HSBC money laundering failures: 5 points we must all learn - for a start AML is not just a process

Written by Pekka Dare on Wednesday July 18, 2012

Up to 1 Billion USD$ in fines. Group Head of Compliance David Bagley quits. Huge reputational fallout and remedial action required. A disastrous scenario for HSBC, and a time for all working in anti money laundering to take stock. What are the lessons to be learnt.

First let’s recap some of the key points from the US Senate Permanent Subcommittee Report on US Vulnerabilities to Money Laundering, Drugs and Terrorist Financing: HSBC Case History:

  • At one point HSBC US had a backlog of 17,000 alerts for suspicious activity, it had also failed to file timely reports and failed to conduct due diligence on its own subsidiaries when opening correspondent backing accounts
  • HSBC had inadequate and unqualified staff who received poor training and had problems with AML leadership
  • A failure to see the big picture: HSBC Mexico (HBMX) had high risk customers and products (e.g. US dollar accounts in the Cayman Islands and Mexican casa de cambios). HBMX moved 7$bn US in cash to HSBC in the US over two years. HSBC were told by regulators and law enforcement that such volumes meant that the cash included drug money
  • HBMX was known to have problems with a lack of Know your Customer (KYC) information, dysfunctional monitoring, inadequate resources and high risk clients
  • OFAC breaches: The use of deceptive practices such as “U- Turn” transactions was escalated to Group Compliance but decisive action wasn’t taken
  • Failing to exit relationships with potential links to terrorist financing. HSBC for many years continued to maintain relationships with entities known or suspected to have links with terrorist financing. Commercial pressure was applied to its US affiliate to provide access to the US financial system
  • HSBC US cleared obviously suspicious bulk traveller’s cheque transactions. Bulk traveller’s cheques were cleared sometimes of more than $500,000 a day, in large denominations, sequentially numbered and signed with an illegible signature. It was later identified that the cheques were purchased from a bank in Russia and were being deposited daily into 30 separate Japanese accounts linked to the used car business
  • Offering bearer share accounts. HSBC US opened over 2000 of them over a decade. The Miami office bearer share accounts alone totalled $2.6bn

Five points for all engaged in AML:

  1. Anti money laundering should not be viewed as purely a process in discrete elements. Too many regulated firms treat AML as a series of discreet process driven silos. I have trained in many large firms where the AML Compliance Team is too far removed from a more process driven Client On Boarding Team, who in turn are totally removed from the review and monitoring teams and the sales force. Too many Know Your Customer / Customer Due Diligence roles in large firms are undertaken by people who are trained to process application or forms without seeing the being picture or thinking critically.

  2. Effective training and education of all staff involved in AML is essential. Until the salesperson, the Client On-boarding Officer and the AML Compliance team all understand the bigger picture in regards to money laundering and terrorist financing, we will continue to see short term commercial gain prioritised over meaningful Customer Due Diligence and AML controls. Delivery of a once a year computer based training package will not achieve this - practical scenario based information is the key to success.

  3. Suspicious Activity Reports (SARs) are all about asking the obvious and common sense questions. This message has still not got out there to frontline staff in too many firms. Staff don’t see that it in their interest to report suspicious activity. If they fail to do so they may not have job or a successful employer in the future. Too many firms still treat SARs as a numbers game and an issue to be dealt with by the AML team. I am regularly dismayed when I train sales people or client on boarding staff in firms as to how few of them have ever submitted a SAR.

  4. AML is not a process to keep regulators happy. It is in the best interests of everyone: sales people, senior management, law enforcement, and yes society as a whole. HSBC is tackling these issues through fundamental and dramatic change. Look at the cost, in terms of reputation, share price and time and effort. The Senate Committee subpoenaed a huge amount of evidence, collected over 1.4 million documents and conducted over 75 interviews with HSBC officials.

  5. Regulators need to challenge AML competency and training within firms. Until we have recognition that AML is a profession requiring critical thought, technical knowledge and sound judgement we will continue to see significant failures. Several jurisdictions such as Singapore and Malaysia have begun to prescribe formal qualification for those undertaking AML roles. Where are the rest of the world’s regulators on this issue?


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