NEW YORK — The drug cartels’ boxes of cash fit precisely into tellers’ windows at their bank in Mexico.
When Iran needed to transfer $55 million in gold bullion, the country, like others on the United States’ rogues list, found the same bank willing to assist: HSBC, the British financial giant.
Although the U.S. Justice Department portrayed HSBC as an effective accomplice to violent drug lords and hostile regimes, authorities chose not to prosecute the bank. HSBC instead will pay $1.9 billion, a financial penalty worth about 11% of the bank’s profit last year.
The massive penalty still was not enough to appease some critics. No bank executives were charged as part of the investigation, leading some analysts to question the government’s willingness to hold powerful Wall Street firms accountable.
“It’s mind-boggling how they think you can have a financial system and allow this kind of impunity,” said William Black, a former banking regulator who aided federal prosecutors during the savings and loan crisis of the 1980s and 1990s. HSBC “put the world at enormous risk.”
The federal government’s settlement with HSBC, announced Tuesday, allows the bank to avoid criminal penalties in what’s known as a deferred prosecution agreement. The bank will be required to get five years of independent monitoring of new controls put in place to prevent illicit money transfers.
The HSBC settlement comes on the heels of a case brought against another British bank, Standard Chartered, which agreed to pay a total of about $670 million to state and federal authorities for similar banking violations involving concealed transactions with Iran.
U.S. laws tightly restrict transfers with countries under sanctions, such as Iran and Sudan. Banking regulations, which were tightened after the Sept. 11, 2001, terrorist attacks, also require strict safeguards to keep dirty money out of the U.S. financial system — and potentially out of terrorists’ hands.
Four other banks have reached similar agreements with the Justice Department in the last four years, but HSBC’s nearly $2-billion settlement sets a record.
Lanny Breuer, an assistant attorney general who oversees the Justice Department’s criminal division, called the settlement historic and criticized the bank’s “stunning failures of oversight.”
“The record of dysfunction that prevailed at HSBC for many years was simply astonishing,” Breuer told reporters at the U.S. attorney’s office in Brooklyn.
Breuer defended the settlement, saying HSBC did not get a pass and will pay a heavy price. The bank has clawed back bonuses awarded to its compliance officials and agreed to partially defer senior executives’ bonuses, Breuer noted.
The deferred prosecution agreement could allow the Justice Department to charge HSBC should the bank fail to abide by the government’s demands.
Justice Department officials also considered potential collateral damage were they to prosecute HSBC, said Breuer, who praised the bank’s cooperation with authorities. The HSBC settlement involved banking regulators as well as the Manhattan district attorney’s office.
“Our goal is not to bring HSBC down,” Breuer said. “It’s not to cause a systemic effect on the economy.”
HSBC allowed more than $881 million in dirty money — much of it from the Sinaloa Cartel in Mexico and the Norte del Valle Cartel in Colombia — to find its way into the U.S. financial system, according to court documents. Much of that cash allegedly came from drug-trafficking proceeds laundered in the so-called Black Market Peso Exchange.
The cartels needed to convert U.S. dollars from drug sales into Colombian pesos, according to court documents. The cartels smuggled American cash across the border and deposited it at banks in Mexico. The peso exchange then acted as a currency broker for Colombian businessmen in need of dollars for purchasing legitimate goods in the United States.
HSBC also violated U.S. sanctions against hostile regimes by conducting financial transactions in Cuba, Iran, Libya, Sudan and Burma, according to court documents. From the mid-1990s until 2006, HSBC allowed the processing of about $660 million in prohibited transactions, the documents say.
Founded as Hongkong and Shanghai Banking Corp. in 1865 to help foster trade between Europe and Asia, HSBC has grown into one of the world’s largest banks, serving 60 million customers through some 6,900 offices in 84 countries and territories, according to its website.
For its part, HSBC noted that the bank had “provided valuable assistance to law enforcement” by supplying information and employees for interviews.
“We accept responsibility for our past mistakes,” Stuart Gulliver, HSBC’s chief executive, said in a statement. “We have said we are profoundly sorry for them, and we do so again. The HSBC of today is a fundamentally different organization from the one that made those mistakes.”
In Washington, Sen. Carl Levin, a Michigan Democrat whose subcommittee also investigated HSBC, praised the settlement.
“Global banks have global responsibilities to prevent participation in illicit or suspect transactions,” Levin said in a statement. “The HSBC settlement sends a powerful wake-up call to multinational banks about the consequences of disregarding their anti-money-laundering obligations.”
Zachary Goldman, a former Treasury official who is executive director of the Center on Law and Security at New York University’s law school, said HSBC’s nearly $2-billion fine and the negative publicity is likely to spur other banks to make sure they have proper controls in place.
The banking controls will make moving large sums of money much more difficult for cartels, terrorists and rogue countries, he said. Couriers and exchange houses are riskier and less efficient.
“By making it harder for them to use their most effective means of transfer, you make life a lot harder for them,” Goldman said. “That’s a victory of sorts.”