HSBC Money Laundering Case: “Too Big To Fail” does not mean “Too Big to Jail” September 24th, 2013 by Kara in Case Studies The Problem Some banking institutions have become so large criminal prosecutions resulting in revocation of banking charters may negatively affect the national, and perhaps the global, economy. The U.S. Attorney General and other prosecutors are thus left with a moral dilemma: ensure justice through prosecution or forego criminal proceedings to protect the economy and society at large. HSBC and Money Laundering In December 2012, multinational banking institution HSBC was penalized a record $1.92 billion by the United States for violating laws designed to prevent money laundering and other illegal financial activity. HSBC was under consistent suspicion and twice given warnings and orders to strengthen its anti-money laundering programs by the U.S. between 2003 and 2010 but failed to make the proper adjustments. The $1.92 billion penalty, issued under the Bank Secrecy Act, was handed down after a report and subsequent investigation that confirmed the bank had set up offshore accounts for drug cartels and suspected criminals in Jersey. HSBC banking executives admitted to laundering as much as $881 billion dollars. Players HSBC North American Holdings, Inc.: parent company of HSBC Group, one of the world’s largest banking and financial services groups. HSBC has more than 6900 offices in over 80 countries. HSBC Bank USA: federally chartered subsidiary of HSBC North American Holdings, Inc.; headquartered in McLean, Virginia with its principal offices in New York City. HSBC Bank USA is the specific entity charged with violating the Bank Secrecy Act. Eric Holder: United States Attorney General; publicly defended the decision not to criminally prosecute HSBC Bank USA executives. HSBC Bank USA Executives: Specifically those responsible for the lax monitoring programs and other negligence that violated the Bank Secrecy Act. HSBC Bank USA Employees: would lose their jobs if HSBC were forced to cease banking operations in the United States. The United States’ (and possibly the global) economy: As stated by Attorney General Eric Holder, the national economy will suffer greatly if HSBC’s U.S. banking charter is revoked. United States Department of the Treasury: As one of the regulators of HSBC Bank USA’s financial affairs the Treasury is tasked with advising the Department of Justice on the economic effects of prosecuting HSBC. Office of the Comptroller: As the regulator of HSBC Bank USA’s banking charter, the Comptroller can revoke HSBC Bank USA’s banking privileges in the U.S. if its executives are prosecuted and convicted. Instruments Bank Secrecy Act (31 USC §5311): enacted by Congress to require banks and other financial institutions to create and maintain anti-money laundering programs and other practices to prevent terrorist financing and other financial crimes. In addition to internal programs and monitoring, the Bank Secrecy Act (BSA) also requires ongoing employee training and due diligence for foreign correspondent accounts. Deferred Prosecution Agreement: To avoid criminal prosecution for violations of the BSA, HSBC executives agreed to pay a $1.92 billion fine and comply with elevated monitoring standards for a probationary period of five years. Events From 2003-2006, HSBC Bank USA was under heavy suspicion by United States regulators and operated under a written agreement to correct the deficiencies of their operational practices. HSBC Bank USA specifically agreed to enhance its anti-money laundering program to achieve adequate compliance with the Bank Secrecy Act. Between 2006 and 2010, HSBC Bank USA violated several components of the BSA: Money laundering risks associated with doing business with certain Mexican customers were ignored, compliance issues at HSBC Mexico were overlooked, and a BSA-adequate anti-money laundering program was not implemented. The Court notes four significant HSBC Bank USA failures: 1. HSBC failed to obtain and maintain due diligence on HSBC Group Affiliates. 2. HSBC failed to adequately monitor over $200 trillion in wire transfers between 2006 and 2009 from customers in nations classified as “standard” or “medium” risk ($670 billion in wire transfers specifically from HSBC Mexico). 3. HSBC Bank USA failed to adequately monitor billions of dollars in U.S. banknote purchases. 