The View

HSBC seems to find it easier to pay fines than fix corporate culture

A US$1.9 billion settlement in the US showed the need for HSBC to fix its inward-looking culture, but so far it seems easier to just pay the fines

PUBLISHED : Monday, 14 July, 2014, 3:09am
UPDATED : Monday, 14 July, 2014, 3:09am

Since the financial crisis, global banks have evolved from "too big to fail" into "too big to jail".

Each new fine, like BNP Paribas' US$8.9 billion penalty, sets a new, ignominious record. Governments fear that a criminal conviction and closure of a major bank would prove far too disruptive to the financial system. But big banks are not making significant progress towards changing the underlying business culture that allows these violations to occur.

Since its 2012 charges of money laundering and US$1.9 billion fine and settlement last year, HSBC has operated under one of the most onerous legal supervision arrangements in financial history. HSBC is now leading corporate life under a strict, five-year, deferred prosecution agreement monitored by the US government. In exchange for deferred prosecution, HSBC needs to undertake reforms to its compliance systems.

Most Hong Kong people don't realise how close they came to witnessing a major bank collapse because HSBC could not have survived for long if it was sanctioned from dealing in US dollars. But after a year, has the bank really learned anything from its ordeal and about its culture beyond public relations damage control?

Matt Taibbi's infamous Rolling Stone article "Gangster Bankers: Too Big to Jail" is a breathtaking revelation of Hong Kong's hometown bank behaving badly. Every HSBC executive grimaces at the mention of Taibbi's tirade, which few Hong Kong people have read even though it is easily found online. It is a gripping story about how one of Hong Kong's largest employers, during 2006 and 2009, did not monitor US$200 trillion in wire transfers and failed to perform due diligence in the purchase of US$9 billion in physical US dollars from Mexico. According to Taibbi, HSBC played a key role in exchanging currency for Mexican and Colombian drug cartels.

HSBC's communications strategy has failed to convince the public about how it is reforming its culture. Beyond announcing the appointment of compliance officials, what are the driving forces for genuine change? Unlike newspaper clippings that age into oblivion at the local library, stories - especially negative ones - live forever on the internet and in the public's mind. HSBC senior management needs to build and articulate a new culture.

While a wholesale change in beliefs and attitudes is difficult for any large organisation, HSBC appears to be mired in a confusing and difficult corporate soul search. But, the answers it seeks actually strike closer to home.

A source said HSBC has been struggling to solve its cultural problems. "HSBC seems to be aware of their lack of internal checks and balances," the source said. "Senior managers aren't always aware of what people further down the management chain are doing and vice versa.

"As a result, they have been conducting in-house, anonymous vetting, so that executives can understand how different branches operate. In doing so, they can theoretically streamline their operations and create more of a company culture where people feel comfortable telling each other anything."

The source continued: "At the moment, there seems to be a lack of transparency due to perceived self-importance, inward-looking culture and the simple fact that some people don't feel comfortable talking about personal work issues with their colleagues."

An anecdote from one bank employee describes its unhealthy respect for hierarchy: deferential staff can sometimes be seen emptying out of a lift at HSBC headquarters to let a senior executive ride up alone.

HSBC ultimately suffers from the weight of its own historical baggage - the worst vestiges of self-entitled, British colonialism combined with an ethically indifferent Hong Kong Chinese business culture. The former was always beyond reproach and the latter didn't care as long as they kept their jobs. While this worked in Hong Kong's free-wheeling capitalism for more than a century, it can potentially destroy a financial institution in the post-financial-crisis world.

HSBC appears to have lost touch with its managers, customers and values. Compliance alone cannot ensure integrity. Only honest employees can do that. When Robert Rubin, the former head of Goldman Sachs, was asked what was responsible for the firm's consistent success, he said the sole factors "culture and people. People and culture."

A company either defines its culture or its culture defines the company. It is that easy and that difficult.

Peter Guy is a financial writer and former international banker