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Why the U.S. Absolutely Should Have Prosecuted [People at] HSBC

December 13, 2012

By EJ Fagan

EJ Fagan was New Media Coordinator for the FTC from 2011-2013. He is now Deputy Communications Director for Global Financial Integrity. You can follow him on Twitter @ejfagan.

Reuters Financial Blogger Felix Salmon today defended the decision by the United States to not prosecute individuals at HSBC for money laundering violations. Salmon writes:

But here’s the thing: you can’t jail a bank, or any corporation; a criminal indictment of a corporation is a bit of a peculiar fish at the best of times. Even if the bank survived, which Gongloff thinks is possible but no one knows for sure, there would certainly be massive job losses — and we can be sure that somewhere between 99% and 100% of those job losses would fall on people who had absolutely nothing at all to do with the money laundering that HSBC was getting up to.

What’s more, it’s important to put HSBC’s crimes in context. The United States, in its role as global hegemon and guardian of the world’s only real reserve currency, has unapologetically taken the opportunity to use its economic power to push its geopolitical agenda. For instance, if you’re an Iranian business and you want to do business in dollars, the US is determined to make your life as difficult as possible. The US might have no jurisdiction over Iranian businesses, but it does have jurisdiction over nearly all the important banks in the world, since it’s impossible to be a global bank without having some kind of presence in the US. And — as Argentina is finding out right now in its court case against Elliott Associates — if you want to send dollars around the world, you basically have to send them through the USA.

To put it another way, the laws that HSBC broke were laws designed to bolster the international standing of the US relative to Iran and other countries: they were geopolitically motivated, and the intended target was not the international banking system, with which the State Department has no particular beef, but rather countries the State Department doesn’t like.

Right off the bat: Salmon is right that individuals commit crimes and can be put in jail, but not institutions or corporations. A criminal sanction of a bank would be something closer to removing its banking license (something that Ben Lawsky in New York threatened to do to Standard Chartered), which would itself function as a pretty big penalty for the bank.

But let’s remove that from the table for now. Individual people at HSBC committed crimes, admitted to committing those crimes, and can in theory be held responsible in a court for them. 

Salmon’s second argument is that HSBC’s crimes weren’t that big of a deal. He describes the difficult-to-comprehend process of moving U.S. dollar business through the United States when working with foreign clients outside the United States. These are transactions that fall under U.S. jurisdiction, but Salmon argues that for a number of reasons, breaking these laws weren’t a very big deal.

We disagree, but I’ll leave it at that. For this kind of sanctions-avoiding wire transaction stripping, that Standard Chartered and ING were also fined for, I can see reasonable people disagreeing on whether or not people should go to jail.

But the HSBC story does not stop at purposely hiding information about Iranian wire transactions. The bulk of the HSBC case involved money laundering between their U.S. and Mexico subsidiaries. From the Statement of Facts of the Deferred Prosecution Agreement:

“From 2006 to 2010, HSBC Bank USA violated the BSA and its implementing regulations. Specifically, HSBC Bank USA ignored the money laundering risks associated with doing business with certain Mexican customers and failed to implement a BSA/AML program that was adequate to monitor suspicious transactions from Mexico. At the same time, Grupo Financiero HSBC, S.A. de C.V. (“HSBC Mexico”), one of HSBC Bank USA’s largest Mexican customers, had its own significant AML problems. As a result of these concurrent AML failures, at least $881 million in drug trafficking proceeds, including proceeds of drug trafficking by the Sinaloa Cartel in Mexico and the Norte del Valle Cartel in Colombia, were laundered through HSBC Bank USA without being detected. HSBC Group was aware of the significant AML compliance problems at HSBC Mexico, yet did not inform HSBC Bank USA of these problems and their potential impact on HSBC Bank USA’s AML program.”

Emphasis mine. Note that HSBC has stipulated to this. Its pretty clear what happened here: HSBC knew that their Mexico business was high risk, meaning that there was good chance that their customers were violating the law and banking the proceeds of drugs, human trafficking, weapons, etc. They opted to not do the things they are required to do by law in order to detect these customers, report them to law enforcement, refuse their business, etc. As a result, at least $881 million was banked through HSBC over just three years for two very large, very dangerous drug cartels.

This has a real human cost. Earlier today, Ann Hollingshead told the story of Maria Susana Flores Gámez, a Mexican beauty pageant winner who was tragically found ridden with bullets from the Sinaloa drug Cartel, one of HSBC’s clients. She is one of thousands of victims of these drug cartels.

But they aren’t just victims of drug cartels. They are also victims of HSBC. Facilitators of crime are legally and morally culpable for the crimes that are committed.

Think of it this way: What if HSBC were a gun distributor, instead of a bank? HSBC-Guns in this comparison would be required by law to screen their customers before selling large amounts of wholesale firearms to one. HSBC-Guns does business in Mexico. They get an order from a high-risk client that the law tells them they need to do their homework on to make sure they aren’t dangerous criminals. However, executives at HSBC-Guns make the decision to not do their homework, and just sell them the wholesale firearms. This customer turns out to be the Sinaloa Cartel, and uses the firearms bought from HSBC-Guns to kill a lot of people. Law enforcement investigates, HSBC-Guns admits to these facts, and gets off with a modest-sized fine and an agreement not to individually prosecute anyone at the bank.

Do the HSBC-Guns executives involved deserve to go to jail? Absolutely. I don’t think anyone disagrees with this. Financing and banking services are no different. Drug cartels cannot function at anywhere near the scale that they do without banks. You can’t stuff $881 million in cash under a mattress. You need a bank. Real people working at HSBC decided to be that bank, were caught, and got off without an ounce of accountability or justice.

Update: Salmon updated his post with the following:

Update: Contra EJ Fagan, this is not an argument against prosecuting individuals at HSBC who broke the law. And in the comments, a lot of people are making the point that HSBC’s crimes centered not on Iran but rather on Mexican drug cartels; again, the laws broken are all part of the US war on drugs. The question here is: do you destroy a bank as collateral damage in that war?

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Disclaimer: Unless specifically stated to be the views of the Financial Transparency Coalition, the opinions expressed on this blog are solely the opinions of the individual blogger and are not necessarily those of the Financial Transparency Coalition.

  • PoliticalFodder

    Why does it have to destroy. Everyone is replaceable there are people ( with much more integrity ) that could take the jobs of these criminals. Orwell was very insightful he just had the wrong year. When people commit crimes they should be arrested no one should be above the law. I don’t believe the whole premise that the whole bank comes down when criminals are taken out of it and prosecuted. Personally I would feel much more comfortable dealing with a bank that doesn’t stand for criminal behavior. Our justice system is broken, a crime is a crime.

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