HSBC’s Ponzi Scam Return to Haunt with A Major Global Money-Laundering Scandal

Summary

• UK’s largest bank HSBC has been alleged of profiting from powerful and dangerous players since last two decades despite red flags about the origin of those funds.
• The role of the bank in the scam came to light after suspicious activity reports filed by banks and other financial firms to FinCEN got leaked to the media.
• The leaked documents appear to indict five major global banks, HSBC Holdings Plc, Bank of New York Mellon Corp, Deutsche Bank AG, JPMorgan Chase & Co, and Standard Chartered Plc for this scandal.

UK’s largest bank HSBC (LON:HSBA) is in the midst of a money-laundering scam yet again. An investigation by International Consortium of Investigative Journalists (ICIJ) on leaked SAR ( Suspicious activity reports) files submitted to FinCEN ( US Department of Treasury’s Financial Crimes Enforcement Network) holds the bank responsible for lapses that allowed suspicious transaction through its systems. The report of ICIJ that was published on 20 September 2020 could spell major trouble for the bank if an investigation is conducted by authorities in either the UK or the USA regarding these allegations. FinCEN is an arm of the United States Department of the Treasury which collects and analyse financial transitions both domestically and globally to combat money laundering and financial crime.

What does the leaked SAR file have about HSBC?

The secret SAR files show that more than five prominent banks continued aiding the movement of illicit funds of suspicious people and organisations related to criminal activities, despite the commitments made by them to the authorities. The report also revealed that many of these banks continued to do business with criminal gangs, fraudsters, and corrupt regimes around the world despite warnings by US law enforcement agencies that they could face prosecution.

The documents have revealed that in a particular instance HSBC helped fraudsters move funds totalling up to $80 million from a Ponzi scam to Hong Kong from the US in 2013 and 2014 while being fully aware of the suspicious nature of the transactions. The bank did not take any actions to close the account of the fraudster till US financial regulator SEC (Securities and exchanges commission) framed charges against it. Later the fraudster at the heart of the Ponzi scam was arrested and prosecuted by the Chinese authorities.

The ICIJ investigation has also revealed that between 2000 and 2017, the bank had identified suspicious transactions valued up to $1.5 billion out of which $900 million were from known criminal activity. The bank, however, failed to conduct proper due diligence on its customers to identify key facts about the customers or the ultimate beneficiary of their accounts and where the money to their accounts came from.

This investigation thus indicated that HSBC turned a blind eye on millions of dollars’ worth of money laundering transactions despite being warned of potential scams.

The leaked documents appear to indict five major global banks, HSBC Holdings Plc, Bank of New York Mellon Corp, Deutsche Bank AG, JPMorgan Chase & Co, and Standard Chartered Plc for this scandal. They suggest that these banks are both under-resourced and overwhelmed, which is the reason for the lapse.

HSBC’s previous tryst with authorities over money laundering allegations

HSBC had been fined $1.92 billion in 2012 by the US authorities for aiding Mexican drug lords move millions of drug money out of the country. At that time, the bank in a deferred prosecution agreement had promised to take necessary steps to fix the problems with their systems so that such instances do not happen again.

Since then HSBC had implemented a multiyear exercise to overhaul its systems in more than 60 Jurisdictions where it operates as per its agreement with US prosecutors.

The current allegations reflect very poorly on the bank and its reputation as a leading global financial institution.

The stock performance of HSBC on the London Stock Exchange after the news broke on the allegations.

The shares of HSBC Holdings Plc have taken a nosedive on the London Stock Exchange on Monday 21 September 2020 after the ICIJ report was published the previous night. The shares of the bank which were trading at GBX 306.00 at the close of trade on 18 September 2020, fell sharply through its trading session on Monday and were trading at GBX 286.25 (GMT+1 12.03 PM) losing 5.89 per cent of its value against the previous days close.

(Source – Thomson Reuters)

The shares of the company have been underperforming throughout the year. On 2 January 2020, its share last traded at GBX 595.10 and have progressively fallen through the year. As on 21 September 2020, the stock has lost nearly 48 per cent of its value compared to its opening price of the year. Now, its Hong Kong shares are trading at the lowest since 1995.

Conclusion

It is hard to say if an investigation will be launched by authorities into the conduct of HSBC or the other banks who are being accused of lapses. However, the reputation damage that HSBC will suffer because of these revelations could be irreparable. These revelations also suggest that the steps taken by the bank to overhaul its systems have been inadequate to stop entities with shady antecedents to exploit it for illegitimate transactions.

The bank's vulnerable systems are also a cause of concern for its other clients, who would now be worried about their transactions in and through the bank. HSBC would have to now take a series of measures to not only rebuild its systems to restrict any such misuse again but also has to take several policy measures that would restrict its transactions with shady individuals and entities. A public relation exercise would also be required in order the bank could regain the confidence of its customers, authorities, and the general public.

The increasingly complex systems and transaction platforms create more opportunities for fraudsters and criminals to exploit banking networks to defraud unsuspecting people and aid illegal and criminal activities.