HSBC Money Laundering Case.docx

HSBC Money Laundering Case.docx

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HSBCMoneyLaunderingCase

HSBCMoneyLaunderingCase:

“TooBigToFail”doesnotmean“TooBigtoJail”

September24th,2013byKarainCaseStudies

TheProblemAlphonseCapone

Somebankinginstitutionshavebecomesolargecriminalprosecutionsresultinginrevocationofbankingchartersmaynegativelyaffectthenational,andperhapstheglobal,economy.TheU.S.AttorneyGeneralandotherprosecutorsarethusleftwithamoraldilemma:

ensurejusticethroughprosecutionorforegocriminalproceedingstoprotecttheeconomyandsocietyatlarge.

HSBCandMoneyLaundering

InDecember2012,multinationalbankinginstitutionHSBCwaspenalizedarecord$1.92billionbytheUnitedStatesforviolatinglawsdesignedtopreventmoneylaunderingandotherillegalfinancialactivity.HSBCwasunderconsistentsuspicionandtwicegivenwarningsandorderstostrengthenitsanti-moneylaunderingprogramsbytheU.S.between2003and2010butfailedtomaketheproperadjustments.The$1.92billionpenalty,issuedundertheBankSecrecyAct,washandeddownafterareportandsubsequentinvestigationthatconfirmedthebankhadsetupoffshoreaccountsfordrugcartelsandsuspectedcriminalsinJersey.HSBCbankingexecutivesadmittedtolaunderingasmuchas$881billiondollars.

Players

HSBCNorthAmericanHoldings,Inc.:

parentcompanyofHSBCGroup,oneoftheworld’slargestbankingandfinancialservicesgroups.HSBChasmorethan6900officesinover80countries.

HSBCBankUSA:

federallycharteredsubsidiaryofHSBCNorthAmericanHoldings,Inc.;headquarteredinMcLean,VirginiawithitsprincipalofficesinNewYorkCity.HSBCBankUSAisthespecificentitychargedwithviolatingtheBankSecrecyAct.

EricHolder:

UnitedStatesAttorneyGeneral;publiclydefendedthedecisionnottocriminallyprosecuteHSBCBankUSAexecutives.

HSBCBankUSAExecutives:

SpecificallythoseresponsibleforthelaxmonitoringprogramsandothernegligencethatviolatedtheBankSecrecyAct.

HSBCBankUSAEmployees:

wouldlosetheirjobsifHSBCwereforcedtoceasebankingoperationsintheUnitedStates.

TheUnitedStates’（andpossiblytheglobal）economy:

AsstatedbyAttorneyGeneralEricHolder,thenationaleconomywillsuffergreatlyifHSBC’sU.S.bankingcharterisrevoked.

UnitedStatesDepartmentoftheTreasury:

AsoneoftheregulatorsofHSBCBankUSA’sfinancialaffairstheTreasuryistaskedwithadvisingtheDepartmentofJusticeontheeconomiceffectsofprosecutingHSBC.

OfficeoftheComptroller:

AstheregulatorofHSBCBankUSA’sbankingcharter,theComptrollercanrevokeHSBCBankUSA’sbankingprivilegesintheU.S.ifitsexecutivesareprosecutedandconvicted.

Instruments

BankSecrecyAct（31USC§5311）:

enactedbyCongresstorequirebanksandotherfinancialinstitutionstocreateandmaintainanti-moneylaunderingprogramsandotherpracticestopreventterroristfinancingandotherfinancialcrimes.Inadditiontointernalprogramsandmonitoring,theBankSecrecyAct（BSA）alsorequiresongoingemployeetrainingandduediligenceforforeigncorrespondentaccounts.

DeferredProsecutionAgreement:

ToavoidcriminalprosecutionforviolationsoftheBSA,HSBCexecutivesagreedtopaya$1.92billionfineandcomplywithelevatedmonitoringstandardsforaprobationaryperiodoffiveyears.

Events

From2003-2006,HSBCBankUSAwasunderheavysuspicionbyUnitedStatesregulatorsandoperatedunderawrittenagreementtocorrectthedeficienciesoftheiroperationalpractices.HSBCBankUSAspecificallyagreedtoenhanceitsanti-moneylaunderingprogramtoachieveadequatecompliancewiththeBankSecrecyAct.

Between2006and2010,HSBCBankUSAviolatedseveralcomponentsoftheBSA:

MoneylaunderingrisksassociatedwithdoingbusinesswithcertainMexicancustomerswereignored,complianceissuesatHSBCMexicowereoverlooked,andaBSA-adequateanti-moneylaunderingprogramwasnotimplemented.TheCourtnotesfoursignificantHSBCBankUSAfailures:

1.HSBCfailedtoobtainandmaintainduediligenceonHSBCGroupAffiliates.

2.HSBCfailedtoadequatelymonitorover$200trillioninwiretransfersbetween2006and2009fromcustomersinnationsclassifiedas“standard”or“medium”risk（$670billioninwiretransfersspecificallyfromHSBCMexico）.

3.HSBCBankUSAfailedtoadequatelymonitorbillionsofdollarsinU.S.banknotepurchases.

4.HSBCBankUSAfailedtoprovideproperstaffingandresourcesnecessarytomaintainaneffectiveanti-moneylaunderingprogram.

AspartoftheDeferredProsecutionAgreement,HSBCBankUSAadmittedtogrossviolationsoftheBankSecrecyAct,includingfailuretoestablishandmaintainaneffectiveanti-moneylaunderingprogram,failuretoestablishduediligence,andinvolvementinthelaunderingofover$881billion.

