HSBC Money Laundering Case

HSBC Money Laundering Case: “Too Big To Fail” does not mean “Too Big to Jail”

September 24th, 2013 by Kara in Case Studies

The ProblemAlphonse Capone

Some banking institutions have become so large criminal prosecutions resulting in

revocation of banking charters may negatively affect the national, and perhaps the global,

economy. The U.S. Attorney General and other prosecutors are thus left with a moral

dilemma: ensure justice through prosecution or forego criminal proceedings to protect the

economy and society at large.

HSBC and Money Laundering

In December 2012, multinational banking institution HSBC was penalized a record $$1.92

billion by the United States for violating laws designed to prevent money laundering and

other illegal financial activity. HSBC was under consistent suspicion and twice given

warnings and orders to strengthen its anti-money laundering programs by the U.S. between

2003 and 2010 but failed to make the proper adjustments. The $$1.92 billion penalty, issued

under the Bank Secrecy Act, was handed down after a report and subsequent investigation

that confirmed the bank had set up offshore accounts for drug cartels and suspected

criminals in Jersey. HSBC banking executives admitted to laundering as much as $$881 billion

dollars.

Players

HSBC North American Holdings, Inc.: parent company of HSBC Group, one of the world’s

largest banking and financial services groups. HSBC has more than 6900 offices in over 80

countries.

HSBC Bank USA: federally chartered subsidiary of HSBC North American Holdings, Inc.;

headquartered in McLean, Virginia with its principal offices in New York City. HSBC Bank

USA is the specific entity charged with violating the Bank Secrecy Act.

Eric Holder: United States Attorney General; publicly defended the decision not to criminally

prosecute HSBC Bank USA executives.

HSBC Bank USA Executives: Specifically those responsible for the lax monitoring programs

and other negligence that violated the Bank Secrecy Act.

HSBC Bank USA Employees: would lose their jobs if HSBC were forced to cease banking

operations in the United States.

The United States’ (and possibly the global) economy: As stated by Attorney General Eric

Holder, the national economy will suffer greatly if HSBC’s U.S. banking charter is revoked.

United States Department of the Treasury: As one of the regulators of HSBC Bank USA’s

financial affairs the Treasury is tasked with advising the Department of Justice on the

economic effects of prosecuting HSBC.

Office of the Comptroller: As the regulator

of HSBC Bank USA’s banking charter, the

Comptroller can revoke HSBC Bank USA’s banking privileges in the U.S. if its executives are

prosecuted and convicted.

Instruments

Bank Secrecy Act (31 USC §5311): enacted by Congress to require banks and other financial

institutions to create and maintain anti-money laundering programs and other practices to

prevent terrorist financing and other financial crimes. In addition to internal programs and

monitoring, the Bank Secrecy Act (BSA) also requires ongoing employee training and due

diligence for foreign correspondent accounts.

Deferred Prosecution Agreement: To avoid criminal prosecution for violations of the BSA,

HSBC executives agreed to pay a $$1.92 billion fine and comply with elevated monitoring

standards for a probationary period of five years.

Events

From 2003-2006, HSBC Bank USA was under heavy suspicion by United States regulators

and operated under a written agreement to correct the deficiencies of their operational

practices. HSBC Bank USA specifically agreed to enhance its anti-money laundering program

to achieve adequate compliance with the Bank Secrecy Act.

Between 2006 and 2010, HSBC Bank USA violated several components of the BSA: Money

laundering risks associated with doing business with certain Mexican customers were

ignored, compliance issues at HSBC Mexico were overlooked, and a BSA-adequate anti-

money laundering program was not implemented. The Court notes four significant HSBC

Bank USA failures:

failed to obtain and maintain due diligence on HSBC Group Affiliates.

failed to adequately monitor over $$200 trillion in wire transfers between 2006 and

2009 from customers in nations classified as “standard” or “medium” risk ($$670 billion in

wire transfers specifically from HSBC Mexico).

Bank USA failed to adequately monitor billions of dollars in U.S. banknote purchases.

Bank USA failed to provide proper staffing and resources necessary to maintain an

effective anti-money laundering program.

