[Senate Hearing 112-597, Volume 1]
[From the U.S. Government Publishing Office]
S. Hrg. 112-597
U.S. VULNERABILITIES TO MONEY
LAUNDERING, DRUGS, AND TERRORIST
FINANCING: HSBC CASE HISTORY
=======================================================================
HEARING
before the
PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
of the
COMMITTEE ON
HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
UNITED STATES SENATE
ONE HUNDRED TWELFTH CONGRESS
SECOND SESSION
----------
VOLUME 1 OF 2
----------
JULY 17, 2012
----------
Available via the World Wide Web: http://www.fdsys.gov
Printed for the use of the
Committee on Homeland Security and Governmental Affairs
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
S. Hrg. 112-597
U.S. VULNERABILITIES TO MONEY
LAUNDERING, DRUGS, AND TERRORIST
FINANCING: HSBC CASE HISTORY
=======================================================================
HEARING
before the
PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
of the
COMMITTEE ON
HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
UNITED STATES SENATE
ONE HUNDRED TWELFTH CONGRESS
SECOND SESSION
__________
VOLUME 1 OF 2
__________
JULY 17, 2012
__________
Available via the World Wide Web: http://www.fdsys.gov
Printed for the use of the
Committee on Homeland Security and Governmental Affairs
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
_____
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20402-0001
COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS
JOSEPH I. LIEBERMAN, Connecticut, Chairman
CARL LEVIN, Michigan SUSAN M. COLLINS, Maine
DANIEL K. AKAKA, Hawaii TOM COBURN, Oklahoma
THOMAS R. CARPER, Delaware SCOTT P. BROWN, Massachusetts
MARK L. PRYOR, Arkansas JOHN McCAIN, Arizona
MARY L. LANDRIEU, Louisiana RON JOHNSON, Wisconsin
CLAIRE McCASKILL, Missouri JOHN ENSIGN, Nevada
JON TESTER, Montana ROB PORTMAN, Ohio
MARK BEGICH, Alaska RAND PAUL, Kentucky
JERRY MORAN, Kansas
Michael L. Alexander, Staff Director
Nicholas A. Rossi, Minority Staff Director
Trina Driessnack Tyrer, Chief Clerk
Patricia R. Hogan, Publications Clerk
------
PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
CARL LEVIN, Michigan, Chairman
THOMAS R. CARPER, Delaware TOM COBURN, Oklahoma
MARY L. LANDRIEU, Louisiana SUSAN M. COLLINS, Maine
CLAIRE McCASKILL, Missouri SCOTT P. BROWN, Massachusetts
JON TESTER, Montana JOHN McCAIN, Arizona
MARK BEGICH, Alaska RAND PAUL, Kentucky
Elise J. Bean, Staff Director and Chief Counsel
Robert L. Roach, Counsel and Chief Investigator
Laura E. Stuber, Senior Counsel
Christopher Barkley, Staff Director to the Minority
Keith B. Ashdown, Chief Investigator to the Minority
Mary D. Robertson, Chief Clerk
C O N T E N T S
------
Opening statements:
Page
Senator Levin................................................ 1
Senator Coburn............................................... 7
Prepared statements:
Senator Levin................................................ 85
Senator Coburn............................................... 91
WITNESSES
Tuesday, July 17, 2012
Hon. David S. Cohen, Under Secretary for Terrorism and Financial
Intelligence, U.S. Department of the Treasury.................. 10
Leigh H. Winchell, Assistant Director for Programs, Homeland
Security Investigations, U.S. Immigration and Customs
Enforcement, U.S. Department of Homeland Security.............. 13
David B. Bagley, Head of Group Compliance, HSBC Holdings plc,
London, England................................................ 21
Paul Thurston, Chief Executive, Retail Banking and Wealth
Management, HSBC Holdings plc, Hong Kong....................... 23
Michael Gallagher, Former Executive Vice President, Head of PCM
North America, HSBC Bank USA, N.A., New York, New York......... 24
Chiu Hon ``Christopher'' Lok, Former Head of Global Banknotes,
HSBC Bank USA, N.A., New York, New York........................ 25
Irene Dorner, President and Chief Executive Officer, HSBC Bank
USA and HSBC North America Holdings, Inc., New York, New York.. 47
Stuart A. Levey, Chief Legal Officer, HSBC Holdings plc, London,
England........................................................ 49
Hon. Thomas J. Curry, Comptroller of the Currency, U.S.
Department of the Treasury..................................... 65
Grace E. Dailey, Former Deputy Comptroller for Large Bank
Supervision, Office of the Comptroller of the Currency......... 67
Daniel P. Stipano, Deputy Chief Counsel, Office of the
Comptroller of the Currency.................................... 67
Alphabetical List of Witnesses
Bagley, David B.:
Testimony.................................................... 21
Prepared statement........................................... 111
Cohen, Hon. David S.:
Testimony.................................................... 10
Prepared statement........................................... 94
Curry, Hon. Tomas:
Testimony.................................................... 65
Prepared statement........................................... 150
Dailey, Grace E.:
Testimony.................................................... 67
Prepared statement........................................... 150
Dorner, Irene:
Testimony.................................................... 47
Prepared statement........................................... 130
Gallagher, Michael:
Testimony.................................................... 24
Prepared statement........................................... 124
Levey, Stuart A.:
Testimony.................................................... 49
Prepared statement........................................... 137
Lok, Chiu Hon ``Christopher'':
Testimony.................................................... 25
Prepared statement........................................... 127
Stipano, Daniel P.:
Testimony.................................................... 67
Prepared statement........................................... 150
Thurston, Paul:
Testimony.................................................... 23
Prepared statement........................................... 116
Winchell, Leigh H.:
Testimony.................................................... 13
Prepared statement........................................... 99
APPENDIX
Report by the Permanent Subcommittee on Investigations Majority
and Minority Staff entitled ``U.S. Vulnerabilities to Money
Laundering, Drugs, and Terrorist Financing: HSBC Case
History,'' July 17, 2012....................................... 169
EXHIBIT LIST
1. a. GMatters Requiring Attention (MRAs) and Recommendations in
OCCSupervisory Letters for HSBC Bank USA, N.A., January 2005-
July 2009, chart prepared by the Permanent Subcommittee on
Investigations................................................. 575
b. GHBMX Compliance Failures, chart prepared by the Permanent
Subcommittee on Investigations................................. 576
c. GDisclosed v. Undisclosed Iranian U.S. Dollar Payments Sent
by HSBC Foreign Affiliates to U.S. Banks, Including HSBC Bank
USA, chart prepared by the Permanent Subcommittee on
Investigations................................................. 577
d. GExcerpts from emails of David Bagley re HBUS awareness of
Iranian transactions, 2003-2004................................ 578
e. GRatings Used in OCC Report of Examinations, chart prepared
by the Permanent Subcommittee on Investigations................ 579
f. G31 USC Sec. 5318(h)--Anti-Money Laundering Programs....... 580
General Documents:
2. a. GHSBC Group News, HSBC Group Chief Executive Stuart
Gulliver letter to all HSBC employees. [PSI-HSBC-76-0001-0002]. 581
b. GHSBC Group Circular Letters (GCL), GCL 120014--HSBC Global
Standards. [PSI-HSBC-75-0001].................................. 583
c. GHSBC Group Standards Manual, Chapter 5 Legal, Compliance
and Reputation................................................. 585
3. GHSBC internal email, dated September 2008, re: Kyc hires (.
. . still grappling with some of the grim realities of the
present--the upcoming OCC exam in November being one of those
grim realities.). [HSBC OCC 0616352-356]....................... 587
4. G30 Day Observations and Recommendations Report from AML
Director (Extremely high risk business model from AML
perspective * * * AML Director has the responsibility for AML
compliance, but very little control over its success). [HSBC-
PSI-PROD-0065332-334].......................................... 592
5. GHSBC internal email, dated October 2009, re: OFAC resources
(. . . not good in that we don't get the staffing levels we
need.). [OCC-PSI-00162661]..................................... 595
6. GHSBC internal email, dated February 2010, re: Received a
call from Kathy G this am. (we are in dire straights right now
over backlogs, and decisions being made by those that don't
understand the risks or consequences of their decisions!!!!).
[OCC-PSI-00165898]............................................. 597
7. GHSBC internal email, dated February 2010, re: Bco Nac Angola
(We don't appear to be on the same page as to who owns the
risk.). [OCC-PSI-00165932]..................................... 599
Documents Related to HBMX and HSBC Mexico:
8. GHSBC internal email, dated July 2002, re: BITAL (There is no
recognisable compliance or money laundering function in Bital
at present . . .) [HSBC OCC 8877797-798]....................... 605
9. GHSBC internal email, dated August 2002, re: HIGH NOON,
attaching copy of Group Internal Audit, Due Diligence Review--
Project High Noon). [HSBC OCC 8873843-855]..................... 607
10. GHSBC internal email, dated November 2002, re: COMPLIANCE DUE
DILIGENCE TRIP BY JOHN ROOT, BITAL (MEXICO CITY)--4-8NOV02.
[HSBC OCC 8877800-807]......................................... 620
11. GMay 2004 Group Audit of HBMX (In our opinion, based upon the
foregoing, the Direction of Money Laundering Deterrence is
operating with a BELOW STANDARD level of Control Risk.). [HSBC
OCC 8874376-381]............................................... 628
12. GHSBC internal email, dated January 2005, re: COMPLIANCE
EXCEPTION (. . . 3 members of the Compliance function within
HBMX have alleged that senior persons within the Compliance
function fabricated records of certain mandatory anti-money
laundering meetings . . . * * * There appears little doubt that
the transaction is a breach of the relevant OFAC sanction on
the part of HBUS, . . .). [HSBC OCC 8873671-673]............... 634
13. GHSBC internal email, dated December 2005, re: OFAC (Some
Western authorities allege more sinister purposes, e.g. the
funding of terrorist Hizbollah activities . . .). [HSBC OCC
8876612-613]................................................... 637
14. GHSBC internal email, dated March 2007, re: Subject redacted
by HSBC (This is a very serious, and high profile, case which
has potential reputational damage to the HSBC Group, and must
be given the highest priority.). [HSBC OCC 8874315-326]........ 639
15. GHSBC internal email, dated March 2007, re: Travellers
Cheques (. . . in the year through 3Q04, HBMX has sold over USD
110 million of travellers cheques, an amount that eclipses that
of HBEU here in the UK, . . .). [HSBC OCC 8876645-646]......... 644
16. GHSBC internal email, dated April 2007, re: GROUP AUDIT
COMMITTEE--APR07 (Lack of a compliance culture, evidenced (in
the most serious way) by the number of staff defalcations and
(in a more widespread general negligence) in the number of
fines we receive from the regulators for avoidable errors . .
.). [HSBC OCC 8874328-330]..................................... 646
17. GHSBC internal email, dated April 2007, re: Managerial
Letter: HBMX (. . . process he initiated over a month ago
following the seizure of the arms and money from our customer's
premises. . . . * * * Not a happy story.). [HSBC OCC 8875010-
014]........................................................... 649
18. a. GHSBC Bank USA, National Association Office Memorandum,
dated May 1, 2007, re: Wall Street Journal Article Regarding
Wachovia (Sigue Corp.--A money service business that allegedly
processed $24.7 million in suspicious money remittances related
to drug-trafficking proceeds.). [OCC-PSI-01358514-517]......... 654
b. GExcerpt from Sigue Corporation Deferred Prosecution
Agreement, January 24, 2008.................................... 658
19. GHSBC internal email, dated July 2007, re: Weekly Compliance
Report (It looks like the business is still retaining
unacceptable risks and the AML committee is going along after
some initial hemming and hawing.). [HSBC OCC 8875925-927]...... 673
20. GHSBC internal email, dated July 2007, re: Subject redacted
by HSBC (The principal factor here is that the quality of
response from the CMB team has not been of the standard that
leads me to believe that they are on top of the compliance
risks here.). [HSBC OCC 8875132-135]........................... 676
21. GHSBC internal email, dated October 2007, re: CNBV Inspection
(This is disturbing and clearly we will need to look at the
management structure and practices.). [HSBC OCC 8873338-342]... 680
22. GHSBC internal email, dated November 2007, re: Mexico (. . .
there are numerous cases of accounts with multiple SARs (16 in
one case!!) in Mexico that remain open.). [HSBC OCC 8875423]... 685
23. GHSBC internal email, dated December 2007, re: Warren
Learning HBMX DEC Visit Issues (Sinaloa massive money-
laundering scheme (+USD 100 million). [HSBC OCC 8875837]....... 686
24. G12/2007 Audit of HBMX-Money Laundering Deterrence (MLD),
GROUP AUDIT MEXICO, AUDIT REPORT SUMMARY SCHEDULE (Main control
weaknesses identified during the audit . . .). [HSBC OCC
8876347]....................................................... 687
25. GHSBC internal email, dated January 2009, re: US Issues--
Various (. . . if they were contacted by US authorities then
they should have thought to advise HBUS.). [HSBC OCC 8873759].. 688
26. GHSBC internal email, dated December 2006, re: OFAC--Wire
payments blocked from HSBC offshore entities--USD 32,000 (re
SDGT) and USD 2,538,939.33 (re Sudan) (How is it that these
payments continue to be processed by our affiliates in light of
the GCLs?). [HSBC OCC 3407608-609]............................. 689
27. GHSBC internal email, dated February 2008, re: CNBV (. . .
Mexico is suffering a major problem with drugs dealers and the
Government is being very robust. . . .). [HSBC-PSI-PROD-
0198508-509]................................................... 691
28. GHSBC internal email, dated February 2008, re: Subject
redacted by HSBC (. . . in spite of the seriousness of this
case and the issues involved, CMB is proposing to retain this
relationship.). [HSBC OCC 8875139-141 and HSBC OCC 8875020-021] 693
29. GHSBC internal email, dated February 2008, re: CONFIDENTIAL--
CNBV/FIU Meeting (This is most disturbing and we will need to
have the most thorough of investigations.). [HSBC OCC 8966014-
018]........................................................... 698
30. GHSBC internal email, dated March 2008, re: HBMX (The
comments made by Leopoldo are quite concerning, and it would
appear that he was more aware of the weaknesses, and the
concerns of the CNBV, than Ramon has indicated.). [HSBC OCC
8874821-825]................................................... 703
31. GHSBC internal email, dated July 2008, re: HBMX Visit Update
(The report . . . concluded that KYC control was ``below
standard.'' A sampling showed that 15% of the customers did not
even have a file. For the files that could be found, there were
serious failures in following Group procedures.). [HSBC OCC
8873487-489]................................................... 708
32. GHSBC internal email, dated July 2008, re: HBMX--Cayman
Accounts (. . . it appears that our CAMP monitoring system
identified significant USD remittances being made by a number
of customers to a US company alleged to have been involved in
the supply of aircraft to drugs [sic] cartels.). [HSBC OCC
8874829-833]................................................... 711
33. GHSBC internal email, dated September 2008, re: Cayman
Accounts (Account opening documentation is generally poor or
non-existent and there is a lot of work to do. Money-laundering
risk is consequently high.). [HSBC OCC 8876784-787]............ 716
34. GHSBC internal email, dated November 2008, re: Seriously
consider restricting the product Dollars accounts in the zona
frontera Product 63 Cuenta Maestra en Dolares P.F. (In the same
way we have already restricted new Caiman Island accounts from
opening, due to the massive misuse of them by organised crime .
. .). [HSBC OCC 8875736-738]................................... 720
35. GHSBC internal email, dated November 2008, re: Mexico (What I
find most frustrating is the way in which new issues constantly
emerge however much time is spent with HBMX.). [HSBC OCC
8875605-607]................................................... 723
36. GHSBC internal email, dated December 2008, re: Mexico Visit
(. . . significant backlog (3,659) of accounts to be closed. .
. . 675 accounts pending closure were ordered to be closed by
the CCC on suspicion that they are used for money laundering
activity. . . . 16 accounts that were sent for closure in 2005,
. . .). [HSBC-PSI-PROD-0197874-876]............................ 726
37. a. GHBUS Banksnotes NY-USD Bought from or Sold to Customers
in Mexico: 3 Month Period (Nov-06 to Feb-07). [OCC-PSI-
00151506]...................................................... 729
b. GBANKNOTES-NY Selected Customers' Activity Alerts &
Traders' Explanations for USD Purchases & Sales from 2005-2009,
prepared by OCC. [OCC-PSI-00005890-904]........................ 730
38. GOCC internal email, dated June 2010, re: HSBC (. . . this
has the makings of potentially being a major criminal case . .
.). [OCC-PSI-00928756-758]..................................... 745
39. GHSBC Presentation, Conducting an Enhanced KYC for Grand
Cayman Accountholders, undated (* * * almost no progress has
been made in enhanced KYC completion * * * success rate in file
completion is approximately 25%). [HSBC OCC 8874560-566]....... 748
Documents Related to HSBC Affiliates--Circumventing OFAC
Prohibitions:
40. GHSBC internal email, dated May 2001, re: BANK MELLI (I wish
to be on the record as not comfortable with this piece of
business.). [HSBC-PSI-PROD-0096138-142]........................ 755
41. GHSBC internal email, dated July 2001, re: Bank Melli (With
the amount of smoke coming off this gun, remind me again why we
think we should be supporting this business?). [HSBC OCC
8876128-136]................................................... 760
42. GHSBC internal email, dated October 2001, re: OFAC SANCTIONS
(. . . bear in mind pending US legislation which will in effect
give the US extra-territorial authority over foreign banks,
particularly if we are unfortunate enough to process a payment
which turns out to be connected to terrorism.). [HSBC OCC
8873890-893]................................................... 769
43. GHSBC internal email, dated October 2002, re: IRAN (Your
already processing USD payments from two existing accounts held
in London.). [HSBC OCC 7687373-377]............................ 773
44. GHSBC internal email, dated January 2003, re: USD Payments
from Iranian Banks (As you may recall, it was agreed that our
London/Middle East office would put together a business case
regarding plans for providing USD payment services to Iranian
Banks . . .). [HSBC OCC 3407510-515]........................... 778
45. GHSBC internal email, dated February 2003, re: BUSINESS
CASE--US PAYMENTS FROM IRANIAN BANKS/ENTITIES (The business
case includes a number of express references to practices which
may constitute a breach of US sanctions, including the OFAC
provisions, and could provide the basis for action against the
HSBC Group . . .). [HSBC OCC 8876487-488]...................... 784
46. GHSBC internal email, dated October 2003, re: IRAN--STRATEGY
DISCUSSION PAPER (. . . there remain serious political and
reputational risks within the USA if they proceed with this . .
.). [HSBC OCC 8873941-947]..................................... 786
47. GHSBC Document, IRAN--STRATEGY DISCUSSION PAPER, undated,
(The Iranian market offers substantial untapped potential for
the HSBC Group.). [HSBC OCC 8873949-956]....................... 793
48. GHSBC internal email, dated October 2003, re: USD Clearing--
Iranian Banks (. . . HBEU have been manually intervening in the
processing of Iranian bank payment instructions by removing the
remitter's name and country to prevent the probable trigger of
a filter in the US, and the subsequent declaration to OFAC (and
possible freezing) of the funds.). [HSBC OCC 8875217-218]...... 801
49. GHSBC internal email, dated October 2003, re: Iran (The
practice of amending instructions is clearly a long standing
one which has hitherto continued despite the RMs believing it
had ceased some years ago.). [HSBC OCC 8874660-663]............ 803
50. a. GHSBC internal email, dated December 2003, re:
COMPLIANCE--OFAC ISSUES IN GENERAL AND SPECIFIC TO IRAN (I
currently feel that we may be exposing ourselves to unnecessary
and unacceptable Reputational and Operational Risk when we are
handling payments originating from FIs domiciled in or who are
a local branch of an FI domiciled in an OFAC regulated
country.). [HSBC OCC 3407517-522].............................. 807
b. GHSBC internal email, dated June 2003, re: PLC--Re ``do not
mention our name'' (When Funds Transfer staff noted the
messages in the BBI field stating ``do not mention our name''
the payment was rejected, per our policy, due to concerns about
evasion issues under the OFAC regulations.). [HSBC OCC 8873922-
928]........................................................... 813
c. GHSBC internal email, dated May 2005, re: Wire Payments
Suspended (Wire payment suspended re ``Iran''--USD
6,912,607.82). [HSBC OCC 8874710-712].......................... 820
d. GHSBC internal email, dated February 2008, re: Rami
Makhlouf (Please be advised that we currently maintain a
relationship with Sellor, Mohamad Makhlouf in our capacity as
Trustee and the individual named in your search request (Rami
Makhlouf) is actually a beneficiary of the Trust . . .). [HSBC-
OCC-8878838-840]............................................... 823
51. GHSBC internal email, dated March 2004, re: BankMarkazi
Payment (. . . I remain extremely uncomfortable with the
practice of amending Iranian payment orders for whatever
means.). [HSBC OCC 8873979-982]................................ 826
52. GHSBC internal email, dated March 2004, re: Bank Markazi
Payment (The complexity of the OFAC regulations, and the fact
that HBUS were unaware that any arrangements existed with
Iranian Banks, has made speedy resolution of this issue
difficult.). [HSBC OCC 8873985-986]............................ 830
53. GHSBC internal email, dated April 2004, re: Iran
Correspondent Banking Services--OFAC (. . . the most pressing
issue to be resolved is that relating to the limited number of
existing relationships that we have (for two small Iranian
Banks) where I suspect that HBUS are not aware that payments
may be passing through them.). [HSBC OCC 8873994-997].......... 832
54. GHSBC internal email, dated June 2004, re: Iran (. . . there
are very compelling commercial reasons which need to be borne
in mind when making this decision, not least of which is the
threat to the Group's position in and business with Iran over
the medium term.). [HSBC OCC 8874001-004]...................... 836
55. GHSBC internal email, dated June 2004, re: Iran (. . . our
interpretation was that we were being asked to ``fudge'' the
nature of the payments to avoid the U.S. embargo and seizure .
. .). [HSBC OCC 8873999]....................................... 840
56. GHSBC internal email, dated July 2004, re: HBEU Iranian
Payments Business (. . . we are being asked to amend
instructions or, assume responsibility that the contents of the
payment message do not attract the fed's attention and seize
the payment. . . .). [HSBC OCC 8876861-863].................... 841
57. GHSBC internal email, dated November 2004, re: U-turns (. . .
initially there were concerns about the potential intentional
removal of wording ``off limit payments'' from these
payments.). [HSBC-PSI-PROD-0096165-167]........................ 844
58. GHSBC internal email, dated December 2004, re: U-turns
(Attached are the conditions under which HBUS will accept U-
Turn transactions.). [HSBC OCC 3407526-527].................... 847
59. GHSBC internal email, dated June 2005, re: IRANIAN PAYMENTS
(. . . HBME is currently seeking to open a USD account with JP
Morgan Chase as our first choice . . . in order to process
Iranian related USD payments.). [HSBC OCC 8878026-029]......... 849
60. GHSBC internal email, dated May 2006, re: TP GATEWAYS (I
would have thought the US regulators would have taken a dim
view of routing stuff around the US.). [HSBC OCC 7687437-438].. 853
61. GHSBC internal email, dated May 2006, re: U Turns (I
anticipate that you would prefer to see Field 72 completed, but
this will mean more hits in the filters even if they will then
be passed.). [HSBC OCC 3243782-787]............................ 855
62. GHSBC internal email, dated January 2007, re: Transactions
with Iran/Cuba, etc (. . . let's set up a completely different
Swift address to help avoid any problems with Cuba and Iran.).
[HSBC OCC 8876921-931]......................................... 861
63. GHSBC internal email, dated June 2007, re: Iran (There are
further complications surrounding the process of closure with
all Iranian banks as we have some USD 9m in reimbursements due
from Sepah, where we are running off trade lines . . .). [HSBC
OCC 8878214-216]............................................... 872
64. GHSBC internal email, dated June 2007, re: GROUP MESSAGING
GATEWAY FOR LAM--CLEAR CHOICE REPORT (We have not engaged with
CI and Nassau as we have no leadership responsibility for this
geography.). [HSBC OCC 8874349-355]............................ 875
65. GHSBC internal email, dated June 2008, re: OFAC processing in
GSC's (. . . we're strapped and getting behind in
investigations (on OFAC cases) and have some of our key
managers in the queues releasing items . . . I cannot hire
first level staff unless it's offshored . . .) [HSBC OCC
0616349-350]................................................... 882
66. GHSBC internal email, dated December 2009, re: OFAC Payments
(. . . we could use 5 or 6 people for 10 days who can review
payments to clear the 700 and building backlog of payments that
have been held over and need to be worked to process.). [HSBC
OCC 7688668-670]............................................... 884
67. GHSBC internal email, dated August 2010, re: Project Topaz US
Urgent Requirements (We need to move quickly to reduce the AML
alerts and the connected KYC issues as it is impossible to plan
the required capacity * * * Attached is a list of 121
international banks that we can no longer support and need to
exit. * * * the US requirements cut across business lines and
it is crucial that the strategies of PCM, TSC and FIG are
aligned to prevent this situation occurring in the future.).
[HSBC OCC 8876104-106]......................................... 887
68. GExcerpt from Deloitte Review of OFAC transactions, RESULTS
OF THE TRANSACTIONS REVIEW--UK GATEWAY, March 29, 2012. [HSBC-
PSI-PROD-0197919, 930-931, 940, 968-969, 976, 980]............. 890
69. GExcerpt from March 29, 2012 Presentation, prepared by
Sullivan & Cromwell LLP and Cahill Gordon & Reindel LLP on OFAC
compliance by HSBC Bank USA. [HSBC OCC 8966113, 118, 143]...... 898
70. GHSBC Group Circular Letters (GCL):
a. GGCL 050047--Compliance with sanctions (28/Jul/2005) [HSBC
OCC 3407560-561];.............................................. 901
b. GGCL 060011--US Dollar Payments (06/Apr/2006) [HSBC OCC
3407587];...................................................... 905
c. GGCL 060041--US OFAC Sanctions against Iran--U-Turn
Exemption (25/Oct/2006) [HSBC OCC 3407606];.................... 907
d. GGCL 070049--Sanctions Against Iran (24/Sep/2007). [OCC-
PSI-00141530-531].............................................. 909
Documents related to other countries:
71. a. GHSBC internal email, dated September 2005, re: OFAC
sanctions (In particular regard to the Sudanese payments, but
also to a lesser extent, Cuban and Burmese, there are a
considerable number of USD denominated transactions.). [HSBC
OCC 8877213-214] 912
b. GHSBC document prepared May 2007. INFORMATION REQUESTED IN
CONNECTION WITH: NORTH KOREA, CUBA, AND MYANMAR (We were
notified that there are relationships with Cuban and North
Korean customers.). [HSBC OCC 8876093-095]..................... 914
c. GHSBC internal email, dated October 2005, re: GCL 050047--
Compliance with Sanctions (I note HBMX continues to process USD
payments involving Cuba. It is very important this is stopped
immediately as the regulators are getting very tough and the
cost to the Group could be considerable if a breach occurs,
both in terms of the fine and in the rectification work which
is likely to be a pre-requisite to any settlement. If this
identifies further breaches, the cost could spiral.). [HSBC OCC
8874357-362]................................................... 917
d. GExcerpt from Deloitte, Transaction Review Progress and
Results Reporting, 18th & 19th October 2011 (Correspondent and
other accounts . . .). [HSBC-PSI-PROD-0096628, 649]............ 923
Documents Related to Al Rajhi Bank--Disregarding Links to
Terrorist Financing:
72. GHSBC internal email, dated January 2005, re: Al Ra[jh]i
Trading/Al Ra[jh]i Banking (. . . Group Compliance has
recommended that the US businesses sever ties with these
clients based on the current regulatory environment and the
interest of US law enforcement.). [HSBC OCC 1884218]........... 925
73. GHSBC internal email, dated March 2005, re: Al Ra[jh]i
Guidance Clarified (Looks like you're fine to continue dealing
with Al Rajhi. You'd better be making lots of money!). [HSBC
OCC 3114022]................................................... 926
74. GHSBC internal email, dated May 2005, re: Al Rajhi (After the
OCC close out and that chapter hopefully finished, could we re-
visit Al Rajhi again. London compliance has taken a more
lenient view . . .). [OCC-PSI-00144350]........................ 927
75. GHSBC internal email, dated August 2005, re: Al Rajhi (We've
gotten push back from OCC on Al Ra[jh]i Trading, which is less
controversial than the bank.). [OCC-PSI-00343527].............. 929
76. GExcerpt from HBUS Global Banknotes--Purchases & Sales USD--
2008 vs 2009. [HSBC OCC 5364770, 784, 793, 794]................ 932
77. GHSBC internal email, dated November 2006, re: Al Rajhi
Banking (. . . the PCM Regional Sales Manager at HBME in
Bahrain . . . has called to say that Al Rajhi has now run out
of patience waiting for us to re-start our banknote trading
relationship . . .). [HSBC OCC 3280505]........................ 936
78. GHSBC internal email, dated November 2006, re: Al Rajhi
Banking (At the end of the day, its Compliance who's the key.).
