FULL REPORT: HSBC, U.S. affiliates, Saudi Bank, Bangladesh Banks with NGO aid financing terrorism and money laundering

July 19, 2012 (TSR) – Global banking giant HSBC 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 (AML) controls, a Senate Permanent Subcommittee on Investigations probe has found.

The bank has also been accused of indulging in various questionable transactions with entities from countries like Mexico, Iran, North Korea , Saudi Arabia, Bangladesh, Syria, Myanmar/Burma, Cuba, Sudan, Cayman Islands, Japan and Russia. Specifically, the bank has been alleged to have provided US dollars and banking services to some banks in Saudi Arabia and Bangladesh despite links to terrorist financing.

David Bagley, Chief of Compliance resigns during the hearing

HSBC is the latest global bank to be caught in US law-enforcement investigations of money laundering. In 2010, Wachovia Corp. agreed to pay $160 million as part of a Justice Department probe that examined Mexican transactions.

Last month, ING Bank NV agreed to pay $619 million to settle US government allegations that it violated US sanctions against Cuba and Iran.

“In an age of international terrorism, drug violence in our streets and on our borders, and organized crime, stopping illicit money flows that support those atrocities is a national security imperative,” said Sen. Carl Levin, D-Mich., subcommittee Chairman. “HSBC used its U.S. bank as a gateway into the U.S. financial system for some HSBC affiliates around the world to provide U.S. dollar services to clients while playing fast and loose with U.S. banking rules.  Due to poor AML controls, HBUS exposed the United States to Mexican drug money, suspicious travelers cheques, bearer share corporations, and rogue jurisdictions.  The bank’s federal bank regulator, the OCC, tolerated HSBC’s weak AML system for years.  If an international bank won’t police 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 that illicit money.”

The Subcommittee conducted a year-long investigation into HSBC and has detailed its findings in a 330-page report released at the hearing on Tuesday, along with more than 100 documents (See Exhibits, including bank records and internal emails.  The hearing, which begins at 9:30 a.m., will include testimony from HSBC officials and federal regulators.

The Subcommittee investigation 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.  HSBC has 7,200 offices in more than 80 countries and 2011 profits of $22 billion; HBUS has 470 branches across the United States with 4 million customers.  HBUS provides accounts to 1,200 other banks including more than 80 HSBC affiliates.  Called correspondent banking, HBUS provides these banks with U.S. dollar services, including services to move funds, exchange currencies, cash monetary instruments, and carry out other financial transactions.  Correspondent banking can become a major conduit for illicit money flows unless U.S. laws to prevent money laundering are followed.

In 2010, HSBC was cited by its federal regulator, the Office of the Comptroller of the Currency (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.  Subcommittee investigators found that the OCC had failed to take a single enforcement action against the bank, formal or informal, over the previous six years, despite ample evidence of AML problems.

The Subcommittee investigation focused on five areas of abuse:

–Servicing High Risk Affiliates.  HSBC’s U.S. bank, HBUS, offered correspondent banking services to HSBC Bank Mexico, and treated it as a low risk client, despite its location in a country facing money laundering and drug trafficking challenges, high risk clients like casas de cambio, high risk products like U.S. dollar accounts in the Cayman Islands, a secrecy jurisdiction, and weak AML controls.  The Mexican affiliate transported $7 billion in physical U.S. dollars to HBUS from 2007 to 2008, outstripping other Mexican banks, even one twice its size, raising red flags that the volume of dollars included proceeds from illegal drug sales in the United States.

–Circumventing OFAC Safeguards.  Foreign HSBC banks actively circumvented U.S. safeguards at HUBS designed to block transactions involving terrorists, drug lords, and rogue regimes.  In one case examined by the Subcommittee, two HSBC affiliates sent nearly 25,000 transactions involving $19.4 billion through their HBUS accounts over seven years without disclosing the transactions’ links to Iran.

–Disregarding Terrorist Financing Links.  HBUS provided U.S. dollars and banking services to some banks in Saudi Arabia and Bangladesh despite links to terrorist financing.

