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Tue 17 Jul 2012 12:22 PM

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US report says HSBC handled terrorist money

Senate report accused lending giant of offering services to Saudi banks with links to terrorists

US report says HSBC handled terrorist money
A US Senate report has condemned global banking giant HSBC for its poor anti-money laundering systems.

A US Senate report has condemned global banking giant HSBC for what it says are poor anti-money laundering systems, claiming it provided services to banks in Saudi Arabia accused of having links to terrorist financing, as well as trying to conceal transactions involving Iran.

The year-long probe was conducted by the Senate Permanent Subcommittee on Investigations and included a review of 1.4m documents and interviews with 75 HSBC officials and bank regulators.

The report concluded HSBC and its US affiliate operated a “pervasively polluted" culture and exposed the US financial system to a wide array of money laundering, drug trafficking, and terrorist financing risks.

As part of the probe, investigators examined HSBC's banking with Saudi Arabia's Al Rajhi Bank, which the report said is accused of having links to financing terrorism. Evidence of those links emerged after the September 11, 2001 attacks on the US, the Senate report said, citing US government reports, criminal and civil legal proceedings and media reports.

In 2004, Al Rajhi sued the Wall Street Journal newspaper, which had published an article about US and Saudi authorities monitoring accounts. The article referenced Al Rajhi.

Al Rajhi said in response to the WSJ story that it "unequivocally condemns terrorism". Al Rajhi and the paper settled in 2004. The paper did not pay damages and stated that it "did not intend to imply an allegation that [Al Rajhi] supported terrorist activity, or had engaged in the financing of terrorism", the Senate report said.

In 2005, HSBC told its affiliates to no longer do business with the bank, the report said. Four months later, HSBC officials reversed course, allowing affiliates to decide whether to continue to do business with Al Rajhi.

A Middle Eastern unit of HSBC continued doing business with the bank, the report said. HSBC ultimately stopped helping the bank handle certain types of transactions, and HSBC compliance officials rebuffed other HSBC bankers seeking to maintain ties to the bank.

Then in late 2006, Al Rajhi threatened to pull all of its business with HSBC unless it regained access to using HSBC's bulk-cash transaction business, the Senate report said. HSBC agreed to continue to provide the bank bulk shipments of US dollars until 2010 when HSBC exited entirely the bulk-cash business.

The focus of the Senate probe was HSBC's US operations, which has its main office in New York. HSBC used the US unit as a selling point to clients outside the United States, touting its ability to handle U.S. dollar transactions.

Among HSBC's problems, the report described the bank's compliance division as unable to battle the suspect money. High turnover of top compliance officials made it difficult for reform to take hold, the report said. Employees were "overwhelmed" by a mounting number of suspect transactions that needed review.

"We're strapped and getting behind in investigations," one bank official wrote in June 2008. By that time, HSBC was cutting costs to offset losses tied to subprime home loans and the brewing financial crisis. In 2010, one disgusted top compliance official threw up his hands and quit after less than a year on the job, according to the report.

"The culture at HSBC was pervasively polluted for a long time," said Senator Carl Levin, chairman of the US Senate Permanent Subcommittee on Investigations, a Congressional watchdog panel.

Some of the money that moved through HSBC was tied to Iran, the report also said, which would violate US prohibitions on transactions linked to it and other sanctioned countries.

To conceal the transactions, HSBC affiliates used a method called "stripping", where references to Iran are deleted from records. HSBC affiliates also characterised the transactions as transfers between banks without disclosing the tie to Iran in what the Senate report called a "cover payment".

HSBC "failed to take decisive action to confront these affiliates and put an end to the conduct," the report said.

Between 2001 and 2007, more than 28,000 transactions were identified by an outside auditor for HSBC that potentially could have run afoul of laws that prohibit transactions with sanctioned countries. Of those, 25,000 involved Iran. A smaller number required additional analysis to determine if violations of US regulations had occurred, the report said.

In an emailed statement to Reuters, HSBC said the Senate report had provided "important lessons for the whole industry in seeking to prevent illicit actors entering the global financial system".

The bank said it is spending more money on compliance and has become more coordinated in policing high-risk transactions.

* With agencies

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