By Rachel Louise Ensign And Aruna Viswanatha
A U.S. independent monitor said HSBC Holdings PLC is moving too
slowly to fix some of its compliance problems, a tough assessment
that comes as the bank is grappling with other issues, including
allegations it aided tax evasion.
The monitor's report, summarized in a court filing Wednesday,
comes as the bank has spent handsomely and hired thousands of
staffers in an effort to overhaul its controls in the wake of a
$1.9 billion settlement over allegations it violated laws against
money laundering.
Monitor Michael Cherkasky applauded the compliance efforts of
top leaders and the bank's adoption of strong anti-money-laundering
standards around the world. But he said HSBC's corporate culture
and rusty technology systems are impeding the implementation of
those standards. The report follows a review that included
different lines of business and a number of countries.
The monitor believes "HSBC group can--and must--do more," the
filing says. The filing is prosecutors' summary of a longer annual
report from the monitor that isn't made public.
The monitor's opinion of the bank's overhaul is crucial. HSBC in
general has to follow the monitor's recommendations on improving
its systems. Prosecutors also typically take a monitor's evaluation
into account when deciding whether to drop criminal charges that
were deferred as part of a settlement.
The bank in 2012 entered into a five-year deferred-prosecution
agreement to settle allegations that included failure to catch at
least $881 million in drug-trafficking proceeds laundered through
its U.S. bank. Authorities also alleged that HSBC staff stripped
data from transactions with Iran, Libya and Sudan to evade U.S.
sanctions.
"We continue to meet all of our obligations under the
[deferred-prosecution agreement], and remain firmly committed to
putting in place a robust [anti-money-laundering] and sanctions
compliance program. We are making steady progress toward that
objective and appreciate the monitor's ongoing work," HSBC's chief
legal officer, Stuart Levey, said in a statement.
The bank has hired several thousand compliance staff, including
high-profile former government enforcement officials such as Mr.
Levey, a former senior U.S. Treasury Department official, and
Jonathan Evans, the former head of the U.K.'s counterintelligence
service.
The bank said HSBC's spending on regulatory programs and
compliance contributed to rise in operating expenses in 2014 and
that since the agreement in 2012, its compliance staff has doubled
to about 6,800.
U.S. authorities have faulted many of the largest global banks
for weak anti-money-laundering controls, and many of these banks
are under related orders by regulators to improve compliance. J.P.
Morgan Chase & Co., for instance, agreed to pay $1.7 billion
last year and reform its anti-money-laundering policies to resolve
criminal charges that it failed to report red flags associated with
Bernard Madoff, who was convicted of running a Ponzi scheme.
Some of these banks also face criticism from monitors installed
as part of settlement agreements. Standard Chartered PLC agreed to
pay a $300 million penalty last year to New York's financial
regulator, which cited a monitor's finding that it hadn't lived up
to promises to improve controls that were made as part of a 2012
settlement.
Still, the critical report from the monitor comes at an
especially tough time for HSBC. The bank recently posted poor
financial results and has been beset by criticism amid allegations
that its Swiss unit helped its clients avoid taxes.
The bank said the Swiss unit at the center of the tax-evasion
allegations had a "different culture" that "was not fully
integrated into HSBC," being largely formed from acquisitions.
HSBC's monitor said that top leaders at the bank are doing a
good job of taking responsibility for the bank's
anti-money-laundering and sanctions compliance program, but
criticized other staffers, the filing said. Senior managers at the
U.S. unit's global banking and markets business inappropriately
pushed back against negative findings from internal auditors and
others, the filing said. Individuals involved in this incident had
their bonuses reduced.
Mr. Cherkasky said the bank's compliance technology remains "an
area of material weakness," the filing said. These systems are
fragmented, which prevents bank investigators from easily reviewing
customer records when evaluating suspicious activity. Mr. Cherkasky
said these systems needed improvement in his initial report on the
bank's progress last year.
HSBC has good plans to improve these technology problems, but
actually executing them will be "difficult, expensive and time
consuming," according to the filing.
Write to Rachel Louise Ensign at rachel.ensign@wsj.com
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