ThePenalty

Therecord-settingfine,comprisedof$1.256billioninforfeitureand$665millionincivilpenalties,allowsHSBCtotemporarilythwartcriminalprosecutionpendingaprobationaryperiodofcompliancewithanti-moneylaunderingstandards.Theprobationaryperiodconsistsofafive-yearagreementwiththeU.S.DOJthatincludesanindependentmonitorofHSBC’sinternalanti-moneylaunderingprograms,bonusdeferencebythebank’stopexecutives,andretractionofbonusesfromsomecurrentandformerexecutiveswhohadparticularinvolvementinthewillfulbreachofU.S.regulations.

PublicControversy

InMarchof2013,AttorneyGeneralEricHolderdefendedtheU.S.government’sdecisionnottopursuecriminalprosecutionofHSBCbyclaimingthatprosecutionofsuchlargeinstitutionshasanegativeimpactonthenationaleconomy.Hisstatementstirredsomeoutrage.Thenotionthatthelargestcorporations,deemedequaltopeopleunderthelawbytheU.S.SupremeCourtintheCitizensUnitedcasein2010,arenowaffordedfreedomfromcriminalprosecutionaswell.

AttheforefrontofprosecutionadvocatesisSenatorElizabethWarren,whovoicedpubliclyherdisdainforthedecisionnottoprosecuteHSBCformoneylaundering.SheposedthisquestiontotheDepartmentofJustice（DOJ）:

“Howmanybillionsofdollarsofdrugmoneydoyouhavetolaunder…beforesomeonewillconsidershuttingdownabank?

”NotoneTreasuryorJusticeDepartmentofficialofferedheradirectanswer.Onethingisevident:

TheJusticeDepartmentseemstoholdallthecardsindecidingthefateofHSBC’sabilitytocontinueoperatingintheU.S.TheComptrollercannotrevokeitscharterwithoutacriminalconvictionandtheroleoftheTreasuryissimplytoadvisetheDOJonaninstitution’simpactontheeconomy.Regardlessoftheeconomicreasons,thedecisionnottoprosecutequestionstheintegrityoftheentirejusticesystem.Canwejustifydeferringprosecutionforwillfulcriminalactivityinthenameofprotectingthenationaleconomy?

Thedebatepresentsanethicaldilemmabetweenjusticeandutilitarianism.

UtilitarianApproach

Utilitarianism,alsoknownasthe“greatesthappinessprinciple”holdsthatdecisionsandactionsareproperaslongastheypromoteproportionalutility,andbythesameaccordimproperastheyproduceanoverallnegativeutility.Autilitarianview,then,wouldadvocateanactifagreaterbenefitwouldbeaffordedtoalargernumberofindividualsinsociety.ThisprinciplesupportstheDepartmentofJusticedecisionnottoprosecuteHSBC,becausenotprosecutingHSBCbenefitsagreaternumberofindividualsinsocietythroughprotectingtheeconomyfromharm,evenattheexpenseoflettingcriminalactivitygolargelyunpunished.

Underatraditionalutilitarianview,then,theJusticeDepartment’sdecisionnottocriminallyprosecuteHSBCofficialsseemssound,asalargerportionofsocietybenefitsfromHSBCmaintainingoperations（nottomentionthenumberofsavedjobs）andkeepingtheeconomyfromfurthersufferinginalreadydifficultfinancialtimes.Therecord-settingmonetarypenaltyandtheprobationarymonitoringperiodarepresumablyaimedatdeterringfuturewrongdoingbyHSBCandotherlargefinancialinstitutions.However,inspiteof$1.92billionbeingthelargestfineimposedonanybankinginstitutioninhistory,itdoesnotreflectanamountthatcouldeffectivelydeterafinancialinstitutionthesizeofHSBC.AccordingtoBankersAlmanac,HSBC’sannualbefore-taxesprofittotalsmorethan$23billion.

The$1.92billionfinehandeddownbytheU.S.representsroughlyamonth’sprofit.

IfHSBCandotherlargebanksarenoteffectivelydeterredfromcontinuingillegalandunethicalfinancialpractices,atsomepointintimetheutilitarianoutcomeoflaunderingmoneyforillegalorganizationsbecomesadversetothegreatestnumberofpeopleinsociety.

Infact,adeeperanalysisshowsthatpursuingcriminalprosecutionofHSBC’sexecutiveslikelyyieldsagreaterutilitarianoutcomeinthelongrun.Whiletheimmediateeffectofprosecutionmayadverselyaffectagreatnumberofindividualsinsocietybymeansofablowtotheeconomyandthelossofjobs,thelongtermeffectsofallowingabankinginstitutionlikeHSBCtoengageincriminalactivitywithnoriskofcriminalprosecution,jailtime,oreventhelossofitsbankinglicense,presentsamoralhazard.A$1.92billionfineforlaunderingupwardsof$881billionhardlyseemslikeincentivetoexerciseduediligenceinfuturepractices.Infact,theoutcomeofHSBC’scasecanactuallyprovideincentiveforotherbankstobemorelaxwiththeiranti-moneylaunderingpractices.

Amongthemostalarmingeffectsthenon-prosecutiondecisionproducesistheharmdonetothelargenumberofindividualsaffectedbydrugtrade.Thatbeingthecase,bothjusticeandutilityseembestservedbycriminalprosecutionofHSBCexecutives.

JusticeApproach:

RetributionandDeterrence

Societyhasalways