In 2007, Mexican authorities raided the home of Zhenli Ye Gon, a local pharmaceutical magnate. There they found, hidden in a locked room, a cash stockpile of more than $205-million (U.S.). They accused Mr. Ye Gon of selling the bulk ingredients to make methamphetamines to the country's drug cartels, a claim Mr. Ye Gon has denied.
Now in a U.S. prison awaiting extradition to Mexico, Mr. Ye Gon was also a long-time client of banking giant HSBC Holdings PLC. In the years leading up to the raid, the bank's employees repeatedly raised concerns about suspicious activity in his accounts and a top compliance executive had even instructed the local banking arm to close them. Yet somehow the relationship continued.
The episode, detailed in a new report from the U.S. Senate, illustrates what American lawmakers are calling a systemic failure by HSBC to control money laundering in its global operations and to prevent such funds from flowing into the U.S.
A year-long investigation by a Senate committee uncovered that HSBC acted as a conduit for drug money, disguised the sources of funds to evade U.S. sanctions against Iran, and included among its clients businesses with alleged ties to terrorism. HSBC's internal culture has been "pervasively polluted for a long time," said Carl Levin, a senator from Michigan, who helped lead the investigation.
On Tuesday, U.S. lawmakers summoned current and former HSBC executives to testify in Washington. The bank has co-operated with the probe, sharing reams of documents and e-mails, and has already shaken up its leadership ranks. David Bagley, the bank's group head of compliance, announced in his testimony that he would resign from his role.
"We deeply regret and apologize for the fact that HSBC did not live up to the expectations of our regulators, our customers, our employees, and the general public," said Irene Dorner, the chief executive of HSBC North America Holdings Inc.
This isn't the first time that U.S. authorities have scrutinized a major bank's failure to control money laundering, but the problems detailed at HSBC appear to be of a different order.
Compared to other large banks, HSBC "pushed the envelope pretty far," said Dennis Lormel, the chief executive of DML Associates and the former head of the financial crimes unit at the Federal Bureau of Investigation. "Frankly, they're lucky somebody is not getting prosecuted here."
Alongside the probe by U.S. lawmakers, the Justice Department is also investigating HSBC and the two parties are reported to be discussing a settlement. As part of a deal, HSBC may have to pay a record fine, possibly as much as $1-billion, analysts have suggested.
The exhaustive 335-page report issued by the Senate Permanent Subcommittee on Investigation paints a portrait of a bank where the employees charged with ensuring compliance to the law were repeatedly overruled by their colleagues responsible for increasing the bank's revenues.
The problems were especially stark at HSBC's Mexico unit. According to the Senate report, the subsidiary had an arm that offered U.S. dollar accounts in the tax haven of the Cayman Islands. In 2008 the Cayman branch had 50,000 accounts and $2.1-billion in assets but no office or staff. HSBC had earlier found that it didn't have reliable information on more than half of the account holders.
HSBC's Mexican arm also sent giant amounts of U.S. dollars, in cash, to the bank's American unit, to the tune of $7-billion in 2007 and 2008, the report found. U.S. and Mexican authorities repeatedly expressed worries that such volumes could be generated only by including proceeds from the illegal drug trade – namely, money which had been brought back to Mexico from the U.S.
Perhaps unsurprisingly, the bank experienced considerable turnover among the employees charged with supervising its anti-money laundering efforts. The head of such efforts in Mexico, Leopoldo Barroso, left HSBC in 2008. In an exit interview, he predicted that "it was only a matter of time before the bank faced criminal sanctions."
The bank also removed data from transfers from Iran, North Korea and Sudan to disguise their origin and avoid U.S. sanctions, the Senate report said. It also said the bank allowed clients in Saudi Arabia, Afghanistan, and Bangladesh with links to terrorist financing activity to access the U.S. financial system.
In their testimony on Tuesday, current HSBC executives stressed that the bank was moving aggressively to correct its past mistakes. "We're burning the bridges to make sure nobody can get back to the way it was before," said Ms. Dorner.
In one such example, earlier this year HSBC hired a new chief legal officer, Stuart Levey, who also testified at the hearing. His previous employer? The U.S. Treasury Department, where he worked for seven years as the country's first Under Secretary for Terrorism and Financial Intelligence.
U.S. regulators were also on the hot seat on Tuesday, as lawmakers zeroed in on their failure to police HSBC despite identifying numerous red flags. "We agree with the concerns reflected in each of the [committee's] recommendations and will take actions in response," said Thomas Curry, who heads the Office of the Comptroller of the Currency, a key bank regulator, in his testimony.
When a bank engages in this kind of misconduct, it cannot occur "without a regulator sharing some of the responsibility," said Nikos Passas, a professor of criminology at Northeastern University and an expert on money laundering. "You cannot have a white elephant sleeping next to you and not know it."