Mon, 10 Dec 2012 20:00 UTC
HSBC is expected to admit on Tuesday it has settled allegations of running money for Mexican drug barons for a larger than expected $1.9bn (£1.2bn), barely 24 hours after close rival Standard Chartered admitted paying $670m (£415m) in penalties to US regulators to settle allegations it broke sanctions on Iran.
The $1.9bn that HSBC will pay to the US authorities exceeds the $1.5bn it had warned it could cost to settle the allegations raised in a damning US Senate report in the summer which came amid a wave of scandals to hit the banking sector.
HSBC is expected to confirm it has struck the agreement which has already led to the departure of compliance head David Bagley and put pressure on former chairman Lord Green, now a trade minister.
The bank is expected to admit violating US laws meant to prohibit money laundering including the Bank Secrecy Act and the Trading with the Enemy Act. The deal is expected to include a settlement with the powerful Manhattan district attorney's office and a deferred prosecution agreement with both the Justice department and Treasury department.
Ahead of the settlement, HSBC on Monday named a former US official as head of group financial crime compliance, a newly created role, as the bank prepared for the fine related to drug allegations. Bob Werner, who used to work for the US treasury, will create a global financial intelligence unit to conduct internal investigations at HSBC.
Peter Henning, a professor of law at Wayne State University, said: "If the numbers are right, this is going to get everybody's attention. The worst situation would be if the charges were for money laundering but it looks like this is a deferred prosecution relating to books and record controls, that gives the bank some wiggle room in terms of its explanations. But the size of the fine means the bottom line is this is very significant."
Henning said the fine would have a significant "reputational impact" and HSBC would have to be very careful in future. "You get one black mark. If something like this comes up again in the US, the authorities are not going to be very forgiving."
European banks seemed to have under estimated the prosecutorial zeal of the US authorities, he said. "We have had Standard Chartered and now this and we still have more Libor cases to come." US authorities are investigating banks involved in the alleged manipulation of London's Libor, the key measure for setting loan rates around the world.
Britain's banks are braced for fines following the £290m penalty slapped on Barclays - now vastly exceeded by the amounts levied by US regulators for breaching sanctions and laundering money.
The fines on Standard Chartered follow accusations that lax systems left the US financial system vulnerable to "drug kingpins" and terrorists.
Standard Chartered is paying $327m to the US Federal Reserve, the US justice department and the New York district attorney, it was announced yesterday, following a settlement of $340m in August with the New York department of financial services.
The bruising episode for Standard Chartered, which until the summer was regarded to have preserved its reputation through the banking crisis, also includes the bank being forced set up "acceptable" compliance programmes. Cyrus Vance, the Manhattan district attorney, said: "Banks occupy positions of trust. It is a bedrock principle that they must deal honestly with their regulators.
My office will accept nothing less - too much is at stake for the people of this country." The Fed, which is receiving $100m of the Standard Chartered fines, said it was imposing "one of the largest penalties" it had ever announced for "alleged unsafe and unsound practices" adopted by the bank.
"Under the cease and desist order Standard Chartered must improve its programme for compliance with US economic sanctions, the Bank Secrecy Act and anti-money-laundering requirements," the Fed said. The Financial Services Authority, the UK watchdog, has agreed to assist in the supervision of the order.
The department of justice and the district attorney for New York County have entered into "deferred prosecution agreements" for which the bank which will pay $227m. The bank has also settled with the Office of Foreign Assets Control (Ofac) but the settlement of $132m is offset against other penalties.
Standard Chartered said that Ofac had concluded the "vast majority" of transactions were not in violation of sanctions. The bank said that $24m of transactions for Iranian counterparties and $109m from other countries facing sanctions - such as Burma, Sudan and Libya - had breached sanctions.
Comment: Though the charges are not for money laundering, how much more than the 1.2 billion dollars was made? The point being, for example, if the bank made $320 billion in profit, "for the fine related to drug allegations," than wouldn't charging the bank around $500 billion dollars be more of a punishment for the crime?