Холдинг HSBC 2
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50.
The Department alleges, and HSBC Bank USA and HSBC Holdings
do not contest, that, beginning in 2008, an investigation
conducted by HSI’s El Dorado Task Force, in conjunction with the
U.S. Attorney’s Office for the Eastern District of New York,
identified multiple HSBC Mexico accounts associated with BMPE
activity. The investigation further revealed that drug
traffickers were depositing hundreds of thousands of dollars in
bulk U.S. currency each day into HSBC Mexico accounts. In order
to efficiently move this volume of cash through the teller
windows at HSBC Mexico branches, drug traffickers designed
specially shaped boxes that fit the precise dimensions of the
teller windows. The drug traffickers would send numerous boxes
filled with cash through the teller windows for deposit into
HSBC Mexico accounts. After the cash was deposited in the
accounts, peso brokers then wire transferred the U.S. dollars to
various exporters located in New York City and other locations
throughout the United States to purchase goods for Colombian
businesses. The U.S. exporters then sent the goods directly to
the businesses in Colombia.
51.
The Department alleges, and HSBC Bank USA and HSBC Holdings
do not contest, that accounts at HSBC Mexico were identified by
tracking wire transfers originating from HSBC Mexico into HSI
undercover accounts in the United States and through seizures
and analysis of U.S.-based business accounts that were funded by
wire transfers from accounts targeted for illegal BMPE activity.
Since 2009, the investigation has resulted in the arrest,
extradition, and conviction in the United States District Court
for the Eastern District of New York of numerous individuals
illegally using HSBC Mexico accounts in furtherance of BMPE
activity. The investigation further revealed that, because of
its lax AML controls, HSBC Mexico was the preferred financial
institution for drug cartels and money launderers. The drug
trafficking proceeds (in physical U.S. dollars) deposited at
HSBC Mexico as part of the BMPE were sold to HSBC Bank USA
through Banknotes. In addition, many of the BMPE wire transfers
to exporters in the United States passed through HSBC Mexico’s
correspondent account with HSBC Bank USA. As discussed above,
from 2006 to 2009, HSBC Bank USA did not monitor Banknotes
transactions or wire transfers from HSBC Mexico and did not
detect the drug trafficking proceeds as they flowed into the
United States.
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Evasion of U.S. Sanctions
52.
From the mid-1990s through at least September 2006, HSBC
Group Affiliates violated both U.S. and New York State criminal
laws by knowingly and willfully moving or permitting to be moved
illegally hundreds of millions of dollars through the U.S.
financial system on behalf of banks located in Cuba, Iran,
Libya, Sudan, and Burma, and persons listed as parties or
jurisdictions sanctioned by the Office of Foreign Assets Control
of the United States Department of the Treasury (“OFAC”)
(collectively, the “Sanctioned Entities”) in violation of U.S.
economic sanctions.
53.
HSBC Group Affiliates engaged in this criminal conduct by:
(a) following instructions from the Sanctioned Entities not to
mention their names in U.S. dollar payment messages sent to HSBC
Bank USA and other financial institutions located in the United
States; (b) amending and reformatting U.S. dollar payment
messages to remove information identifying the Sanctioned
Entities; (c) using a less transparent method of payment
messages, known as cover payments; and (d) instructing at least
one Sanctioned Entity how to format payment messages in order to
avoid bank sanctions filters that could have caused payments to
be blocked or rejected at HSBC Group or HSBC Bank USA.
54.
HSBC Group’s conduct, which occurred outside the United
States, caused HSBC Bank USA and other financial institutions
located in the United States to process payments that otherwise
should have been held for investigation, rejected, or blocked
pursuant to U.S. sanctions regulations administered by OFAC.
Additionally, by its conduct, HSBC Group: (a) prevented HSBC
Bank USA and other financial institutions in the United States
from filing required BSA and OFAC-related reports with the U.S.
Government; (b) caused false information to be recorded in the
records of U.S. financial institutions located in New York, New
York; and (c) caused U.S. financial institutions not to make
records that they otherwise would have been required by law to
make.
Applicable Law
55.
At all times relevant to this matter, various U.S. economic
sanctions laws regulated and/or criminalized financial and other
transactions involving sanctioned countries, entities, and
persons. Those laws applied to transactions occurring within
U.S. territorial jurisdiction and to transactions involving U.S.
Page 19
persons, including U.S. corporations, anywhere in the world.
OFAC promulgated regulations to administer and enforce the
economic sanctions laws, including regulations for economic
sanctions against specific countries, as well as sanctions
against Specially Designated Nationals (“SDNs”). SDNs are
individuals, groups, and entities that have been designated by
OFAC as terrorists, financial supporters of terrorism,
proliferators of weapons of mass destruction, and narcotics
traffickers.
Cuba Sanctions
56.
Beginning with Executive Orders and regulations issued at
the direction of President John F. Kennedy, the United States
has maintained an economic embargo against Cuba through the
enactment of various laws and regulations. These laws,
restricting U.S. trade and economic transactions with Cuba, were
promulgated under the Trading With the Enemy Act (“TWEA”), 50
U.S.C. app. §§ 1-44. These laws are administered by OFAC, and
prohibit virtually all financial and commercial dealings with
Cuba, Cuban businesses, and Cuban assets.
Iran Sanctions
57.
In 1987, President Ronald W. Reagan issued Executive Order
No. 12613, which imposed a broad embargo on imports of Iranian-
origin goods and services. United States sanctions against Iran
were strengthened in 1995 and 1997 when President William J.
Clinton issued Executive Order Nos. 12957, 12959, and 13059.
These Executive Orders prohibit virtually all trade and
investment activities between the United States and Iran. With
the exception of certain exempt or authorized transactions, OFAC
regulations implementing the Iranian sanctions generally
prohibit the export of services to Iran from the United States.
Until 2008, OFAC regulations permitted U.S. depository
institutions to handle certain “U-Turn” transactions, in which
the U.S. depository institution acts only as an intermediary
bank in clearing a U.S. dollar payment between two non-U.S.,
non-Iranian banks.
Libya Sanctions
58.
On January 7, 1986, President Reagan issued Executive Order
No. 12543 imposing broad economic sanctions against Libya.
Subsequently, President Reagan issued Executive Order No. 12544
on January 8, 1986, ordering the blocking of all property and
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interests in property of the Government of Libya. President
George H. W. Bush strengthened those sanctions in 1992, pursuant
to Executive Order No. 12801. On September 20, 2004, President
George W. Bush issued Executive Order No. 13357, terminating the
national emergency with regard to Libya and revoking the
sanction measures imposed by the prior Executive Orders.
Sudan Sanctions
59.
On November 3, 1997, President Clinton issued Executive
Order No. 13067 imposing a trade embargo against Sudan and
blocking all property, and interests in property, of the
Government of Sudan. President George W. Bush strengthened
those sanctions in 2006, pursuant to Executive Order No. 13412.
