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HSBC Allowed Several Billions of Dollars to be Laundered
HSBC Allowed Several Billions of Dollars to be Laundered

Top compliance and banking officials at HSBC Holding PLC (NYSE: HBC) were interrogated by a key lawmaker on Tuesday, a day after the official produced a report showing that the global bank allowed drug traffickers, terrorists and rogue states to launder several billions of dollars because of poor controls. “Your position was that malfeasance was expected so don’t even bother doing any additional anti-money laundering monitoring,” Senator Carl Levin, a Democrat from Michigan and chairman of the Senate Subcommittee on Investigations, told a top former HSBC banker at a hearing on Capitol Hill. According to the report, HSBC serviced high-risk customers in drug-trafficking countries with weak anti-laundering measures. The firm allowed $19.4 billion in transactions linked to Iran to go through their affiliates over a seven-year period; and provided services to certain banks in Saudi Arabia and Bangladesh despite their ties to terrorist financing. Levin pressed Christopher Lok, former head of Global Banknotes for HSBC Bank USA, a unit that provided U.S. dollars to financial institutions around the world. Levin referred to an exchange of emails between the big bank’s compliance division and Lok in 2005 over whether to categorize a particular high-risk client as a “special category client,” subjecting the institution to additional scrutiny. Levin said that the compliance unit described the foreign bank which was based in China, as one in which the senior management and employees have been involved in numerous significant instances of corruption, fraud and embezzlement over the past few years and recommended that it be classified as high-risk. Levin added that another HSBC official described the bank as government-owned in a high-risk country that could expose the company to reputational risk In response, Lok’s email said he opposed the special designation, adding that “yes corruption can be rampant in this bank but it is not unique to that bank.” Lok acknowledged at the hearing that the email expressed what he believed at that time but, added that the bank was in China, a country with “its own characteristics” and that the bank shared the same characteristics of other big Chinese banks. “I was overwhelmed by this feeling that if this bank was to be [subject to elevated scrutiny] that means the other banks need to be as well and at that time China was looked at as an important market. I wanted to elevate that issue and bring in my colleagues to look at this,” Lok said. Levin pressed Lok on a Bangladeshi bank, which he noted was partly owned by a Saudi bank whose account was closed in 2005 for terrorist financing reasons. Levin said that in 2007, partly because of Lok’s urging, the Bangladeshi account was approved. According to Levin, Lok wrote, “I’m happy to be the relationship manager if this account is worth chasing.” According to an email exchange, when told that the account would produce $75,000 a year in revenues, Lok wrote “the money is there and we should go for this account. I will jump in and wear the global relationship manager hat.” “You are head of the bank notes department, so when your employees see those kind of remarks, what kind of impact does it have on their willingness to considering compliance issues and whether they will open up an account with potentially lucrative but high-risk client?” Levin asked. Lok said that he agreed that it was not sending the right message. Other issues cited in the report included allegedly clearing “$290 million in obviously suspicious U.S. travelers checks for a Japanese bank, benefiting Russians who claimed to be in the used-car business,” and offering accounts to bearer-share corporations, “despite the high risk of money laundering and illicit conduct.” HSBC said that the steps it plans to take include doubling spending on compliance as well as, adopting a single global standard for guarding against such problems. David Bagley, head of HSBC’s compliance office in London, told lawmakers that he is stepping down in response to the investigation. Bagley also responded, at the hearing, to concerns raised by Levin about HSBC bank officials removing the names of Iranian banks from transactions involving them. “When you learned that they were removing the name of Iranian banks why was the practice not simply stopped right then? Why did it take so long to fix?” Levin asked. “That is an absolutely appropriate question and with the benefit of hindsight, this clearly took far too long to resolve,” said Bagley.

The Labor Department reported Tuesday that U.S. consumer prices were unchanged during June as the higher cost of food offset another decline in energy. The energy index fell 1.4% while the food index rose 0.2%. Core prices, which strip out volatile food and energy costs, rose a seasonally adjusted 0.2% in June. Consumer prices rose an unadjusted 1/7% over the past 12 months. The core rate has increased 2.2% over the past 12 months, down from 2.3%. The Labor Department also reported that inflation-adjusted hourly wages, on average, rose 0.2% in June.

The Treasury Department reported that foreigners bought a net $50.1 billion in long-term securities during May, up from $27.9 billion in April. In the key Treasury sector, overseas investors were net buyers of $45.9 billion in securities, up from $38.6 billion in April

The Federal Reserve reported that industrial production rose a seasonally adjusted 0.4% in June after a 0.2% dip in May. Production gained 4.7% compared to June 2011 and for Q2, industrial production decelerated to 2.2% from a 5.8% growth rate in Q1. Capacity utilization moved slightly higher to 78.9% from a downwardly revised 78.7% in May.


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July 17, 2012


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