UPDATE 6-Senators doubtful as HSBC touts money-laundering fixes

Wed Jul 18, 2012 7:48am IST

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* Top HSBC compliance exec announces his exit

* US Senate report calls bank 'pervasively polluted'

* HSBC apologizes, promises to change

* Senator Levin says bank put revenue over the law

* Shares down 1.7 pct; analysts expect $1 bln fine

By Carrick Mollenkamp

WASHINGTON, July 17 (Reuters) - Officials of HSBC Holdings Plc pledged to a U.S. Senate panel on Tuesday that the bank is changing the way it polices illicit funds, but senators were skeptical the bank could deliver on promises it had broken before.

HSBC's top compliance officer announced he was stepping down and that the bank will shut down businesses in secret havens such as the Cayman Islands, but those offers did not blunt the senators' allegations that the bank sacrificed propriety for profits.

The hearing by the Senate Permanent Subcommittee on Investigations came a day after it released a 400-plus-page report detailing how the British bank acted as a financier to clients routing funds from the world's most dangerous corners, including Mexico, Iran and Syria.

While money laundering problems at HSBC have been flagged by regulators for nearly a decade, the criticism comes at a sensitive time for the banking industry.

Banks are facing accusations of greed tied to allegations that international banks for years tried to rig the global lending benchmark rate Libor and other scandals, including a trading bet gone awry at JPMorgan Chase & Co.

The hearing brought HSBC's own scandal squarely into the political spotlight.

Senator Carl Levin, who chairs the panel, read what he said was a 1993 statement from HSBC that asked its group members to comply with the letter and spirit of laws, and said it sounded similar to the commitments offered by HSBC on Tuesday.

"Do you agree, given past commitments have not been kept, that the bank has a heavy burden of proof that they mean what they say?" Levin asked one panel of witnesses consisting of HSBC's top legal officer and the head of HSBC's U.S. operations.

Levin later added that others would judge HSBC's accountability. "We are not in the prosecution business here, we are in the oversight business."

The bank is still facing a Justice Department investigation, with a potential fine that dwarfs the record $619 million that ING agreed in June to pay to settle similar claims.

Reuters own investigation into HSBC found persistent lapses in the bank's anti-money laundering compliance since 2010, after years of being scolded for lax practices.

Levin, who suggested the bank's charter could be at risk if it did not do better, pressed HSBC officials on whether they looked the other way on suspicious activity if it meant profits.

"Your test apparently for opening an account is first, how much revenue it would produce. But what about the second test Mr. Lok?" Levin asked former executive Christopher Lok. "What about a test of, is the bank involved in wrongdoing?"

NOT CONSISTENT

David Bagley, the outgoing compliance executive, told the hearing that while reforms had been made, it was time for him to go. "I recommended to the group that now is the appropriate time for me and for the bank, for someone new to serve as the head of group compliance," he said.

Bagley also told the panel the bank would close thousands of Caymans accounts as part of its renewed compliance efforts.

The Senate report said HSBC had little oversight of client accounts housed in a shell operation in the Cayman Islands, well known for offering secret accounts and a limited tax regime. By 2008, the Cayman accounts held $2.1 billion.

Bagley was on a panel with other executives, but some of the toughest questions were reserved for Stuart Levey, who joined the bank in January as chief legal officer. He had been the Treasury Department's top official on terrorism finance from 2004 to 2011.

In an August 2007 email, Bagley told his superiors that he had seen Levey at a conference and Levey had "expressed concern" that the bank had accounts for an entity that ultimately served as a conduit for Iranian government funding.

"Levey essentially threatened that if HSBC did not withdraw from relationships with (redacted name) we may well make ourselves a target for action in the U.S.," Bagley told his bosses.

In subsequent emails, Bagley and another HSBC official discussed that while little of the banking relationship remained, "it would have been inaccurate to tell Levey there was nothing," Bagley wrote in an email.

Levin battered Levey with questions about whether the bank would follow U.S. law or Cayman law in cases of conflict and whether HSBC would improve its own internal sharing of information to help cut down on illicit activity.

Levey placed much of the blame on HSBC's rapid expansion, but said the bank is now better at spotting risky activities.

To some extent Levey and HSBC Bank USA CEO Irene Dorner were able to deflect the harshest criticism by pointing out that they were relatively new to their jobs, and had taken them up after the worst of the bad acts had happened.

"We've committed within the company ... to maximize the sharing of info for risk management purposes," Levey said. "We've decided that's the value that we're going to pursue, we need to share information."

The changes Bagley and Levey talked about are coming at a significant cost to the bank, as spending on anti-money laundering systems and staff have increased substantially. Dorner said the bank now has 892 full-time anti-money laundering compliance professionals.

FAILED TO MEET STANDARDS

HSBC shares closed 1.7 percent lower in London trade. Analysts warned that the bank faced huge financial penalties but said political risk may be a greater threat.

"(The) most important consequence is that the bank is now under the microscope ... at a very bad time where banks are used as scapegoats by politicians globally," analysts at Italian bank Mediobanca said in a research note, adding that they expect HSBC to face a $1 billion fine as well.

The Senate report alleged that HSBC did regular business in areas tied to drug cartels, terrorist funding and tax cheats.

It detailed how between 2007 and 2008, HSBC's Mexican operations moved $7 billion into the bank's U.S. operations. Both Mexican and U.S. authorities warned HSBC that the amount of money could only have reached such a level if it was tied to illegal narcotics proceeds, the report said.

It also examined banking HSBC did in Saudi Arabia with Al Rajhi Bank, which the report said has links to financing terrorism.

HSBC had company in the Senate's harsh spotlight -- the report was also highly critical of the Office of the Comptroller of the Currency, a major U.S. bank regulator.

The OCC took enforcement action against HSBC in 2010, more than seven years after the Federal Reserve Bank of New York and the New York State Banking Department issued their own criticism of HSBC's money-laundering detection systems.

Levin pounced on Grace Dailey, the former deputy comptroller for large bank supervision at OCC, demanding to know why more action had not been taken and sooner.

"We probably did not appreciate the systemic nature of some of those issues," Dailey said. "We could have and should have taken formal enforcement action, with the benefit of hindsight."

Levin was quick to dismiss the notion of hindsight and put one of his sharpest comments of the day to Thomas Curry, who took over as Comptroller of the Currency less than four months ago and who expressed his regrets for the OCC's inaction.

"This is pretty feeble enforcement," Levin said.

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