Bloomberg News

HSBC to Pay $1.92 Billion in U.S. Money-Laundering Probe

December 11, 2012

HSBC Agrees to Pay $1.92 Billion in Money-Laundering Settlement

A Senate committee said in July that failures in HSBC’s money-laundering controls gave terrorists and drug cartels access to the U.S. financial system. Photographer: Brent Lewin/Bloomberg

HSBC Holdings Plc (HSBA), Europe’s largest bank, agreed to pay $1.92 billion to settle U.S. probes of money laundering in the largest such accord ever.

The settlement includes a deferred prosecution agreement with the U.S. Department of Justice, the London-based bank said in an e-mailed statement today. The U.K.’s Financial Services Authority said the bank will have to employ an independent monitor to oversee compliance with anti-money laundering requirements.

Chief Executive Officer Stuart Gulliver’s attempts to reduce costs and improve profitability have been hurt by the U.S. probes and by compensation claims from U.K. clients. A Senate committee said in July that lax oversight by top HSBC executives gave terrorists and drug cartels access to the U.S. financial system. The settlement is the biggest reached in the U.S. over such allegations, topping the $619 million in penalties paid in June by the Netherlands’ ING Groep NV.

“This has removed an uncertainty, though it doesn’t clear the path completely for HSBC,” said Lewis Wan, Hong Kong-based chief investment officer at Pride Investments Group Ltd., which doesn’t hold HSBC shares. “Regulators have been tightening oversight of banks. Lenders like HSBC will have to continue to strengthen their compliance.”

HSBC rose 0.6 percent to 644.8 pence in London. The shares have gained 31 percent this year, giving the company a market value of 118.7 billion pounds ($191.1 billion).

‘Profoundly Sorry’

HSBC (HSBA) has been in talks with U.S. regulators over allegations it laundered funds of sanctioned nations including Iran and Sudan, prompting Standard & Poor’s to question whether the lender is too big to be managed effectively.

HSBC handled so-called U-turn transactions through U.S. financial institutions that involved funds from Iran to non-U.S. banks, altering its transaction records to obscure information about its clients, according to U.S. Senate testimony in July.

Around 25,000 transactions with Iran worth more than $19.4 billion were made with about 90 percent passing through the U.S., according to an audit by Deloitte LLP. Senate investigators documented similar transactions with North Korea, Cuba, Sudan and Burma, which along with Iran are subject to sanctions administered by the Office of Foreign Assets Control.

In a deferred prosecution agreement, the government allows a target to avoid charges by meeting certain conditions -- including the payment of fines or penalties -- and by committing to specific reforms, either under the guidance of a monitor, or the creation of an internal compliance panel.

‘Past Mistakes’

“We accept responsibility for our past mistakes,” Gulliver said in the statement. “We have said we are profoundly sorry for them, and we do so again. The HSBC of today is a fundamentally different organization from the one that made those mistakes.”

In a range of measures, the bank has to have a group money laundering reporting officer and establish a board to oversee anti-money laundering controls, the FSA said in a statement today. HSBC will also spend $700 million over five years on a “know your customer” review, it said.

HSBC yesterday named Robert Werner, previously head of the U.S. Treasury’s Office of Foreign Assets Control and Financial Crimes Enforcement Network, as head of group financial crime compliance and group money laundering reporting officer.

Standard Chartered Plc (STAN), which like HSBC (HSBA) generates most of its earnings in Asia, said yesterday it will pay a further $327 million to settle regulators’ allegations that transactions with Iranian clients violated U.S. sanctions. It agreed to pay $340 million to the New York Department of Financial Services on Aug. 14.

Already Earmarked

HSBC (HSBA) made an $800 million provision in the third quarter to cover a potential settlement, adding to $700 million it had already earmarked. The bank said on Nov. 5 it will probably face criminal charges from U.S. anti-money-laundering probes and the cost of a settlement may “significantly” exceed the $1.5 billion it has set aside.

“In an age of international terrorism, drug violence, and organized crime, stopping illicit money flows is a national security imperative,” Senator Carl Levin, a Michigan Democrat who is chairman of the Senate’s Permanent Subcommittee on Investigations, said in an e-mailed statement. “Global banks have global responsibilities to prevent participation in illicit or suspect transactions.”

Gulliver, who became CEO in January 2011, is seeking to cut costs by $2.5 billion to $3.5 billion and revive profit by selling assets to focus on emerging economies in which the bank has a greater market share. Savings will probably exceed that range and be achieved by the end of 2013, HSBC said last month.

Standard Chartered

The bank said Dec. 5 it will sell its stake in China’s Ping An Insurance (Group) Co. to Thai billionaire Dhanin Chearavanont for $9.4 billion, giving it a $2.6 billion profit.

The bank generated 64 percent of its first-half pretax income in the Asia Pacific region, up from 47 percent five years ago, according to data compiled by Bloomberg. At Standard Chartered (STAN), it slipped to 63 percent from 65 percent.

Standard Chartered (STAN) in August was accused by Benjamin Lawsky, head of the New York Department of Financial Services, of helping Iran launder about $250 billion in violation of federal laws, keeping false records and handling lucrative wire transfers for Iranian clients. The settlement was the largest paid to an individual regulator as part of a money-laundering accord.

The bank will pay $100 million to the Federal Reserve and $227 million to the Department of Justice and the Manhattan District Attorney. The settlement includes a $132 million fine to the Treasury Department’s Office of Foreign Assets Control.

Deferred Bonuses

Standard Chartered entered into a deferred prosecution agreement with the Justice Department whereby it will forfeit $227 million of funds tied to the illegal transactions, according to court records filed in Washington.

As part of that agreement, the U.S. charged the bank with one count of conspiring to violate the International Emergency Economic Powers Act. That charge will be dismissed after two years if Standard Chartered (2888) abides by the terms of the agreement, according to court papers.

HSBC agreed an independent monitor will evaluate progress in fulfilling its promises as part of the five-year agreement. During that period, bonuses based on compliance will be deferred, according to a person familiar with the situation who declined to be identified because the information is private.

HSBC executives including Gulliver did not receive the maximum discretionary bonus available to them for 2011 for reasons including the bank’s improper sale of payment protection insurance in the U.K. and the advice given to elderly customers on products to fund nursing-home costs.

Half of Gulliver’s bonus for the year was tied to non- financial performance, including 15 percent for compliance and reputation.

To contact the reporter on this story: Howard Mustoe in London at hmustoe@bloomberg.net

To contact the editors responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net; Edward Evans at eevans3@bloomberg.net


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