UK Bank Dealt Illegally With Iran, Saudi Radicals

Last week, the U.S. Senate Homeland Security and Governmental Affairs Permanent Subcommittee on Investigations released a report and held hearings on the giant British-based HSBC bank. HSBC Holdings was ranked as the sixth-largest public company in the world by Forbes in 2011, with assets of $2.5 trillion.

The Senate subcommittee, led by Carl Levin (D, Mich.) and Tom Coburn (R, Okla.), conducted a yearlong probe of HSBC Bank USA, N.A., known as HBUS, a major platform for HSBC’s expansive operations. According to the subcommittee’s press release, HSBC “exposed the U.S. financial system to a wide array of money laundering, drug trafficking, and terrorist financing risks.”

The results of the HSBC inquiry are both damning and enigmatic. The subcommittee’s report, running 340 pages, is titled, “U.S. Vulnerabilities to Money Laundering, Drugs, and Terrorist Financing: HSBC Case History.” The report is supplemented, separately, by 539 pages of exhibits.

HSBC is charged with laxity in its anti-money laundering (AML) controls. This issue was aggravated by the inadequacy of its federal regulator, the Office for the Comptroller of the Currency (OCC), in monitoring “$60 trillion in wire transfer and account activity; a backlog of 17,000 unreviewed account alerts regarding potentially suspicious activity; and a failure to conduct AML due diligence before opening accounts for HSBC affiliates. Subcommittee investigators found that the OCC had failed to take a single enforcement action against the bank, formal or informal, over the previous six years, despite ample evidence of AML problems.”

The subcommittee investigated five “areas of abuse.” These included, first, “service to high-risk affiliates,” notably HSBC Bank Mexico (HBMX), which was maintained as a “low-risk client.” HBMX transferred $7 billion in U.S. paper money to HBUS in 2007-08, income that Mexican and U.S. authorities surmised came from illicit drug sales.

The bank was next accused of evading oversight by the U.S. Treasury’s Office of Foreign Asset Control (OFAC). The Subcommittee press release stated bluntly, “Foreign HSBC banks actively circumvented U.S. safeguards at HBUS designed to block transactions involving terrorists, drug lords, and rogue regimes. In one case examined by the Subcommittee, two HSBC affiliates sent nearly 25,000 transactions involving $19.4 billion through their HBUS accounts over seven years without disclosing the transactions’ links to Iran.”

Third, the subcommittee charged HBUS with “Disregarding Terrorist Financing Links. HBUS provided U.S. dollars and banking services to some banks in Saudi Arabia and Bangladesh despite links to terrorist financing.”

The two final areas of scrutiny appear of lesser significance when compared with services to drug smugglers, Iran, and Saudi-based radicals. They involve “Suspicious Bulk Travelers Checks,” in which HSBC “cleared $290 million in obviously suspicious U.S. travelers cheques for a Japanese bank, benefiting Russians who claimed to be in the used car business,” and “Offering Bearer Share Accounts.” Under the latter heading, the subcommittee states that “HSBC offered more than 2,000 accounts to bearer share corporations, despite the high risk of money laundering and illicit conduct that results since their ownership can be readily transferred without a trail.”

In dealing with Iran, the subcommittee found that “from 2000 to 2010... HSBC affiliates sending OFAC sensitive transactions involving Iran through their U.S. dollar correspondent accounts at HBUS took steps to conceal them, including by deleting references to Iran from the payment instructions or by characterizing the transaction as a transfer between banks in permitted jurisdictions without disclosing any Iranian connection.”

The Senate investigators additionally found HSBC doing business with Burma, Cuba, North Korea, and Sudan, along with individuals on the roster of “specially designated nationals” (SDN) maintained by the Treasury Department, “although to a much lesser extent than those related to Iran.” The SDN list includes “individuals, groups, and entities, such as terrorists and narcotics traffickers designated under programs that are not country-specific.”

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