HSBC Deferred Prosecution Agreement: Helping Clients Evade U.S. Sanctions

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HSBC Bank USA N.A. and HSBC Bank Holdings plc, its parent company, agreed to forfeiture and penalties of a little more than $1.9 billion dollars for systemic and willful violations of U.S. anti-money laundering and foreign sanctions laws. $1.9 billion may sounds like a lot, but does the penalty fit the crime?

This is part 2 of a series of excerpts from the Statement of Facts, which constitutes Attachment A to the Deferred Prosecution Agreement entered into between U.S. regulators and the HSBC banks, and let you decide for yourself. These are excerpts detailing events that HSBC has explicitly admitted to.

Except 4: Evasion of U.S. Sanctions

52. From the mid-1990s through at least September 2006, HSBC Group Affiliates violated both U.S. and New York State criminal laws by knowingly and willfully moving or permitting to be moved illegally hundreds of millions of dollars through the U.S. financial system on behalf of banks located in Cuba, Iran, Libya, Sudan, and Burma, and persons listed as parties or jurisdictions sanctioned by the Office of Foreign Assets Control of the United States Department of the Treasury (“OFAC”) (collectively, the “Sanctioned Entities”) in violation of U.S. economic sanctions.

53. HSBC Group Affiliates engaged in this criminal conduct by: (a) following instructions from the Sanctioned Entities not to mention their names in U.S. dollar payment messages sent to HSBC Bank USA and other financial institutions located in the United States; (b) amending and reformatting U.S. dollar payment messages to remove information identifying the Sanctioned Entities; (c) using a less transparent method of payment messages, known as cover payments; and (d) instructing at least one Sanctioned Entity how to format payment messages in order to avoid bank sanctions filters that could have caused payments to be blocked or rejected at HSBC Group or HSBC Bank USA.

61. The Department alleges, and HSBC Holdings admits, that its conduct, as described herein, violated TWEA. Specifically, HSBC Group violated Title 50, United States Code, Appendix Sections 5 and 16, which makes it a crime to willfully violate or attemptto violate any regulation issued under TWEA, including regulations restricting transactions with Cuba. The Department further alleges, and HSBC Holdings admits, that its conduct, as described herein, violated the International Emergency Economic Powers Act (“IEEPA”). Specifically, HSBC Group violated Title 50, United States Code, Section 1705, which makes it a crime to willfully violate or attempt to violate any regulation issued under IEEPA, including regulations restricting transactions with Iran, Libya, Sudan, and Burma.

65. Specifically, beginning in the 1990s, HSBC Bank plc (“HSBC Europe”), a wholly owned subsidiary of HSBC Group, devised a procedure whereby the Sanctioned Entities put a cautionary note

in their SWIFT payment messages including, among others, “care sanctioned country,” “do not mention our name in NY,” or “do not mention Iran.4 Payments with these cautionary notes 4 HSBC Group is a member of the Society for Worldwide Interbank Financial Telecommunications (“SWIFT”) and historically has used the SWIFT system to transmit international automatically fell into what HSBC Europe termed a “repair queue” where HSBC Europe employees manually removed all references to the Sanctioned Entities. The payments were then sent to HSBC Bank USA and other financial institutions in the United States without reference to the Sanctioned Entities, ensuring that the payments would be processed without delay and not be blocked or rejected and referred to OFAC.

74. In April 2001, HSBC Europe instructed an Iranian bank how to evade detection by OFAC filters and ensure its payments would be processed without delay or interference. The HSBC Europe employee wrote, “we have found a solution to processing your payments with minimal manual intervention . . . . the key is to always populate field 52 – if you do not have an ordering party then quote ‘One of our Clients’ . . . outgoing payment instruction from HSBC will not quote [Iranian bank] as sender – just HSBC London. . . . This then negates the need to quote ‘do not mention our name in New York.’”7 Thus, according to the instructions sent by HSBC Europe, if the Iranian bank entered the term “One of our Clients” into Field 52, there would be no interference with the processing of the wire payment, whether it was OFAC-compliant or not. Ultimately, this business was never taken on, due to protests from HSBC Bank USA.

You can read the whole Statement of Facts here. Part 1 of the series is here. Part 2 is here. Part 3 is here.