Amid charges that poor controls and maneuvering around banking regulations facilitated money laundering by Mexican Drug cartels and potentially aided terrorist groups, the chief compliance officer at HSBC announced that he would resign from that post during a Senate hearing on Tuesday. (Watch Video of the hearing.)
David Bagley, who is based out of HSBC London headquarters, said that he would stay with the company to help transition in a new head of compliance.
On Tuesday, a Senate Permanent Subcommittee on Investigations released a report charging that global banking giant HSBC and its U.S. affiliate exposed the U.S. financial system to what Chairman Carl Levin (D-Mich) called “a wide array of money laundering, drug trafficking, and terrorist financing risks due to poor anti-money laundering (AML) controls.” The Subcommittee conducted a year-long investigation into HSBC and detailed those findings in a 330-page report that was released during Tuesday's hearing, which included testimony from HSBC executives.
“HSBC's compliance culture has been pervasively polluted for a long time,” Levin said. “Its recent change in leadership says it's committed to cleaning house. That commitment is welcome surely, but it will take more than words for the bank to change course. Just as certain is the need for tough regulation by the OCC.”
“My chief focus as the Head of Group Compliance at HSBC has been promoting the values that we as a bank have set for ourselves and the values that you and our regulators, both in the United States and around the world, rightly expect from a global bank like HSBC,” Bagley said prior to announcing his resignation. “And, while there have been successes on many compliance issues, I recognize that there have been some significant areas of failure.”
“Despite the best intentions and efforts of so many dedicated compliance and business professionals, HSBC has in some important areas failed to meet our expectations and the expectations of our regulators,” he added. “I am happy, however, to be able to say that the bank has learned from its past and is already on a path to becoming a better, stronger banking institution. The bank's structure is, in short, very different from what it was in 2002, when I agreed to serve as Head of Group Compliance.”
The Subcommittee investigation focused on HSBC's key U.S. affiliate, HBUS.
In 2010, HSBC was cited by its federal regulator, the Office of the Comptroller of the Currency (OCC), for multiple severe AML deficiencies, including a failure to monitor $60 trillion in wire transfer and account activity; a backlog of 17,000 unreviewed account alerts regarding potentially suspicious activity; and a failure to conduct AML due diligence before opening accounts for HSBC affiliates. Subcommittee investigators found that the OCC had failed to take a single enforcement action against the bank, formal or informal, over the previous six years, despite ample evidence of AML problems.
The Subcommittee investigation focused on several allegations:
- HBUS, offered banking services to HSBC Bank Mexico, and treated it as a low risk client, despite its location in a country facing money laundering and drug trafficking challenges. The Mexican affiliate transported $7 billion in physical U.S. dollars to HBUS from 2007 to 2008, outstripping other Mexican banks, even one twice its size, raising red flags that the volume of dollars included proceeds from illegal drug sales in the U.S.
- Foreign HSBC banks actively circumvented U.S. safeguards at HUBS "designed to block transactions involving terrorists, drug lords, and rogue regimes." In one case examined by the Subcommittee, two HSBC affiliates sent nearly 25,000 transactions involving $19.4 billion through their HBUS accounts over seven years without disclosing the transactions' links to Iran.
- HBUS provided U.S. dollars and banking services to some banks in Saudi Arabia and Bangladesh despite links to terrorist financing.
The report recommended a number of changes at HSBC's U.S. bank, including higher scrutiny of HSBC affiliates for money-laundering risk, closing accounts of banks linked to terror financing, and steps to ensure the bank does not process transactions with prohibited entities.