'Money laundering': HSBC boss quits

The head of compliance at British banking giant HSBC resigned in front of a US Senate subcommittee today after it emerged the bank had exposed the US to billions of dollars worth of money laundering, drug trafficking, and terrorist financing.

David Bagley, who has been HSBC head of group compliance since 2002, stepped down before the Homeland Security and Governmental Affairs subcommittee after its findings were published.

Mr Bagley, who had a 20 year career with the bank and is based in London, said: “Despite the best efforts and intentions of many dedicated professionals, HSBC has fallen short of our own expectations and the expectations of our regulators.”

Earlier in the hearing, subcommittee chairman Senator Carl Levin said HSBC’s compliance culture had been “pervasively polluted for a long time”.

The revelations are another blow to the reputation of the banking industry following the current scandal over the manipulation of te Libor inter-bank lending rate.

Mr Bagley told the panel that he had recommended to HSBC senior management that it was the ``appropriate time'' for ``someone new to serve as the head of group compliance''.

In his written submission to the subcommittee, he said the bank had “learned a number of valuable lessons” and partly blamed the oversights on the bank’s rapid growth.

“The bank underestimated some of the challenges presented by its numerous acquisitions, and despite efforts to meet these challenges, we were not always able to keep up,” he said.

Mr Bagley added that HSBC was in the process of “shedding the historical compliance model that the bank has outgrown”.

He also revealed that the bank is to close 20,000 bank accounts on the Cayman islands as result of the money laundering investigation.

The US arm of HSBC (HBUS) treated HSBC Bank Mexico, which transported $7bn in cash in armoured vehicles to the bank in 2007 to 2008, as a “low risk” client, the subcommittee found.

Foreign HSBC banks avoided safeguards designed to block transactions involving terrorists, drug lords, and rogue regimes, the subcommittee said, while it also ignored links to terrorists, providing services to risky banks in Saudi Arabia and Bangladesh.

Mr Levin told the hearing that HSBC used its US bank as a gateway into the US financial system for HSBC affiliates around the world while “playing fast and loose with US banking rules”.

He said: “Due to poor anti-money laundering controls, HBUS exposed the United States to Mexican drug money, suspicious travellers cheques, bearer share corporations, and rogue jurisdictions.”

HBUS offered banking services to HSBC Bank Mexico despite the country’s troubles with money laundering and drug trafficking, high risk clients, high risk products, a secretive jurisdiction and weak anti-money laundering controls, Mr Levin said.

In another case examined by the subcommittee, two HSBC affiliates sent nearly 25,000 transactions involving $19.4bn over seven years without disclosing the transactions’ links to Iran.

The bank was also found to be clearing suspicious bulk travellers cheques, including clearing 290 million US dollars in “obviously suspicious” US travellers cheques for a Japanese bank, benefiting Russians who claimed to be in the used car business.

Paul Thurston, chief executive of retail banking and wealth management, who was previously chief executive of HSBC Mexico, said his experience in the Central American country was “as challenging as any I had experienced”.

He added: “Some of the things I found frankly took my breath away.”

Mr Thurston said bank employees faced very real risks of being targeted for bribery, extortion, and kidnapping and high levels of security were required for Bank staff working in Mexico.

He said Mexico was a data-poor environment, making it difficult to verify the identity of customers.

Mr Levin also criticised the federal agency supervising the bank’s US operations, saying it “tolerated” HSBC’s weak controls against money laundering.

HSBC said it has changed its senior management and moved to strengthen its compliance with rules to prevent money laundering.