DEA News: HSBC Holdings Plc. And HSBC Bank USA N.A. Admit To Anti-Money Laundering And Sanctions Violations, Forfeit $1.256 Billion In Deferred Prosecution Agreement

DEC 11 - (WASHINGTON, D.C.) -  - DEA and other federal officials announced today that HSBC Holdings (HSBC Group) - a United Kingdom corporation headquartered in London - and HSBC Bank USA N.A. (HSBC Bank USA) (together, HSBC) - a federally chartered banking corporation headquartered in McLean, Va. - have agreed to forfeit $1.256 billion and enter into a deferred prosecution agreement with the Justice Department for HSBC’s violations of the Bank Secrecy (BSA), the International Emergency Economic Powers (IEEPA) and the Trading with the Enemy (TWEA).  According to court documents, HSBC Bank USA violated the BSA by failing to maintain an effective anti-money laundering program and to conduct appropriate due diligence on its foreign correspondent account holders.  The HSBC Group violated IEEPA and TWEA by illegally conducting transactions on behalf of customers in Cuba, Iran, Libya, Sudan and Burma - all countries that were subject to sanctions enforced by the Office of Foreign Assets (OFAC) at the time of the transactions.

The announcement was made by Lanny A. Breuer, Assistant Attorney General of the Justice Department’s Criminal Division; Loretta Lynch, U.S. Attorney for the Eastern District of New York; and John Morton, Director of U.S. Immigration and Customs (ICE); DEA Special Agent in Charge Brian Crowell, along with numerous other law enforcement and regulatory partners.  The New York County District Attorney’s Office worked with the Justice Department on the sanctions portion of the investigation.  Treasury Undersecretary David S. Cohen and Comptroller of the Currency Thomas J. Curry also joined in today’s announcement.

A four-count felony criminal information was filed today in federal court in the Eastern District of New York charging HSBC with willfully failing to maintain an effective anti-money (AML) program, willfully failing to conduct due diligence on its foreign correspondent affiliates, violating IEEPA and violating TWEA.  HSBC has waived federal indictment, agreed to the filing of the information, and has accepted responsibility for its criminal conduct and that of its employees.

“HSBC is being held accountable for stunning failures of oversight - and worse - that led the bank to permit narcotics traffickers and others to launder hundreds of millions of dollars through HSBC subsidiaries, and to facilitate hundreds of millions more in transactions with sanctioned countries,” said Assistant Attorney General Breuer.  “The record of dysfunction that prevailed at HSBC for many years was astonishing.  Today, HSBC is paying a heavy price for its conduct, and, under the terms of today’s agreement, if the bank fails to comply with the agreement in any way, we reserve the right to fully prosecute it.”

“Today we announce the filing of criminal charges against HSBC, one of the largest financial institutions in the world,” said U.S. Attorney Lynch.  “HSBC’s blatant failure to implement proper anti-money laundering controls facilitated the laundering of at least $881 million in drug proceeds through the U.S. financial system.  HSBC’s willful flouting of U.S. sanctions laws and regulations resulted in the processing of hundreds of millions of dollars in OFAC-prohibited transactions.  Today’s historic agreement, which imposes the largest penalty in any BSA prosecution to date, makes it clear that all corporate citizens, no matter how large, must be held accountable for their actions.” 

“Cartels and criminal organization are fueled by money and profits,” said ICE Director Morton.  “Without their illicit proceeds used to fund criminal activities, the lifeblood of their operations is disrupted.  Thanks to the work of Homeland Security Investigations and our El Dorado Task Force, this financial institution is being held accountable for turning a blind eye to money laundering that was occurring right before their very eyes.  HSI will continue to aggressively target financial institutions whose inactions are contributing in no small way to the devastation wrought by the international drug trade.  There will be also a high price to pay for enabling dangerous criminal enterprises.”

In addition to forfeiting $1.256 billion as part of its deferred prosecution (DPA) with the Department of Justice, HSBC has also agreed to pay $665 million in civil penalties - $500 million to the Office of the Comptroller of the (OCC) and $165 million to the Federal Reserve - for its AML program violations.  The OCC penalty also satisfies a $500 million civil penalty of the Financial Crimes Enforcement (FinCEN).  The bank’s $375 million settlement agreement with OFAC is satisfied by the forfeiture to the Department of Justice.  The United Kingdom’s Financial Services (FSA) is pursuing a separate action. 

