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Money Laundering Costs HSBC $1.9B

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HSBC Holdings plc. reached a settlement with the U.S. law enforcement authorities in the money laundering case and agreed to pay a hefty amount for it. The company would pay a penalty of $1.9 billion for its misdeeds and take proper measures to avoid such issues going forward.  

As a matter of fact, HSBC was blamed for substantial lapses in its anti-money laundering compliance. The company was accused of being involved in the displacement of funds through the U.S. financial system for countries under the sanctioned list of the United States.

Moreover, it was charged for controversial transactions pertaining to the illegal narcotics trade in Mexico. No less than $881 million of drug trafficking earnings are said to have been laundered through HSBC Bank USA between 2006 and 2010.

The settlement includes a Deferred Prosecution Agreement with the US Department of Justice. Over the five-year term of the agreement, HSBC’s progress in executing the measures would be evaluated by an independent monitor. As per the type of agreement, in case the company falters again, it may be sued by the Justice Department.

Notably, HSBC, which admitted to its misdeeds, undertook measures to increase its controls and compliances. In addition to elevating its expenditures on anti-money laundering as well as increasing the unit staff strength, the company has overhauled its Know Your Customer program.

HSBC has already initiated a review of all Know Your Customer files worldwide, which would cost the company an estimated $700 million over five years. Moreover, on grounds of risk, the company exited 109 correspondent relationships while a number of senior officers’ bonus have been revoked. Also, a set of guiding principles have been adopted for restricting business in countries which pose a high financial crime risk.

HSBC reached an agreement with all other US government agencies which have probed the former’s prior activities associated with these issues. Further, it expects to finalize an agreement with the U.K. Financial Services Authority shortly.

The settlement with HSBC demonstrates the efforts of the U.S. regulators to come down hard on the unjustifiable activities of the banks and terminate 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 - Free Report) for its involvement in money laundering in Iran.

Earlier this year, the U.S. government held Netherlands-based ING Groep NV (ING - Free 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.

For HSBC, whose shares currently retain a Zacks #4 Rank (implying a short-term Sell rating), though the settlement comes as a relief as the burden of litigation overhangs would be lessened and legal costs would be curtailed, it also exhausts the company’s financials. Moreover, we believe that negligence relating to such critical rules is not acceptable since these issues can subject the global economy to dire consequences.

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