More than just risky business: HSBC’s money-laundering scandal

Recent news that HSBC executives admitted to allowing Iran, terrorists and drug dealers to launder nearly USD$16 billion over a six-year period would make earth underneath you shake.

How is that the bank’s risk-management system could not detect such sensitive transactions? Was the bank’s risk-management system inadequate, or did the bank’s management knowingly turn a Nelson’s eye? What were the regulators doing? Were appropriate laws/mechanisms in place to detect and deter such activities? These and other questions would cloud the mind of ordinary tax payers the world over.

Interestingly, the above scandal took place although elaborate arrangements exist at national and international levels to detect and deter money laundering and terrorism financing activities.

In 1989, the Financial Action Task Force (FATF), an international body, was set up not only to define standards for combating money laundering and terrorist financing (MLTF) but also to carry out mutual evaluation studies to ensure that the legislative arrangements made by a country comply with the standards. Over 180 countries around the world are members of FATF and follow the global standards. All member countries have passed suitable legislation to counter money laundering and terrorism financing.

Specialised financial intelligence units (such as AUSTRAC in Australia) have been set and detailed reporting and compliance standards have been prescribed. One can’t say standards / legislations were not in place.

Did HSBC break the law?

Yes.

Interestingly, the FATF particularly warned about doing transactions with countries that pose high money laundering and terrorism financing risk such as “Uzbekistan, Iran, Pakistan, Turkmenistan and São Tomé and Principe, and the northern part of Cyprus”.

Yet the HSBC not only threw all caution overboard and allowed transactions from high-risk countries such as Iran to flow through its system, but engaged in fraudulent conduct (hiding the country name) as transactions were passing through the system.

As though this was not enough, as stated in the US Senate Committee on Homeland Security Report, it engaged in transactions with Al Rajhi – the Saudi Arabian bank – which had links with al Qaeda.

Top executives of HSBC also over-ruled warnings from its own officers that the bank should severe links with Al Rajhi.

Why was all this done? Obviously, greed underpinned the behaviour.

The HSBC have now issued a statement that it will apologise, acknowledge these mistakes, answer for actions and give absolute commitment to fixing what went wrong.

But will it provide solace to ordinary law-abiding citizens across the world?