By William K. Black
Quito: April 19, 2015
I have been researching the HSBC frauds for a column I am doing about Loretta Lynch, the U.S. Attorney who refused to prosecute HSBC or any of its officers for the largest and most destructive money laundering and anti-terror finance sanctions-busting in history and continues to fail to do so even though her own appointed monitor at HSBC reports that HSBC is not complying with the sweetheart deal Lynch gifted them and even though she is now aware (of something she should have been well aware of for years) that senior HSBC officials continued to violate the laws to aid the wealthy and criminal evade taxes while HSBC’s lawyers were negotiating the sweetheart deal with Lynch about other mass felonies. That research caused me to reexamine Lanny Breuer’s statements at the press conference celebrating the great Department of Justice (DOJ) “victory” in failing to hold any HSBC officer or employee accountable and for the anti-regulators acting to ensure that the bank was not held accountable for those crimes in any meaningful fashion.
The obvious aspect of Breuer’s statements that right drew scorn was his embrace of the concept that the systemically dangerous institutions (SDIs), particularly the largest banks, were “too big to prosecute.” Bloomberg describes the two most distressing aspects of Breuer’s explanation for why DOJ, as always, refused to prosecute the bankers who grew wealthy from leading the largest and most destructive fraud schemes in banking history.
“The decision not to prosecute HSBC was a decision of the Justice Department and was influenced by factors including the impact of the probe on the company’s employees and the potential economic effect, Breuer said.
‘As bad has HSBC’s conduct was, this is not a case where the HSBC people intended to create money laundering,’ Breuer said. ‘What they did do was they affirmatively violated the Bank Secrecy Act, they did not have the controls in place that they needed to do. This was insidious and wrong and had occurred over decades of time and we’ve held them very much accountable. I’m not sure you can find a more robust resolution.’”
The first paragraph asserts that the SDIs are too big to prosecute even when they commit massive frauds for many years. Three points need to be made.
- None of this logic remotely applies to prosecuting the officers and employees who violated the law. There was no excuse for Lynch refusing to prosecute the officers.
- Conservative economists love the concept of “creative destruction” of bad businesses. There can be no more creative form of destruction than putting a corruptly-run bank through a receivership and putting in place honest, competent controlling officers. The conservative economists that successfully terrorized Breuer about the horrors of receivership, breaking HSBC up into manageable banks (in their “defense” of their crimes HSBC essentially said that it was too large to manage) that no longer posed a systemic danger to the global financial system, and putting in place honest, competent managers were lying through their teeth.
- The incentives created by treating the bank and the banksters as too big to be prosecuted (even when Standard Chartered and HSBC violate their non-prosecution agreement commitments) are so perverse that they guarantee just what developed – recurrent, massive crimes by the largest banks. In a prior column about Lynch I explained that even the NYT’s Wall Street Sorkiophants at DealBook admit that the response to DOJ’s failure to prosecute has been “repeat offenses on Wall Street” establishing a “pattern of corporate recidivism” by the banks that pose grave systemic risks to the global economy.
It is Breuer’s second paragraph that I focus on in this column.
“‘As bad has HSBC’s conduct was, this is not a case where the HSBC people intended to create money laundering,’ Breuer said. ‘What they did do was they affirmatively violated the Bank Secrecy Act, they did not have the controls in place that they needed to do. This was insidious and wrong and had occurred over decades of time and we’ve held them very much accountable. I’m not sure you can find a more robust resolution.’”
His claim is that HSBC’s senior officers deliberately decided to violate the laws designed to prevent banks from aiding and abetting money laundering, but “HSBC people” did not intend to “create money laundering” even though that was the inevitable result of their actions, and even though they knew that the inevitable result was occurring. Note the sneaky use of the word “create.” Right, HSBC officials knew that the Sinaloa drug cartel would “create” the money laundering – the HSBC’s officials’ function was to make sure that no one at HSBC got in the way of the money laundering. The facts at HSBC, however, according to a senior DOJ official, refute Breuer who (characteristically) slipped into his defense counsel persona. The senior DOJ official stated that HSBC’s officers and employees engaged in the following conduct.
“From 2006 to 2010, the Sinaloa Cartel in Mexico, the Norte del Valle Cartel in Colombia, and other drug traffickers laundered at least $881 million in illegal narcotics trafficking proceeds through HSBC Bank USA. These traffickers didn’t have to try very hard. They would sometimes deposit hundreds of thousands of dollars in cash, in a single day, into a single account, using boxes designed to fit the precise dimensions of the teller windows in HSBC Mexico’s branches.
In total, HSBC Bank USA failed to monitor over $670 billion in wire transfers from HSBC Mexico between 2006 and 2009, and failed to monitor over $9.4 billion in purchases of physical U.S. dollars from HSBC Mexico over that same period.
In addition to this egregious lack of oversight, from the mid-1990s through at least September 2006, HSBC knowingly allowed hundreds of millions of dollars to move through the U.S. financial system on behalf of banks located in countries subject to U.S. sanctions, including Cuba, Iran and Sudan. On at least one occasion, HSBC instructed a bank in Iran on how to format payment messages so that the transactions would not be blocked or rejected by the United States.
As part of today’s resolution, HSBC has admitted that it violated the Bank Secrecy Act, the International Emergency Economic Powers Act and the Trading With the Enemy Act, and it has agreed to forfeit over $1.25 billion – by far the largest forfeiture ever in a case involving a bank. HSBC has also agreed to pay $665 million in civil penalties, bringing the total cost of this resolution to the bank to nearly $2 billion. HSBC will also be subject to strict oversight by a corporate monitor for the next five years – the duration of the deferred prosecution agreement – and it must further enhance its compliance structure.