Under these Executive Orders, virtually all trade and investment
activities between the United States and Sudan are prohibited.
With the exception of certain exempt or authorized transactions,
OFAC regulations implementing the Sudanese sanctions generally
prohibit the export of services to Sudan from the United States.
Burma Sanctions
60. On May 20, 1997, President Clinton issued Executive Order
No. 13047, which prohibited both new investment in Burma by U.S.
persons and U.S. persons’ facilitation of new investment in
Burma by foreign persons. On July 28, 2003, President George W.
Bush signed the Burmese Freedom and Democracy Act of 2003
(“BFDA”) to restrict the financial resources of Burma’s ruling
military junta. To implement the BFDA and to take additional
steps, President Bush issued Executive Order No. 13310 on July
28, 2003, which blocked all property and interests in property
of certain listed Burmese entities[3] and provided for the blocking
of property and interest in property of other individuals and
entities meeting the criteria set forth in Executive Order No.
13310. Executive Order No. 13310 also prohibited the
importation into the United States of articles that are a
product of Burma and the exportation or re-exportation to Burma
of financial services from the United States, or by U.S.
persons, wherever located. On July 11, 2012, President Barack
Obama signed an executive order easing restrictions to allow
U.S. companies to do business in Burma.
[3]
President Bush subsequently issued Executive Order Nos.
13448 and 13464, expanding the list of persons and entities
whose property must be blocked.
Page 21
Department of Justice Charges
61.
The Department alleges, and HSBC Holdings admits, that its
conduct, as described herein, violated TWEA. Specifically, HSBC
Group violated Title 50, United States Code, Appendix Sections 5
and 16, which makes it a crime to willfully violate or attempt
to violate any regulation issued under TWEA, including
regulations restricting transactions with Cuba. The Department
further alleges, and HSBC Holdings admits, that its conduct, as
described herein, violated the International Emergency Economic
Powers Act (“IEEPA”). Specifically, HSBC Group violated Title
50, United States Code, Section 1705, which makes it a crime to
willfully violate or attempt to violate any regulation issued
under IEEPA, including regulations restricting transactions with
Iran, Libya, Sudan, and Burma.
New York State Penal Law Charge
62.
DANY alleges, and HSBC Holdings admits, that its conduct,
as described herein, violated New York State Penal Law Sections
175.05 and 175.10, which make it a crime to, “with intent to
defraud, . . . (i) make[ ] or cause[ ] a false entry in the
business records of an enterprise [defined as any company or
corporation] . . . or (iv) prevent[ ] the making of a true entry
or cause the omission thereof in the business records of an
enterprise.” It is a felony under Section 175.10 of the New
York State Penal Law if a violation under Section 175.05 is
committed and the person or entity’s “intent to defraud includes
an intent to commit another crime or to aid or conceal the
commission thereof.”
Conduct in Violation of U.S. Sanctions Laws
63.
From at least 2000 through 2006, HSBC Group knowingly and
willfully engaged in conduct and practices outside the United
States that caused HSBC Bank USA and other financial
institutions located in the United States to process payments in
violation of U.S. sanctions. To hide these transactions, HSBC
Group Affiliates altered and routed payment messages in a manner
that ensured that payments involving sanctioned countries and
entities cleared without difficulty through HSBC Bank USA and
other U.S. financial institutions in New York County and
elsewhere. The total value of OFAC-prohibited transactions for
the period of HSBC Group’s review, from 2000 through 2006, was
approximately $660 million. This includes approximately $250
million involving Sanctioned Entities in Burma; $183 million on
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behalf of Sanctioned Entities in Iran; $169 million on behalf of
Sanctioned Entities in Sudan; $30 million on behalf of
Sanctioned Entities in Cuba; and $28 million on behalf of
Sanctioned Entities in Libya.
64.
Financial institutions in the United States are obligated
to screen financial transactions, including wire payment
processing, to make certain they do not execute transactions
that violate U.S. sanctions. OFAC regularly publishes a
comprehensive list of Sanctioned Entities that includes names of
individuals, entities, their variations, and, if known,
addresses, dates of birth, passport numbers, and other
identifying information. Because of the vast volume of wire
payments processed by financial institutions, most financial
institutions employ sophisticated computer software, known as
OFAC filters, to automatically screen all wire payments against
the official OFAC list (as well as similar lists containing
names of individuals and entities sanctioned by the United
Nations and the European Union). When the filters detect a
possible match to a Sanctioned Entity, the payment is stopped
and held for further review. When a financial institution
detects a funds transfer that violates sanctions, the
institution must refuse to process or execute that payment.
This is termed a “rejection.” If a party to the payment is an
SDN, then the payment must be frozen (or “blocked”) and the bank
must notify OFAC. The sending bank must then demonstrate to
OFAC that the payment does not violate sanctions before the
funds can be released and the payment processed. Thus, foreign
banks seeking to send payments involving sanctioned countries or
entities through U.S. banks must by-pass or subvert the OFAC
filters to make sure the payments pass through the U.S. clearing
banks. HSBC Group accomplished this using a number of methods.
Amending Payment Messages
65. Specifically, beginning in the 1990s, HSBC Bank plc (“HSBC
Europe”), a wholly owned subsidiary of HSBC Group, devised a
procedure whereby the Sanctioned Entities put a cautionary note
in their SWIFT payment messages including, among others, “care
sanctioned country,” “do not mention our name in NY,” or “do not
mention Iran.[4] Payments with these cautionary notes
[4]
HSBC Group is a member of the Society for Worldwide
Interbank Financial Telecommunications (“SWIFT”) and
historically has used the SWIFT system to transmit international
Page 23
automatically fell into what HSBC Europe termed a “repair queue”
where HSBC Europe employees manually removed all references to
the Sanctioned Entities. The payments were then sent to HSBC
Bank USA and other financial institutions in the United States
without reference to the Sanctioned Entities, ensuring that the
payments would be processed without delay and not be blocked or
rejected and referred to OFAC.
66.
HSBC Group was aware of this practice as early as 2000. In
2003, HSBC Group’s Head of Compliance acknowledged that amending
payment messages “could provide the basis for an action against
[HSBC] Group for breach of sanctions.” At that time, HSBC Group
Compliance instructed HSBC Europe to stop the practice.
However, HSBC Europe appealed, and due to the “significant
business opportunities” offered by the Sanctioned Entities, HSBC
Group’s Head of Compliance granted HSBC Europe an extension to
continue processing payments in the same manner. HSBC Europe
was also concerned about some other factors, including technical
and logistical issues with SWIFT, payments, and HSBC Europe’s
payment processing system. Over the next several years, HSBC
Europe and HSBC Middle East Limited (“HSBC Middle East”) sought
and obtained numerous extensions, allowing the amendment of
payment messages from the Sanctioned Entities to continue until
2006.
