HSBC Deferred Prosecution Agreement: The Caymans Connection

January 2nd, 2013

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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.

Excerpt 4: The Caymans Connection: Dedicated to Anthony Travers.

32. One area in which KYC was particularly poor was HSBC Mexico’s Cayman Island U.S. dollar accounts. Mexican law prohibited most individuals from maintaining U.S. dollar denominated deposit accounts in Mexico unless they lived near the U.S.-Mexico border or were a corporation. However, Mexican law permitted almost any Mexican citizen to maintain offshore U.S. dollar accounts. These HSBC Mexico accounts were based in the Cayman Islands, but were essentially offshore in name only, because HSBC Mexico had no physical presence in the Cayman Islands and provided the front and back office services for these accounts at its branches in Mexico. Customers holding these accounts did all of their banking, including depositing physical U.S. dollars, at branches in Mexico. Nevertheless, the accounts were legal under Mexican and Cayman law.

33. In January 2006, HSBC Mexico conducted an internal audit of the Cayman Islands U.S. dollar accounts. At that time, there were only approximately 1,500 such accounts. Over 50 percent of the audited accounts lacked the proper KYC information, while 15 percent of audited accounts did not contain any KYC documentation. Over the next two years, nothing was done to address the KYC issues with these accounts. By 2008, there were 35,000 Cayman Island U.S. dollar accounts. At least 2,200 of these accounts were designated high risk due to suspicious activity within the accounts and/or negative information regarding the account owners. In July 2008, the total outstanding balance of these high risk Cayman accounts was approximately $205 million. Without adequate KYC information, HSBC Mexico knew very little about who these high risk customers were or why they had such large amounts of U.S. dollars.

However, even without the benefit of adequate KYC information, the risks were obvious. Indeed, one HSBC Mexico compliance officer noted “the massive misuse of [the HSBC Mexico Cayman Islands U.S. dollar accounts] by organized crime.” One example, identified by HSBC Group’s Head of Compliance in July 2008, involved “significant USD [U.S. dollar] remittances being made by a number of [HSBC Mexico’s Cayman Islands U.S. dollar] customers to a US  company alleged to be involved in the supply of aircraft to drug cartels.”

You can read the whole Statement of Facts here. Part 1 of the series is here. Part 2 is here.AttributionShare Alike Some rights reserved by roger4336

Written by Heather Lowe

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