HSBC agrees to pay record US$1.9b over US money laundering probe

PUBLISHED : Tuesday, 11 December, 2012, 4:47pm
UPDATED : Thursday, 29 August, 2013, 4:13am

HSBC, Europe’s largest bank, agreed to pay US$1.92 billion to settle US probes of money laundering in the largest such accord ever.

The settlement includes a deferred prosecution agreement with the US Department of Justice, the London-based bank said on Tuesday in a statement. HSBC expects to complete an undertaking with the British Financial Services Authority soon, it said, without providing specifics.

Chief executive Stuart Gulliver’s attempts to reduce costs and improve profitability have been hurt by the US probes and by compensation claims from British clients. A Senate committee said in July that lax oversight by top HSBC executives gave terrorists and drug cartels access to the US financial system.

“This has removed an uncertainty, though it doesn’t clear the path completely for HSBC,” Lewis Wan, Hong Kong-based chief investment officer at Pride Investments, said by telephone on Tuesday, adding that his company doesn’t hold HSBC shares. “Regulators have been tightening oversight of banks. Lenders like HSBC will have to continue to strengthen their compliance.”

In a deferred prosecution agreement, the government allows a target to avoid charges by meeting certain conditions – including the payment of fines or penalties – and by committing to specific reforms, either under the guidance of a monitor, or the creation of an internal compliance panel.

The settlement is the biggest reached in the US over such allegations, topping the US$619 million in penalties paid in June by ING Groep NV, the biggest Dutch financial-services company.

“We accept responsibility for our past mistakes,” Gulliver said in the statement. “We have said we are profoundly sorry for them, and we do so again. The HSBC of today is a fundamentally different organisation from the one that made those mistakes.”

Standard Chartered, which like HSBC makes most of its profit in Asia, said on Monday it would pay a further US$327 million to settle regulators’ allegations that transactions with Iranian clients violated US sanctions. It agreed to pay US$340 million to the New York Department of Financial Services on August 14.

HSBC made an US$800 million provision in the third quarter to cover a potential settlement, adding to US$700 million it had already earmarked. The bank said on November 5 it will probably face criminal charges from US anti-money-laundering probes and the cost of a settlement may “significantly” exceed the US$1.5 billion it has set aside.

Gulliver, who became chief executive in January last year, is seeking to cut costs by US$2.5 billion to US$3.5 billion and revive profit by selling assets to focus on those emerging economies in which the bank has a greater market share. The savings will probably exceed that range and be achieved by the end of next year, HSBC said last month.

The bank said on December 5 it will sell its stake in China’s Ping An Insurance to Thai billionaire Dhanin Chearavanont for US$9.4 billion, giving it a US$2.6 billion profit.

HSBC has been in talks with US regulators over allegations it laundered funds of sanctioned nations including Iran and Sudan. The probes prompted Standard & Poor’s to question whether the lender is too big to be managed effectively.

The bank generated 64 per cent of its first-half pretax income in the Asia Pacific region, up from 47 per cent five years earlier, according to data compiled by Bloomberg. At Standard Chartered, the share slipped to 63 per cent from 65 per cent.

Standard Chartered in August was accused by Benjamin Lawsky, head of the New York Department of Financial Services, of helping Iran launder about US$250 billion in violation of federal laws, keeping false records and handling lucrative wire transfers for Iranian clients. The settlement was the largest paid to an individual regulator as part of a money-laundering accord.

The bank will pay US$100 million to the Federal Reserve and US$227 million to the Department of Justice and the Manhattan District Attorney. The settlement includes a US$132 million fine to the Treasury Department’s Office of Foreign Assets Control.

Standard Chartered entered into a deferred prosecution agreement with the Justice Department whereby it will forfeit US$227 million of funds tied to the illegal transactions, according to court records filed in the Washington federal court.

As part of that agreement, the US charged the bank with one count of conspiring to violate the International Emergency Economic Powers Act. That charge will be dismissed after two years if Standard Chartered abides by the terms of the agreement, according to court papers.