LONDON A U.S. fine for anti-money laundering rule breaches could cost HSBC (HSBA.L) significantly more than $1.5 billion and is likely to lead to criminal charges, 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, adding to $700 million 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.
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 the report criticised a "pervasively polluted" culture and said HSBC's Mexican operations had moved $7 billion into its U.S. operations between 2007 and 2008.
"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 had pay clawed back.
HSBC shares closed down 1. 3 percent at 61 8 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 Lansdown.
Charges against companies in the United States are often resolved by " d eferred prosecution agreements" , where authorities impose fines, restrictions and behaviour m onitoring f o r a period of time and dismiss the charges if all requirements are met.
HSBC said a deferred agreement was not certain, however, and authorities have "substantial discretion" to do what they want.
The issue is another blow for the reputation of British banks, after rival Barclays (BARC.L) 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 happen again.
"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, adding that it was his job to get HSBC back to a position "where it's regarded as the best of the bunch".
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. Th e bank said its trading performance in October had been "satisfactory".
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, whose origins date back to 1865 as a financier of trade between Europe and Asia.
HSBC has cut almost 30,000 jobs in the last two years - close to what Gulliver had predicted under his revamp - although about half of those have been due to disposals. "In terms of the organic reduction, there's still some way to go," he said.
He has sold or closed 41 businesses as part of that plan, including selling its U.S. credit card arm and half of its U.S. branches, and said he was about three quarters of the way through that plan. (Additional reporting by Sarah White; Editing by Philippa Fletcher and Peter Graff)