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20th July 2012

HSBC and ignored money laundering warnings
Opinion

The most important fact that came from the US Permanent Subcommittee on Investigations report into HSBC and money-laundering was the multiple credible ignored warnings over close to a decade.


In the case of lack of money laundering failures by HSBC on transfers to some countries the report can only point to money moved with inadequate checks and suspected links to terrorist or criminal factions. In the case of money sent to Iran from the US, money was deliberately routed via London without the usual end destination tags so as to disguise the end destination. This is evidence of deliberate avoidance rather than any accidental failure of controls. It also required complicity in both the US and UK. Although the Iran transactions have been known about for some years, the scale had not previously been reported, with over $19bn sent by this method. At the time of these events although US had banking sanctions against Iran the majority of countries did not.

However it is the case of Mexico that is most damaging to HSBC, most difficult to explain, and will have the most serious long term consequences. There is clear evidence of drug gangs using the bank, the authorities informing HSBC and no action taken by the bank. Around $7bn was moved from Mexico to the US by HSBC during 2007 and 2008. HSBC was warned several times this was money from drug gangs. It was pointed out that the money must be illegal because Mexican legitimate business was not near the scale to need to move this amount of money. A HSBC Anti Money Laundering official stated in his exit interview that he estimated up to 70% of drug money flow between Mexico and the US used HSBC and no action was taken by the bank.


In 2002 HSBC bought GF Bital in Mexico forming the main HSBC business in the country. The use of HSBC for Money laundering occurred from this time through to 2010. David Bagley, Head of Group Compliance since 2002, chose his appearance testifying to the senate committee to publicly announce his resignation. The authorities will want prosecutions against individuals, resignations, as well as significant financial penalties against the bank itself. The HSBC Mexican head from the acquisition in 2002 and 2006 was Sandy Flockhart who recently retired from the bank and has cancer. The Mexico issue along has the potential to cause as much reputational damage to HSBC as the Libor fixing has to Barclays. HSBC is under investigation with regard to Libor fixing in addition.


The hearing comes at a time when there is a strong protectionist wave in the US. Many politicians believe the UK banking sector to be out of control. They blame the UK partly over the Lehman Brothers collapse and point to the Libor scandal and the recent JPM losses occurring in their UK CIO unit as further evidence. The US will use the incident to press for tougher action against the the two UK territories near the US and the source of money laundering, the Cayman Islands and the British Virgin Islands.