HSBC moved vast sums of dirty money after paying record laundering fine
22 Sep 2020

By Spencer Woodman, ICIJ, 21 September 2020

ICIJ — In March 2014, three men kidnapped Reynaldo Pacheco and bludgeoned his head with rocks, leaving the 44-year-old father of a young daughter dead in a creek bed in California’s Napa County. Local authorities determined that his murder was a consequence of an investment fraud that targeted low-income Latino and Asian immigrants around the world.

Like other victims of the World Capital Market scheme, or WCM, Pacheco energetically promoted the deal to relatives and acquaintances. When the Ponzi scheme collapsed, an unlucky investor decided to have him killed.

Four days before Pacheco was beaten to death, compliance officers at the global banking giant HSBC raised a warning about millions of dollars flowing into a big-dollar account in Hong Kong controlled by the scammers. It was at least the third in a series of so-called suspicious activity reports that the bank’s internal watchdogs had lodged about WCM over several months.

Yet HSBC continued to handle the Ponzi network’s massive flow of dirty money into — and out of — its accounts at the bank.

HSBC was profiting from an international criminal scheme even while on probation for having served murderous drug cartels and other criminals. HSBC had admitted to U.S. prosecutors in 2012 that it had helped dirty money flow through its branches around the world, including at least $881 million controlled by the notorious Sinaloa cartel and other Mexican drug gangs.

In a controversial decision, prosecutors declined to seek an indictment of the bank but instead allowed it to pay a $1.92 billion settlement and serve five years of probation during which its efforts to prevent money laundering would be monitored by a court-appointed watchdog. The court named a former top New York state financial crimes prosecutor, Michael Cherkasky.

A 16-month investigation by the International Consortium of Investigative Journalists, BuzzFeed News and 108 other media partners has found that HSBC continued to provide banking services to alleged criminals, Ponzi schemers, shell companies tied to looted government funds and financial go-betweens for drug traffickers. This occurred even while the bank was on probation and under Cherkasky’s scrutiny.

The FinCEN Files investigation found that HSBC’s highly profitable branch in Hong Kong played a key role in keeping the dirty money flowing. Although providing only a partial view of HSBC’s suspicious activity reports, the records show that between 2013 and 2017, HSBC’s U.S. compliance staff, who are charged with monitoring customer activity, filed reports lacking crucial customer information on 16 shell companies that had processed nearly $1.5 billion in more than 6,800 transactions through the bank’s Hong Kong operations alone. More than $900 million of that total involved shell companies linked to alleged criminal networks, according to an analysis by ICIJ and its media partners.

In a statement, HSBC defended changes the bank made under the monitorship. “Starting in 2012, HSBC embarked on a multi-year journey to overhaul its ability to combat financial crime,” said Heidi Ashley, a spokesperson for the bank. “HSBC is a much safer institution than it was in 2012.”

The bank told ICIJ that it increased its compliance staff from a few hundred members in 2012 to several thousand in 2017 and invested more than $1 billion in compliance initiatives since 2015. “Though we have made significant improvements in our financial crime compliance programme, we are continually seeking ways to improve,” the bank said in a statement.

The investigation is based on a review of dozens of leaked suspicious activity reports, or SARs, as well as interviews with more than a dozen former HSBC anti-money-laundering employees. Banks doing business in the United States submit the confidential reports to an intelligence office within the U.S. Treasury Department known as the Financial Crimes Enforcement Network, or FinCEN. Suspicious activity reports reflect concerns of watchdogs within banks and are not necessarily evidence of any criminal conduct or wrongdoing.

Leaked records show HSBC processed at least $31 million between 2014 and 2015 for companies later revealed to have moved stolen government funds from Brazil; and more than $292 million between 2010 and 2016 for a Panama-based organization branded by U.S. authorities as a major money launderer for drug cartels. The organization, Vida Panama, denies wrongdoing and is fighting the U.S. designation. The records show HSBC worked with a bank in Tiraspol, within Moldova’s breakaway territory of Transnistria, for four years after the U.S. Treasury Department issued a 2011 advisory warning of the risks of doing business with the Tiraspol bank.

In interviews with ICIJ and BuzzFeed News, more than a dozen former HSBC compliance officers expressed deep concerns about the bank’s anti-money-laundering program, even during its probationary period. Compliance officers said that the bank did not give them enough time to meaningfully investigate suspicious transactions and that branches outside the U.S. often ignored requests for crucial customer information. They said they were treated as a second-class workforce within the bank, with little power to shut down problematic accounts.

The FinCEN Files raise new questions about the U.S. Justice Department’s decision in 2012 to forgo indicting HSBC or any bank executives in the Sinaloa cartel case. The decision was opposed by rank-and-file prosecutors, who had prepared a list of up to 175 criminal charges against the bank that the government ultimately shelved. No one went to prison over the bank’s historic wrongdoing. The findings also raise questions about the department’s decision, five years later, to pronounce HSBC reformed and allow its probation to lapse. The investigation builds upon ICIJ’s previous Swiss Leaks project, which exposed how HSBC’s Swiss private banking arm profited from doing business with tax dodgers and criminals around the world prior to 2008.

