Here’s Why HSBC Holdings Plc (ADR) (HSBC) Is In Trouble

Legal problems have caused a serious strain on the credibility of Europe’s biggest bank

HSBC Holdings plc (ADR) (NYSE:HSBC), which is currently up by 0.34% and trading at $44.69, has found itself at the center of a series of serious legal and possibly criminal tangles in recent years.

Tax evasion, money laundering and market rigging keep coming up in the files. But those aren’t the only problems.

The most famous, recent case was highlighted by Swiss ex-HSBC employee, Herve Falciani when he revealed the extent of the bank’s involvement in tax evasion and avoidance in its Swiss subsidiary. Mr. Falciani said HSBC, “Have created a system for making themselves rich at the expense of society, by assisting in tax evasion and money laundering.”

This has lead to the bank announcing on Thursday that it was being asked to pay almost $1.1 billion in penalties in relation to a French tax evasion investigation. In fact, the bank is undergoing parallel inquiries in India, Switzerland and Belgium.

HSBC’s, CEO, Stuart Gulliver and Chairman Douglas Flint have been under scrutiny from UK lawmakers, especially when the UK’s former Director of Public Prosecutions, wrote that under the 1977 Criminal Law Act, HSBC should be prosecuted, saying “It seems clear, from the evidence we have seen, that there exists credible evidence that HSBC Swiss and/or its employees have engaged over many years in systematic and profitable collusion in serious criminal activity against the exchequers of a number of countries.”

In 2012, HSBC was accused of assisting Mexican drug dealers to launder money via a Caribbean branch set up specifically to deal with Mexican money. In the same year, it was accused of breaking the sanctions regime imposed by the US government on Iran.

In relation to these violations, HSBC had to agree terms presented by the US Department of Justice allowing the department to install a monitor who would oversee bank operations. HSBC was also made to a pay a penalty of $1.9 billion.

This week, the Department of Justice’s monitor lodged a report saying the bank was not complying with the agreed terms. HSBC says it is in fact “making steady progress” and that there are almost three years before the agreement runs its course.

The report presents yet another problem for the bank, which is trying to put 2012, when it was accused of transferring funds to blacklisted nations including Iran, behind it.

HSBC also finds itself criticized for not spotting suspicious transactions, despite the promising it would do so in the aftermath of the 2012investigations.

When fined for doing business with Mexican drug cartels, HSBC agreed to a deferred prosecution arrangement. This arrangement could be scrapped if HSBC is found guilty of tax evasion or manipulation of the foreign exchange markets; of which HSBC is currently being investigated in connection with both allegations.

Meanwhile, in the UK, HSBC has been caught up in one of Britain’s costliest scandals. A series of banks were found to have pushed unnecessary payment protection insurance onto clients. HSBC (along with several other banks) has had to set aside $3.7 billion in compensation after for services customers didn’t want. Bloomberg has collected Bank earnings statements which show HSBC ranked fourth in the UK for in its reserves for ‘mis-sold’ payment protection insurance.

Back in the US; inside sources have revealed to Bloomberg, that HSBC is being scrutinized by regulators and the Department of Justice for possible violations of the 2012 money laundering terms. Sources claimed the authorities supect the bank’s currency trading practices break the Department’s guidelines.

Over in the UK, the bank has already paid penalties amounting to $618 million, in relation to the issue with the UK Financial Conduct Authority and the Commodity Futures Trading Commission. According to Bloomberg records, HSBC ranks fourth among six banks that have been asked to pay a total of $4.3 billion in penalties for currency rigging.

Market rigging allegations don’t end there. US authorities are also investigating the possibility of HSBC’s precious metal dealings violating regulatory sanctions. In fact, numerous class actions have alleged the bank for being involved in the manipulation of silver and gold prices.

In November, the allegations just kept coming. In that month, the Wall Street Journal revealed the US Justice Department was probing HSBC in relation to the leaking of confidential client information. A currency trader at HSBC disclosed private client details to a hedge fund before going ahead with a $35 billion acquisition the fund was working on.

In the same month, HSBC paid almost $ 12.5 million under settlement terms with the Securities and Exchange Commission. The commission blamed HSBC for the bank’s Swiss private banking unit lobbying unregistered US investors that were not registered.

Last year, HSBC was made to pay $550 million to the Federal Housing Finance Agency in relation to accusations of mishandling the sale of mortgage securities. The bank “expects the focus on mortgage secularizations to continue” and is awaiting further probes and litigation charges.

HSBC along with JPMorgan Chase &Co and UBS Group AG, have all been accused of benefitting from a massive Ponzi scheme run by Bernie Madoff.

Finally, the Bank said in last years Annual Report that it was facing legal costs in the US, UK, Ireland , Cayman Islands, Luxembourg and Bermuda. HSBC warned it could be facing serious liabilities and they “could be significant”.

Problems are still ongoing, as HSBC has come under extreme pressure from investors and media alike as reports of acute tax avoidance and legal violations continue to surface..

The general analyst consensus on the HSBC stock is bullish. According to the data collected by Bloomberg, 75% analysts have a Buy call on the stock and 25% analysts are advocating a Sell rating. The 12-month mean estimate of analysts on target price is $46.42.

CEO, Mr. Gulliver expressed remorse in front of UK’s Treasury Select Committee, saying: “It clearly was unacceptable, we very much regret this and it has damaged HSBC’s reputation. I am responsible for clearing it up. I have made substantial changes.”