A combination of federal, local and international government actions and investigations resulted in the largest bank settlement in U.S. history (the “Settlement”), pursuant to which HSBC Bank USA, N.A., a federally-chartered banking institution (“HSBC USA”) and subsidiary of HSBC North America Holding, Inc., and HSBC Holdings plc, a financial institution holding company organized under the laws of England and Wales (“HSBC Holdings,” together with its affiliates, “HSBC”) will pay a penalty of approximately $1.9 billion as a result of anti-money laundering violations (“AML”) and violations of the sanctions programs administered by the Office of Foreign Assets Control (“OFAC”). HSBC Holdings is the ultimate parent company of financial institutions throughout the world (“HSBC Group Affiliates”) which it owns through various intermediate holding companies. The Settlement was not the first time that HSBC was sanctioned for AML violations—from 2003-2006, HSBC operated under a written consent order related to failure to meet certain AML requirements, and in 2010, the OCC and the FRB issued cease and desist orders to HSBC based on failures to comply with AML requirements.
$1.256 billion of the penalty results from a five-year deferred prosecution agreement (“DPA”) entered into with the U.S. Department of Justice (“DOJ”) and the United States Attorney’s Offices for the Eastern District of New York and the Northern District of West Virginia in which HSBC admitted to: (a) willful failure to maintain an effective AML program, in violation of the Bank Secrecy Act (the “BSA”); (b) willful failure to conduct and maintain due diligence on correspondent accounts, in violation of the BSA; (c) willful violation and attempted violation of the Trading with the Enemy Act, specifically willful violations of the Cuban sanctions programs administered by OFAC; and (d) willful violation and attempted violation of the International Emergency Economic Powers Act, specifically willful violations of the Iranian, Libyan, Sudanese and Burmese sanctions programs administered by OFAC.
Of particular concern was HSBC’s failure to perform due diligence on foreign affiliates and improperly risk rating customers and countries. Specific attention was paid to HSBC’s failure to properly assess the risk involved with Mexican transactions, the failure to conduct due diligence on Mexican customers and transactions, the absence of an acceptable AML program at its Mexican subsidiary (“HSBC Mexico”), and the lack of communication among affiliated HSBC entities (including HSBC Mexico and HSBC USA). As a result of these and other failures, at least $881 million in drug trafficking proceeds were laundered through HSBC USA.
In addition to the penalty, the DPA noted that HSBC has taken or will take several remedial measures, including for instance, spending $244 million more on AML compliance in 2011 than it had in 2009, replacing many key leaders throughout the HSBC organization, treating HSBC Group Affiliates as third parties subject to the same diligence as all other customers, exiting 109 correspondent relationships and implementing strict and uniform global AML standards that, at a minimum, require that HSBC Group Affiliates adhere to U.S. AML standards. The DPA further requires that HSBC retain an independent compliance monitor for at least 5 years.
While, with exceptions, the DPA protects HSBC from criminal prosecution by the DOJ related to the conduct described in the DPA, it does not similarly protect from criminal prosecution present or former officers, directors, employees, agents or consultants. Additionally, it does not protect HSBC from criminal prosecution by entities other than the DOJ.