July 17, 2012 -- The head of compliance for HSBC told a U.S. Senate committee that he will be stepping down from his job during a hearing over whether his bank, one of the world's largest, violated anti-money-laundering rules by allowing billions from drug cartels.
"I recommended to the group that now is the appropriate time for me and for the bank for someone new to serve as the head of group compliance," said Bagley, the head of compliance since 2002. "I have agreed to work with the bank's senior management toward an orderly transition of this important role."
The Senate's Permanent Subcommittee on Investigations was grilling Bagley and other current and former HSBC execs over allegedly ignoring warning signs that violent drug gangs in Mexico, suspected terrorist financiers in the Middle East, and other rogue characters and enemy states may have been moving billions of dollars into and out of their vaults.
"In an age of international terrorism, drug violence in our streets and on our borders, and organized crime, stopping illicit money flows that support those atrocities is a national security imperative," said Sen. Carl Levin, D.-Michigan, chair of the subcommittee.
A year-long Senate investigation produced a nearly 400-page report, that describes in exhaustive detail how HSBC executives repeatedly ignored warning signs from their own compliance officers, and from outside regulators, all of whom watched what they believed to be billions of dollars in suspicious transactions passing through the bank without adequate scrutiny.
The report describes how HSBC's Mexican affiliate moved $7 billion in physical U.S. dollars through the bank in a two-year stretch, "raising red flags that the volume of dollars included proceeds from illegal drug sales in the United States." It lays out how HSBC's executives ignored warnings that it was providing currency to a Saudi bank alleged by some U.S. officials to be involved in financing al Qaeda. It found that two HSBC affiliates sent nearly 25,000 transactions involving $19.4 billion through their bank accounts over seven years without disclosing that the transactions had links to Iran.
And it determined that HSBC altogether failed to monitor some $60 trillion in wire transfer and account activities and amassed a backlog of 17,000 unreviewed account alerts regarding potentially suspicious activity.
Jack Blum, a Washington attorney and longtime expert on money laundering, said he has never seen such an extreme case of failure, both by the bank and by regulators.
"This is an across the board, spectacular, total failure," Blum said. "These are not minor, they are gross violations. You have to ask, what kind of management is this? What you come away with is that they cared about the bottom line. They did not care about obeying the law."
HSBC Under Investigation
HSBC has reported in its public filings that it is the subject of multiple federal and state investigations and that it could be subject to significant fines and criminal penalties.
"We will acknowledge that, in the past, we have sometimes failed to meet the standards that regulators and customers expect," said a statement released by the bank in response to the Senate's report. "We will apologize, acknowledge these mistakes, answer for our actions and give our absolute commitment to fixing what went wrong." The bank said it has put new leadership in place to try and change its culture and its performance in monitoring transactions.
Advocates with several watchdog groups said that, as egregious as they believe the HSBC case is, numerous banks have failed to police themselves and monitor transactions they handle to make sure they are not helping criminals, terrorists and rogue states launder money.
"We have seen U.S. bank after U.S. bank involved in facilitating or turning a blind eye to criminal money coming in their doors, including the proceeds of corruption, terrorist financing and drug money," said Heather Lowe, Legal Counsel and Director of Government Affairs at Global Financial Integrity.
She and other advocates said the failure is not just inside the banks.
"This hearing is as much about regulatory oversight of the banking sector as a whole as it is about HSBC's alleged facilitation of criminal activity," said Stefanie Ostfeld, a policy advisor with Global Witness. "Hopefully, this hearing will prompt a proper law enforcement response, including appropriate jail time, for banks and individuals who are proved to be involved in this type of criminal activity."