Washington: Global banking giant HSBC failed in preventing money laundering by drug cartels and terrorists not only in the US, but also other parts of the world, possibly including India, a Senate Permanent Subcommittee on Investigations probe has found.
"HSBC used its US bank as a gateway into the US financial system for some HSBC affiliates around the world to provide US dollar services to clients while playing fast and loose with US banking rules," Senator Carl Levin, the Chairman of the subcommittee, said following the release of the investigation report in this regard.
According to the report, the Mexican affiliate of HSBC transported USD 7 billion in physical US dollars to HSB-US from 2007 to 2008, outstripping other Mexican banks, even one twice its size, raising red flags that the volume of dollars included proceeds from illegal drug sales in the US.
The investigations found that HSBC, with its headquarters in London, allowed affiliates in countries such as Mexico, Saudi Arabia and Bangladesh to move billions of dollars in suspect funds into the US without adequate controls.
According to the report running into 340 pages, HSBC in 2009 authorised its affiliate to supply Indian rupees to Saudi Arabia's Al Rajhi Bank, which, the report said, has links to financing terrorism.
"From 2007 to 2010, HBUS (HSBC-USA) continued to supply, through its London branch, hundreds of millions of US dollars to Al Rajhi Bank in Saudi Arabia.
"In addition, at Al Rajhi Bank's request, HBUS expanded the relationship in January 2009, by authorising its Hong Kong branch to supply Al Rajhi Bank with non-US currencies, including the Thai bat, Indian rupee, and Hong Kong dollar," the report said.
However, no further details about the Indian rupees are available in the report.
According to the report, in 2010 HSBC launched a new funds transfer product called 'HBL Fast Cash', which was designed to allow the instant transfer of funds from Riyadh, Saudi Arabia, to any branch of the Habib Bank, the largest bank in Pakistan, whether or not the sender or recipient of the funds had an account in either financial institution.
In a statement, Levin alleged that due to poor anti-money laundering controls, HSBC-US exposed the US to Mexican drug money, suspicious travelers cheques, bearer share corporations, and rogue jurisdictions.
"The bank's federal bank regulator, the OCC, tolerated HSBC's weak AML system for years. If an international bank won?t police its own affiliates to stop illicit money, the regulatory agencies should consider whether to revoke the charter of the US bank being used to aid and abet that illicit money," he said.
Officials of HSBC and officials of the US Department of Treasury and Department of Homeland Security are scheduled to testify before the committee later in the day.
The Subcommittee investigation focused on HSBC's key US affiliate, HSBC Bank USA, N.A., known as HBUS, which functions as the US nexus for HSBC's worldwide network.
HSBC has 7,200 offices in more than 80 countries. HBUS has 470 branches across the US with 4 million customers.
HBUS provides accounts to 1,200 other banks, including more than 80 HSBC affiliates.
Called correspondent banking, HBUS provides these banks with US dollar services, including services to move funds, exchange currencies, cash monetary instruments, and carry out other financial transactions.
Correspondent banking can become a major conduit for illicit money flows unless US laws to prevent money laundering are followed.
Reacting to the report from the Senate Sub-Committee, HSBC said in a statement that it would apologise for failing to meet regulatory and customer standards in the past.
The bank said it recognises that its "controls could and should have been stronger and more effective in order to spot and deal with unacceptable behavior."
For decades, HSBC has been one of the most active global banks in the Middle East, Asia, and Africa, despite being aware of the terrorist financing risks in those regions, the panel report said.
"After the 9/11 terrorist attack in 2001, evidence began to emerge that Al Rajhi Bank and some of its owners had links to financing organisations associated with terrorism, including evidence that the bank's key founder was an early financial benefactor of al Qaeda.
"In 2005, HSBC announced internally that its affiliates should sever ties with Al Rajhi Bank, but then reversed itself four months later, leaving the decision up to each affiliate. HSBC Middle East, among other HSBC affiliates, continued to do business with the bank," it added.
The report also said that HSBC sent nearly 25,000 transactions involving USD 19.4 billion through their HBUS accounts over seven years without disclosing the transactions' links to Iran.
In less than four years, HSBC cleared USD 290 million in suspicious US travellers cheques for a Japanese bank, benefiting Russians who claimed to be in used car business.
The report revealed that HSBC offered more than 2,000 accounts to bearer in the name of bearer "share corporations", which allows secrecy by assigning ownership to the person with physical possession of the shares.
In 2010, HSBC was cited by its federal regulator, the Office of the Comptroller of the Currency (OCC), for multiple severe Anti-Money Laundering (AML) deficiencies.
These deficiencies include a failure to monitor USD 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 report recommended a number of changes at HSBC?s US bank, including higher scrutiny of HSBC affiliates for money-laundering risk, closing accounts of banks linked to terror financing, and steps to ensure the bank does not process transactions with prohibited entities such as terrorists, drug lords, and rogue regimes.
It also recommended overhauling the AML controls on travellers cheques and eliminating bearer share accounts.
First Published: Tuesday, July 17, 2012, 09:31