HSBC, SCB Agree to AML Penalties

Banks Settle with Feds over SARs Violations
HSBC, SCB Agree to AML Penalties

Two London-based banks, HSBC Group and Standard Chartered Bank, have agreed to pay financial penalties for violations of U.S. laws related to anti-money-laundering practices and suspicious activity reporting.

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On Dec. 11, HSBC Group announced it would pay $1.92 billion for violations of the Bank Secrecy Act stemming from a cease and desist order issued by the Office of the Comptroller of the Currency in October 2010 against HSBC's North American Branch [d.b.a. HSBC USA] (see HSBC's BSA Violations Set Example).

HSBC said a deferred prosecution agreement with the Department of Justice calls for the bank's forfeiture of $1.25 billion in illegal transactions plus $655 million in civil penalties. Regulators says the bank neglected to monitor bulk-cash transactions with foreign affiliates and conducted bulk-cash wire transfers and purchases without due diligence. HSBC's lack of monitoring and due diligence limited its assessment of customer risk and the identification of suspicious activity, authorities said.

"We accept responsibility for our past mistakes," HSBC Group CEO Stuart Gulliver said in a statement. "The HSBC of today is a fundamentally different organization from the one that made those mistakes. Over the last two years, under new senior leadership, we have been taking concrete steps to put right what went wrong and to participate actively with government authorities in bringing to light and addressing these matters."

HSBC says it also expects to soon finalize an undertaking with the United Kingdom Financial Services Authority to strengthen its compliance policies and procedures.

SCB Agrees to Similar Deal

HSBC's agreement comes one day after a similar deal was reached between London-based Standard Chartered Bank and federal and New York state authorities. On Dec. 10, SCB agreed to hefty U.S. financial penalties for sanctions violations linked to illegal transactions and payments the bank pushed through its New York branch for entities in nations, such as Iran, which are subject to U.S. economic sanctions.

SCB's latest penalties come in addition to $340 million in penalties levied by the New York State Department of Financial Services in August for failure to comply with state-mandated bookkeeping practices tied to foreign transactions. State authorities claimed the falsification of records related to transactions conducted between 2001 and 2007 at the New York branch broke state laws.

In the SCB case, federal authorities accused the bank of conspiring to violate the International Emergency Economic Powers Act and falsifying bookkeeping and paperwork to conceal transactions that violated Office of Foreign Assets Control regulations.

Similar to the HSBC settlement, the Justice Department has agreed not to prosecute SCB for illegally conducting transactions with Iran, Sudan, Libya and Burma in exchange for SCB's forfeiture of $227 million in illegal transactions. As part of the deal, the New York County District Attorney's Office also has agreed not to file charges for similar violations of state laws.

SCB's $227 million settlement with the Justice Department also satisfies an additional $135 million penalty against the bank by the Office of Foreign Assets Control. The office, however, has required that SCB conduct a review of its policies and procedures to ensure the bank's compliance program can effectively detect, correct and report sanctions violations in the future.

Separately, the Federal Reserve has imposed an additional $100 million civil penalty against SCB for insufficient oversight of its compliance program for U.S. economic sanctions, the Bank Secrecy Act and anti-money-laundering requirements.

The Fed's order also alleges SCB offered inadequate and incomplete responses to examiner inquiries.

The U.K.'s Financial Services Authority also has agreed to assist the Fed in its supervision of SCB.

"For years, Standard Chartered Bank deliberately violated U.S. laws governing transactions involving Sudan, Iran, and other countries subject to U.S. sanctions," says Assistant Attorney General Lanny Breuer of the Justice Department's Criminal Division.

"The United States expects a minimum standard of behavior from all financial institutions that enjoy the benefits of the U.S. financial system. Standard Chartered's conduct was flagrant and unacceptable. Together with the Treasury Department and our state and local partners, we will continue our unrelenting efforts to hold accountable financial institutions that intentionally mislead regulators to do business with sanctioned countries."

Penalties' Long-Term Impact?

