HBC to Settle Money-Laundering Claim

HSBC Holdings plc (HBC - Analyst Report) is likely to settle money laundering charges with the U.S. law enforcement authorities next week, according to a Reuters report. HSBC will shell out an estimated $1.8 billion in penalties.

The settlement is anticipated to involve a deferred prosecution agreement between HSBC and the regulators. Deferred prosecution agreements are deals whereby, the regulators delay or may even discontinue the prosecution if the company admits its mistake, is ready to pay penalty and cleanout its compliance systems. However, in case the company falters again, it may be sued by the Justice Department.

The expected settlement for money laundering charges has been held up for months now. In its latest regulatory filings, the company stated that it was anticipating nearly $1.5 billion in fines to resolve the claims. In July this year, the company faced a tough inquiry by a congressional committee for its alleged involvement in money laundering during the period 2004–2010.

The investigation revealed substantial lapses in the bank's anti-money laundering compliance. This resulted in a worldwide displacement of funds from riskier nations through the bank. Controversial transactions pertaining to its Iranian clientele and the illegal narcotics trade in Mexico drew maximum attention.

The settlement with HSBC reflects the efforts of the U.S. regulators to come down hard on unwarranted activities of the banks and discontinue the illegal cash flow through its financial system. In August this year, the New York State Department of Financial Services (DFS) reached a $340 million settlement with Standard Chartered PLC (SCBFF) for its involvement in money laundering in Iran. The agreement came after the London-based bank was accused by New York’s top regulating authority of concealing transactions worth $250 billion (£160 billion) relating to Iran.

Earlier this year, the U.S. government had also held Netherlands-based ING Groep NV (ING - Snapshot Report) responsible for transferring billions of dollars through the American financial system to nations that were economically restricted by the U.S. As a result, ING bank ended up paying $619 million in penalties.

Moreover, Wachovia bank, which was acquired by Wells Fargo & Company (WFC - Analyst Report) in 2008, was accused of transferring funds related to Mexican Drug cartel. It shelled out $160 million as compensation.

Most definitely, this settlement will result in huge expenditure for HSBC. However, the bank anticipates sale of non-core assets to absorb the losses. In addition, HSBC must be credited for fully supporting the U.S. regulators and law enforcement bodies while these were conducting the investigations. However, it must be mentioned that negligence relating to such critical rules is not acceptable since these issues expose the entire world to dangers with dire consequences.

Shares of HSBC currently retain a Zacks #3 Rank, which translates into a short-term Hold rating. Moreover, considering the fundamentals, we maintain a long-term Neutral recommendation on the stock.