Updated: December 11, 2012 12:19PM
British bank HSBC has agreed to pay $1.9 billion to settle a New York based-probe in connection with the laundering of money from narcotics traffickers in Mexico, U.S. authorities announced Tuesday.
The government also alleges that HSBC intentionally allowed prohibited transactions with Iran, Libya, Sudan and Burma. The bank also facilitated transactions with Cuba in violation of the Trading With the Enemy Act, according to the documents.
The documents in federal court in Brooklyn say the prohibited transactions with Iran, Libya, Sudan and Burma took place from 2001 through 2006.
The move avoids a legal battle that could further savage the bank’s reputation and undermine confidence in the global banking system. The announcement was made by Assistant Attorney General Lanny A. Breuer and U.S. Attorney Loretta A. Lynch in Brooklyn.
At least $881 million in drug trafficking proceeds was laundered through HSBC Bank USA, violating the Bank Secrecy Act, U.S. authorities said.
“HSBC is being held accountable for stunning failures of oversight — and worse — that led the bank to permit narcotics traffickers and others to launder hundreds of millions of dollars through HSBC subsidiaries and to facilitate hundreds of millions more in transactions with sanctioned countries,” Breuer said in a statement.
“The record of dysfunction that prevailed at HSBC for many years was astonishing. Today, HSBC is paying a heavy price for its conduct, and, under the terms of today’s agreement, if the bank fails to comply with the agreement in any way, we reserve the right to fully prosecute it,” he said.
“We accept responsibility for our past mistakes,” HSBC Chief Executive Stuart Gulliver said. “We have said we are profoundly sorry for them, and we do so again.”
It’s the latest scandal to hit banks since the financial crisis started in 2008. Standard Chartered PLC, another British bank, signed an agreement with New York regulators on Monday to settle a money-laundering investigation involving Iran with a $340 million payment.
“These banks are operating in an environment where you can’t afford to have uncertainty attached to your name, and they are dependent on confidence from their investors,” said Sabine Bauer, director of financial institutions at Fitch Ratings. “And that makes them keen to get past such events very quickly and settle.”
Despite the high price of the settlement, markets seemed relieved. HSBC Holdings PLC’s share price in London was trading 0.5 percent higher at 645 pence. Standard Chartered’s was flat at 1,498 pence.
Analysts said the two Britain-based banks will be able to absorb the cost of the settlements.
According to Shore Capital analyst Gary Greenwood, the penalties are equivalent to around 9 percent of each company’s 2012 pretax profits.
“The certainty is clearly welcome and helps to draw a line under the situation,” Greenwood said. “In terms of knock-on effects, we think it is likely to lead to higher ongoing compliance costs and perhaps some minor loss of business in the U.S., but nothing that will be particularly material to either company.”
Banks are facing greater scrutiny since the financial crisis. A string of banking scandals has highlighted lax oversight and a culture of arrogance and entitlement.
Money laundering by banks has become a priority target for U.S. law enforcement. Since 2009, Credit Suisse, Barclays, Lloyds and ING have all paid big settlements related to allegations that they moved money for people or companies that were on the U.S. sanctions list.
HSBC conceded that its anti-money laundering measures were inadequate and that it has taken big steps in beefing up its controls. Among other measures, it has hired a former Treasury undersecretary for terrorism and financial intelligence as its chief legal officer.
The bank also said it has reached agreements over investigations by other U.S. government agencies and expects to sign an agreement with British regulators shortly.