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David Bagley, HSBC: US Banking Violations Have Occurred

Michael Bowman

July 18, 2012

Global private banking giant HSBC has admitted that lax vigilance made it vulnerable to money laundering by Mexican drug cartels, as well as transactions involving Iran that are banned under U.S. law. HSBC managers pledged to do better in testimony before a Senate investigative committee.

U.S. law seeks to disrupt the cash flow of criminal organizations, from drug traffickers to terrorist groups. But for years, London-based HSBC seemingly turned a blind eye to illegal transactions originating in Mexico and elsewhere that used the bank’s U.S. affiliates as a gateway to America’s financial system. Senator Carl Levin of Michigan said HSBC is a prime example of a widespread problem in international banking.

“Some international banks abuse their U.S. access. Some allow affiliates operating in countries with severe money laundering, drug trafficking, or terrorist financing threats to open up U.S. dollar accounts without establishing safeguards at their U.S. affiliate," said Levin. "The end result is that the U.S. affiliate can become a sinkhole of risk for an entire network of bank affiliates and their clients around the world playing fast and loose with U.S. rules. The U.S. bank can end up aiding and abetting transactions that fund terrorists, drug cartels, corrupt dictators, and tax cheats.”

HSBC’s head of compliance, David Bagley, admitted the bank’s mistakes in recent years.

“I recognize that there have been some significant areas of failure. This is something that a bank seeking to conduct business in the United States and globally must acknowledge, learn from, and, most importantly, take steps to avoid in the future,” he said.

Bagley said that many affiliates of HSBC, which operates in 80 nations, were not subject to a centralized oversight process, thereby allowing questionable transactions to proceed undetected. He said the problem has been corrected, and that his office is now in charge of all affiliate compliance operations.

But the damage has been done, according to the U.S. Treasury Department’s Under Secretary for Terrorism and Financial Intelligence, David Cohen.

“We have seen, for instance, an example where a bank effectively failed to monitor its correspondent banking relationship with high-risk customers, resulting in the processing of $420 billion with 13 high-risk Mexican “casas de cambio” [currency exchange outfits] from 2004 to 2007. We have also seen several cases where foreign banks stripped out the names of Iran or other sanctioned entities in wire transaction messages routed through the United States.”

Levin said HSBC’s contrition is appropriate, and the bank must now follow through on its promises. He said any bank’s failure to ensure compliance with U.S. laws and regulations should result in the loss of its operating charter on U.S. soil.

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