FCPA Compliance and Ethics Blog

April 14, 2015

Lincoln Assassinated and HSBC’s Continued Self-Inflicted Woes

Filed under: Anti-Money Laundering,Compliance,compliance programs,HSBC — tfoxlaw @ 12:01 am

Lincoln AssassinationToday is the 150th anniversary of the first successful Presidential assassination attempt. It was on this day in 1865 that John Wilkes Booth shot President Abraham Lincoln at Ford’s Theater in Washington DC. Booth was not a lone gunman but led a group of Confederate sympathizers who attacked or planned to attack leading US government officials. Co-conspirator Lewis T. Powell burst into Secretary of State Seward’s home, repeatedly stabbing him and seriously wounding him and three others, while George A. Atzerodt, assigned to kill Vice President Johnson, lost his nerve and fled.

HSBC continues to stay in the news, unfortunately largely for the wrong reasons in the realm of anti-corruption, facilitating tax evasion and money laundering. In an article in the New York Times (NYT), entitled “HSBC Is Deemed Slow To Carry Out Changes”, reporters Jessica Silver-Greenberg and Ben Protess noted that earlier this month, federal prosecutors made a quarterly count filing as a part of their report on the bank’s Deferred Prosecution Agreement (DPA) “faulting the bank for weaknesses in spotting suspicious transactions and for enabling a corporate culture resistant to change.”

The filing itself was based upon the corporate monitor’s Michael Cherkasky’s “confidential 1000 page report submitted to prosecutors in January. That report, people briefed on the matter said, offered a more scathing assessment of the bank’s progress.” The monitor has been “evaluating HSBC’s global operations for cracks in its money-laundering controls. As such, he has reviewed the bank’s various business lines, including its sprawling operations in China.”

In the technology area, the filing noted the “bank’s technology systems, despite some improvement, still suffer from “fragmentation” and “lack of connectivity” the Justice Department filing said. With its creaky framework, the filing said, “the collection and analysis” of data could suffer.” This lack of technology to both check on customers or potential customers and then review the transactions they might engage in were a prime deficiency noted in the original 2012 enforcement action where “prosecutors found that HSBC facilitated money laundering on behalf of Mexican drug cartels, allowing at least $881 million in tainted money to course through its United States branches.”

But perhaps the more troubling finding in the prosecutors filing was around the culture at the bank. There was not specific criticism of the tone at the top of the bank or with senior management but with the employees’ attitudes towards meeting the obligations under the DPA. The filing said that “Change at the bank was met with resistance” providing at least one example; “When presented with negative findings from auditors, the filing said, managers at the bank’s United States unit for global banking and markets “inappropriately pushed back.” Ultimately, the resistance caused an internal audit report “to be more favorable to the business than it would have been otherwise.”

Interestingly HSBC itself pushed back against the government’s filing, at least in the press. The article noted that “In response to the filing, Stuart Levey, the bank’s chief legal officer said, “The Justice Department recognized in its letter that HSBC has made material progress toward meeting the most stringent compliance standards imposed to date upon a global financial institution.” Levey also said that “the bank was continuing to meet all its obligations under the deferred-prosecution-agreement and that its leaders “are making progress toward that objective and appreciate the monitor’s ongoing work.””

Monitor Cherkasky’s report and the Department of Justice (DOJ) filing bring up a couple of interesting points for speculation. The first is the continuing dialogue and debate on the effectiveness of DPAs and whether they actually do achieve their stated goals of changing corporate culture and behavior. The NYT article said that the DOJ filing, which came under the name of the President’s Attorney General-designee, as head of the US Prosecutor’s office, comes “at a time when prosecutors are grappling with repeat offenders on Wall Street”. Moreover, “the filing underscores the Justice Department’s efforts to stem the pattern of corporate recidivism.” Just how hard should the DOJ come down on HSBC? There are other more aggressive steps the DOJ could take, even at this point. These include “extending the five-year deferred-prosecution agreement or singling out culpable employees by name.” Indeed the article cited to a recent speech by the head of the DOJ’s criminal division, Deputy Assistant Attorney General Leslie Caldwell, where she said, “the government has “a range of tools” to deal with corporate recidivism, including extending the term of a deferred-prosecution agreement while prosecutors investigate accusations of new criminal conduct.”

How about tearing up the DPA and simply criminally prosecuting the bank on the facts it admitted to in the DPA? Caldwell also spoke to that possibility when she said in the same speech, “Make no mistake: The criminal division will not hesitate to tear up a D.P.A. or N.P.A and file criminal charges where such action is appropriate and proportional to the breach.” Since parties are required to agree to facts in any DPA or Non-Prosecution Agreement (NPA) it would seem that tearing up those settlement documents and then prosecuting those companies on the underlying facts would be a relatively straightforward matter.

The other party in this debate is the Attorney General-nominee herself. While at this point it is not clear if the GOP majority will ever let her nomination come up for a vote before the full Senate, what if the Senate Judiciary Committee decides to reopen the hearings on this issue and then shoehorn it into the larger ongoing academic and FCPA Inc. debate on DPAs (and NPAs and other settlement tools). What if the FCPA testified on the “Façade of FCPA Enforcement”? What if Ted Cruz came in to ask why the DOJ is even bothering to prosecute the British banking giant?

At the time of its settlement in 2012, the HSBC fine was the largest for any bank involving money laundering. The monitor’s report and DOJ court filing demonstrate that the settlement is still controversial and the conduct engaged in by the bank many years ago may well continue to resonate up to this day and well into the future.

But the negative news for HSBC did not end with the filing of the DOJ report. As reported in the Financial Times (FT), in an article entitled “French magistrates open formal criminal probe into HSBC”, Emma Dunkley wrote that the parent entity of the bank, HSBC Holdings, “has been placed under criminal investigation by French authorities and made to post €1bn bail over allegations that its Swiss private banking arm helped clients avoid taxes.” This is separate and apart from the investigations into the company’s Swiss banking unit, which has been indicted or is under investigation “over tax evasion allegations in several other countries, including the US, Belgium and Argentina.”

In another article in the NYT, entitled “HSBC Facing Criminal Investigation in French Tax Case, Chad Bray reported that the bank apologized after released documents “showed that its employees had reassured clients that the lender would not disclose details of their accounts to the tax authorities of their home countries and discussed options to avoid paying taxes on those assets. The bank has acknowledged previous “conduct and compliance failures” in its Swiss business and has said that it has overhauled its private banking business and reduced its client base in Switzerland by 70 percent since its peak.”

The woes of HSBC continue and indeed seem to be increasing. With the fallout from the monitor’s report and other ongoing investigations the bank may be in danger of having its DPA revoked. While HSBC is not the only poster child for Banks Behaving Badly it may find itself as the first bank to have its DPA torn up and either the entity or responsible individuals criminally prosecuted for recidivist behavior.

This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at tfox@tfoxlaw.com.

© Thomas R. Fox, 2015

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