British lender HSBC Holdings plc (HBC: Quote,HSBA.L) and its U.S. affiliate exposed the U.S. financial system to a wide array of money laundering, drug trafficking, and terrorist financing risks due to poor anti-money laundering controls, according to a U.S. Senate report issued on Monday.
The report also criticized top U.S. bank regulator, the Office of the Comptroller of the Currency, for failing to properly monitor HSBC.
The Senate Permanent Subcommittee on Investigations said that HSBC, Europe's largest lender, used its U.S. bank as a gateway into the U.S. financial system for some HSBC affiliates to provide U.S. dollar services to clients while playing "fast and loose" with U.S. banking rules.
Further, the Senate report noted that the bank's federal bank regulator, the OCC, tolerated HSBC's weak anti-money laundering or AML system for years.
The Subcommittee conducted a year-long probe into HSBC and has detailed its findings in a 330-page report to be released at a hearing on Tuesday, along with more than 100 documents, including bank records and internal emails.
The Subcommittee probe focused on HSBC's key U.S. affiliate, HSBC Bank USA, N.A., known as HBUS, which functions as the U.S. "nexus" for HSBC's worldwide network.
In 2010, HSBC was cited by the OCC for multiple severe AML deficiencies, including a failure to monitor $60 trillion in wire transfer and account activity, a backlog of 17,000 unreviewed account alerts regarding potentially suspicious activity, and a failure to conduct AML due diligence before opening accounts for HSBC affiliates.
However, the subcommittee investigators found that the OCC failed to take a single enforcement action against HSBC over the previous six years despite proof of the bank's AML problems.
The report criticized the OCC's AML oversight and has recommended that the agency treat money laundering as a threat to a bank's safety and soundness, rather than as a consumer compliance concern.
The report also recommends several changes at HSBC's U.S. bank. These include higher scrutiny of HSBC affiliates for money-laundering risk, closing accounts of banks linked to terror financing, and steps to ensure that HSBC does not process transactions with prohibited entities such as terrorists, drug lords, and rogue regimes.
Further, the report recommends overhauling HSBC's AML controls on travelers cheques and eliminating bearer share accounts.
Senator Carl Levin, a Michigan Democrat and subcommittee Chairman, said, "HSBC's compliance culture has been pervasively polluted for a long time. Its recent change in leadership says it's committed to cleaning house. That commitment is welcome surely, but it will take more than words for the bank to change course."
Levin said that if an international bank did not monitor its own affiliates to stop illicit money, the regulatory agencies should consider whether to revoke the charter of the U.S. bank being used to aid and abet the illicit money.
HBC closed Monday's trading at $43.48, down $0.13 or 0.30 percent on a volume of 1.07 million shares. In after-hours, the stock further declined $0.98 or 2.25 percent to $42.50.
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by RTT Staff Writer
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