[OCC-PSI-00150795]............................................. 937
79. GHSBC internal email, dated November 2006, re: Alrajhi [sic]
(To cancel the Amanah business is much bigger than not dealing
with banknotes.). [OCC-PSI-00150798]........................... 939
80. GHSBC internal email, dated December 2006, re: Al Rajhi Bank
(. . . the notion of `no smoke without fire' is one we must
bear in mind and any business unit dealing with this entity
must acknowledge the associated risks.). [OCC-PSI-00150892].... 942
81. GHSBC internal email, dated July 2007, re: Al Rajhi Bank in
Saudi Arabia (This article on Al Rajhi Bank & TF was in the
Wall Street Journal today.). [HSBC OCC 2830874-879]............ 943
82. GHSBC internal email, dated November 2007, re: ISLAMI BANK
BANGLADESH LIMITED (. . . the money is there and we should go
for this account.). [HSBC OCC 0739987-991]..................... 949
83. GHSBC internal email, dated November 2007, re: ISLAMI BANK
BANGLADESH LIMITED--Bangladesh (. . . the Al-Rajhi family has
been associated with Islami Bank, Bangladesh Limited, since its
inception.). [OCC-PSI-00154139]................................ 954
84. a. GHSBC internal email, dated August 2009, re: EDD Report of
Findings [redacted] Bank Ltd in Bangladesh (BN-SP & PCM) (I
support Hersel's stance that this is such a large bank hence
malfeasance is expected.). [HSBC OCC 7688017-024].............. 958
b. GHSBC internal email, dated September 2005, re: Report of
Findings--[redacted] Bank--FIG (Yes, corruption can be rampant
in this bank. . . .). [HSBC OCC 7690024-032]................... 964
85. GHSBC Know Your Customer Profile for Al Rajhi Banking &
Investment Corp, October 2010. [HSBC-PSI-PROD-0102310-324]..... 967
86. GHSBC Know Your Customer Profile for Islami Bank Bangladesh
Limited, June 2011. [HSBC-PSI-PROD-0117222-237]................ 982
87. a. GIslami Bank Bangladesh Ltd. responses to questions from
the U.S. Senate Permanent Subcommittee on Investigations, July
4, 2012. [PSI-IBBL-01-0001-003]................................ 998
b. GSocial Islami Bank Ltd. responses to questions from the
U.S. Senate Permanent Subcommittee on Investigations, July 10,
2012. [PSI-SIBL-01-0001-004]................................... 1001
Documents Related to Hokuriku Bank--Cashing Bulk Travelers
Checks:
88. GHSBC internal email, September 2008, re: Hokuriku Bank Ltd--
Compliance query (Information from Hokuriku Bank regarding some
of the car dealerships they do business with that we
questioned. Its very limited information that took us over a
month to get.). [OCC-PSI-00409214-216]......................... 1005
89. GHSBC internal email, dated November 2008, re: Hokuriku Bank
(This use of cash letter is inappropriate and the Committee has
concluded that PCM should no longer allow Hokuriku to send
traveler's checks through cash letter.). [OCC-PSI-00808695].... 1017
90. GHSBC internal email, dated December 2008, re: Hokuriku
Bank--information needed (They have been good enough to provide
information so far but as you may understand from bank secrecy
view point, they should not or cannot disclose customer
information.). [OCC-PSI-00811358].............................. 1024
91. GHSBC internal email, dated December 2008, re: SK Trading (.
. . we uncovered huge amounts of [redacted] travelers' checks
(daily averages of $500M to $700M per day) being processed by
HSBC for their correspondent Hokuriku Bank in Japan.). [OCC-
PSI-00888526].................................................. 1037
92. GHokuriku Bank, Ltd. responses to questions from the U.S.
Senate Permanent Subcommittee on Investigations, June 26 and
29, 2012. [PSI-HokurikuBank-01-0001-005 and PSI-HokurikuBank-
02-0001]....................................................... 1038
Documents Related to HBUS Private Bank Americas--Offering Bearer
Share Accounts:
93. GHSBC internal email, dated August 2007, re: Bearer Share
Companies (The following is our current policy for Bearer Share
Corporations in NY . . .). [OCC-PSI-00318438].................. 1044
94. GHSBC internal email, dated December 2007, re: Bearer Share
Corporation Policy (IPB Miami maintains existing accounts for
1,679 Bearer Share Corporations of which 126 are considered
High Risk.). [OCC-PSI-00226652]................................ 1059
95. GTranscript of 4/25/2007 telephone conversation between HBUS
Claude Mandel and Mauricio Cohen (Mr. Cohen: But I can't put
that, otherwise I have to declare them in the United States? I
can't do that, I don't want to declare . . . otherwise, I have
to close the accounts with you and go to Geneva.). [HSBC-PSI-
PROD-0024791-795].............................................. 1062
96. a. GHSBC internal email, dated June 2007, re: Waiver Request
(The two accounts are bearer shares. The client does not want
neither to register nor custodize the shares, and they do not
want to sign the BOL.). [OCC-PSI-00214516]..................... 1067
b. GHSBC internal email, dated June 2007, re: Waiver Request
(I would do it without going to Geneva but audit wrote up DPB
on a similar situation.). [OCC-PSI-00214534]................... 1071
97. Documents related to Peruvian Family:
a. GHSBC internal email, dated June 2007, re: [redacted]
Family (I spoke to Susan Wright, Group Head of AML. She is
reluctant to grant the exception but will consider it.). [OCC-
PSI-00214880].................................................. 1073
b. GHSBC internal email, dated June and July, 2007, re:
[redacted] Family (This is too important a family in Peru for
us not to want to do business with, . . .). [OCC-PSI-00215211]. 1075
Documents Related to OCC--Exercising Ineffective AML Oversight:
98. GHSBC internal email, dated February 2010, re: OCC Meeting
(In light of the extent of our alert backlogs, Sally indicated
that they will shortly be issuing a Supervisory Letter . . .).
[HSBC OCC 3405315-316]......................................... 1081
99. GHSBC internal email, dated June 2009, re: GMO business
reviews--LATAM (The inherent AML risk in Mexico is still very
high . . .). [HSBC OCC 8874895]................................ 1083
Additional Documents:
100. GCorrespondence from the Comptroller of the Currency (OCC)
to the Permanent Subcommittee on Investigation, September 20,
2012, on actions taken by the OCC since the Subcommittee's July
2012 hearing. [PSI-OCC-45-0000010-016]......................... 1084
101. GResponses to supplemental questions for the record from
HSBC, September 11 and 25, 2012. [PSI-HSBC-80-000001-006, PSI-
HSBC-81-000001-003]............................................ 1100
VOLUME 2
102. GDocuments cited in footnotes to U.S. Vulnerabilities to
Money Laundering, Drugs, and Terrorist Financing: HSBC Case
History, the Report released in conjunction with the
Subcommittee hearing on July 17, 2012. A Document Locator List
provides Bates numbers and document descriptions of the
documents cited in the Report. Not included are documents
related to Subcommittee interviews, which are not available to
the public, and widely available public documents.............. 1109
U.S. VULNERABILITIES TO MONEY
LAUNDERING, DRUGS, AND TERRORIST
FINANCING: HSBC CASE HISTORY
----------
TUESDAY, JULY 17, 2012
U.S. Senate,
Permanent Subcommittee on Investigations,
of the Committee on Homeland Security
and Governmental Affairs,
Washington, DC.
The Subcommittee met, pursuant to notice, at 9:36 a.m., in
room SD-342, Dirksen Senate Office Building, Hon. Carl Levin,
Chairman of the Subcommittee, presiding.
Present: Senators Levin and Coburn.
Staff Present: Elise J. Bean, Staff Director/Chief Counsel;
Mary D. Robertson, Chief Clerk; Laura E. Stuber, Senior
Counsel; Robert L. Roach, Counsel and Chief Investigator; Eric
Walker, Detailee; Kristin Gwin, Congressional Fellow;
Christopher Barkley, Staff Director to the Minority; Keith B.
Ashdown, Chief Investigator to the Minority; Adam Henderson,
Professional Staff Member; Dennis Bogucz, Congressional Fellow;
Brian Egger, Detailee; Beth Baltzan, Congressional Fellow; Noah
Czarny, Law Clerk; Bill Gaertner, Law Clerk; Curtis Kowalk, Law
Clerk; Lane Powell, Law Clerk; Arielle Woronoff, Law Clerk;
Sofia Knutsson, Intern; and Jacquelyn Jones, Law Clerk.
OPENING STATEMENT OF SENATOR LEVIN
Senator Levin. Good morning, everybody. Today's hearing
will examine the money-laundering, drug-trafficking, and
terrorist-financing risks created in the United States when a
global bank uses its U.S. affiliate to provide U.S. dollars and
access to the U.S. financial system to a network of high-risk
affiliates, high-risk correspondent banks, and high-risk
clients.
Most international banks have a U.S. affiliate. They use it
in part to compete for U.S. clients and business, but also to
provide themselves with access to the U.S. financial system.
Global banks want access to U.S. dollars because they are
accepted internationally, they are the leading trade currency,
and they hold their value better than any other currency. They
want access to U.S. wire transfer systems because they move
money across international lines quickly, securely, and to the
farthest corners of the Earth. They want to clear U.S. dollar
monetary instruments like travelers checks, bank checks, and
money orders. And they want the safety, efficiency, and
reliability that are the hallmarks of U.S. banking.
The problem here is that some international banks abuse
their U.S. access. Some allow affiliates operating in countries
with severe money-laundering, drug-trafficking, or terrorist-
financing threats to open up U.S. dollar accounts without
establishing safeguards at their U.S. affiliate. Some operate
in secrecy jurisdictions. Some allow poorly managed or corrupt
foreign banks to make use of an affiliate's U.S. dollar
account. Others allow high-risk clients to use those accounts
without taking adequate anti-money laundering (AML) steps. Some
even allow their affiliates to pressure their U.S. cousins to
ease up on U.S. AML restrictions or look the other way when
they spot suspicious activity. The end result is that the U.S.
affiliate can become a sinkhole of risk for an entire network
of bank affiliates and their clients around the world playing
fast and loose with U.S. rules.
The consequences are the ones you would expect from
operating a U.S. bank with inadequate safeguards against money
laundering. The U.S. bank can end up aiding and abetting
transactions that fund terrorists, drug cartels, corrupt
dictators, and tax cheats, because all of them want access to
the U.S. financial system, too, and for the same reasons.
Wrongdoers can use U.S. dollars and U.S. wire transfers to
commit crimes, arm terror groups, produce and transport illegal
drugs, loot government coffers, and even pursue weapons of mass
destruction. That is why our country has made combating money
laundering and terrorist financing a national security
imperative.
For the last decade, this Subcommittee has contributed to
the battle against money laundering and terrorist financing by
exposing problems that increase U.S. vulnerabilities to abuse.
In 2001, for example, this Subcommittee released a report
showing how U.S. banks that offer accounts to foreign banks,
engaging in what is known as correspondent banking, can become
conduits for illegal proceeds involving organized crime, drug
trafficking, or financial fraud. Back then, most U.S. banks
opened a correspondent account for any foreign bank with a
banking license. After our hearing, U.S. banks took a harder
look and assessed the risks before opening a correspondent
account. In 2002, Congress cited our hearings when enacting
tougher AML laws in the PATRIOT Act, including in that Act a
provision making it a legal obligation for U.S. banks to
conduct a due diligence review before opening an account for a
foreign bank.
Tougher AML laws have helped deny criminals access to the
U.S. financial system. But as our report that we are releasing
today shows, enormous problems remain.
To illustrate those problems, today's hearing focuses on a
case study involving HSBC, one of the largest banks in the
world. Headquartered in London, HSBC has a network of over
7,200 offices in more than 80 countries, 300,000 employees, and
2011 profits of nearly $22 billion. HSBC has been among the
most active banks in Asia, the Middle East, and Africa. It
first acquired a U.S. presence in the 1980s; today its leading
U.S. affiliate is HSBC Bank USA, sometimes called ``H-BUS.''
That HBUS affiliate now has 470 branches across the United
States and 4 million customers here.
HBUS is the key U.S. nexus for the entire HSBC worldwide
network. In 2008, HBUS processed 600,000 wire transfers per
week; in 2009, two-thirds of the U.S. dollar payments that HBUS
processed came from HSBC affiliates in other countries. One
HSBC executive told us that a major reason why HSBC opened its
U.S. bank was to provide its overseas clients with a gateway
into the U.S. financial system.
Now, add on top of that, HBUS's history of weak AML
controls, and you have a recipe for trouble. In 2003, the
Federal Reserve and New York State Banking Department took a
formal enforcement action requiring HBUS to revamp its AML
program. HBUS, which was then converting to a nationally
chartered bank under the supervision of the Office of the
Comptroller of the Currency (OCC) made changes, but even before
the OCC lifted its order in 2006, the bank's AML program began
deteriorating. In September 2010, the OCC issued a supervisory
letter, 31 pages long, describing a long list of severe AML
deficiencies, and followed in October 2010 with a cease and
desist order requiring HBUS to revamp its AML program a second
time.
The OCC cited, among other problems, a massive backlog of
unreviewed alerts identifying potentially suspicious activity;
a failure to monitor $60 trillion in wire transfers and account
activity; a failure to examine risks at HSBC's overseas
affiliates before providing them correspondent banking
services; and a failure, over a 3-year period, to conduct AML
checks on more than $15 billion in bulk cash transactions with
those same affiliates.
To examine the issues, the Subcommittee issued subpoenas,
reviewed more than 1.4 million documents, and conducted
extensive interviews with HSBC officials from around the world,
as well as officials at other banks, and with Federal
regulators. HSBC has cooperated fully with our investigation.
The Subcommittee's work identified five key areas of
vulnerability exposed by the HSBC history. The five areas
involve the following:
First, providing U.S. correspondent accounts to high-risk
HSBC affiliates without performing due diligence, including a
Mexican affiliate with unreliable AML controls.
Second, failing to stop deceptive conduct by HSBC
affiliates to circumvent a screening device designed to block
transactions by terrorists, drug kingpins, and rogue nations
like Iran;
Third, providing bank accounts to overseas banks with links
to terrorist financing;
Fourth, clearing hundreds of millions of dollars in bulk
U.S. dollar travelers checks, despite serious suspicious
circumstances;
And, finally, offering bearer share accounts, a high-risk
account that invites wrongdoing by facilitating hidden
corporate ownership.
Let us take each in turn.
First, the issue of high-risk affiliates. HSBC operates
affiliates in 80 countries, including jurisdictions facing
major money-laundering, drug-trafficking, or terrorist-
financing challenges as well as weak AML laws and oversight.
Yet, until recently, HSBC's London-based parent company, known
as the HSBC Group, instructed its affiliates to assume that
every HSBC affiliate met the group's AML standards and
automatically was told to provide it with correspondent banking
services. HBUS did as told and opened U.S. correspondent
accounts for more than 80 HSBC affiliates, ignoring our law,
the American law requiring due diligence reviews before opening
U.S. accounts for foreign banks.
HBUS's dealings with an HSBC affiliate in Mexico illustrate
the money laundering dangers. HSBC Mexico (HBMX), operates in a
high-risk country battling drug cartels; it has had high-risk
clients such as casas de cambios; and it has offered high-risk
products such as U.S. dollar accounts in the Cayman Islands, a
jurisdiction known for secrecy and money laundering. HBMX also
has a long history of severe AML deficiencies. You add all that
up and the U.S. bank should have treated HBMX, the Mexican
affiliate, as a high-risk account for AML purposes. But it did
not.
Instead, HBUS treated HBMX as such a low-risk client bank
that it did not even monitor their account activity for
suspicious transactions. In addition, for 3 years, from mid-
2006 to mid-2009, HBUS conducted no monitoring of a banknotes
account used by HBMX to physically deposit billions of U.S.
dollars from clients, even though large cash transactions are
inherently risky and Mexican drug cartels launder U.S. dollars
from illegal drug sales. Because our tough AML laws in the
United States have made it hard for drug cartels to find a U.S.
bank willing to accept huge unexplained deposits of cash, they
now smuggle U.S. dollars across the border into Mexico and look
for a Mexican bank or casa de cambio willing to take the cash.
Some of those casas de cambios had accounts at HBMX, which in
turn took all the physical dollars that it got, transported
them by armored car or aircraft back across the border to HBUS
for deposit into its U.S. banknotes account, completing the
laundering cycle.
Over 2 years, from 2007 to 2008, HBMX shipped $7 billion in
physical U.S. dollars to HBUS. That was more than any other
Mexican bank, even one twice HBMX's size. When law enforcement
and bank regulators in Mexico and the United States got wind of
the banknotes transactions, they warned HBMX and HBUS that such
large dollar volumes were red flags for drug proceeds moving
through the HSBC network. In 2008, after warnings from
regulators, HBMX stopped taking large deposits of U.S. dollars,
but for years, HBUS provided an easy gateway into our financial
system for suspicious cash from their foreign affiliate in
Mexico.
Next, a second problem involves actions taken by some HSBC
affiliates to circumvent a U.S. ban on bank transactions
involving designated drug traffickers, terrorists, or rogue
regimes such as Iran. To enforce that ban, the U.S. Treasury
Department's Office of Foreign Assets Control (OFAC) has
developed a list of prohibited persons which banks use to
develop what is known as an ``OFAC filter'' to identify and
stop prohibited or suspicious transactions.
The Subcommittee found that for years HSBC affiliates in
Europe and the Middle East acted to circumvent the OFAC filter
when sending U.S. dollar transactions involving Iran through
their accounts at HBUS. Although they viewed these transactions
as legal under a U.S. exception for so-called ``U-turn''
transactions, the affiliates did not want to trigger the OFAC
filter and undergo the individualized reviews required to make
sure that they were legal. So they stripped out or omitted any
reference to Iran from the paperwork. An outside auditor hired
by HBUS has found that, from 2001 to 2007, HSBC affiliates sent
nearly 25,000 transactions involving Iran, worth over $19
billion, through HBUS and other U.S. accounts while concealing
any link to Iran in 85 percent of the transactions.
HSBC's chief compliance officer and other senior executives
in London knew what was going on, but allowed the deceptive
conduct to continue. While some HBUS officials in the United
States claim not to have known they were processing undisclosed
Iranian transactions, documents show that key HBUS officials
were informed early on. HBUS compliance and payment executives
repeatedly told HSBC affiliates that they had to use fully
transparent Iranian transactions, but when faced with evidence
that the affiliates were secretly circumventing the OFAC
filter, nobody in HBUS confronted those affiliates, brought the
issue to a head, and forced the transactions to the light.
Problems also arose when some HSBC affiliates tried to
circumvent the OFAC filter to send potentially prohibited
transactions involving other countries like Sudan or North
Korea.
OFAC programs are aimed at exposing and disabling the
financial dealings of some of the most dangerous persons and
regimes in the world, including terrorists, persons involved
with weapons of mass destruction, drug traffickers, and rogue
jurisdictions. The OFAC filter is the key to blocking
prohibited transactions from polluting the U.S. financial
system. Global financial institutions have a special
responsibility to respect OFAC prohibitions, but that is not
what happened here. While HSBC affiliates may have been aiming
simply at avoiding processing delays, circumventing OFAC
safeguards can also facilitate transactions undertaken by some
of the world's worst wrongdoers.
A third issue involves the fact that HSBC is active in
regions of the world with significant terrorism challenges
while demonstrating a worrisome willingness to do business with
banks that have links to terrorist financing. One example
involves Al Rajhi Bank, the largest private bank in Saudi
Arabia. After the September 11, 2001 terrorist attack on the
United States, evidence emerged that the bank's key founder was
an early financial benefactor of al-Qaeda and that it provided
accounts to suspect clients.
In 2005, HSBC Group told its affiliates to sever ties with
that bank, but they made an exception for HSBC Middle East.
Four months later, without explaining why, HSBC Group reversed
itself and said that all of its affiliates could decide whether
to do business with Al Rajhi Bank. HBUS chose to close its Al
Rajhi accounts. Over the next 2 years, however, its own bankers
and bankers from other HSBC affiliates pressed HBUS to resume
ties with Al Rajhi Bank. And in 2006, after Al Rajhi Bank
threatened to pull all of its business from HSBC unless HBUS
reinstated its U.S. dollar banknotes account, HSBC gave in. And
over the next 4 years, HBUS supplied Al Rajhi Bank with nearly
$1 billion in U.S. dollars, stopping only when HSBC made a
global decision to exit the banknotes business altogether.
The fourth area of concern involves HBUS's willingness to
clear suspicious bulk travelers checks for foreign banks. From
2005 to 2008, on a regular basis, HBUS cleared $500,000 or more
per day in bulk travelers checks for the Hokuriku Bank of
Japan. Routinely, these checks arrived in large stacks of
sequentially numbered checks signed and countersigned with the
same illegible signature. Forced by the Office of the
Comptroller (OCC) of the Currency--to investigate, HBUS found
the Japanese bank could not provide any ``know your client''
information or any explanation of why two dozen of its
customers, supposedly in the used-car business, were often
depositing $500,000 a day in U.S. dollar travelers checks
purchased from the same bank in Russia. Under OCC pressure,
HBUS stopped clearing the travelers checks in 2008, but kept
open the correspondent account, despite the Japanese bank's
poor AML controls. In less than 4 years, HBUS provided over
$290 million in U.S. dollars to a Japanese bank for the benefit
of Russians, again, supposedly in the used-car business.
Finally, there is HBUS's willingness to offer accounts to
bearer share corporations. These corporations are prime
vehicles for money laundering and other illicit activity by
providing anonymity through assigning legal ownership of the
corporation to whoever has physical possession of its shares.
Over a decade, HBUS opened accounts for 2,000 such
corporations, despite warnings by internal auditors and outside
regulators that the accounts posed high money-laundering risks.
Documents show that the actual account owners deliberately
pressured the bank to help hide their identities. One such
account was used by a father-son team of Miami Beach hotel
developers who were later convicted of tax fraud for hiding
$150 million in assets.
Bearer share accounts, suspicious travelers checks, banks
with terrorist-financing links, hidden transactions dodging
OFAC safeguards, and Mexican drug money--none of them represent
the types of transactions we want in a U.S. bank. If the parent
corporation of a global bank cannot do a better job policing
its affiliates, we should not be providing a bank charter to
their U.S. affiliate. If the U.S. affiliate cannot do a better
job of standing up to affiliate pressures and safeguarding the
U.S. financial system, Federal regulators should consider
whether to pull its charter.
HSBC Group recently issued a policy statement declaring
that all of its affiliates would be subject to the highest AML
standards among them; that its affiliates would start sharing
information to strengthen their AML defenses; and that all
affiliates would be subject to diligence reviews. HBUS has more
than doubled the size of its AML compliance department, put in
a new AML monitoring system, and closed over 395 high-risk
correspondent accounts. These are all good steps, but we saw
this movie before in 2003. The recent commitments are welcome.
Apologies and commitments to improve are also welcome. But
accountability for past conduct is essential, and that is what
has been missing here.
It is bad enough that a single bank such as HSBC exposes
the U.S. financial system to multiple-money laundering risks.
It is made worse when there is a failure of anti-money
laundering oversight by the regulator which is supposed to
oversee our biggest banks--the OCC. It is of great concern to
the Subcommittee, and it should be of great concern to every
American, that the OCC tolerated the mounting AML problems at
HBUS for 5 years, without taking any formal or informal
enforcement action. In addition, when the OCC decided the
problems had gone far enough, it lowered HBUS's consumer
compliance rating instead of its safety and soundness rating.
Every other Federal banking agency treats anti-money laundering
deficiencies as a matter of safety and soundness of the bank.
Only the OCC treats anti-money laundering deficiencies as if
they were a matter of consumer protection law. Anti-money
laundering safeguards are not aimed at protecting bank
customers; they are aimed at protecting the entire American
public from wrongdoers seeking to misuse the U.S. financial
system.
The new leadership at the OCC needs to move swiftly to
correct the previous oversight shortfalls and to assure that
promised changes at HSBC are implemented promptly and
effectively.
Our report contains many recommendations to address the
abuses that we have identified. Among the most important are
the following:
HBUS should identify which of its sister affiliates are
high risk, subject them to enhanced monitoring, and in
particular, review whether it should close the account of
HSBC's Mexican affiliate.
HBUS should beef up its OFAC compliance program by auditing
affiliate transactions to see if they are circumventing the
safeguards that protect our country and other countries from
terrorists, drug traffickers, and rogue jurisdictions.
HBUS should close accounts with banks suspected of
involvement in terrorist financing, revamp its travelers check
controls, and eliminate bearer share accounts.
HSBC should require affiliates to share information to
strengthen their anti-money laundering defenses, and should
continue to beef up its compliance program which was given
short shrift in the past.
At the OCC, the agency should follow the lead of other
regulators and treat anti-money laundering compliance as a
matter of safety and soundness of banks.
The new OCC leadership needs to get the OCC moving against
money laundering by identifying statutory violations, not just
identifying failures of banks as Matters Requiring Attention,
in the face of significant anti-money laundering deficiencies.
Global banks have caused the world a lot of heartache. Our
focus today is one global bank that failed to comply with rules
aimed at combating terrorism, drug trafficking, and the money
laundering that fuels so much of what threatens the global
community. I want to thank my staff for their extraordinary
work. I want to thank Senator Coburn for all of his support and
for the work of his staff. And I now turn to him for his
opening statement.
OPENING STATEMENT OF SENATOR COBURN
Senator Coburn. Thank you, Mr. Chairman. I normally submit
an opening statement for the record and make a few short
comments. I will not do that today because of the gravity of
the problem that we face, and I want to make sure my words are
heard and part of the record.
I agree with most of what we heard Senator Levin say. I
want to thank him for his tireless work on this issue. He is
one of my favorite bulldogs in terms of when he gets a hold of
something, he really does not let go of it. I do not always
agree with the number of teeth that he loses when he grabs hold
of it, but the fact is that he does grab hold of it.
I would also like to thank both the Office of the
Comptroller of the Currency and HSBC Bank, and the reason I am
thanking them is because in the years that I have been on this
Subcommittee and this Committee, which is 8 years now, I have
never seen the type of cooperation that we received both from a
government agency and a private entity. OCC provided a number
of people for interviews as well as essential documents about
the regulatory process. HSBC Bank officials likewise sat for
dozens of interviews and handed over millions of pages of
documents. Some of today's witnesses were flown in from posts
around the world.
As Chairman Levin laid out in his statement, the
Subcommittee's investigation into anti-money laundering and
anti-terror finance efforts at HSBC has covered quite a bit of
ground. PSI examined in detail the types of vulnerabilities our
Nation faces from criminals and terrorists who want to take
advantage and abuse our banking system and take away our
freedoms. What we learned is that the United States faces some
very unique risks, both because of our post-September 11, 2001
security needs and because of the strength of our financial
system, which attracts worldwide attention.
Every day, countless transactions denominated in U.S.
dollars occur around the world. This is good for our economy,
which benefits from a strengthened currency and increased
economic activity. But criminals around the globe are also
drawn to U.S. banks, which offer the attractive option of
making illicit funds look legitimate. If they can pass criminal
proceeds through a U.S. bank unnoticed and untouched, the funds
are unlikely ever to be stopped or ever be recovered.
This hearing raises the big and important questions. Banks
want to obey the law, but also grow their businesses. What
happens when the two goals conflict? Banks want to know their
customers, but some customers want privacy. How do we resolve
this? As we write AML policy, we should look for ways to get
all boats rowing in the same direction, letting banks and
government each do what they do best as we all work to combat
crime and terror.
At HSBC, we uncovered a number of troubling examples in
which weak AML systems may have let criminal or terrorist funds
pass through. In Mexico, for example, as the Chairman said,
billions of U.S. dollars flowed from the HSBC affiliate in
Mexico. The Mexico affiliate was the single largest exporter of
U.S. dollars in Mexico to HBUS. U.S law enforcement and the
regulatory entities have concluded that because of the volume
of money, it likely came from proceeds of the illegal drug
trade--not a far assumption.
In another case, an Iranian bank was allowed to initiate
U.S. dollar transactions that HSBC would process through the
United States without explaining where they came from. At the
time, however, there were severe legal restrictions on any
payments coming from or going to Iran, most often meaning they
would be manually inspected. HSBC's affiliate in London coached
the Iranian bank on how to get the payments through the United
States without inspection and simply requested the bank send
transactions that would not violate U.S. law. In effect, it
relied exclusively on an Iranian bank to comply with a law
intended to catch payments from Iranian banks. The bank or the
officials that made the decision were either naive or willfully
blind.
This is why tough AML laws are important. If illicit funds
can be tracked and stopped, there are fewer places for
criminals and terrorists to hide. And while our focus has been
on the problems we found at HSBC Bank, we also have to
emphasize that similar problems exist at other banks. For
example, Citibank, Bank of America, Wachovia, Western Union,
and others have come under scrutiny for laundering drug cartel
profits.
The purpose of this hearing, then, is not just to make an
example of HSBC as if it were an anomaly. Rather, this hearing
is to help Congress understand what kind of risks this Nation
faces and what we should do to reduce them. If we can get a
better handle on the risks by looking closely at the operations
of a single bank, we can write better laws and achieve our true
goals: Stopping crime and preventing terror.
With that in mind, I believe there are several lessons we
can learn from the problems that we uncovered at HSBC Bank.
First, banks around the world operate under different laws,
creating different sensitivities to money laundering. While
this seems apparent, it was not clear how much this would
affect a bank with worldwide affiliates until we took a closer
look. In the case of HSBC, its bank in the United States
operated differently even than its own affiliates in London,
Mexico, and the Middle East. Failure to recognize this can lull
us into thinking we can rely on foreign banks to carry out U.S.
law.
Second, bank regulators are sometimes better at identifying
money-laundering vulnerabilities than knowing how to fix them.
Throughout this inquiry, it became clear the Office of the
Comptroller of the Currency was aware of many of HSBC's AML
weaknesses, which it frequently pointed out. It was often at a
loss, however, to prescribe how HSBC could eliminate the
weaknesses. And so its record of enforcement at HSBC resembles
a lapdog rather a watchdog that we sorely need.
We have also learned recently that investigators from
Treasury's own Office of Inspector General have cited OCC
personnel for unethical practices. This, unfortunately, does
not seem to be an isolated incident, and we will go into
greater detail in that as we see the facts unfold. Taken
together with our Subcommittee's findings in this
investigation, these conflicts are startling and suggest
Congress should give closer scrutiny to the OCC's actions.
The purpose here is to stop criminals from hiding their
illicit funds and preventing terrorists from having the freedom
to plot and plan. The metrics we use to measure a bank's AML
compliance need to focus less on form and more on substance.
How well are we achieving our goal?
This Subcommittee has shown the kinds of vulnerabilities
that we now face. Too often what we found left us very
troubled, both for the risks to our Nation and for the level of
effort we saw to eliminate them. HSBC made its share of
mistakes, for which it is now being held accountable.
But what we must all remember is that money laundering
always begins with a crime, and this ultimately is what we mean
to fight. To the extent that this hearing results in criminals
and terrorists having fewer options to rob and harm the public,
we will count it a success.
It may be impossible to stop all money laundering. Most of
what we call money laundering in a certain context is a benign
transaction in another. Buying travelers checks is innocent
behavior for the tourist, but suspicious behavior when they are
purchased in bulk by terrorists or drug lords. This does not
mean we should not try to stop criminals from laundering their
money through U.S. banks, but we need to do so wisely.
I appreciate the efforts that HSBC has made thus far to
improve their AML systems, and I sincerely hope they stick. I
look forward to hearing from their witnesses, as well as from
the OCC, and appreciate their appearance before us today.
Thank you, Mr. Chairman.
Senator Levin. Thank you very much, Senator Coburn.
I would now like to call our first panel of witnesses for
this morning's hearing: The Hon. David S. Cohen, the Under
Secretary for Terrorism and Financial Intelligence at the U.S.
Department of the Treasury; and Leigh Winchell, the Assistant
Director for Investigative Programs at the U.S. Immigration and
Customs Enforcement (ICE). I very much appreciate both of you
being with us this morning. We look forward to your testimony.
Pursuant to our Rule VI, all witnesses who testify before
the Subcommittee are required to be sworn, so at this time I
would ask you both to please stand and raise your right hand.
Do you swear that the testimony you are about to give before
this Subcommittee will be the truth, the whole truth, and
nothing but the truth, so help you, God?
Mr. Cohen. I do.
Mr. Winchell. I do.
Senator Levin. We will use a timing system today. About 1
minute before the red light comes on, you will see the lights
change from green to yellow. That will give you an opportunity
to conclude your remarks. Your written testimony, of course,
will be printed in the record in its entirety, so please try to
limit your oral testimony to 7 minutes.
