In documents filed in federal court in Brooklyn, it also charged the bank with violating sanctions laws by doing business with customers in Iran, Libya, Sudan, Burma and Cuba. HSBC Holdings Plc admitted to a breakdown of controls and apologised for its conduct. "We accept responsibility for our past mistakes. We have said we are profoundly sorry for them, and we do so again. The HSBC of today is a fundamentally different organisation from the one that made those mistakes," said Chief Executive Stuart Gulliver.
In an agreement with the Justice Department, the bank will take steps to fix the problems, pay a fine of $1.256 billion, and retain a compliance monitor to resolve the charges through a deferred-prosecution agreement. Including penalties imposed by other agencies, the bank's fines total $1.92 billion. HSBC also faces civil penalties, to be announced later Tuesday.
The settlement offers new information about failures at HSBC to police transactions linked to Mexico, details of which were reported this summer in a sweeping US Senate probe. Between 2006 and 2010, HSBC ignored money-laundering risks associated with certain Mexican customers and allowed at least $881 million in drug trafficking proceeds, including proceeds from the Sinaloa Cartel in Mexico and the Norte del Valle Cartel in Colombia, to be laundered through the bank, according to the Tuesday agreement.
Despite known risks of doing business in Mexico, the bank put Mexico in its lowest risk category, which excluded $670 billion in transactions from the monitoring systems. "The HSBC settlement sends a powerful wakeup call to multinational banks about the consequences of disregarding their anti-money laundering obligations," said Senator Carl Levin, who led the Senate inquiry.
HSBC said it expected to also reach a settlement with British watchdog the Financial Services Authority. The FSA declined to comment. US and European banks have now agreed to settlements with US regulators total ling some $5 billion in recent years on charges they violated US sanctions and failed to police potentially illicit transactions. No bank or bank executives have been indicted. Instead, prosecutors have used deferred prosecutions, under which criminal charges against a firm are set aside if it agrees to conditions such as paying fines and changing its behaviour.
HSBC's settlement also includes agreements or consent orders with the Manhattan district attorney, the Federal Reserve and three US Treasury Department units: the Office of Foreign Assets Control, the Comptroller of the Currency and the Financial Crimes Enforcement Network.
The settlement is the third time in a decade that HSBC has been penalised for lax controls and ordered by US authorities to improve its monitoring of suspicious transactions. Previous directives by regulators to improve oversight came in 2003 and in 2010. Last month, HSBC told investors it had set aside $1.5 billion to cover fines or penalties stemming from the inquiry and warned that costs could be significantly higher.
Analyst Jim Antos of Mizuho Securities said the settlement costs were "trivial" in terms of the company's book value. "But in terms of real cash terms, that's a huge fine to pay," said Antos, who rates HSBC a "buy." HSBC shares closed up 0.56 percent at 644.8 pence in London,
HSBC said it had increased spending on anti-money laundering systems by around nine times between 2009 and 2011, exited business relationships and clawed back bonuses for senior executives. As evidence of its determination to change, it cited the hiring last January of Stuart Levey, a former top US Treasury Department official, as chief legal officer. Under a five-year agreement with the Justice Department, HSBC agreed to have an independent monitor evaluate its progress in improving its compliance. It also said that as part of the overhaul of its controls, it has launched a global review of its "Know Your Customer" files, which will cost an estimated $700 million over five years. The files are designed to ensure that banks do not unwittingly act as conduits for criminal funds.