HSBC, the giant British bank accused of laundering money for drug cartels and transferring funds for Iran and other blacklisted nations, avoided criminal prosecution in 2012 by promising to clean up its act.
But the bank is slow in delivering on that promise, federal prosecutors said in a court filing on Wednesday, faulting the bank for weaknesses in spotting suspicious transactions and for enabling a corporate culture resistant to change.
The filing, made in federal court in Brooklyn as part of a quarterly update on the bank's progress after the 2012 deferred-prosecution agreement, showed just how far HSBC needed to go. Progress has been "too slow," the filing said, summarising the work of Michael Cherkasky, the independent monitor who has been scrutinising HSBC's operations for more than a year.
The filing represents a subtle yet important shift for the Justice Department, which until now has largely applauded HSBC's efforts since reaching the deferred-prosecution agreement and paying $1.9 billion to the federal authorities. While commending HSBC for continuing "to act in good faith to meet the requirements of the DPA," prosecutors highlighted times when bank employees resisted the overhaul.
The prospect that HSBC is backsliding could cause political headaches for Loretta Lynch, the top federal prosecutor in Brooklyn. Lynch, who signed the filing on Wednesday, faces a tough confirmation fight as President Barack Obama's nominee to succeed Eric H Holder Jr as United States attorney general.
Her filing, alternating between praise and concern, reflects duelling messages from the Justice Department. Coming at a time when prosecutors are grappling with repeat offenses on Wall Street, the filing underscores the Justice Department's efforts to stem the pattern of corporate recidivism.
Yet prosecutors did not take the more aggressive step of extending the five-year deferred-prosecution agreement or singling out culpable employees by name. And the six-page filing offered only a snapshot of the problems that Cherkasky laid bare in a confidential 1,000-page report submitted to prosecutors in January. That report, people briefed on the matter said, offered a more scathing assessment of the bank's progress.
Cherkasky, a former prosecutor who was also the monitor for the Los Angeles Police Department and oversaw a consent decree involving the Teamsters union, has been evaluating HSBC's global operations for cracks in its money-laundering controls. As such, he has reviewed the bank's various business lines, including its sprawling operations in India and China.
Boiling those findings down to the six-page filing, the Justice Department emphasised two areas that needed improvement: the bank's technology for spotting suspicious transactions and its culture.
Change at the bank was met with resistance, the filing said. When presented with negative findings from auditors, the filing said, managers at the bank's United States unit for global banking and markets "inappropriately pushed back." Ultimately, the resistance caused an internal audit report "to be more favourable to the business than it would otherwise have been."
According to the filing, the bank reassigned one of the managers and docked his bonus.
In response to the filing, Stuart Levey, the bank's chief legal officer, said, "The Justice Department recognised in its letter that HSBC has made material progress toward meeting the most stringent compliance standards imposed to date upon a global financial institution." Levey added that the bank was continuing to meet all its obligations under the deferred-prosecution agreement and that its leaders "are making steady progress toward that objective and appreciate the monitor's ongoing work."
But the bank's technology systems, despite some improvement, still suffer from "fragmentation" and "lack of connectivity," the Justice Department filing said. With its creaky framework, the filing said, "the collection and analysis" of data could suffer.
Cherkasky singled out weaknesses in HSBC's technology in an earlier progress report, suggesting that the gaps are ingrained in the bank.
The scrutiny presents the latest setback for HSBC as it wrangles with a number of government authorities. In November, the bank reached a settlement with the Securities and Exchange Commission over suspicions that it helped American clients evade taxes. The bank still faces a criminal tax evasion investigation from the Justice Department.
In the 2012 case, prosecutors found that HSBC facilitated money laundering on behalf of Mexican drug cartels, allowing at least $881 million in tainted money to course through its US branches. The bank was also accused of transferring money on behalf of nations like Iran and Sudan that are blacklisted by the United States. Prosecutors found, for example, that the bank moved tainted money for Saudi banks with links to terrorist groups.
Instead of indicting the bank, though, state and federal authorities reached an agreement in 2012 that deferred charges in exchange for the $1.9 billion in penalties and the installation of the independent monitor, Cherkasky. The use of such agreements, a notch below a guilty plea, has raised concerns that some banks are too big to charge.
The progress of HSBC tests that approach, raising questions about whether the agreements do enough to stamp out repeat offenses on Wall Street.
Leslie Caldwell - head of the Justice Department's criminal division, which is overseeing the HSBC case along with Lynch - recently outlined in new detail her policy on repeat offenders. In a recent speech, Caldwell noted that the government had "a range of tools" to deal with corporate recidivism, including extending the term of a deferred-prosecution agreement while prosecutors investigate accusations of new criminal conduct.
"Make no mistake: The criminal division will not hesitate to tear up a DPA or NPA and file criminal charges where such action is appropriate and proportional to the breach," she said.
©2015 The New York Times News Service