HSBC Judge Seeks More Information About Sanctions Compliance

A federal judge demanded to know more about HSBC Holdings Plc’s compliance with its trade sanctions and anti-money-laundering deal with the U.S. after a monitor said the bank was “too slow” to mend its ways.

U.S. District Judge John Gleeson in Brooklyn, New York, ordered the government to file a full report on how HSBC is performing on its 2012 agreement to comply with money-transfer and trade laws and avoid prosecution for helping Latin American drug-runners launder billions of dollars. The government and HSBC seek 30 days to comply, saying they may need to request that the report be filed under seal, or with redactions.

Government officials have said recently that agreements not to prosecute firms that run afoul of the law could be at risk if companies don’t follow through on their commitments, and judges have been showing greater vigilance in checking that companies aren’t getting off too lightly.

The settlement was controversial in that HSBC admitted to moving money for Mexican cartels and violating sanctions laws against Iran, but avoided being charged. A summary of the report indicated the bank’s compliance with the settlement was moving too slowly.

“I would think a judge would want to look into that,” said James Cox, a professor at Duke University School of Law who focuses on corporations and financial markets. “This is a very important matter: This is money-laundering for an enemy of the state.”

Rob Sherman, a spokesman for London-based HSBC, declined to comment on the judge’s April 28 request for more information. The bank joined in the U.S.’s May 1 request for a 30-day period to confer with the Federal Reserve and the Financial Conduct Authority in the U.K. about “potential regulatory privileges” or other factors that might weigh against public disclosure.
Report Summary

A court-appointed monitor’s January report on HSBC, said to be more than 1,000 pages, has so far been made available to the Brooklyn court only in the form of a six-page summary by the U.S. Justice Department.

The confidential report, which describes HSBC’s first year under the monitor, shows the bank could be falling short of reforms and compliance procedures, two people familiar with the report told Bloomberg in March. It described findings that the pace of change was inadequate and included an incident in which a bank manager shouted at an internal auditor who had criticized his work.

HSBC’s 2012 deferred-prosecution agreement with the U.S. is meant to resolve charges that it enabled drug cartels to launder billions of dollars. The bank agreed to pay a $1.9 billion fine after the U.S. accused it of failing to maintain an effective anti-money-laundering program and violating sanctions law.

As part of the deal, HSBC accepted the monitor, Michael Cherkasky, to oversee reforms.
Attorney General

The deferred-prosecution agreement was filed by Loretta Lynch, who was U.S. attorney in Brooklyn at the time. She was sworn in last month as attorney general. During her confirmation hearings, she faced criticism for her treatment of HSBC.

The Justice Department has threatened to take the unprecedented step of revoking such settlement agreements. Leslie Caldwell, the head of the criminal division, said in a March speech that the U.S. is prepared to tear up settlements and charge banks if more wrongdoing is found.

Should the U.S. seek to prosecute HSBC at any point, the bank has agreed not to contest certain facts, according to court papers.

Daniel Alonso, a spokesman for Cherkasky, declined to comment on any matters related to the confidential agreement.
Slow Progress

According to the summary, filed in Gleeson’s court April 1, the monitor “believes that HSBC Group’s progress has been too slow.” The Justice Department found the bank has “made material progress” toward meeting compliance standards, but must “continue to enhance its progress in order to maintain compliance” with the agreement’s “very strict terms,” according to the filing.

European financial firms including HSBC, Deutsche Bank AG and Barclays Plc have consented to monitors in settlements with U.S. authorities in recent years.

BNP Paribas SA has agreed to pay a record $8.97 billion fine for violating U.S. trade sanctions. The French bank was sentenced to five years’ probation Friday in Manhattan federal court.

In March, Commerzbank AG agreed to pay $1.45 billion to settle U.S. investigations.

Standard Chartered Plc has faced consequences for inadequate cleanup efforts. Its monitor, Ellen Zimiles, identified continuing problems at that bank, exposing it to further penalties after authorities re-opened their investigations.

The London-based bank has said improving its sanctions and anti-money-laundering systems remains a “top priority.”

The case is U.S. v. HSBC Bank USA NA, 12-cr-00763, U.S. District Court, Eastern District of New York (Brooklyn).