Mr. Cohen, we are going to have you go first, followed by
Mr. Winchell, and after we have heard your testimony, we will
then turn to questions. Please proceed, Mr. Cohen.
TESTIMONY OF HON. DAVID S. COHEN,\1\ UNDER SECRETARY FOR
TERRORISM AND FINANCIAL INTELLIGENCE, U.S. DEPARTMENT OF THE
TREASURY
Mr. Cohen. Thank you, Chairman Levin and Senator Coburn.
Thank you for inviting me to testify today. I am pleased to
have the opportunity to discuss the importance of the Treasury
Department's efforts to identify and combat money laundering
and terrorist financing in the U.S. banking sector.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Cohen appears in the Appendix on
page 94.
---------------------------------------------------------------------------
At the outset, it is important to recognize that the United
States maintains one of the strongest and most effective anti-
money laundering and counter-terrorist financing regimes in the
world. This is a testament to the work of the Congress,
including this Subcommittee, the regulators, the enforcement
agencies, and the financial institutions themselves. But the
scale, efficiency, and sophistication of the United States'
financial system--particularly its banking sector--make it a
prime target for those who seek to conceal and move illicit
money. This involves not just money launderers, of course, but
also terrorists, weapon proliferators, drug lords, and
organized crime figures, who all at some point rely on the
financial system to store, move, and launder the funds
supporting or derived from their operations.
Treasury's ability to protect the integrity of the U.S.
financial system from abuse and to combat critical threats to
our national security and foreign policy depends to a
significant extent on the implementation by U.S. financial
institutions of robust programs to prevent money laundering,
terrorist financing, and sanctions evasion.
This morning I would like to briefly address why effective
anti-money laundering, counter-terrorist financing, and
sanctions compliance programs are so critical to our national
security and the integrity of our financial system, as well as
some of the steps we are taking, along with our partners in
Congress, the Executive Branch, and internationally, to improve
the effectiveness of our anti-money laundering, counter-
terrorist financing, and sanctions compliance regime.
Although it is difficult to measure with precision, by any
estimate, the total amount of dirty money moved through and
concealed within the U.S. financial system is massive--in the
hundreds of billions annually. The sheer volume of money moving
through the banking system in particular makes banks both the
most vulnerable financial institutions for money laundering and
terrorist financing and the most important line of defense
against money laundering and terrorist financing. Our
regulatory framework, overseen by Treasury's Financial Crimes
Enforcement Network (FinCEN), along with the Federal functional
regulators, was built to require financial institutions to
implement risk-based anti-money laundering programs, to collect
and report useful information to law enforcement and national
security authorities for the purpose of combating the full
range of illicit finance. This regulatory framework assists
banks in identifying and managing risk and creates the
foundation of financial transparency required to apply targeted
financial measures, such as sanctions against specific actors
or prohibitions against specific activity.
To implement targeted financial sanctions, banks must
screen clients and transactions against the Specially
Designated Nationals (SDN) list, maintained by the Treasury's
Office of Foreign Assets Control. This is a list of drug
traffickers, weapons proliferators, terrorists, officials from
rogue regimes, and other threats to our national security whose
U.S. assets are frozen and who are generally forbidden from
engaging in any transactions in the U.S. financial system.
Despite the importance of robust anti-money laundering and
sanctions compliance programs, recent civil enforcement actions
by OFAC, FinCEN, and the Federal banking regulators illustrate
that sometimes financial institutions fail to implement
adequate programs, exposing the U.S. financial system to
significant risks of money laundering and resulting in illicit
actors gaining access to the U.S. financial system.
We have seen, for example, an instance where a bank failed
effectively to monitor its correspondent banking relationship
with high-risk customers, resulting the processing of $420
billion in cross-border financial transactions with 13 high-
risk Mexican casas de cambio from 2004 to 2007. We have also
seen several cases where foreign banks stripped out the names
of Iran or other sanctioned entities in wire transaction
messages routed through the United States, resulting in
billions of dollars of benefits to sanctioned parties.
These and other similar cases have resulted in criminal
fines and forfeitures of more than $4.6 billion over the past 6
years. These cases raise important questions about
vulnerabilities in the framework of anti-money laundering and
counter-terrorist financing requirements that require immediate
attention. As a result, Treasury is working closely with our
interagency partners and the private sector to better
understand the compliance challenges faced by financial
institutions, clarify U.S. Government expectations of financial
institutions, and strengthen the overall anti-money laundering
and counter-terrorist financing regulatory structure.
In addition to continuing to impose sanctions on weapons
proliferators, narcotics traffickers, transnational criminals,
human rights abusers, and terrorist financiers, my office is
also focused on improvements to our regulatory framework. One
of our most important initiatives is to examine whether the
customer due diligence rules, the foundation of financial
transparency, should be improved.
Earlier this year, FinCEN issued an Advance Notice of
Proposed Rulemaking suggesting ways to clarify, consolidate,
and strengthen customer due diligence requirements for
financial institutions, including an obligation to collect
beneficial ownership information. We are also focused on
combating the use of shell companies and other opaque legal
structures that facilitate illicit financial activity. We
strongly support legislation requiring disclosure of beneficial
ownership information in the company formation process. And
because strengthening anti-money laundering and counter-
terrorist financing regimes internationally directly benefits
the integrity of the U.S. financial system, my office works
with others in the U.S. Government through the Financial Action
Task Force, the International Monetary Fund, the World Bank,
and the United Nations to encourage foreign jurisdictions to
implement measures to combat illicit finance.
I began my testimony this morning by noting that the United
States is home to one of the strongest anti-money laundering
and counter-terrorist financing regimes in the world. In order
to continue as the world leader in financial integrity,
something we can and must do, we are obligated to push
ourselves to identify where we can do better and to work
tirelessly to get there. Today's hearing is one important step
on this road, and I look forward to continuing to work with
this Subcommittee to achieve this critical goal. Thank you.
Senator Levin. Thank you very much, Mr. Cohen. Mr.
Winchell.
TESTIMONY OF LEIGH H. WINCHELL,\1\ ASSISTANT DIRECTOR FOR
PROGRAMS, HOMELAND SECURITY INVESTIGATIONS, U.S. IMMIGRATION
AND CUSTOMS ENFORCEMENT, U.S. DEPARTMENT OF HOMELAND SECURITY
Mr. Winchell. Good morning, Chairman Levin and Senator
Coburn. Thank you for the opportunity to appear before you
today and discuss the efforts of the U.S. Immigration and
Customs Enforcement to combat transnational criminal
organizations and the illicit proceeds used to fund their
criminal activities.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Winchell appears in the Appendix
on page 99.
---------------------------------------------------------------------------
Over the past two decades, transnational organized crime
has transformed in size, scope, and impact, posing a
significant threat to the national and international security.
While the globalization of organized crime is not new, the
magnitude, pace, and violence accompanying the illicit
activities is alarming.
For example, in the past 5 years, we have seen an
unprecedented level of drug-related violence south of our
border which has claimed over 47,000 lives since 2006.
The fight against transnational organized crime is one of
the highest priorities of ICE. With the most expansive
investigative authority and the largest investigative force in
the Department of Homeland Security (DHS), we work closely
across agency and international boundaries with our law
enforcement partners, creating a united front to disrupt and
dismantle transnational criminal organizations. This is aided
by our expansive global footprint. With a force of nearly 7,000
special agents assigned to more than 200 U.S. cities in 71
offices in 47 countries worldwide, our domestic and
international network of agents all work in concert to target
transnational crime.
One of the most effective methods of dismantling a
transnational criminal organization is to attack the criminal
proceeds that is the lifeblood of their operations. In fiscal
year 2011, Homeland Security Investigation special agents
initiated nearly 4,300 financial investigations, resulting in
nearly 1,800 arrests, over 1,000 criminal convictions, more
than 7,700 seizures worth approximately $359 million, including
$331 million in currency and monetary instruments.
In 2010, ICE initiated a financial investigative project in
the State of Arizona following an increase in cash activity at
financial institutions along the U.S. and Mexican international
border. As a result of recent changes in Mexican financial
regulations, many criminal organizations were forced to explore
new ways to exploit legitimate financial systems in order to
launder their proceeds. A new trend emerged, known as the
repatriation of the U.S. dollar, and coupled with the Mexican
black market peso exchange, has led to an increase in
identified U.S. currency along the southwest border region, in
the last year and a half or so, approximately two-thirds of $1
billion in the form of outbound international wires or
cashier's check purchases from border branches of U.S.
financial institutions, mostly to Mexico.
In 2005, ICE initiated Operation Firewall as an effort to
raise worldwide awareness of the dangers posed by the cross-
border movement and smuggling of illicit funds. Operation
Firewall targets methods used to move and smuggle currency by
focusing on all aspects of illicit cash movements. Since its
inception, Operation Firewall has resulted in more than 5,700
arrests, totaling more than $553 million, and the arrest of
1,182 individuals. These efforts include 367 international
seizures totaling nearly $258 million and 253 international
arrests.
In August 2009, ICE officially launched the National Bulk
Cash Smuggling Center (BCSC) as a 24/7 investigative support
and operations facility. Since its inception, the BCSC
initiated over 500 criminal investigations, resulting in
millions of dollars seized. The center has also provided
training and outreach to over 21,000 Federal, State, and local
law enforcement.
ICE's interaction with the financial institutions from an
anti-money laundering perspective is multilayered. Through our
Cornerstone Outreach Initiative, ICE HSI special agents share
lessons learned, best practices, and money-laundering
typologies with the AML personnel from financial institutions
throughout the world. As part of these outreach efforts,
special agents show how the bank systems and processes can and
are being exploited. By sharing this information, the financial
institutions are better able to understand the threats,
inherent vulnerabilities, and build counter measures into their
training and automatic monitoring systems. These outreach
presentations take place at local branch bank locations as well
as through speaking engagements at AML conferences such as
those hosted by the Association of Certified Anti-Money
Laundering Specialists (ACAMS).
In late 2009, HSI expanded their working relationship with
the private sector through ACAMS to assist bank AML specialists
to better identify and monitor financial activity related to
non-traditional criminal groups. This expanded working
relationship allows the members to learn more about current
active financial indicators related to those crimes. The
members can then incorporate what they have learned into
creating models and filters within their AML software to more
accurately identify financial transactions indicative of those
crimes. The CAMS certification, obtained through ACAMS, is the
most widely recognized AML certification among compliance
professionals worldwide.
Since its inception, HSI special agents have conducted over
11,800 Cornerstone presentations and trained over 243,000
participants worldwide. This outreach has resulted in the
initiation of over 447 criminal investigations, led to the
arrest of approximately 330 individuals, 280 indictments, and
over $666 million seized.
Recognizing the magnitude of transnational organized crime,
ICE will continue to work closely with our law enforcement
partners as well as with the industry to identify potential
vulnerabilities that could be exploited by terrorists and other
criminal organizations to earn, move, and store their illicit
proceeds.
I want to thank you again for the opportunity to appear
before you today, and I would be pleased to answer any
questions at this time.
Senator Levin. Thank you both. Let us start with a 7-minute
first round.
Mr. Winchell, in your prepared testimony you talk about
bulk cash, and we will be seeing a lot of discussion of that,
about drug cartels smuggling U.S. dollars from the United
States into Mexico, finding a Mexican bank or a casa de cambio
willing to accept the cash, after which the financial
institution brings or tried to bring the dollars back to the
United States.
Now, why would a drug cartel bother to smuggle U.S. dollars
across the border into Mexico only to send those dollars or try
to send those dollars back here again for deposit in our bank?
Explain that circle. And why is it that process takes place? I
tried in my opening statement to do it, but I would like to
hear you try it also.
Mr. Winchell. The laws that were initiated in Mexico
involving the banking industry set certain limits on the amount
of U.S. currency that could go into banks in any particular
period of time; $7,000 for a business and $4,000 per individual
per month, I believe, are what the figures are. Bulk cash is
moved south across the border as the proceeds of their illicit
activity in the United States and pooled in Mexico. They are
sold then to money brokers anywhere between 4 to 7 percent
discounted rate. That may be casas de cambios and others that
they use then to move in bulk cash back across the United
States border into U.S. institutions and then wired back into
Mexico and exchanged at the current rate between Mexican
dollars and pesos, and in essence completing the laundering
process of cleaning the money.
Senator Levin. But to put it simply, they cannot just
directly deposit these drug sales money into U.S. banks because
we have a Know Your Customer requirement. Is that correct?
Mr. Winchell. That would be correct, sir. They have to find
someone in Mexico that would be complicit with their activity.
Senator Levin. But they want that money to be in U.S.
banks, to get there and to be laundered.
Mr. Winchell. Yes, sir.
Senator Levin. So the short answer is they cannot do it
directly, so they have to go through this process of sending it
to a Mexican bank, if they can, and then having it returned
cleansed. Is that correct?
Mr. Winchell. That is correct.
Senator Levin. Now, what is the relationship between the
strength of a drug cartel and the ability of that drug cartel
to launder money? Is it clear that the more it is able to
launder its money, the stronger the cartel is?
Mr. Winchell. Their profits fuel their activity. The more
profit they have, in other words, the more legitimate money
they can appear to have, the more they can fuel their illicit
activity and then diversify their criminal activity. So the
larger the cartel, the richer the cartel, the more powerful
they get.
Senator Levin. But also they will be more powerful if they
can launder that money so that they can then diversify?
Mr. Winchell. Absolutely.
Senator Levin. All right. So that, again, we have all this
huge violence on the border. We have drug cartels down in
Mexico and drug groups here as well fighting for power,
bringing violence to their streets and to our streets. And if
they can successfully launder money, they are stronger. Is that
accurate?
Mr. Winchell. That would be very accurate.
Senator Levin. OK. Mr. Cohen, would you agree that the more
a terrorist can get their money through our system, the
stronger a terrorist group will be?
Mr. Cohen. I would, Mr. Chairman.
Senator Levin. All right. Now, even though they have new
rules down in Mexico, as you have just pointed out, I think
starting in 2010, are illicit drug proceeds still being
laundered into U.S. financial institutions, Mr. Cohen?
Mr. Cohen. I think there is no question that there
continues to be a problem with money laundering in U.S.
financial institutions coming from Mexico, from the casas de
cambio and other institutions in Mexico, as well as from other
sources where illicit proceeds are placed into the U.S.
financial system.
Senator Levin. And, therefore, even though there have been
changes in the laws, for instance, in Mexico and other efforts
made to clamp down on the ability to launder money for these
groups, the terrorist groups or drug cartels, it is still going
on, and the efforts have continued. Can you give us some of the
new efforts that are being made, the new challenges, Mr. Cohen,
in this area of money laundering?
Mr. Cohen. Well, to pick up on what Mr. Winchell was
discussing earlier, with respect to Mexico, obviously there is
a substantial amount of legitimate trade with Mexico and a
substantial amount of legitimate U.S. dollars that are spent in
Mexico. And what we see is these Mexican financial institutions
working with casas de cambio and then working with U.S.
financial institutions to take in U.S. dollars from the Mexican
economy. Dirty money is layered in with legitimate funds and
placed into U.S. financial institutions. That continues to be a
serious problem even after the really very important and
aggressive steps that the Mexican Government has taken to
restrict the ability of businesses and individuals to deposit
U.S. dollars directly into Mexican financial institutions.
We have also seen some displacement of the money-laundering
cycle, so instead of the drug dollars just moving into Mexico,
because of the steps the Mexican Government has taken, we have
seen some of these dollars move further south in coming back
into the U.S. financial system from countries further into
Central America.
Senator Levin. Now, when law enforcement or bank regulators
see a bank in a country with drug-trafficking challenges
transporting large volumes of U.S. dollars to the United
States, is a red flag that illegal drug proceeds might be
involved?
Mr. Cohen. I think financial institutions have in their
anti-money laundering programs a whole series of factors that
they look at to determine whether what is happening is normal,
typical behavior or something out of the ordinary and whether
it spikes in the amount of bulk cash coming in or other sort of
anomalous activity. Those are the sorts of things that a well-
tuned anti-money laundering program should identify and cause a
financial institution to look at more carefully.
Senator Levin. OK. Senator Coburn.
Senator Coburn. Thank you.
Mr. Cohen, in your testimony, you stated that when
safeguards are not stringently enforced, illicit actors are
able to take advantage of the U.S. financial system. If they
were all enforced 100 percent of the time, basically what I am
hearing is they would still be able to take advantage of the
U.S. financial system because when you blend good with bad from
a legitimate organization--so what are the next steps to limit
that down?
Mr. Cohen. Well, Senator Coburn, I would draw a distinction
between the OFAC list, the SDN list, and anti-money laundering
programs in responding to this question. A properly functioning
compliance program with respect to the SDN list should prohibit
anybody on that list from getting access to any U.S. financial
institution because banks can run the filter, run the names,
and if a transaction is coming through from someone who is on
the SDN list, it should be stopped.
Preventing money laundering is a more difficult task, and
the regulatory structure that we have implemented and that
Congress has legislated through the Bank Secrecy Act and the
PATRIOT Act and other amendments to Title 31 require a risk-
based approach by financial institutions to have an anti-money
laundering program that is appropriate given the risk that the
bank faces across the range of its activities.
Every bank is going to approach this in a slightly
different way, and every bank has a slightly different risk
profile given its customer base domestically and how they
interact with affiliates and non-affiliates overseas.
I do not think anyone expects to ever achieve a financial
system where there is absolutely no money laundering, but it is
also the case that when financial institutions do not implement
robust anti-money laundering programs across the range of their
activities that is appropriately tuned to the risk that they
face, there is a greater opportunity for illicit acts to get
access to----
Senator Coburn. So whose responsibility is it to see that
the banks do just that?
Mr. Cohen. Well, I think it is all of our responsibility--
--
Senator Coburn. No, but it is specific to the Treasury,
right?
Mr. Cohen. Sure.
Senator Coburn. It is the Treasury Department. Who in the
Treasury Department is responsible for that? What agency?
Mr. Cohen. Well, my office is responsible for helping to
set policy. We have obviously the OCC, which is part of the
Treasury Department, that is a bank regulator. It undertakes
its regulatory activities independently from the Secretary of
the Treasury by statute.
Senator Coburn. Right.
Mr. Cohen. There are obviously other bank regulators as
well that regulate other financial institutions.
Senator Coburn. But it is not necessarily that we do not
have enough good regulations. Part of the problem is that the
regulations we have are not being monitored and enforced
properly. Would you agree with that statement?
Mr. Cohen. Senator, I think as we continue to work on the
issue of money laundering, I think we need to look both at the
regulatory structure itself and see whether there are
modifications that would be appropriate. And I also think we
need to look at how effectively the regulators are overseeing
financial institutions----
Senator Coburn. Well, I think we have seen that. Our
investigation is going to show a lot of lack of effectiveness.
As a matter of fact, it does show a lot of a lack of
effectiveness. So the point I am trying to get to is we can
write all the rules and regulations in the world, but if they,
in fact, are not carried out by the bureaucracy assigned to do
that, it does not matter. So the whole point is: Do we write a
whole bunch more regs? Do we make it even more complicated?
One of the questions I had for you I am not going to ask. I
will, if I may, Mr. Chairman, send supplemental questions to
both of these witnesses. Of the people that are doing it
right--and I am going to ask HSBC this, too. What is the cost
of compliance with this as a percentage of the volume in their
banks? And is there going to become a point at which it is not
worth dealing with us? In other words, can we do it more
effectively and more efficiently? And are we doing the right
things?
Mr. Cohen. Well, Senator, I think we are looking at, as I
said, whether the regulatory structure needs some modification,
not to make it more complicated but to make it more effective.
I think we are looking at whether the financial institutions
themselves need to do a better job in complying with the
regulations. And we are working very closely with the bank
regulators across the spectrum of regulators, both bank
regulators and the regulators in the securities industry, to
talk about how we all can do a better job of overseeing
compliance in the regulated industries.
Senator Coburn. Thank you.
Mr. Winchell, just one question. I am going to submit my
questions for the record to both of you, if I might, and have
you respond to them, hopefully in a timely fashion. You talked
about your outreach efforts have resulted in the initiation of
950 criminal investigations. Did HSI agents identify the
illicit funds or did the banks?
Mr. Winchell. It was usually the banks that--I would think
I would be safe in answering that question. Our outreach
efforts are an attempt to educate them on the red flags, and
then they would bring those to our----
Senator Coburn. So you are getting some response?
Mr. Winchell. Yes, sir.
Senator Coburn. All right. And does your Trade Transparency
Unit include partnerships with countries other than Central and
South America?
Mr. Winchell. Our Trade Transparency Unit continues to
grow.
Senator Coburn. But where is it now? Is it mainly Central
and South America?
Mr. Winchell. It is primarily Central and South America,
but it is expanding towards the Philippines and others, now.
Senator Coburn. And one thing I will ask you. Prepaid cards
and stored value devices seems to be a new, novel method. I
would love in the response to my questions from both of you on
that, how are we going to handle that one? That one seems even
more difficult.
Mr. Winchell. That one is a bit of a challenge for us;
particularly as the individual crosses back and forth across
the border in bearer form, it is basically a bearer instrument.
Of greater concern to us are the loadable and reloadable cards.
Senator Coburn. All right. Thank you, Mr. Chairman.
Senator Levin. Thank you very much, Senator Coburn.
I just have one more question. You touched on this in the
answer to Senator Coburn's question. Just explain for us, if
you would, Mr. Cohen, very simply, what the SDN list is, what
the OFAC filter is, and how the OFAC filter relates to the SDN
list and why these are important.
Mr. Cohen. Sure. The SDN list is the compilation of
individuals and entities that have been subject to sanctions
under the range of sanctions programs that OFAC and the
Treasury Department implement. These sanctions programs cover
illicit actors like terrorist financiers, weapons
proliferators, transnational organized criminal groups,
narcotics traffickers, as well as rogue regimes--Iran, North
Korea, Syria, and others. Everybody who is subject to sanctions
under those sanctions programs appears on the SDN list. This is
a list that is published by OFAC, available to every financial
institution, and by and large, financial institutions
incorporate this list into their compliance programs and screen
transactions coming through their financial institutions
against this list, because everybody who appears on that list
is forbidden from dealing with any U.S. person, including any
U.S. financial institution, and their assets are to be frozen.
It is critically important that financial institutions run
the OFAC list in their filters so that our sanctions programs
are effectively implemented. We rely on financial institutions
to ensure that those for whom we have applied sanctions are not
able to access the U.S. financial system. That makes our
sanctions programs, which at root are designed to pursue our
most important national security and foreign policy objectives,
as effective as they can be.
Senator Levin. How effective is the OFAC filter, in your
judgment?
Mr. Cohen. There are some notable examples of situations
where financial institutions have taken steps to try and evade
the OFAC filter. We have over the course of the last 5 or 6
years entered into a number of significant settlements with
major financial institutions that all have essentially the same
fact pattern, which is that the foreign financial institution
was stripping information from transaction messages running
through the United States as a means to evade their U.S.
partners' OFAC filter. Those are very important cases for us
and I think illustrate how seriously we take this issue. But,
at the same time, I think by and large, U.S. financial
institutions do a good job of incorporating into their
compliance programs the list of names and entities that are on
the OFAC SDN list and screening transactions to prevent access
to their institutions by those who are subject to sanctions.
Senator Levin. Will you put in your words now--I asked Mr.
Winchell this before. Put in your words why it is that these
entities we are trying to keep out of our financial system try
to get into our financial system. Why is it that they make this
effort, in your words?
Mr. Cohen. I think the simple answer is if you can run
money through the United States, it helps to create an air of
legitimacy to those funds that makes it easier for you to then
make use of those funds for whatever purpose you want to put
them to. And if this is dirty money that you are trying to
portray as clean funds, being able to run it try the U.S.
financial system helps you achieve that objective.
Senator Levin. And makes you stronger.
Mr. Cohen. It helps you achieve whatever illicit objective
it is that you are trying to achieve, whether it is weapons
proliferation, terrorist financing, or any of the other
activities that are the subject of our sanctions, all of which
we are trying to combat by weakening their financial support.
Senator Levin. It helps you achieve the very activities
that we are trying to stop.
Mr. Cohen. It does.
Senator Levin. Do you have any additional questions?
Senator Coburn. No, but I would make one observation. The
better we get, the more they are going to want to be here. That
is one. And number two is it is hard for us to know what an
excellent anti-money laundering system is because we can always
do better. But I would remind us that the cost of that is borne
by the banks, which is ultimately the American consumer. And so
efficiency in how we do this and the worry about too much--in
other words, for the next regulation, what are we achieving for
it? Cost-effectiveness has got to be part of our concern as we
look to handle this.
Thank you, Mr. Chairman.
Senator Levin. Thank you very much, Senator Coburn.
There will be additional questions for the record for you
both, and that will be true with all of our panelists this
morning and afternoon. And talking about this afternoon, I
think we have talked to your staff about it, Senator Coburn.
The likelihood is that we will need to break at some point here
for lunch. We will see how quickly the next panel goes.
We thank you both. We thank you and your agencies for the
work that you do. It is critically important to our Nation's
security, and you are excused.
Mr. Cohen. Thank you, Mr. Chairman.
Senator Levin. We will now call our second panel of
witnesses for this morning's hearing: David Bagley, the head of
Group Compliance of HSBC Holdings in London; Paul Thurston,
Chief Executive for Retail Banking and Wealth Management at
HSBC Holdings in Hong Kong; Michael Gallagher, the Former
Executive Vice President and Head of PCM North America for HSBC
Bank USA in New York; and, finally, Christopher Lok, the Former
Head of Global Banknotes at HSBC Bank USA in New York.
We appreciate all of you being here this morning. We look
forward to your testimony. And as you heard, we have Rule VI,
which requires that all witnesses who testify before the
Subcommittee are required to be sworn, so we would ask each of
you to please stand and raise your right hand. Do you swear
that the testimony that you are about to give will be the
truth, the whole truth, and nothing but the truth, so help you,
God?
Mr. Bagley. I do.
Mr. Thurston. I do.
Mr. Gallagher. I do.
Mr. Lok. I do.
Senator Levin. The timing system that we will be using
today will give you a warning 1 minute before the red light
comes on, and than it will shift from green to yellow. It will
give you an opportunity to conclude your remarks. Your written
testimony will be printed in the record in its entirety. Please
try to limit your oral testimony to no more than 5 minutes
each.
Before you start, I want to thank HSBC for their
cooperation. As I said in my opening statement, HSBC was
totally cooperative with this investigation. We appreciate
that.
So, Mr. Bagley, I guess we are going to have you go first
followed by Mr. Thurston, then Mr. Gallagher, and then Mr. Lok.
And then we will turn to questions. So, Mr. Bagley, please
proceed.
TESTIMONY OF DAVID B. BAGLEY,\1\ HEAD OF GROUP COMPLIANCE, HSBC
HOLDINGS PLC, LONDON, ENGLAND
Mr. Bagley. Thank you. Good morning, Chairman Levin,
Senator Coburn, and Members of the Subcommittee. My name is
David Bagley. Thank you for the opportunity to be here today. I
have submitted written testimony, but in the interest of time,
I have confined my remarks to a few points.
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\1\ The prepared statement of Mr. Bagley appears in the Appendix on
page 111.
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Since 2002, I have been the head of Group Compliance at
HSBC Holdings plc, which is the global parent of HSBC. Having
been a compliance officer for 13 years in a bank that operates
in approximately 80 jurisdictions worldwide, I have dedicated
my career--not only within HSBC but through my broader industry
work as well--to meeting the significant challenges that
confront global banking institutions in the world we live in. I
have followed the work of this Subcommittee and have seen how
your work has advanced important dialogues and helped the
international banking community, including HSBC, identify and
address potential vulnerabilities.
My chief focus as the head of Group Compliance at HSBC has
been promoting the values that we, as a bank, have set for
ourselves and the values that you and our regulators, both in
the United States and around the world, rightly expect from a
global bank like HSBC. And while there have been successes on
many compliance issues, I recognize that there have been some
significant areas of failure. I have said before and I will say
again: Despite the best efforts and intentions of many
dedicated professionals, HSBC has fallen short of our own
expectations and the expectations of our regulators. This is
something that a bank seeking to conduct business in the United
States and globally must acknowledge, learn from, and, most
importantly, take steps to avoid in the future.
The group has always had as a core element of its
compliance policy a focus on both the letter and the spirit of
laws and regulations, not just what is permissible but what is
prudent and responsible.
In hindsight, as I reflect on the dialogue from 2002 to
2007, and specifically the wider lessons learned out of both
the OFAC and Mexico issues, I think we all sometimes allowed a
focus on what was lawful and compliant to obscure what should
be best practices for a global bank. Transparency is a
principle that HSBC and every bank should always make a top
priority, even when it is not legally required. I think that
with our revised structure and approach, this is where we are
today.
Indeed, we have learned a number of valuable lessons, and
the bank is well along the way of converting those lessons into
solutions. As I expect my colleague, Stuart Levey, to describe
in some detail, HSBC is in the process of shedding the
historical compliance model that the bank has outgrown. This
departure from the old model is very significant. Our former
compliance structure was a product of historical growth by
acquisition, and it was a major factor behind some of the
issues that I expect we will be discussing today.
Under the former model, my mandate was limited to advising,
recommending, and reporting. My job was not to ensure that all
of our global affiliates followed the group's compliance
standards, and I did not have the authority, resources,
support, or infrastructure to do so. Rather, final authority
and decisionmaking rested with local line management in each of
the bank's affiliates.
Now a major overhaul is underway. The new compliance model
is a product of deep reflection and is tailored to address
today's challenges as well as the inevitable challenges of
tomorrow. Significantly, the Group Compliance function now for
the first time has authority over the compliance departments at
every one of the bank's affiliates. This is a stark break from
the past. Now Group Compliance has both the mandate and the
resources to ensure that affiliates are compliant. In other
words, for the first time, Group Compliance is an advisory and
a control function. In addition, personnel at the affiliates
are now accountable to Group Compliance for their conduct.
Second, under the new model, Group Compliance oversees the
bank's nearly 3,500 compliance officers worldwide and takes the
lead on decisions about resource allocation, compensation,
objectives, strategy, and accountability.
Last, while I do not have the time to describe all of the
recent enhancements, I would like to emphasize the creation of
our assurance function. In short, the authority of the head of
Group Compliance and, therefore, the function as a whole is
greatly increased.
As I have thought about the structural transformation of
the bank's compliance function, I recommended to the group that
now is the appropriate time, for me and for the bank, for
someone new to serve as the head of Group Compliance. I have
agreed to work with the bank's senior management towards an
orderly transition of this important role.
Thank you for your time. I welcome this opportunity to
answer any questions.
Senator Levin. Thank you very much, Mr. Bagley. Mr.
Thurston.
