US Senate Committee publishes report on alleged money laundering failures by HSBC

11 Sep 2012

The Permanent Subcommittee on Investigations of the US Senate’s Committee on Homeland Security and Governmental Affairs has published (http://www.hsgac.senate.gov/subcommittees/investigations/media/hsbc-exposed-us-finacial-system-to-money-laundering-drug-terrorist-financing-risks?intEmailHistoryId=778390&intEmailListId=133&intEmailId=60099&intExternalSystemId=1) a report concerning HSBC and its US affiliate (HBUS) for alleged anti-money laundering (AML) control failures.

To examine the current money laundering and terrorist financing threats associated with correspondent banking, the Subcommittee selected HSBC as a case study. The Report’s focus was on how overseas banks’ relationships with their US affiliates allow customers access to the US financial sector and US currency.

The Subcommittee’s recommendations included:-

(1) Screen High Risk Affiliates. HBUS should re-evaluate its correspondent relationships with HSBC affiliates, including by reviewing affiliate AML and compliance audit findings, identifying high risk affiliates, designating affiliate accounts requiring enhanced monitoring, and closing overly risky accounts. HBUS should conduct a special review of its account for HSBC Mexico.

(2) Respect OFAC Prohibitions. HSBC Group and HBUS should take concerted action to stop non-U.S. HSBC affiliates from circumventing the OFAC filter that screens transactions for terrorists, drug traffickers, rogue jurisdictions, and other wrongdoers, including by developing audit tests to detect OFAC sensitive transactions by HSBC affiliates. In the findings of fact section of the report it was alleged that, while HBUS had insisted that HSBC affiliates provide fully transparent transaction information, when it obtained evidence that some affiliates were acting to circumvent the OFAC filter, HBUS had failed to take decisive action to confront those affiliates and put an end to such conduct.

(3) Close Accounts for Banks with suspected Terrorist Financing Links. HBUS should terminate correspondent relationships with banks whose owners have links to, or present high risks of involvement with, terrorist financing.

(4) Revamp Travellers Cheque AML Controls. HBUS should restrict its acceptance of large blocks of sequentially numbered U.S. dollar travellers cheques from HSBC affiliates and foreign financial institutions; identify affiliates and foreign financial institutions engaged in suspicious travellers cheque activity; and not accept travellers cheques from affiliates and foreign banks that sell or cash U.S. dollar travellers cheques with little or no KYC information.

(5) Boost Information Sharing Among Affiliates. HSBC should require AML personnel to routinely share information among affiliates to strengthen AML coordination, reduce AML risks, and combat wrongdoing. (We note that the interaction between information sharing within the EU and data privacy rules is an issue that has been highlighted in the EU’s current review of the Third Money Laundering Directive).

(6) Eliminate Bearer Share Accounts. HBUS should close its remaining 26 bearer share corporate accounts, eliminate this type of account, and instruct financial institutions using HBUS correspondent accounts not to execute transactions involving bearer share corporations. U.S. financial regulators should prohibit U.S. banks from opening or servicing bearer share accounts.

(7) Increase HBUS’ AML Resources. HBUS should ensure a full time professional serves as its AML director, and dedicate additional resources to hire qualified AML staff, implement an effective AML monitoring system for account and wire transfer activity, and ensure alerts, including OFAC alerts, are reviewed and Suspicious Activity Reports are filed on a timely basis.

(8) Treat AML Deficiencies as a Matter of Safety and Soundness. The Regulator, OCC, was criticised and it was recommended that OCC should align its practice with that of other federal bank regulators by treating AML deficiencies as a safety and soundness matter, rather than a consumer compliance matter, and condition management CAMELS ratings in part upon effective management of a bank’s AML program.

(9) Act on Multiple AML Problems. To ensure AML problems are corrected in a timely fashion, the OCC should establish a policy directing that the Supervision Division coordinate with the Enforcement and Legal Divisions to conduct an institution-wide examination of a bank’s AML program and consider use of formal or informal enforcement actions, whenever a certain number of Matters Requiring Attention or legal violations identifying recurring or mounting AML problems are identified through examinations.

(10) Strengthen AML Examinations. The OCC should strengthen its AML examinations by citing AML violations, rather than just Matters Requiring Attention, when a bank fails to meet any one of the statutory minimum requirements for an AML program; and by requiring AML examinations to focus on both specific business units and a bank’s AML program as a whole.

Banks and other financial institutions may wish to consider their programmes to ensure that they take into account, where appropriate, the Sub-Committee’s Recommendations.

There is speculation that other financial institutions may be subject to investigation for sanctions and related violations by the US authorities.