Despite the massive penalties against HSBC and SCB, anti-money-laundering expert Kevin Sullivan says certain big banks may continue to violate sanctions, if they deem it good for business.

"In all the big AML cases in the last couple of years, the real problem is ethics, or lack thereof," Sullivan says. "I do not see an end to the issue of some financial institutions going over the line. A fine, while it might be heavy, can still be absorbed."

Sullivan says the best way to deter these types of violations is to prosecute bank executives, rather than fine the institutions.

Charles Intriago, another anti-money laundering expert, offers a similar assessment. "The only deterrent in the long analysis is not only a significant dent in profit, but also significant prison terms," he says. "You start sending them away for five or 10 years to the federal penitentiary and you're going to start to see some change in these institutions."

Avivah Litan, a financial fraud expert and distinguished analyst at consultancy Gartner, believes both cases may lead some institutions to enhance their AML-detection systems to better detect violations, even those approved by upper management.

"Compliance is the main driver of purchases of security-related software, such as anti-money laundering, illegal-money-transfer detection and general fraud prevention," Litan says. "Other banks most certainly want to avoid these types of fines and prosecutions."

Besides, it's easier for banks and credit unions to have technology expenses approved when they are linked to compliance, rather than simply security and fraud-prevention, she adds.

Violations Were Ongoing

Between mid-2006 and mid-2009, regulators say, HSBC failed to adequately monitor transactions with foreign affiliates in which HSBC North America's parent, HSBC Group, holds a majority interest.

Ultimately, because of those oversights and others, the bank was unable to "disposition its alerts appropriately or to comply fully with its obligation to report suspicious activity on time," the OCC found.

In SCB's case, the violations were more intentional, authorities say. SCB's New York branch provides wholesale banking services, primarily U.S.-dollar clearing for international wire payments. The branch also offers correspondent banking services for branches in London and Dubai.

According to court records, from 2001 through 2007, SCB's New York branch violated U.S. and state laws by moving millions of dollars illegally through the U.S. financial system on behalf of entities in Iran, Sudan, Libya, and Burma, nations subject to U.S. economic sanctions. More than $200 million in transactions that should have been rejected, blocked or stopped were run through the New York branch and unaffiliated U.S. financial institutions, investigators say.

SCB tried to conceal transactions that violated Office of Foreign Assets Control sanctions by falsifying paperwork, according to court records. One customer in a sanctioned country was told to represent itself using SCB London's unique banking code in payment messages by replacing references to sanctioned entities with special characters and deleting payment data that would have revealed the involvement of sanctioned entities and countries.

That falsification of transaction history and payment statements occurred in various business units within SCB in locations around the world, but was most prevalent within SCB's London and Dubai branches, prosecutors say. Senior corporate managers, as well as legal and compliance departments, were aware of that concealment, court records reveal.

Other SCB Violations

In addition to evading U.S. economic sanctions, SCB made misleading statements to regulators to further conceal its business with sanctioned countries. In August 2003, SCB told the Office of Foreign Assets Control that the use of cover payments for transactions related to sanctioned countries was contrary to SCB's global instructions, despite its ongoing business with entities in sanctioned countries.

"Standard Chartered Bank regularly engaged in prohibited banking practices, took steps to conceal the illegal conduct, and misled regulators about the pattern of illegality," said George Venizelos, assistant director in charge of the Federal Bureau of Investigation's New York field office. "New York is a world financial capital, and an international banking hub, and you have to play by the rules to conduct business here."

About the Author

Tracy Kitten

Tracy Kitten

Former Director of Global Events Content and Executive Editor, BankInfoSecurity & CUInfoSecurity

Kitten was director of global events content and an executive editor at ISMG. A veteran journalist with more than 20 years of experience, she covered the financial sector for over 10 years. Before joining Information Security Media Group in 2010, she covered the financial self-service industry as the senior editor of ATMmarketplace, part of Networld Media. Kitten has been a regular speaker at domestic and international conferences, and was the keynote at ATMIA's U.S. and Canadian conferences in 2009. She has been quoted by, ABC News, and MSN Money.

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