Following the terrorist attacks of 9/11, the USA Patriot Act was signed into law, expanding Anti-Money Laundering ("AML") obligations for U.S. financial institutions and stimulating public debate by officials, academics and intelligence officers on effective measures to combat terrorist financing. Title III of the Patriot Act, entitled the “International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001” contains provisions authorizing the Secretary of the Treasury to adopt special measures for foreign jurisdictions, financial institutions or types of accounts of primary money laundering concern (section 311); requiring due diligence and enhanced due diligence in respect of foreign correspondent accounts and private banking accounts (section 312); prohibiting certain financial institutions from dealing with foreign shell banks (section 313); providing certain record-keeping requirements for foreign bank correspondent accounts (section 319); requiring financial institutions to establish customer identification programs (section 326); and requiring financial institutions to establish AML programs (section 352).

Substantive AML compliance is complex and expensive, and contradicts the profit motive of banks to ‘get money now, ask questions later’. Through a series of investigations dating back to Riggs Bank in 2004, agencies have sanctioned a long list of individual banks including Citibank, Wachovia and Barclays for showcasing AML compliance standards that were substantively deficient. With the AML enforcement agenda squarely within the public domain, the use of civil monetary penalties and deferred prosecution agreements as a means to effect behavioral change is therefore highly questionable.

While the AML problems at HSBC have garnered the majority of financial media attention for the past few days, the findings of the U.S. Senate Permanent Subcommittee on Investigations is by no means a surprise. In April 2003, the Federal Reserve Bank of New York and New York state bank regulators issued warnings with regard to “suspicious money flows” sending staff in the AML division into a panic attack.  The U.S. sub-division hired a federal prosecutor to oversee and install AML efforts. Nearly a decade later, the Department of Justice has unilaterally declared HSBC’s efforts to be a monumental failure. The extent of the failure is laid out in a 340 page report which sets out a laundry list of how HSBC repeatedly put the pursuit of profit ahead of substantive compliance with AML provisions.  The report faults HSBC’s regulator, Treasury’s Office of the Comptroller of the Currency, for “systemic failures” in the face of evidence of risky banking, letting the problem “fester for years” and is released at a pivotal time for banking regulation, where global banks have been accused of greed relating to conflicts of interest associated with setting LIBOR as well as trading abuses at JP Morgan Chase & Co.

The report, which accuses HSBC of failing to prevent billions of dollars worth of money transfers linked to drug cartels and terrorist groups, dates back to 2001 and suggests that the bank created an operation that was "a systematically flawed sham paper-product designed solely to make it appear that the Bank has complied” with the Bank Secrecy Act and other anti-money laundering laws, such as the FCPA. In particular, the report finds that between 2007 and 2008 HSBC’s Mexican operations moved $7 billion into the bank’s U.S. operations. Both Mexican and U.S. authorities issued warnings to HSBC that such an amount of money could only be reached if linked to narcotics trades. HSBC also knowingly and willingly circumvented government safeguards designed to block terrorist funding, allowing, for example, affiliates to shield the fact that thousands of transactions involved links to Iran. An independent audit paid for by HSBC found the bank facilitated 25,000 questionable transactions with Iran between 2001 and 2007. The report also detailed that HSBC worked extensively with Saudi Arabia's Al Rajhi Bank, some owners of which have been linked to terrorism financing. HSBC’s U.S. affiliate supplied Al Rajhi with nearly $1 billion worth of U.S. banknotes until 2010, and worked with two banks in Bangladesh linked to terrorism financing. HSBC executives admitted as much at Senate hearings on Wednesday, where HSBC confessed to years of failure to comply with rules to prevent money laundering. David Bagley, who has been HSBC head of group compliance since 2002, said that “despite the best efforts and intentions of many dedicated professionals, HSBC has fallen short of our own expectations and the expectations of our regulators … I recommended to the group that now is the appropriate time for me and for the bank, for someone new to serve as the head of group compliance.” As eloquently summarized by William J. Ihlenfeld II, the US Attorney for the Northern District of West Virginia, in a letter to officials at the U.S. Department of Justice “HSBC is to Riggs, as a nuclear waste dump is to a municipal land fill.”

At the end of the day, apologies and resignations will not shield HSBC from the wrath of the U.S. Department of Justice which is expected to soon yield a fine that dwarfs the record $619 million that Dutch bank ING agreed in June 2012 to pay to settle similar accusations. In that case, ING was accused of moving money into the U.S. from Iran and Cuba, despite sanctions against those countries for close to two decades. Similarly, In 2010 the U.S. Department of Justice entered into a deferred prosecution agreement with Barclay’s Bank for $298 million to settle allegations over illegal dealings with such nations as Sudan and Iran (the enforceability of which is now being raised in light of the LIBOR scandal). Persistent AML failings, despite a public enforcement agenda and harsh civil penalty sanctions, suggests that negotiated prosecutions are ineffective at producing behavioral change and inadequately punish the crime. While commentators predict that HSBC’s fine will be close to $1 billion, it is insignificant when viewed against HSBC’s net worth. In 2011, HSBC’s net income was $16.8 billion. It operates in approximately 80 countries and its U.S. division is among the top 10 banks operating in the U.S, where it has assets of approximately $210 billion. Against this rubric, will the imminent U.S. Department of Justice settlement agreement adequately punish HSBC for knowing and persistent AML failings? In short, no.  A financial wrist slap, no matter how large, is insufficient to deter wrongdoers from future violations. To ensure accountability and substantive compliance, Global Witness suggests that agencies must address three further issues.  First, mandate external audits into AML procedures across all financial institutions. Second, prosecution under criminal rather than civil sanctions is likely to have a greater deterrent effect on future violations, especially if coupled with a threat to revoke a U.S. banking license. Third, and most importantly, evaluate the legislation governing the formation and function of shell companies, which facilitate money laundering by hiding the ultimate owner of the bank accounts. While HSBC has apologized and undertaken to close its U.S. Dollar accounts in the Cayman Islands, it is only the tip of the iceberg. HSBC tried to cut corners in AML monitoring procedures and will now pay the price.