Question

What types of ethical misconduct took place at HSBC Holdings?

What consequences did HSBC face as a result of its ethical and illegal actions?

Do you think the government’s settlement with HSBC will fix the bank’s ethical lapses? Why or why not?

Reflect on this issue. What are your final thoughts?

The U.S. government ordered British Bank HSBC Holdings to strengthen its anti-money laundering practices after the financial institution was caught laundering more than 800 million dollars for Mexican drug cartels. The investigation of HSBC found that the bank covered up illegal transactions for Burma, Iran, Sudan, Cuba, and Libya—countries existing under banking sanctions due to human rights violations, terrorism, and nuclear programs. For a settlement, the bank had to pay $1.9 billion to the U.S. government—the largest fine in history. Although HSBC has anti-corruption programs in place, the bank worked with known drug cartels and helped other banks hide illegal transactions. In response, the U.S. government fined the company and set up a five-year monitoring program to oversee the company’s transactions.

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Answer 1

HSBC’s money-laundering lapses in Mexico and elsewhere were cited in an extensive Senate report earlier this year, but the documents filed in court on Tuesday provided new details.

Despite the known risks of doing business in Mexico, the bank put the country in its lowest risk category, which excluded $670 billion in transactions from the monitoring systems, according to the documents.

Bank officials repeatedly ignored internal warnings that HSBC’s monitoring systems were inadequate, the Justice Department said. In 2008, for example, the CEO of HSBC Mexico was told that Mexican law enforcement had a recording of a Mexican drug lord saying that HSBC Mexico was the place to launder money.

Mexican traffickers used boxes specifically designed to the dimensions of an HSBC Mexico teller’s window to deposit cash on a daily basis.

The agreement also described a vastly understaffed compliance department. At times, only one to four employees were responsible for reviewing alerts identifying suspicious wire transactions. When HSBC processed bulk cash, a business it calls Banknotes, only one or two compliance officials oversaw transactions for 500 to 600 customers, the Justice Department said.Compliance was “woefully inadequate

In documents filed in federal court in Brooklyn, the Justice Department also charged the bank with violating sanctions laws by doing business with customers in Iran, Libya, Sudan, Burma and Cuba.

HSBC separately reached a settlement with British watchdog the Financial Services Authority.

“The HSBC settlement sends a powerful wakeup call to multinational banks about the consequences of disregarding their anti-money laundering obligations,” said Senator Carl Levin, who led the Senate inquiry.

U.S. and European banks have now agreed to settlements with U.S. regulators totaling some $5 billion in recent years on charges they violated U.S. sanctions and failed to police potentially illicit transactions.

No bank or bank executives have been indicted. Instead, prosecutors have used deferred prosecutions, under which criminal charges against a firm are set aside if it agrees to conditions such as paying fines and changing its behavior.

The settlement is the third time in a decade that HSBC has been penalized for lax controls and ordered by U.S. authorities to improve its monitoring of suspicious transactions. Previous directives by regulators to improve oversight came in 2003 and in 2010.

HSBC said it had increased spending on anti-money laundering systems by around nine times between 2009 and 2011, exited business relationships and clawed back bonuses for senior executives. As evidence of its determination to change, it cited the hiring last January of Stuart Levey, a former top U.S. Treasury Department official, as chief legal officer.

Under a five-year agreement with the Justice Department, HSBC agreed to have an independent monitor evaluate its progress in improving its compliance.

It also said that as part of the overhaul of its controls, it has launched a global review of its “Know Your Customer” files, which will cost an estimated $700 million over five years. The files are designed to ensure that banks do not unwittingly act as conduits for criminal funds.

HSBC’s settlement comes a day after rival British bank Standard Chartered Plc agreed to a $327 million settlement with U.S. law enforcement agencies for sanctions violations, a pact that follows a $340 million settlement the bank reached with the New York bank regulator in August.