Compliance Blog

Written by Shari R. Pogach, Regulatory Paralegal

In December 2012, a combined federal, local and international government action accused global British bank, HSBC, of laundering money for drug cartels and transferring funds for terrorist regimes.  HSBC avoided criminal prosecution by paying a record settlement totaling $1.9 billion in forfeitures and penalties, and agreeing to court-appointed monitoring while the bank cleaned up its act.  But according to federal prosecutors in a court filing on April 1, 2015, HSBC’s clean-up progress is too slow.  As part of a quarterly update on the bank’s progress after the 2012 deferred prosecution agreement, the court filing summarizes the independent monitor's findings.  After monitoring HSBC’s operations for more than a year,  the monitor states the bank's weaknesses involve HSBC’s corporate culture and compliance technology: 

            “Overall, the Monitor believes that HSBC Group has made progress in developing an effective AML and sanctions compliance program and is better protected from and positioned to detect financial crime than when it entered into the DPA in December 2012. Specifically, the Monitor found that HSBC Group has made progress in the areas of risk assessment, “Know Your Customer” information and customer due diligence processes, compliance monitoring and testing, transaction monitoring alert adjudication and suspicious activity reporting, distribution of information to management, responses to potential financial crime violations, and incentivizing AML and sanctions compliance through compensation adjustment. However, in certain instances, the Monitor believes that HSBC Group’s progress has been too slow. The Monitor does not believe this is the result of bad faith or lack of commitment by HSBC Group’s senior leadership, but does believe that HSBC Group can – and must – do more.”  

[…] 

            “While adopting strong written policies is a significant step, it is only part of the equation. At present, the Monitor believes HSBC Group has a substantial amount of work left to do to implement its written policies. In the Monitor’s view, two of the greatest impediments to HSBC Group’s implementation of a sustainable compliance program are its corporate culture and its compliance technology. A strong corporate culture is one where senior executives, mid-level managers, and employees across business lines accept and believe in the importance of rigorous AML and sanctions compliance controls. The Monitor recognizes that a true cultural transformation in an institution as large and geographically diverse as HSBC Group and in an industry as challenged as the financial services industry is a massive undertaking. In the last year, the Monitor has seen a number of positive shifts in HSBC Group’s internal emphasis on AML and sanctions compliance.” 

[…] 

            “While this acceptance of responsibility by senior executives and the resulting tone from the top is important, it is not sufficient for a cultural transformation. Notwithstanding the attitude of HSBC Group’s senior executives, the Monitor observed other indicators that some of HSBC Group’s historical cultural deficiencies continue to pervade its operations today. For example, during the United States country review, the Monitor found that senior managers of HSBC Bank USA’s Global Banking and Markets (“GBM”) business line inappropriately pushed back against adverse findings by the HSBC Global Internal Audit team and HSBC Bank USA’s Compliance Testing and Control (“CTAC”) team arising from separate reviews in early 2014 of GBM’s “Know Your Customer” practices.”  

[…]  

            “Aside from corporate culture, one of the other biggest impediments to HSBC Group’s development of a sustainable compliance program, in the Monitor’s view, is its compliance technology. The Monitor believes, despite progress in improving its compliance technology, this remains an area of material weakness in which a great deal of work remains to be done. Specifically, HSBC Group’s compliance technology systems continue to suffer from fragmentation and lack of connectivity. The lack of connectivity between systems prevents the Bank’s investigators from easily reviewing a customer’s banking history when evaluating potentially suspicious activity and inhibits the adequate collection and analysis of customer due diligence information. The Monitor believes HSBC Group’s future compliance technology plans are reasonably calculated to produce an effective compliance program – if the plans can be successfully executed. Execution of these plans will be difficult, expensive, and time consuming.”  

HSBC’s Swiss subsidiary was recently found to have helped thousands of clients launder criminal proceeds and evade taxes. The Department of Justice (DOJ) has hinted at its willingness to revoke settlement agreements with banks where more wrongdoing is found.  The head of DOJ’s criminal division, Leslie Caldwell, outlined policy concerning repeat offenders.  In a March speech Caldwell stated:  

“…we have often entered into deferred prosecution agreements or non-prosecution agreements – known as DPAs and NPAs – with the banks.  

DPAs and NPAs are useful enforcement tools in criminal cases.  Through those agreements, we can often accomplish as much as, and sometimes even more than, we could from a criminal conviction.”

[…]  

“Make no mistake: the Criminal Division will not hesitate to tear up a DPA or NPA and file criminal charges, where such action is appropriate and proportional to the breach. 

DPAs and NPAs are powerful tools.  They can’t be ignored once they’re signed, and they can’t be followed partially but not completely.  We will take action to ensure that banks are held accountable for DPA or NPA violations.  And where a bank that violates a DPA or NPA is a repeat offender with a history of misconduct, or where a violating bank fails to cooperate with an investigation or drags its feet, that bank will face criminal consequences for its breach of the agreement.”  

Time will tell how much patience DOJ has for HSBC.

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BSA Blast.   The April 2015 quarterly issue of the BSA Blast is now available for NAFCU members (member login needed).   This edition reviews the elements of an effective compliance program according to the Department of Justice’s (DOJ’s) Criminal Division and highlights two recent enforcement actions.  The issue also includes a new BSA quiz with a focus on OFAC compliance.