HSBC Mexican branches said to be traffickers’ favourites

PUBLISHED : Wednesday, 12 December, 2012, 11:52am
UPDATED : Thursday, 13 December, 2012, 9:02am

HSBC Holdings’ Mexican branches had become so well-known to drug traffickers as the place to launder proceeds from illicit sales that cartels began using special boxes to speed transactions, US prosecutors said.

From 2006 to 2010, the Sinaloa cartel in Mexico and the Norte del Valle Cartel in Columbia moved more than US$881 million in proceeds through HSBC’s US unit, said Lanny Breuer, assistant attorney general for the US Justice Department’s criminal division. Breuer, along with US Attorney Lorretta Lynch in Brooklyn, New York, announced that the bank had agreed to pay at least US$1.9 billion to settle money laundering probes.

“These traffickers didn’t have to try very hard,” Breuer said at a press conference in Brooklyn. “They would sometimes deposit hundreds of thousands of dollars in cash in a single day into a single account using boxes designed to fit the precise dimension of the tellers’ windows in HSBC’s Mexico branches.”

In total, the bank’s US and Mexican units failed to monitor more than US$670 billion in wire transfers and more than US$9.4 billion in purchases of US dollars from HSBC Mexico, Breuer said.

Europe’s largest bank agreed to pay at least US$1.9 billion in a deferred prosecution agreement to settle probes of money laundering, including a US$1.25 billion forfeiture, the biggest ever by a bank, the US said today. The bank also agreed to pay US$665 million in civil penalties.

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.

HSBC chief executive Stuart Gulliver’s attempts to reduce costs and improve profitability have been hurt by the US probes and by compensation claims from UK 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. The settlement is the biggest reached in the US over such allegations, topping the US$619 million in penalties paid in June by the Netherlands’ ING Groep.

“We accept responsibility for our past mistakes,” Gulliver said in a 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.”

In a range of measures, the London-based bank has to have a group money laundering reporting officer and establish a board to oversee anti-money laundering controls, the UK’s Financial Services Authority said on Wednesday. HSBC will also spend US$700 million over five years on a “know your customer” review, it said.

Because of HSBC’s “egregious breakdowns in anti-money laundering compliance,” trillions of dollars in wire transfers every year were excluded from its review, billions of dollars in “suspicious bulk cash” entered its vaults, and hundreds of millions of dollars in “dirty money” from Mexican drug proceeds went through the bank’s US accounts, said David Cohen, undersecretary of the US Treasury.

“Despite the well-known illicit finance risks associated with Mexican drug trafficking organizations, HSBC inexplicably placed Mexico in its lowest possible risk category,” Cohen said. “As a result, it allowed billions in wire transactions and bulk cash to pass through its gates with minimal if any monitoring.”

HSBC also allowed about US$660 million in transactions prohibited by the Office of Foreign Assets Control to be processed through US financial institutions from the mid-1990s through 2006, and followed instructions from sanctioned countries such as Cuba and Iran to omit their names, the US said in a statement.

The bank engaged in payment practices that violated US law and interfered with economic sanctions, such as forwarding messages to US banks that said that an HSBC affiliate was the ordering institution and not individuals or entities subject to US sanctions, Cohen said.

At least once, HSBC told a bank in Iran how to format payment messages so the US wouldn’t block or reject the transactions, Breuer said.

Investigators identified about 2,300 transactions conducted from March 2004 to June 2010 involving about US$430 million that appeared to have violated sanctions against Burma, Cuba, Iran, Libya and Sudan, Cohen said.

They also found 10 transactions involving US$21 million in apparent violation of sanctions against Burma, Iran, Sudan and Zimbabwe -- including one that involved the purchase of 32,000 ounces of gold bullion for the central bank of Iran, Cohen said.

The bank failed to manage its money-laundering risk or implement adequate programs to protect itself, didn’t identify and report suspicious transactions, and didn’t hire, train, equip or support compliance officials or give them sufficient authority, Cohen said.

In all, HSBC’s wholly inadequate money laundering practices and procedures left dangerous gaps that international drug traffickers and other criminals readily abused
David Cohen, undersecretary of the US Treasury

“In all, HSBC’s wholly inadequate money laundering practices and procedures left dangerous gaps that international drug traffickers and other criminals readily abused,” Cohen said.

The investigation into violations of the Bank Secrecy Act began in the Eastern District of New York in 2008, when a Homeland Security Department task force identified multiple HSBC accounts in Mexico that were associated with the Black Market Peso Exchange. The exchange is a system designed to move proceeds from the sale of illegal drugs in the US that is “the lifeblood of international narcotics trafficking,” Lynch said.

In the exchange, narcotics dealers in Colombia sell drugs in the US and send the cash to Mexican banks, which allow the money to be transferred to buy goods that are then sold for proceeds that are given to traffickers “without the hefty transaction fees imposed on currency conversions in Colombia and the scrutiny on funds wired directly to that country,” Lynch said.

The decision not to prosecute HSBC was a decision of the Justice Department and was influenced by factors including the impact of the probe on the company’s employees and the potential economic effect, Breuer said.

“As bad has HSBC’s conduct was, this is not a case where the HSBC people intended to create money laundering,” Breuer said.

“What they did do was they affirmatively violated the Bank Secrecy Act, they did not have the controls in place that they needed to do. This was insidious and wrong and had occurred over decades of time and we’ve held them very much accountable. I’m not sure you can find a more robust resolution.”