As part of the Deferred Prosecution Agreement, HSBC Bank USA admitted to gross violations

of the Bank Secrecy Act, including failure to establish and maintain an effective anti-money

laundering program, failure to establish due diligence, and involvement in the laundering of

over $$881 billion.

The Penalty

The record-setting fine, comprised of $$1.256 billion in forfeiture and $$665 million in civil

penalties, allows HSBC to temporarily thwart criminal prosecution pending a probationary

period of compliance with anti-money laundering standards. The probationary period

consists of a five-year agreement with the U.S. DOJ that includes an independent monitor of

HSBC’s internal anti

-

money laundering programs, bonus deference by the bank’s top

executives, and retraction of bonuses from some current and former executives who had

particular involvement in the willful breach of U.S. regulations.

Public Controversy

In March of 2013, Attorney General Eric Holder defended the U.S. government’s decision

not to pursue criminal prosecution of HSBC by claiming that prosecution of such large

institutions has a negative impact on the national economy. His statement stirred some

outrage. The notion that the largest corporations, deemed equal to people under the law by

the U.S. Supreme Court in the Citizens United case in 2010, are now afforded freedom from

criminal prosecution as well.

At the forefront of prosecution advocates is Senator Elizabeth Warren, who voiced publicly

her disdain for the decision not to prosecute HSBC for money laundering. She posed this

question to the Department of Justice (DOJ): “How many billions of dollars of drug money

do you have to launder…before someone will consider shutting down a bank?” Not one

Treasury or Justice Department official offered her a direct answer. One thing is evident:

The Justice Department seems to hold all the cards in deciding the fate of HSBC’s ability to

continue operating in the U.S. The Comptroller cannot revoke its charter without a criminal

conviction and the role of the Treasury i

s simply to advise the DOJ on an institution’s impact

on the economy. Regardless of the economic reasons, the decision not to prosecute

questions the integrity of the entire justice system. Can we justify deferring prosecution for

willful criminal activity in the name of protecting the national economy? The debate

presents an ethical dilemma between justice and utilitarianism.

Utilitarian Approach

Utilitarianism, also known as the “greatest happiness principle” holds that decisions and

actions are proper as long as they promote proportional utility, and by the same accord

improper as they produce an overall negative utility. A utilitarian view, then, would

advocate an act if a greater benefit would be afforded to a larger number of individuals in

society. This principle supports the Department of Justice decision not to prosecute HSBC,

because not prosecuting HSBC benefits a greater number of individuals in society through

protecting the economy from harm, even at the expense of letting criminal activity go

largely unpunished.

Under a traditional utilitarian view, then, the Justice Department’s decision not to criminally

prosecute HSBC officials seems sound, as a larger portion of society benefits from HSBC

maintaining operations (not to mention the number of saved jobs) and keeping the

economy from further suffering in already difficult financial times. The record-setting

monetary penalty and the probationary monitoring period are presumably aimed at

deterring future wrongdoing by HSBC and other large financial institutions. However, in

spite of $$1.92 billion being the largest fine imposed on any banking institution in history, it

does not reflect an amount that could effectively deter a financial institution the size of

HSBC. According to Bankers Almanac,

HSBC’s annual before

-taxes profit totals more than

$$23 billion.

The $$1.92 billion fine handed down by the U.S. represents roughly a month’s profit.

If HSBC and other large banks are not effectively deterred from continuing illegal and

unethical financial practices, at some point in time the utilitarian outcome of laundering

money for illegal organizations becomes adverse to the greatest number of people in

society.

In fact, a deeper analysis shows that pursuing criminal prosecution of HSBC’s executives

likely yields a greater utilitarian outcome in the long run. While the immediate effect of

prosecution may adversely affect a great number of individuals in society by means of a

blow to the economy and the loss of jobs, the long term effects of allowing a banking

institution like HSBC to engage in criminal activity with no risk of criminal prosecution, jail

time, or even the loss of its banking license, presents a moral hazard. A $$1.92 billion fine for

laundering upwards of $$881 billion hardly seems like incentive to exercise due diligence in

future practices. In fact, the outcome of HSBC’s case can actually provide incentive for other

banks to be more lax with their anti-money laundering practices.