FinCEN Files documents show that HSBC knew regulators were investigating its customer, the WCM Ponzi scheme, even as it helped move its money.

A federal class-action lawsuit brought by bilked investors alleged that HSBC Hong Kong was “instrumental in helping WCM777 to continue its Ponzi scheme.” A federal judge dismissed the suit last month, ruling it had been brought in an improper jurisdiction.

In an exclusive interview with ICIJ, the Ponzi scheme’s bow-tie-sporting founder, Ming Xu, said HSBC did not contact him to ask about massive money flows WCM was moving through the bank’s Hong Kong accounts.

Banks’ SARs form the backbone of U.S. authorities’ attempts to fight money laundering, but the system fails to stop deluges of dirty money. Banks can, but are not necessarily required to, block or close accounts suspected of being used for money laundering, and they can fulfill a key legal obligation by simply reporting the transactions to FinCEN. The office received more than two million of those reports last year, more than its agents could hope to read.

The SARs reviewed by ICIJ and its partners include 73 reports filed between 2012 and 2017 by HSBC. The documents contain information on more than $4.4 billion in more than ten years of transactions reported as suspicious. That amounts to a tiny fraction of the tens of thousands of SARs HSBC files each year but offers a window into the bank’s troubled compliance efforts.

The confidential records and interviews with former employees reveal that compliance officers often filed SARs lacking even basic information about who owned companies banking with HSBC, the nature of their businesses, and where the money came from. Sometimes, records show, they asked branches for the information and were ignored or rebuffed.

“It was impossible to do the job without this information,” said Alexis Grullon, a former compliance officer who monitored international suspicious activity for HSBC’s New York offices from November 2012 to August 2014. Grullon said that, in most cases, HSBC branches in other countries would simply ignore his requests for ownership information about suspicious accounts.

“They would say: ‘Sure, we’ll get back to you.’ But they’d never get back,” he recalled.

Grullon said that a key component of his job was submitting SARs to the federal government but that the reports did little to stop customers’ suspicious activities.

“Why are we filing SARs?” Grullon recalls wondering. “The account is still open. Nothing is actually being done.”

‘The world’s local bank’

Founded in Hong Kong as the Hong Kong and Shanghai Banking Corp. in 1865, HSBC prospered managing British government accounts across East Asia. By the mid-2000s, the bank had become one of the world’s most pervasive retail financial institutions, with thousands of branches in more than 70 countries, dubbing itself at one point, “the world’s local bank.”

It was more than a slogan. Under the global brand, HSBC operated as a loose confederation of largely autonomous fiefs. This degree of decentralization meant that the bank’s headquarters, which moved to London in 1941, extended its hands-off approach even to anti-money laundering questions.

One result: HSBC accepted clients whose massive wealth translated into big profits but who turned out to be criminals.

In 2003, HSBC agreed to a consent order drawn up by U.S. authorities in which the bank promised to fix its anti-money laundering program and empower compliance officers by providing better tools and information about customers.

Instead, the bank took part in one of the most notorious episodes in money laundering history. As the Mexican drug war metastasized in the mid-2000s, the bank provided essential U.S. dollar-denominated accounts to narco-gangs needing to clean hundreds of millions of dollars in drug earnings. The cartels designed specially shaped boxes that fit HSBC’s teller windows to deliver the massive amounts of illicit cash pouring in.

In 2010, the bank was forced to submit to another court order secured by its primary regulator, the U.S. Office of the Comptroller of the Currency. The bank promised to boost anti-money-laundering systems and provide compliance officers with more information about its clients — again.

In the summer of 2012, the U.S. Senate investigative panel released its 339-page report on the bank’s work with Mexican narco-gangs and its role in terrorist financing. Later that year, the Justice Department and HSBC reached their deferred-prosecution agreement. Critics cast the government’s decision to forgo indictment of the bank or any of its executives as a sign of big banks’ virtual impunity from meaningful consequences for their misdeeds.

Hong Kong

Although no longer the banking giant’s headquarters, Hong Kong remains the beating heart of HSBC. In 2015, its operations in the island territory, which include a subsidiary called Hang Seng Bank, accounted for nearly half of HSBC’s global profits, and its market share in Hong Kong dwarfs that of its competitors.

On June 20, 2012, the same day HSBC’s attorneys were describing the bank’s anti-money-laundering protocols to Senate investigators on Capitol Hill, HSBC’s Hong Kong branch began transmitting funds for a shell company called Trade Leader Corp. Ltd.

By February 2014, transfers into and out of the shell company’s Hong Kong accounts totaled more than $581 million.

Records from the FinCEN Files show that, when the bank’s U.S. compliance staff asked for information about who owned the big-dollar account, HSBC’s Hong Kong bankers simply responded that there was “none available.”

Read more at the International Consortium of Investigative Journalists

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