HSBC Shares Surge As US DoJ Removes "Sword Of Damocles" On Money Laundering

On Monday, HSBC announced its deferred prosecution agreement with the US Department of Justice (DoJ) had expired, removing the threat of criminal prosecution for money laundering which had been hanging over the company for five years. From the Financial Times.

The US Department of Justice has given HSBC a major boost by seeking dismissal of the deferred criminal charges that have been hanging over the bank since it was fined for money laundering and sanctions breaches five years ago. The move by the DoJ lifts the threat of criminal prosecution that had been a “sword of Damocles” hanging over London-headquartered HSBC, as its new management team looks to put its misconduct-plagued past behind it.

HSBC said the DoJ would file a motion with the US District Court for the Eastern District of New York seeking the dismissal of the charges deferred by the agreement it reached as part of a settlement with the bank in December 2012.The deferred prosecution agreement meant the DoJ could have reopened the criminal case against HSBC if the bank had been caught breaching the rules again during that period.

To recap, in December 2012, HSBC agreed to pay the largest fine ever - £1.2 billion ($1.9 billion) - to settle charges of money laundering after a US Senate investigation concluded that the bank had acted as a conduit for “drug kingpins and rogue nations”. HSBC was found to have violated the Bank Secrecy Act, the International Emergency Economic Powers Act and the Trading with the Enemy Act. From the DoJ’s press release.

“HSBC’s blatant failure to implement proper anti-money laundering controls facilitated the laundering of at least $881 million in drug proceeds through the U.S. financial system.  HSBC’s willful flouting of U.S. sanctions laws and regulations resulted in the processing of hundreds of millions of dollars in OFAC-prohibited transactions.

The bank admitted to poor money laundering controls and its CEO, Stewart Gulliver apologised, stating “We accept responsibility for our past mistakes”. At the time, the BBC summarised the key points from the Senate’s report.

HSBC in the US had not treated its Mexican affiliate as high risk, despite the country's money laundering and drug trafficking challenges
The Mexican bank had transported $7bn in US bank notes to HSBC in the US, more than any other Mexican bank, but had not considered that to be suspicious.

It had circumvented US safeguards designed to block transactions involving terrorists drug lords and rogue states, including allowing 25,000 transactions over seven years without disclosing their links to Iran.

Providing US dollars and banking services to some banks in Saudi Arabia despite their links to terrorist financing.

In less than four years it had cleared $290m in "obviously suspicious" US travellers' cheques for a Japanese bank, benefiting Russians who claimed to be in the used car business.

HSBC’s share price surged up to 2.1% after trading opened in London on Monday, hitting an intra-day peak of 748.9 pence. In its 2016 annual report, the bank had warned that an independent assessor appointed by the DoJ had expressed “significant concerns” about the pace of HSBC’s attempts to address the shortcoming highlighted in the Senate report. The media is portraying the announcement as a victory for outgoing CEO, Stuart Gulliver, an HSBC lifer, and the recently appointed Chairman – never mind that the bank has paid $13-14bn of fines for all manor of misconduct since 2011. From Bloomberg.

The expiry of the DPA is a vindication for Stuart Gulliver, who is due to hand over his role as chief executive to his retail banking and wealth management head John Flint after the bank’s full-year results in February. Mr Gulliver said: “HSBC is able to combat financial crime much more effectively today as the result of the significant reforms we have implemented over the last five years.”

The move also provides an early success for Mark Tucker, who took over as non-executive chairman of HSBC in October having been chief executive of Asian insurer AIA for almost a decade.

HSBC was “lucky” to receive a deferred prosecution after DoJ prosecutors recommended criminal charges. In 2013, the Financial Services Committee of the U.S. House of Representatives, led by Jeb Hensarling, a Republican of Texas, investigated the 2012 decision to settle with HSBC. We will leave readers to ponder on this July 2016 report from CNBC.

Senior U.S. Department of Justice officials overruled internal recommendations to prosecute global bank HSBC for money-laundering violations because of concerns about the stability of the financial system, according to a congressional report released on Monday.

The report, which relies on internal records from the Department of the Treasury, said the U.S. attorney general at the time, Eric Holder, "misled" Congress about the Justice Department's reasoning for declining to prosecute.

Internal emails cited in the report show the Justice Department's Asset Forfeiture and Money Laundering Section, represented by then-chief Jennifer Shasky Calvery, was "considering seeking a guilty plea from HSBC" as early as September 2012. Shasky Calvery earlier this year joined HSBC in a senior global financial crime-fighting role, a source familiar with her plans told Reuters in April.

Senior leadership at the Justice Department, including Holder, ultimately overruled criminally charging the bank, even though Holder had testified in front of Congress that "banks are not too big to jail," the report said.

Too big to fail, too big to jail, plus ca change.