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DOJ to Rescind HSBC's Deferred-Prosecution Agreement?
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Shares of HSBC Holdings plc (HSBC - Free Report) fell 1.3% following a Bloomberg report stating that the U.S. prosecutors are considering a criminal charge against one of its units due to the bank’s conduct on its foreign exchange desk, according to people familiar with the matter. Notably, this charge could rescind the deferred-prosecution agreement (DPA), signed by the bank in 2012.
Analysis of the Charge
In Jul 2016, a group of prosecutors had brought up the fraud case against the former head of HSBC’s foreign-exchange cash trading in London, Mark Johnson and a former colleague Stuart Scott, per sources. These men were charged with conspiracy and wire fraud, originating from a foreign-exchange transaction in 2011, in which they manipulated prices to help the bank profit, at the expense of its clients.
Notably, the prosecutors will be considering many factors before deciding whether to file a criminal charge against the bank in the currency case, including the severity of the conduct on the foreign-exchange desk and the extent to which the bank addressed it.
Will The DPA Be Rescinded?
HSBC is currently in its probation period. In 2012, the company was fined $1.9 billion on money laundering charges. Further, as part of the settlement deal, HSBC signed the DPA agreement, which required the bank to improve its internal controls and submit it to an outside monitor over a period of five years. (read more: Money Laundering Costs HSBC $1.9B)
Post completion of the current investigation, if the Justice Department finds that the bank broke the U.S. law after it entered into the agreement, it can invoke a section of the deal that says HSBC would be held responsible for the conduct it admitted to in 2012. Such a flow of events could lead to a conviction in the laundering and sanctions case, thereby threatening the bank with more legal troubles.
Nonetheless, an important argument against charging HSBC is that the foreign-exchange transaction, on which the charge is based, appears to be a one-time event, and which has not been linked to a wider pattern of behavior. Also, the event had occurred prior to the 2012 agreement.
Moreover, the Justice Department has said that a DPA would be rescinded only after a significant misconduct. However, the prosecutors are concerned that HSBC that has barely escaped criminal prosecution and was operating under heavy monitoring could not control the principal foreign-exchange traders involved in the conduct.
Road Ahead
Due to the DPA agreement, any unlawful activity carried out by HSBC after 2012 will result in a breach of the agreement. In this case, if the prosecutors determine that the bank could not properly discipline its employee’s alleged misconduct, then HSBC would also be charged. The bank would then be comparable to an individual, who on his parole for a previous crime commits a new crime. In such situation, the defendant would be charged with two crimes, the new offense and the crime of violating the terms of his probation.
Notably, if the prosecutors in the current case and those from the 2012 settlement agree to file a criminal charge against HSBC and abandon the DPA, they will have to notify the bank and give a chance to respond, according to the terms of the settlement.
Moreover, because of the notoriety of the case, the decision to withdraw the DPA might eventually be appealed to the deputy attorney general, Sally Quillian Yates and Attorney General Loretta Lynch, who signed the 2012 pact. Nonetheless, the lawyers of HSBC are also likely to appeal against such decision to Caldwell, chief of the Justice Department’s criminal division.
Conclusion
Caldwell has recently broadcasted her willingness at various occasions to walk away from DPAs when the defendants violate the terms. In 2015, the Justice Department voided its DPA with the UBS Group AG (UBS - Free Report) , after the bank acknowledged unlawful conduct in its foreign-exchange desk.
Hence, HSBC should start taking intensive care to maintain proper discipline along all of its business activities so as to stay away from severe regulatory probes.
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DOJ to Rescind HSBC's Deferred-Prosecution Agreement?
Shares of HSBC Holdings plc (HSBC - Free Report) fell 1.3% following a Bloomberg report stating that the U.S. prosecutors are considering a criminal charge against one of its units due to the bank’s conduct on its foreign exchange desk, according to people familiar with the matter. Notably, this charge could rescind the deferred-prosecution agreement (DPA), signed by the bank in 2012.
Analysis of the Charge
In Jul 2016, a group of prosecutors had brought up the fraud case against the former head of HSBC’s foreign-exchange cash trading in London, Mark Johnson and a former colleague Stuart Scott, per sources. These men were charged with conspiracy and wire fraud, originating from a foreign-exchange transaction in 2011, in which they manipulated prices to help the bank profit, at the expense of its clients.
Notably, the prosecutors will be considering many factors before deciding whether to file a criminal charge against the bank in the currency case, including the severity of the conduct on the foreign-exchange desk and the extent to which the bank addressed it.
Will The DPA Be Rescinded?
HSBC is currently in its probation period. In 2012, the company was fined $1.9 billion on money laundering charges. Further, as part of the settlement deal, HSBC signed the DPA agreement, which required the bank to improve its internal controls and submit it to an outside monitor over a period of five years. (read more: Money Laundering Costs HSBC $1.9B)
Post completion of the current investigation, if the Justice Department finds that the bank broke the U.S. law after it entered into the agreement, it can invoke a section of the deal that says HSBC would be held responsible for the conduct it admitted to in 2012. Such a flow of events could lead to a conviction in the laundering and sanctions case, thereby threatening the bank with more legal troubles.
Nonetheless, an important argument against charging HSBC is that the foreign-exchange transaction, on which the charge is based, appears to be a one-time event, and which has not been linked to a wider pattern of behavior. Also, the event had occurred prior to the 2012 agreement.
Moreover, the Justice Department has said that a DPA would be rescinded only after a significant misconduct. However, the prosecutors are concerned that HSBC that has barely escaped criminal prosecution and was operating under heavy monitoring could not control the principal foreign-exchange traders involved in the conduct.
Road Ahead
Due to the DPA agreement, any unlawful activity carried out by HSBC after 2012 will result in a breach of the agreement. In this case, if the prosecutors determine that the bank could not properly discipline its employee’s alleged misconduct, then HSBC would also be charged. The bank would then be comparable to an individual, who on his parole for a previous crime commits a new crime. In such situation, the defendant would be charged with two crimes, the new offense and the crime of violating the terms of his probation.
Notably, if the prosecutors in the current case and those from the 2012 settlement agree to file a criminal charge against HSBC and abandon the DPA, they will have to notify the bank and give a chance to respond, according to the terms of the settlement.
Moreover, because of the notoriety of the case, the decision to withdraw the DPA might eventually be appealed to the deputy attorney general, Sally Quillian Yates and Attorney General Loretta Lynch, who signed the 2012 pact. Nonetheless, the lawyers of HSBC are also likely to appeal against such decision to Caldwell, chief of the Justice Department’s criminal division.
Conclusion
Caldwell has recently broadcasted her willingness at various occasions to walk away from DPAs when the defendants violate the terms. In 2015, the Justice Department voided its DPA with the UBS Group AG (UBS - Free Report) , after the bank acknowledged unlawful conduct in its foreign-exchange desk.
Hence, HSBC should start taking intensive care to maintain proper discipline along all of its business activities so as to stay away from severe regulatory probes.
Currently, HSBC carries a Zacks Rank #3 (Hold).
Other Stocks That Warrant a Look
Some better-ranked foreign bank stocks include Itaú Unibanco Holding S.A. (ITUB - Free Report) and Grupo Financiero Galicia S.A. (GGAL - Free Report) , both sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
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Beyond this Analyst Blog, would you like to see Zacks' best recommendations that are not available to the public? Our Executive VP, Steve Reitmeister, knows when key trades are about to be triggered and which of our experts has the hottest hand. Click to see them now>>