67.
HSBC Bank USA had express policies requiring full
transparency in processing payments involving Sanctioned
Entities. In 2001, a senior compliance officer at HSBC Group
told HSBC Bank USA that HSBC Group would not permit HSBC Group
Affiliates to amend payment messages to avoid detection by
sanctions filters in the United States. Yet, contrary to this
assurance, HSBC Group Affiliates intentionally hid the practice
of amending payments involving Sanctioned Entities from HSBC
Bank USA. As a result, during the relevant time period, HSBC
Bank USA and other financial institutions in the United States
processed hundreds of millions of dollars in transactions
involving Sanctioned Entities in violation of U.S. sanctions.
Cover Payments
68.
Historically, HSBC Group processed U.S. dollar payment
messages from and through numerous global locations. During the
relevant time period, HSBC Group consolidated its U.S. dollar
payment messages with financial institutions around the world,
including its U.S. affiliate, HSBC Bank USA.
Page 24
payment processing so that the payments were predominately
processed at HSBC Europe’s Multi-Currency Payment Processing
Center in England and, later, at HSBC Middle East in Dubai.
69.
International wire payments generally are executed via the
secured communications services provided by SWIFT, and the
communications underlying the actual payments are commonly
referred to as SWIFT messages. When a bank customer sends an
international wire payment, the de facto standard to execute
such a payment is the MT 103 SWIFT message (also called a serial
payment, or a serial MT 103 payment). When a financial
institution sends a bank-to-bank credit transfer, the de facto
standard is the MT 202 SWIFT message. The crucial difference,
during the relevant time period, was that MT 202 payments
typically did not require the bank to identify the originating
party to the transactions, and banks typically did not include
that information in MT 202 messages.[5] A “cover payment”
typically involves both types of messages: an MT 103 message
identifying all parties to the transaction is sent from the
originating bank to the beneficiary, but the funds are
transferred through the United States via an MT 202 message that
lacks that detail. Instead of using MT 103 payment messages for
transactions involving the Sanctioned Entities, which would have
revealed the identity of the ordering customer and beneficiary,
HSBC Group used MT 202 “cover payment” messages for these bank-
to-bank credit transfers, which did not. Consequently, U.S.
financial institutions were unable to detect when payments were
made to or from a Sanctioned Entity.
70.
HSBC Group employees understood that cover payments hid the
identity of the ordering customer and beneficiary, and therefore
allowed for straight-through processing of transactions that
would have otherwise been stopped for review in the United
States. They also knew that using MT 103 payments would likely
result in the payment being delayed, rejected, or blocked.
71.
Although HSBC Europe instituted nominal processes to screen
for SDNs when processing transactions from Sanctioned Entities,
and make determinations as to whether or not payments fit within
certain exceptions such as the U-Turn exemption, they employed
inadequately trained payment clerks and untested automated
[5]
Subsequent changes to MT 202 messaging formats now
generally require the inclusion of originating party information
when an MT 202 message is utilized to execute a customer
payment.
Page 25
filters in the process. As a result, HSBC Europe could not
verify with a sufficient degree of accuracy or reliability
whether payments it processed from Sanctioned Entities complied
with OFAC restrictions. In processing these payments and
sending them to HSBC Bank USA, HSBC Europe provided HSBC Bank
USA with no information that the payments involved Sanctioned
Entities, and thus prevented HSBC Bank USA from exercising its
own due diligence and OFAC screening.[6]
72.
As early as July 2001, HSBC Bank USA told HSBC Group’s Head
of Compliance that it was concerned that the use of cover
payments prevented HSBC Bank USA from confirming whether the
underlying transactions met OFAC requirements. From 2001
through 2006, HSBC Bank USA repeatedly told senior compliance
officers at HSBC Group that it would not be able to properly
screen Sanctioned Entity payments if payments were being sent
utilizing the cover method. These protests were ignored.
73.
HSBC Europe resisted sending serial payments to HSBC Bank
USA because it was concerned that payments would be blocked or
rejected, and that Sanctioned Entity banks, specifically those
from Iran, would discontinue their relationships with HSBC
Europe, due to the increased costs associated with serial
payments. These Iranian relationships resulted in revenue of
millions of dollars per year for HSBC Group Affiliates outside
of the United States. It was not until 2006 that HSBC Group
ordered all HSBC Group Affiliates to use serial payments for
U.S. dollar transactions.
Straight-Through Processing Instructions
74.
In April 2001, HSBC Europe instructed an Iranian bank how
to evade detection by OFAC filters and ensure its payments would
be processed without delay or interference. The HSBC Europe
[6]
Until 2008, OFAC regulations included an exception to the
prohibition on Iranian transactions that permitted certain
transactions known as “U-Turns.” While HSBC Europe and HSBC
Middle East processed approximately $20 billion in otherwise
permissible Iranian U-Turn payments during the period, employees
amended payment messages and used cover payments to conceal the
nature of the transactions from HSBC Bank USA and other
financial institutions in the United States, which deprived the
U.S. banks of their ability to filter and review the
transactions to determine whether they were legal under OFAC
regulations.
Page 26
employee wrote, “we have found a solution to processing your
payments with minimal manual intervention . . . . the key is to
always populate field 52 - if you do not have an ordering party
then quote ‘One of our Clients’ . . . outgoing payment
instruction from HSBC will not quote [Iranian bank] as sender -
just HSBC London. . . . This then negates the need to quote ‘do
not mention our name in New York.’”[7] Thus, according to the
instructions sent by HSBC Europe, if the Iranian bank entered
the term “One of our Clients” into Field 52, there would be no
interference with the processing of the wire payment, whether it
was OFAC-compliant or not. Ultimately, this business was never
taken on, due to protests from HSBC Bank USA.
75.
In July 2001, HSBC Bank USA’s Chief Compliance Officer
confronted HSBC Group’s Head of Compliance on this issue and was
assured that “Group Compliance would not support blatant
attempts to avoid sanctions, or actions which would place [HSBC
Bank USA] in a potentially compromising position.”
76.
HSBC Europe issued guidelines to deal with transactions
that came from the Sanctioned Entities. One of these was to
refer flagged payments back to the Sanctioned Entity for
“clarification.” In doing so, HSBC Europe was alerting the
Sanctioned Entity that the payment message as sent was
prohibited by OFAC sanctions. The Sanctioned Entities responded
by reformatting the payment so that it would be processed
through the U.S. clearing banks, including HSBC Bank USA,
without being subject to U.S. filters.
HSBC Bank USA’s and HSBC Group’s Cooperation and Remedial Actions
77.
From early in this investigation, HSBC Bank USA and HSBC
Group have fully cooperated and have provided valuable
assistance to law enforcement. With the assistance of outside
counsel, HSBC Bank USA has made numerous, detailed, periodic
reports to the Department and DANY concerning those findings.
