By Philip Mattera
Once a staid financial institution with a focus on Asia, HSBC has found itself caught up in recent years in scandals involving predatory lending, tax evasion and the role its lax internal controls have played in helping drug traffickers and organizations said to be linked to terrorist groups. To resolve U.S. charges relating to the latter, HSBC had to pay out nearly $2 billion in penalties. In 2015 the bank came under fire again when leaked data on secret customer accounts led to new allegations that the bank was abetting tax evasion.
Hong Kong Origins
HSBC has its origins in 1865, when the Hongkong and Shanghai Banking Company was established in Hong Kong to provide a local alternative to the foreign-based banks that had dominated the financial services business in the British colony. It went on to become the de facto central bank of Hong Kong while also opening numerous overseas branches.
After Britain agreed in 1984 to turn over control of Hong Kong to China in 1997, Hongkong Bank created a new UK-based parent company, HSBC Holdings PLC, in 1991. HSBC reinforced its new British identity the following year with the takeover of Midland Bank.
HSBC’s U.S. operations had consisted of a majority stake (and then full ownership) in Buffalo, New York-based Marine Midland Bank and a cooperative agreement with Wells Fargo. In 1999 HSBC raised its U.S. profile by agreeing to pay more than $10 billion to purchase the parent company of Republic National Bank in what was then the largest foreign acquisition deal for an American banking operation.
Acquiring U.S. Legal Problems
Along with a bank, HSBC was getting legal problems. In 2001 HSBC’s Republic New York Securities division pleaded guilty to felony charges of securities fraud and conspiracy and had to pay $606 million after admitting its role in a Ponzi scheme that defrauded Japanese companies of hundreds of millions of dollars.
HSBC took on more trouble after it made a $16 billion deal in 2002 to acquire the consumer finance company Household International, a pioneer of the shady subprime lending business in the United States. In 1986 the Federal Reserve had fined Household $600,000 for repeated violations of rules governing limited-service banks. Around the time of the HSBC deal, Household was one of the primary targets of a movement that was seeking to use state and local legislation to combat predatory lending. And just weeks before the deal was announced, Household had agreed to pay up to $484 million to settle multi-state charges that it misled tens of thousands of borrowers into paying inflated mortgage rates. HSBC later shut down all of Household’s operations.
HSBC faced other problems with U.S. regulators. In 2007 industry regulator NASD (now FINRA) fined HSBC Securities $250,000 for failing to provide the best execution of customer orders for government securities. That same year, the SEC announced that HSBC would pay a $10 million civil penalty to resolve charges that it allowed its name and logo to be used in connection with the fraudulent sale of financial products by Pension Fund of America, L.C.
In 2008 the New York Times reported that HSBC was one of the European banks being investigated by the U.S. Justice Department for assisting wealthy Americans engage in tax evasion.
In 2009 Britain’s Financial Services Authority fined HSBC more than £3 million for not having adequate systems and controls in place to protect confidential customer information from being lost or stolen.
In 2010 FINRA fined HSBC $1.5 million for abuses relating to the sale of auction-rate securities and then $375,000 for unsuitable sales of collateralized mortgage obligations. That same year, the Federal Reserve ordered HSBC to improve its procedures designed to prevent money laundering by customers.
There were reports in 2011 that the U.S. tax evasion investigation of HSBC was heating up, and the Justice Department got a federal judge to order the bank turn over the names of scores of Indian-American clients who were being investigated for tax offenses.
In June 2011, HSBC agreed to pay $62.5 million to settle legal claims that had been made by investors in funds serviced by the bank that had lost hundreds of millions of dollars by investing in funds controlled by Bernard Madoff while he was carrying out a massive Ponzi scheme. The settlement was later rejected by a federal judge, and the litigation continues.
In September 2011 the Federal Housing Finance Agency sued HSBC and other firms for abuses in the sale of mortgage-backed securities to Fannie Mae and Freddie Mac. (In 2014 HSBC consented to paying $550 million to settle the case.)
In December 2011 the Financial Services Authority fined HSBC £10.5 million for selling what it said were inappropriate financial products to elderly customers, including individuals who were entering or already in nursing homes.
