[The HSBC deal, which
is expected to be filed on Tuesday in the Eastern District of New York,
includes a deferred prosecution agreement with the Manhattan district
attorney's office and the Justice Department. The deferred prosecution
agreement, a notch below a criminal indictment, requires the bank to forfeit
more than $1.2 billion and pay about $650 million in fines, according to the
officials briefed on the matter. The case, officials say, will claim violations
of the Bank Secrecy Act and Trading with the Enemy Act.]
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Facundo Arrizabalaga/European Press photo Agency
HSBC’s headquarters in London.
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State and federal authorities
decided against indicting HSBC in a money-laundering case over
concerns that criminal charges could jeopardize one of the world's largest
banks and ultimately destabilize the global financial system.
Instead, authorities
on Tuesday are expected to announce a record $1.9 billion settlement with the
bank, according to law enforcement officials briefed on the matter. The bank,
which is based in Britain, faces accusations that it transferred billions of dollars
for nations like Iran and enabled Mexican drug cartels to move money illegally
through its American subsidiaries.
While the settlement
is a major victory for the government, the case raises questions about whether
certain financial institutions, having grown so large and so interconnected,
are too big to indict. Four years after the failure of Lehman Brothers nearly toppled the financial
system, regulators are still wary that a single institution could undermine the
recovery of the industry and the economy.
But the threat of
criminal prosecution acts as a powerful deterrent. If authorities signal such
actions are remote for big banks, the threat could lose its sting.
Behind the scenes,
authorities debated for months the advantages and perils of a criminal
indictment against HSBC.
Some prosecutors at
the Justice Department's criminal division and the Manhattan district
attorney's office wanted the bank to plead guilty to violations of the federal
Bank Secrecy Act, according to the officials, who spoke on the condition of
anonymity. The law forces financial institutions to report any cash transaction
of $10,000 or more and requires banks to bring any dubious activity to the
attention of regulators.
Given the extent of
the evidence against HSBC, some prosecutors saw the charge as a healthy
compromise between a settlement and a harsher money-laundering indictment.
While the charge would most likely tarnish the bank's reputation, some
officials argued that it would not set off a series of devastating
consequences.
A money-laundering
indictment, or a guilty plea over such charges, would essentially be a death
sentence for the bank. Such actions could cut off the bank from certain
investors like pension funds and ultimately cost it its charter to operate in
the United States, officials said.
Despite the Justice
Department's proposed compromise, Treasury Department officials and bank
regulators at the Federal Reserve and the Office of the Comptroller of the Currency pointed
to potential issues with the aggressive stance, according to the officials
briefed on the matter. When approached by the Justice Department for their
thoughts, the regulators cautioned about the impact on the broader economy.
"The Justice
Department asked Treasury for our view about the potential implications of
prosecuting a large financial institution," David S. Cohen, the Treasury's
under secretary for terrorism and financial intelligence, said in a statement.
"We did not believe we were in a position to offer any meaningful
assessment. The decision of how the Justice Department exercises its
prosecutorial discretion is solely theirs and Treasury had no role."
Still, some
prosecutors proposed that Attorney General Eric H. Holder Jr. meet with Treasury
Secretary Timothy F. Geithner, people briefed on the
matter said. The meeting never took place.
After months of
discussions, prosecutors decided against a criminal indictment, but only after
securing record penalties and wide-ranging sanctions.
The HSBC deal, which
is expected to be filed on Tuesday in the Eastern District of New York,
includes a deferred prosecution agreement with the Manhattan district
attorney's office and the Justice Department. The deferred prosecution
agreement, a notch below a criminal indictment, requires the bank to forfeit
more than $1.2 billion and pay about $650 million in fines, according to the
officials briefed on the matter. The case, officials say, will claim violations
of the Bank Secrecy Act and Trading with the Enemy Act.