TESTIMONY OF PAUL THURSTON,\1\ CHIEF EXECUTIVE, RETAIL BANKING
AND WEALTH MANAGEMENT, HSBC HOLDINGS PLC, HONG KONG
Mr. Thurston. Thank you and good morning, Chairman Levin,
Senator Coburn, and Members of the Subcommittee. My name is
Paul Thurston. I am the Chief Executive of Retail Banking and
Wealth Management for the HSBC Group. I have submitted written
testimony, but in the interest of time today, I will confine my
comments to a few points as well.
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\1\ The prepared statement of Mr. Thurston appears in the Appendix
on page 116.
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I have worked in the banking industry for 37 years, and I
have served at various roles in HSBC around the world. I was
the Chief Executive of HSBC for 14 challenging and stressful
months beginning in February 2007.
When I arrived in Mexico, I set out to find out the most
important business issues and risks that there were in the
business. I met with business heads, risk management, audit,
and also with the regulators, and it became clear that a number
of group systems and policies had been put in place by that
time but that this was not HSBC as I knew it. There were
significant weaknesses in the control infrastructure, and these
weaknesses existed in Know-Your-Client (KYC) and AML management
and in other areas of the bank as well, including credit risk
management, card fraud prevention, technology, and management
information.
As I investigated these issues and tried to assess why the
problems persisted, I came to learn that they were exacerbated
by a business model and a performance management system that we
had inherited from the former Bital Bank that was heavily
focused on business growth rather than control.
I should add that we were operating in an external
environment in Mexico that was incredibly challenging. Bank
employees faced very real risks of being targeted for bribery,
extortion, and kidnapping. And, indeed, there were many
kidnappings during my tenure, and high levels of security were
required for staff working in Mexico. In addition, unlike the
United States, Mexico was a data-poor environment, making it
difficult to verify the identity of customers.
Some of the things I found, frankly, took my breath away.
But every time I found a weakness, I tried to ensure that we
took action, not just in dealing with the immediate issues but
also in setting up programs to improve the infrastructure,
processes, and business model for the future. I frequently
requested audit and group compliance reviews to be scheduled so
that I would have an independent review of progress, and I kept
the board, the regional audit committee, and group management
informed of everything that I saw and did. And I also ensured
that we cooperated fully with the regulators, as indeed the
group has done with this investigation.
Effective AML depends upon properly knowing your customers,
and this was a major area of concern to me, with substandard
files and KYC documentation housed across a network of 1,300
branches. I committed to invest in technology and people, to
centralize the review of all files for all new and existing
accounts, and to keep central records that could be used for
ongoing alert management. I recognized that this would take
time to develop and install, but it would give us a more robust
platform, provide more reliable reports, and improve the
quality and speed of remediation once implemented.
I believe that we made real progress at HSBC Mexico during
my short tenure. We changed the business model, the performance
management systems, and we enhanced our compliance systems.
But, clearly, after only a short period of time, there was
still much work to be done upon my departure in April 2008, and
the scale of the remediation work alongside an escalating drug
war in Mexico and ever more adept criminals continued to raise
challenges and new issues.
After I left, further steps continued to be taken.
Decisions were made to stop U.S. dollar cash handling in
Mexico. We closed branches in areas where there was a high risk
of money laundering. We are now in the process of closing all
the HSBC Mexico accounts in the Caymans. We will continue to
scrutinize our business in Mexico to determine how we can
further mitigate compliance risk.
We know that criminals operate globally, and as an
international bank, we will be a target. We have to be sure
that we have the best and strongest defense in place in every
business, in every market in which we operate, regardless of
the local challenges, and we are committed to doing this. We
know we should have done this better, sooner.
There are many learnings in our experience in Mexico for us
and others, and I will be pleased to answer any questions that
you have.
Senator Levin. Thank you very much, Mr. Thurston. Mr.
Gallagher.
TESTIMONY OF MICHAEL GALLAGHER,\1\ FORMER EXECUTIVE VICE
PRESIDENT, HEAD OF PCM NORTH AMERICA, HSBC BANK USA, N.A., NEW
YORK, NEW YORK
Mr. Gallagher. Good morning. Chairman Levin, Senator
Coburn, and Members of the Subcommittee, my name is Michael
Gallagher, and I reside in Lincroft, New Jersey. From 2001
until last year, I was an Executive Vice President at HSBC Bank
USA, also referred to as ``HBUS,'' and I was responsible for
the Payments and Cash Management Business in North America. On
November 21, 2011, I was subject to a reduction in force at the
bank and, therefore, have not been a member of the bank for the
past 8 months.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Gallagher appears in the Appendix
on page 124.
---------------------------------------------------------------------------
During my time at HSBC, PCM developed and marketed payments
and cash management services to corporate middle-market clients
as well as financial institutions, including HSBC-affiliated
banks. While PCM generally did not manage the various
operational units within PCM processing PCM products, we worked
very closely with our operations colleagues to manage and
maintain the expected standards of quality and control.
I understand the Subcommittee is interested in HBUS's anti-
money laundering efforts. During my tenure at HBUS, my team and
I took compliance matters very seriously. We were active
participants in the efforts of the compliance department to
ensure safety and soundness. PCM assisted the compliance
department operations as well as relationship managers in this
regard. In instances, when PCM became aware of negative
information regarding the client, PCM worked closely with the
compliance department operations and the relationship managers
to ensure that they received the information they needed.
PCM also made resources available to relationship managers
and the compliance department to assist in any way that we
could. At various times, PCM made staff available or seconded
these staff to different departments to assist in various
projects and problem resolution.
In summary, I would like to thank the Chairman of the
Subcommittee for allowing me to speak at the hearing on these
critical matters. Anti-money laundering, terrorism financing,
and global access to the U.S. financial systems are issues of
critical importance to the banking industry, to national
security, and to me.
HSBC and the banking industry as a whole have learned many
important lessons over the past decade or so. I believe that
HSBC's experience, especially in light of its uniquely global
footprint, can add real value to understanding more broadly the
risks and opportunities for enhance safety in this industry.
During my time at HSBC, there were steps taken to tighten
anti-money laundering controls, and I understand that
significant progress has been made in this regard since my
departure. But with hindsight, it is clear that we did not
always fully understand the risks of our businesses or the
challenges of the global, cross-border nature of the business.
It is clear that we could have done much more and done it more
quickly.
I appreciate the opportunity to provide this information to
the Subcommittee, and I am prepared to answer any additional
questions that the Subcommittee may have at this hearing. Thank
you.
Senator Levin. Thank you very much, Mr. Gallagher. Mr. Lok.
TESTIMONY OF CHIU HON ``CHRISTOPHER'' LOK,\1\ FORMER HEAD OF
GLOBAL BANKNOTES, HSBC BANK USA, N.A., NEW YORK, NEW YORK
Mr. Lok. Good morning. Chairman Levin, Senator Coburn, and
Members of the Subcommittee, I appreciate the opportunity to be
here today. My name is Christopher Lok, and from 2001 until
2010 I served as the global head of the banknotes business at
HSBC.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Lok appears in the Appendix on
page 127.
---------------------------------------------------------------------------
In my statement today, I will cover three topics. First, I
will provide my background. Second, I will provide an overview
of the banknotes business at HSBC. And, third, I will address
some of the specific problems and issues that I believe the
Subcommittee is interested in.
For me, it is painful and embarrassing to talk about the
areas where, in hindsight, we fell short. At the same time, it
is valuable to do so in order to find constructive solutions
and so that others do not make the same mistakes going forward.
I was born and raised in Hong Kong. In 1981, I started
working in the banknotes business, and that is what I did for
29 years. During the entire time from 1981 through 2010, I
worked for HSBC or a predecessor institution. For most of my
career I was based in Asia, but I was privileged to have lived
and worked in New York for a brief period in the 1990s and
again from 2001 until 2010. Even though I am not a U.S.
citizen, I had a wonderful experience living and working in
this country, and I have a great admiration and affection for
the United States.
I would like to provide a brief overview of the banknotes
business. In essence, the business is about the buying and
selling of physical currency at the wholesale level. Our
clients were banks and other financial institutions around the
world. We employed about 275 people, including traders, back
office staff, and people who focused on operations and
logistics. We dealt with approximately 800 customers in over
100 countries, and we transacted in about 75 different
currencies. These customers have natural demand for and supply
of currency banknotes, driven by various economic activities.
To them, HSBC was a safe and reliable counterparty, and I
believe that we provided them with a valuable service.
I understand that the Subcommittee is focused on some of
the compliance challenges that we faced in the banknotes
business.
Let me start by emphasizing that compliance was a critical
part of the HSBC banknotes business. Over a period of years,
there were some occasions when I communicated with my
colleagues in compliance in a manner that was unnecessarily
aggressive and harsh. These communications were unprofessional,
and I deeply regret them.
In reality, the business line and compliance shared the
same objective: To avoid the bank being used by inappropriate
people for improper transactions. Despite my overly critical
emails, I believe banknotes business and compliance people
actually had a good working partnership. While I did not always
communicate this, I had great respect for my colleagues in
compliance, and I valued their work.
With respect to banknotes transactions with customers in
Mexico, up until December 2008 I was under the impression that
HSBC's Mexican affiliate, HBMX, was operating under HSBC group
standards. In December 2008, HBMX announced that it would no
longer be accepting U.S. currency in Mexico. I was surprised by
this announcement, and I tried to find out what was the reason
behind it. It was not until early 2009 that I learned, as a
result of my own inquiries, that HBMX had gotten into problems
because their anti-money laundering controls were seriously
compromised. I was surprised and concerned about this news. I
was not previously aware of the AML problems at HBMX. If we had
known of these problems, I am certain that we, in the banknotes
business, would have done things differently.
As time went by, some questions were raised about the
banknotes business in Mexico. In retrospect, we did not
adequately appreciate the concerns being raised about the
business environment in Mexico. While we did our best to deal
with these inquiries, I am sorry to say that I did not
understand what later became apparent. With the benefit of
hindsight, it is now clear that we did not perceive the extent
of the anti-money laundering deficiencies and the risks present
in Mexico. Thank you very much.
Senator Levin. Thank you very much, Mr. Lok.
Let us have a 10-minute first round, if that is all right.
Does that give you enough time?
Senator Coburn. Yes.
Senator Levin. Because we will have more than one round.
Mr. Thurston, HBMX was a bank that had a longstanding
severe money-laundering problem, and we describe this at length
in our report. The bank was purchased in 2002. You did not
arrive until 2007. Take a look, if you would, at the exhibit
book, Mr. Thurston, in front of you there, Exhibit 1b.\1\ What
we have done here is we have put together a chart summarizing
some of the exhibits. Just a few highlights from those
exhibits, which are really a litany of money-laundering
deficiencies at HBMX from 2002 to 2009.
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\1\ See Exhibit No. 1b, which appears in the Appendix on page 576.
---------------------------------------------------------------------------
The first reference is to 2002 in this exhibit. Here is
what the audit found: ``There is no recognizable compliance or
money laundering function'' at Bital. That is the bank that you
bought. That is 2002.
Then in 2005, 3 years later now, ``senior persons within
the compliance function fabricated records of certain mandatory
anti-money laundering meetings.'' This quote is taken from
Exhibit 12,\2\ but we put together these quotes on this Exhibit
1b.
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\2\ See Exhibit No. 12, which appears in the Appendix on page 634.
---------------------------------------------------------------------------
Now, the fabrications were ordered by the head of the anti-
money laundering compliance program who was asked then to leave
the bank. This email was sent by Mr. Bagley to Stephen Green,
who was then CEO of the HSBC Group.
Next, 2007. This is a quote from a July 7, 2007, email from
a senior compliance person at HSBC Group, John Root. It is
taken from Exhibit 19.\3\ It is an email to the head of HBMX
compliance after finding out that the anti-money laundering
committee allowed three different high-risk accounts with
suspected illegal drug proceeds to stay open, and he writes,
``What is this, the School of Low Expectations banking?''
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\3\ See Exhibit No. 19, which appears in the Appendix on page 673.
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Then in 2008, this is a statement from HBMX's own AML
director who was leaving that Mexican affiliate, and he was
participating in an exit interview with Mr. Bagley, and he said
the following: That there were allegations of 60 percent to 70
percent of laundered proceeds in Mexico going through HBMX. He
also stated that HBMX executives did not care about AML
controls. That comes from Exhibit 30.\4\ This is 2008.
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\4\ See Exhibit No. 30, which appears in the Appendix on page 703.
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And then another quote from Mr. Bagley in 2008: ``What I
find most frustrating is the way in which new issues constantly
emerged, however much time is spent with HBMX.''
In 2009, a statement from an email from Mr. Bagley to the
CEO of HSBC Latin America, Mr. Alonso: ``The inherent anti-
money laundering risk in Mexico is still very high.''
So this had been going on for 7 years, money-laundering
problems at the HBMX bank, the Mexican affiliate.
So, Mr. Thurston, when you arrived in 2008, you began
immediately making some changes. The problems that you faced
had been longstanding. They were not corrected before you got
there, and some of them, plenty of them, were not corrected
until you got there, and then some remained and they were
corrected, some of them, after you left.
Why did you discover that these had festered for so many
years? What was there about that bank, that culture that you
discovered that allowed these things to go on and on and on?
These are not thing which were discovered later. These were
known at the time. Emails show that they were known at the
time. A number of you have talked about hindsight. These are
contemporaneous emails. This is not something discovered in
hindsight or learned in hindsight. This is something that
people knew was going on at that bank. Why was it allowed to
continue? What did you find when you got there?
Mr. Thurston. Thank you, Mr. Chairman. My assessment was
that starting from before the acquisition, this bank had been a
fast-growth bank. In fact, that was the reason why it got into
trouble, and that was the reason that we were able to acquire
it. It grew fast, but it had no controls. The business model
was completely decentralized. All the files, all the decisions
were taken in a distributed branch network. It was very
difficult from the center to get controls, and there was a very
strong incentive scheme that backed continued volume growth
rather than quality of controls.
A number of steps were taken to install group processes and
group systems, but if you are confronted with that, as I said
in my opening remarks, you need to address the business model
that is underneath it and put something systemic in. So one of
the steps that I took was to create this centralized platform
where, instead of relying on 1,300 branches to do the KYC, we
would have all of those papers imaged to a central site where
we could check and see that we had all the documents, that we
had all the papers, and if we did not, then we would not open
the accounts.
But that kind of investment takes time, and there was a
significant remediation task to be done to put right the files
from the past. So there were multiple problems that existed in
the bank, as I saw it when I was there.
Senator Levin. These were problems which were known for
years. This is not something which was looking back. This is
something which year after year after year, starting in 2002,
was known by this bank. And yet these problems festered for
years.
Here is another email, Exhibit 36.\1\ This was an HSBC
Group deputy head of compliance, a 2008 email. Now, he had been
sent to Mexico to try to get a handle on money-laundering
problems there. One of the problems discussed was a backlog of
3,600 accounts that were supposed to be closed but were not,
including 675 which had been identified as potentially
involving money laundering that had been ordered closed by
HBMX's anti-money laundering committee, known as CCC, or Triple
C. Here is what the email noted, and this is Exhibit 36: That
of the 675 accounts, 16 had been ordered closed in 2005, 130 in
2006, 172 in 2007, 309 in 2008. So it took 3 or 4 years to
close a suspicious account.
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\1\ See Exhibit No. 36, which appears in the Appendix on page 726.
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Now, is there any way that should have been allowed to have
happened at the time? Forget the business case and anything
else.
Mr. Thurston. No, Senator.
Senator Levin. Now, another problem involving HBMX was the
committee at the bank which was mandated under Mexican law and
is composed of both business and compliance personnel charged
with resolving anti-money laundering issues, such as what
accounts should be closed.
In July 2008, after the CCC committee decided to allow
several suspect accounts to remain open, a senior compliance
official at HSBC Group, John Root--so now this is the group
now--sends a blistering letter to HBMX compliance head, Mr.
Garcia, at Exhibit 19.\1\ I am going to read from this exhibit.
``A number of items jump out from your most recent weekly
report . . . but everything pales in comparison with the
[money-laundering] items on page 4,'' he writes. ``It looks
like the business is still retaining unacceptable risks and the
AML committee is going along after some initial hemming and
hawing. I am quite concerned that the committee is not
functioning properly. Alarmed, even. I am close to picking up
the phone to your CEO.''
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\1\ See Exhibit No. 19, which appears in the Appendix on page 673.
---------------------------------------------------------------------------
``What on earth is an `assumption responsibility letter'
and how would it protect the bank if the client is a money
launderer? Please note,'' he writes, ``that you can dress up
the USD 10 million to be paid . . . to the U.S. authorities as
an `economic penalty' if you wish but a fine is a fine is a
fine, and a hefty one at that. What is this, the School of Low
Expectations Banking? (`We didn't go to jail! We merely signed
a settlement with the Feds for $10 million!')''
``So,'' he said, one problem was ``strike one.'' Another is
``strike two. Let's now look at strike three,'' he writes. ``(I
hope you like baseball.)''
``The same person who is giving''--this is his writing--
``the sacrosanct `assumption responsibility letter' . . . is
being asked by the CEO to explain why he retained Casa de
Cambio Puebla relationship after USD 11 million was seized by
the authorities in Puebla in an account with Wachovia in Miami.
What?! The business was OK with this?''
And then he says, ``The [anti-money laundering] committee
just can't keep rubber-stamping unacceptable risks merely
because someone on the business side writes a nice letter. It
needs to take a firmer stand. It needs some cojones. We have
seen this movie before, and it ends badly.''
Why is it that the bank--the bank that is the group bank--
that sees these kind of problems just does not flat out hold
some folks accountable and fire some folks? I mean, they can
write this kind of a letter, and they did, and we dug this out
of the emails. Why, if the folks running this bank are so bad,
why isn't action taken against them by the parent bank?
Mr. Thurston. Mr. Chairman, in the time that I was in
Mexico, we were very firm on discipline. We took strict
disciplinary action against many members of staff, even at
senior management levels, including dismissals. So we were
certainly taking it seriously within Mexico.
Senator Levin. My time is up. Thank you. Senator Coburn.
Senator Coburn. I want to go to Mr. Bagley for a moment, if
I might. I think your testimony was that you were in charge of
compliance, but you had no essential line authority to enforce
that compliance. Is that correct?
Mr. Bagley. That is right. The core responsibility of Group
Compliance was to set policy, to report, to escalate issues
when they were reported to us, but we did not manage and
control the individual compliance departments in each one of
the affiliates or subsidiaries.
Senator Coburn. Those individual compliance departments in
those subsidiaries reported to the head of whatever that
subsidiary was, correct?
Mr. Bagley. There were two reporting lines: One to the
Group Compliance team for reporting and other reasons, and then
another line to the local CEO or business head.
Senator Coburn. And I think it was also your testimony that
had now been changed and that there is a line function for
compliance from corporate HSBC all the way down to every bank.
Is that correct?
Mr. Bagley. It has fundamentally changed in that the
hardest line of reporting is now through the function, so I am
accountable, responsible, and have authority over the whole
function globally, 3,500 people across the group, and that
means I control resource, allocation, budget, remuneration, the
performance and the function, and can ensure that the adequate
resources, the right amount of money is spent on this effort.
It is a radical shift, a significant change.
Senator Coburn. There is the answer to the question you
asked. In other words, there is no line authority--you can have
a compliance officer all you want. If they have no line
authority to cause people to change actions and the same people
they are guiding have a line authority that says here is your
profit, how well our affiliate or our subsidiary does, one of
those is going to have more power than the other. Thank you.
Mr. Gallagher, you said in your testimony, ``But with
hindsight, it is clear that we did not always fully understand
the risks of our businesses'' and ``that we could have done
much more and done it more quickly.''
Looking at the whole of this, that to me is almost an
unbelievable statement when you have things going on in Mexico,
things going on elsewhere. It is almost like you were not aware
that these things were happening?
Mr. Gallagher. It is a fact that there are certain things
that we were not aware were happening. Within certain entities
that is true.
Senator Coburn. What were the efforts made to try to become
aware of what was happening? My natural inclination is to say
you were not--did not fully understand the risk or you ignored
reality, based on the testimony and the data that we have
collected from inside your own operations. Would you just
expand on that a little bit so I can gain a clearer
understanding?
Mr. Gallagher. Yes, I appreciate the question, and I share
your concern on this matter. One of the lessons we have
certainly learned is the sharing of information not only
throughout the organization across various operations and
silos, as it were, but across geography is something that
requires significant improvement. I am led to believe that has
improved significantly since I left, and even during my time
there, there was improvement in the process. But heretofore it
was not easy to move information across organizations and to
filter it down to the appropriate levels to get action.
Compliance and monitoring was our first level of finding
issues and looking after them, and whenever we found issues, in
my experience, I believe we inquired, we reacted, and we
pursued. So I think we did a lot at the time, but as has been
said by others this morning, we have learned a lot as we have
gone along.
Senator Coburn. OK. Thank you.
Mr. Thurston, in early 2007, right when you started, one of
HBMX's clients was Zhenli Ye Gon, a reported drug lord who got
caught selling precursor chemicals for methamphetamine
production for La Familia and the Sinaloa cartels. When you
learned that Mr. Ye Gon was a client of HBMX, what was your
reaction? What did you do?
Mr. Thurston. Well, I was horrified by the case, and this
really exposed a whole series of weaknesses within the bank. So
I personally conducted an investigation. I brought in the audit
team. I brought in the security and fraud team. I brought in
the compliance team. And we made a number of changes. This is
where I found, for example, the business heads were overriding
the people in the Compliance Department on decisions on
accounts. So I put up an escalation process so that Compliance
had a route to the chief operating officer and then to me if
they were not comfortable with the decisions that were being
made through that legal committee.
I looked at the fact that we had here a business account
that was being managed in the personal consumer part of the
bank, which would make it very hard for people then to spot the
underlying activity and compare it with normal activity. So we
made a number of changes about that, and that is where we
started to--we dismissed a number of people who had falsified
visit records, not been to visit the premises when they said
they had. That is when I realized that practice existed.
We looked to see if there was any sign whatsoever of any
collusion. We investigated all the staff's accounts. And as a
result of that, we found some incidents of staff lending to
each other, so we created policies on that.
So there were a whole series of actions that stemmed out of
finding that incident.
Senator Coburn. There was, in fact, significant attention
from the compliance officer at that time, correct? Prior to
your knowledge of it, that had been raised as an issue.
Mr. Thurston. That is correct, Senator Coburn.
Senator Coburn. All right. Thank you.
During your tenure at HBMX, I understand that law
enforcement in Mexico raised concerns about high-risk money
laundering at HBMX. Why was it that the Mexican legal
authorities think now today that your record was worse than any
other bank in Mexico? Is it a fact or is there some assumptions
there that the Subcommittee should know about?
Mr. Thurston. They found that whenever they wanted
information from the banks, HSBC was one of the slowest to
respond. So when they were conducting investigations, HSBC took
longer to produce documents and had more challenges producing
documents than most of the other banks. When we investigated
that, again, we looked to see is this collusion, is this people
deliberately trying to hold information from the authorities,
and we found no sign of that whatsoever. But what we did find
was a process where these things would go out to branches.
Because all the files were held out in all the branches around
the country and the quality was so poor, it would take a long
time to collate effective information and get it back, and
there were things that were missing, which is why the
centralized program we had was so important. But we were also
swamped with information requests. We had on average 1,000 a
week coming from the regulators, not distinguishing between
different types.
So we then set up a direct line with the financial
intelligence unit within Mexico so that where they were
conducting urgent investigations, they could come through
straight to the bank so that we could respond more quickly.
Senator Coburn. OK. Thank you. I will yield back for right
now.
Senator Levin. Thank you.
Mr. Thurston, you were at the bank there for a year, you
have testified, and while there, you made some improvements.
But the problems continued, and part of the reason was the
nature of high-risk products and clients that the bank had, and
I want to get to some of that issue by discussing with you the
Cayman accounts.
Now, when you bought the Mexican bank, when HSBC bought the
Mexican bank, it found that HBMX kept open a so-called branch
office in the Cayman Islands. Now, I say ``so-called branch
office'' because my understanding is there was no actual
building, no office, no employees. It was just a shell
operation that offered U.S. dollar accounts.
The branch, so-called, in the Caymans was run by HBMX
itself using its own employees in Mexico. Any HBMX branch could
open a U.S. dollar account for a client, and at one point
50,000 clients had these Cayman accounts, holding $2.1 billion
in assets.
Now, we have spent a lot of time on this Subcommittee
raising questions about Caymans and other tax havens for tax
avoidance purposes, but this is a little bit different, and
this Subcommittee has a lot of interest in these issues
involving the Caymans because they are shell corporations, and
they pose significant money-laundering problems, and they do it
as soon as they are organized because nobody knows who is
behind those corporations. And here are a few of the highlights
relative to the Caymans.
Exhibit 9 \1\ is a 2002 audit of HBMX, and that audit notes
that 41 percent of the accounts in the Cayman Islands had no
client information.
---------------------------------------------------------------------------
\1\ See Exhibit No. 9, which appears in the Appendix on page 607.
---------------------------------------------------------------------------
Exhibit 31\2\ is a 2008 email by Mr. Root saying that ``15
percent of the customers there did not even have a file.''
---------------------------------------------------------------------------
\2\ See Exhibit No. 31, which appears in the Appendix on page 708.
---------------------------------------------------------------------------
``Fixing the Cayman accounts will be a huge struggle.'' He
says, ``How do you locate clients when there is no file?''
Exhibit 32 \3\ is a July 2008 email noting that HBMX has
discovered ``significant U.S. dollar remittances being made by
a number of HBMX Cayman customers to a U.S. company alleged to
be involved in the supply of aircraft to drug cartels.''
---------------------------------------------------------------------------
\3\ See Exhibit No. 32, which appears in the Appendix on page 711.
---------------------------------------------------------------------------
A later email, November 2008, which is Exhibit 34,\4\
describes the Cayman accounts as having been frozen ``due to
massive misuse of them by organized crime.''
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\4\ See Exhibit No. 34, which appears in the Appendix on page 720.
---------------------------------------------------------------------------
So, Mr. Thurston, first of all, did you know that the
Cayman branch was fictitious, just a shell?
Mr. Thurston. It is what is called a cat B license, I
believe.
Senator Levin. But did you know that it was just a shell
company? There were no employees there, no office there. Were
you aware of that?
Mr. Thurston. I know now, sir.
Senator Levin. And did you know about the problems at the
Cayman accounts that I have just read?
Mr. Thurston. Mr. Chairman, no, I did not during the time
that I was there, and on reading your report, I was really
angry to find there had been an audit report on these in the
previous year, but that it had been closed off with no action.
So when I got there and went through what are the top risks and
the big audit outstanding items, these were nowhere to be seen.
Senator Levin. All right. So you were unaware of the Cayman
accounts at the time that you were head of that office?
Mr. Thurston. Correct, sir.
Senator Levin. Now, Mr. Bagley, you indicated to the
Subcommittee during an interview that although you were aware
of the accounts since 2002, the Cayman accounts, you focused on
them only after a July 2008 incident involving funds going to
buy planes for drug cartels. Now, I do not know, given the
history here, how you could possibly not know of the severity
of the problems involving the Caymans until that time, but in
any event, after that incident, the new head of HBMX decided--
and this is, I think, 2008 now--Mr. Pena decided to suspend
opening new Cayman Island accounts.
So under Mr. Pena, HBMX initiated a review of the accounts,
eventually closed 9,000 of them. But as of the beginning of
2012, there were still about 20,000 accounts with $670 million
in assets. So two-thirds of the money-laundering risk
continues.
So, Mr. Bagley, this Subcommittee really has found out that
these kind of shell corporations in the Caymans and other
places create all kinds of tax avoidance problems, but this is
a different kind of an issue here. This is a money-laundering
issue, and we have now two-thirds of those accounts which were
in the Caymans, with that many assets apparently still sitting
there. What are you going to do about it?
Mr. Bagley. Thank you. The point is that when we became
aware of those Cayman accounts, the ones that remain have all
been fully remediated. So when we became aware and focused on
the Cayman accounts themselves, what we did as a group, what
HBMX did was work through each and every one of those accounts,
revised and refreshed the KYC to satisfy ourselves that there
was an explanation for the monies and that we were satisfied
with the source of the funds. And, therefore, what is left has
been subject to revised and enhanced due diligence and a
refreshment of all of the information that we are holding.
Senator Levin. Does that mean 20,000 accounts now that you
are going to keep there?
Mr. Bagley. Well, actually, the group has recently arrived
at a decision, which I support, which is to actually close all
of those Cayman accounts.
Senator Levin. ``No.'' Well, that is the short answer, a
very welcome answer, and particularly I think this Subcommittee
can really look at its work as contributing to this kind of
pressure on you to do the right thing.
Mr. Bagley. Sorry to interrupt. I should just be very clear
that we are in the process of closing those accounts. They are
not yet closed, but they will all be closed.
Senator Levin. That is good news.
Now, HBMX did not inform HBUS about the Cayman U.S. dollar
accounts for many years. Is that correct, Mr. Gallagher?
Mr. Gallagher. Yes, sir, that is correct.
Senator Levin. So these transactions were run through the
U.S. dollar correspondent account that HBMX had at HBUS. Would
HBUS have wanted to know about these high-risk accounts in a
secrecy jurisdiction? Would you have wanted to know that?
Mr. Gallagher. Absolutely.
Senator Levin. Do you know why you were not informed?
Mr. Gallagher. No, sir, I cannot answer that question.
Senator Levin. Maybe Mr. Bagley or Mr. Thurston. Why
wouldn't HBUS have been informed of those accounts?
Mr. Bagley. It is a very appropriate question. I think
there are two or three reasons. One is that at that stage
neither HBUS, as your report reflects, was conducting affiliate
due diligence. Second, we at that time did not do affiliate due
diligence across the rest of the group. And as a consequence,
the questions that you would normally expect to be asked by one
affiliate of another, one correspondent bank of another, were
not asked. They are now.
Senator Levin. Under your new rules now, you are going to
be notifying each of the affiliates of this kind of action?
Mr. Bagley. What we are doing and have introduced and are
in the process of rolling out is affiliate due diligence across
the whole group, so every affiliate will do due diligence on
its own affiliates. That will be to the same standard as we
apply to an entirely independent third party.
In addition, we have put in place a process that ensures
that if there is a material AML deficiency or issue or risk in
one affiliate, that will be reported on a mandatory basis
across the group and will automatically go to the head of
compliance for each region. So what that will mean, when that
work is complete, is that each affiliate will treat its
affiliates at arm's length, will ask all of the appropriate
questions, will know everything that it needs to know about the
risk profile that one affiliate presents to another.
Senator Levin. And when will this be put in place? You said
it is being put in place. When will this be accomplished?
Mr. Bagley. We are rolling out--it will take a while,
obviously, to complete those due diligence profiles. We will
use the ones we have already completed for the United States in
response to the cease and desist orders. We will do it as fast
as we can. We have already put in place the mandatory reporting
of AML deficiencies, and we have that up and running as a
process.
