Financial Transparency Coalition

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Senator Carl Levin (aka “Watchdog of America”) is at it again. Yesterday morning the Senate’s Permanent Subcommittee on Investigations, which Senator Levin (D-MI) chairs, held a hearing to investigate HSBC, the UK-based bank and Europe’s largest financial institution, which has allegedly systematically (and knowingly) lapsed its anti-money laundering systems and allowed suspicious transactions into the United States. According to the subcommittee’s investigative report released Monday, HSBC systematically ignored warnings and failed to stop illegal behavior many times between 2001 and 2010. The report found HSBC accepted deposits into U.S. branches from Mexican drug cartels, Saudi Arabian banks with terrorist ties, and Iranians looking to circumvent financial sanctions.

To me, the most shocking part of all this is not that it happened. Quite the contrary. HSBC—along with its other large bank counterparts—has already been known to aid American citizens evade taxes and knowingly accepted deposits from politically exposed persons in Nigeria, violating about a billion UK laws. So I can’t say I’m surprised.

What shocked me here is not the fact that it happened. And it’s not even that the bank acted subversively when it thought no one was looking. It’s that since 2010, when U.S. officials started—publicly—scrutinizing HSBC’s anti-money laundering controls and ordered a “look back” of thousands of old transactions, the bank not only failed to clean up its act, but—according to an investigation by Reuters—continued to overlook persistent lapses in AML compliance. During the look back, bank managers allegedly specifically “buried” many suspicious cases. According to former employees, the managers focused single-mindedly on “clearing out the paperwork as fast as possible,” handled the reports “like a factory,” and hired “gullible, poorly trained, and otherwise incompetent personnel who were incapable of recognizing blatantly suspicious money laundering activities.” How’s that for diligence?

Of course, there is a transparency issue here that cannot be ignored. But I’ve talked about the link between the offshore industry, banking, and money laundering/terrorist financing ad nauseam. In case you haven’t already read all those posts, you can read some of them here and here and here.

So what’s [another] underlying problem here?

I’ll give you a hint. It’s not the “gullible, poorly trained, and otherwise incompetent” personnel who are in charge of HSBC’s money laundering program. It’s whatever is underlying the culture, mechanisms, and system that give HSBC the idea that it’s okay to hire those people in the first place. That gives HSBC such indifference towards its AML operations.

Let me explain what I mean by that. HSBC’s statements to the contrary, it is clear from the evidence that the bank is not serious about its AML procedures. Not only that, but it is clear HSBC’s management shows blatant disregard–if not downright contempt—for anti-money laundering laws. As Senator Levin put it: “While the bank is saying all the right things, and that is fine, it has said all the right things before.”

Part of the problem is self-enforcement. HSBC conducted its own “look back,” while technically the bank gave oversight responsibilities to a consultant, the bank had ultimately responsibility. It even fired some contractors, who were overseeing the review, for “not clearing enough alerts.”  Saskia Rietbroek, an AML consultant, noted it is a bit of conflict of interest for banks to find their own suspicious transactions. “The more unreported transactions they find, the higher the fine,” she said. “So, do you think they will dig and dig until they find everything?”

But that only explains a piece of it. If HSBC is flaunting the rules they are clearly not sufficiently afraid of the consequences.

We see the same problem with Securities and Exchange Commission (SEC) fines. Take Goldman Sachs, the investment bank, which helped spread toxic mortgages throughout the financial system, precipitating the 2008 collapse, and then turned around and profited from that meltdown by putting millions of dollars into a subrpime mortgage deal. The SEC eventually fined the firm $550 for fraud and misleading investors. Robert Khuzami, head of the SEC, glowingly called it a “heavy price.”

The next day, Goldman Sachs’ share price rose $7; adding more than $1 billion to its market value. In the wake of this debacle, analysts argued “the stock market…believes that Goldman has struck an amazing deal with the SEC.” Pro Publica, a non-profit investigative reporters group, calculated that the fine was only slightly less than the amount the company donated to help small businesses after criticism of its bonus structure. Arlen Specter, then Democratic Senator from Pennsylvania, argued on the Senate floor that major companies consider such fines “a cost of doing business,” Specter contended: “I have long been concerned about the acceptance of fines instead of jail sentences in egregious cases.”

Maybe this time will be different. The hearing isn’t the end of HSBC’s problems. The Department of Justice is also investigating money laundering charges that could lead to criminal charges and analysts believe HSBC could face fines up to $1 billion. That ain’t chump change, even for HSBC.

But as Senator Levin has put it “as long as a bank just sees that it is going to be dealt with kid gloves I think we are going to continue to see these shortfalls that have been so endemic.” At least Levin isn’t afraid to take off the gloves. We’ll see about the rest of them.

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