–Clearing Suspicious Bulk Travelers Checks.  In less than four years, HSBC cleared $290 million in obviously suspicious U.S. travelers cheques for a Japanese bank, benefiting Russians who claimed to be in the used car business.

–Offering Bearer Share Accounts.  HSBC offered more than 2,000 accounts to bearer share corporations, despite the high risk of money laundering and illicit conduct that results since their ownership can be readily transferred without a trail.

The report recommends a number of changes at HSBC’s U.S. bank, including higher scrutiny of HSBC affiliates for money-laundering risk, closing accounts of banks linked to terror financing, and steps to ensure the bank does not process transactions with prohibited entities such as terrorists, drug lords, and rogue regimes.  It also recommends overhauling the AML controls on travelers cheques and eliminating bearer share accounts.


To watch the Permanent Subcommittee on Investigations hearing, “U.S. Vulnerabilities to Money Laundering, Drugs, and Terrorist Financing: HSBC Case History (348:43 minutes), click HERE.


The report also offers several criticisms of the OCC’s AML oversight.  It recommends that the agency follow the lead of regulators at other banks and treat money laundering as a threat to a bank’s safety and soundness, rather than as a consumer compliance concern.  It also recommends the OCC change its practice of foregoing statutory violations when a bank’s AML program does not meet one or more of four minimum statutory requirements.  In addition, it recommends that the OCC take stronger action when a bank hits a threshold number of AML statutory violations or Matters Requiring Attention from bank management.

The findings are the results of a year-long Senate probe into HSBC’s activities, highlighting negligence throughout the bank’s international structure. Probe will be published in a 340-page report in Washington on Tuesday, and senior members of the bank will be called to account for the allegations.

“HSBC used its US bank as a gateway into the US financial system for some HSBC affiliates around the world to provide US dollar services to clients while playing fast and loose with US banking rules,” said Senator Carl Levin in a press release. He added that the US branch of the corporation “exposed the United States to Mexican drug money, suspicious travelers’ checks, bearer share corporations, and rogue jurisdictions.”

“The culture at HSBC was pervasively polluted for a long time,” Senator Levin said.


HSBC’s activities in Saudi Arabia were brought into question in the report, specifically referencing banking with Al Rajhi Bank. The investigation claims the Saudi bank has links to financing terrorism based on evidence gathered after the September 11 attacks.

HSBC was found to be doing business with Saudi Arabia’s Al Rajhi Bank, whose key founder “was an early financial benefactor of al-Qaida.

HSBC forbade its affiliates from doing business with the Saudi bank in 2005, but this policy was overturned only a few months later when the banks resumed dealings.

According to the report running into 340 pages, HSBC in 2009 authorized its affiliate to supply Indian rupees to Saudi Arabia’s Al Rajhi Bank, which, the report said, has links to financing terrorism . “From 2007 to 2010, HBUS (HSBC-USA ) continued to supply, through its London branch, hundreds of millions of US dollars to Al Rajhi Bank in Saudi Arabia. In addition , at Al Rajhi Bank’s request , HBUS expanded the relationship in January 2009, by authorizing its Hong Kong branch to supply Al Rajhi Bank with non-US currencies , including the Thai bat, Indian rupee, and Hong Kong dollar,” the report said.

However, no further details about the Indian rupees are available in the report.

According to the report, in 2010 HSBC launched a new funds transfer product called ‘HBL Fast Cash’ , which was designed to allow the instant transfer of funds from Riyadh , Saudi Arabia, to any branch of the Habib Bank, largest bank in Pakistan.

In addition, the report cites dealings with two Bangladeshi banks thought to have links with terrorist organizations.

“From an oversight perspective, the failure of accountability here is dramatic,” Senator Levin commented.