As required by the DPA, HSBC also has committed to undertake enhanced AML and other compliance obligations and structural changes within its entire global operations to prevent a repeat of the conduct that led to this prosecution.  HSBC has replaced almost all of its senior management, “clawed back” deferred compensation bonuses given to its most senior AML and compliance officers, and has agreed to partially defer bonus compensation for its most senior executives - its group general managers and group managing directors - during the period of the five-year DPA.  In addition to these measures, HSBC has made significant changes in its management structure and AML compliance functions that increase the accountability of its most senior executives for AML compliance failures. 

The AML Investigation -

According to court documents, from 2006 to 2010, HSBC Bank USA severely understaffed its AML compliance function and failed to implement an anti-money laundering program capable of adequately monitoring suspicious transactions and activities from HSBC Group Affilliates, particularly HSBC Mexico, one of HSBC Bank USA’s largest Mexican customers.  This included a failure to monitor billions of dollars in purchases of physical U.S. dollars, or “banknotes,” from these affiliates.  Despite evidence of serious money laundering risks associated with doing business in Mexico, from at least 2006 to 2009, HSBC Bank USA rated Mexico as “standard” risk, its lowest AML risk category.  As a result, HSBC Bank USA failed to monitor over $670 billion in wire transfers and over $9.4 billion in purchases of physical U.S. dollars from HSBC Mexico during this period, when HSBC Mexico’s own lax AML controls caused it to be the preferred financial institution for drug cartels and money launderers.   

A significant portion of the laundered drug trafficking proceeds were involved in the Black Market Peso (BMPE), a complex money laundering system that is designed to move the proceeds from the sale of illegal drugs in the United States to drug cartels outside of the United States, often in Colombia.  According to court documents, beginning in 2008, an investigation conducted by ICE Homeland Security Investigation’(HSI’s) El Dorado Task Force, in conjunction with the U.S. Attorney’s Office for the Eastern District of New York, identified multiple HSBC Mexico accounts associated with BMPE activity and revealed that drug traffickers were depositing hundreds of thousands of dollars in bulk U.S. currency each day into HSBC Mexico accounts.  Since 2009, the investigation has resulted in the arrest, extradition, and conviction of numerous individuals illegally using HSBC Mexico accounts in furtherance of BMPE activity.

As a result of HSBC Bank USA’s AML failures, at least $881 million in drug trafficking proceeds - including proceeds of drug trafficking by the Sinaloa Cartel in Mexico and the Norte del Valle Cartel in Colombia - were laundered through HSBC Bank USA.  HSBC Group admitted it did not inform HSBC Bank USA of significant AML deficiencies at HSBC Mexico, despite knowing of these problems and their effect on the potential flow of illicit funds through HSBC Bank USA.  

The Sanctions Investigation -

According to court documents, from the mid-1990s through September 2006, HSBC Group allowed approximately $660 million in OFAC-prohibited transactions to be processed through U.S. financial institutions, including HSBC Bank USA.  HSBC Group followed instructions from sanctioned entities such as Iran, Cuba, Sudan, Libya and Burma, to omit their names from U.S. dollar payment messages sent to HSBC Bank USA and other financial institutions located in the United States.  The bank also removed information identifying the countries from U.S. dollar payment messages; deliberately used less-transparent payment messages, known as cover payments; and worked with at least one sanctioned entity to format payment messages, which prevented the bank’s filters from blocking prohibited payments. 

Specifically, beginning in the 1990s, HSBC Group affiliates worked with sanctioned entities to insert cautionary notes in payment messages including “care sanctioned country,” “do not mention our name in NY,” or “do not mention Iran.”  HSBC Group became aware of this improper practice in 2000.  In 2003, HSBC Group’s head of compliance acknowledged that amending payment messages “could provide the basis for an action against [HSBC] Group for breach of sanctions.”  Notwithstanding instructions from HSBC Group Compliance to terminate this practice, HSBC Group affiliates were permitted to engage in the practice for an additional three years through the granting of dispensations to HSBC Group policy.

