The revelations about HSBC’s
alleged indiscretions are sobering. What has emerged from the Permanent
Subcommittee On Investigations to date is a tale of systematic and
deliberate avoidance of anti money laundering (AML) programmes in the US. It is
not an edifying read.
The central institution in this
story is HSBC’s largest US affiliate: HSBC Bank USA or ‘HBUS’. HBUS is key
because it provides HSBC’s overseas clients with access to dollar markets and the
US financial system, which is important because the dollar’s role as leading
trade currency makes it a prime target for launderers.
Perhaps most staggering is the
finding that between 2007-2008, HSBC’s Mexican affiliate, HBMX, shipped $7
billion in physical U.S. dollars to HBUS, more than any other Mexican bank,
even one twice HBMX’s size. According to the Chair’s report:
“HBMX
operates in a high risk country battling drug cartels; it has had high-risk
clients such as casas de cambios; and it has offered high risk products such as
U.S. dollar accounts in the Cayman Islands, a jurisdiction known for secrecy
and money laundering. HBMX also has a long history of severe AML deficiencies.
Add all that up and the U.S. bank should have treated HBMX, the Mexican
affiliate, as a high risk account for AML purposes. But it didn’t. Instead,
HBUS treated HBMX as such a low risk client bank that it didn’t even monitor
their account activity for suspicious transactions. In addition, for three
years from mid-2006 to mid-2009, HBUS conducted no monitoring of a banknotes
account used by HBMX to physically deposit billions of U.S. dollars from
clients, even though large cash transactions are inherently risky and Mexican
drug cartels launder U.S. dollars from illegal drug sales. Because our tough
AML laws in the United States have made it hard for drug cartels to find a U.S.
bank willing to accept huge unexplained deposits of cash, they now smuggle U.S.
dollars across the border into Mexico and look for a Mexican bank or casa de
cambio willing to take the cash. Some of those casas de cambios had accounts at
HBMX. HBMX, in turn, took all the physical dollars it got and transported them
by armored car or aircraft back across the border to HBUS for deposit into its
U.S. banknotes account, completing the laundering cycle”.
This situation occurred because
of the particular way HSBC is run. The report makes it clear that HSBC Group HQ
in London instructed its affiliates to assume that every other HSBC affiliate
met the group’s AML standards and so should be provided with correspondent banking
services. HBUS merely followed this instruction, ignoring more stringent US law
which requires due diligence reviews before any US account can be opened for a foreign
bank.
In addition to the cross border
movement of physical notes, it was also found that HSBC affiliates in Europe
and the Middle East circumvented filters set up by the US Treasury Department’s
Office of Foreign Assets Control (OFAC) to prevent the funding of terrorist
organisations: references to Iran in $19bn worth of US dollar transactions between
Iranian entities and HBUS or other US affiliates were stripped out of or
omitted from paperwork in 85% of cases, in full knowledge of HSBC’s Chief
Compliance Officer and other senior executives in London. There were similar
allegations of negligence and cover-ups made regarding HSBC’s ties with the
suspect Al Rajhi Bank; clearing travellers cheques for suspicious Russian used
car business via a Japanese bank; and offering accounts to ‘bearer share’
corporations, which due to their anonymity are prime vehicles for money
laundering and other illicit activity.
It is difficult to dignify such
actions with the descriptor ‘neglect’.
‘Neglect’ suggests fault through casual disregard, carelessness or
indifference. This kind of behaviour is not an accident; it is written into the
DNA of banking in its current form. It is a culture
borne of particular structures.
So what structures nurture this
kind of behaviour? Two interesting blog posts are illuminating on this issue.
The first, an interesting post by an ex-investment banker, Honestly
Banking, outlines the problems of what he/she terms ‘loose control’ at HSBC
HQ in London. HSBC encourage a quasi-decentralised system whereby relatively
autonomous and highly paid 'International Managers' (IMs) are posted to the
various HSBC affiliates in senior roles. According to Honestly Banking, loose
control creates local mandarins: these IMs make critical decisions in those
affiliates and have the right to accept or ignore the recommendations of the
local compliance officers. It is unlikely that these IMs run their
organisations autocratically, it is likely that decentralisation is replicated
at the affiliate level. That is a very effective way of building an
organisation that maximises returns from different regions, but it may also
encourage accommodation and entanglement with all kinds of risky and
unpalatable local operations.
The FT
puts this outcome more directly: it is one where “the bank’s business
interests trump its compliance obligations”. But that is to confuse the
interests of the institution with those who stand to gain individually from
this activity. We need to ask a more troubling question: was it really in the long term interests of the
institution to behave like this? A second blog post by London
Banker highlights this broader tension and the problem of decentralised
management. Using the metaphor of a wooden ship, he/she describes a situation
where the crew, oblivious to the history and craft of the vessel, are tasked
with turning a profit individually, or face being turned ashore. The crew
respond by pulling nails from the ship and selling them at each port, at each
stage telling themselves that the Admiralty do not understand ships and had specified
too many nails in the first place. This sets in train a disastrous set of
consequences:
“They
self-certify to their warrant officer, who self-certifies to the midshipman,
who self-certifies to the lieutenant, who self-certifies to the captain, who
self-certifies to the admiral, who self-certifies to the Sea Lords that every
nail is where it should be and the supply of surplus nails remains adequate to
meet unexpected reverses. And they turn a profit, so everyone is happy and the
crew are given bonuses.”
London Banker’s post is
concerned with residential mortgage backed securities. But the point applies.
Loose control produces both the returns and the information that suites those
who have most to gain; but loose control also gradually erodes the hull of the
institution. And once the water begins to seep through the timber, all too
often it is an emasculated compliance officer that is sacrificed; a most
convenient firewall between the authorities and the mandarins in the absence of
a paper trail.
Decentralised structures extend
the
option of informal direction to those in the upper ranks of an organisation
and put a lot of people with much responsibility and little power between senior
bankers and the regulators. Fining the institution does not begin to address
this problem of how elite individuals navigate organisational structures to secure
their position and means.
Stanley.
