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

Some banking institutions have become so large criminal prosecutions resulting in revocation of banking charters may negatively affect the national, and perhaps the global, economy. The U.S. Attorney General and other prosecutors are thus left with a moral dilemma: ensure justice through prosecution or forego criminal proceedings to protect the economy and society at large.

From 2003-2006, HSBC Bank USA was under heavy suspicion by United States regulators and operated under a written agreement to correct the deficiencies of their operational practices. HSBC Bank USA specifically agreed to enhance its anti-money laundering program to achieve adequate compliance with the Bank Secrecy Act.

Between 2006 and 2010, HSBC Bank USA violated several components of the BSA: Money laundering risks associated with doing business with certain Mexican customers were ignored, compliance issues at HSBC Mexico were overlooked, and a BSA-adequate anti-money laundering program was not implemented. The Court notes four significant HSBC Bank USA failures:

1. HSBC failed to obtain and maintain due diligence on HSBC Group Affiliates.
2. HSBC failed to adequately monitor over $200 trillion in wire transfers between 2006 and 2009 from customers in nations classified as “standard” or “medium” risk ($670 billion in wire transfers specifically from HSBC Mexico).
3. HSBC Bank USA failed to adequately monitor billions of dollars in U.S. banknote purchases.
4. HSBC Bank USA failed to provide proper staffing and resources necessary to maintain an effective anti-money laundering program.

As part of the Deferred Prosecution Agreement, HSBC Bank USA admitted to gross violations of the Bank Secrecy Act, including failure to establish and maintain an effective anti-money laundering program, failure to establish due diligence, and involvement in the laundering of over $881 billion.

The record-setting fine, comprised of $1.256 billion in forfeiture and $665 million in civil penalties, allows HSBC to temporarily thwart criminal prosecution pending a probationary period of compliance with anti-money laundering standards. The probationary period consists of a five-year agreement with the U.S. DOJ that includes an independent monitor of HSBC’s internal anti-money laundering programs, bonus deference by the bank’s top executives, and retraction of bonuses from some current and former executives who had particular involvement in the willful breach of U.S. regulations.

The conduct of HSBC’s executives in knowingly failing to adhere to U.S. sanctions and regulations is certainly unjust. In making the decision to defer prosecution of HSBC Bank USA executives, the primary consideration of the United States government was to prevent harm to an already struggling economy. While instances may exist when other consequences may mitigate an application of justice, the long-term effects of avoiding prosecution for the criminal acts of HSBC are too great. When government allows big financial institutions to go largely unpunished for laundering vast sums of money for criminal organizations such as drug cartels, it is essentially endorsing the immeasurable amount of harm associated with the day-to-day activities of global drug trade. Justice for perpetuating such criminal enterprises cannot be adequately administered by a mere financial penalty.

The ethical analysis above applies theories of justice, utilitarianism, and deontology to the Department of Justice decision not to pursue prosecution of HSBC executives. The analysis suggests that criminal prosecution is probably the right move, rather than the deferred prosecution agreement currently in place. The reasons are:

1. The $1.92 billion fine and 5-year probationary monitoring period is unlikely to deter future misconduct.
2. The long-term consequences of the Deferred Prosecution Agreement may outweigh its immediate utility.
3. The DOJ is not fulfilling its prosecutorial duty to pursue punishment for those who violate the law.

While some may believe the Deferred Prosecution Agreement promotes the best interests of the United States, its long-term effects may ultimately pose a greater danger.