* Largest U.S. penalty ever imposed on a bank
* HSBC CEO apologizes, admits to breakdown of controls
* $881 mln in drug traffic proceeds laundered through HSBC
* HSBC shares close slightly higher in London
By Carrick Mollenkamp
Dec 11 In February 2008, Mexican authorities
told the CEO of HSBC Holdings Plc's Mexico unit that a
local drug lord referred to the bank as the "place to launder
money," U.S. prosecutors said on Tuesday, as they announced a
record $1.92 billion settlement with the British bank.
Lax money laundering controls at HSBC allowed two cartels -
one each in Mexico and Colombia - to move $881 million in drug
proceeds through the bank over the second half of the last
decade, according to prosecutors and federal court documents.
So rampant was the practice, prosecutors said, that on some
days drug traffickers deposited hundreds of thousands of dollars
at HSBC Mexico accounts. To speed things along, the criminals
even designed "specially shaped boxes" that fit the size of
teller windows at HSBC branches, according to the documents.
Prosecutors said a multi-year, multi-agency probe into such
transactions revealed how HSBC had degenerated into the
"preferred financial institution" for drug traffickers and money
launderers. And on Tuesday, that culminated in a far-reaching
deferred prosecution agreement with HSBC.
An HSBC spokesman declined to discuss specific transactions
or clients. But as part of the agreement, the bank acknowledged
major lapses in compliance and ignoring red flags. It also
acknowledged enabling clients to avoid U.S. sanctions that
prohibit dealings with countries such as Iran, Libya, Sudan,
Myanmar and Cuba.
The bank agreed to take steps to fix problems, forfeit
$1.256 billion, and retain a compliance monitor. It also agreed
to pay $665 million in civil penalties to resolve regulatory
actions by the U.S. Office of the Comptroller of the Currency,
the Federal Reserve, the Treasury Department and others.
"We accept responsibility for our past mistakes. We have
said we are profoundly sorry for them, and we do so again. The
HSBC of today is a fundamentally different organization from the
one that made those mistakes," HSBC Chief Executive Stuart
The settlement, the largest penalty ever paid by a bank, had
In November, the bank told investors its penalty could
exceed $1.5 billion. And many of the details of the bank's
lapses that allowed shadowy money to sluice through HSBC were
contained in a U.S. Senate investigative report in July.
HSBC shares closed up 0.6 percent in London on Tuesday, and
its Hong Kong-listed shares were up about 0.25 percent
by late morning on Wednesday.
MONEY LAUNDERING AND WASHING MACHINES
Top U.S. law-enforcement officials, standing sternly at a
news conference in Brooklyn, New York, gave new details on
Tuesday of how the bank was used. They pointed to flow charts
decorated with green dollar bills showing how cartels used HSBC
accounts to move money through Mexico, Colombia and elsewhere.
In one type of money-laundering transaction, the documents
show how millions of dollars of drug money flowed through HSBC
as Colombian drug cartels used the so-called Black Market Peso
Exchange to convert U.S. dollars to Colombian pesos.
In a multi-step laundering process, middlemen - referred to
as peso brokers - used U.S. dollars from drug cartels to buy
consumer goods such as washing machines and then exported them
to Colombia, where they were sold, according to the documents
and a source familiar with the situation. Part of the sale
proceeds, now in Colombian pesos, was then given back to the
drug cartels, the documents show.
Other transactions involved Mexican drug cartels,
After the February 2008 meeting with Mexican authorities,
HSBC conducted an internal inquiry that found a small number of
Mexican clients accounted for a large percentage of the U.S.
dollars moving through HSBC, according to the documents, which
include a "statement of facts" that HSBC has agreed to.
A significant sum ultimately was traced to the city of
Culiacan in the rugged Mexican state of Sinaloa, home to one of
Mexico's powerful drug gangs that is directed by the country's
most-wanted man, Joaquin "Shorty" Guzman, the documents show. In
2001, Guzman escaped from a maximum security prison in a laundry
HSBC closed the suspected accounts, but the bank kept
accepting dollar deposits in Sinaloa. Between 2006 and 2008,
HSBC's Mexican unit moved $1.1 billion from Sinaloa to the
bank's U.S. branches, according to the documents.
Drug cartels earn an estimated $60 billion a year from
trafficking in the United States, according to the United
Nations. Half of that money is routed back to Mexico to pay off
politicians, fund private arsenals and fuel violence that killed
more than 60,000 people over the past six years.
Loretta Lynch, the U.S. Attorney in Brooklyn, said that
compliance at HSBC was "woefully inadequate."
HSBC's compliance employees were vastly outnumbered,
according to prosecutors. Less than a handful of bank employees,
for example, were charged with reviewing 13,000 to 15,000
suspicious alerts generated monthly, they said.
Prosecutors agreed to a deferred prosecution deal, which
means that HSBC avoids being criminally charged. They also
decided against charging any individuals.
Lanny Breuer, chief of the Justice Department's criminal
division, defended the move, saying, "HSBC is paying a heavy
price for its conduct."
Later, he said that while HSBC permitted itself to be an
essential element in money laundering, it was not the
mastermind. "They are not the Sinaloa cartel," he said.
HSBC said it had increased spending on anti-money laundering
systems by about nine times between 2009 and 2011, exited
business relationships and clawed back bonuses for senior
executives. As evidence of its determination to change, it cited
the hiring last January of Stuart Levey, a former top U.S.
Treasury Department official, as chief legal officer.
Under the five-year agreement with the Justice Department,
HSBC has agreed to have an independent monitor evaluate its
progress in improving its compliance.
It also said that as part of the overhaul of its controls,
it has launched a global review of its "Know Your Customer"
files, which will cost an estimated $700 million over five
years. The files are designed to ensure that banks do not
unwittingly act as conduits for criminal funds.
There is already some evidence that the crackdown on HSBC
has slowed the flow of illegal cash.
In 2009, HSBC began exiting a business that moves bulk cash
through the global financial system and a year later, the Office
of the Comptroller of the Currency ordered the bank to improve
Since then, the repatriation of U.S. dollars from Mexico has
fallen to less than $5 billion in 2011 compared with $12 billion
in 2008, according to Donald Semesky, a former Drug Enforcement
Administration official who provided the data last month at an
anti-money laundering conference in Washington.