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Too Big to Prosecute? -- HSBC Pays Record Fine for "Aiding and Abetting Drug Lords and Terrorists" But Dodges Criminal Sanctions

Posted  December 17, 2012

By Gordon Schnell

The London-based mega-bank HSBC agreed last week to pay $1.9 billion to settle government charges that it violated the Bank Secrecy Act for facilitating money laundering by some of the world’s nastiest drug cartels.  The charges also included alleged violations of the Trading with the Enemy Act for the bank’s improper dealings with a number of countries subject to international sanctions.  Click here to see the DOJ press release.  The payment represents the largest any financial institution has ever made for engaging in this kind of misconduct.  But with all the attention this historic settlement has received, the main focus has been less about what the government’s punishment of HSBC included, and more about what it did not.  It did not include any criminal sanctions against the bank.

The absence of criminal sanctions is all the more surprising given the extreme nature of HSBC’s wrongdoing.  The bank processed close to $1 billion in drug trafficking proceeds, including those from the notorious Sinaloa Cartel in Mexico and the Norte del Valle cartel in Columbia.  Apparently, the bank had become the go-to source for these and other cartels to “cleanse” their ill-gotten gains.  The bank also allowed hundreds of millions of dollars of prohibited financial transactions from a who’s-who listing of sanctioned countries including Iran, Sudan, Libya, Burma and Cuba.  Not only did HSBC permit these transactions, it actively supported them by supposedly working with these countries to keep hidden their involvement.  On at least one occasion, HSBC actually instructed an Iranian bank on how to disguise its connection to the transfers so the transactions would not be rejected in the United States.  Much of this activity had been previously detailed in a Senate report released in July which concluded that over the past decade HSBC “exposed the U.S. financial system to a wide array of money laundering, drug trafficking, and terrorist financing risks.”  Click here to see the Senate report.

HSBC’s transgressions cannot be excused as simple sloppiness or even gross negligence.  In the DOJ’s own words, we are talking about “stunning failures of oversight,” a “record of dysfunction that . . . was astonishing,” and ultimately, a “willful flouting” of U.S. law.  And not just any laws.  But laws that bare directly on our national security.  What is more, it follows a string of similar wrongdoing by others in the banking industry.  Indeed, just a day before the HSBC settlement, Standard Charter, another British bank, paid more than $300 million to settle charges of illicit money transfers involving Iran, Sudan and Libya.  Click here to see the DOJ press release.  ING, Barclays, Credit Suisse, Wachovia and several other banks also have recently paid hundreds of millions of dollars to settle similar types of charges.  Click here, here, here for the DOJ’s press releases on these settlements.  Clearly, it would seem, fines alone are not doing enough to scare the industry straight into complying with these banking laws.

As far as the HSBC penalty, the markets reacted with a yawn.  The bank’s share price actually rose after the settlement was announced.  And why shouldn’t it.  The $1.9 billion dollar payment represents just a trifle of the close to $17 billion in profits the bank pulled in last year.  Senator Chuck Grassley (R-Iowa), the Ranking Member of the Senate Judiciary Committee, in a letter to Attorney General Eric Holder, called the settlement “hardly even a slap on the wrist” for what he characterized as “aiding and abetting drug lords and terrorists.”  He excoriated the DOJ for failing to prosecute the bank criminally and cautioned that it sends out the clear message that “crime actually does pay” and, borrowing from a New York Times editorial, that “too big to fail is too big to jail.”  Click here to see the Grassley letter.

Where this all leaves things is unclear.  No doubt, the DOJ has taken a lot of heat from all sides for what was supposed to be a groundbreaking settlement.  Whether it will make the agency more aggressive going forward remains to be seen.  There certainly is the legitimate concern that mere monetary fines are not doing enough to get banks to behave.  But there also is some legitimacy to the concern that bringing these banks down criminally could negatively impact a still teetering economy.  In addition, in the case of HSBC, it has taken some fairly significant steps to clean house.  It has supposedly shed those most closely connected to the illegal activity, clawed-back bonuses from key executives, hired former Treasury officials to key compliance positions, and agreed to be monitored by an independent auditor for the next five years.  Only time will tell whether the DOJ did enough here, or whether more severe repercussions — including jailing those most directly responsible — will be necessary to make the message stick that this kind of crime does not pay and will not be tolerated.

Tagged in: Financial and Investment Fraud, Financial Institution Fraud, Money Laundering,