[7]
Field 52 is a data code field in a SWIFT payment message
that identifies the bank of the ordering customer, or the
“originating bank.” When the originating bank was Iranian, its
inclusion in a payment message could trigger review by the
clearing bank in New York. For payments using MT 103 messages,
Field 52 was mandatory. For MT 202 cover payments, it was
optional.
Page 27
78.
To date, HSBC Bank USA has produced more than 9 million
pages of documents. HSBC Bank USA has also made past and
present employees, including HSBC Group employees throughout the
world, available to be interviewed by the Department and DANY as
requested.
79.
In addition to the cooperative steps listed above, HSBC
Bank USA has assisted the Government in investigations of
certain individuals suspected of money laundering and terrorist
financing.
80.
HSBC Group discontinued its use of the U-Turn exemption in
October 2006, over two years before it was abolished by OFAC.
HSBC Group implemented a policy voluntarily discontinuing all
business with Iranian banks, persons, and entities, regardless
of currency, in 2007.
81.
HSBC Bank USA and HSBC Group have invested hundreds of
millions of dollars to remediate the shortcomings in their
BSA/AML programs. Management has made significant strides in
improving “tone from the top” and ensuring that a culture of
compliance permeates the institution. The efforts of management
have dramatically improved HSBC Bank USA’s and HSBC Group’s
BSA/AML and OFAC compliance programs. The steps taken evidence
HSBC Bank USA’s and HSBC Group’s current commitment to ensuring
the past failures do not recur:
HSBC Bank USA’s Remedial Measures
a.
HSBC North America has a new leadership team, including a
new Chief Executive Officer, General Counsel, Chief Compliance
Officer, AML Director, Deputy Chief Compliance Officer and
Deputy Director of its Global Sanctions program.
b.
As a result of its AML violations and program deficiencies,
HSBC North America and HSBC Bank USA “clawed back” deferred
compensation (bonuses) for a number of their most senior AML and
compliance officers, to include the Chief Compliance Officer, AML
Director and Chief Executive Officer.
c.
In 2011, HSBC Bank USA spent $244 million on AML,
approximately nine times more than what it spent in 2009.
d.
In particular, HSBC Bank USA has increased its AML
staffing from 92 full time employees and 25 consultants as of
Page 28
January 2010 to approximately 880 full time employees and 267
consultants as of May 2012.
e.
HSBC Bank USA has reorganized its AML department to
strengthen its reporting lines and elevate its status within the
institution as a whole by (i) separating the Legal and
Compliance departments; (ii) requiring that the AML Director
report directly to the Chief Compliance Officer; and (iii)
providing that the AML Director regularly report directly to the
Board and senior management about HSBC Bank USA’s BSA/AML
program.
f.
HSBC Bank USA has revamped its KYC program and now treats
HSBC Group Affiliates as third parties that are subject to the
same due diligence as all other customers.
g.
HSBC Bank USA has implemented a new customer risk-rating
methodology based on a multifaceted approach that weighs the
following factors: (1) the country where the customer is
located, (2) the products and services utilized by the
customer, (3) the customer’s legal entity structure, and (4)
the customer and business type.
h.
HSBC Bank USA has exited 109 correspondent relationships
for risk reasons.
i.
HSBC Bank USA has a new automated monitoring system. The
new system monitors every wire transaction that moves through
HSBC Bank USA. The system also tracks the originator, sender
and beneficiary of a wire transfer, allowing HSBC Bank USA to
look at its customer’s customer.
j.
HSBC Bank USA has made significant progress in remediating
all customer KYC files in order to ensure they adhere to the
new AML policies discussed above and plans to have completed
remediation of 155,554 customers by December 2012.
k.
HSBC Bank USA has exited the Banknotes business.
l.
HSBC Bank USA has spent over $290 million on remedial
measures.
Page 29
HSBC Group’s Remedial Measures
a.
HSBC Group also has a new leadership team, including a new
CEO, Chairman, Chief Legal Officer, and Head of Global
Standards Assurance.
b.
HSBC Group has simplified its control structure so that
the entire organization is aligned around four global
businesses, five regional geographies, and ten global
functions. This allows HSBC Group to better manage its
business and communication, and better understand and address
risks worldwide.
c.
Since January 2011, HSBC Group has begun to apply a more
consistent global risk appetite and, as a result, has sold 42
businesses and withdrawn from 9 countries.
d.
HSBC Group has undertaken to implement single global
standards shaped by the highest or most effective anti-money
laundering standards available in any location where the HSBC
Group operates. This new policy will require that all HSBC
Group Affiliates will, at a minimum, adhere to U.S. anti-money
laundering standards.
e.
HSBC Group has elevated the Head of HSBC Group Compliance
position to a Group General Manager, which is one of the 50 most
senior employees at HSBC globally. HSBC Group has also replaced
the individual serving as Head of HSBC Group Compliance.
f.
The Head of HSBC Group Compliance has been given direct
oversight over every compliance officer globally, so that both
accountability and escalation now flow directly to and from HSBC
Group Compliance.
g.
Eighteen of the top twenty-one most senior officers at
HSBC Group are new in post since the beginning of 2011.
h.
Material or systemic AML control weaknesses at any
affiliate that are reported by the Regional and Global
Business Compliance heads are now shared with all other
Regional and Global Business Compliance heads facilitating
horizontal information sharing.
i.
The senior leadership team that attends HSBC Group
Management Board meetings is collectively and individually
Page 30
responsible for reviewing all of the information presented at the
meeting, as well as all written documentation provided in advance
of the meeting, and determining whether it affects their
respective entity or region. In addition, if an executive
believes that something occurring within his or her area of
responsibility affects another business or affiliate within HSBC
Group, it is that executive’s responsibility to seek out the
executives from that business or affiliate and work to address
the issue.
j.
HSBC Group has restructured its senior executive bonus
system so that the extent to which the senior executive meets
compliance standards and values has a significant impact on the
amount of the senior executive’s bonus, and failure to meet
those compliance standards and values could result in the
voiding of the senior executive’s entire year-end bonus.
k.
HSBC Group has commenced a review of all customer KYC files
across the entire Group. The first phase of this remediation
will cost an estimated $700 million to complete over five years.
l.
HSBC Group will defer a portion of the bonus compensation
for its most senior officers, namely its Group General Managers
and Group Managing Directors, during the pendency of the
deferred prosecution agreement, subject to EU and UK legal and
regulatory requirements.
m.
HSBC Group has adopted a set of guidelines to be taken into
account when considering whether HSBC Group should do business
in countries posing a particularly high corruption/rule of law
risk as well as limiting business in those countries that pose a
high financial crime risk.
n.
Under HSBC Group’s new global sanctions policy, HSBC Group
will be utilizing key OFAC and other sanctions lists to conduct
screening in all jurisdictions, in all currencies.
