U.K.-Based Bank Expected to Admit Money-Laundering Lapses as Part of $1.9 Billion Agreement
WASHINGTON—HSBC Holdings HSBA.LN +0.36% PLC on Tuesday plans to acknowledge that for years it ignored possible money laundering, part of a record $1.9 billion settlement with U.S. authorities that caps the bank’s disastrous foray into the U.S. market.
The U.K.-based banking company is expected to forfeit nearly $1.3 billion as part of a deferred prosecution agreement, the largest-ever U.S. forfeiture for a bank, according to people briefed on the agreement between HSBC and multiple U.S. agencies. The deal includes a civil fine of more than $650 million, according to these people.
As part of the agreement, the bank will admit to violating the Bank Secrecy Act, the Trading with the Enemy Act and other U.S. laws intended to prohibit money laundering, a government official said.
In a statement early Tuesday, HSBC confirmed the U.S. settlement, saying it expected reach a similar agreement with UK authorities soon.
CEO Stuart Gulliver said: “We accept responsibility for our past mistakes. We have said we are profoundly sorry for them, and we do so again. The HSBC of today is a fundamentally different organization from the one that made those mistakes.”
HSBC shares climbed 0.3% on Tuesday in Hong Kong.
The bank, whose history dates to an era when the British empire was at its height, has spent the past two years selling off unprofitable businesses and centralizing its global structure stretched across 80 countries.
HSBC officials now blame that structure for much of their U.S. legal trouble, which began when Immigration and Customs Enforcement agents in 2007 looked at suspicious cash flows involving HSBC branches in Mexico and the U.S.
In the past year, the bank has hired several former U.S. government money-laundering experts to help improve its financial controls. It named Stuart Levey as its top legal officer. Mr. Levey formerly served as the Treasury Department’s top official tracking terrorism and illicit financing. His portfolio includes managing legal officers in HSBC operations around the world.
Many of the HSBC money-laundering problems centered on bulk-cash, U.S. dollar transactions between HSBC’s Mexico and U.S. units. The transactions were detailed in a U.S. Senate investigative report published this past summer.
The report by the Senate Permanent Subcommittee on Investigations detailed a regulatory culture at HSBC that shocked even its own employees, according to testimony provided to the committee and at a hearing.
Senate investigators concluded HSBC did little to clean up operations that should have raised concerns. HSBC’s Mexico bank had a branch in the Cayman Islands that had no offices or staff but held 50,000 client accounts and $2.1 billion in 2008, the report said.
“What is this, the School of Low Expectations Banking?” one HSBC Latin America compliance official wrote in a complaint about the practices at HSBC Mexico, according to the Senate report. The HSBC official said the Mexico bank’s antimoney-laundering committee “can’t keep rubber-stamping unacceptable risks because someone on the business side writes a nice letter.…We have seen this movie before, and it ends badly.”
At a Senate hearing in July, Irene Dorner, chief executive of HSBC’s U.S. bank, delivered an official apology to lawmakers “for the fact that HSBC did not live up to the expectations of our regulators, our customers, our employees, and the general public.”
For HSBC, much of the U.S. operation became not only legally hazardous but also money-losing.
In 2007, HSBC started posting billions of dollars of losses at its U.S. consumer-lending arm, known as Household, which it has since sold to Capital One Financial Corp. COF +0.75% Those losses nearly crippled HSBC at the time, forcing it to go hat in hand to shareholders for more capital.
Chief Executive Stuart Gulliver has embarked on a strategy to focus on lower-risk businesses. While HSBC intends to maintain a presence in the U.S., the bank is unwinding big parts of its U.S. business and selling off some loan portfolios.
The bank also has introduced stringent “know your customer” standards, intended to avoid doing business with suspicious parties, according to bank officials.
The retrenchment in the U.S. mirrors HSBC’s strategy elsewhere in the world. The bank, whose motto is “the world’s local bank,” is pulling out of countries where it was a second- or third-tier player. On Monday, it said it completed an $800 million sale of some Central American businesses to a Colombian bank.
Problems with lax financial controls at HSBC emerged 2010 when the Office of the Comptroller of the Currency issued a cease-and-desist order citing deficient monitoring of bulk-cash purchases and international funds transfers, among other issues.
Before the OCC warning, the U.S. was telling banks to watch closely their bulk-cash business in Mexico and, in particular, dealings with money-changing firms called “casas de cambio.” A U.S. investigation into casas de cambio transactions led to a $160 million Justice Department settlement in 2010 with Wachovia Bank, now part of Wells Fargo Co. WFC -0.54%
Tuesday’s settlement would resolve investigations conducted by the Justice Department, Treasury and other federal agencies, as well as the Manhattan district attorney.
A crackdown by U.S. authorities on banking violations has netted multiple settlements in the hundreds of millions of dollars with the world’s biggest banks in recent years, leading to complaints from bankers and even some regulators in other countries that the penalties have become excessive. On Monday, the most recent such settlement with Standard Chartered Bank netted $327 million for violations of sanctions laws involving transactions with Iranian entities.
However the HSBC investigation reached more broadly than alleged sanctions violations and included allegations that the bank turned a blind eye to transactions involving suspicious customers from Cuba to Mexico to Saudi Arabia.
—David Enrich contributed to this article.
Corrections & Amplifications
HSBC issued a statement confirming the U.S. settlement Tuesday. An earlier version of this article said the statement was issued Wednesday.