Vidya Ram

HSBC — the unravelling story

Vidya Ram | Updated on March 13, 2018 Published on July 22, 2012

When it comes to banking sector reform, harsh measures that will hit the bottomline are called for.

There’s so much to be startled by in last week’s revelations about HSBC, courtesy of the 330-page report of the US Senate permanent sub-committee on investigations, it’s hard to know where to start.

Being accused of acting as a means for Mexican drug cartels to send illicit funds to the US — including by shipping of some $7 billion in cash across the border; Executives exerting heavy pressure on compliance and others for the reopening of the account of a Saudi Arabian bank with terrorist ties; Helping facilitate payments involving countries on US sanctions lists; Clearing $290 million in suspicious travellers cheques; Ignoring alarms raised internally (such as the head of Latin American compliance warning that the bank’s Mexican team were “rubber stamping unacceptable risks”); Ignoring the often-inadequate warnings of regulators, including the Office of Comptroller of the Currency; All of which amounted to, in the words of the sub-committee’s leader, Senator Carl Levin, “playing fast and loose with US banking rules,” and a compliance culture that had been “pervasively polluted for a long time.”

Artificial line

There are a number of important takeaways. Firstly: the artificial line that some sought to draw following the 2008 crisis between the “responsible” and “irresponsible” banks, on the basis of those that had to seek government assistance and those that didn’t, just doesn’t wash any more.

HSBC and Barclays certainly sought to distinguish themselves from others precisely on those grounds.

While Barclays’ Bob Diamond once lectured MPs on the need to move beyond “remorse and apology” by the banking sector, HSBC’s former CEO certainly seemed to have confidence in his position when in 2009 he penned a book entitled Good Value on morality, capitalism and the financial system. (“Good Value offers new perspectives on how we can live in a richer, more dynamic world,” its Amazon blurb promises).

Shocking revelations over the past few weeks have shaken those banks from any sense of superiority — and for any others that might venture down that path, we know it’s unlikely to be a long journey.

We know that some 20 banks are under investigation in the Libor and Euribor rigging scandal, while a number of banks have come under fire in the US over their lack of control over foreign assets.

Last month, ING faced a $619-million fine over $1.6 billions worth of transactions on behalf of Cuban and Iranian entities, while two years ago Barclays was fined $298 million over transactions relating to Cuba, Iran, Libya, Sudan and Myanmar.

Quite what the next revelations will be, and which banks will come under the spotlight, we can only guess at.

Light-touch regulation

Secondly, the sub-committee report highlights just where a light-touch approach by regulators, based on the assumption that supposedly responsible banks will do the right thing, can lead to.

We know there were warnings from the bank’s own internal compliance that went unheeded, while the wrist-slaps delivered by regulators failed to make much of a difference.

The report notes that in the five years between 2005 and 2010, the OCC, which is meant to regulate and supervise all US-based banks, conducted nearly 48 anti-money laundering examinations, identified at least 83 matters that required attention at HSBC, but for most of it took no enforcement actions — formal or informal — against the bank, allowing its problems to “fester,” the report says, until a cease and desist order issued in 2010.

While prior to that the bank promised to act on and “sometimes” acted on problems identified, the corrective actions were narrowly targeted and failed to improve the bank’s anti-money laundering programme as a whole.

The OCC has since tightened up its scrutiny processes, but yet again the situation shows us what a catch-up game regulation has been and continues to be.

Yet politicians continue to warn of the damage that too much regulation could do to their nation’s financial sector.

Harsher measures

Thirdly, the HSBC case has exposed the narrow thinking on banking sector reform.

Plans such as carving off investment banking from retail banking and increasing capital requirements are all very well, but don’t tackle the “pervasively polluted culture,” of compliance that Mr Levin described, and don’t tell us what should be done when a bank ignores the warnings of its own experts in the face of clear evidence (One HSBC executive’s warning that “We have seen this movie before, and it ends badly,” was to little avail).

These are failures and wrongdoings that bad press, resignations and contrition, and an occasional fine won’t address (in a recent note, analysts at one bank described as “manageable” the estimated $1 billion fine that HSBC is thought to be facing in the US, being less than a per cent of its estimated total net asset value.

Harsher measures that truly hit the bottomline will have to be part of the solution: “If an international bank won’t police its own affiliates to stop illicit money, the regulatory agencies should consider whether to revoke the charter of the US bank being used to aid and abet that illicit money,” suggested Mr Levin.


Yet governments seem hamstrung. Following the HSBC revelations, the British opposition has stepped up calls for a judge-led banking inquiry into the nation’s banking sector — similar in scale to the one that examined the British media following the phone hacking scandal.

However, its moral authority is dampened by the fact that when in government for the thirteen years that preceded the current government, it was responsible for introducing much of the light-touch regulation it now rails against.

Meanwhile, Lord Green, who was CEO and then Chairman of HSBC, during many of the years during which the failures identified by the committee took place (though no allegations of wrongdoing have been made against him), remains as Britain’s trade minister, with the government rejecting Labour calls that he has questions to answer.

“He’s not going anywhere,” a Downing Street source told The Telegraph newspaper earlier this year. Neither, it seems, for the moment, does root and branch reform of the banking sector.

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Published on July 22, 2012
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