"I recommend it 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," said David Bagley, head of Group Compliance at HSBC. "I have agreed to work with the bank's senior management toward an orderly transition of this important role."
HSBC is being cited as a case study for problems that can occur when a U.S. affiliate bank provides international affiliates with access to the U.S. financial system.
"The problem here is that some international banks abuse their U.S. access," said Sen. Carl Levin, D-Mich., and chairman of the Senate Permanent Subcommittee on Investigations, in his opening statement. "The result is that the U.S. affiliate can become a sinkhole of risk for an entire network of bank affiliates and their clients around the world playing fast and loose with U.S. banking rules."
The subcommittee issued a number of recommendations to combat money laundering in U.S. banks, including closely monitoring affiliates in countries with a high risk of money laundering and improving Office of the Comptroller of the Currency regulations.
Senators' questions focused heavily on the problems in HSBC's Mexican affiliate, HBMX. The report found that in 2007 and '08, HBMX sent $7 billion in physical U.S. dollars to HBUS from, "which should have raised red flags that the volume of dollars included proceeds from illicit drug sales in the United States," Levin said Monday during a briefing.
Evidence obtained from HSBC executive documents and e-mail messages suggests HSBC executives' knowledge that money laundering was occurring at HBMX, the panel said. Levin pointed to a 2009 message from Bagley to the chief executive officer of HSBC Latin America, in which Bagley said the "inherent AML risk in Mexico is still very high."
Bagley told the committee: "I have said before and I will say again: Despite the best efforts and intentions of many dedicated professionals, HSBC has fallen short of our own expectations and the expectations of our regulators."
The gap between knowledge and accountability was the result of a poor compliance structure at HSBC, he said. There was no direct line between the head of group compliance of corporate HSBC to the executives of the international affiliate banks, Bagley said.
"You can have a compliance officer all you want, if there is no line of authority to change the action," said Sen. Tom Coburn, R-Okla.
Executives also faced questions concerning concealed transactions linked to Iran sent to HBUS from international affiliates. U.S. banks are prohibited from doing business directly with Iran but money can be sent to the United States through another foreign bank.
HSBC international affiliates, wanting to save time and avoid the review of the transactions by the Office of Foreign Assets Control, routinely removed evidence of links to Iran to conceal the information from HBUS, Levin said.
When asked by Levin why he "did not just raise hell" if he was uncomfortable with these transactions, former HBUS Executive Vice President Michael Gallagher said, "We should have been louder, sooner."
The report also indicated that HBUS provided almost $1 billion to Saudi Arabia's Al Rajhi Bank over four years, despite evidence that "the bank's key founder was an early benefactor of al-Qaida," he said.
The subcommittee similarly criticized regulators from the OCC for failure to take action against HSBC for six years despite knowledge of anti-money laundering deficiencies.
"Banks that ignore anti-money laundering rules are a problem for our country but also troubling is a bank regulator that does not adequately do its job," Levin said.
The subcommittee's 335-page report is the result of a yearlong investigation during which it interviewed 75 HSBC officials and reviewed more than 1.4 million documents. Both HSBC and the OCC cooperated throughout the investigation, Coburn noted.
Despite recent changes to improve anti-money laundering regulations, money laundering continues, said David Cohen, undersecretary for terrorism and financial intelligence at the Treasury Department. Hundreds of billions of dollars of illicit money are moved through the U.S. financial system, he said.
"We can write all the rules of regulations in the world but if they are in fact not carried out by the bureaucracy to do that, it doesn't matter," Coburn said.
Levin is calling for HSBC to be held accountable for its actions.
"Apologies are important," he said Monday. "Promises and commitments to improve are also welcome, but accountability is essential and that's what's been missing here."
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