4. HSBC Bank USA failed to provide proper staffing and resources necessary to maintain an effective anti-money laundering program. As part of the Deferred Prosecution Agreement, HSBC Bank USA admitted to gross violations of the Bank Secrecy Act, including failure to establish and maintain an effective anti-money laundering program, failure to establish due diligence, and involvement in the laundering of over $881 billion. The Penalty The record-setting fine, comprised of $1.256 billion in forfeiture and $665 million in civil penalties, allows HSBC to temporarily thwart criminal prosecution pending a probationary period of compliance with anti-money laundering standards. The probationary period consists of a five-year agreement with the U.S. DOJ that includes an independent monitor of HSBC’s internal anti-money laundering programs, bonus deference by the bank’s top executives, and retraction of bonuses from some current and former executives who had particular involvement in the willful breach of U.S. regulations. Public Controversy In March of 2013, Attorney General Eric Holder defended the U.S. government’s decision not to pursue criminal prosecution of HSBC by claiming that prosecution of such large institutions has a negative impact on the national economy. His statement stirred some outrage. The notion that the largest corporations, deemed equal to people under the law by the U.S. Supreme Court in the Citizens United case in 2010, are now afforded freedom from criminal prosecution as well. At the forefront of prosecution advocates is Senator Elizabeth Warren, who voiced publicly her disdain for the decision not to prosecute HSBC for money laundering. She posed this question to the Department of Justice (DOJ): “How many billions of dollars of drug money do you have to launder…before someone will consider shutting down a bank?” Not one Treasury or Justice Department official offered her a direct answer. One thing is evident: The Justice Department seems to hold all the cards in deciding the fate of HSBC’s ability to continue operating in the U.S. The Comptroller cannot revoke its charter without a criminal conviction and the role of the Treasury is simply to advise the DOJ on an institution’s impact on the economy. Regardless of the economic reasons, the decision not to prosecute questions the integrity of the entire justice system. Can we justify deferring prosecution for willful criminal activity in the name of protecting the national economy? The debate presents an ethical dilemma between justice and utilitarianism. Utilitarian Approach Utilitarianism, also known as the “greatest happiness principle” holds that decisions and actions are proper as long as they promote proportional utility, and by the same accord improper as they produce an overall negative utility. A utilitarian view, then, would advocate an act if a greater benefit would be afforded to a larger number of individuals in society. This principle supports the Department of Justice decision not to prosecute HSBC, because not prosecuting HSBC benefits a greater number of individuals in society through protecting the economy from harm, even at the expense of letting criminal activity go largely unpunished. Under a traditional utilitarian view, then, the Justice Department’s decision not to criminally prosecute HSBC officials seems sound, as a larger portion of society benefits from HSBC maintaining operations (not to mention the number of saved jobs) and keeping the economy from further suffering in already difficult financial times. The record-setting monetary penalty and the probationary monitoring period are presumably aimed at deterring future wrongdoing by HSBC and other large financial institutions. However, in spite of $1.92 billion being the largest fine imposed on any banking institution in history, it does not reflect an amount that could effectively deter a financial institution the size of HSBC. According to Bankers Almanac, HSBC’s annual before-taxes profit totals more than $23 billion. The $1.92 billion fine handed down by the U.S. represents roughly a month’s profit. If HSBC and other large banks are not effectively deterred from continuing illegal and unethical financial practices, at some point in time the utilitarian outcome of laundering money for illegal organizations becomes adverse to the greatest number of people in society. In fact, a deeper analysis shows that pursuing criminal prosecution of HSBC’s executives likely yields a greater utilitarian outcome in the long run. While the immediate effect of prosecution may adversely affect a great number of individuals in society by means of a blow to the economy and the loss of jobs, the long term effects of allowing a banking institution like HSBC to engage in criminal activity with no risk of criminal prosecution, jail time, or even the loss of its banking license, presents a moral hazard. A $1.92 billion fine for laundering upwards of $881 billion hardly seems like incentive to exercise due diligence in future practices. In fact, the outcome of HSBC’s case can actually provide incentive for other banks to be more lax with their anti-money laundering practices. Among the most alarming effects the non-prosecution decision produces is the harm done to the large number of individuals affected by drug trade. That being the case, both justice and utility seem best served by criminal prosecution of HSBC executives. Justice Approach: Retribution and Deterrence Society has always had a keen interest in providing justice for the wrongdoings of individuals. As for the intentional breaking of U.S. laws and sanctions by HSBC executives, justice can be readily sought in the forms of retribution and deterrence.