Senator Levin. When will it be completed, do you know?
Mr. Bagley. I do not know exactly when it will be
completed, but we will do the highest risk as quickly as we
can.
Senator Levin. All right. Will you let the Subcommittee
know when it is completed?
Mr. Bagley. I would be very happy to.
Senator Levin. Thank you very much. Senator Coburn.
Senator Coburn. Mr. Gallagher, if you would turn to Exhibit
40.\1\ The Bank Melli in Iran, prior to September 11, 2001,
HSBC had a relationship with this bank in Iran which, because
of its home country, would get more scrutiny in the United
States. HSBC in Europe helped coach Bank Melli to send payments
through the United States without getting slowed down.
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\1\ See Exhibit No. 40, which appears in the Appendix on page 755.
---------------------------------------------------------------------------
Why was HSBC interested in doing business with this bank?
Mr. Gallagher. I cannot speak specifically for all of the
reasons. The business desire was coming out of Europe and the
Middle East, not coming out of the United States. There was a
memo that described some opportunities that they saw for growth
in business generally, but HBUS was not driving that business
decision.
Senator Coburn. What was it exactly that made you say in
this email, ``I wish to be on the record as not comfortable
with this piece of business''?
Mr. Gallagher. Yes, thank you. That is a very important
question. I was very concerned about the lack of transparency
in the proposal that had been put forward that described how
the payments would flow. So in this particular case, there
seemed to be an inability for the bank--that is to say, Melli--
to describe in advance who its primary beneficiaries would be.
That caused me to say we should not want to engage in business
with a client who cannot provide that level of transparency to
our system.
Senator Coburn. So there was really no Know Your Customer
here?
Mr. Gallagher. I cannot speak to that because Know Your
Customer would have been done on the European side. But when I
became aware that there was seemingly a lack of transparency in
one of my roles, I thought that was inappropriate and very
strongly suggested we should not proceed.
Senator Coburn. And so what was the response to that?
Mr. Gallagher. Well, ultimately the transaction never was
approved.
Senator Coburn. And do you know why?
Mr. Gallagher. Discussion went on for some time back and
forth across the regions and the world. I do not recall the
specific reason, but I was delighted to know that my
recommendation was part of the solution.
Senator Coburn. Did you raise other concerns other than in
this email that we have documented under Exhibit 40? \1\
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\1\ See Exhibit No. 40, which appears in the Appendix on page 755.
---------------------------------------------------------------------------
Mr. Gallagher. About Bank Melli specifically?
Senator Coburn. Yes.
Mr. Gallagher. I do not recall.
Senator Coburn. OK. If you would turn to Exhibit 57,\2\
Iranian U-turn payments, in November 2004. This email suggests
that some inside HSBC thought that all Iranian payments through
the United States should be fully disclosed. Nonetheless, many
payments still went through without full transparency,
sometimes because information was removed by HBEU. This email
says, ``HBEU would be advised to not alter the payment details
in any way.''
---------------------------------------------------------------------------
\2\ See Exhibit No. 57, which appears in the Appendix on page 844.
---------------------------------------------------------------------------
Was it well understood within HSBC that information was
being removed from payments before they arrived in the United
States?
Mr. Gallagher. I do not know how well understood it was,
and I do not recall specifically some of these exchanges. But
if I had to speculate, consistent with my earlier position,
which was unchanged, regarding the importance of transparency
in these messages, I am quite comfortable that the proper
people were alerted and it was in the proper hands for
resolution. But specific details on this I do not recall.
Senator Coburn. But the decision went really against your
advice?
Mr. Gallagher. Yes.
Senator Coburn. Because, in fact, they were altered,
correct?
Mr. Gallagher. It would seem so, yes.
Senator Coburn. OK. Do you have any idea how HSBC intended
to make sure all these payments complied with U.S. law?
Mr. Gallagher. There was a view at the time that the team
in London and/or subsequently elsewhere was going to ensure
that the payments were going to be U-turn compliant before they
got to the United States.
Senator Coburn. Do you think they were?
Mr. Gallagher. I do not honestly know specifically that
they were not. Some of this information is slightly new to me
in being involved in this investigation and catching up. So I
do not know the specific answer to that question.
Senator Coburn. Who would know the answer to that question?
Mr. Gallagher. I would suggest either operational staff
doing the work on the other side and/or possibly somebody in
Compliance.
Senator Coburn. Should they have relied on people in Iran
to do that?
Mr. Gallagher. No. Certainly, in retrospect, we should not
have relied on anybody but ourselves to ensure the soundness of
the payments coming into our system.
Senator Coburn. Mr. Lok, in your testimony, you said
compliance was a critical part of the HSBC banknotes business.
Mr. Lok. Correct, sir.
Senator Coburn. Can you explain to me exactly what you mean
by this? And tell me what it looked like.
Mr. Lok. We have a system in place whereby customers are
risk-rated, and they are rated according to different
categories, and then, therefore, the high-risk customers, we
need to make sure that there is a process in place whereby the
information about a client is laid out in the open so that
people can come in, including the relationship managers, the
business people, as well as compliance, so that we can evaluate
the risk. And, finally, compliance has to be the final sign-off
so that we can do business with these people. In other words,
we consider compliance a very important partner in our
business.
Senator Coburn. Did you recognize certain vulnerabilities
in your compliance strategy in the banknote business?
Mr. Lok. At that moment, honestly, no.
Senator Coburn. You would agree that there were, though, in
hindsight?
Mr. Lok. In hindsight, yes. Looking at all these documents,
yes. The answer is definitely yes.
Senator Coburn. Just for our educational purposes and given
your broad experience, are there certain challenges that are
different in the banknote business related to specific
currencies over other currencies?
Mr. Lok. I am sorry. Can you repeat the question?
Senator Coburn. Are there specific challenges in the
banknote business in terms of compliance related to one
currency over another, not necessarily in terms of geographic
location, but, for example, is it easier to run a scam or play
the game with the U.S. dollar, the British pound, the euro, the
Japanese yen, the renminbi? In other words, does the same
compliance vulnerabilities that you see now in hindsight apply
differently to different currencies and different geographic
locations?
Mr. Lok. At that moment, no, it did not strike me that
there is a difference in terms of compliance risk because the
policy itself spells out exactly how we run it, analyzing the
risk. No, we were not--no. The answer is no.
Senator Coburn. All right. I will yield back.
Senator Levin. Let me ask some questions about the Sigue
Corporation, which was a U.S. money service business that
transmitted funds from U.S. clients to Mexico and Latin
America. The Drug Enforcement Association undertook a sting
operation in 2007 in which its agents told Sigue's operators
that they wanted to send drug proceeds to Mexico, and more than
two dozen of those Sigue operators obliged.
In January 2008, Sigue entered into a deferred prosecution
agreement with the U.S. Department of Justice, admitting the
facts, for failing to have adequate money-laundering programs.
HBUS determined that in 2007 alone it had processed 159 U.S.
dollar wire transfers for Sigue involving about half a billion
dollars, and they were all sent through the HBMX correspondent
account with HBUS.
Then if you would look at Exhibit 18a,\1\ Mr. Gallagher,
this was a memo that was prepared by HBUS after a 2008 Wall
Street Journal article on the Wachovia case. It talks about the
Sigue case and its use of the HBMX account, but it also notes
that Sigue was not added to the HBUS filter so that it could be
subjected to enhanced anti-money laundering to identify
suspicious activity.
---------------------------------------------------------------------------
\1\ See Exhibit No. 18a, which appears in the Appendix on page 654.
---------------------------------------------------------------------------
Now, you were the head of PCM at that time, Mr. Gallagher,
and that handles wire monitoring. Do you know why HBUS did not
subject Sigue to enhanced monitoring after the 2008 deferred
prosecution agreement?
Mr. Gallagher. No, Mr. Chairman, I do not know. Looking at
the memo, I note that I am not addressed on the memo. I cannot
honestly recall if I saw the memo. But the decision as to
whether or not to add any name to enhanced monitoring or to a
filter, etc., is a decision that would be taken in Compliance,
not in PCM.
Senator Levin. But you do not know why. You are saying it
is not your department, but you just do not know why it was not
added. Should it have been added?
Mr. Gallagher. Seemingly, absolutely it should have been
added. I do not know why it was not.
Senator Levin. OK. In 2007--this is Exhibit 30 \2\--a man
named Mr. Barroso, who was head of the HBMX anti-money
laundering program, was leaving the bank. He had an exit
meeting with you, Mr. Bagley, I believe, and according to a
meeting summary that you wrote, Mr. Barroso told you that there
were allegations that ``60 to 70 percent of laundered proceeds
in Mexico went through HBMX,'' and he did not think that senior
management had any commitment to robust anti-money laundering
controls.
---------------------------------------------------------------------------
\2\ See Exhibit No. 30, which appears in the Appendix on page 703.
---------------------------------------------------------------------------
That memo, I believe, Exhibit 30, was written to you, Mr.
Thurston, if I have that correct.
Mr. Thurston. That is correct, Chairman.
Senator Levin. What was your reaction when you got that
memo?
Mr. Thurston. Mr. Chairman, I was incredibly distressed. I
do not think anybody wants to hear those sorts of things coming
through, so we made sure that we investigated. We made sure
that we took the points that were there. We had recently had
discussion with the regulators in Mexico, and we made sure that
we took account of those points within the remediation program
that we were looking at in Mexico to make sure there was
nothing new that we had missed. It also caused us to question
whether our head of compliance was sufficiently good for the
role as well.
Senator Levin. All right. Let me now turn to the Iranian
issue, which Senator Coburn asked some questions about as well.
Now, Iran had been subject to sanctions in the United
States for a long time as a rogue nation. It had long been on
the U.S. SDN list, as we heard about this morning, as a
prohibited country. Our laws consistently prohibited U.S.
persons from doing business directly with Iran, but until 2008,
U.S. banks were allowed to process transactions that might
involve Iran but which were sent to the United States by
foreign banks located outside of Iran. Now, those transactions
were called ``U-turns'' because they went from Iran to a non-
Iranian bank, a foreign bank, then to a U.S. bank and then back
to a different non-Iranian foreign bank and then to the final
party. So there was a U-turn that was made through the U.S.
bank.
The issue with HBUS is that the HSBC affiliates in Europe
and the Middle East wanted to send U-turn transactions through
their accounts at HBUS without triggering that OFAC filter or
an individualized review to make sure that they were permissive
U-turns. They wanted to remove any reference to Iran and to go
through the HBUS systems without any manual or more detailed
review. So this was a battle over transparency.
The United States wanted full transparency so that it knew
it was dealing with an Iranian U-turn and could make sure it
complied with U.S. law. The affiliates did not want to trigger
these reviews or to take the time for those reviews. So HBUS
and the affiliates fought over this issue for 3 years, from
2001 to 2004. But while they were arguing, the overseas HSBC
affiliates were sending undisclosed Iranian U-turns through
their HBUS accounts, anyway. And to do that, the HSBC affiliate
in Europe, HBEU, stripped out the references to Iran. Senior
employees at HBEU protested in 2003 and 2004--and I believe one
of these protests was read by Senator Coburn--that they did not
want to be altering wire transfer documents for Iran. They even
set two deadlines in 2004 when they said that they would stop
doing it, but both deadlines were ignored.
HSBC issued group-wide policy statements on Iran in 2005
and 2006, but neither resolved the U-turn issue. The issue was
resolved only in 2007 when HSBC made a global decision to exit
Iran.
Now, I believe that Exhibit 41 was referred to by Senator
Coburn, and if so, I will not read it again.
Senator Coburn. I did Exhibit 40.
Senator Levin. OK. So Exhibit 40 was read by Senator
Coburn, which made reference to the statement about, ``I wish
to be on record as not comfortable with this piece of
business.''
Exhibit 41\1\ was, ``With the amount of smoke coming off of
this gun, remind me again why we think we should be supporting
this business?'' So that is another HBUS employee describing
the Iranian business. But at HBEU, the Europe branch, they were
stripping payment information, so the United States was unaware
of these Iranian payments.
---------------------------------------------------------------------------
\1\ See Exhibit No. 41, which appears in the Appendix on page 760.
---------------------------------------------------------------------------
Senior officials at HSBC, at the headquarters in London
from 2001 to 2007, knew that affiliates in England and the
Middle East, the HBEU and HBME, were sending undisclosed
payments through their HBUS accounts but did not stop them or
inform HBUS of the extent of the activity. So they knew that
their affiliates were hiding key information from each other.
Now, at HBUS, senior compliance officials were on notice as
early as 2001 that this stripping was occurring but took no
decisive action to stop it. They stopped occasional wire
transfers from Iran with the words, ``Do not use our name in
New York.''
So, first, Mr. Bagley, didn't the European and Middle East
affiliates--why weren't those affiliates told, why wasn't HBUS
told, what possible justification is there for not telling an
affiliate that key information to them so that they can comply
with their own laws has been removed?
Mr. Bagley. It is a very fair question, Senator. My
understanding of the position was that HBEU was checking each
one of those transactions to ensure that they were U-turn
compliant, that I was always advised that they were U-turn
compliant. When I first focused on this issue, which was, I
think, in mid-2003, although there were indications in emails
before that, I emphasized and recommended that there should be
full transparency given to HBUS so that they could check the U-
turn compliance--compliance with the U-turn themselves.
Senator Levin. Was it?
Mr. Bagley. It was not.
Senator Levin. So as Exhibit 55 says so simply and
eloquently and dramatically, your own people ``were being asked
to `fudge' the nature of the payments to avoid the U.S. embargo
and seizure.'' That is Exhibit 55.\1\
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\1\ See Exhibit No. 55, which appears in the Appendix on page 840.
---------------------------------------------------------------------------
Then you were not the only one that was uncomfortable, Mr.
Gallagher, with this piece of business. People in this bank,
this global bank, were being asked to fudge the nature of the
payments to avoid the U.S. embargo and seizure. And it is
pretty shocking stuff.
Now, in 2002 and 2003, HSBC affiliates continued to send
thousands of these undisclosed Iranian transactions through
HBUS. Exhibit 1c \2\ is a chart that shows the numbers. So even
though the HSBC Group was on notice as early as 2001 that HSBC
affiliates were sending these hidden Iranian transactions
through their accounts in the United States, nobody did
anything to stop it for years.
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\2\ See Exhibit No. 1c, which appears in the Appendix on page 577.
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Mr. Bagley, in 2003, you had recently become head of
compliance for the entire HSBC Group. Earlier that month, the
Middle East affiliate, HBME, sent HBUS a memo laying out the
business case for it to process Iranian transactions. Why were
they processing them? Because there was a substantial income
opportunity, and here is what you wrote in 2003, Exhibit 45:\3\
``The business case includes a number of express references to
practices which may constitute a breach of U.S. sanctions.''
But then in October 2003--and this is Exhibit 48 \4\--one of
your attorneys in Group Compliance, John Root, wrote to you
that six banks were processing U.S. dollar payments and that
these payments were being altered by HBEU before going to HBUS.
He said HBEU was removing the remitter's name. Breaching these
U.S. sanctions is a serious matter, and as the head of
Compliance, you were making that point.
---------------------------------------------------------------------------
\3\ See Exhibit No. 45, which appears in the Appendix on page 784.
\4\ See Exhibit No. 48, which appears in the Appendix on page 801.
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When you learned that HBEU was removing the names of
Iranian banks, why was not the practice simply stopped right
then? Why did it take so long to fix?
Mr. Bagley. Mr. Chairman, that is an absolutely appropriate
question, and with the absolute benefit of hindsight, this
clearly took far too long to resolve.
What I can say is that when it came to my attention, I very
clearly recommended that all transactions should be compliant,
should be transparent, and should be made in a way which HBUS
was comfortable with, and that recommendation went to the
relevant parts of the group and ultimately was escalated to
senior management within the group.
Senator Levin. How long did it take?
Mr. Bagley. I think as you have indicated, there were then
various discussions between different parts of the group, and I
think we progressively started to introduce transparency into
the payments in 2006.
Senator Levin. So that would be about what, 3 years?
Mr. Bagley. Far too long.
Senator Levin. But about 3 years?
Mr. Bagley. Yes.
Senator Levin. Senator Coburn.
Senator Coburn. If a U-turn transaction is fully compliant
and fully transparent, I would make the point it is legal, and
nobody here is claiming illegality. But if one of these--and
this is for you, Mr. Bagley. If one of these U-turn payments
was not compliant with U.S. law, who is responsible?
Mr. Bagley. Ultimately I anticipate that the transaction
passing through the U.S. bank may expose the U.S. bank to risk.
And if there was malign intent, then it could expose somebody
else to risk as well.
Senator Coburn. So in this great big organization called
HSBC, is it fair for one profit center to put another profit
center at that kind of risk? Not only is it fair, is it the
right thing to do?
Mr. Bagley. I neither think it is fair nor the right thing
to do, which is why I urged transparency so that HBUS could
satisfy itself. But I would like to stress that at all times we
were told and believed that those transactions were compliant
and lawful and that there was a process where people seriously
tried to ensure within HBEU that the transactions that were
sent were compliant.
Senator Coburn. So it is your feeling--and you cannot know
this for a fact because you have not looked at all of them. But
it is your feeling that none of these transactions that HBUS
saw no transparency on, it is your testimony that you feel that
they all met the intent that our government says if you are
going to run it through U.S. dollar banks, that you actually
met that expectation?
Mr. Bagley. I do not think I can say that all of those
transactions were. What I was always told was that people were
seeking to ensure they were compliant----
Senator Coburn. Who are those people?
Mr. Bagley. The processing unit within HBEU.
Senator Coburn. And who are those? Who is the head of the
processing unit at HBEU?
Mr. Bagley. I cannot recall the name.
Senator Coburn. Who could recall the name?
Mr. Bagley. I am sure we could find that name.
Senator Coburn. Would you do that for the Subcommittee,
please?
Mr. Bagley. Absolutely.
Senator Coburn. I would love to have that name during our
questioning this afternoon because that is a key point. Either
they were legitimate U-turns or they were not.
Mr. Bagley. I believe that the results of the lookback that
has been conducted by Deloitte indicates that most, if not all,
of those transactions were compliant, or a significant number,
I believe. That is not a report I have seen, but that is my
understanding.
Senator Coburn. OK. And who has that report?
Mr. Bagley. I believe the results of that report have been
disclosed to the Subcommittee.
Senator Coburn. OK. Thank you.
Mr. Lok, on Al Rajhi Bank, Exhibit 78,\1\ if you would take
a look at that. You were interested in carrying on a business
relationship with this bank to sell it banknotes, as this email
shows. Page 2 of the email also shows that one of your
compliance people wrote, ``I am not trying to be difficult,''
but that she did not want to approve the business.
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\1\ See Exhibit No. 78, which appears in the Appendix on page 937.
---------------------------------------------------------------------------
What was your impression at the time why she would be
concerned about being difficult?
Mr. Lok. The way I read her message, ``difficult'' refers
to her reluctance to sign off the profile, and she is saying
here that she is not comfortable signing it because she does
not know the client.
Senator Coburn. Did she feel like she was being difficult
because somebody was pressing her to approve something that she
did not feel comfortable with?
Mr. Lok. No, that is not my interpretation. It is just
because she was asked, and then she turned it down. That could
be interpreted as difficult. I think that is what she is
referring to.
Senator Coburn. All right. She also states, ``I cannot
answer questions if/when the Al Rajhi name appears in the U.S.
media.'' What kind of concerns were you aware of that would
rise to that level?
Mr. Lok. I know that this name had appeared numerous times
in the papers, negative reports about the family members, and
all sorts of allegations. So it is a very controversial name.
Senator Coburn. All right. You also, on page 1 of this
email, wrote it is compliance that is the key. Were you
suggesting that you needed to convince somebody in compliance
to approve the deal or that you were willing to submit to
whatever compliance said?
Mr. Lok. Because this is a very difficult case, it is not
simple at all. When it was passed on to me by my colleague, on
the one hand, there were these negative news in the paper, etc.
But, on the other hand, there was this very supportive report
coming out from the RMs based in Saudi Arabia. And at the same
time, the Group Compliance had actually reversed its decision
saying that they were happy to let individual entities resume
doing business.
So, to me, it is a balancing act where you have some very
bad news, but, on the other hand, you cannot ignore the news
that appeared to be favorable. So that is why I presented this
to the compliance so that we can engage in an open dialogue,
show it to a few more people for elevating the issue, so that
more people who know this thing a lot better than me can engage
in and arrive at a decision.
Senator Coburn. And ultimately you did not do this deal? Is
that correct?
Mr. Lok. I am sorry. No. I think after a very long period
of time, New York Compliance had agreed to letting us resume
the relationship. I mean the U.S. side. But it took a long
time, because I had read this file before coming here, the
dialogue first started in May, and then a decision was made in
New York that we could resume for trading, that this was in
December 2006.
Senator Coburn. OK. Thank you.
Senator Levin. Thank you.
Mr. Gallagher, take a look at Exhibit 50a,\1\ if you would,
when Denise Reilly of HBUS writes to Teresa Pesce at HBUS,
anti-money laundering director, that the so-called Eastwood
memo, which was referring to alterations to remove references
to Iran, that the memo was discussed at a meeting with you, Mr.
Gallagher.
---------------------------------------------------------------------------
\1\ See Exhibit No. 50a, which appears in the Appendix on page 807.
---------------------------------------------------------------------------
This is dated December 17, 2003, so the question is--when
you learned that HBEU was sending these hidden Iranian payments
through their HBUS account, you saw it as a problem, you said
so, and the real question is: What steps did you take to stop
the practice? You objected to it. But what did you do beyond
that?
Mr. Gallagher. Yes, thank you for that. I have reread these
documents as well, and while I do not recall the specific
meeting that is discussed there, mentioned there, I feel very
comfortable about two things: First, that my position on this
with respect to the necessity for transparency and full
compliance was unchanged throughout the process; and, second,
that this was really in the right hands. Denise Reilly at the
time was in Compliance, I believe already, and Terry Pesce was
the head of AML Compliance. So all the right hands from an HSBC
Bank USA perspective into which this needed to be elevated
were, in fact, contained in this memo. I do not recall my
specific discussions here, but I would have to speculate they
would be consistent with my prior positions, which is an
abundance of caution.
Senator Levin. So you objected in 2001 to the practice. By
2003, you were the head of the HBUS's Payments and Cash
Management Division. Why not just pick up the phone in 2003,
call the CEO of HBUS or somebody in the HSBC Group and just
raise hell? Why not do that?
Mr. Gallagher. Well, certainly with----
Senator Levin. I think you knew whoever was supposed to be
taking care of it was not taking care of it.
Mr. Gallagher. Yes. With the benefit of hindsight, that is
exactly what I should have done, and I think we have all
learned the lesson that we should have been louder sooner and
more broadly in the organization.
Senator Levin. Mr. Lok, let me ask you about Exhibit
84b.\1\ You were the head of HBUS's global banknotes business
that supplied physical U.S. dollars to financial institutions
around the world. Some of your clients, to put it mildly, did
not inspire confidence and were either opposed by HBUS's
Compliance, the division there, or they sought to subject them
to special anti-money laundering monitoring. But you often
opposed those recommendations, and here are a few examples, 84b
is one.
---------------------------------------------------------------------------
\1\ See Exhibit No. 84b, which appears in the Appendix on page 964.
---------------------------------------------------------------------------
This is an email exchange in 2005. This was about whether
to classify a particular HBUS banknotes client as a special
category client (SCC), which means that is a high-risk client
that undergoes additional scrutiny.
HBUS Compliance described the foreign bank as one in which,
``the bank's senior management and employees have been involved
in numerous significant instances of corruption, fraud, and
embezzlement over the past few years,'' and recommended that it
be classified as a SCC.
You responded as follows: ``Yes, corruption can be rampant
in this bank, but it is not unique'' to that bank. So you
opposed the SCC designation.
Now, the HBUS compliance officer for banknotes, Daniel
Jack, described a bank as ``government-owned, in a high-risk
country with a politically exposed person,'' which is someone
who requires enhanced due diligence, ``and reputational risk
due to corruption, etc.'' This is now Exhibit 84a.\2\ And he
recommended an SCC designation, and your response: ``. . . this
is such a large bank hence malfeasance is expected.''
---------------------------------------------------------------------------
\2\ See Exhibit No. 84a, which appears in the Appendix on page 958.
---------------------------------------------------------------------------
``However,'' you wrote, ``I do not agree that just on these
numerous breaches that the bank should be classified.''
So your position was that malfeasance is to be expected at
a large bank so do not even bother to do additional anti-money
laundering monitoring.
And then Exhibit 82 \3\--this is from 2007--in this email
chain, an HBUS banknotes colleague asks if you--and, Mr. Lok,
we are referring to you--would be willing to help open a
banknotes account for Islami Bank Bangladesh, which was partly
owned by Al Rajhi Bank, a Saudi Arabian bank whose account was
closed by HBUS in 2005 for terrorist-financing reasons,
although in part in 2007, because of your urging, HBUS reopened
that account.
---------------------------------------------------------------------------
\3\ See Exhibit No. 82, which appears in the Appendix on page 949.
---------------------------------------------------------------------------
Here is what you wrote: ``I am happy to be the relationship
manager if this is an account worth chasing. How much money can
you expect to make from this name?''
And then when you were told the account would produce about
$75,000 in revenues per year, you wrote: ``One, the money is
there, and we should go for this account. Two, I will jump in
and wear the [global relationship manager] hat.''
So your test, apparently, for opening an account was,
first, how much revenue it would produce, but what about the
second test, Mr. Lok? What about a test is the bank involved in
wrongdoing, whether it is terrorist financing, corruption, or
malfeasance? Why weren't those factors enough for you to say we
are not going to do it?
Mr. Lok. Mr. Chairman, let me try to explain what had
happened. Exhibit 84b,\1\ that was about classifying that
particular client in China as a SCC. The thinking was China is
a different country from a lot of other countries. It has its
own characteristics. And this bank actually shared the same
characteristics of the other big banks as well. So it is not
one just on this particular bank. So my point at that time was
if FIG, which is a unit within Compliance, wants to say that
this should be SCC, that means the other banks should also be
subject to the same rating.
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\1\ See Exhibit No. 84b, which appears in the Appendix on page 964.
---------------------------------------------------------------------------
Senator Levin. Well, why not all banks that, in your words,
where corruption is rampant? Why shouldn't they all be subject
to that rating?
Mr. Lok. First of all, I have to apologize the colorful
words I used that. It was not the appropriate----
Senator Levin. Apologize to whom?
Mr. Lok. Well, that email give the impression that I was
very tolerant of this malfeasance. That is why I said that the
word itself is not the right word to use.
Senator Levin. I am afraid it was the right word to use if
you believed it. Corruption was rampant at that bank. Did you
believe it was rampant?
Mr. Lok. Well, it is a very large organization. I think
just like other organizations, when you have such a large bank,
yes, there are bound to be cases of malfeasance.
Senator Levin. You did not really mean what you said, that
it was rampant? Is that what you are saying? At the time you
wrote it was rampant and that it was not unique to that bank.
So were you inaccurate in your email? Did you express what you
believed at the time?
Mr. Lok. At that time, yes, but I need to qualify that
statement, which is the email came forward, I was overwhelmed
by this feeling that if this bank were to have been SCC, that
means the other banks need to be SCC. And at that time China
was a country that the group itself looked at as a very
important market. So I wanted to elevate the issue. That is why
I copied my colleagues in London, bring in Group Compliance,
take a look at this. That was what I was trying to do at that
time.
Senator Levin. What about your Exhibit 84a? \2\ Here you
are recommending you proceed despite the fact that the
compliance officer for banknotes, Daniel Jack, described this
as a government-owned bank in a high-risk country with
politically exposed persons that require enhanced due diligence
and a reputational risk--that is to you, to your bank--due to
corruption. And your recommendation was go ahead anyway. ``It
is a large bank. Hence''--your word--``malfeasance is expected.
I do not agree,'' you said, ``that just on these numerous
breaches the bank should be classified''--in other words, given
enhanced review.
---------------------------------------------------------------------------
\2\ See Exhibit No. 84a, which appears in the Appendix on page 958.
---------------------------------------------------------------------------
Did that reflect your view at the time? Did you believe
what you wrote at that time?
Mr. Lok. At that moment, yes.
Senator Levin. OK. What about this Bangladeshi bank? When
you said--all you seemed to be interested in is how much money
will it make for us, how much money can we expect. Then $75,000
in revenues. And then you say, ``We ought to go for it.'' You
will be happy to wear the hat, the global relationship hat.
You are head of the Banknotes Department, and when your
employees see those kinds of remarks in your emails from their
boss, what kind of an impact do you think it has on their
willingness to consider compliance issues when deciding whether
to open an account for a potentially lucrative but a high-risk
client? What do you think the effect of those words are on your
employees?
Mr. Lok. Mr. Chairman, I agree that this is not portraying
a right image, not giving the right message, looking at the
message right now.
Senator Levin. Senator Coburn.
Senator Coburn. Just for the record, the email that Mr. Lok
sent did not say it was rampant. It actually said ``can be
rampant.'' And some of the realism of the world we live in in
global commerce, if you take this particular bank--and this is
not a defense, but if you look at their own bank in Mexico, I
would tell you it looked like it could be rampant there as
well. And I think that Mr. Thurston certainly found that, that
corruption could be rampant in that.
I think we have a better understanding, Mr. Chairman, of
what went on. Someone taught me a long time ago that greed
tends to conquer all technologic difficulties, and so we are
about anti-money laundering. That is what this hearing is
about. And it is not the accusation of illegality. It is the
accusation of poor judgment and mistakes and not good line
authority inside a very large and very successful organization.
I would just say, one, I appreciate the candor of the
witnesses today. It is a very difficult issue. I am still
concerned even though Deloitte said there are 79 accounts they
could not account for in terms of U-turns. I still think it is
a difficult issue when the world is dealing with a terrorist
state like Iran and we are allowing them the flexibility. So my
hope is that we can learn some things, and I know HSBC
certainly has, and I appreciate our witnesses' testimony.
Senator Levin. Thank you, Senator Coburn. I think I read
the email correctly. I will read it again. ``Yes, corruption
can be rampant in this bank, but it is not unique to'' the
bank.'' And so I think it speaks for itself. If I at one point
said that he said it is rampant instead of, ``Yes, it can be
rampant'' and ``it is not unique,'' then your quote is exactly
right, and the one I just read I think is also exactly right.
But there is not much difference between ``it can be rampant''
and ``it is not unique'' to what the point was of this question
and Mr. Lok's answer.
[Pause.]
Senator Levin. We thank our witnesses, and, again, we
appreciate the cooperation with this investigation of your
bank.
We are going to recess now until 2 o'clock. We thank our
witnesses, and you are discharged.
[Whereupon, at 12:34 p.m., the Subcommittee was recessed,
to reconvene at 2 p.m., this same day.]
