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.