A “Polluted” Compliance Culture
HSBC’s reputation was seriously damage in July 2012 when the U.S. Senate’s Permanent Subcommittee on Investigations released a 300-page report detailing how its weak money laundering controls were exploited by what the report said were drug traffickers and groups with terrorist connections. Along with “severe” deficiencies in anti-money laundering efforts, the bank was accused of failing to observe the U.S. Treasury Department’s Office of Foreign Assets Control list of prohibited parties, clearing suspicious bulk quantities of travelers cheques, providing U.S. correspondent accounts to some foreign banks despite evidence of links to terrorist financing and other serious shortcomings. Subcommittee chair Carl Levin called HSBC’s compliance culture “pervasively polluted for a long time.”
Five months after the publication of the report, the Justice Department announced that HSBC would pay $1.3 billion and enter into a deferred prosecution agreement to settle criminal charges that it violated the Bank Secrecy Act, the International Emergency Economic Powers Act and the Trading with the Enemy Act “by failing to maintain an effective anti-money-laundering program and to conduct appropriate due diligence on its foreign correspondent account holders.” HSBC also agreed to pay $665 million in civil penalties ($500 million to the Office of the Comptroller of the Currency and $165 million to the Federal Reserve), bringing the total penalties to $1.92 billion.
A subsequent Matt Tiabbi Rolling Stone article about HSBC’s misdeeds quoted former Senate investigator Jack Blum as saying: “They violated every goddamn law in the book.”
In January 2013 HSBC agreed to pay $249 million to settle charges of foreclosure abuse brought by the Office of the Comptroller of the Currency and other federal regulators, with $96 million going to borrowers who lost their homes and $153 million going to loan modifications and forgiveness.
In March 2013 the government of Argentina filed criminal charges against the local subsidiary of HSBC for helping businesses evade taxes and launder money.
In April 2014 the U.S. Justice Department revealed that the independent compliance monitor charged with overseeing HSBC's settlement of its federal case warned that the bank needed to do more to improve its safeguards against money laundering.
In July 2014 the U.S. Attorney for the Southern District of New York announced that HSBC would pay $10 million and admit to misconduct to settle civil fraud charges for failing to monitor reimbursement claims submitted to the federal government in connection with foreclosures on government-insured mortgages.
In November 2014 HSBC was fined $275 million by the U.S Commodity Futures Trading Commission and $343 million by Britain's Financial Conduct Authority as part of a settlement of charges that it and other major banks manipulated the foreign exchange market.
That same month, a unit of HSBC consented to pay $12.5 million to settle U.S. Securities and Exchange Commission charges that it failed to register with the agency before offering cross-border brokerage and investment advisory services to U.S. clients.
In 2015 HSBC came under new fire when the International Consortium of Investigative Journalists and news organizations from around the world released reports on HSBC's role in abetting tax evasion by wealthy customers of its Swiss private banking unit.
In February 2016 HSBC agreed to pay $470 million to settle cases brought by federal agencies and state governments alleging abuses relating to mortgage origination, servicing and foreclosure abuses.
In July 2016 one HSBC executive and a former colleague were charged with conspiracy to commit wire fraud in connection with the foreign exchange manipulation.
In January 2017 the Office of the Comptroller of the Currency penalized HSBC $32.5 million for having failed to comply with a 2011 order that directed the bank to overhaul its foreclosure practices.
Other Information Sources
Violation Tracker summary page
Watchdog Groups and Campaigns
Key Books and Reports
A Big Deal? Corporate Social Responsibility and the Finance Sector in Europe (CORE Coalition, December 2005).
Farming Money: How European Banks and Private Finance Profit from Food Speculation and Land Grabs (Friends of the Earth Europe, January 2012).
Shaping the Future of Sustainable Finance (WWF and BankTrack, January 2006)
The Banks and Society: Rebuilding Trust (Ecumenical Council for Corporate Responsibility, March 2011).
Too Big to Jail: Inside the Obama Administration's Decision not to Hold Wall Street Accountable (Republican Staff of the House Committee on Financial Services, July 2016).
U.S. Vulnerabilities to Money Laundering, Drugs, and Terrorist Financing: HSBC Case History (U.S. Senate Permanent Subcommittee on Investigations, July 2012).
Undue Diligence: How Banks Do Business with Corrupt Regimes (Global Witness, March 2009).
Last updated February 4, 2017