50.
The Department alleges, and HSBC Bank USA and HSBC Holdings
do not contest, that, beginning in 2008, an investigation
conducted by HSI’s El Dorado Task Force, in conjunction with the
U.S. Attorney’s Office for the Eastern District of New York,
identified multiple HSBC Mexico accounts associated with BMPE
activity. The investigation further revealed that drug
traffickers were depositing hundreds of thousands of dollars in
bulk U.S. currency each day into HSBC Mexico accounts. In order
to efficiently move this volume of cash through the teller
windows at HSBC Mexico branches, drug traffickers designed
specially shaped boxes that fit the precise dimensions of the
teller windows. The drug traffickers would send numerous boxes
filled with cash through the teller windows for deposit into
HSBC Mexico accounts. After the cash was deposited in the
accounts, peso brokers then wire transferred the U.S. dollars to
various exporters located in New York City and other locations
throughout the United States to purchase goods for Colombian
businesses. The U.S. exporters then sent the goods directly to
the businesses in Colombia.
51.
The Department alleges, and HSBC Bank USA and HSBC Holdings
do not contest, that accounts at HSBC Mexico were identified by
tracking wire transfers originating from HSBC Mexico into HSI
undercover accounts in the United States and through seizures
and analysis of U.S.-based business accounts that were funded by
wire transfers from accounts targeted for illegal BMPE activity.
Since 2009, the investigation has resulted in the arrest,
extradition, and conviction in the United States District Court
for the Eastern District of New York of numerous individuals
illegally using HSBC Mexico accounts in furtherance of BMPE
activity. The investigation further revealed that, because of
its lax AML controls, HSBC Mexico was the preferred financial
institution for drug cartels and money launderers. The drug
trafficking proceeds (in physical U.S. dollars) deposited at
HSBC Mexico as part of the BMPE were sold to HSBC Bank USA
through Banknotes. In addition, many of the BMPE wire transfers
to exporters in the United States passed through HSBC Mexico’s
correspondent account with HSBC Bank USA. As discussed above,
from 2006 to 2009, HSBC Bank USA did not monitor Banknotes
transactions or wire transfers from HSBC Mexico and did not
detect the drug trafficking proceeds as they flowed into the
United States.
Page 18
Evasion of U.S. Sanctions
52.
From the mid-1990s through at least September 2006, HSBC
Group Affiliates violated both U.S. and New York State criminal
laws by knowingly and willfully moving or permitting to be moved
illegally hundreds of millions of dollars through the U.S.
financial system on behalf of banks located in Cuba, Iran,
Libya, Sudan, and Burma, and persons listed as parties or
jurisdictions sanctioned by the Office of Foreign Assets Control
of the United States Department of the Treasury (“OFAC”)
(collectively, the “Sanctioned Entities”) in violation of U.S.
economic sanctions.
53.
HSBC Group Affiliates engaged in this criminal conduct by:
(a) following instructions from the Sanctioned Entities not to
mention their names in U.S. dollar payment messages sent to HSBC
Bank USA and other financial institutions located in the United
States; (b) amending and reformatting U.S. dollar payment
messages to remove information identifying the Sanctioned
Entities; (c) using a less transparent method of payment
messages, known as cover payments; and (d) instructing at least
one Sanctioned Entity how to format payment messages in order to
avoid bank sanctions filters that could have caused payments to
be blocked or rejected at HSBC Group or HSBC Bank USA.
54.
HSBC Group’s conduct, which occurred outside the United
States, caused HSBC Bank USA and other financial institutions
located in the United States to process payments that otherwise
should have been held for investigation, rejected, or blocked
pursuant to U.S. sanctions regulations administered by OFAC.
Additionally, by its conduct, HSBC Group: (a) prevented HSBC
Bank USA and other financial institutions in the United States
from filing required BSA and OFAC-related reports with the U.S.
Government; (b) caused false information to be recorded in the
records of U.S. financial institutions located in New York, New
York; and (c) caused U.S. financial institutions not to make
records that they otherwise would have been required by law to
make.
Applicable Law
55.
At all times relevant to this matter, various U.S. economic
sanctions laws regulated and/or criminalized financial and other
transactions involving sanctioned countries, entities, and
persons. Those laws applied to transactions occurring within
U.S. territorial jurisdiction and to transactions involving U.S.
Page 19
persons, including U.S. corporations, anywhere in the world.
OFAC promulgated regulations to administer and enforce the
economic sanctions laws, including regulations for economic
sanctions against specific countries, as well as sanctions
against Specially Designated Nationals (“SDNs”). SDNs are
individuals, groups, and entities that have been designated by
OFAC as terrorists, financial supporters of terrorism,
proliferators of weapons of mass destruction, and narcotics
traffickers.
Cuba Sanctions
56.
Beginning with Executive Orders and regulations issued at
the direction of President John F. Kennedy, the United States
has maintained an economic embargo against Cuba through the
enactment of various laws and regulations. These laws,
restricting U.S. trade and economic transactions with Cuba, were
promulgated under the Trading With the Enemy Act (“TWEA”), 50
U.S.C. app. §§ 1-44. These laws are administered by OFAC, and
prohibit virtually all financial and commercial dealings with
Cuba, Cuban businesses, and Cuban assets.
Iran Sanctions
57.
In 1987, President Ronald W. Reagan issued Executive Order
No. 12613, which imposed a broad embargo on imports of Iranian-
origin goods and services. United States sanctions against Iran
were strengthened in 1995 and 1997 when President William J.
Clinton issued Executive Order Nos. 12957, 12959, and 13059.
These Executive Orders prohibit virtually all trade and
investment activities between the United States and Iran. With
the exception of certain exempt or authorized transactions, OFAC
regulations implementing the Iranian sanctions generally
prohibit the export of services to Iran from the United States.
Until 2008, OFAC regulations permitted U.S. depository
institutions to handle certain “U-Turn” transactions, in which
the U.S. depository institution acts only as an intermediary
bank in clearing a U.S. dollar payment between two non-U.S.,
non-Iranian banks.
Libya Sanctions
58.
On January 7, 1986, President Reagan issued Executive Order
No. 12543 imposing broad economic sanctions against Libya.
Subsequently, President Reagan issued Executive Order No. 12544
on January 8, 1986, ordering the blocking of all property and
Page 20
interests in property of the Government of Libya. President
George H. W. Bush strengthened those sanctions in 1992, pursuant
to Executive Order No. 12801. On September 20, 2004, President
George W. Bush issued Executive Order No. 13357, terminating the
national emergency with regard to Libya and revoking the
sanction measures imposed by the prior Executive Orders.
Sudan Sanctions
59.
On November 3, 1997, President Clinton issued Executive
Order No. 13067 imposing a trade embargo against Sudan and
blocking all property, and interests in property, of the
Government of Sudan. President George W. Bush strengthened
those sanctions in 2006, pursuant to Executive Order No. 13412.