Among the most alarming effects the non-prosecution decision produces is the harm done

to the large number of individuals affected by drug trade. That being the case, both justice

and utility seem best served by criminal prosecution of HSBC executives.

Justice Approach: Retribution and Deterrence

Society has always had a keen interest in providing justice for the wrongdoings of individuals.

As for the intentional breaking of U.S. laws and sanctions by HSBC executives, justice can be

readily sought in the forms of retribution and deterrence. Retributive justice is simply

providing adequate punishment to lawbreakers in accordance with their offenses.

Retribution provides two important results: disincentive for the offender to recommit the

wrongful act and a general deterrence to the rest of society who may contemplate acting

wrongfully. While retribution is generally served as a calculated punishment proportional to

the wrongful act, deterrence is most often pursued by a punishment that outweighs the

wrongful act, to ensure avoidance of future wrongdoing in general. Often, these

punishments come in the form of large fines.

The conduct of HSBC’s executives in knowingly failing to adhere to U.S. sanctions and

regulations is certainly unjust. In making the decision to defer prosecution of HSBC Bank

USA executives, the primary consideration of the United States government was to prevent

harm to an already struggling economy. While instances may exist when other

consequences may mitigate an application of justice, the long-term effects of avoiding

prosecution for the criminal acts of HSBC are too great. When government allows big

financial institutions to go largely unpunished for laundering vast sums of money for

criminal organizations such as drug cartels, it is essentially endorsing the immeasurable

amount of harm associated with the day-to-day activities of global drug trade. Justice for

perpetuating such criminal enterprises cannot be adequately administered by a mere

financial penalty.

Deontological Aspect: Prosecutorial Duty

A deontological approach asserts individuals are morally obligated to act according to a set

of principles regardless of outcome. Rational people have a duty to act ethically, no matter

the consequences. The criminal justice system of the United States is based largely on

deontological ideals. Prosecutors have a duty to carry out justice.

Prosecutors and Attorneys General, like all government officials, are elected or appointed

under the promise to uphold the laws. Prosecutors, by design, are charged with the

responsibility to fairly and appropriately pursue punishment for wrongdoers in society.

While all human beings have the same general obligation to act morally, prosecutors take

on a special obligation, or duty, when taking office. Prosecutors assume an elevated duty to

make certain decisions as a part of their role in the justice system. As prosecutors accept

taking on the role of pursuing justice for illegal behavior, they assume an ethical duty to do

so fairly and diligently no matter the offender.

The Attorney General and the DOJ failed in their prosecutorial duties. They did not

prosecute HSBC officials because of an uncertain forecast outcome (economic harm).

Ultimately, they failed to provide justice for gross wrongdoing. The decision not to

prosecute also prevents other regulators from punishing HSBC. The Court, in upholding the

financial penalty and the Justice Department’s decision not to prosecute, stated its need to

give broad prosecutorial discretion to the Executive Branch in matters like these. Hence, the

Comptroller is unable

to completely revoke HSBC’s U.S. banking privileges without some

form of conviction by the Justice Department. The Deferred Prosecution Agreement

essentially lets HSBC off the hook with a $$1.92 billion pass for laundering more than $$880

billion.

Conclusion

The ethical analysis above applies theories of justice, utilitarianism, and deontology to the

Department of Justice decision not to pursue prosecution of HSBC executives. The analysis

suggests that criminal prosecution is probably the right move, rather than the deferred

prosecution agreement currently in place. The reasons are:

$$1.92 billion fine and 5-year probationary monitoring period is unlikely to deter future

misconduct.

long-term consequences of the Deferred Prosecution Agreement may outweigh its

immediate utility.

DOJ is not fulfilling its prosecutorial duty to pursue punishment for those who violate

the law.

While some may believe the Deferred Prosecution Agreement promotes the best interests

of the United States, its long-term effects may ultimately pose a greater danger.

BY: SAM STORRS

Works Cited

1. HSBC’s Deferred Prosecution Agreement, Statement of Facts. Case 1:12

-cr-00763-ILG

Document 3-3, December 11, 2012.

Accessed online: /opa/documents/hsbc/dpa-attachment-

2. 31 U.S.C. §5311 (Bank Secrecy Act), Declaration of Purpose.

Accessed online: /uscode/text/31/5311