IIRO is a Saudi-based non-profit organisation which was added to the SDN list by the United States for “facilitating fund raising for Al Qaeda and affiliated terrorist groups,” the report said, while adding that HSBC’s internal Financial Intelligence Group (FIG) itself had raised questions about IIRO in 2003. SDN (Specially Designated Nationals) List, published by the US government, includes names of individuals and entities with whom US citizens are prohibited from doing business.

Again in 2006, an FIG report noted that “the IIRO had been linked to Al Qaeda and other terrorist groups, plots to assassinate President Bill Clinton and the Pope, attacks on the Brooklyn Bridge and Lincoln Tunnel, and the 1993 attack on the World Trade Center,” the report said.

It further said that Al Rajhi Bank had gained notoriety as well for providing banking services to several of the hijackers in the 9-11 terrorist attack, including Abdulaziz al Omari who was aboard American Airlines Flight 11.

The probe also found loopholes in HSBC’s dealings with Islami Bank Bangladesh, which opened a US dollar account with HBUS in 2000, and US dollar clearing accounts with HSBC India and HSBC Pakistan in 2006.


When Bangladesh Bank (BB) governor Dr Atiur Rahman’s attention was drawn to the report, he said Wednesday, “The BB is going through the full report and analysing the allegation against the two Bangladeshi Islami banks.”

Dr Atiur Rahman said, “The country’s export and import business could be affected, if the allegation against those two Islami banks is found true. So we will take necessary action against them.”

The central bank was actively working on devising means to stop recurrence of similar incidence in the future, he added.

However, it was an old issue. “But always we remain active so that this kind of incident doesn’t happen in the future again,” he said.

The BB governor also said, “We have taken a tough stand on money laundering by building our capacity. Bangladesh’s position is better at the global stage in terms of controlling money laundering. We will soon procure anti-money laundering software.”

Senior consultant and BB governor’s adviser Allah Malik Kazemi, senior economic adviser Dr Hasan Zaman, deputy governor SK Sur Chowdhury and Nazneen Sultana were also present.

Deputy governor SK Sur Chowdhury said, “It’s an old issue, of 2005-2007 and the BB has done whatever necessary giving due importance to the issue. We’ll do whatever we need within the ambit of laws of the country.”

Saudi Arabia’s Al Rajhi group holds a 37% direct ownership stake in the Islami Bank Bangladesh Ltd, the country’s largest private lender, the US Senate Permanent Subcommittee on Investigations report said.

The Social Islami Bank Ltd has partnerships with the Saudi Arabian charity International Islamic Relief Organisation, also a US-listed institution that is under suspicion.

Islami Bank denied allegations it financed terror, while the Social Islami Bank said it was not involved in any money-laundering or illegal transaction.

Narco-banking in Mexico

The Senate probe examined HSBC’s dealings in Mexico, a country fraught with drug-traffickers who move money through the US banking system. A good portion of that money is transferred through Mexican foreign-exchange houses.

The report gives reference to the banking conglomerate’s Mexican affiliate transporting a total of $7 billion in hard cash to HBUS from 2007 to 2008. The sheer quantity of capital transferred raised concerns that some of it came from illegal drugs sales in the US.

The report also implicates the Office of the Comptroller of the Currency (OCC), a US financial regulator, for failing to regulate HSBC’s activities.

The OCC reported multiple failings on the part of HSBC in 2010 to implement anti-money laundering measures, namely its failure to monitor $60 trillion in bank transfers and 17,000 account alerts detailing suspicious activity.

The Senate report lays the blame for HSBC’s negligence over the past six years partly at the feet of the OCC for its lack of action in spite of consistent evidence of the banks money laundering issues.

“We have learned a great deal working with the subcommittee on this case history and also working with US regulatory authorities, and recognize that our controls could and should have been stronger and more effective in order to spot and deal with unacceptable behavior,” HSBC said in a statement. The bank also emphasize that they had already taken “concrete steps” to address the issues including drastic changes to “strengthen compliance, risk management and culture.”


The new report comes after the UK’s largest bank revealed it would have to pay a $1 billion fine to US authorities for money laundering offenses committed between 2004 and 2010.

