* Adds $800 mln to provision for lax anti-money laundering
* Fine could be "significantly higher", likely to involve
* Takes $353 million charge for mis-selling in Britain
* Underlying Q3 profits rise to $5 bln on drop in bad debts
* Shares end down 1.3 percent in London
By Steve Slater and Matt Scuffham and Aruna Viswanatha
LONDON/WASHINGTON, Nov 5 A U.S. fine for
violating federal anti-money laundering laws could cost HSBC
Holdings significantly more than $1.5 billion and is
likely to lead to criminal charges as well, Europe's biggest
bank said on Monday.
HSBC said the U.S. investigation had damaged the bank's
reputation and forced it to set aside a further $800 million to
cover a potential fine for breaches in anti-money laundering
controls in Mexico and other violations. The provision was on
t op of $700 million it put aside in July
"It could be significantly higher," Chief Executive Stuart
Gulliver told reporters on a conference call, saying the latest
provision was based on discussions with the various U.S.
authorities involved in the probe.
The timing of any settlement is in the hands of regulators
and is likely to involve the filing of corporate criminal and
civil charges, the bank said.
Any settlement with U.S. prosecutors is likely to come in
the form of a deferred prosecution agreement, which would allow
the company to avoid a formal indictment. Deferred prosecutions
have become an increasingly popular way for federal prosecutors
to penalize companies without running the risk of forcing them
out of business by indicting them.
A U.S. Senate report in July criticised HSBC for letting
clients shift potentially illicit funds from countries such as
Mexico, Iran, the Cayman Islands, Saudi Arabia and Syria. HSBC
had warned earlier in the year it could face criminal or civil
charges as part of the investigation.
The London-based bank has said the issue was "shameful and
embarrassing" after a report by Congress' Permanent Subcommittee
on Investigations criticised a "pervasively polluted" culture
and said HSBC's Mexican operations had moved $7 billion into its
U.S. operations between 2007 and 2008. Volume that large
suggested it included illegal narcotics proceeds, the report
"The report undoubtedly caused considerable reputational
damage to HSBC. The extent to which that has resulted in loss of
business is hard to measure, but it has undoubtedly damaged our
brand," Gulliver said.
He said a number of staff had left the firm as a result of
the investigation and a number had their pay clawed back.
HSBC shares closed down 1.3 percent at 618 pence, slightly
weaker than a fall in the European bank index.
"The money laundering provision is a concern, particularly
given the uncertainty on what the final figure might be," said
Richard Hunter, head of equities at stockbroker Hargreaves
The U.S. usually resolves corporate criminal cases by
imposing fines and requiring changes to a compliance program but
dismisses the charges if all requirements are met. The Justice
Department has entered into 27 such agreements so far this year,
according to statistics compiled by the law firm Gibson, Dunn &
HSBC said a deferred agreement was not certain, however, and
authorities have "substantial discretion" to do what they want.
The size of the fine expected by HSBC also dwarfs every
other similar case, including the previous record set by ING
Bank N.V., which agreed in June to forfeit $619 million to
resolve allegations that it illegally moved money on behalf of
sanctioned entities in Cuba and Iran.
HSBC's problems involve not just sanctions issues but also
major apparent lapses in money laundering controls, as stated in
the Senate subcommittee report.
"What it reflects is the gravity of the wrongdoing that HSBC
is at least implicitly admitting," said Jimmy Gurule, a former
top Treasury official who is now a law professor at the
University of Notre Dame. "This case has multiple dimensions and
layers of wrongdoing, it transcends economic sanctions."
Reuters detailed in a July Special Report how
money-laundering lapses continue to persist at HSBC, with
managers allegedly focused on clearing paperwork fast rather
than uncovering risks, highlighting the extent of problems at
the bank. [ID:n L2 E8IG3XI]
It is unclear whether other pending inquiries into
money-laundering issues including at JPMorgan Chase & Co
have the potential to be similar in scope, but U.S. banks have
generally avoided some of the larger penalties imposed on
foreign banks for sanctions or money laundering violations.
The issue is another blow for the reputation of British
banks after rival Barclays was fined $450 million in
June for rigging Libor interest rates. The industry has also had
to set aside more than 12 billion pounds to compensate UK
customers for mis-selling insurance products.
Gulliver said it would take time to clean up the mess.
"There's a whole series of things that came from probably a
decade in the 2000 to 2008-09 period that have surfaced now that
the industry needs to sort out, remediate, and make sure doesn't
"It will take a chunk of time to clean the system and then
it will take a little bit longer than that for trust to be
restored more fully," he said.
COST CUTS, JOB CUTS
HSBC reported an underlying profit - after stripping out the
impact of disposals and changes in the value of its own debt -
in the July-September quarter of $5.0 billion, up from a revised
$2.2 billion a year earlier.
It was helped by a bigger-than-expected drop in losses from
bad debts and a solid performance by its investment bank arm.
Underlying operating expenses rose by 16 percent in the
quarter from a year ago due to higher compliance and regulatory
costs, which it said amounted to $200 million to $300 million.
Gulliver is well into a three-year restructuring plan to
streamline the bank and he said he expects to surpass his target
of cutting annual costs by $3.5 billion, after driving through
$3.1 billion of savings already.
But subdued revenue growth and the higher compliance costs
left its underlying cost/income ratio at 63.7 percent in the
third quarter, well above his 48-52 percent target. Gulliver
said hitting that was "proving challenging" but he remained
committed to delivering it by the end of 2013.
Return on equity, a key measure of profitability, dropped to
5.8 percent in the third quarter, down from 14.6 percent in the
previous quarter and well below Gulliver's 12-15 percent target.
HSBC took another $357 million charge for mis-selling
payment protection insurance in Britain, lifting the total
amount set aside to $2.1 billion. The bank said it paid out $1
billion in compensation.
Gulliver said more job cuts were likely before the end of
2013 at his bank. O ver the past two years, HSBC has cut almost