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HSBC money laundering: Bank vows fixes. Senators doubtful.

HSBC money laundering comes under the microscope in a Senate hearing. Bank officials promise to shut down operations in the Cayman Islands, tied to HSBC money laundering. 

By Carrick MollenkampReuters / July 19, 2012

Paul Thurston, chief executive of Retail Banking and Wealth Management HSBC Holdings plc, reviews documents while testifying before a Senate subcommittee Tuesday on Capitol Hill in Washington. The Senate panel is investigating charges of HSBC money laundering.

Haraz N. Ghanbari/AP



Officials of HSBC Holdings Plc pledged to a U.S. Senate panel on Tuesday that the bank is changing the way it polices illicit funds, but senators were skeptical the bank could deliver on promises it had broken before.

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HSBC's top compliance officer announced he was stepping down and that the bank will shut down businesses in secret havens such as the Cayman Islands, but those offers did not blunt the senators' allegations that the bank sacrificed propriety for profits.

The hearing by the Senate Permanent Subcommittee on Investigations came a day after it released a 400-plus-page report detailing how the British bank acted as a financier to clients routing funds from the world's most dangerous corners, including Mexico, Iran and Syria.

While money laundering problems at HSBC have been flagged by regulators for nearly a decade, the criticism comes at a sensitive time for the banking industry.

Banks are facing accusations of greed tied to allegations that international banks for years tried to rig the global lending benchmark rate Libor and other scandals, including a trading bet gone awry at JPMorgan Chase & Co.

The hearing brought HSBC's own scandal squarely into the political spotlight.

Senator Carl Levin, who chairs the panel, read what he said was a 1993 statement from HSBC that asked its group members to comply with the letter and spirit of laws, and said it sounded similar to the commitments offered by HSBC on Tuesday.

"Do you agree, given past commitments have not been kept, that the bank has a heavy burden of proof that they mean what they say?" Levin asked one panel of witnesses consisting of HSBC's top legal officer and the head of HSBC's U.S. operations.

Levin later added that others would judge HSBC's accountability. "We are not in the prosecution business here, we are in the oversight business."

The bank is still facing a Justice Department investigation, with a potential fine that dwarfs the record $619 million that ING agreed in June to pay to settle similar claims.

Reuters own investigation into HSBC found persistent lapses in the bank's anti-money laundering compliance since 2010, after years of being scolded for lax practices.

Levin, who suggested the bank's charter could be at risk if it did not do better, pressed HSBC officials on whether they looked the other way on suspicious activity if it meant profits.

"Your test apparently for opening an account is first, how much revenue it would produce. But what about the second test Mr. Lok?" Levin asked former executive Christopher Lok. "What about a test of, is the bank involved in wrongdoing?"


David Bagley, the outgoing compliance executive, told the hearing that while reforms had been made, it was time for him to go. "I recommended to the group that now is the appropriate time for me and for the bank, for someone new to serve as the head of group compliance," he said.

Bagley also told the panel the bank would close thousands of Caymans accounts as part of its renewed compliance efforts.

The Senate report said HSBC had little oversight of client accounts housed in a shell operation in the Cayman Islands, well known for offering secret accounts and a limited tax regime. By 2008, the Cayman accounts held $2.1 billion.

Bagley was on a panel with other executives, but some of the toughest questions were reserved for Stuart Levey, who joined the bank in January as chief legal officer. He had been the Treasury Department's top official on terrorism finance from 2004 to 2011.

In an August 2007 email, Bagley told his superiors that he had seen Levey at a conference and Levey had "expressed concern" that the bank had accounts for an entity that ultimately served as a conduit for Iranian government funding.

"Levey essentially threatened that if HSBC did not withdraw from relationships with (redacted name) we may well make ourselves a target for action in the U.S.," Bagley told his bosses.

In subsequent emails, Bagley and another HSBC official discussed that while little of the banking relationship remained, "it would have been inaccurate to tell Levey there was nothing," Bagley wrote in an email.

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