London-based banking giant HSBC Holdings confirmed last week that it has reached a record $1.9 billion settlement with U.S. Justice Department for anti-money laundering and sanctions violations.

The settlement includes a record $1.2 billion forfeiture as part of its deferred prosecution agreement (DPA) reached with the Department of Justice Dec. 11 for violations of the Bank Secrecy Act (BSA), the International Emergency Economic Powers Act (IEEPA) and the Trading with the Enemy Act (TWEA). 

According to court documents, HSBC Bank USA violated the BSA by failing to maintain an effective anti-money laundering program, and failing 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 Control (OFAC) at the time of the transactions.

By failing to implement proper anti-money laundering controls, HSBC facilitated the laundering of at least $881 million in drug proceeds through the U.S. financial system, according to the Justice Department. 

“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,” Assistant Attorney General Breuer said in a prepared statement.  “If the bank fails to comply with the agreement in any way, we reserve the right to fully prosecute it.”

In addition to forfeiting $1.2 billion as part of its DPA, HSBC has also agreed to pay $665 million in civil penalties, including $500 million to the Office of the Comptroller of the Currency (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 Network. 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 Authority (FSA) is pursuing a separate action. 

HSBC Group Chief Executive Officer Stuart Gulliver said in a prepared statement that the company accepts responsibility. “The HSBC of today is a fundamentally different organization from the one that made those mistakes,” he said.

Inside the DPA

“Over the last two years, under new senior leadership, we have been taking concrete steps to put right what went wrong and to participate actively with government authorities in bringing to light and addressing these matters,” said Gulliver.

As noted in the DPA, HSBC Bank USA already has undertaken the following voluntary remedial measures:

Increased its spending on AML approximately nine-fold between 2009 and 2011;

Increased its AML staffing nearly ten-fold between 2010 and 2012;

Revamped its Know Your Customer program, including treating non-US HSBC Group Affiliates as third parties subject to the same due diligence as all other customers;

Exited 109 correspondent relationships for risk reasons;

Clawed back bonuses for a number of senior officers; and

Spent over $290 million on remedial measures.

HSBC Group has also undertaken a comprehensive overhaul of its structure, controls, and procedures. A number of these improvements are included in the DPA. Among other measures, HSBC Group has simplified its control structure, allowing the Group to manage risks worldwide more effectively.

The role of group compliance has also been elevated and given it direct oversight over every compliance officer globally, so that both accountability and escalation now flow directly to and from HSBC Group Compliance.

HSBC also created the new role of Head of Group Financial Crime Compliance and Group Money Laundering Reporting Officer, who will help to establish a Global Financial Intelligence Unit. Other new senior hires will have extensive experience handling relevant international legal and regulatory issues, including a new chief legal officer and a new global general counsel for litigation and regulatory affairs.

adopted a set of guidelines limiting business in those countries that pose a high financial crime risk.

Other proactive measures HSBC has taken include:

Issuing a new global sanctions policy using a more extensive and consistent set of lists to screen all cross-border payments;

Commencing a review of all Know Your Customer files across the entire Group; and

Implementing a single global set of standards shaped by the highest or most effective anti-money laundering standards available in any location where the HSBC Group operates.

HSBC will “continue to cooperate fully with regulatory and law enforcement authorities,” said Gulliver, “and take further action to strengthen its compliance policies and procedures.”