Several HSBC executives testified, including the bank’s chief legal officer Stuart Levey, who joined the bank in January. He was previously one of the top officials on terrorism and finance at the US Treasury Department.In a regulatory filing earlier this year, HSBC said it expected a formal enforcement action that could be criminal in nature.

The disclosure came as a leaked internal memo from the bank’s CEO Stuart Gulliver emerged in Hong Kong.“Between 2004 and 2010, our anti-money laundering controls should have been stronger and more effective, and we failed to spot and deal with the unacceptable behaviour,” Gulliver wrote.

The confession came just weeks after the UK’s second biggest bank, Barclays, was caught up in a rate-fixing scandal and had to pay a $450 mln fine. Chairman Marcus Agius, CEO Bob Diamond and COO Jerry de Misier stepped down under the subsequent pressure.

In a memo this week ahead of the hearing, Chief Executive Stuart Gulliver said: “It is right that we will be held accountable and that we take responsibility for fixing what went wrong. As well as answering the subcommittee’s questions, we will explain the significant changes we have already made to strengthen our compliance and risk management infrastructure and culture.”

During the hearing, David Bagley, a top compliance executive at HSBC since 2002, said he would step down. The resignation was part of HSBC’s effort to apologize and show that it has cleaned up its act, even as the bank faces fresh questions about whether it has really fixed major flaws in catching and stopping money laundering.

Bagley told the hearing that while reforms had been made at HSBC, it was time for him to go.

“I recommended to the group that now is the appropriate time for me and for the bank, for someone new to serve as the head of group compliance,” he said.

Bagley also told the Senate panel that the bank would close thousands of Cayman Islands accounts as part of its renewed compliance efforts.

“That’s good news,” Levin said.

The Senate report said HSBC had little oversight of client accounts housed in a shell operation in the Cayman Islands, well known for offering secret accounts and a limited tax regime. By 2008, the Cayman accounts held $2.1 billion.

Bagley was on a panel with other high-level HSBC executives, but the harshest spotlight is expected later when Stuart Levey, who joined the bank in January as chief legal officer, is due to testify. He had been the Treasury Department’s top official on terrorism finance from 2004 to 2011 — during which time he was involved in cracking down on HSBC for Iran-related transgressions.

In prepared testimony released at the start of the hearing, Levey placed much of the blame on HSBC’s rapid expansion, which left in place a decentralized management structure that did not implement consistent standards across the bank and viewed compliance only as an advisory job.

Levey said the bank has reorganized its businesses to make the firm better connected to manage risk.

The changes Bagley and Levey talked about are coming at a great cost to the bank, as spending on anti-money laundering systems and staff have increased substantially. HSBC Bank USA CEO Irene Dorner, in prepared remarks, said the bank now has 892 full-time anti-money laundering compliance professionals.


In its regulatory filings, HSBC has said the transactions with Iranian parties are under investigation by the Justice Department, the Federal Reserve and the district attorney in Manhattan. Iran was also a focus of the Senate investigation.

The probe also details how the bank bypassed US safeguards that protect against transactions potentially involving terrorists, drug lords, and “rogue regimes”. The investigations committee alludes to almost 25,000 transactions to Iran amounting to over $19 billion conducted through the banks US office over a period of seven years. The bank did not disclose that the funds were being sent to Iran.

HSBC posted $22-bn profit this year

It is also important to note that HSBC Holdings, Europe’s biggest bank, said paying rising wages in Brazil, China and other emerging market is the price of avoiding the slowdown being felt by most of its rivals as it posted the largest 2011 profit by a western bank as reported in Feb.

The bank, with 89 million customers in 85 countries, said pretax profit in 2011 rose 15% to $21.9 billion. The figure fell short of the group’s record profit of $24.2 billion in 2007, but beat all other western banks that have reported so far for last year, including US rival JP Morgan, which made a $19 billion profit.