As a result of the government’s investigation, HSBC has replaced virtually all of its senior management, “clawed back” deferred compensation bonuses given to some of its most senior U.S. anti-money laundering and compliance officers, and agreed to partially defer bonus compensation for its most senior officials during the five-year period of the deferred prosecution agreement.
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.”
Here is what we can learn from this senior DOJ’s officials’ none too candid explanation of the massive crimes at HSBC.
- “HSBC has admitted that it violated the Bank Secrecy Act, the International Emergency Economic Powers Act and the Trading With the Enemy Act….”
- There is no dispute but that HSBC’s senior managers deliberately decided to violate the International Emergency Economic Powers Act and the Trading With the Enemy Act.” Internal communications demonstrate that HSBC’s responsible officers decided that the bank had a wonderful strategic opportunity, given U.S. sanctions against Iran deterring less dishonest bankers from dealing with Iran, to greatly expand banking revenues from Iran by adopting twin policies of violating U.S. sanctions and deceiving U.S. regulators and law enforcement personnel to prevent them from learning about HSBC’s violation of U.S. sanctions with Iran (and other nations supporting terrorism).
- The senior DOJ official outlined facts that would normally lead not only to vigorous prosecutions of the corporate officers, but a DOJ request for a maximum sentence given that the corrupt culture persisted for a decade. Note that the senior DOJ official improperly uses the term “HSBC” alone rather than explaining that he is referring to senior HSBC officers’ crimes (for which HSBC is legally culpable under U.S. law).
“[F]rom the mid-1990s through at least September 2006, HSBC knowingly allowed hundreds of millions of dollars to move through the U.S. financial system on behalf of banks located in countries subject to U.S. sanctions, including Cuba, Iran and Sudan. On at least one occasion, HSBC instructed a bank in Iran on how to format payment messages so that the transactions would not be blocked or rejected by the United States.”
- Under the senior DOJ leader’s own logic, therefore, DOJ could and should have prosecuted dozens of HSBC’s officers for these multiple crimes involving breaking U.S. sanctions on assisting financing to nations supporting terror.
- Given that HSBC’s officers decided to violate the two other U.S. sanction statutes in order to make more money, and the fact that Breuer concedes that HSBC officers deliberately violated the anti-money laundering (AML) statute (which bears the confusingly name “Bank Secrecy Act”) why is Breuer so sure that the HSBC managers did not violate the AML statute in order to secure large, low-cost deposits on which they could charge fees for money transfers? Why else would the HSBC officers deliberately violate an AML statute – in Mexico, which is notorious for money laundering for the drug cartels?
- HSBC officers took many incriminating steps indicating that the reason they violated the AML was to aid money laundering. They classified Mexico as being in the lowest risk category for money laundering! That would be very funny if the results were not so tragic. They knew they were receiving massive amounts of cash that could not be explained by legal enterprises. They knew that they were receiving cash from individual “depositors” in increments of hundreds of thousands of dollars, which almost invariably indicates money laundering (and tax evasion). They knew that their largest cash customers were publicly reported to be associates of the Sinaloa cartel. HSBC paid its AML specialists bonuses while they failed to take even the most basic AML steps.
- Large banks do not maintain “astonishing” degrees of “dysfunction” for many years without a strong reason why its senior managers and controls allow the “dysfunction” to continue for many years. Typically, persistent dysfunction of this nature indicates that management wants internal controls to be poor to facilitate the commission of fraud.
- Note that the senior DOJ official is dramatically understating the volumes of money that HSBC laundered and helped evade U.S. terror sanctions, using “millions” when his own data show that he should be using “tens of billions.”
Consider two related facts about the senior DOJ official’s statement about HSBC. The senior DOJ official promised that DOJ could prosecute the original charges if HSBC did not comply with the sweetheart deal Lynch cut with HSBC. Lynch’s own monitor has reported that HSBC did not comply with the deal, but Lynch often praised HSBC’s management rather than prosecuting.
The senior DOJ official is very proud that HSBC “clawed back” the (relatively tiny) bonuses to HSBC’s AML and compliance specialists. No one thinks that the idea for HSBC to violate the AML statutes arose with the AML specialists as opposed to HSBC’s senior managers. What about the vastly larger bonuses that HSBC’s senior managers received due to the massive money laundering for the drug cartels and the sanction violations? According to the senior DOJ official, none of those crime proceeds were clawed back. Instead, Lynch agreed that the senior HSBC officials that led the massive crimes at the bank could keep their salaries and bonuses generated almost entirely by criminal and abusive conduct (see my articles about PPI sales in the UK). HSBC’s wealthy officers suffered the mild inconvenience that HSBC will “partially defer bonus compensation for its most senior officials during the five-year period of the deferred prosecution agreement.” Lynch did not even insist on a claw back of these proceeds of fraud and abuse when her own monitor reported that HSBC has not complied with the sweetheart deal that Lynch gifted HSBC.
As readers may have already guessed or checked, the “senior DOJ official” that refuted Breuer’s claim that there was no basis for prosecuting any HSBC officer or employee was Lanny Breuer, in his prepared written statement for the December 11, 2012 press conference he staged to celebrate the sweetheart deal with HSBC.