Global banks' role in money laundering probed, but mostly tolerated

A global bank awash in blood money from Mexico's drug wars was called on the carpet in Congress last week, but the episode only highlighted the relative futility of existing anti-money laundering efforts.

The Senate Homeland Security and Governmental Affairs Committee's Permanent Subcommittee on Investigations last week released a massive report (large pdf) on money laundering and held a hearing on the subject, highlighting in particular massive alleged money laundering at HSBC, a $2.5 trillion bank based n London with global affiliates including in Texas. Here's a press release from the subcommittee, here's the hearing page.

David Cohen, Undersecretary for Terrorism and Financial Intelligence, US Treasury Department (testimony here), told the subcommittee that, "by any estimate, the total amount of illicit money moved through and concealed within the U.S. financial system is massive—in the hundreds of billions"

"In one case, failure to effectively monitor foreign correspondent banking relationships with high-risk customers and file suspicious activity reports (SARs) resulted in the processing of $420 billion in cross-border financial transactions with thirteen high-risk Mexican casas de cambio from 2004-2007, through wire transfers, bulk cash and pouch and remote deposits, including millions of dollars subsequently used to purchase airplanes for narcotics traffickers." Said Cohen, "the United States government has instituted criminal fines and forfeitures totaling more than $4.6 billion in approximately 20 ... criminal prosecutions of financial institutions over the past 6 years."

Leigh Winchell, Assistant director of investigative programs, ICE (testimony here), updated the committee on a relatively new initiative based out of El Paso aimed at reducing bulk cash smuggling:

On August 11, 2009, [ICE] officially launched the National Bulk Cash Smuggling Center (BCSC), in cooperation with the El Paso Intelligence Center, as a 24/7 investigative support and operations facility. The BCSC has undertaken a full assessment of the bulk cash smuggling threat and developed a strategic plan to address the problem. By analyzing the movement of bulk cash as a systematic process, HSI develops enforcement operations specifically designed to combat the various methodologies currently employed by trafficking organizations. This targeted approach allows us to more efficiently and effectively utilize our interdiction and investigative resources.

Compared to the hundreds of billions being laundered, though, the bulk-cash center deals in small change: "Since its inception, the BCSC has initiated over 500 criminal investigations resulting in 132 seizures totaling $65.8 million. These investigations have culminated in 319 criminal arrests, 96 indictments, and 68 convictions in both Federal and state courts." The most significant federal effort against bulk cash smuggling, dubbed Operation Firewall, resulted in "6,700 seizures totaling more than $621 million, and arrests of over 1,400 individuals" over the last seen years - hardly a rounding error given the illegal drug industry's enormous gross revenue.

Winchell did mention a positive change in Mexican banking regulations:

One of the most significant developments in recent years was a change in Mexican banking regulations implemented in June 2010 that severely limits the amount of U.S. dollars that can be deposited within Mexican financial institutions. This change has ultimately proven to be a successful tool in combating drug trafficking and the TCOs that control the movement and smuggling of drugs by causing them to change how drug proceeds are laundered. We believe that as a result of this change, TCOs may seek to place these funds into U.S. financial institutions and then wire the proceeds back to Mexico.

So the new Mexican regs are expected to alter how money is laundered - perhaps routing the money through other countries - but nobody thinks it will prevent the practice. And of course, we must wait and see how rigorously those regulations are enforced.

Testimony of the Office of Comptroller of the Currency (see here) reminds us of charges of massive money laundering at Wachovia bank and gave a brief recap of the case. Wachovia paid $270 million in fines, penalties and forfeitures in 2010 after accepting more than $55 billion (with a "b") in laundered deposits.

The OCC found that Wachovia: (a) failed to implement adequate policies, procedures, or monitoring controls governing the repatriation of nearly $14 billion of U.S. dollar (USD) bulk cash for high risk casa de cambio (CDC) and other foreign correspondent customers; (b) failed to conduct monitoring of high volumes of monetary instruments flowing through the CDCs and other foreign correspondent accounts in the form of RDC products, consisting of nearly six million checks worth approximately $41 billion; (c) failed to conduct adequate levels of due diligence of high risk CDC and foreign correspondent customers; (d) failed to appropriately monitor traveler’s checks in a manner that was consistent with the bank’s policy limits over sequentially numbered traveler’s checks for high risk CDC customers; (e) failed to appropriately institute risk-based monitoring of the bank’s foreign correspondent customers, primarily as a result of placing too much emphasis on staffing considerations when setting alert parameters; (f) failed to file timely SARs involving suspicious transactions conducted through certain foreign correspondent accounts at the bank; and (g) failed to adequately report cash structuring activity from review of alerts generated in the bank’s Financial Intelligence Unit. After conducting a voluntary look back, the bank filed over 4,300 SARs involving suspicious transactions conducted through the bank by CDCs and high risk foreign correspondent customers.

Keep in mind that when banks launder money, they're not just clipping a small fee like the bulk-cash smuggler taking money to Mexico in a suitcase. Like other deposits, they're able to loan and invest that money as though it's their own. If Wachovia (which has since been purchased by Wells Fargo) earned greater than a one-half of one percent return on those illegal deposits, then they still made profit from the enterprise despite the fines and forfeitures. Such enforcement actions basically amount to an acceptable cost of doing business.

It was evidence from the Wachovia case, said the Comptroller, that led federal officials to begin investigating HSBC. Reported the UK Guardian, "HSBC continued to operate hundreds of accounts with suspected links to Mexican drug cartels, even after ... executives were told by regulators that HSBC was one of the worst banks for money laundering." The bank was singled out at the hearing not because they're the only ones engaging in such activities, but as a "case study." Who knows what's happening at other, similar institutions?

According to the report, "A senior HSBC executive told the Subcommittee that HSBC acquired its U.S. affiliate, not just to compete with other U.S. banks for U.S. clients, but primarily to provide a U.S. platform to its non-U.S. clients and to use its U.S. platform as a selling point to attract still more non-U.S. clients." In particular, HSBC bought a Mexican bank in 2002 which had virtually no anti-money laundering controls in place and treated it as a "low risk" affiliate until 2009. The bank does not closely apply anti-money laundering controls to transactions from countries with medium or low risk assessments.

Banking regulations enacted so far are inadequate to prevent the same thing from happening again. Said the subcommittee report, "the money laundering risks associated with correspondent banking have not been eliminated. Correspondent accounts continue to provide a gateway into the U.S. financial system, and wrongdoers continue to abuse that entryway."

It's worth mentioning that HSBC's compliance failures went beyond Mexico, Latin America and the drug trade. "From 2001 to 2007, HSBC affiliates sent almost 25,000 transactions involving Iran worth over $19 billion through HBUS and other US accounts, while concealing any link with Iran in 85 per cent of the transactions." The bank proactively deleted references to Iran from documents, presumably to conceal the transactions from regulators.

Like Wachovia before it, Grits suspects HSBC will receive a relative slap on the wrist, at most, probably as part of a deferred prosecution agreement which prevents individuals involved from being held accountable. So HSBC's shareholders take a minor hit, but that was more than made up for by profits made from illicit deposits and money transfers over the last decade.

Ironically, HSBC was one of the few global banks that did not experience a major liquidity crisis in 2008: Perhaps now we know why.