Under these Executive Orders, virtually all trade and investment
activities between the United States and Sudan are prohibited.
With the exception of certain exempt or authorized transactions,
OFAC regulations implementing the Sudanese sanctions generally
prohibit the export of services to Sudan from the United States.
Burma Sanctions
60. On May 20, 1997, President Clinton issued Executive Order
No. 13047, which prohibited both new investment in Burma by U.S.
persons and U.S. persons’ facilitation of new investment in
Burma by foreign persons. On July 28, 2003, President George W.
Bush signed the Burmese Freedom and Democracy Act of 2003
(“BFDA”) to restrict the financial resources of Burma’s ruling
military junta. To implement the BFDA and to take additional
steps, President Bush issued Executive Order No. 13310 on July
28, 2003, which blocked all property and interests in property
of certain listed Burmese entities[3] and provided for the blocking
of property and interest in property of other individuals and
entities meeting the criteria set forth in Executive Order No.
13310. Executive Order No. 13310 also prohibited the
importation into the United States of articles that are a
product of Burma and the exportation or re-exportation to Burma
of financial services from the United States, or by U.S.
persons, wherever located. On July 11, 2012, President Barack
Obama signed an executive order easing restrictions to allow
U.S. companies to do business in Burma.
[3]
President Bush subsequently issued Executive Order Nos.
13448 and 13464, expanding the list of persons and entities
whose property must be blocked.
Page 21
Department of Justice Charges
61.
The Department alleges, and HSBC Holdings admits, that its
conduct, as described herein, violated TWEA. Specifically, HSBC
Group violated Title 50, United States Code, Appendix Sections 5
and 16, which makes it a crime to willfully violate or attempt
to violate any regulation issued under TWEA, including
regulations restricting transactions with Cuba. The Department
further alleges, and HSBC Holdings admits, that its conduct, as
described herein, violated the International Emergency Economic
Powers Act (“IEEPA”). Specifically, HSBC Group violated Title
50, United States Code, Section 1705, which makes it a crime to
willfully violate or attempt to violate any regulation issued
under IEEPA, including regulations restricting transactions with
Iran, Libya, Sudan, and Burma.
New York State Penal Law Charge
62.
DANY alleges, and HSBC Holdings admits, that its conduct,
as described herein, violated New York State Penal Law Sections
175.05 and 175.10, which make it a crime to, “with intent to
defraud, . . . (i) make[ ] or cause[ ] a false entry in the
business records of an enterprise [defined as any company or
corporation] . . . or (iv) prevent[ ] the making of a true entry
or cause the omission thereof in the business records of an
enterprise.” It is a felony under Section 175.10 of the New
York State Penal Law if a violation under Section 175.05 is
committed and the person or entity’s “intent to defraud includes
an intent to commit another crime or to aid or conceal the
commission thereof.”
Conduct in Violation of U.S. Sanctions Laws
63.
From at least 2000 through 2006, HSBC Group knowingly and
willfully engaged in conduct and practices outside the United
States that caused HSBC Bank USA and other financial
institutions located in the United States to process payments in
violation of U.S. sanctions. To hide these transactions, HSBC
Group Affiliates altered and routed payment messages in a manner
that ensured that payments involving sanctioned countries and
entities cleared without difficulty through HSBC Bank USA and
other U.S. financial institutions in New York County and
elsewhere. The total value of OFAC-prohibited transactions for
the period of HSBC Group’s review, from 2000 through 2006, was
approximately $660 million. This includes approximately $250
million involving Sanctioned Entities in Burma; $183 million on
Page 22
behalf of Sanctioned Entities in Iran; $169 million on behalf of
Sanctioned Entities in Sudan; $30 million on behalf of
Sanctioned Entities in Cuba; and $28 million on behalf of
Sanctioned Entities in Libya.
64.
Financial institutions in the United States are obligated
to screen financial transactions, including wire payment
processing, to make certain they do not execute transactions
that violate U.S. sanctions. OFAC regularly publishes a
comprehensive list of Sanctioned Entities that includes names of
individuals, entities, their variations, and, if known,
addresses, dates of birth, passport numbers, and other
identifying information. Because of the vast volume of wire
payments processed by financial institutions, most financial
institutions employ sophisticated computer software, known as
OFAC filters, to automatically screen all wire payments against
the official OFAC list (as well as similar lists containing
names of individuals and entities sanctioned by the United
Nations and the European Union). When the filters detect a
possible match to a Sanctioned Entity, the payment is stopped
and held for further review. When a financial institution
detects a funds transfer that violates sanctions, the
institution must refuse to process or execute that payment.
This is termed a “rejection.” If a party to the payment is an
SDN, then the payment must be frozen (or “blocked”) and the bank
must notify OFAC. The sending bank must then demonstrate to
OFAC that the payment does not violate sanctions before the
funds can be released and the payment processed. Thus, foreign
banks seeking to send payments involving sanctioned countries or
entities through U.S. banks must by-pass or subvert the OFAC
filters to make sure the payments pass through the U.S. clearing
banks. HSBC Group accomplished this using a number of methods.
Amending Payment Messages
65. Specifically, beginning in the 1990s, HSBC Bank plc (“HSBC
Europe”), a wholly owned subsidiary of HSBC Group, devised a
procedure whereby the Sanctioned Entities put a cautionary note
in their SWIFT payment messages including, among others, “care
sanctioned country,” “do not mention our name in NY,” or “do not
mention Iran.[4] Payments with these cautionary notes
[4]
HSBC Group is a member of the Society for Worldwide
Interbank Financial Telecommunications (“SWIFT”) and
historically has used the SWIFT system to transmit international
Page 23
automatically fell into what HSBC Europe termed a “repair queue”
where HSBC Europe employees manually removed all references to
the Sanctioned Entities. The payments were then sent to HSBC
Bank USA and other financial institutions in the United States
without reference to the Sanctioned Entities, ensuring that the
payments would be processed without delay and not be blocked or
rejected and referred to OFAC.
66.
HSBC Group was aware of this practice as early as 2000. In
2003, HSBC Group’s Head of Compliance acknowledged that amending
payment messages “could provide the basis for an action against
[HSBC] Group for breach of sanctions.” At that time, HSBC Group
Compliance instructed HSBC Europe to stop the practice.
However, HSBC Europe appealed, and due to the “significant
business opportunities” offered by the Sanctioned Entities, HSBC
Group’s Head of Compliance granted HSBC Europe an extension to
continue processing payments in the same manner. HSBC Europe
was also concerned about some other factors, including technical
and logistical issues with SWIFT, payments, and HSBC Europe’s
payment processing system. Over the next several years, HSBC
Europe and HSBC Middle East Limited (“HSBC Middle East”) sought
and obtained numerous extensions, allowing the amendment of
payment messages from the Sanctioned Entities to continue until
2006.
