FCPA: The HSBC AML Settlement – Lessons Learned for the AML Compliance Practitioner

I recently wrote about banks behaving badly. Currently, Exhibit A in that list is HSBC. In December, 2012, the UK banking giant HSBC agreed to pay a fine of $1.92 billion for its transgressions involving money laundering. Today I want to look at the violations which the company engaged in and its resolution.

I.  HSBC AML Violations

Regarding the HSBC AML claims there were four major areas of money laundering violations by HSBC. As listed in the Statement Facts to the Deferred Prosecution Agreement (DPA) they read:

10. There were at least four significant failures in HSBC Bank USA’s AML program that allowed the laundering of drug trafficking proceeds through HSBC Bank USA:

1. Failure to obtain or maintain due diligence or KYC information on HSBC Group Affiliates, including HSBC Mexico;
2. Failure to adequately monitor over $200 trillion in wire transfers between 2006 and 2009 from customers located in countries that HSBC Bank USA classified as “standard” or “medium” risk, including over $670 billion in wire transfers from HSBC Mexico;
3. Failure to adequately monitor billions of dollars in purchases of physical U.S. dollars (“banknotes”) between July 2006 and July 2009 from HSBC Group Affiliates, including over $9.4 billion from HSBC Mexico; and
4. Failure to provide adequate staffing and other resources to maintain an effective AML program.

We will review each of these in more depth to provide guidance to the AML compliance practitioner on the steps that their financial institution needs to take.

a. HSBC Bank USA Failed to Conduct Due Diligence on HSBC Group Affiliates

One of HSBC Bank USA’s high risk products was its correspondent banking practices and services. Correspondent accounts were established at banks to receive deposits from, make payments on behalf of, or handle other financial transactions for foreign financial institutions. They are considered high risk because the US bank does not have a direct relationship with the clients and, therefore, has no diligence information on the foreign financial institution’s customers who initiated the wire transfers. To mitigate this risk, the Bank Secrecy Act (BSA) requires financial institutions to conduct due diligence on all non-US entities for which it maintains correspondent accounts. There is no exception for foreign financial institutions with the same parent company.

HSBC Bank USA was required under the BSA to conduct due diligence on all foreign financial institutions with correspondent accounts, including HSBC Group Affiliates, which it failed to do, from at least 2006 to 2010.  The decision not to conduct due diligence was guided by a formal policy memorialized in HSBC Bank USA’s AML Procedures Manuals.

b.   HSBC Bank USA Failed to Adequately Monitor Wire Transfers

From 2006 to 2009, HSBC Bank USA monitored wire transfers using an automated system called the Customer Account Monitoring Program (“CAMP”). The CAMP system would detect suspicious wire transfers based on parameters set by HSBC Bank USA under which various factors triggered review, in particular, the amount of the transaction and the type and location of the customer. However, HSBC Bank USA knowingly set the thresholds in CAMP so that wire transfers by customers located in countries categorized as standard or medium risk, including foreign financial institutions with correspondent accounts, would not be subject to automated monitoring unless the customers were otherwise classified as high risk.

Between 2000 and 2009, HSBC Bank USA, specifically disregarded numerous publicly available and industry-wide advisories about the money laundering risks inherent to Mexican financial institutions. These included the following:

1. The U.S. State Department’s designation of Mexico as a “jurisdiction of primary concern” for money laundering as early as March 2000;
2. The U.S. State Department’s International Narcotics Control Strategy Reports from as early as 2002 stating that Mexico was and continues to be one of the most challenging money laundering jurisdictions for the United States;
3. The April 2006 Financial Crimes Enforcement Network (“FinCEN”) Advisory concerning bulk cash being smuggled into Mexico and deposited with Mexican financial institutions;
4. The federal money laundering investigations that became public in 2007-08, involving Casa de Cambio Puebla, a Mexican-based money services business that had accounts at HSBC Mexico, and Sigue, a U.S.-based money services business, that had accounts at HSBC Mexico; and
5. The federal money laundering investigation into Wachovia for its failure to monitor wire transactions originating from the correspondent accounts of certain Mexican money services businesses, which became public in April 2008.

 c.  HSBC Bank USA Failed to Monitor Banknotes’ Transactions with HSBC Group Affiliates

HSBC Bank USA’s Banknotes business (“Banknotes”) involved the wholesale buying and selling of bulk cash throughout the world. The Banknotes business line was a high risk business because of the high risk of money laundering associated with transactions involving physical currency and the countries where some of its customers were located. In an attempt to mitigate these risks, Banknotes’ AML Compliance monitored customer transactions.  The purpose of transaction monitoring was to identify the volume of currency going to or coming from each customer and to determine whether there was a legitimate business explanation for buying or selling that amount of physical currency.

Despite the high risk of money laundering associated with the Banknotes business and FinCen advisories to the contrary, the HSBC Banknotes’ AML compliance consisted of one, or at times two, compliance officers. Unlike the CAMP system for wire transfers, Banknotes did not have an automated monitoring system, and, as a result, the Banknotes’ compliance officers were responsible for personally reviewing the transactions of approximately 500 to 600 Banknotes customers. These attempted reviews were deemed wholly insufficient.

d.  HSBC Bank USA Failed to Provide Adequate Staffing and Other Resources to Maintain an Effective AML Program

HSBC’s conduct regarding its AML policy was found to be completely wanting. Not only did the Bank fail to fill senior compliance officer positions after personnel left the Bank but it actually reduced the resources available to the compliance program by cutting funding in 2007. In 2008, the Chief Operating Officer (COO) for Compliance conducted an internal review of the AML compliance program and found it to be “behind the times” and noted that the program was under-resourced and understaffed. Despite these findings the Bank did not begin to address the resource problems until late 2009.

II.  HSBC Remedial Measures

The Department of Justice (DOJ) listed the remedial actions which HSBC engaged in that led, in part, to successfully avoiding a Criminal Indictment by the DOJ.

1. Change in Leadership and increase in resources. The Bank hired a new leadership team. In 2011, the Bank spent more than $244 on its compliance program. The Bank substantially increased the personnel in its compliance function from 92 full time employees and 25 consultants in 2010 to 880 full time employees and 267 consultants as of May 2012.
2. Claw Backs. The Bank ‘clawed back’ compensation from senior company executives.
3. Compliance Function. The Compliance Department was separated from the legal department and given direct reporting lines to the Board of Directors.
4. Exiting high risk business lines. The Bank exited the Banknotes business and ended 109 high risk business relationships.

The HSBC investigation and enforcement action took years and cost the Bank millions of dollars. The Bank ignored not only its internal compliance requirements but also outside information about the high risk nature of many of its business relationships. Banks must review their compliance programs to determine if any of the factors present in the HSBC matter are risks to their business models and remediate them as soon as possible to avoid a similar fate.

Filed under: Anti-Money Laundering,Background Checks,compliance programs,HSBC — tfoxlaw @ 1:01 am
Tags: AML, compliance programs, HSBC

© Thomas R. Fox, 2013