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HSBC spared further US money laundering sanctions as it battles to clean up its act

Iain Withers
Despite incurring the hefty fine and subsequent monitoring costs, HSBC’s fate could have been worse

US regulators described it as the "sword of Damocles" hanging over HSBC. Britain’s biggest lender had to pay a $1.9bn (£1.4bn) fine in 2012 for helping drug cartels launder money in Mexico and for contravening sanctions to do business with Iran.

Alongside the payout, HSBC agreed a five-year deferred prosecution agreement (DPA) with the US Department of Justice (DoJ) under which it promised to clean up its act.

The DoJ’s head of criminal division, Lanny Breuer, invoked the Roman parable at the time to illustrate the bank could face severe repercussions if it failed to do so.

Potential penalties included further multi-billion dollar fines or having its US banking licences ripped up, which could have crippled the bank.

But the sword was finally lifted from above HSBC on Monday when the DoJ agreed to allow the DPA to expire.

The Mexico saga is one of a number of misconduct scandals that have hit HSBC in recent years. These have included evidence it helped wealthy clients evade tax through its Swiss private bank and allegations of rigging foreign exchange and precious metals markets.

Outgoing HSBC chief executive Stuart Gulliver Credit: Bobby Yip/REUTERS

So outgoing HSBC chief executive Stuart Gulliver will be relieved to see the back of this Mexico entanglement, one of the last remaining major legacy issues before he hands over to his successor John Flint in February.

Fellow FTSE 100 bank Standard Chartered has had its own deferred prosecution agreement related to money laundering extended twice – the latest to next July – showing the DoJ’s decision was not a foregone conclusion.

Ian Gordon, an analyst at Investec, said HSBC’s legacy problems were now “largely” behind it. “We’ve seen these deferred prosecution agreements can be extended, as we saw with Standard Chartered. It was largely expected but it’s very welcome,” he said.

The DoJ’s 2012 settlement with HSBC revealed Mexican and Colombian cartels laundered $881m through HSBC entities, while the bank violated US sanctions by working not only with Iran, but Libya, Sudan, Burman and Cuba.

At the time the DoJ’s Breuer commented: "The record of dysfunction that prevailed at HSBC for many years was simply astonishing."

HSBC will be relieved to see the back of this Mexico entanglement Credit: Jose Luis Magana/AP Photo

The DoJ appointed former New York prosecutor Michael Cherkasky to monitor HSBC’s anti-money laundering programme by the following summer. His work has cost the bank some $200m a year, with his monitoring role formally ending this coming July.

Despite incurring the hefty fine and subsequent monitoring costs, HSBC’s fate could have been worse – it could have faced a full criminal prosecution.

It emerged last July in a report compiled by US lawmakers entitled "Too Big to Jail" that both former chancellor George Osborne and British regulators weighed in on HSBC’s behalf behind the scenes to try to dissuade US regulators from pursuing criminal action. 

They argued ahead of the DPA being agreed that criminal proceedings against a “systemically important” bank such as HSBC would risk “global financial disaster”.

HSBC boss Gulliver has good reason to believe he is handing over a very different bank to his colleague Flint.

Although the DoJ decision is a welcome relief to HSBC as an important UK employer, for me the verdict is still out on their response to money laundering in South Africa

Lord Peter Hain

Under Gulliver the bank has spent more than $1bn tightening up its compliance procedures and has a workforce of more than 6,000 people dedicated to ensuring they are adhered to.

HSBC is also a smaller, more manageable beast. It is coming out of a period of extensive restructuring, having exited more than half the countries where it had branches and made more than 87,000 job cuts.

However a number of outstanding misconduct issues remain unresolved. HSBC is expecting a $1bn-plus fine in the coming months for its role in mis-selling toxic mortgage products in the US ahead of the financial crisis.

It is also separately being investigated by UK regulators for its alleged links to money laundering by South Africa’s billionaire Gupta family, whose links to president Jacob Zuma are at the heart of a political storm in the country.

Labour peer and former anti-apartheid campaigner Lord Peter Hain passed evidence allegedly connecting the banks to laundering for Gupta-linked companies through Dubai and Hong Kong in recent weeks.

Investec’s Gordon said the South Africa investigation was a "known unknown" and "hard to quantify". 

Compliance will remain a top priority for HSBC into 2018 and beyond

Stuart Gulliver, outgoing HSBC CEO

Lord Hain told The Daily Telegraph: “Although the DoJ decision is a welcome relief to HSBC as an important UK employer, for me the verdict is still out on their response to the money laundering by President Zuma’s family and his close business associates the Indian-South African Gupta brothers.”  

HSBC declined to comment on the ongoing South Africa investigations. It has previously said it is co-operating with regulators and has shut accounts it believes are linked to the Guptas. Both the Guptas and Zuma have repeatedly strongly denied wrongdoing and said they are the victims of a “politically motivated witch-hunt”.

Commenting on the expiry of the DPA, Gulliver said improving compliance would “remain a top priority for the bank into 2018 and beyond". 

While his successor Flint faces some unresolved misconduct issues, there’s no doubt the lifting of the DPA will be a weight off his mind.

The development may enable HSBC to return more capital to shareholders either by paying higher dividends or extending its share buy-back programme. 

Flint will have a freer hand than his predecessor.