Senator Levin. The Subcommittee will now come back to
order.
I would like to call our third panel of witnesses for this
hearing, Irene Dorner, the President and Chief Executive
Officer of HSBC Bank USA and HSBC North America Holdings in New
York; and Stuart Levey, the Chief Legal Officer of HSBC
Holdings in London.
We welcome you both. We appreciate both of you being with
us this morning. We look forward to your testimony, and we also
want to tell you that we appreciate the cooperation of your
bank. It has been consistently cooperative with us and we are
grateful for that.
Pursuant to Rule VI, all witnesses who testify before the
Subcommittee are required to be sworn, so I would ask you both
to please stand and raise your right hand.
Do you swear that the testimony you will give before this
Subcommittee will be the truth, the whole truth, and nothing
but the truth, so help you, God?
Ms. Dorner. I do.
Mr. Levey. I do.
Senator Levin. The timing system that we have will give you
a red light after 5 minutes, but a minute before that it will
shift from green to yellow to give you an opportunity to
conclude your remarks. Your entire written testimony will be
printed in the record. And we would, again, appreciate that you
attempt to limit your oral testimony to 5 minutes each.
Ms. Dorner, we will have you go first, followed by Mr.
Levey, and then we will proceed to questions. But first, let me
turn to Senator Coburn.
Senator Coburn. Thank you. I privately greeted our
witnesses and I would apologize. This afternoon, I will be in
and out, but I will be here to ask my share of the questions.
So if you are in the midst of your testimony and I leave,
please forgive me.
Senator Levin. Thank you very much, Senator Coburn. Ms.
Dorner.
TESTIMONY OF IRENE DORNER,\1\ PRESIDENT AND CHIEF EXECUTIVE
OFFICER, HSBC BANK USA AND HSBC NORTH AMERICA HOLDINGS, INC.,
NEW YORK, NEW YORK
Ms. Dorner. Thank you, Chairman Levin and Senator Coburn.
My name is Irene Dorner and I serve as President and CEO of
HSBC Bank USA and HSBC North America Holdings, Inc. I have led
the bank in the United States since January 2010.
---------------------------------------------------------------------------
\1\ The prepared statement of Ms. Dorner appears in the Appendix on
page 130.
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I fully appreciate why we are here and believe that the
discussion about controls at global banks is an important one
to have. We deeply regret and apologize for the fact that HSBC
did not live up to our own expectations, the expectations of
our regulators, our customers, our employees, and the general
public.
HSBC's compliance history as examined today is
unacceptable. HSBC has learned some very hard lessons from the
experience of the past few years, but we have taken very
substantial steps to address the problems that we, our
regulators, and this Subcommittee have identified. We have made
fundamental changes in governance, culture, training, and
funding to ensure that we can effectively deter illicit use of
our bank in a manner that will be embedded and sustained going
forward. The process is ongoing and requires vigilance.
As you know, these issues and challenges do not end at the
water's edge, so we are combining our efforts with reforms that
apply throughout HSBC's global businesses, and I am joined
today by our new Chief Legal Officer, Stuart Levey, who is here
on behalf of the HSBC group, and who will describe HSBC's
global compliance commitment.
Given my experience working for HSBC in other parts of the
world, I am cognizant of the risks and obligations that come
with serving our customers who have a need for global banking
services, and at an absolute minimum, we must have the proper
controls and systems in place to ensure that we are doing the
right business in the right places with the right customers and
that our customers' transactions are properly monitored. If,
for any reason, a transaction appears to be unlawful or
suspicious, then we scrutinize the customer and report this
information to the authorities in a timely manner.
As the Subcommittee has documented, we have fallen short in
a number of serious ways. In October 2010, the U.S. bank
entered into a consent order with the OCC. With the full
support of our board and of the HSBC group, I took the lead in
overseeing our remediation efforts and we have taken
significant steps.
First, we have worked hard to foster a new culture that
values and rewards effective compliance and that starts at the
top. By the end of 2010, we had a new U.S. senior management
team in place. We overhauled our AML compliance function,
improving the quality, coverage, and strength of our AML
program through additional staffing and training. We have
increased spending in AML compliance nine-fold from 2009 to
2011. And today, we have 892 full-time AML compliance
professionals.
Second, we have undertaken an enterprise-wide risk
assessment and have exited customer relationships and
businesses that do not represent acceptable manageable risks.
This is an ongoing process and we continue to do a formal risk
assessment twice a year.
Third, we have made changes to our ``know your customer''
policies because proper KYC must be robust to be effective. We
must know a significant amount about our customers to be
satisfied that we want their business. Our new KYC policy
delivers a critical look at each customer, including our own
HSBC affiliates. We have also implemented a new customer risk
rating methodology which takes a holistic view of customer
risk. I chair the project to apply our new KYC standards to our
entire customer base. Many of the changes we are making are
being adopted as HSBC Global best practices.
And finally, we have made significant investments in
technology and we have built better controls around our
automated monitoring system, although we recognize that there
is more to be done. The intended consequence of these changes
is to embed a new culture of responsibility, accountability,
and deterrence within our U.S. bank. It has been my mission and
the mission of my new senior team to make sure that compliance
is on every employee's mind at every level in the organization.
In closing, let me say that I do appreciate this
Subcommittee's efforts to examine and improve the steps taken
by industry and government to address these challenges and the
recommendations you have made. We are committed to fulfilling
our responsibilities in an effective and sustained manner.
Thank you, and I am happy to address any questions.
Senator Levin. Thank you very much, Ms. Dorner. Now, Mr.
Levey.
TESTIMONY OF STUART A. LEVEY,\1\ CHIEF LEGAL OFFICER, HSBC
HOLDINGS PLC, LONDON, ENGLAND
Mr. Levey. Thank you, Mr. Chairman and Senator Coburn. My
name is Stuart Levey. I am the Chief Legal Officer of HSBC, a
position I have held for the past 6 months. I am pleased to be
here at the Subcommittee's request to participate in today's
hearing, and I would also like to express the appreciation to
the Subcommittee staff for its hard work and professionalism.
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\1\ The prepared statement of Mr. Levey appears in the Appendix on
page 137.
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Some of the information discussed earlier today and in the
Subcommittee's report is sobering. It highlights serious
historical problems at HSBC, and we have not shied away from
that. In fact, we have gone to great lengths to cooperate, not
only to be helpful to you, but to help us diagnose the problems
and identify solutions. We obviously have a great deal of work
to do.
I know from experience that it is critically important to
our safety and security to stop illicit actors from gaining
access to the financial system. At HSBC, we must do everything
in our power to prevent that access through our bank and we
embrace that responsibility. That is why we are taking action
not only to address the specific deficiencies the Subcommittee
identified, but also to implement a global strategy to tackle
their root causes. This is a complex undertaking, given the
scale of our institution and our multinational footprint. But
if we get this right, it will make a difference.
At the beginning of 2011, there was a transition at HSBC to
a new CEO, Stuart Gulliver, and our new Chairman, Douglas
Flint. Our new leadership team understands these challenges and
they approached me to join them to help drive the necessary
changes. My views on these issues were public and well known
and HSBC's leadership wanted me to bring my experience and
commitment to bear on their challenges.
I would like to outline for you the path that we are on.
First, beginning in January 2011, we have reorganized HSBC
around four global businesses and 10 global functions. This
means for the first time that the global head of a function,
like myself, has authority over the operations and personnel of
that function wherever we operate. This makes it easier to
manage our risk globally. The historical decentralized
corporate structure that concentrated authority on country
heads has been replaced.
Second, we have simplified our business model to make HSBC
easier to manage. We are reducing our footprint and product
lines. We have focused on selling and exiting non-core
businesses, such as our global banknotes business. Over the
past 18 months, we have sold or exited 31 businesses and are
already withdrawing from nine countries.
Third, we have elevated and strengthened the role of group
compliance so it is now in power to set standards across the
organization and has the necessary authority to ensure that
those standards are enforced. Our new Chief Risk Officer, Marc
Moses, is also providing fresh leadership in this area.
Fourth, on April 30 of this year, our CEO issued a
directive to the entire bank requiring adoption of high uniform
standards across the firm. We are adopting a highest common
denominator approach, applying everywhere the highest standard
that we must apply anywhere. That will most often mean that we
will be applying U.S. standards globally. This means that
instead of the United States taking on risk from abroad, as you
discussed in your opening statement, Mr. Chairman, instead,
high U.S. standards will be exported globally, thereby
promoting the integrity of the financial system.
Among other things, that directive, or group circular
letter, also requires that we maximize information sharing for
risk management purposes and that we apply a globally
consistent approach to knowing and retaining our customers. The
CEO has also directed the Chief Risk Officer and me to co-chair
a steering committee, on which Ms. Dorner also sits, to drive
implementation of this new approach.
We have already begun our work. For example, we adopted a
new global sanctions policy. We ordered global application of
the obligation to conduct affiliate due diligence. And we
adopted a new risk filter to reduce and better control the
business we do in any high-risk country where we operate. This
is the process under which we decided to close the Mexican
Cayman accounts that were discussed this morning.
This is the beginning of the journey and we have a long way
to go, and we agree with you, as you say in your report, that
the burden of proof is on HSBC to demonstrate progress on these
reforms.
In addition, in 2011, our CEO introduced a new values
program under which all senior executives are evaluated on
whether they adhere to the bank's core values, including
respect for compliance.
In the end, sustainability of these reforms depends
critically on the commitment of HSBC's top leadership. I have
confidence because I know our board and senior leadership are
committed to seeing these reforms through. We understand that
this is something that absolutely must be done for the long-
term success of the bank.
I appreciate the opportunity to speak to you today and I
look forward to answering your questions.
Senator Levin. Thank you very much, Mr. Levey.
Let me start. We will have, I think, a 10-minute round.
Senator Coburn. You may go 20 minutes.
Senator Levin. OK. In 2003, HBUS was the subject of a
formal enforcement order by its regulators at the time, the
Federal Reserve of New York and the New York State Banking
Department, and it required the bank to revise and revamp its
AML program due to some very serious deficiencies. HBUS made a
commitment at that time to correct the problems. And after 3
years, in 2006, the Office of the Comptroller of the Currency
(OCC), lifted the enforcement action despite a host of
unresolved issues.
Four years later, in 2010, the bank was right back in the
soup, the subject of another enforcement action by its
regulator, this time the OCC, requiring the bank to revamp its
AML program due to severe deficiencies. And many of those were
similar to the problems that had been identified in 2003,
including many violations of Federal AML law, a backlog of over
17,000 un-reviewed alerts regarding possible suspicious
activity, failure to conduct any anti-money laundering
monitoring of $60 trillion annually in wire transfer activity
by customers domiciled in countries rated by HBUS as lower
risk, and failure to conduct any due diligence of HSBC
affiliates.
Now, on April 30 of this year, the HSBC group, as you have
testified, issued a new group-wide policy that applies to all
of its affiliates around the world, and that is Exhibit 2b.\1\
Now, this group circular letter requires all HSBC affiliates to
meet the most stringent standards anywhere in the group, and it
states that, ``The bank and its affiliates will adopt and
enforce the adherence to a single standard globally that is
determined by the highest standard that we must apply anywhere.
Often, this will mean adhering globally to U.S. regulatory
standards. But to the extent another jurisdiction requires
higher standards, then that jurisdiction's requirements must
shape our global standard.''
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\1\ See Exhibit No. 2b, which appears in the Appendix on page 583.
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That new policy statement could be a groundbreaking
commitment that will force the entire HSBC network to improve,
and I hope it does. I understand, Mr. Levey, that you are co-
chairing a committee--you have just testified about that--aimed
at implementing the new group circular letter.
But here is what HSBC said in 1993. ``Group members should
comply with both the letter and spirit of all relevant laws,
codes, rules, regulations, and standards of good market
practice in each jurisdiction around the world where they
conduct business.''
The 2012 and the 1993 compliance policy statement have good
sentiments and they sound very similar in a lot of regards.
They promise the bank will adhere to high standards, and as I
have said before, commitments and promises are welcome. But
accountability for previous failures and conduct that has
already taken place is essential as a deterrent, and it is that
accountability that has been missing.
My first question is the following, and either one of you
can answer. Let me try you first, Ms. Dorner. Do you agree that
given past commitments that have not been kept that the bank
has a heavy burden of proof that they mean what they say, or
you mean what you say, both as to changing behavior and as to
changing the culture?
Ms. Dorner. Thank you, Mr. Chairman. I can entirely
understand these concerns. It is quite clear that we have had
failures in the past, which we deeply regret, and I would agree
that we have some way to go to regain the trust of our
regulators and of yourselves on this Subcommittee.
Senator Levin. Thank you.
Exhibit 71d \2\ is a chart which was prepared by an outside
auditor at HBUS's request. It lists accounts that are held by
HSBC affiliates in the United Kingdom and Hong Kong for banks
in rogue regimes subject to U.S. sanctions, such as Iran, Iraq,
North Korea, and Sudan, a total of 55 suspect banks with U.S.
dollar accounts made possible by the HSBC affiliates'
correspondent accounts at HBUS.
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\2\ See Exhibit No. 71d, which appears in the Appendix on page 923.
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Basically, how could HSBC affiliates accept such clients
and do you know whether HSBC told HBUS that it was servicing
these type of clients?
Ms. Dorner. Mr. Chairman, clearly, this predates my tenure
of being in the United States and so I cannot comment
specifically on this. I can tell you now that HBUS does not
hold accounts for any of these names.
Senator Levin. Thank you.
One of the accounts that was in an HSBC affiliate is a U.S.
dollar account for an Afghan bank on the SDN list from October
of 1999 through February 2002. It was on the SDN list because
of its ties to the Taliban. It is incredible to me that an
affiliate of HSBC, an affiliate which is located in the United
Kingdom, could even consider owning an account for a Taliban-
affiliated organization and continue the relationship after the
September 11, 2001 attack.
Now, there is another extraordinary example here, as well,
and that is Exhibit 50d.\1\ That is an exchange of emails in
2008 between HSBC employees in the U.S. and the Cayman Islands.
An AML compliance officer at HBUS received an inquiry from OFAC
regarding a trust account in the HSBC Cayman affiliate which
was administered by HSBC Geneva and which had been established
to benefit a well-known international terrorist named Rami
Makhlouf. He is from Syria. The exchange is stunning, if you
will take a look at this one.
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\1\ See Exhibit No. 50d, which appears in the Appendix on page 823.
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The Internal Control Officer for Compliance in the Cayman
Islands admits that the trust for Makhlouf exists and the
Cayman affiliate is the trustee. In a subsequent email, she
informs the HBUS AML officer that a year earlier, in 2007,
concerns about this client were raised and the relationship was
viewed at the group level, which decided to maintain it. In
other words, people at HSBC headquarters made a conscious,
knowing decision to maintain the account for the benefit of an
international terrorist.
So how is it that HSBC Geneva or its Cayman affiliate, or
any affiliate in the HSBC system, could have maintained a trust
benefitting a terrorist or gotten permission from group
headquarters to service such an individual, and if you wish to
comment, as well, on that account that was being held for a
Taliban-affiliated organization, you can do so at the same
time. Ms. Dorner.
Ms. Dorner. Mr. Chairman, I am afraid I am not able to
assist you on the account for Mr. Makhlouf because he is not a
customer of HBUS and I am not acquainted with this chain of
events.
Senator Levin. Could you become acquainted and then give us
your comment for the record?
Ms. Dorner. I can look at the chain of emails, yes.
Senator Levin. Will you do that?
Ms. Dorner. I can do that.
Senator Levin. OK. Mr. Levey, do you have a comment?
Mr. Levey. Naturally, this is long before my tenure. I do
know who this individual is. He is someone that we designated
when I was in the government. He was designated in 2008, I am
pretty sure, under the sanctions program by the United States.
I do not think this is the kind of thing that we need to
change. I do think this is the kind of thing that we need to
change.
Senator Levin. You made reference to your service with the
U.S. Government. If I remember, you were the Under Secretary of
the Treasury for Terrorism and Financial Intelligence. Do I
have it right?
Mr. Levey. Yes, sir.
Senator Levin. How would you have reacted if you knew that
HSBC was engaged in such a practice and that an HSBC affiliate
knew of the HSBC account and did not report it?
Mr. Levey. I think that would be unacceptable.
Senator Levin. Would it not be even stunningly
unacceptable? I mean, a lot of things are unacceptable. But on
degrees of unacceptability, is this not kind of shocking?
Mr. Levey. I am not going to quarrel with you, Senator. Of
course, this is exactly the kind of thing, I should say, that
we are trying to change, where we are trying to make important
compliance information mandatorily shared to compliance
officers around the world. This would be the kind of thing that
would, in my view, fall into that category.
Senator Levin. Senator Coburn.
Senator Coburn. Thank you.
Ms. Dorner, as I understand from the report, you arrived to
run the U.S. affiliate or the U.S. organization in 2010 and
were handed a pretty good sized mess. But why, irrespective of
these challenges, does HSBC choose to have a presence in the
United States in the first place? I mean, what is the value to
HSBC? You are in all these countries. You are worldwide. What
is the value? Why are you here?
Ms. Dorner. Senator, that is a great question. This is a
terrific place to do business. There are more than 10,000 U.S.
headquarters of international companies based here in the
United States. We, as an international bank, it is our business
to help our customers realize their aspirations. And so we have
many United States companies who want to grow internationally
and they use us and we help them to do that. We connect them
with international business.
And then there is incoming business, and, of course, as you
know, we do have businesses in other parts of the world, and I
am thinking particularly here of Asia and emerging markets,
where many companies wish to do business and wish to invest in
the United States. And it is the role of HSBC as an
international bank to facilitate that. The United States is the
biggest trading Nation in the world. It is a massive
opportunity.
Senator Coburn. So given the mess you have had and what you
have seen, the consequences, both financial and from a business
standpoint, as a result of the consent order with OCC, would
you outline what the impacts have been on your organization,
the latest consent order?
Ms. Dorner. The latest consent order has had a massive
impact. Clearly, it happened just after I arrived, and I can
tell you that what we have done is that we have changed the
senior management here in the United States. We have changed
our General Counsel. We have changed our Head of Compliance. We
changed our AML Director. We have had a top-to-bottom overhaul
of the way that we actually do AML compliance. We are burning
the bridges to make sure nobody can get back to the way it was
before. We have new governance in place. We have new
structures. We have new policies.
But actually, the processes and the policies are never
enough. This is actually about the people. And so it is my job
to make sure that the right way down the whole organization,
the DNA of HBUS, we actually get compliance on the front foot
in everybody's mind.
And in terms of fixing it, that is what CEOs do. I am
clearly absolutely committed to fixing this. But the reality
is, the change that will take place and is taking place is that
this has to be fixed for the future. This has got to be BAU. So
business as usual is not just about fixing the consent order.
It is driving this through into the future as a full-scale
remediation that will last.
Senator Coburn. So you put all these steps forward and all
these changes, but the real thing that you have to change is
the culture.
Ms. Dorner. That is correct, Senator.
Senator Coburn. So how are you doing that? I mean, you have
outlined the steps, but where is the leadership that is going
to change the culture? Where is the example so far since you
have been there changing the culture? When somebody has
violated some of these policies, what has been the consequence?
The only way you change a culture is if everybody in the
organization sees when you violate the core values of the
institution that there is a consequence.
Ms. Dorner. Senator, I can tell you unequivocally since I
have been here that I have fired people for not complying, that
I have clawed back in terms of future remuneration, and I have
reduced compensation. Of course, that is the negative side of
things. Equally, we have celebrated success. We have examples
of compliance officers who have been put onto our Internet to
show people that this is where it is at that they should be
looking at, these kind of standards to drive the way that we do
business. It is quite clear that we need to make further
changes. There is never enough done. We can always improve. But
this has got to be on everybody's lips, from top to bottom of
the organization.
And I would just say that one of the big changes that has
helped me in this is that this group has changed in terms of
how it wishes compliance to be viewed, and compliance now has a
control function role within the whole group. And so I am
totally supported by the HSBC group in this and by the HSBC
group's senior management.
Senator Coburn. OK. I just have one more question for you.
You mentioned the changes you made to ``Know Your Customer''
policies have enabled you to make better decisions about
whether a customer fits your risk appetite. Would you describe
what your risk appetite is at HSBC or HBUS?
Ms. Dorner. I can do that. I think that the thing about
risk is it has to be taken at the highest level. You are trying
to find the right customer, and so it is about understanding
customers' business, where they do business, why they do
business, and what they want to do with us. And, therefore,
when you put a KYC process in place, those are the things that
you are looking for throughout, and not only are we looking for
that in our future customers, we are actually remediating the
existing customer base we have to make sure that the customers
that we already have fit within the risk appetite that we have.
And I can tell you now that we have exited, as a result of
rolling out this remediation, in the order of 14,000 customers
because they simply did not fit our risk appetite.
Senator Coburn. OK. Thank you.
Mr. Levey, this was a 300,000 person organization. You have
an impressive resume, but there is just one of you. And you
have entered into an organization that has an admittedly poor
record and presumably a poor culture for compliance to match
that poor record. When you leave here today and resume business
as usual, go back, what is going to be the impact of a hearing
like this or a meeting with the government like this in terms
of how it affects the bank, the bank operations, the structure,
and the culture?
Mr. Levey. Well, Senator, I can assure you that the top
leadership of this company is very focused on your report, on
this hearing, on all the information that has been developed in
the course of this investigation. In fact, it was not just when
the report was issued or we were coming to testify today that
there was engagement from the top. As I said, the change began
when the new CEO took office at the beginning of 2011 and they
reached out to me soon thereafter to ask if I would come and
help drive the change that they were pursuing.
I believe that the culture and the tone at the top is
excellent. We have risk management meetings where the top
executives of the firm sit around the table and we share the
information in ways that apparently did not happen as robustly
before and make the kinds of decisions that are necessary for
controlling these sorts of risks.
I believe that this whole experience is one in which, as
our CEO has said, we are going to be judged by how we respond
to this sort of adversity, and he is absolutely committed to
getting this right--in large part, because we think it is
critical to our success. If we are going to be a successful,
the leading international bank, which is our aspiration, we
have to be successful at this. We have to lead in this area, as
well.
Senator Coburn. Is there a conflict within your board to--I
am trying to think of the best way to phrase this--compliance
here does not necessarily have to be difficult, but it has to
be right, and there are some variables that affect that. How
well do the regulators do? Are they fair? But are they trying
to do the right thing, not just be right? Is there a conflict
or tension between the potential, as Ms. Dorner outlined, of
being a global bank with a large number of multinational
countries here, and the cost of compliance, because I actually
see that is where things really went awry. How do you manage
that tension so that when they are looking--if this is a great
business opportunity for HSBC, is this too much of a compliance
hurdle or cost given the potential capital appreciation
opportunities for your organization?
Mr. Levey. Senator, I do not believe we view this as a
tension or a tough call. We are going to have to get this
right, whatever it takes to get this compliance in order. I do
not think there is any ambivalence about that on our board. And
we view it as our responsibility--quite aside from the
regulators, candidly--it is our responsibility to get this
right and we appreciate the help we have had from the
Subcommittee and the recommendations, but we have--it is our
responsibility to look at those and improve and also identify
the improvements ourselves that we need to make.
Senator Coburn. With the changes that Ms. Dorner has put in
and with your expertise, is it your opinion that not only will
you be better in terms of compliance, but you will be a better
organization and a more profitable organization as a result of
it?
Mr. Levey. I agree with that entirely, Senator. I think
that there is no conflict in the long run between those two
things. Being compliant, having the right controls in place, is
in our long-term financial interest.
Senator Coburn. Thank you, Mr. Chairman.
Senator Levin. I want to go back just for a moment to that
situation with the Syrian terrorist. There was an inquiry from
OFAC. We want to start with that. It was an inquiry regarding a
trust account in the HSBC Cayman affiliate that was
administered by HSBC Geneva. What happened then is that an AML
officer at HBUS--and this, again, is Exhibit 50d \1\--an AML
officer at HBUS wrote the following, ``that we have determined
that accounts held in HSBC Cayman are not in the jurisdiction
of and are not housed on any systems in the United States.
Therefore, we will not be reporting this match to OFAC.''
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\1\ See Exhibit No. 50d, which appears in the Appendix on page 823.
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So HBUS knew the account existed, knew that there had been
a request about this account from OFAC, knew that an HSBC
affiliate maintained it, but was not going to get that
information to OFAC based on this jurisdictional line. In
effect, what the AML official decided to do is to use the
affiliates' separate entity status as a reason to not report a
Syrian terrorist's HSBC account to OFAC.
So we have HSBC crossing international lines to establish
and service the trust, to protect its assets, and to facilitate
Makhlouf's transactions. And this is 2008, by the way. And yet
they rely on that technicality not to report the information to
OFAC.
And so my question to you folks is, if this same thing
happened today, would you get that information to OFAC?
Mr. Levey. Mr. Chairman, I am--obviously, this is, again,
several years before I arrived. I do not know the details of
what happened here. What I can tell you is that one thing we
have done that would handle this kind of situation is that we
have now adopted a global sanctions policy so that anyone who
is designated by OFAC will be--we will search across the entire
bank in all jurisdictions and all currencies to ensure that we
catch all those situations and either freeze accounts if we are
permitted to, because in some--if it is a U.S.-only
designation, we may not be able to freeze the account--or exit
or reject transactions. I am not in a position to go into the
details of transaction.
Senator Levin. Well, I think you have answered the
question, without going into details. You are saying that,
first of all, every affiliate is going to apply the same catch
mechanism. So, presumably, they would have caught this.
Mr. Levey. Yes. What I do not know----
Senator Levin. If it would have been caught by HBUS, it
would have been caught by Cayman.
Mr. Levey. Right.
Senator Levin. Right? OK. Presumably.
Mr. Levey. Presumably, yes.
Senator Levin. It should be.
Mr. Levey. What I do not know is when Rami Makhlouf was
actually designated. I do not have the date in my head.
Senator Levin. Well, putting aside that, the question is,
presumably, it will be caught by the same mechanism being
applied in every one of your banks, wherever they are located.
My question, though, is if for some reason it fails and if one
bank knows that information is being sought by OFAC, will it
make sure that the information is provided?
Mr. Levey. Again, my view on this would be that we would
give to any government as much information as we are legally
permitted to do when we had a valid request. So I cannot tell
you whether there will be some legal restriction, but we would
do everything we could to get them the information.
Senator Levin. Well, when you say what you are legally
permitted to do, were you legally permitted by the Caymans, by
their law, to provide this? Do you know, Cayman law will not
allow this. They are a secrecy jurisdiction.
Mr. Levey. I do not know, Senator.
Senator Levin. Well, but you need to find out.
Mr. Levey. Will I find out?
Senator Levin. Are you going to be bound by a secrecy
jurisdiction's law that says you cannot share that information,
or are you going to be carrying out your commitment here that
you are going to treat all of your affiliates as though they
are in one place globally and you are going to respond to law
enforcement with their request? I mean, if you are going to
say, if legally permitted by the Caymans or by any other
country, you have tax havens, and so forth with secrecy
jurisdictions, Caymans being one of them. Are you bound by
that? Are you going to work with law enforcement or are you
going to be bound by Caymans?
Mr. Levey. We are going to do everything we can to
cooperate with law enforcement.
Senator Levin. Well, you say, though, that if it is legally
permitted. That is your hedge word. U.S. law binds you to
report to OFAC. What are you going to do, live up to Cayman law
or U.S. law?
Mr. Levey. I do not know if there would be a conflict
there.
Senator Levin. There is. Assume there is.
Mr. Levey. If there is, we do everything we can to get it
to OFAC.
Senator Levin. To comply with U.S. law?
Mr. Levey. Yes.
Senator Levin. Now, sharing information across
international lines is not just an ancient problem at HSBC, it
is still a current problem, and I am going to give you what has
happened recently involving this Subcommittee. In 2010, in a
hearing before this Subcommittee, we reviewed an incident in
which an HSBC affiliate in the Bahamas was asked to open an
account for the Central Bank of Angola. Email exchanges
obtained by the Subcommittee made it clear at that time that
the Angolan Central Bank wanted to use an offshore secrecy
jurisdiction--that is the Bahamas--to hold its funds in order
to avoid court orders that might lead to a freezing of its
funds. At the 2010 Subcommittee hearing, I asked HSBC if the
account was ever opened, and not surprisingly, HSBC refused to
answer, citing jurisdictional constraints.
Last week, HSBC informed us that the account had been
opened and was opened at the time of our 2010 hearing, but that
it was closed 45 days ago. HSBC also revealed that the only
reason it could provide that information to the Subcommittee
was because HSBC had received permission from the Central Bank
of Angola. HSBC Bahamas could not release it to HBUS without
the client's permission, so that is the problem with what you
are telling us today. It is the problem with HSBC's word, the
subject of being legally permitted, that description, which is
a real big loophole, and it is a problem with other
international banks.
The international banking system established a financial
system that enables them to facilitate financial transactions
and move around the globe across jurisdictional lines in a
matter of seconds, but when it comes time to sharing critical
information with U.S. authorities about clients and their
accounts and transactions, then things begin to grind to a halt
and banks point to jurisdictional rules and local laws,
sometimes using that argument disingenuously. But putting that
aside, that is the reason given by HSBC not to share that
information.
Now, in the most recent group-wide policy, your GCL, on
April 30, you say that you will ``maximize the sharing of
information for risk management purposes amongst group
companies and amongst global businesses and functions.'' You
have noted that HSBC is going to maximize the sharing of
information to ``the extent permitted by laws.'' And that,
again, is the rub.
What policies are you going to enact or implement to ensure
that you provide law enforcement and governmental officials in
this country which has given HBUS a charter--rather than using
jurisdictional constraints as the excuse to avoid sharing
information, what are you going to do with your new rules and
regulations to make sure that this government and the proper
authorities are given information upon request?
Mr. Levey. Mr. Chairman, as you indicate, we have committed
within the company in the GCL to maximize the sharing of
information for risk management purposes among our companies
and functions. We have decided that is the value that we are
going to pursue, which is that we need to share information. I
think your report highlights the serious consequences that
occur when we do not.
We have also decided through this policy that when there
is--we are going to do everything we can to share information
across borders. We have found, as you indicated in your
question, that sometimes the secrecy jurisdiction was being
used as a comfort, in a way. Well, no, we cannot share the
information because of the jurisdictional rules.
It is my job as the Chief Legal Officer to look at that,
right, and to try to work that out and make sure that we are
not using it as an excuse. But in the end, of course, we have
to abide by the law wherever we operate. That is true of any
multinational company. All we can commit to do is--whenever
there is any discretion, to exercise it in favor of sharing
information. I do not know that we can do more than that or
that any multinational organization can do more than that.
Senator Levin. Senator Coburn.
Senator Coburn. Ms. Dorner, in how many locales does HSBC
now have operations that have such agreements as the Bahamas?
