This week, the London-based global bank HSBC agreed to pay the US government $1.9 billion to avoid prosecution for ignoring a variety of anti-money-laundering laws that resulted in everyone from Mexican cartels to Iran moving money through the United States. But while the Department of Justice and the Treasury Department, the two agencies that put HSBC in the hot seat, are eager to trumpet the record-breaking fine, some wonder why it wasn’t even higher—especially since, as we’ve reported, HSBC can earn back the cost of the penalty in less than three months. Here’s a breakdown of where the number came from.
The $1.256 billion in “disgorged profits”. The main penalty is for profits the bank is estimated to have made as a result of money-laundering, which the Department of Justice is forcing it to give up, or “disgorge”. Assistant Attorney General Lanny Breuer told Bloomberg TV that the penalty was “based on what we were able to trace that we thought were direct proceeds of money laundering. Remember, HSBC itself didn’t do the money laundering, they were just so lax by violating the bank secrecy act that they let other people come there and do the money laundering.”
We have a fine for failing to monitor all that money laundering. This $500 million ding was cooked up by Treasury’s Financial Crimes Enforcement Network (FinCEN), based on a fine of up to $100,000 per transaction that violates anti-money laundering rules, and an additional fine of up to $1 million per transaction for failing to set up a due diligence program. It’s clear that Treasury didn’t level the harshest penalties it could, since violations went on for years, perhaps decades; but it does suggest it penalized the bank for a significant number of transactions. The Office of Comptroller of Currency, a banking regulator house in Treasury, assessed a $500 million fine on the bank for the same violations; under the terms of the deal, HSBC’s payment to the OCC will also cover its FinCEN penalty.
There’s yet another fine for failing to monitor all that money laundering. The Federal Reserve penalized the bank $165 million for these violations, since it also has jurisdiction over the bank.
Then there’s the violations of economic sanctions. The bank’s $660 million in unreported transactions with clients in Iran, Sudan, Libya and Cuba—all countries under the yoke of US economic sanctions—earned it a fine of $375 million. The Office of Foreign Assets Control uses regulatory guidelines (pdf) to assess these fees; long story short, there’s a maximum fine of $250,000 per transaction, depending on its size and how egregiously the law was violated. This fine will be covered by the disgorged profits paid to the DOJ, so that’s something of a break for the bank.
Was HSBC “too big to jail”? While the Justice Department is focused on enforcing the law, the Treasury is also worried about the financial system as a whole. Dealbook reports that, according to unnamed sources, financial regulators cautioned Justice that a full-on indictment of the bank, and a subsequent guilty plea, would cut off access to certain investments, tarnish its reputation, and perhaps cost it its charter to operate in the US. In public, a Treasury official denied any such interference, and Breuer told Bloomberg that while “collateral consequences” to innocent bank employees, counterparties and customers were considered, the bank’s “excellent” cooperation with the investigation was a larger mitigating factor. The ultimate decision to go with a deferred-prosecution agreement was a middle road between an indictment and an out-of-court settlement.
But shouldn’t someone go to jail? While senior management at the bank, and the employees involved, have lost their jobs, they won’t face criminal charges. Prosectors say it’s very hard to prove intent in white-collar crime cases—they have to prove not only the breach of conduct, but also that the person intended to break the law. The former is fairly easy; the latter is much harder, especially when individual violations took place over years, with different individuals, mostly mid-level employees, involved. Meanwhile, CEOs, where the buck presumably stops, can obtain the best legal defenses arguing a lack of knowledge or criminal intent. Sarbanes-Oxley, the accounting law passed after the Enron and Worldcom scandals, forces top managers to take responsibility for their books, cooked or otherwise, by signing off on financial reports; however, there isn’t a similar mechanism for compliance systems.
So what’s the point? The idea is to send a message to executives at financial firms: If you don’t take regulations seriously, it’ll cost you your job and a lot of money. Critics of the deal say it’s a slap on the wrist that won’t deter other banks from laundering money. It’s safe to say that financial institutions doing business with shady clients without reporting it to the government aren’t going to be quaking in their boots. But once you add legal fees, public embarrassment and years of depositions and investigation to the fines themselves, the cost-benefit analysis might tip the scale toward good behavior.