Court documents show that as early as July 2001, HSBC Bank USA’s chief compliance officer confronted HSBC Group’s Head of Compliance on the issue of amending payments and was assured that “Group Compliance would not support blatant attempts to avoid sanctions, or actions which would place [HSBC Bank USA] in a potentially compromising position.”  As early as July 2001, HSBC Bank USA told HSBC Group’s head of compliance that it was concerned that the use of cover payments prevented HSBC Bank USA from confirming whether the underlying transactions met OFAC requirements.  From 2001 through 2006, HSBC Bank USA repeatedly told senior compliance officers at HSBC Group that it would not be able to properly screen sanctioned entity payments if payments were being sent using the cover method.  These protests were ignored.         

“Today HSBC is being held accountable for illegal transactions made through the U.S. financial system on behalf of entities subject to U.S. economic sanctions,” said Debra Smith, Acting Assistant Director in Charge of the FBI’s Washington Field Office.  “The FBI works closely with partner law enforcement agencies and federal regulators to ensure compliance with federal banking laws to promote integrity across financial institutions worldwide.”

“Banks are the first layer of defense against money launderers and other criminal enterprises who choose to utilize our nation’s financial institutions to further their criminal activity,” said Richard Weber, Chief, Internal Revenue Service-Criminal (IRS-CI).  “When a bank disregards the Bank Secrecy Act’s reporting requirements, it compromises that layer of defense, making it more difficult to identify, detect and deter criminal activity.  In this case, HSBC became a conduit to money laundering.  The IRS is proud to partner with the other law enforcement agencies and share its world-renowned financial investigative expertise in this and other complex financial investigations.”

Manhattan District Attorney Cyrus R. Vance Jr., said, “New York is a center of international finance, and those who use our banks as a vehicle for international crime will not be tolerated.  My office has entered into Deferred Prosecution Agreements with two different banks in just the past two days, and with six banks over the past four years.  Sanctions enforcement is of vital importance to our national security and the integrity of our financial system. The fight against money laundering and terror financing requires global cooperation, and our joint investigations in this and other related cases highlight the importance of coordination in the enforcement of U.S. sanctions. I thank our federal counterparts for their ongoing partnership.”

Queens County District Attorney Richard A. Brown said, “No corporate entity should ever think itself too large to escape the consequences of assisting international drug cartels.  In particular, banks have a special responsibility to use appropriate due diligence in monitoring the cash transactions flowing through their financial system and identifying the sources of that money in order not to assist in criminal activity.  By allowing such illicit transactions to occur, HSBC failed in its global responsibility to us all.  Hopefully, as a result of this historical settlement, we have gained the attention of not only HSBC but that of every other major financial institution so that they cannot turn a blind eye to the crime of money laundering.” 

This case was prosecuted by Money Laundering and Bank Integrity Unit Trial Attorneys Joseph Markel and Craig Timm of the Criminal Division’s Asset Forfeiture and Money Laundering Section, and Assistant U.S. Attorneys Alex Solomon and Daniel Silver of the U.S. Attorney’s Office for the Eastern District of New York. 

The AML investigation was conducted by HSI’s El Dorado Task Force, a joint task force composed of members from more than 55 law enforcement agencies in New York and New Jersey, including special agents and investigators from IRS-CI and the Queens County District Attorney’s Office, other federal agents, state and local police investigators and intelligence analysts, with the assistance of DEA’s New York Division.  The sanctions investigation was conducted by the FBI’s Washington Field Office.

The Money Laundering and Bank Integrity Unit is a corps of prosecutors with a boutique practice aimed at hardening the financial system against criminal money laundering vulnerabilities by investigating and prosecuting financial institutions and professional money launderers for violations of the anti-money laundering statutes, the Bank Secrecy Act and other related statutes. 

The Department of Justice expressed gratitude to William Ihlenfeld II, U.S. Attorney for the Northern District of West Virginia; Assistant District Attorney Garrett Lynch of the New York County District Attorney’s Office, Major Economic Crimes Bureau; the Treasury Department’s Office of Foreign Assets Control; the Board of Governors of the Federal Reserve System; and the Office of the Comptroller of the Currency for their significant and valuable assistance.