Poisoned compliance

In a dramatic hearing before a US Senate investigative committee on Tuesday, David Bagley, the head of compliance at HSBC resigned from his position and apologized, after the US Senate accused Europe's largest bank of allowing terrorists and organized criminals to exploit the US financial system.

Other HSBC executives also apologized at the hearing, which focused on the bank's lapses, but all said they weren't aware of illicit transactions flowing through the bank.

But despite the contrite statements and promises of reform, the senators expressed skepticism, pointing out that the dealings had been continuing for several years. New policies "are all good steps" and apologies are welcome, said Senator Carl Levin, chairman of the Senate Permanent Subcommittee on Investigations. But "accountability ... is essential as a deterrent and that accountability has been missing."

Helping terrorists

The charges against HSBC were severe. "Global banking giant HSBC and its US affiliate exposed the US financial system to a wide array of money laundering, drug trafficking, and terrorist financing risks due to poor anti-money laundering (AML) controls," an official Senate statement began.

The report had five separate charges against HSBC, including servicing high-risk affiliates, circumventing US safeguards, clearing suspicious bulk travellers checks, and offering accounts to so-called bearer share corporations - companies considered to be particularly prone to criminal dealings.

But possibly the Senate's most damaging charge is that HSBC ignored possible terrorist financing links, particularly in its dealings with banks in Bangladesh and Saudi Arabia. One of these, according to the report, was Saudi Arabia's Al Rajhi Bank, a known al-Qaeda financier.

Internal documents show HSBC attempted to cut ties with the bank, but then reversed the decision under pressure from Al Rajhi. The Saudi bank received shipments of $1 billion (810 million euros) in cash from HSBC's US branch between 2006 and 2010, the report said.

Feeble apologies

"They have been caught red-handed yet again," Simon Dilloway consultant at KYC Cube, a UK-based anti-money laundering e-learning company, told DW. "The response is feeble, but as expected, totally insincere. What they are sorry about is getting found out, I suspect."

Dilloway was not surprised by the scale and vehemence of the charges. "I should be, because you would think that they would learn lessons from being repeatedly hit by the regulators in US and UK," he said. "However, time and again it seems that bank boards think that they can get away with lax controls for wealthy clients. It seems as if they view the fines, huge as they are, as an operating cost like any other."

Anti-money laundering consultant Susan Grossey of Thinking about Crime believes that HSBC's compliance department, which is meant to flag up money laundering concerns, was simply handicapped. "It sounds to me like the compliance department was rather hamstrung," she told DW. "Bagley did say at one point that despite being head of compliance he'd not had full authority to act over all parts of the bank. Which is just madness."

But this attitude to the compliance department is apparently endemic in modern banking. "There's often a real split in organizations where compliance is seen as the business prevention department," said Grossey. "And you get this culture where people try to get one over on compliance. And it's sometimes seen as career-limiting to work in compliance. It's a bit like working in health and safety in a factory. It's seen as preventing people doing what they want to do."

HSBC is also accused of violating embargoes with states hostile to the US, particularly Iran and Cuba. The Senate report mentioned an outside audit that found that the bank was involved in 25,000 transactions, totalling more than $19.4 billion, that involved ties with Iran.

"In effect, HSBC was relying on an Iranian bank to regulate Iranian transactions," Senator Tom Coburn said at the hearing. "Too often, what we found left us very troubled."

Rotten at the top

As Dilloway explains, the fault for these failures can only be the management's. "If the top gives the impression that AML is something that has to be done purely to watch its back, and is a drain on the bottom line, then that will pervade throughout the structure, and risks will not be properly assessed," he said. "If they take it seriously however, and back up their compliance department with support and resources, these things should be picked up and stopped in their tracks."

"I doubt HSBC is any different from the other big banks," he added.

HSBC has now promised that it has implemented reforms and empowered its compliance department to police transactions better.

"I despair of the attitude," said Dilloway. "I used to think that it was unfortunate slips, but these things are coming to light so regularly that I now feel that there must be knowing culpability on the boards' part, inspired by corporate greed."

"This is an ideal opportunity for the banks to realize that compliance is not just a theoretical thing," said Grossey. "Money laundering is not just theoretical. It's nasty money from nasty crimes."

Author: Ben Knight
Editor: Rob Mudge