67.
HSBC Bank USA had express policies requiring full
transparency in processing payments involving Sanctioned
Entities. In 2001, a senior compliance officer at HSBC Group
told HSBC Bank USA that HSBC Group would not permit HSBC Group
Affiliates to amend payment messages to avoid detection by
sanctions filters in the United States. Yet, contrary to this
assurance, HSBC Group Affiliates intentionally hid the practice
of amending payments involving Sanctioned Entities from HSBC
Bank USA. As a result, during the relevant time period, HSBC
Bank USA and other financial institutions in the United States
processed hundreds of millions of dollars in transactions
involving Sanctioned Entities in violation of U.S. sanctions.
Cover Payments
68.
Historically, HSBC Group processed U.S. dollar payment
messages from and through numerous global locations. During the
relevant time period, HSBC Group consolidated its U.S. dollar
payment messages with financial institutions around the world,
including its U.S. affiliate, HSBC Bank USA.
Page 24
payment processing so that the payments were predominately
processed at HSBC Europe’s Multi-Currency Payment Processing
Center in England and, later, at HSBC Middle East in Dubai.
69.
International wire payments generally are executed via the
secured communications services provided by SWIFT, and the
communications underlying the actual payments are commonly
referred to as SWIFT messages. When a bank customer sends an
international wire payment, the de facto standard to execute
such a payment is the MT 103 SWIFT message (also called a serial
payment, or a serial MT 103 payment). When a financial
institution sends a bank-to-bank credit transfer, the de facto
standard is the MT 202 SWIFT message. The crucial difference,
during the relevant time period, was that MT 202 payments
typically did not require the bank to identify the originating
party to the transactions, and banks typically did not include
that information in MT 202 messages.[5] A “cover payment”
typically involves both types of messages: an MT 103 message
identifying all parties to the transaction is sent from the
originating bank to the beneficiary, but the funds are
transferred through the United States via an MT 202 message that
lacks that detail. Instead of using MT 103 payment messages for
transactions involving the Sanctioned Entities, which would have
revealed the identity of the ordering customer and beneficiary,
HSBC Group used MT 202 “cover payment” messages for these bank-
to-bank credit transfers, which did not. Consequently, U.S.
financial institutions were unable to detect when payments were
made to or from a Sanctioned Entity.
70.
HSBC Group employees understood that cover payments hid the
identity of the ordering customer and beneficiary, and therefore
allowed for straight-through processing of transactions that
would have otherwise been stopped for review in the United
States. They also knew that using MT 103 payments would likely
result in the payment being delayed, rejected, or blocked.
71.
Although HSBC Europe instituted nominal processes to screen
for SDNs when processing transactions from Sanctioned Entities,
and make determinations as to whether or not payments fit within
certain exceptions such as the U-Turn exemption, they employed
inadequately trained payment clerks and untested automated
[5]
Subsequent changes to MT 202 messaging formats now
generally require the inclusion of originating party information
when an MT 202 message is utilized to execute a customer
payment.
Page 25
filters in the process. As a result, HSBC Europe could not
verify with a sufficient degree of accuracy or reliability
whether payments it processed from Sanctioned Entities complied
with OFAC restrictions. In processing these payments and
sending them to HSBC Bank USA, HSBC Europe provided HSBC Bank
USA with no information that the payments involved Sanctioned
Entities, and thus prevented HSBC Bank USA from exercising its
own due diligence and OFAC screening.[6]
72.
As early as July 2001, HSBC Bank USA told HSBC Group’s Head
of Compliance that it was concerned that the use of cover
payments prevented HSBC Bank USA from confirming whether the
underlying transactions met OFAC requirements. From 2001
through 2006, HSBC Bank USA repeatedly told senior compliance
officers at HSBC Group that it would not be able to properly
screen Sanctioned Entity payments if payments were being sent
utilizing the cover method. These protests were ignored.
73.
HSBC Europe resisted sending serial payments to HSBC Bank
USA because it was concerned that payments would be blocked or
rejected, and that Sanctioned Entity banks, specifically those
from Iran, would discontinue their relationships with HSBC
Europe, due to the increased costs associated with serial
payments. These Iranian relationships resulted in revenue of
millions of dollars per year for HSBC Group Affiliates outside
of the United States. It was not until 2006 that HSBC Group
ordered all HSBC Group Affiliates to use serial payments for
U.S. dollar transactions.
Straight-Through Processing Instructions
74.
In April 2001, HSBC Europe instructed an Iranian bank how
to evade detection by OFAC filters and ensure its payments would
be processed without delay or interference. The HSBC Europe
[6]
Until 2008, OFAC regulations included an exception to the
prohibition on Iranian transactions that permitted certain
transactions known as “U-Turns.” While HSBC Europe and HSBC
Middle East processed approximately $20 billion in otherwise
permissible Iranian U-Turn payments during the period, employees
amended payment messages and used cover payments to conceal the
nature of the transactions from HSBC Bank USA and other
financial institutions in the United States, which deprived the
U.S. banks of their ability to filter and review the
transactions to determine whether they were legal under OFAC
regulations.
Page 26
employee wrote, “we have found a solution to processing your
payments with minimal manual intervention . . . . the key is to
always populate field 52 - if you do not have an ordering party
then quote ‘One of our Clients’ . . . outgoing payment
instruction from HSBC will not quote [Iranian bank] as sender -
just HSBC London. . . . This then negates the need to quote ‘do
not mention our name in New York.’”[7] Thus, according to the
instructions sent by HSBC Europe, if the Iranian bank entered
the term “One of our Clients” into Field 52, there would be no
interference with the processing of the wire payment, whether it
was OFAC-compliant or not. Ultimately, this business was never
taken on, due to protests from HSBC Bank USA.
75.
In July 2001, HSBC Bank USA’s Chief Compliance Officer
confronted HSBC Group’s Head of Compliance on this issue and was
assured that “Group Compliance would not support blatant
attempts to avoid sanctions, or actions which would place [HSBC
Bank USA] in a potentially compromising position.”
76.
HSBC Europe issued guidelines to deal with transactions
that came from the Sanctioned Entities. One of these was to
refer flagged payments back to the Sanctioned Entity for
“clarification.” In doing so, HSBC Europe was alerting the
Sanctioned Entity that the payment message as sent was
prohibited by OFAC sanctions. The Sanctioned Entities responded
by reformatting the payment so that it would be processed
through the U.S. clearing banks, including HSBC Bank USA,
without being subject to U.S. filters.
HSBC Bank USA’s and HSBC Group’s Cooperation and Remedial Actions
77.
From early in this investigation, HSBC Bank USA and HSBC
Group have fully cooperated and have provided valuable
assistance to law enforcement. With the assistance of outside
counsel, HSBC Bank USA has made numerous, detailed, periodic
reports to the Department and DANY concerning those findings.
