with US law enforcement agencies for sanctions violations, a pact that follows a $340m settlement the bank reached with the New York bank regulator in August. 

Such settlements have become commonplace. In what had been the largest settlement until this week, ING Bank NV in June agreed to pay $619m to settle US government allegations it violated sanctions against countries including Cuba and Iran. 

Other banks that have reached settlements over sanctions violations are Credit Suisse Group of Switzerland, Lloyds Banking Group and Barclays in Britain and ABN Amro Holdings, a Dutch bank acquired by Royal Bank of Scotland Group and a bank consortium in 2007. In the United States, J.P. Morgan Chase & Co, Wachovia Corp and Citigroup have been cited for anti-money laundering lapses or sanctions violations. 

HSBC's failings date to 2003, when the Federal Reserve Bank of New York and New York state regulators ordered the bank to better monitor suspicious money flows. 

In 2010, a consent order from the Comptroller of the Currency (OCC) ordered HSBC to review suspicious transactions moving through the bank. At the time, the OCC called HSBC's compliance programme "ineffective". 

In 2008, the US Attorney in Wheeling, West Virginia, began investigating HSBC and how a local pain doctor allegedly used the bank to launder Medicare fraud. 

Ultimately, that prosecutor's office came to believe the case was "the tip of the iceberg" in terms of the suspicious transactions conducted through HSBC, according to documents reviewed by Reuters and reported earlier this year.


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