This morning, numerous media outlets reported that HSBC had agreed to pay a $1.92 billion fine to settle an investigation by the United States Department of Justice and various other agencies, who alleged the bank failed to enforce compliance controls designed to prevent laundering of criminal proceeds.  HSBC issued a statement on its website, announcing the agreement, which includes a Deferred Prosecution Agreement with the Department of Justice as well as “agreement to achieve a global resolution with all other US governmental agencies that have investigated HSBC’s past conduct” in connection with anti-money laundering and sanctions laws.  According to the press release, those other agencies are the New York County District Attorney’s Office, the Board of Governors of the U.S. Federal Reserve System, the U.S. Department of the Treasure’s Offices of Foreign Assets Control, the Office of the Comptroller of the Currency and the Financial Crimes Enforcement Network (FinCEN) of the Treasury Department.

Reuters reported that “[t]he deferred prosecution agreement, when detailed by U.S. Justice Department officials later on Tuesday, could yield new information about a failure at HSBC to police transactions linked to Mexico, sources familiar with the matter said.”

In July, 2012, the Senate Permanent Subcommittee on Investigations held a hearing, “U.S. Vulnerabilities to Money Laundering, Drugs, and Terrorist Financing: HSBC Case History.”  (For links to the exhibits, report and testimony, please see here). The Subcommittee’s report detailed five key problem areas for HSBC:

  • Servicing a High Risk Affiliate (HSBC Mexico, which was the subject of significant concerns about drug trafficking proceeds);
  • Circumventing OFAC Prohibitions relating to Iran;
  • Disregarding Links to Terrorism (and in particular, continuing to do business with Al Rajhi Bank of Saudi Arabia even after evidence that the bank’s founder was a financial benefactor of Al Qaeda);
  • Clearing Suspicious Bulk Travelers Cheques; and
  • Offering Bearer Share Accounts (a type of account where the owner of stocks or securities is not identified, making it difficult to trace).

Dealbook reported that:

While the settlement with HSBC is a major victory for the government, the case raises questions about whether certain financial institutions, having grown so large and interconnected, are too big to indict. Four years after the failure of Lehman Brothers nearly toppled the financial system, regulators are still wary that a single institution could undermine the recovery of the industry and the economy.

But the threat of criminal prosecution acts as a powerful deterrent. If authorities signal such actions are remote for big banks, the threat could lose its sting.

Behind the scenes, authorities debated for months the advantages and perils of a criminal indictment against HSBC.

Some prosecutors at the Justice Department’s criminal division and the Manhattan district attorney’s office wanted the bank to plead guilty to violations of the federal Bank Secrecy Act, according to the officials with direct knowledge of the matter, who spoke on the condition of anonymity. The law requires financial institutions to report any cash transaction of $10,000 or more and to bring any dubious activity to the attention of regulators.

Given the extent of the evidence against HSBC, some prosecutors saw the charge as a healthy compromise between a settlement and a harsher money-laundering indictment. While the charge would most likely tarnish the bank’s reputation, some officials argued that it would not set off a series of devastating consequences.

A money-laundering indictment, or a guilty plea over such charges, would essentially be a death sentence for the bank. Such actions could cut off the bank from certain investors like pension funds and ultimately cost it its charter to operate in the United States, officials said.

Reuters also reports that that the Department of Justice today filed the felony criminal information against HSBC in federal court in Brooklyn, and that the “information is a widely expected precursor to a deferred prosecution agreement.”

HSBC’s statement provides some detail about the expected deferred prosecution agreement:

HSBC Group has also undertaken a comprehensive overhaul of its structure, controls, and procedures. A number of these improvements is included in the DPA. Among other measures, HSBC Group has:

  • simplified its control structure, allowing the Group to manage risks worldwide more effectively;
  • elevated the role of Group Compliance and given it direct oversight over every compliance officer globally, so that both accountability and escalation now flow directly to and from HSBC Group Compliance;
  • created the new role of Head of Group Financial Crime Compliance and Group Money Laundering Reporting Officer, who will help to establish a Global Financial Intelligence Unit;
  • made other new senior hires with extensive experience handling relevant international legal and regulatory issues, including a new Chief Legal Officer and a new Global General Counsel for Litigation and Regulatory Affairs;
  • adopted a set of guidelines limiting business in those countries that pose a high financial crime risk;
  • issued a new global sanctions policy using a more extensive and consistent set of lists to screen all cross-border payments;
  • commenced a review of all Know Your Customer files across the entire Group - the first phase of this remediation will cost an estimated US$700m over five years, and
  • undertaken to implement single global standards shaped by the highest or most effective anti-money laundering standards available in any location where the HSBC Group operates.

Over the five-year term of the agreement with the Department of Justice, an independent monitor will evaluate HSBC’s progress in fully implementing these and other measures it recommends, and will produce regular assessments of the effectiveness of HSBC’s compliance function.