As part of the deal,
one of the officials briefed on the matter said, HSBC must also strengthen its
internal controls and stay out of trouble for the next five years. If the bank
again runs afoul of the federal rules, the Justice Department can resume its
case and file a criminal indictment.
"We are
cooperating with authorities in ongoing investigations," said Rob Sherman,
a spokesman for the bank. He added, "The nature of any conversations is
confidential."
The Justice Department
and the Manhattan district attorney's office declined to comment, as did the
bank regulators.
The HSBC case is part
of a sweeping investigation into the movement of tainted money through the
American financial system. In 2010, Lanny A. Breuer, the head of the Justice
Department's criminal division, created a money-laundering task force that has
collected more than $2 billion in fines from banks, a number that is set to
double with the HSBC case.
The inquiry - led by
the Justice Department, the Treasury and the Manhattan prosecutors - has
ensnared six foreign banks in recent years, including Credit Suisse andBarclays. In June, ING Bank reached a $619 million
settlement to resolve claims that it had transferred billions of dollars in the
United States for countries like Cuba and Iran that are under United States
sanctions.
On Monday, federal and
state authorities also won a $327 million settlement from Standard Chartered, a British bank. Standard,
which in September agreed to a larger settlement with New York's top banking
regulator, admitted processing thousands of transactions for Iranian and
Sudanese clients through its American subsidiaries. To avoid having Iranian
transactions detected by Treasury Department computer filters, Standard
Chartered deliberately removed names and other identifying information,
according to the authorities.
"You can't do it.
It's against the law, and today Standard Chartered is being held to
account," Mr. Breuer said in an interview.
HSBC's actions stand
out among the foreign banks caught up in the investigation, according to
several law enforcement officials with knowledge of the inquiry. Unlike those
of institutions that have previously settled, HSBC's activities are said to
have gone beyond claims that the bank flouted United States sanctions to
transfer money on behalf of nations like Iran. Prosecutors also found that the
bank had facilitated money laundering by Mexican drug cartels and had moved
tainted money for Saudi banks tied to terrorist groups.
HSBC was thrust into
the spotlight in July after a Congressional committee outlined how the bank, between
2001 and 2010, "exposed the U.S. financial system to money laundering and
terrorist financing risks." The Permanent Subcommittee on Investigations
held a subsequent hearing at which the bank's compliance chief resigned amid
mounting concerns that senior bank officials were complicit in the illegal
activity. For example, an HSBC executive at one point argued that the bank
should continue working with the Saudi Al Rajhi bank, which has supported Al Qaeda, according to the Congressional
report.
Despite repeated
urgings from federal officials to strengthen protections in its vast Mexican
business, HSBC instead viewed the country from 2000 to 2009 as low-risk for
money laundering, the Senate report found. Even after HSBC's Mexican operation
transferred more than $7 billion to the United States - a volume that law
enforcement officials said had to be "illegal drug proceeds" - lax controls
remained.
HSBC has since moved
to bolster its safeguards. The bank doubled its spending on compliance
functions and revamped its oversight, according to a spokesman. In January,
HSBC hired Stuart A. Levey as chief legal officer to come up with stricter
internal standards to thwart the illegal flow of cash. Mr. Levey was formerly
an under secretary at the Treasury Department who focused on terrorism and
financial intelligence.
On Monday, the bank
said it was promoting Robert Werner, who oversaw the group at the Treasury
Department that enforces sanctions, to run a specially created division focused
on anti-money laundering efforts.
Regulators have also
vowed to improve. The Congressional hearings exposed weaknesses at the Office
of the Comptroller of the Currency, the national bank regulator. In 2010, the
regulator found that HSBC had severe deficiencies in its anti-money laundering
controls, including $60 trillion in transactions and 17,000 accounts flagged as
potentially suspicious, activities that were not reviewed. Despite the
findings, the regulator did not fine the bank.
During the hearings
this summer, lawmakers blasted the regulator. At one point, Senator Tom Coburn, Republican of Oklahoma, called the
comptroller "a lapdog not a watchdog."