[7]
Field 52 is a data code field in a SWIFT payment message
that identifies the bank of the ordering customer, or the
“originating bank.” When the originating bank was Iranian, its
inclusion in a payment message could trigger review by the
clearing bank in New York. For payments using MT 103 messages,
Field 52 was mandatory. For MT 202 cover payments, it was
optional.
Page 27
78.
To date, HSBC Bank USA has produced more than 9 million
pages of documents. HSBC Bank USA has also made past and
present employees, including HSBC Group employees throughout the
world, available to be interviewed by the Department and DANY as
requested.
79.
In addition to the cooperative steps listed above, HSBC
Bank USA has assisted the Government in investigations of
certain individuals suspected of money laundering and terrorist
financing.
80.
HSBC Group discontinued its use of the U-Turn exemption in
October 2006, over two years before it was abolished by OFAC.
HSBC Group implemented a policy voluntarily discontinuing all
business with Iranian banks, persons, and entities, regardless
of currency, in 2007.
81.
HSBC Bank USA and HSBC Group have invested hundreds of
millions of dollars to remediate the shortcomings in their
BSA/AML programs. Management has made significant strides in
improving “tone from the top” and ensuring that a culture of
compliance permeates the institution. The efforts of management
have dramatically improved HSBC Bank USA’s and HSBC Group’s
BSA/AML and OFAC compliance programs. The steps taken evidence
HSBC Bank USA’s and HSBC Group’s current commitment to ensuring
the past failures do not recur:
HSBC Bank USA’s Remedial Measures
a.
HSBC North America has a new leadership team, including a
new Chief Executive Officer, General Counsel, Chief Compliance
Officer, AML Director, Deputy Chief Compliance Officer and
Deputy Director of its Global Sanctions program.
b.
As a result of its AML violations and program deficiencies,
HSBC North America and HSBC Bank USA “clawed back” deferred
compensation (bonuses) for a number of their most senior AML and
compliance officers, to include the Chief Compliance Officer, AML
Director and Chief Executive Officer.
c.
In 2011, HSBC Bank USA spent $244 million on AML,
approximately nine times more than what it spent in 2009.
d.
In particular, HSBC Bank USA has increased its AML
staffing from 92 full time employees and 25 consultants as of
Page 28
January 2010 to approximately 880 full time employees and 267
consultants as of May 2012.
e.
HSBC Bank USA has reorganized its AML department to
strengthen its reporting lines and elevate its status within the
institution as a whole by (i) separating the Legal and
Compliance departments; (ii) requiring that the AML Director
report directly to the Chief Compliance Officer; and (iii)
providing that the AML Director regularly report directly to the
Board and senior management about HSBC Bank USA’s BSA/AML
program.
f.
HSBC Bank USA has revamped its KYC program and now treats
HSBC Group Affiliates as third parties that are subject to the
same due diligence as all other customers.
g.
HSBC Bank USA has implemented a new customer risk-rating
methodology based on a multifaceted approach that weighs the
following factors: (1) the country where the customer is
located, (2) the products and services utilized by the
customer, (3) the customer’s legal entity structure, and (4)
the customer and business type.
h.
HSBC Bank USA has exited 109 correspondent relationships
for risk reasons.
i.
HSBC Bank USA has a new automated monitoring system. The
new system monitors every wire transaction that moves through
HSBC Bank USA. The system also tracks the originator, sender
and beneficiary of a wire transfer, allowing HSBC Bank USA to
look at its customer’s customer.
j.
HSBC Bank USA has made significant progress in remediating
all customer KYC files in order to ensure they adhere to the
new AML policies discussed above and plans to have completed
remediation of 155,554 customers by December 2012.
k.
HSBC Bank USA has exited the Banknotes business.
l.
HSBC Bank USA has spent over $290 million on remedial
measures.
Page 29
HSBC Group’s Remedial Measures
a.
HSBC Group also has a new leadership team, including a new
CEO, Chairman, Chief Legal Officer, and Head of Global
Standards Assurance.
b.
HSBC Group has simplified its control structure so that
the entire organization is aligned around four global
businesses, five regional geographies, and ten global
functions. This allows HSBC Group to better manage its
business and communication, and better understand and address
risks worldwide.
c.
Since January 2011, HSBC Group has begun to apply a more
consistent global risk appetite and, as a result, has sold 42
businesses and withdrawn from 9 countries.
d.
HSBC Group has undertaken to implement single global
standards shaped by the highest or most effective anti-money
laundering standards available in any location where the HSBC
Group operates. This new policy will require that all HSBC
Group Affiliates will, at a minimum, adhere to U.S. anti-money
laundering standards.
e.
HSBC Group has elevated the Head of HSBC Group Compliance
position to a Group General Manager, which is one of the 50 most
senior employees at HSBC globally. HSBC Group has also replaced
the individual serving as Head of HSBC Group Compliance.
f.
The Head of HSBC Group Compliance has been given direct
oversight over every compliance officer globally, so that both
accountability and escalation now flow directly to and from HSBC
Group Compliance.
g.
Eighteen of the top twenty-one most senior officers at
HSBC Group are new in post since the beginning of 2011.
h.
Material or systemic AML control weaknesses at any
affiliate that are reported by the Regional and Global
Business Compliance heads are now shared with all other
Regional and Global Business Compliance heads facilitating
horizontal information sharing.
i.
The senior leadership team that attends HSBC Group
Management Board meetings is collectively and individually
Page 30
responsible for reviewing all of the information presented at the
meeting, as well as all written documentation provided in advance
of the meeting, and determining whether it affects their
respective entity or region. In addition, if an executive
believes that something occurring within his or her area of
responsibility affects another business or affiliate within HSBC
Group, it is that executive’s responsibility to seek out the
executives from that business or affiliate and work to address
the issue.
j.
HSBC Group has restructured its senior executive bonus
system so that the extent to which the senior executive meets
compliance standards and values has a significant impact on the
amount of the senior executive’s bonus, and failure to meet
those compliance standards and values could result in the
voiding of the senior executive’s entire year-end bonus.
k.
HSBC Group has commenced a review of all customer KYC files
across the entire Group. The first phase of this remediation
will cost an estimated $700 million to complete over five years.
l.
HSBC Group will defer a portion of the bonus compensation
for its most senior officers, namely its Group General Managers
and Group Managing Directors, during the pendency of the
deferred prosecution agreement, subject to EU and UK legal and
regulatory requirements.
m.
HSBC Group has adopted a set of guidelines to be taken into
account when considering whether HSBC Group should do business
in countries posing a particularly high corruption/rule of law
risk as well as limiting business in those countries that pose a
high financial crime risk.
n.
Under HSBC Group’s new global sanctions policy, HSBC Group
will be utilizing key OFAC and other sanctions lists to conduct
screening in all jurisdictions, in all currencies.