Thursday, July 19, 2012

HSBC: Too Big to Fail, Too Big to Prosecute?

In 2010, Michael Smith wrote a fascinating article for Bloomberg titled Banks Financing Mexico Gangs Admitted in Wells Fargo Deal. The subject of the article was the illicit money laundering provided for the Mexican cartels by Wachovia Corporation. Wells Fargo was involved because it purchased Wachovia in 2008.
"Wachovia admitted it didn’t do enough to spot illicit funds in handling $378.4 billion for Mexican-currency-exchange houses from 2004 to 2007. That’s the largest violation of the Bank Secrecy Act, an anti-money-laundering law, in U.S. history -- a sum equal to one-third of Mexico’s current gross domestic product."

"’Wachovia’s blatant disregard for our banking laws gave international cocaine cartels a virtual carte blanche to finance their operations,’ says Jeffrey Sloman, the federal prosecutor who handled the case."

This was no case of lack of oversight. Wachovia executives were well-aware that these transactions involved drug money and they chose to continue on in order to pocket the profits. Such an egregious crime should have serious penalties—right?

"....Wells Fargo promised in a Miami federal courtroom to revamp its detection systems. Wachovia’s new owner paid $160 million in fines and penalties, less than 2 percent of its $12.3 billion profit in 2009."

"If Wells Fargo keeps its pledge, the U.S. government will, according to the agreement, drop all charges against the bank in March 2011."

Smith explains this slap on the wrist.

"No big U.S. bank -- Wells Fargo included -- has ever been indicted for violating the Bank Secrecy Act or any other federal law. Instead, the Justice Department settles criminal charges by using deferred-prosecution agreements, in which a bank pays a fine and promises not to break the law again."

HSBC, a global bank centered in London, was recently caught breaking the rules. An article by Michael Mathes, HSBC apologizes for anti-money-laundering failures, explains what was involved.

"HSBC apologized Tuesday for failing to apply anti-laundering rules and one senior executive resigned, as lawmakers accused the global bank of giving Iran, terrorists and drug dealers access to the US financial system."

As in the Wachovia case this involved willful criminal behavior.

"Among the findings was the revelation that HSBC and its US affiliate concealed more than $16 billion (13 billion euros) in sensitive transactions to Iran, violating US transparency rules over a six-year period."

"HSBC executives were aware of the "concealed Iranian transactions" -- which stripped all identifying Iranian information from documentation -- as early as 2001 but allowed thousands of transactions to continue until 2007."

While the article focused on the illegal Iranian transactions, HSBC was willing to break the law in other areas.

"The report said HSBC's Mexican affiliate ‘transported $7 billion in physical US dollars to HBUS [HSBC’s US affiliate] from 2007 to 2008... raising red flags that the volume of dollars included proceeds from illegal drug sales in the United States’."

"And it said HBUS ‘provided US dollars and banking services to some banks in Saudi Arabia and Bangladesh despite links to terrorist financing’."

The article quotes Senator Carl Levin as suggesting HSBC would face penalties for its behavior, presumably another fine and a deferred-prosecution agreement as in the Wachovia case. Why is no one ever prosecuted and sent to jail? Michael Smith provided this insight in his article.

"Large banks are protected from indictments by a variant of the too-big-to-fail theory. "

"Indicting a big bank could trigger a mad dash by investors to dump shares and cause panic in financial markets, says Jack Blum, a U.S. Senate investigator for 14 years and a consultant to international banks and brokerage firms on money laundering."

"The theory is like a get-out-of-jail-free card for big banks, Blum says."

"’There’s no capacity to regulate or punish them because they’re too big to be threatened with failure,’ Blum says. ‘They seem to be willing to do anything that improves their bottom line, until they’re caught’."

Hardly a week goes by without some new revelation of illegal behavior on the part of banks. It is hard to see how a culture that has been so ethically compromised can be reformed without throwing some people in jail in order to create appropriate precedents.

HSBC was caught aiding and abetting a designated foe of the United States. Didn’t they used to hang people for things like that?

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