Its India operations posted a 22% increase in profit before tax at $814 million, supported by increased lending to small and medium enterprises and global markets business. India continues to be the sixth-largest contributor to the group’s profitability.

The bank’s retail banking and wealth management business in India posted a loss of $14 million compared with a loss of $83 million in the corresponding period last year. The profit of the commercial banking business increased 71% to $122 million for the year ended 2011. The global banking and markets profits increased by 6.10% to $539 million for the year ended December 2011.

HSBC is nine months into a major revamp of its global operations under Chief Executive Stuart Gulliver that includes around 30,000 job cuts, a retreat in some countries from retail banking and growing its wealth management business.

So far, it has disposed of its US creditcard business and has agreed to sell its Canadian retail brokerage, and exited retail banking in Russia, Chile and Poland.

Banks across Europe have been posting billions of dollars of losses as the euro zone sovereign debt crisis has hit their trading profits, and as they strive to meet tough new rules aimed at preventing a repeat of the 2007-09 banking crisis.

HSBC, which has been relatively unscathed and its executives said that they expect the trend to continue.

HSBC will continue to invest in compliance, having raised its spending on this to $400 million from $200 million in 2010, he added.

An HSBC official in Hong Kong, where the bank has a secondary listing, did not immediately respond to requests for comment on the report.

HSBC was one of the British banks — along with Barclays, Lloyds and Royal Bank of Scotland — ordered last month to pay for misleading businesses over interest rate insurance.

The global banking system’s reputation has been blackened by an interest rate-rigging scandal that erupted at Barclays and threatens to spread to other lenders.

Britain’s Serious Fraud Office on Friday launched an investigation into the scandal after announcing that it was considering criminal prosecutions.

Key facts about HSBC

HSBC Holdings plc was founded in London in 1991 by The Hongkong and Shanghai Banking Corporation to act as a new group holding company and to enable the acquisition of UK-based Midland Bank. The origins of the bank lie in Hong Kong and Shanghai, where branches were first opened in 1865.  Today, HSBC remains the largest bank in Hong Kong, and recent expansion in mainland China, where it is now the largest international bank, has returned it to that part of its roots.

Since the end of 2005, HSBC has been rated the largest banking group in the world by Tier 1 capital. HSBC is known in banking circles for its conservative and risk-averse approach to business – a company tradition going back to the 19th century.

The HSBC Group has a significant presence in each of the world’s major financial markets, with the Americas, Asia Pacific and Europe each representing around one third of the business. HSBC is the largest bank in Hong Kong and prints most of Hong Kong’s local currency in its own name.

HSBC’s world headquarters is at 8 Canada Square in Canary Wharf, London.


“U.S. Vulnerabilities to Money Laundering, Drugs, and Terrorist Financing: HSBC Case History” on Tuesday, July 17, 2012, at 9:30 a.m., in Room 106 of the Dirksen Senate Office Building.


The Subcommittee hearing examined the issue of money laundering and terrorist financing vulnerabilities created when a global bank uses its U.S. affiliate to provide U.S. dollars, U.S. dollar services, and access to the U.S. financial system to high risk affiliates, high risk correspondent banks, and high risk clients, using HSBC as a case study.

REPORT: U.S. Vulnerabilities to Money Laundering, Drugs, and Terrorist Financing: HSBC Case History








    Under Secretary for Terrorism and Financial Intelligence
    U.S. Department of the Treasury
    Washington, DC

    Download Testimony (32.7 KB)


    Assistant Director, Investigative Programs
    U.S. Immigration & Customs Enforcement, U.S. Department of Homeland Security
    Washington, DC

    Download Testimony (68.7 KB)





    Comptroller of the Currency
    U. S. Department of the Treasury
    Washington, DC

    Download Testimony (117 KB)


    Former Deputy Comptroller for Large Bank Supervision
    Office of the Comptroller of the Currency
    Washington, DC

    Download Testimony (117 KB)


    Deputy Chief Counsel
    Office of the Comptroller of the Currency
    Washington, DC

    Download Testimony (117 KB)

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