HSBC, Europe's largest bank, ignored clear signs its Mexican division was being used as a conduit for billions of dollars of drug money to be transferred to the United States.
That's the conclusion of a US Senate investigation into money laundering, drugs, and terrorist financing which also found HSBC continued to do business with a Saudi Arabian bank with suspected links to terrorist financing operations.
The report, published by the Committee on Homeland Security and Governmental Affairs, uses HSBC as a case study to explore what can go wrong when a multinational bank, with access to the US financial system, operates lax security controls.
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One of the most glaring pieces of evidence is that in 2007 HSBC Mexico transferred $3bn to its US affiliate. In 2008 that figure rose to $4bn. That made HSBC Mexico "the single largest exporter of US dollars" to HSBC USA. And it gets worse.
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Those transfers were made despite the fact: "Mexican and U.S.
law enforcement and regulatory authorities expressed concern that (HSBC Mexico's) bulk cash shipments could reach that volume only if they included illegal drug proceeds..."
So despite official warnings, and despite the obvious fact of enormous transfers taking place, HSBC just let it happen.
The Senate report also digs into several other incidents which will cause acute embarrassment for the company that liked to call itself "the world's local bank".
One of those incidents concerns the Saudi Arabian outfit, Al Rajhi Bank. In January 2005 HSBC's own compliance office "recommended internally that, due to terrorist financing concerns, HSBC affiliates should sever ties with the bank."
This meant all of HSBC's business units, operating in over 80 countries had an official memo from head office that said: "don't do business with Al Rajhi".
Some of those units straightforwardly ignored the order, others moaned that it was losing the bank millions of dollars in lost revenue and pressured the compliance officials to reverse the recommendation. It didn't take long, by the end of 2006 HSBC's Banknotes division was allowed to restart supplying American dollars to Al Rajhi in Saudi Arabia. This, very likely, gave terrorists direct access to American currency which could then be used to fund operations around the world.
HSBC has already apologised for its failures and given an "absolute commitment to fixing what went wrong".
But the pain won't simply be reputational, it's thought the bank will end up paying up to $1bn in fines to the US authorities.
One might be tempted to ask what more could go wrong for the banking industry. But then we're still waiting to find out which other institutions were involved in fixing LIBOR. Not to mention the hangover from the mis-selling of complicated interest rate swaps, the mis-selling of personal protection insurance and the small matter of almost bankrupting the western world with toxic mortgage backed securities in 2008. Perhaps the straightforward matter of handling drug and terrorist money was just another day at the office.
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