In other words, what percentage of HSBC's locations throughout
the world are tax havens or isolated places where
jurisdictional differences preclude the sharing of information?
Ms. Dorner. I am sorry, Senator. I cannot actually put a
number on that for you.
Senator Coburn. We have seen changes in Liechtenstein, for
example, from pressure from this Subcommittee and others, where
they have actually changed their laws. But could you get that
to us?
Ms. Dorner. I am sure that we could. I think it is fair to
say that all countries have privacy rules of one sort or
another.
Senator Coburn. I understand, but we are talking about
those countries that have privacy rules intended to not be
transparent in the commission or the suppression of information
that may or may not be, in fact, in the best interest of the
global economy as a whole and may be associated with illicit
activity.
Ms. Dorner. I understand. I am sure we could do that.
Senator Coburn. Thank you.
Do you know of any history in your experience where a bank
charter has been pulled for cross-jurisdictional violations or
what was perceived as a violation, but what was also perceived
as in the best interest of your company as a whole or in the
best interest of transparency in terms of fighting illicit
activity?
Ms. Dorner. I am not aware of any.
Senator Coburn. OK. Thank you.
Back to Mr. Levey just for a minute. Do you believe there
is sufficient oversight of the affiliates that make up the
group compliance right now in your organization?
Mr. Levey. I think we are on the path to getting there,
Senator, but I do not think I can sit here today and tell you
that we are at the end of the road. I think we are at the
beginning of the journey and we do have our work cut out for
us, but we are on the right path.
Senator Coburn. As I said, I believe you have the best of
intentions. This is not to question the new management at all,
but I think some questions need to be asked. Do you know of any
affiliates now that are not complying with the set standards?
Mr. Levey. Senator, I do not have knowledge of such a
thing, but I also cannot sit here and tell you I am comfortable
with the scope of this whole----
Senator Coburn. One further question along that line. If
today you found out an affiliate that was not in compliance,
what are the consequences?
Mr. Levey. The consequence is they would have to improve
immediately, and the new thing, though, is that information
would be shared with all other affiliates so that Ms. Dorner
here in the United States would not be blind to it in the ways
that we saw in the examples in the report.
Senator Coburn. You have powerful experience in the
government and now applying that in the private sector. Do you
have a recommendation for Senator Levin and I in terms of what
we could do to make us both more effective, less burdensome,
and more efficient as--even though you stated it is in your own
best interest to be compliant, the point is, are there ways
that we can help do that in a more efficient way that gets a
better result.
Mr. Levey. I have to say, that sounds like a dangerous
question. I did not come here to give you recommendations.
Senator Coburn. I have a reputation of being a straight
shooter. I am asking that because I really want to know. I
actually like to try to fix what is wrong with government
rather than pile on another program that is supposed to do the
same thing that is going to fail again. So if you would like to
think about that and shoot me a short note, I would love to
hear from you, but that was not meant in jest or as a trap----
Mr. Levey. No, I did not intend that.
Senator Coburn. It is my intent to try to make government
work, and too often, it does not. Having been on both sides of
the wall, you have a perspective that not many people have and
I think you could offer us lots of suggestions on how we might
be better at what we are doing, much like we have made
recommendations in our report.
Mr. Levey. Well, I appreciate that, Senator. Of course, we
have a lot to do to fix ourselves, but I do think that there
are ways in which the sharing of information, which is the key
here, right? The sharing of information is the key to these
kinds of controls being effective and there are ways to improve
that. There are changes that can be made in the way governments
share information with the private sector and in which the
private sector shares information amongst itself. That is
ultimately what needs to be done. If we are going to really get
these illicit actors, we are going to have to have better
visibility. But I would be happy to try to follow up.
Senator Coburn. Thank you. Which would mean you need better
information from us on illicit conduct. You need a more robust
PATRIOT ACT in the areas of this illicit conduct. And you also
need access to beneficial ownership information from us.
Mr. Levey. I agree with all of that.
Senator Coburn. OK. Thank you. Mr. Chairman, I yield back
to you.
Senator Levin. I want to go back to the question about an
affiliate that does not share information with you because of a
local law that says that secrecy is the order of the day. These
are the secrecy jurisdiction entities, and Ms. Dorner, I guess
you are going to give us how many of those jurisdictions there
are affiliates in, is that correct? You were asked to do that
and you are going to give us that for the record, I believe.
Now, you are committed to do a whole bunch of things. You
are going to police the HSBC affiliates that use your accounts.
You are going to audit so-called cover payments sent by HSBC
affiliates to see if they are circumventing the OFAC filter. I
think you prepared in your new approach to look at affiliates'
internal audit findings to look for those with weak AML
controls. I think you were just asked by Senator Coburn, what
are you prepared to do if an affiliate does not provide
information to you or to a law enforcement entity in a country
that you have a charter, the United States.
I guess one of the ways you could enforce it would be to
deny a U.S. correspondent account to an affiliate. Do you know
whether or not that has ever been done? Has HBUS ever said no
to an HSBC affiliate?
Ms. Dorner. The direct answer to your question is no, we
have not. But we now have KYC at a level for all of our
affiliates that we use for third parties and I can assure you
that in the event that one of our affiliates did not pass the
KYC as it stands now, I would have no hesitation in not opening
an account or, indeed, closing an account.
Senator Levin. And what about if they do not share
information with you? That was the question which I believe
Senator Coburn was asking. Is not one of the remedies you just
simply say, we are not going to let you have a correspondent
account with us?
Ms. Dorner. The same rules would apply for any third party.
If we asked for information and did not get it, we would close
the account.
Senator Levin. But you will apply that test to an
affiliate?
Ms. Dorner. We would.
Senator Levin. OK. Talking about secrecy jurisdictions and
beneficial owners, I think you and I talked about this issue
before, but let me get you on the record in this setting, Mr.
Levey, and that is should the U.S. Government get the
beneficial ownership information for U.S. corporations?
Mr. Levey. I believe so, Mr. Chairman, and it would also be
helpful to banks--it would be helpful to us so that we could
better know our customers because, as you know and you probably
better than anyone, this is one of the obstacles that we
sometimes face.
Senator Levin. That is very helpful and we will be sure to
be quoting you for that in different places. [Laughter.]
I want to talk to you both about bearer shares. Bearer
share corporations, so-called, are notorious vehicles for money
laundering and for other illicit activity because they provide
anonymity through assigning legal ownership of the corporation
to whoever has the physical possession of its shares. There is
no paper trail. There is no way of knowing who owns those
corporations, just the way there is no way of knowing who is
the real beneficial owner of a bank account unless we require
people owning the accounts to tell us who the beneficial owners
are.
But at times over the last decade, HBUS maintained over
2,000 bearer share accounts despite warnings by internal
auditors and outside regulators that the accounts posed high
money laundering risks. Internal bank documents show the
account owners deliberately pressured the bank to help hide
their identities, and Exhibit 95 \1\ is one example of that, of
a phone conversation between a man named Mauricio Cohen and an
HBUS banker in Miami. I made reference to that in my opening
statement.
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\1\ See Exhibit No. 95, which appears in the Appendix on page 1062.
---------------------------------------------------------------------------
I know that HBUS has reduced the total number of bearer
share accounts, and I guess my question is why have any?
Ms. Dorner. Mr. Chairman----
Senator Levin. Could I interrupt your answer, and forgive
me for this. I want to just read one thing to you before you
answer, and that is what the World Bank has had to say about
these bearer share accounts in its report last year. It said
that no bank with any sort of due diligence standards is
willing to conduct business with a company that has free-
floating bearer shares. That is what the World Bank said. So,
now, please.
Ms. Dorner. Thank you, Mr. Chairman. Entirely understand
the concern with bearer shares, a matter of great concern to
me. It is always very important for us to know our customer. We
have changed our policy here in the United States. We have
toughened it up. We do not really want to do this business. To
the extent we do it at all, it is going to be done under very
limited circumstances, only when we can hold the shares
ourselves or get them into a custodial agent that we know so
that we can actually understand the movement of the shares.
I think that because this is such a matter of general
concern, the group--we are considering, or the new Group
Standards Committee, on which I sit with Mr. Levey, they are
looking, or we are looking at the U.S. policy with a view to
extending that around the world.
Senator Levin. OK. That is really a step forward.
Another issue that I raised in the opening statement was
HBUS's willingness to clear suspicious bulk travelers' checks
for foreign banks. From 2005 to 2008, on a regular basis, HBUS
cleared up to a half-million dollars or more a day in bulk
travelers' checks from the Hokuriku Bank of Japan. They
routinely arrived in large stacks of sequentially numbered
checks signed and countersigned with the same signature, which
was unreadable. HBUS found that the Japanese bank could not
provide any ``know your client'' information or explain why two
dozen of its customers were often depositing large stacks of
U.S. dollar travelers' checks all purchased from the same bank
in Russia, allegedly for the used car business people.
Now, this was under OCC pressure. HBUS stopped clearing the
travelers' checks in 2008, but it kept open the correspondent
account despite that Japanese bank's poor AML controls, and in
less than 4 years, HBUS provided over $290 million in U.S.
dollars to a Japanese bank for the benefit of unknown clients
dealing with unknown Russians who, again, were allegedly in the
used car business.
So I guess the real question is, would that happen again?
Would that correspondent account be kept open again under your
new rules?
Ms. Dorner. Mr. Chairman, first, may I say I entirely
understand the issue with travelers' checks and I have asked
the AML Director immediately to do a full review.
As regards Hokuriku, they failed our new KYC standards in
2012, which is why we have closed the account, and I have now
exited, or we have now exited 326 correspondent banking
accounts since we instituted the new KYC procedures. And,
therefore, I would hope that we would close any bank such as
this because they would fail the new KYC procedures.
Senator Levin. A number of money laundering problems
identified by the OCC in 2010 related to inadequate monitoring
for suspicious activity. Among other problems, the failure to
monitor for suspicious activity for the $60 trillion in wire
activity, failed to monitor the bank notes accounts held by its
affiliates, used poor procedures to identify who could get
enhanced monitoring, and a backlog of alerts that were not
reviewed, and the OCC provided several pages of criticism
related to the weak parameters that the bank used to review
wire and account activity.
Now, one of the key provisions in that cease and desist
order of the OCC in 2010 required HBUS to install a new AML
monitoring system to replace its old one, called CAMP. The new
one is called NORKOM, I believe, and the bank is supposed to
ensure that it has useful parameters to identify potentially
suspicious activity for review. Can you tell us whether or not
that effort has been completed and whether you have fully met
the requirements of the cease and desist order with respect to
a new AML monitoring system?
Ms. Dorner. Thank you, Chairman. The whole point about the
system, and this is, I know, why you are interested in it, the
whole point about installing a system is it has to be
absolutely fit for purpose. It absolutely has to fit the
parameters of the business. It must identify the correct risks.
And we must be able to monitor it.
We have installed NORKOM. It has been a huge investment. I
would be the first to say that with all systems, as usual,
improvements can always be made, and it has been pointed out to
us that there are two ways that we need to improve this system.
We entirely agree. We are on the front foot. We are taking
these as a priority and we will fix it. I would imagine that we
will be improving this system going forward forever because
there are always new ways to fix these systems in such a way
that they can deter illicit actors.
Senator Levin. As I understand the history here, when this
was not working properly by the deadline of 180 days, rather
than seeking an extension of the 180 days, the implementation
plan was modified and then ended up in noncompliance with the
consent order. Is that accurate?
Ms. Dorner. There are two MRAs that have been raised and
they are very technical. They are very important because they
are about the validation of the model and we will have to fix
those two things. To the extent that the OCC have raised other
issues, we have replied in full and I believe that you have a
copy of that letter.
Senator Levin. Is there a new deadline?
Ms. Dorner. There is not, to my knowledge, a deadline as
such, but it is closely monitored and we are in day-to-day
contact, literally, with the OCC, who are clearly very
interested in getting this fixed.
[Pause.]
Senator Levin. OK. We have a vote on now, and I think what
we will do is we will release this panel. We sure hope that you
are going to carry out the commitments which have been made by
this bank because our report raises just a lot of serious
issues about international banking and this particular bank.
Again, the bank has been cooperative, but we hope this
visibility will actually help reform efforts at the bank.
Again, as I have said a couple of times this morning, we
welcome the commitments. We welcome the apologies. It is the
change in culture and actions which are critical. But there is
that nagging question of accountability which others are going
to have to judge. We are not in the prosecution business here.
We are in the oversight business. Others will have to judge the
accountability issues. But it has been significantly missing,
not just in this situation, but generally in a whole lot of
other banking situations and other situations in modern times.
We hope that, somehow or other, the hearing and the
investigation will also lead to some greater accountability.
But we will now release you and thank you.
Ms. Dorner. Thank you very much.
Mr. Levey. Thank you, Mr. Chairman.
Senator Levin. And we are going to stand adjourned for 10
minutes or until Senator Coburn gets back, whichever comes
earlier.
[Recess.]
Senator Levin. The meeting will restart. I am told Senator
Coburn will be coming back, but he told me we should start if
he was not back, so here we go.
Let me now call on our next panel of witnesses, Thomas J.
Curry, the Comptroller of the Currency; Grace E. Dailey, the
former Deputy Comptroller for Large Bank Supervision at the
Office of the Comptroller of the Currency; and finally Daniel
Stipano, the Deputy Chief Counsel at the OCC.
Mr. Curry, I am sure this is the first time that you have
appeared before this Subcommittee and we welcome you and look
forward to your testimony.
Mr. Stipano, I believe you appeared before us about 8 years
ago at our hearing on money laundering and foreign corruption.
Mr. Stipano. Yes, sir.
Senator Levin. We welcome you back, and I think this is Ms.
Dailey's first appearance here. We welcome you, as well. We
appreciate all of you being with us and we look forward to your
testimony.
I think as you have heard or are familiar with our rules,
all witnesses who testify before this Subcommittee are required
to be sworn, so I would ask that each of you stand and raise
your right hand.
Do you swear that the testimony that you will give before
this Subcommittee will be the truth, the whole truth, and
nothing but the truth, so help you, God?
Mr. Curry. I do.
Ms. Dailey. I do.
Mr. Stipano. I do.
Senator Levin. Under our timing system, you will get a red
light a minute before a 5-minute--well, I guess now we are
going to have a 10-minute testimony as the limit, so a minute
before the 10 minutes is up, it will go from green to yellow
and then you could conclude your remarks, and we would ask that
you do limit your oral testimony to no more than 10 minutes. I
believe, Mr. Curry, you are going to be presenting the
statement, of course, for the OCC, so please proceed.
TESTIMONY OF HON. THOMAS J. CURRY,\1\ COMPTROLLER OF THE
CURRENCY, U.S. DEPARTMENT OF THE TREASURY
Mr. Curry. Thank you, Chairman Levin, Senator Coburn, and
Members of the Subcommittee. I appreciate the opportunity to
appear before you today to discuss the OCC's work in ensuring
compliance with the Bank Secrecy Act and the work we are doing
to improve our Bank Secrecy Act (BSA) and AML compliance
program.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Curry appears in the Appendix on
page 150.
---------------------------------------------------------------------------
The Subcommittee's staff report has identified important
concerns with the activities of HSBC and with oversight and
enforcement of BSA and AML requirements by the OCC in the case
of HSBC. As I will describe below, we agree with the concerns
reflected in the report's recommendations concerning the OCC
and will fully implement those recommendations.
In one of my first speeches after becoming Comptroller of
the Currency just a little more than 3 months ago, I
highlighted the importance of BSA compliance. I also noted that
this is an inherently difficult area. It requires banks to sift
through large volumes of transactions to identify those that
are suspicious, a task that is complicated by the ingenuity
that criminal and terrorist elements bring to bear in finding
new ways to conceal the true nature of their transactions.
In my speech on operational risk, I emphasized, and I want
to reaffirm today, that no matter how difficult compliance is,
I expect institutions we supervise to have effective programs
in place to comply fully with the requirements of the BSA. We
will insist on that.
Our testimony today provides details about the OCC's BSA
and AML supervisory policies and practices. It further
describes how the OCC monitors compliance with BSA requirements
and ongoing supervision that we provide at the largest national
banks and thrifts, as well as our current enforcement process
when problems or concerns are identified through our
supervision and our enforcement record for BSA.
As requested in the invitation to this hearing, our written
statement also discusses our supervision of HSBC. In 2010, the
OCC issued a comprehensive cease and desist order against HSBC.
As our written statement details, with the benefit of
hindsight, the OCC could have and should have taken this action
sooner. But the issuance of this order does not conclude our
activities with respect to the matters covered by the cease and
desist order. We are now actively evaluating the bank's
compliance with the order and considering the assessment of
monetary penalties.
The Subcommittee's report contains three specific
recommendations focused on the OCC's BSA/AML supervision. I
agree with the concerns reflected in each of the
recommendations and the OCC has begun taking actions in
response.
First, we have already identified a new approach that we
will implement to assure that BSA/AML deficiencies are fully
considered in the safety and soundness context and are taken
into account as part of the management component of a bank's
CAMELS rating. We will direct our examiners to view serious
deficiencies in a bank's BSA/AML compliance area, including
program violations, as presumptively adversely affecting a
bank's management component rating. We will also provide
guidance on how to document application of this approach in
determining the management component rating.
Second, we are revising and clarifying the operation of our
Large Bank BSA Review Team to enhance our ability to bring
different perspectives to bear and to react on a more timely
basis to circumstances where a bank has multiple instances of
matters requiring attention or apparent violations of the
required components of its BSA/AML program. We will also
explore how we track and review relevant information in this
regard and whether new initiatives are appropriate in that
area, as well.
Third, we will also revamp our current approach to citing
BSA/AML violations to provide more flexibility for individual
pillar violations to be cited and we will identify what steps
we can take in our examinations to obtain a holistic view of a
bank's BSA/AML compliance more promptly. One of the reasons for
the current OCC approach is that it requires the OCC to focus
on determining whether the deficiencies in a bank's program
amount to a BSA compliance program violation, which requires a
mandatory cease and desist order. Therefore, in implementing
changes on this point, it will be important not to create
disincentives to making the necessary tough calls when there
are BSA compliance program violations mandating the issuance of
a cease and desist order.
Finally, we will review other areas, such as training,
staffing, recruitment, policies, and interagency coordination
to make improvements in our BSA/AML supervision program.
I am joined today by Dan Stipano, Deputy Chief Counsel, and
Grace Dailey, who served as the Deputy Comptroller for Large
Banks from 2001 until November 2010. The three of us share a
commitment to a rigorous BSA/AML supervisory and enforcement
program at the OCC and we are continually seeking ways to
improve our supervision in this important area.
I have asked Ms. Dailey and Mr. Stipano to introduce
themselves to the Subcommittee, and then we will be pleased to
answer your questions. Ms. Dailey.
TESTIMONY OF GRACE E. DAILEY,\1\ FORMER DEPUTY COMPTROLLER FOR
LARGE BANK SUPERVISION, OFFICE OF THE COMPTROLLER OF THE
CURRENCY
Ms. Dailey. Chairman Levin, Senator Coburn, my name is
Grace Dailey and I have been with the OCC for 29 years as an
examiner. I am currently the Examiner in Charge of a large bank
in Minneapolis, where I oversee a team of examiners responsible
for that bank's supervision.
---------------------------------------------------------------------------
\1\ The prepared statement of Ms. Dailey appears in the Appendix on
page 150.
---------------------------------------------------------------------------
From the end of 2001 through late 2010, I served as one of
three Deputy Comptrollers in the OCC's Large Bank Division. In
that role, I oversaw the supervision of a portfolio of large
national banks. That portfolio changed over time, but included
HSBC Bank USA, N.A., from July 2004 through November 2010.
Prior to becoming Deputy Comptroller for Large Banks, I held a
variety of roles supporting bank supervision, including serving
as Examiner in Charge and other field positions in Minneapolis,
Chicago, and New York.
I look forward to answering your questions.
Senator Levin. Thank you very much, Ms. Dailey. Mr.
Stipano.
TESTIMONY OF DANIEL P. STIPANO,\2\ DEPUTY CHIEF COUNSEL, OFFICE
OF THE COMPTROLLER OF THE CURRENCY
Mr. Stipano. Chairman Levin, Senator Coburn, and Members of
the Subcommittee, my name is Daniel P. Stipano and I am one of
two Deputy Chief Counsels at the Office of the Comptroller of
the Currency. I have spent 27 years at the OCC, with the
majority of that time working in enforcement and compliance. In
my current role, I supervise the OCC's enforcement and
compliance, litigation, community and consumer law, and
administrative and internal law divisions, as well as the OCC
District Counsel staffs in the OCC's Southern and Western
Districts.
---------------------------------------------------------------------------
\2\ The prepared statement of Mr. Stipano appears in the Appendix
on page 150.
---------------------------------------------------------------------------
Prior to becoming Deputy Chief Counsel, I served as the
Director for Enforcement and Compliance at the OCC, where I was
responsible for taking administrative enforcement actions
against national banks and their institution-affiliated
parties. From 1989 to 1995, I was an Assistant Director in the
Enforcement and Compliance Division after joining the OCC in
1985 as a Staff Attorney in the Division.
Senator Levin. OK. We thank you all.
Let us try 10 minutes for our first round of questions.
Let me start with a question for you, Ms. Dailey. You were
the OCC Deputy Comptroller for Large Banks from 2001 to 2010
and were in charge of the OCC's supervision of a number of
large international banks, including HBUS. When the OCC became
HBUS's primary regulator in July 2004, the bank was already
under a formal enforcement action by the Federal Reserve Bank
of New York and the New York State Banking Department for
having an inadequate AML program. As a condition for allowing
HBUS to become a nationally chartered bank, the OCC required
HBUS to complete all of the corrective actions set out in the
written agreement that was the result of the enforcement
action.
In 2006, the OCC determined that HBUS had fulfilled the
requirements and terminated that agreement. Were you involved,
first of all, in the decision to terminate the agreement?
Ms. Dailey. I was one of the recommending officials. I was
not the final decisionmaker.
Senator Levin. OK. Did you recommend that it be terminated?
Ms. Dailey. Yes, I did.
Senator Levin. All right. Now, the Subcommittee has
prepared a chart, Exhibit 1a,\1\ that tracks the 44 AML
examinations conducted by the OCC at HBUS from 2004 to 2010. As
you can see from the chart in your book--you will not be able
to follow that one, but it is also in your book--the OCC
conducted seven exams before it voted to terminate the 2003
agreement in 2006. Those seven exams all took place in about 1
year, from 2005 to 2006, and identified 35 matters requiring
attention, or MRAs, which are practices that the OCC defines as
deviating from sound fundamental principles and ``may adversely
impact earnings or capital, risk profile or reputation,'' or
``result in substantive non-compliance with laws.''
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\1\ See Exhibit No. 1a, which appears in the Appendix on page 575.
---------------------------------------------------------------------------
First, are 35 MRAs, matters requiring attention, a high
number for a bank to accumulate in 12 months?
Ms. Dailey. Yes, it is a high number to accumulate in 12
months.
Senator Levin. So the 35 MRAs identified in those first
seven examinations found that in most instances that the bank
was not following its policies, was not monitoring properly,
was not conducting appropriate due diligence, that written
policies were not adequate, and that staff needed training, all
of that while the bank was still under the 2003 enforcement
actions. So all of those are matters that the Bank Secrecy Act
specifically identifies as pillars or key components that a
bank must have for an effective Bank Secrecy Act program. So
how could that bank, with all of those outstanding problems in
2006, be considered to have an effective AML program?
Ms. Dailey. Well, we did a lot of work in that time period,
as you have pointed out by the chart, and we did find a lot of
issues. Many of those issues--in fact, I think most of those
issues--were corrected quite soon after they were detected. So
some of the issues were not longstanding problems from the
standpoint that it would take the institution a long time to
fix, so they were corrected and when we made our determination,
we went through the WSRC process. So it is a process to
determine when we think a bank is in compliance with the
articles, how to go about lifting that. Our examiners felt that
the bank did have an adequate program at that time, was in
technical compliance with the conditions, and we proceeded
through our process, which is to take that through our WSRC
process, which is members of management, and there was a
recommendation and then a final decision was made. But I
understand your concern that there were a lot of issues that
were identified at that time.
Senator Levin. Well, there not only were a lot of other
issues identified, but 23 of the 35 identified issues were also
identified in four supervisory letters written in January 2006.
Now, all four of those supervisory letters were dated within 20
days of the decision, February 6, 2006, to terminate the
agreement. So it is hard--I do not know how you can say that
most of them had been dealt with, and then you have those four
supervisory letters written within 20 days of the decision to
terminate, and here are some of the issues that were listed in
those four letters, again, within a 20-day period.
Monitoring problems were noted in all four letters.
Policies in need of enhancements were cited in all four
letters. Not following policies was identified in three of the
four letters. Customer due diligence issues in three of the
four letters. And staff in need of training in three of the
four letters.
So I do not know how the OCC could rank and rate the bank's
AML program as satisfactory and how they could cancel the
enforcement action.
Senator Levin. I just do not understand it.
Ms. Dailey. In hindsight, we should not have. From what we
know today, they did not have an effective BSA program, and in
fact, many of the problems that we detected in our 2009
examination were in existence during this time. So in
retrospect and from what we know now, we would not have lifted
those conditions.
Senator Levin. Well, but my point is that looking back now
at what you knew then, it should not have been lifted, because
what you knew then when you lifted it, 23 of the 35 matters
requiring attention were still outstanding.
Ms. Dailey. We probably did not appreciate the systemic
nature of some of those issues. I understand the concern.
Senator Levin. Now, over the next 4 years, the MRAs or
matters requiring attention did not stop. OCC examinations
repeatedly found significant AML problems across a number of
business lines, many of which were high risk and vulnerable to
illicit activity. Fourteen of the examinations found AML
monitoring problems. Eight found weak customer due diligence.
Seven found insufficient staffing. Five found that the bank was
not following its own policies. These problems existed in
critical, high-risk business units such as banknotes, foreign
correspondent banking, embassy, banking, international and
domestic private banking, wire transfers, and pouch services.
By 2009, HBUS had 83 MRAs, more than any other national bank.
The next closest had 20 fewer.
So with this kind of a record, the first question that one
wonders is why the OCC never took formal enforcement action
against HBUS prior to 2010. Do you know why it did not?
Ms. Dailey. Stepping back and looking at it, we should
have. We could have and we should have taken action sooner.
Senator Levin. I am talking about formal enforcement
action, right? That is what we are talking about.
Ms. Dailey. Yes. I agree that we could have and should have
taken formal enforcement action. With the benefit of hindsight,
we should have.
Senator Levin. Well, these words are the benefit of
hindsight. Given what you knew then, should you not have taken
enforcement action?
Ms. Dailey. Had we applied the process that we plan to
apply going forward, which is to have the flexibility to cite
pillar violations, we would have cited pillar violations in
these instances and we may have drawn a different conclusion
then to cite a program violation.
Senator Levin. What about informal enforcement action? Was
there any informal enforcement action taken against HBUS prior
to 2010?
Ms. Dailey. There was not.
Senator Levin. This is pretty feeble enforcement. Mr.
Curry, what do you think about this record that you inherited?
Mr. Curry. I would like to see going forward a much more
aggressive posture by the OCC. If there is evidence of material
weaknesses in a BSA/AML program, I would like to see, at the
very least, a progressive remedial program being instituted and
to use all the tools that are available to us, including cease
and desist orders.
Senator Levin. Did the OCC ever cite a violation of law for
noncompliance with AML statutes prior to 2010? Do you know, Ms.
Dailey?
Ms. Dailey. I do not believe we did prior to 2010.
Senator Levin. Mr. Stipano, you are the Deputy Chief Legal
Counsel for the OCC. You told the Subcommittee staff that you
did not have much involvement with HBUS prior to 2009 because
the Supervision Division was responsible for examinations and
the Legal Department generally gets involved only in
enforcement actions, investigations, or legal actions brought
against the bank by the Supervision Division. But in the spring
of 2009, the OCC was contacted by two Federal enforcement
agencies regarding investigations that they were conducting of
possible money laundering, going through accounts at HBUS, and
the OCC met with representatives of those agencies in
Washington, DC, on September 1, 2009. When the meeting
concluded, the OCC staff continued to discuss the HBUS
situation. Was it at that meeting that you learned for the
first time about the findings of previous AML exams of HBUS and
that they had resulted in 83 MRAs?
Mr. Stipano. To the best of my recollection, that was the
first time that I learned about the 83 MRAs.
Senator Levin. Had you encountered some of the problems at
HBUS before that?
Mr. Stipano. Yes. One situation I remember, and I do not
have a date on it, was the agency was contacted by two former
HSBC employees who were essentially whistleblowers and they had
concerns about the way that the bank was managing its embassy
banking business. At that time, I directed the Director of
Enforcement to meet with Ms. Dailey, to set up a meeting and to
have them come in and interview them and find out what the
basis of their concerns were. That meeting did take place. I
was not personally a participant. Following that, an
examination was opened into the embassy banking area and I
believe that findings were made and that supervisory actions
were taken as a consequence.
Senator Levin. When you learned that there were 83 MRAs
that were specific to the Bank Secrecy Act, were you surprised
by the number?
Mr. Stipano. Yes.
Senator Levin. And did you also learn that there had been
two recommendations that cease and desist orders be issued
against HBUS?
Mr. Stipano. I did learn that, but I do not recall whether
I learned that following that meeting or if I learned that
subsequently. But I was not aware of that, to my knowledge,
prior to that meeting.
Senator Levin. Did anyone ever explain why the Supervision
Division never tried to elevate the issue and take some kind of
regulatory action?
Mr. Stipano. I do not recall anybody explaining that to me.
I think that judgments were made by bank supervision that the
matter did not rise to the level of warranting a cease and
desist order or another enforcement action up to that point.
Senator Levin. And what was your reaction to that?
Mr. Stipano. I was very concerned. I think that learning
what we learned both through our discussions with the law
enforcement agents and what we learned from the examiners
following the meeting, it was apparent to me that there was a
serious problem in the BSA/AML area and that it needed to be
addressed promptly.
Senator Levin. Did you start an investigation in which both
the Legal and Enforcement Divisions got involved at that time?
Mr. Stipano. Yes. I do not have precise dates, but
shortly----
Senator Levin. About that time?
Mr. Stipano. Yes, shortly thereafter.
Senator Levin. And did you then expand an ongoing AML exam?
You set time tables, secured an order of investigation, helped
craft the two supervisory letters to HBUS in 2010 which were
the first to cite the bank for violations of AML laws and OFAC
regulations? Did that happen?
Mr. Stipano. Yes, but there was an ongoing examination into
the banknotes area, and this was something that the agency
became concerned about following an enforcement action at
Wachovia that concerned banknotes and bulk cash services. So
the examiners were already looking into it, but I think that
the consequence of the meeting with law enforcement and the
information that we obtained at that time was to expand the
examination and open a formal investigation.
