HSBC’s money laundering for terrorists

Recent news that HSBC executives admitted to allowing Iran, terrorists and drug dealers to launder nearly USD$16 billionover a six-year period would make earth underneath you shake.

How is that the bank’s risk management system could not detect such sensitive transactions? Was the bank’s risk management system inadequate, or did the bank’s management knowingly turn a Nelson’s eye? What were the regulators doing? Were appropriate laws/mechanisms in place to detect and deter such activities? These and other questions would cloud the mind of ordinary tax payers the world over.

Interestingly, the above scandal has taken place although elaborate arrangements exist at national and international levels to detect and deter money laundering and terrorism financing activities.

In 1989, the Financial Action Task Force (FATF), an international body, was set up not only to define standards for combating money laundering and terrorist financing (MLTF) but also to carry out mutual evaluation studies to ensure that the legislative arrangements made by a country comply with the standards. Over 180 countries around the world are members of FATF and follow the global standards. All member countries have passed suitable legislation to counter money laundering and terrorism financing.

Specialised financial intelligence units (such as AUSTRAC in Australia) have been set and detailed reporting and compliance standards have been prescribed. One can’t say standards / legislations were not in place.

Did HSBC break the law?

Yes.

Interestingly, the FATF particularly warned about doing transactions with countries that pose high money laundering and terrorism financing risk such as “Uzbekistan, Iran, Pakistan, Turkmenistan and São Tomé and Principe, and the northern part of Cyprus”.

Yet the HSBC not only threw all caution overboard and allowed transactions from high-risk countries such as Iran to flow through its system, but engaged in fraudulent conduct (hiding the country name) as transactions were passing through the system.

As though this was not enough, as stated in the US Senate Committee on Homeland Security Report, it engaged in transactions with Al Rajhi – the Saudi Arabian bank – which had links with al Qaeda.

Top executives of HSBC also over-ruled warnings from its own officers that the bank should severe links with Al Rajhi.

Why was all this done? Obviously, greed underpinned the behaviour.

The HSBC have now issued a statement that it will apologise, acknowledge these mistakes, answer for actions and give absolute commitment to fixing what went wrong.

But will it provide solace to ordinary law-abiding citizens across the world?

One can see a repeat of behaviour on the part of banks. The US Financial Crisis Inquiry Commission (FCIC), for example, stated: “we clearly believe the crisis was a result of human mistakes, misjudgements, and misdeeds that resulted in systemic failures for which our nation has paid dearly”.

When the misdeeds get detected, outright denials are first made as a matter of routine. Similarly, when responsibilities get pinned down, the buck gets passed on. And when everything fails, apologies are issued with a promise that systems would be put in place so that this doesn’t happen again. It is common pattern. It was seen when the USD$7 billion Societe Generale scandalbroke, or when the recent USD$2 billion Adoboli scandal came to light. Someone down the line is made a scapegoat. Nick Leeson, who brought the century-old Barings Bank down, wrote: “I completely recognise my fault in what happened, but it was clear Barings were incompetent, and their lack of oversight was appalling”.

In the case of HSBC, the difference is that it is not oversight or incompetence, but wilful negligence.

What were the regulators doing?

As found by the FCIC, once again regulators were sleeping at the wheel.

What do we need to do?

The actions of HSBC are beyond negligent. The bank appears to be knowingly involved in assisting MLTF activities. One would expect that criminal proceedings be brought against HSBC board and CEO, with whom the buck stops. In the early 1990s, the Bank of Credit and Commerce International, started by a Pakistani financier, was found guilty of involvement in money laundering activities and was closed down.

Simultaneously, the US authorities need to take the regulators to task.

Could we expect the authorities to show the required responsibility? Or do we expect a repeat of the Indian epicMahabharata (400 BCE) where the Druapadi, the princess, was disrobed in public eye and the King and the court were sitting with blindfolds over their eyes?

In his book, The Difficulty of Being Good: The Subtle Art of Dharma, Gurcharan Das writes: “there will always be nasty types – Shakuni, Duryodhana, Duhshasana — but good institutions are designed to punish them and to reward decent behaviour”.

It remains to be seen if this hope is rooted in reality.