Banking: HSBC prepares for US fines

When Riggs Bank tried to defend the due diligence failures that led to the bank's demise, it did so with reference to the two banks that US banks want to keep out of the USA, and to beat internationally: Santander and HSBC. The two are easy targets in the USA: after all, both challenge - on some measures easily beat - the supposedly mighty Citigroup and, therefore, all other large US banks operating internationally.

And many that operate domestically.

US regulators and enforcement agencies don't like the fact that foreign banks have information that they have difficulty accessing. And they especially don't like the fact that the foreign banks operate accounts for US companies and therefore keep both information and profits outside the USA's influence - at least to a degree.

The soft-target for all actions by US enforcement agencies - as the Lloyds-TSB case shows - is international payments and the relating documentation. And correspondent banking is at the heart of that area.

That brings in Senator Carl Levin. Levin has been chomping on a steady diet of correspondent banking since he found out about John Matthewson's Caymans based bank. His committee investigated the system and produced a very helpful report - helpful because it at last publicised well known holes in the approach to countering money laundering which the USA had, largely, ignored.

But the risks and failings in the correspondent banking system had been recognised - amongst the more alert US authorities - as early as the mid 1970s when Robert Morgenthau had claimed dominion over the US currency when used in any form of inter-bank transaction anywhere in the world. It was Morgenthau's approach that ultimately underpinned Levin's work that, eventually, became ss311/312 of the USA PATRIOT Act.

However, Morgenthau, in March 2008, said that he would not prosecute any US headquartered bank for money laundering because to do so "would undermine the credibility of the US financial system." That same approach has been adopted in relation to problems in the USA's correspondent banking system. Only foreign banks are prosecuted.

HSBC has said, in a filing with the SEC, that it knows about the investigation and formal proceedings are expected but cannot say how it will be resolved.

This is how, in all probability, it will be resolved: the DOJ will issue criminal prosecutions; the SEC will issue a civil action. The evidence will be vague and both bodies will issue press releases carefully crafted to ensure that they cannot be sued for libel: they will be laden with the phrase "according to court documents...." HSBC will conclude that to fight off the allegations will be too expensive, too time consuming and attract too much publicity. The bank will therefore enter into a "settlement" with both the DOJ and the SEC in which it will "neither admit nor deny the allegations" but under which it will agree to pay a large sum by way of penalty and to "disgorge" i.e. surrender profits from specified types of transaction for an agreed period.

That penalty will exceed the penalties imposed on US banks in the UK for e.g. mixing client and company money, and will exceed them by some margin, regardless of the severity of the conduct complained of. And the conduct complained of has not, so far, been particularised.

It doesn't matter: the precise allegations don't matter.

For the USA, action against foreign banks is both designed to produce revenue and to present the false image that foreign banks operating in the USA are in some way abusing the privilege of operating there; a public relations campaign not dissimilar to the attacks on BP.

Some of the business areas concerned, largely relating to cash management, have already been terminated, says the bank. Levin wants more: he has said that he wants the bank prosecuted.

In the meantime, the question still remains: is it really, really the case that only foreign banks have compliance, risk management and other problems in the USA?

Or is HSBC a suitable political target, especially coming through the financial crisis almost unscathed despite its large US footprint and exposure to US business where US banks crashed and burned - and are still doing so at an extraordinary rate - due to disastrous, government motivated, lending policies, appalling regulation (including as to ratings) and a hands-off approach to misdeeds and failures in the US banking sector?

But what US regulators and prosecutors might like to notice is this: HSBC did not take any TARP money, it did not take any foreign government money. And unlike most US banks, it continued to lend into both the retail and SME sector in the USA when US headquartered banks took TARP money and used it to make mega deals, leaving millions of US citizens short of credit and tens of thousands of US SMEs to fail.

Ironically, the very bank the USA is targetting actively supported the US economy - and acted in accordance with US government policy on lending - when US banks did not.

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Nigel Morris-Cotterill is Head, The Anti Money Laundering Network, and editor in chief of BankingInsuranceSecurities.Com