HSBC & Financial Crime: What the Annual Report tells us

Written by Dave Robson on Tuesday February 24, 2015

It seems HSBC are never out of the headlines at the moment, and the detail becomes more incredible each time (allegedly the Chief Executive’s bonuses were paid to an anonymous Panamanian holding company and then kept in a Swiss bank account).

The Annual Report

The opportunity to ‘officially’ find out a bit more presented itself yesterday, as the HSBC Holdings Annual Reports were published. There’s quite a few of them, but I thought I’d highlight some of the bits I thought were particularly interesting/useful.

There isn’t just one Report. There’s quite a bit of it. I’m choosing to focus on two key areas: risk and legal proceedings/regulatory matters.

(NB: it seems the markets weren’t all that impressed, as HSBC shares fell 5% on the results of “a challenging year”).

Risk first

It’s an area we teach about and something it’s interesting to hear about directly from HSBC. What do they actually do to manage/mitigate risk? If you simply read the media reports you might think ‘not a lot’.

If you head to the HSBC Holdings Strategic Report 2014, page 27, you can look at the Group Risk Appetite information and how it relates to the ‘six filter’ process. A lot of these are financial focused, but the final metric is financial crime compliance (FCC).

You can see that this is taken seriously by HSBC as the risk appetite statement was more closely integrated with core FCC principles around deterrence, detection and protection.

Legal Proceedings & Regulatory Matters

‘HSBC is party to legal proceedings, investigations and regulatory matters in a number of jurisdictions arising out of our normal business operations. Our provisions for legal proceedings and regulatory matters and for customer remediation at 31 December 2014 totalled US$4.0bn’.

Again, this is something we look at. You can learn a lot from enforcement actions. The detail is tucked away, but if you want to find out more, head to Section 40, page 448 of the HSBC Holdings Annual Report & Accounts 2014.

There is quite a bit in there. I don’t want to sound flippant, but do you fancy taking a guess at how many/which areas are covered…? OK – here goes:

  • Securities litigation (US)
  • Bernard L. Madoff Investment Securities LLC (UK, US, BVI, Bermuda, Cayman Islands, Luxembourg, Ireland
  • US mortgage-related investigations (US)
  • US mortgage securitisation activity and litigation (US)
  • Anti-money laundering and sanctions-related matters (UK & US)
  • Tax and broker-dealer investigations (US, but also Belgium, France, Argentina, Switzerland and India)
  • London interbank offered rates (LIBOR), European interbank offered rates (Euribor) and other benchmark interest rate investigations and litigation (UK, US, the EU, Switzerland and elsewhere)
  • Foreign exchange rate investigations and litigation (UK, the US, the EU and elsewhere)
  • Precious metals fix-related litigation and investigations (US).

I’d encourage you to have a read of the detail – there’s some interesting stuff in there. This might be a simplistic view, but with the drop in profit and the lengthy list of known Legal Proceedings & Regulatory Matters, you can see why the share price may be affected.

Same time next year?

I’m certainly not suggesting by writing this piece that HSBC is alone in struggling with all this. I’m sure that’s not the case.

And to be honest, this is the first annual report I’ve taken a look at in this depth – but I think I might do a similar thing when the rest of the big-boys come out with theirs.

I know there’ll be people who argue what is said in the Report doesn’t appear to match what is done, but what I did find interesting is the detail and the clarity around what HSBC ‘think’ – particularly in an age when we hear a new revelation almost every day.


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