Senator Levin. Why did the Legal Department and the
Enforcement Department have to get involved before some
regulatory action was taken? Was that ever explained to you?
Mr. Stipano. I think that if we are talking about actually
doing an investigation or taking an enforcement action, that
really cannot be done without the participation of lawyers. Our
investigations involve issuance of subpoenas, subpoenas for
documents, and subpoenas for testimony. It is not something
that examiners can do on their own, and the same thing with our
enforcement actions. The document is a legal document. It is
legally enforceable. The respondent bank or individual has due
process rights. So the Legal and the Enforcement Division need
to be involved.
Senator Levin. But apparently, your level and the
enforcement folks were not contacted until after the OCC was
contacted by law enforcement agencies in the midst of a
criminal investigation involving the bank. So you had all of
this background, having all of these unresolved issues,
important issues, but yet you were not contacted and you just
point out how important it is that the Legal Department and the
Enforcement Department be contacted before some regulatory
action was taken. But until that time, with all of the problems
that were identified in the exams, which had been recurring and
mounting for years, it did not reach your level, is that
correct?
Mr. Stipano. That is basically correct. I mean, there could
have been incidental contact. There could have been
discussions. There is a senior counsel of the Law Department
who works for me that is on the Large Bank Review Team. His
role in that capacity is to review supervisory letters and
conclusion memos. So it was not like nobody in the Legal
Department ever spoke to anybody in Large Banks. But in terms
of actually getting a referral or being brought in in order to
conduct an investigation or take an action, that did not happen
prior to 2009.
Senator Levin. So, Mr. Curry, this was not a case where OCC
examiners failed to do their job, by the way. They were
identifying the AML problems at HBUS all along the way. The
higher-ups were overly passive. They were waiting until the
problems grew into a very huge one before taking any action,
before there had to be criminal investigations that were begun,
before there was any real referral to the enforcement folks or
the legal folks.
Now, you are new there. You are only there a couple months,
so you may not know the answer yet to this question, but when a
bank is exhibiting the kind of problems that this bank showed,
the problems that continually occur in multiple business lines,
do you not believe that the OCC should take some type of
regulatory action before those problems become so great that
they are the subject of a criminal grand jury, for instance?
Mr. Curry. One of the most troubling aspects of the
Subcommittee's report really is the issue of our ability to
identify and act upon the cumulative effect of BSA/AML
deficiencies and that is an area that I would like to see much
greater clarity as to the posture of enforcement at the agency,
and also is the rationale for the expansion of the Large Bank
Review Team's mandate to actually be the vehicle to look at the
entire compliance posture of our largest institutions to take a
holistic view and to react accordingly.
Senator Levin. Are you ready, Senator Coburn?
Senator Coburn. Yes.
Senator Levin. OK. Senator Coburn.
Senator Coburn. I apologize for being absent during your
opening statements and your questions, so if I get ready to
repeat a question that was already asked, I hope you will stop
me.
Senator Levin. Well, you may be getting a better answer.
One never knows. [Laughter.]
I think the answers have been responsive. I should not
suggest otherwise.
Senator Coburn. This is for Mr. Curry, how do you respond
to the charge that the OCC, by giving such high scores to HSBC
for so many years, became an enabler because it gave false
comfort?
Mr. Curry. I think, again, judging on what I am familiar
with, the Subcommittee's record and from the information I have
determined as Comptroller, the agency has been much too slow in
responding and addressing what are significant weaknesses or
violations at this institution. And going forward, I would hope
that we would be much more nimble and take into account the
entire picture, what we are looking at in terms of compliance.
Senator Coburn. Knowing what you know now, I mean, what
this Subcommittee's report has exposed and what also was known
by you at times, is it a matter of being nimble and more
responsive, or is it a matter of competency?
Mr. Curry. I believe it is really a matter of being more
nimble and recognizing the importance of BSA/AML compliance as
both a national interest and in terms of it being a significant
and serious safety and soundness issue. And my hope is that,
going forward, we will react accordingly, which requires direct
and progressive remedial action as supervisors.
Senator Coburn. So have some of those actions taken place
now?
Mr. Curry. Yes. We have begun to already implement the
specific recommendations of the Subcommittee. We are also
taking an independent look at how we recruit, train, our
policies, and also how we can improve our coordination with
both our fellow bank regulatory agencies and with law
enforcement agencies. This is an opportunity for us to look at
the big picture of how we are implementing our responsibilities
under the Bank Secrecy Act and AML statutes.
Senator Coburn. This kind of reminds me, but on a much
larger scale, of the Homeland Security Oversight Subcommittee
and Federal Financial Management Subcommittee in terms of the
Defense Audit Agency. And what we found there is they never
hired new blood. It was all promoted from within. And the vast
majority of those auditors never had real experience auditing,
and so you kind of got a downward trend of the least favorable
aspects as they promoted people with lesser and lesser
experience and no variety of their experience.
How do you go about hiring people now?
Mr. Curry. It is a challenge to obtain people with the
requisite skills that you need to assess bank operations and
the specific legal requirements and regulatory requirements of
the BSA and AML. That being said, I am committed in renewing a
real effort to attract competent personnel from both within and
outside the agency.
Senator Coburn. Would not one source be people who have
been very good at figuring out how to duck your issues and
having them work for you?
Mr. Curry. Yes, and that is part of our training. We do
seek to understand or have presentations by individuals who
have experience with how the criminal element exploits our Bank
Secrecy Act and AML----
Senator Coburn. Well, I was not talking about the criminal
element. I was talking about the people who were on the other
side on compliance in terms of recruiting them.
Mr. Curry. Yes, that would be a source of personnel.
Senator Coburn. A lot has been said in our report about
HSBC allowing drug cartels and terrorists to move money through
its banks. Since you all knew all of this was happening and did
not stop it, are you not somewhat complicit in it?
Mr. Curry. I deeply regret that we did not act sooner and
more decisively.
Senator Coburn. So is that a yes?
Mr. Curry. Yes. Absolutely.
Senator Coburn. This is a little harder question. Take a
little bit longer time. But with as much specificity as
possible, can you explain what a good AML system within a bank
should look like? And I am not talking about pillars or
principles. I am talking about the actuality of what a bank--
what would you all ideally--I know what your regulations say. I
know what we have recommended. What would you, if I came to you
and I had a 150-bank operation and it is international and I
said, what should my AML look like, what would you tell me?
Mr. Curry. I think the No. 1 principle or attribute would
be having management and the board being committed to
developing and funding a BSA/AML program that was appropriate
for the business activities of that institution. That is
probably the No. 1 thing. And then in a successful program, all
other requirements would flow from that--hiring competent
personnel with the requisite experience to implement a credible
program, building the management information systems that are
necessary to monitor BSA/AML activities, as well. And at the
end of the day, it is a corporate commitment to compliance.
Senator Coburn. Did you happen to hear Ms. Dorner and Mr.
Levey's testimony today?
Mr. Curry. I was able to hear the tail end of their
testimony.
Senator Coburn. Do you think they have put in place a good
AML system?
Mr. Curry. That is our expectation as their primary
supervisor.
Senator Coburn. But based on what they said here today, is
it your belief, if they carry out what they have said here
today, that they will have a great AML system?
Mr. Curry. I would hope that is the case. I think we are in
the position as their supervisor that we need to verify that
and I do not believe we are in a position to do that right now.
Senator Coburn. OK. So how do you know when somebody has a
good AML system?
Mr. Curry. Personally, as the Comptroller, I am relying on
the expertise and the supervision programs of our examinations
staff.
Senator Coburn. And so who directly under you is
responsible for that?
Mr. Curry. The Senior Deputy Comptrollers of both our Large
Bank Division and our Mid-Size and Community Bank Divisions are
the primary people responsible for our BSA examination
programs. We also have, which Mr. Stipano mentioned and I
mentioned in response to an earlier question, a Large Bank
Review Team, which is really the Washington-based clearing
function for making sure that there is coordination and
consistency within our supervision programs, and especially in
the area of enforcement.
Senator Coburn. I would be interested if you would get the
videotape of Ms. Dorner and Mr. Levey and share with the
Subcommittee your thoughts in terms--I know you have to prove
and make sure, that is your responsibility, but I would love to
hear your thoughts about what they said they were doing, how
they were doing it, how they were implementing it, how they
were doing clawbacks, how they were holding people accountable,
and how they were trying to change the culture within their
organization.
Mr. Curry. I would be happy to do that, Senator, and to get
back to you.
Senator Coburn. Thank you.
Ms. Dailey, our investigation found in 2007 that examiners
recommended the OCC take formal enforcement action against HBUS
for weakness in how it monitored how its pouch services report.
That is on page 304. But the OCC decided to take no such
action. Do you recall that?
Ms. Dailey. To the best of my recollection, that
recommendation did not reach me.
Senator Coburn. OK. Do you have any idea how high up it
got?
Ms. Dailey. Generally, what would happen is an examiner
would make a recommendation and present that to an Examiner in
Charge. I do not know if that happened or not.
Senator Coburn. Well, that would seem to suggest to me that
some of the same problems are going on at the OCC that were
going on at HSBC. We heard testimony from our first two panels
of what was not happening, where information was not flowing
that should be flowing, some of it for profit motive, some of
it from incompetence. Is it possible that line-level examiners
thought a tough enforcement action was needed but were
overruled by their supervisors?
Ms. Dailey. I do not know that. I do not have any knowledge
to that effect because it did not come to me. It could have
been presented to the Examiner in Charge and they could have
made a different determination once looking at the facts.
Oftentimes, when the examiners make determinations, they sit
down with the Examiner in Charge and go through the different
criteria and the different facts and they could come to a
different conclusion. I do not know that, though, because I was
not part of any of those types of discussions.
Senator Coburn. All right. And it is easy for us to arm
chair quarterback it now, looking backwards, and I understand
that.
Does the agency or did the agency have any processes in
place to make sure all proper enforcement actions were handled
consistently across the various banks that OCC regulated?
Ms. Dailey. Yes. We have what we call a WSRC process in
place, and what happens is whenever an enforcement action,
whether it is informal or formal, is recommended, it goes
through the examination team. It would be presented to the
Large Bank Review Team. If the Large Bank Review Team agreed
with those findings, it would be presented to the WSRC
committee, and that committee is made up of members of across
our agency in supervision, policy, enforcement, etc., and that
committee is a recommending body for an informal or formal
action and the final decision would be made by a Senior Deputy
Comptroller.
Senator Coburn. So as you look back through the past few
years, where do you think you all have failed? I mean, just an
honest assessment of where was our management not good? Where
was our quality of instruction and direction, where were our
employees not up to the task? In other words, we obviously had
a great big problem here. Everybody agrees with that. So from
just your viewpoint, where you sit, where do you think the
problem was?
Ms. Dailey. I think we did a lot of work. We did a lot of
examinations. We found a lot of issues. We received some
corrective action along the way. But we did not probably step
back as well as we should, and with the benefit of hindsight,
we could have and should have taken action sooner.
Senator Coburn. Mr. Chairman, that is the kind of answer we
get all the time. The fact is, is what that means is things are
going to be repeated, and what our whole goal is, is so that
things are not repeated.
Mr. Curry. Senator Coburn, I think from my perspective as
Comptroller, I really want to address the same issues that you
asked me to look at how HSBC was addressing. I want to have a
culture at the OCC in which examiners feel free to voice
documented, well founded concerns about the performance of the
banks that they are examined, to know that those concerns are
going to be fairly and thoroughly reviewed, and at the end of
the day, the appropriate action or, in some cases, inaction
will be taken by the agency as a whole.
Senator Coburn. So what happens right now when an examiner
feels strongly that some action needs to be taken and the
person in charge of that examination disagrees? Where is the
outlet pressure for somebody to appeal without it costing them?
Mr. Curry. I would encourage them and they have the
opportunity to appeal to me. We also have review functions,
whether it is in the case of BSA and the Large Bank Review
Team, or to contact our Committee on Bank Supervision or any
one of the senior members of the agency.
Senator Coburn. So how many times has that happened?
Mr. Curry. In my short tenure, I am not aware of that
number.
Senator Coburn. Has it happened? Has anyone called you?
Mr. Curry. No one has called me specifically, but I want to
create a culture at the OCC, or to reinforce a culture that we
are here to be bank supervisors and that we are to be fair and
reasonable in how we approach that. But at the end of the day,
we are to do what we are being paid to do.
Senator Coburn. All right. I have gone over time. It is
yours.
Senator Levin. How many months have you been there?
Mr. Curry. A little over 3 months.
Senator Levin. All right. Well, I would believe that in the
next 3 months, you will be getting some phone calls and it is
important that line of communication be kept open, that people
be able to appeal denials of their strong urgings after
notifying their supervisor that they are going to do it. You
have to be able to go around your supervisor, and if they do it
privately, without notice to the supervisor, I guess they would
become a whistleblower at that point and they have to be
protected under our whistleblower laws because the stakes here
are just too huge and the failures here are too massive to
allow them to be repeated.
My own belief is that part of the reason has been a
culture, but the other part is that there has been just a lack
of accountability. It was true, at least, inside this agency.
This is not a matter of hindsight, by the way. I would
disagree with you here, Ms. Dailey. This is where at the time
things were known and were not acted on. And that is what is so
troubling here. We obviously want to use hindsight to improve.
We always can use hindsight to benefit us. But what we have
seen throughout this hearing today is that at the time,
contemporaneously with these events, that there were people who
knew better. There were sometimes efforts made that were
ignored and squelched. But it is not just a matter of with the
benefit of hindsight here.
The testimony that you have given us today, Mr. Curry, is
that the agency is reviewing the matter in which MRAs are
reported to ensure that banks with high numbers of MRAs will
receive additional supervisory attention and consideration of
formal enforcement action and I would like to get some
additional details on this matter, who is going to be involved
in this revised approach, looking at matters requiring
attention when there are a number of these that are issued. Who
is going to be looking at it, just supervision, or are the
Legal and Enforcement Divisions going to be in the mix? Give us
some details on how this is going to work.
Mr. Curry. Initially, we are looking to expand the mandate
of our Large Bank Review Team to take on that function. That is
our initial response to the report's findings. My hope is that
we will have additional recommendations after we look at this
matter further, as we examine our policies and procedures.
There may be a more effective measure that we will employ. In
any event, I will endeavor to keep this Subcommittee informed
of the improvements that we will be making on an ongoing basis.
Senator Levin. So that the enforcement folks and the legal
folks are going to be involved in this new process early?
Mr. Curry. That is the intention.
Senator Levin. Is the revised approach going to have some
sort of thresholds that they are going to apply, maybe to
different time frames, such as how many MRAs in a month, how
many MRAs in a year, and so forth?
Mr. Curry. I cannot say that we will come up with an
arithmetical floor, but we will have a process that looks at
the totality of circumstances of which the number of MRAs will
be a critical factor.
Senator Levin. The Subcommittee investigation found that in
some instances, the conclusion memos of exams at HBUS were a
lot stronger than the supervisory letters that were sent to the
bank. So in those instances, the real message about the
seriousness of problems was not being delivered to the bank. Is
your Large Bank Review Team going to get better information now
than in prior years?
Mr. Curry. That particular practice has already been
corrected. Both the conclusion memo and the supervisory letter
draft will be reviewed by the Large Bank Review Team.
Senator Levin. I am also encouraged by your testimony today
and by the OCC's willingness to look for ways to improve the
exam supervision, and here is what our report noted, that there
are some practices at the OCC that depart from the practices
utilized by other Federal bank regulators, and more
importantly, seem to act as a barrier to your examiners, your
AML examiners. Those barriers made it difficult for your AML
examiners to get the appropriate attention of their supervisors
when AML problems were quite evident. In your testimony, you
acknowledge that your agency does differ from other agencies
with respect to including AML exam findings in the consumer
compliance exam process and you are going to correct that.
By the way, has anyone explained to you exactly why the
anti-money laundering was inserted into customer compliance
examinations and ratings? That was a longstanding process. It
did not occur by happenstance. We are delighted today to hear
that you are correcting that. Your testimony is very clear on
that, that you are going to now follow the same practice that
other examiners do in this regard.
But was it ever explained to you why it was part of the
customer compliance ratings?
Mr. Curry. I did ask why we deviated from the other Federal
bank regulatory agencies in that regard. Personally, my view is
that BSA/AML is a significant or serious safety and soundness
issue and that it is appropriately addressed by looking at it
in the context of the management component in the CAMELS rating
system and that policy has been adopted at the agency already
and we are simply in the process of communicating that decision
and making appropriate changes to the examination procedures
for our staff.
Senator Levin. And when will the new AML exam process take
effect? Will it take effect immediately?
Mr. Curry. It is immediate. There will be some lag in
communicating the actual procedures to staff, but we will,
again, keep you informed on that process, if you would like.
Senator Levin. So the exams are going to be considered this
year when assigning CAMELS management ratings?
Mr. Curry. Yes, as soon as possible. I would expect it to
be sooner rather than later.
Senator Levin. A matter of months?
Mr. Curry. Yes. Less than that, hopefully.
Senator Levin. Good. Might this have implications for the
current rating at some banks, including HBUS?
Mr. Curry. I believe our position is that serious and
significant BSA violations should be presumptively a factor in
an adverse management rating.
Senator Levin. All right. And if it applies, if it has an
impact on HBUS, so be it?
Mr. Curry. So be it.
Senator Levin. The Subcommittee report also recommended
that the OCC cite violations when a bank fails to meet any one
of the statutory minimum requirements for an AML program. You
state in your testimony that the OCC is going to ``revisit its
current approach in order to provide more flexibility for
individual pillar violations to be cited.'' Can you give us
just a little bit more detail on what you mean by ``revisiting
our current approach''?
Mr. Curry. We are looking to broaden the range and types of
violations that examiners will be reporting in the reports of
examination and in supervisory communications. The only
reservation that we stated was we want to make sure that where
there are program violations, that is clear that they will
result in a mandatory cease and desist order.
Senator Levin. OK. Senator Coburn.
Senator Coburn. Just a few more questions. Ms. Dailey, in
September 2009, OCC officials, including you, met with
officials from DHS, Immigration and Customs Enforcement who
were investigating money laundering. After the meeting, the
lead AML examiner for HBUS said he had twice recommended cease
and desist orders against HBUS for AML weaknesses. Do you
recall that?
Ms. Dailey. I recall the meeting afterward and I recall the
gentleman discussing the MRAs. I do not recall whether he
discussed or mentioned that there had been previous
recommendations or not.
Senator Coburn. Yes. So you cannot tell me whether that was
an accurate statement he made to us?
Ms. Dailey. I do not recall that part of the conversation.
Senator Coburn. Well, Mr. Stipano, a memo following that
September 2009 meeting states that when learning of the cease
and desist recommendations that were not followed, you said you
were unaware of the recent history of HBUS and that you
requested the thorough review. Is that right?
Mr. Stipano. Yes. My recollection, and Senator Coburn, we
did talk about this a little bit when you were out of the
room----
Senator Coburn. All right.
Mr. Stipano. But my recollection of it was that following
the broader meeting with law enforcement, we had a smaller
internal meeting and I learned at that point for the first time
about the 83 MRAs. I do not recall whether I also learned at
the same time that there had been past recommendations for
cease and desist orders. I did learn that at some point
subsequent to that. It could have been at that meeting. It
could have been later. I just do not remember.
Senator Coburn. But the fact is, there were recommendations
made for cease and desist orders from examiners, correct?
Mr. Stipano. We know that now.
Senator Coburn. Yes.
Mr. Stipano. Yes.
Senator Coburn. So back to Mr. Curry. Here is a prime
example where recommendations were made and got squelched,
essentially. Somebody made a decision that it was not going to
happen. To me, I would use that as one of the learning models.
Here is what we do not want to happen in the future, so here is
how our policies and procedures are going to make sure this
does not happen, because you obviously had a problem. Everybody
agrees there was a problem. The examiner made probably the
right recommendation, except nothing happened on it. The whole
purpose of this is to learn, to get better, and to make the
changes so that does not happen. Any disagreement with that?
Mr. Curry. No, none at all, Senator Coburn. I think it is
important as a supervisor that when we detect significant
weaknesses in any program, particularly BSA/AML, that the
sooner that we take appropriate remedial action or corrective
action, the better all of us are, both the institution, the
agency, and the public.
Senator Coburn. You made an offer to communicate with this
Subcommittee on your progress. I would hope that as you do
that, that situations like this are specifically addressed.
Here is what we have done to make sure that this does not
happen. Here is the policies and procedures. And I know this is
not easy stuff that you are tasked with. Let me say I
understand that. But it also is not rocket science and key
management metrics and culture change to where somebody can
scream, something is going wrong here, and it is heard all the
way to the top.
Mr. Curry. I agree with you completely, Senator Coburn. It
is also clear that, from the top, that we be clear as to what
the objective is and what the expectations are, and that is
something that I intend to do, and to do forcefully.
Senator Coburn. All right. I think my staff tells me the
rest of this has been pretty well covered by you. And you have
talked about the conflict of interest on bank examiners, on
examiners while I was gone?
Senator Levin. No.
Senator Coburn. Well, let us just do that for a moment.
Earlier this month, the Treasury Inspector General released a
report detailing significant ethical breaches by an OCC
national bank examiner. And I will not go into what those are,
but the breaches occurred at times when he was supposed to be
examining their bank and he was off doing something else other
than that. Also, it was noted that he was dishonest on time
sheets, etc.
Based on this one finding, have you had time to look into
this and to say, is this an isolated incident or is this
occurring more than we might think, and does this put our
examinations at risk?
Mr. Curry. This particular conduct, which I just recently
became aware of, is totally unacceptable and reprehensible
conduct by a bank examiner, and what I find particularly
troubling is the potential for disrepute that it places on the
many fine people, the 3,600 people who work for the OCC. That
is not our standard of ethical conduct. We take great pains to
advise and to educate our staff about what conduct is expected
from a bank examiner, particularly given the significance of
their duties as examiners. So it is troubling to me.
The preliminary information I have been able to gather from
the Treasury IG data is that this appears to be a very isolated
case. There were only six cases that were reviewed by the IG.
And I might add that in this particular case, the agency itself
referred it to the Inspector General of the Treasury to
investigate. But only three of those six had any merit, and
that was over a 3-year period. That is not the conduct that I
or my colleagues at the OCC expect of an examiner.
Senator Coburn. It speaks well for you, because the
complaint was initiated by one of your other examiners and so
there was responsiveness on the part of the OCC to that
complaint.
Mr. Chairman, I yield to you.
Senator Levin. Thank you very much, Senator Coburn.
Just a few more questions from me. The question was raised
with the earlier panel about whether HBUS is complying with the
2010 cease and desist order which was issued in October of that
year. Article 9 of the order required the bank within 180 days
to install, test, and activate a new wire transaction
monitoring system. I understand that there was a supervisory
letter which was written by the OCC on May 25 of this year
informing the bank that it was not in compliance with the order
and you identified two MRAs that instructed the bank to address
deficiencies. The two MRAs instructed the bank to implement an
effective AML automated monitoring system and an effective
automated alert risk scoring prioritization function to
identify the more important alerts.
They were supposed to do that in 180 days. It is now 2
years later. Are the bank's deficiencies in how it is
monitoring for suspicious activity a problem as far as the OCC
is concerned?
Mr. Stipano. Chairman Levin, you are correct that the OCC
did recently issue a supervisory letter that cited the bank for
noncompliance with an article of the cease and desist order
concerning their automated monitoring system for wire
transfers. That is a matter that we are currently reviewing
along with other current examination findings and will be taken
into account in any subsequent enforcement actions that we may
take.
Senator Levin. Now, another article of the consent order
required that the bank retain one or more independent
consultants to conduct an independent review of account and
transaction activities, a so-called look back, to determine
whether suspicious activity was timely identified by the bank
and, if appropriate, suspicious activity reports were timely
filed with law enforcement. Are you satisfied that the
requirement has been met?
Mr. Stipano. My understanding is that we are presently
looking at all areas of potential noncompliance with the cease
and desist order and we are in a process right now of making
some determinations and we will take appropriate action.
Senator Levin. Article 8 of that order required that the
bank develop and implement appropriate policies and procedures
for gathering customer due diligence for new and existing
accounts. As part of that requirement, the OCC directed HBUS to
identify accounts opened for offshore banks, in other words,
for banks with a license that prohibits them from conducting
banking activities with citizens of or with the local currency
of the country which issued the license. I understand that the
bank identified having accounts for 57 offshore banks, of which
it will close 23 and keep 33. Has the OCC reviewed that effort,
and how high of an anti-money laundering risk is attached to
those 33 banks?
Mr. Stipano. Chairman Levin, I am really not in a position
to discuss details of the bank's compliance beyond what I had
said earlier. We are in the midst of a civil money penalty
proceeding. We will be looking at the total record of
compliance with the document in making our determinations.
Senator Levin. Also, will you give us for the record, then,
also whether you have reviewed these accounts where there is a
so-called politically exposed person because in your order you
required that the bank's ``know your customer'' program
identify and conduct an enhanced due diligence review of all
accounts opened for political figures, which are referred to
internationally as politically exposed persons. Will you give
us for the record the status of that effort?
Mr. Stipano. I cannot report on the details. I can tell you
that our examiners, our supervisory staff, and our enforcement
attorneys, are very much focused on the level of compliance
with our document. We will do a thorough review and we will
take appropriate action.
Senator Levin. And will you let us know what that leads to?
Mr. Stipano. Yes, sir.
Senator Levin. Has HSBC established an effective program to
identify the beneficial owners of any bearer share accounts?
Mr. Stipano. I think that is something that we need to
determine.
Senator Levin. OK, and you are going to let us know that?
Mr. Stipano. Yes, sir.
Senator Levin. Why should banks open accounts for bearer
share corporations? Maybe I should ask you, Mr. Curry. Or any
one of you can answer it.
Mr. Curry. Given the high-risk nature of those accounts, I
do not know.
Senator Levin. Will you take a look at that whole issue
because it sort of continues. They have said they have taken
some steps, and I take their word for it. The steps that they
identified this morning were that they are going to hold those
shares in escrow or put them with an agent, I believe they
said, who would be a reliable agent. But there is a waiver
provision in there and that waiver provision is an easy
loophole, I am afraid. I did not ask the panel about that at
the time. I forgot to do that, and I can ask that for the
record, as a matter of fact. But take a look at that issue and
see whether or not the loophole in that new step that they are
going to take is acceptable to the OCC.
Mr. Curry. Yes. I would expect that would be a focus of our
ongoing supervision.
Senator Coburn. Mr. Chairman, I would just add one point.
It is interesting. We have already established the fact that
there was some complicity with OCC and HSBC. But there is some
irony in the fact that this organization that is now going to
fine them, I wonder who is going to fine you?
Mr. Curry. No, in terms of accountability, I am accountable
and I will hold myself accountable and I know you will hold me
accountable. Also, I want to emphasize that the vast majority
of the people at the Office of the Comptroller of the Currency,
particularly the supervisory personnel, are committed. They are
very proud to be commissioned national bank examiners and that
pride--we will appeal to that pride to make sure that it is
evident in the work that we do going forward.
Senator Coburn. I guess my point is, is there is no
financial consequence when we have an agency responsible for
something and yet fails, but there is a financial consequence
to the people that were regulated by the agency that actually
failed to do what the agency was supposed to hold them
accountable not to do. That was the only point I was making.
Senator Levin. I agree with that and I also agree that
Congress has responsibility, too, in our oversight.
Senator Coburn. And that is why we are here.
Senator Levin. That is exactly what this Subcommittee is
about and other committees and subcommittees are involved in
and should be involved in. The oversight function is critically
important and that is our responsibility, to bring about
accountability through oversight. But it has been missing in
many places and in many places where it deserves to be applied.
That is one of the results, I hope, of these hearings and what
our Subcommittee has tried to do over the years is to promote
accountability wherever it needs to be achieved.
I do not have any further questions. Do you have any
further questions, Senator Coburn?
Senator Coburn. No.
Senator Levin. Let me just summarize very briefly, and that
is that we have seen today what the problems are, and our
staffs, both of them working together so beautifully as they
do, have put together a powerful report, a compelling report
and it speaks for itself, but we have tried to summarize the
best we could here today.
HBUS and HSBC have made commitments to improve in a number
of ways. They have improved by a big increase in the number of
compliance personnel. The compliance resources have been
increased. The affiliate due diligence requirements that they
are putting in are extremely important. They sure were missing
in the history so far. They have closed 325 correspondent
accounts, including those accounts of 55 banks in sanctioned
countries, such as Iran, Syria, and North Korea. They closed
the Cayman accounts, and that is a real beginning of some
action against these kind of hidden accounts kept secret from
the world that can be put to such dubious purposes as we have
seen here today. We have seen, in other words, the beginning,
we hope, of the cleanup of this global bank, and if it happens,
it is going to strengthen protections for people in countries
around the world.
The OCC has agreed to strengthen its anti-money laundering
oversight. It is going to treat the failures as safety and
soundness problems, not just consumer compliance problems. That
is going to have a very strong impact and a deterrent impact on
our banks. It will cite statutory violations for banks that
fail to meet the requirements for the four mandatory components
of an AML program. It has agreed as part of its strengthening
of anti-money laundering oversight to have a large bank review
whenever a bank hits a threshold of a certain number or
approximate number of MRAs or violations.
So if everybody carries out the violations--excuse me. If
everyone carries out the commitments--they have already carried
out the violations, so if folks carry out all the commitments
which we have heard about here today, we are going to take a
major step towards stopping terrorists, drug traffickers, and
other wrongdoers from misusing and abusing the U.S. financial
system for their nefarious purposes.
I want to again thank my colleague and my friend, Senator
Coburn, and our staffs for the way they worked together and put
together an extremely powerful report and for helping us to
understand a very complex area.
We want to thank you, Mr. Curry, because you have taken
over a very difficult job. You have done it with gusto. You
have brought in a real sense of newness and a freshness, a
determination to clean up that situation at OCC.
And with that, I will turn to Senator Coburn to see if he
has any comments. ----------------------------------------
Senator Coburn. I just want to thank you all for your
cooperation with us for your straightforwardness. What you have
in front of you is not easy. Nobody ever said it was easy, but
it is really important. So I take you, Mr. Curry, at your word
that you are going to continue to communicate with this
Subcommittee because decisive action and follow through--it is
not enough to have a plan to fix this, you have to have a plan
that gets executed and then monitored, and my hope is that we
see a vigorous OCC that is the right amount, does not overreact
but it is the right amount to do what we can do to stop some of
the things that are going on that really only benefit those of
criminal intent. So I thank you for your testimony and your
time and your patience.
Thank you, Mr. Chairman.
Senator Levin. Thank you all. The record will be kept open
for questions of this panel and all of our other panels and we
will stand adjourned.
[Whereupon, at 4:49 p.m., the Subcommittee was adjourned.]
A P P E N D I X
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