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 In December 2012, the bank paid to U.S. authorities what was then a
record amount to resolve charges that it failed to stop hundreds of
millions of dollars in drug money from flowing through the bank from
Mexico, and promised at the time to fix the problems.
When announcing the settlement, HSBC Chief Executive Stuart Gulliver
said: "The HSBC of today is a fundamentally different organization
from the one that made those mistakes."
But examiners from the Office of the Comptroller of the Currency
have continued to find problems, two people familiar with the matter
said. They said that the regulator told the bank late last year it
has not seen enough improvement in the bank's controls in its
correspondent banking business, which processes transactions for
financial institutions around the world, including HSBC units.
Sources declined to provide further detail about the nature of the
weaknesses. The sources declined to be named because they were not
authorized to speak publicly about the internal changes or the
communication with regulators.
While none of the people suggested HSBC could face another
regulatory or enforcement action at this point, the assessment by
the authorities shows how difficult it is for the bank to resolve
the issues.
HSBC spokesman Rob Sherman said in a statement: "We continue to make
solid progress in addressing AML (anti-money laundering) and
sanctions compliance deficiencies, but recognize there's more work
to do."
The bank is working to implement globally consistent controls and
has hired experienced executives to continue transforming the
compliance team and help it to work directly with HSBC bankers,
Sherman said.
OCC spokesman Bryan Hubbard declined comment.
SPEEDING UP OVERHAUL
In response to the regulator's findings, the bank, which is Europe's
largest, has taken steps to speed up its overhaul, the sources said.
In the past few months HSBC has hired several new anti-money
laundering executives, restructured its compliance department, and
is considering the unusual step of cutting off U.S. dollar-clearing
access to some foreign affiliates, they said.
HSBC has already pulled out of several high-risk and low-profit
business areas and countries, including Panama and other Latin
American countries, Reuters previously reported. It retrenched from
banking some embassies and consulates last year, and is in the
process of cutting off relationships with some small, cash-focused
businesses in the United States, such as corner stores.
It is spending about $800 million each year on compliance costs
across its operations in 80 countries.
Two top legal officials at the U.S. arm of the bank, anti-money
laundering director Alan Schienberg and chief compliance officer
Gary Peterson, left in November amid HSBC's compliance overhaul.
Instead of replacing those positions, HSBC is globally restructuring
its department that deals with questionable transactions around
regional heads of "financial crimes compliance," and hired former
Bank of America executive Patty O'Connor earlier this month to fill
that role in the United States, according to people familiar with
the changes.
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The new structure, a brain child of former U.S. Treasury Department
official Robert Werner who was appointed head of group financial
crimes compliance in December 2012, increases the team's firepower.
Three of O'Connor's direct reports will be executives who deal
exclusively with HSBC's anti-money laundering efforts,
anti-corruption efforts, and compliance with sanctions laws. That
structure is expected to be replicated at HSBC units around the
world, the sources said.
HSBC also just hired former JPMorgan executive Jessica Gomel into a
new position, global head of financial crime compliance for
correspondent banking, and plans to make additional hires in the
coming weeks, the sources said.
Gomel's mandate is to police bank-to-bank transactions and all
currency clearing activity, sources said.
HSBC's struggles with its correspondent banking controls have been a
long-standing issue for the bank. A 2010 OCC order flagged the issue
as the bank's primary anti-money laundering problem and said HSBC
had failed to properly police some high-risk cash transactions of
its affiliates.
HSBC operates hundreds of affiliates around the world and its U.S.
arm acts as the gateway into the U.S. financial system for this
network by processing U.S. dollar-denominated payments.
A U.S. Senate report released in mid-2012 said HSBC failed to assess
the money laundering risks associated with affiliates before opening
correspondent accounts for them.
The interaction between HSBC's U.S. arm and HSBC affiliates around
the world continues to be a concern for the OCC, the sources said.
In response, the bank has begun advising units that those that fail
to implement full anti-money laundering regimes could have their
correspondent accounts closed, one of the sources said.
The bank has specifically found problems with transactions coming
from its Hong Kong unit, but was unlikely to cut off dollar clearing
services for that unit, the source said. HSBC has a huge presence in
Hong Kong and made around one-third of its profits from there in the
first nine months of 2013.
(Reporting by Brett Wolf of the
Compliance Complete service of Thomson Reuters Accelus and Aruna
Viswanatha in Washington; additional reporting by Steven Slater in
London; editing by Karey Van Hall, Martin Howell and Bernard Orr)
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