Last updated: 17 July, 2012

HSBC hid $16 billion in Iran transactions

Shamed HSBC executives admitted failing to apply anti-laundering rules on Monday, as lawmakers accused the global bank of giving Iran, terrorists and drug dealers access to the US financial system.

With the banking sector already under fire for manipulating interest rates and reckless trading, HSBC said more should have been done to prevent years of abuse amounting to tens of billions of dollars of illicit transactions.

The president of HSBC Bank USA (HBUS), Irene Dorner, was expected to apologize to US Senators later Tuesday for what the bank has called its “unacceptable” level of compliance over nearly a decade.

“I recognize that there have been some significant areas of failure,” David Bagley, the head of group compliance for London-based HSBC, said at a hearing of the Senate Homeland Security Subcommittee on Investigations.

“HSBC has fallen short of our own expectations and the expectations of our regulators,” he said.

While Bagley said the bank has “learned a number of valuable lessons” he acknowledged that this “clearly took far too long to resolve.”

In its 330-page report, the Senate found the lender allowed affiliates in countries such as Mexico, Saudi Arabia and Bangladesh to move billions of dollars in suspect funds into the United States without adequate controls.

Lawmakers grilled HSBC executives and US Treasury officials for failing to guard against money laundering they said benefited Mexican drug lords and terrorist networks, and for their bypassing of US sanctions on Iran.

“It’s pretty shocking stuff,” subcommittee chairman Senator Carl Levin said.

Among the findings was the revelation that HSBC and its US affiliate concealed more than $16 billion (13 billion euros) in sensitive transactions to Iran, violating US transparency rules over a six-year period.

HSBC executives were aware of the “concealed Iranian transactions” — which stripped all identifying Iranian information from documentation — as early as 2001 but allowed thousands of transactions to continue until 2007.

A review of HSBC’s use of so-called U-turn transactions, in which funds are sent into and then out of the United States through non-Iranian foreign banks, showed the bank conducted almost 25,000 US dollar transactions with Iran.

“The vast majority of the Iranian transactions, ranging from 75 to 90 percent over the years, were sent through HBUS and other US dollar accounts without disclosing any connection to Iran,” according to the report.

The US prohibits doing business with nations it regards as enemies such as Iran and North Korea, and its Office of Foreign Assets Control (OPAC) imposes tight filters to halt potentially prohibited transactions.

Levin said the bank willfully circumvented the OFAC filters.

The senator said senior HSBC officials in London “knew what was going on, but allowed the deceptive conduct to continue.”

Under the slogan “The World’s Local Bank”, the network that began life as the Hong Kong and Shanghai Banking Corporation provides US dollars to HSBC banks in many countries under a procedure known as “correspondent banking.”

But its compliance failures clearly spun out of control.

The report said HSBC’s Mexican affiliate “transported $7 billion in physical US dollars to HBUS from 2007 to 2008… raising red flags that the volume of dollars included proceeds from illegal drug sales in the United States.”

And it said HBUS “provided US dollars and banking services to some banks in Saudi Arabia and Bangladesh despite links to terrorist financing.”