Britain’s Chancellor George Osborne and the UK’s former financial watchdog “hampered” the 2012 US investigation into HSBC’s money laundering and contributed to a watering down of the banks eventual punishment, according to a damning US congressional report.
The Chancellor and the Financial Services Authority (FSA) warned that a possible criminal prosecution of the bank could lead to “very serious implications for financial and economic stability” and even another “global financial disaster.”
The Congressional report, titled “Too Big to Jail”, looks at the US Department of Justice’s decision not to prosecute HSBC for money laundering offenses in 2012, instead hitting it with a $1.9 billion (£1.44 billion) fine.
The report, prepared by the Republican staff of the committee on financial services in Congress, says (emphasis ours):
“The involvement of the United Kingdom’s Financial Services Authority in the U.S. government’s investigations and enforcement actions relating to HSBC, a British-domiciled institution, appears to have hampered the U.S. government’s investigations and influenced DOJ’s decision not to prosecute HSBC.”
How it happened
The US told the Financial Services Authority (FSA) on an inter-agency call in mid-2012 that it was considering a $2 billion fine for HSBC and pursuing criminal charges against the bank for what the report calls “stunning failures of oversight — and worse — that led the bank to permit narcotics traffickers and others to launder hundreds of millions of dollars through HSBC subsidiaries.”
Poor anti-money laundering checks in HSBC’s Mexico operation meant “at least $881 million in drug trafficking proceeds — including proceeds of drug trafficking by the Sinaloa Cartel in Mexico and the Norte del Valle Cartel in Colombia — were laundered through HSBC Bank USA.”
The report adds: “From the mid-1990s through September 2006, HSBC Group allowed approximately $660 million in OFAC prohibited transactions to be processed through U.S. financial institutions, including HSBC Bank USA.” This included dealing with customers in Cuba, Iran, Libya, Sudan, and Burma.
Criminal charges for HSBC would have meant the US would have to review and possibly revoke the bank’s charter to do business there.
After learning of the US’ plans to prosecute and slap a huge fine on HSBC, “The FSA was clearly concerned,” according to a 2012 memo by the Office of Foreign Asset Control’s Acting Chief Counsel Matthew Tuchband.
‘Very serious implications:’ The Osborne letter
The FSA then flagged the issue to the Chancellor, George Osborne, who was equally worried. He wrote to then-Federal Reserve Chairman Ben Bernanke and then-Treasury Secretary Timothy Geithner urging them to ease up.
The report says:
“Chancellor Osborne insinuated in his letter of September 10th that the U.S. was unfairly targeting UK banks by seeking settlements that were significantly higher than “comparable” settlements with U.S. banks. Moreover, the Chancellor’s letter warned Chairman Bernanke and Secretary Geithner that prosecuting a ‘systemically important financial institution’ such as HSBC ‘could lead to [financial] contagion’ and pose ‘very serious implications for financial and economic stability, particularly in Europe and Asia.'”
Here is the relevant passage:
Later in negotiations, the FSA “emphasised their view that HSBC is the second most systemically important bank in the world” and that if the US withdrew the bank’s write to operate in the US it could even “result in a global financial disaster.”
‘A nation governed by the rule of law cannot have a two-tiered system of justice’
In the end, HSBC was hit with a $1.9 billion fine but faced no criminal charges, either as an institution or for any of its people. The settlement also allowed the bank to avoid pleading guilty to any wrongdoing.
The report concludes that the interventions by the UK helped to steer the Department of Justice away from a criminal prosecution as it originally planned.
Furthermore, the report says the Department of Justice failed to tell Congress that this was the reason for not going after the bank. The report says: “DOJ has not been forthright with Congress or the American people concerning its decision to decline to prosecute HSBC.”
The report concludes:
“Treasury documents acquired by the Committee raise very serious concerns about DOJ’s DPA deal with HSBC in late 2012 — not the least of which is that DOJ declined to prosecute anyone involved in a massive breach of U.S. anti-money laundering and sanctions laws due to HSBC’s large size and “systemic importance.”
“A nation governed by the rule of law cannot have a two-tiered system of justice — one for the largest banks, and another for everyone else. Accordingly, inasmuch as DOJ continues to believe that certain financial institutions are too large to effectively prosecute, it is imperative that DOJ promptly inform the Congress of this fact, so that Congress can seek to address the problem of ‘too big to jail’ through its legislative function.”
The BBC says Justice Department spokesman Peter Carr told it that a series of factors were considered when deciding how to resolve a case, including whether there may be “adverse consequences for innocent third parties, such as employees, customers, investors, pension holders and the public.”
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