Recent Financial Scandals – HSBC Bank USA N.A. (July 2012)

Anti-Money Laundering and Terrorist Financing Vulnerabilities attributable to HSBC Bank USA N.A. (From Report of United States Senate Sub Committee on Investigations dated 17th July 2012)

The US Senate Permanent Committee on Investigations examines the anti-money laundering and terrorist financing vulnerabilities created when a global bank uses its affiliate to provide U.S. dollars, U.S. dollar services, and access to U. S. financial system to high risk affiliates, high risk correspondent banks, and high risk clients.    

In their report dated 17th July 2012, their observations on HSBC were mainly as follows:

  1. Longstanding severe AML deficiencies: HSBC Bank USA N.A. (HBUS), key U.S. affiliate of HSBC Group operated its correspondent accounts for foreign financial institutions, with long standing,  severe AML deficiencies, including dysfunctional AML monitoring system for account and wire transfer activity, and had an unacceptable backlog of 17,000 un-reviewed alerts, insufficient staffing, inappropriate country and client risk assessments, and late or missing Suspicious Activity Reports
  2.  Taking on High Risk Affiliates: HBUS failed to assess AML risks associated with HSBC affiliates before opening correspondent accounts for them. HBUS provided correspondent banking facilities to HSBC Mexico (HSMX) which was operating in a country “under siege from drug crime, violence and money laundering” and had inadequate money laundering controls. Between 2007-8, for example, HBMX shipped $7bn to HSBC’s US operation, more than any other HSBC affiliate. Mexican and US authorities expressed concern that drug traffickers were able to circumvent the anti-money laundering controls at US banks by transporting US dollars to Mexico, and then using HBMX to transfer it to the US. The report also observed that  HBMX had high-profile clients involved in drug trafficking, millions of dollars of suspicious bulk travellers cheques, and a resistance to closing accounts linked to suspicious activity. HBUS nevertheless classed Mexico as a low-risk country and as a result, failed to properly monitor its transfers and other dealings with it.
  3. Circumventing OFAC prohibitions: US laws prevent banks doing business with what it regards as the most dangerous individuals and countries. HSBC frequently circumvented the rules designed to prevent dealings with Iran, Burma, North Korea and Iran. Actions taken to get around these safeguards in the system “may have facilitated transactions on half of terrorists, drug traffickers or other wrongdoers”, it said. For example, HBUS carried out 28,000 undisclosed sensitive transactions between 2001 and 2007, an internal audit commissioned by the bank found. The vast majority of those transactions – worth $19.7bn – involved Iran. Two affiliates, HSBC Europe and HSBC Middle East repeatedly altered transaction information to take out any reference to Iran, the report said. This may have been to prevent red flags in the system triggering an individual review of an accepted transaction, slowing it down, the committee said. But more work would need to be done to established which of these thousands of cases, if any, had broken US law.
  4. Disregarding Terrorist Links: HSBC did business with Saudi Arabia’s biggest financial institution, Al Rajhi Bank. The report claims that after the terrorist attacks in the US on 11 September 2001, evidence emerged that Al Rajhi and some of its owners had links to financial organisations associated with terrorism. HSBC Middle East was one of a number of affiliates which continued to work with the bank. HBUS closed the accounts it provided to Al Rajhi, before resuming some ties with them in 2006. The report claimed it had done this after pressure from HSBC, after Al Rajhi threatened to withdraw all of its business from HSBC globally.
  5. Clearing Suspicious Bulk Travelers Cheques: The committee is concerned that HSBC cleared large amounts of travellers’ checks over a number of years, without proper anti-money laundering controls, despite evidence of suspicious activity. Between 2005 and 2008, HBUS cleared $290m worth of US dollar travellers’ cheques which were being presented at a Japanese bank. The daily transactions were worth up to half a million dollars, with large blocks of sequentially numbered cheques being handed over. After prompting from US regulators, HBUS found out that the travellers’ cheques were being bought in Russia – a country at high-risk of money laundering.
  6. Offering Bearer Share Accounts: Bearer share corporation is a notorious type of corporation that invites secrecy and wrong doing by assigning ownership to whomsoever has physical possession of shares. Over the course of a decade, HBUS opened over 2,000 high risk bearer share corporate accounts with inadequate AML controls.
  7. Allowing AML Problems to Fester: The OCC allowed AML problems of HBUS to fester due to its treatment of AML problems as consumer compliance matters rather than safety and soundness problems.

The report contains the following recommendations:

  1. Proper screening of high risk affiliates
  2. Respecting OFAC prohibitions
  3. Closing accounts of banks with links to terrorist financing
  4. Revamping Treavellers Cheques AML controls
  5. Boosting information sharing amongst affiliates
  6. Eliminating Bearer Share Accounts
  7. Increasing AML resources
  8. Treating AML deficiencies as a matter of safety and soundness by OCC
  9. Acting on multiple AML problems
  10. Strengthening AML examinations

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