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Dublin: 11 °C Tuesday 2 September, 2014

Column: HSBC funnelled money for drug kingpins? This isn’t surprising.

We’re not surprised any more by unscrupulous behaviour by banks – but HSBC’s actions are as bad as it gets, writes Nick Leeson.

Nick Leeson

BRITISH BANKING IS facing increased scrutiny this week and once again we see concrete evidence that the world of finance fails to learn lessons from its mistakes.

Hot on the heels of the Barclays rate fixing scandal and the implosion of the IT infrastructure at RBS and Ulster Bank,  HSBC is looking for its own place in the Banking Hall of Fame. In fact they may have just propelled themselves right to the very top.

None of us are any longer surprised by the unscrupulous behaviour of our banks: rate fixing, mis-selling and a culture seriously warped by ego and greed unfortunately appear to be the norm. However being accused by a US Senate committee of operating a money-laundering conduit for “drug kingpins and rogue nations” is as bad as it gets.

The allegations now facing HSBC are as damning as they can be but as someone who used to work within the industry, I can’t say that I am surprised. Banking is under more scrutiny than ever before and I think that is why we are seeing so many stories hit the media, but money laundering through the financial markets is nothing new. Neither are any of the areas of wrongdoing and neither is the complete disdain with which the banks continue to treat all of the warning signals.

What is changing is that we are all starting to pay more attention and call the parties concerned to account – and that can only be a good thing

In this latest, possibly greatest episode of shooting oneself in the foot, Britain’s biggest bank purchased a Mexican lender, Grupo Financiero Bital, acknowledging internally that the operation was lacking a compliance department; a major deficiency and flaw that was obvious to all. If you were the boss of HSBC’s unit in Mexico you were a mini-emperor, answerable to almost nobody. You were even in charge of your own compliance department. Sounds remarkably similar to my own time in Singapore when I initiated the trading, settled my own trades and made sure that everything was compliant and risk adverse. Clearly it wasn’t and isn’t good corporate governance and should be guarded against.

“Was this client a drug dealer, money launderer, or a hedge fund manager?”

The problem, according to US Senate investigators, is that the bank’s business interests were trumping its compliance obligations. Sound familiar? It is the same pattern time after time, whether it’s Ireland breezing through normal lending ratios to earn more money, the UK where rates were rigged to present a better picture or Mexico, Russia and Iran where the commission earned on these transactions blinded the bank to the real purpose.

I remember receiving calls from one particular client in Singapore during which I could hear the clicking through various telephone exchanges as the call was connected, probably to a yacht in the Pacific. It was a highly sought-after client, probably the biggest in the market at that time. It had taken a long time to win the business. Was he a drug dealer, money launderer, or a successful hedge fund manager? His business was the most important thing. As a character in Hamlet says, ‘Something is rotten in the state of Denmark’.

In this case the numbers are extraordinary and the countries involved aren’t those that you would expect to see at the lower end of the risk framework when it comes to money laundering. According to the Senate committee, HSBC accepted more than $15 billion (€12.2 billion) in bulk cash transactions from subsidiaries in Mexico, Russia and other countries at high risk of money laundering between mid-2006 and mid-2009 but failed to conduct proper checks.

According to the notes of the head of anti-money laundering at HSBC’s Mexico unit, as much as 70 per cent of laundered proceeds in Mexico went through HSBC. These are shocking statistics and not unlike my own illegal trading account in Singapore. The executive in Mexico told his counterpart in London that “it was only a matter of time before the bank faced criminal sanctions”. Well it looks as though he got one thing right!

It’s not just HSBC…

HSBC are not alone. This year, ING agreed to pay $619m (€504 million) to settle accusations it violated US sanctions by helping Iranian and Cuban companies move billions of dollars through the US financial system. It has also been alleged that HSBC stripped details from transactions that would have identified Iranian entities – which may have put the bank in breach of US sanctions against that country – a similar accusation that was levelled against ING.

The bank has not been formally accused of a crime in connection with the most recent spate of investigations. But many of the allegations in the Senate report closely resemble those that led other banks to reach settlements worth hundreds of millions of dollars with US authorities. Early estimates suggest that the fine will exceed $1bn.

So yet again we have a situation where a bank has inadequate controls, have considered themselves aloof and blatantly ignored all of the warning signals. Increased scrutiny can only be good, transparency we are asked to believe is the cornerstone of all financial markets. Opaque is what it has been for far too long and maybe now we will start to see real change. Is this the tip of the iceberg? Unfortunately I think there is more to come.

Read other columns by Nick Leeson >

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