LITTLE ROCK — The chief executive officer of international bank HSBC’s U.S. division and other bank leaders apologized Tuesday for lax controls that lawmakers say allowed Mexican drug cartels to launder at least $7 billion in cash.
Irene Dorner, president and CEO of HSBC Bank USA, said “we deeply regret and apologize” for the lapses. The bank’s U.S. division is among the top 10 banks operating in the United States with assets of about $210 billion. London-based HSBC is Europe’s largest bank.
A 335-page Senate report released Monday said HSBC has been used by Mexican drug cartels looking to get cash back into the United States. The report also said HSBC had handled cash for Saudi Arabian banks that needed access to dollars despite their terrorist ties and by Iranians who wanted to circumvent U.S. sanctions.
The report also said regulators at the Office of the Comptroller of the Currency ignored warning signs and failed to stop the illegal behavior at many points between 2001 and 2010.
“The problem here is that some international banks abuse their U.S. access,” Sen. Carl Levin, the Michi- gan Democrat who heads the Permanent Subcommittee on Investigations, said at the start of the hearing. “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.”
David Bagley, HSBC Bank USA’s chief compliance officer said during his testimony that he is stepping down from that position but will remain employed by the bank. He has been the head of compliance since 2002. He said he had told HSBC senior management “that now is the appropriate time — for me and for the bank — for someone new to serve as the head of group compliance.”
Bagley and other current and former executives said they weren’t fully aware of illicit transactions flowing through the bank.
Senators expressed skepticism that they didn’t know about problems that persisted for seven years.
Bagley said he lacked full authority over the bank’s farflung affiliates, which each had its own compliance officer. HSBC, with net income last year of $16.8 billion, operates in about 80 countries.
“HSBC has fallen short of our own expectations and the expectations of our regulators,” Bagley testified.
The executive who headed HSBC’s Mexican affiliate in 2007 and 2008 said he tried to clean up deficiencies he found in the operation. The Senate report said cash from drug cartels was deposited in the Mexican bank and then transferred to HSBC branches in the U.S.
“I believe that we made real progress at HSBC Mexico during my short tenure,” Paul Thurston told the panel. However, he added, “We know we should have done this better, sooner.”
The executives said the bank has changed its policies and corporate culture to prevent illicit use of the bank. The bank changed its senior management last year.
Levin challenged Thurston. “This is something that people knew was going on at that bank,” Levin said. “Why did people allow it to continue?”
Thurston said the Mexican bank, which HSBC had acquired in 2002, had been a “fast-growth” bank that lacked controls against money laundering.
Sen. Tom Coburn of Oklahoma, the panel’s senior Republican, said he found it hard to believe that HSBC executives didn’t know what was going on and accused the Office of the Comptroller of the Currency, the federal agency supervising the bank’s U.S. operations, of being a “lapdog.”
“Its record of enforcement at HSBC resembles a lapdog rather than a watchdog that we sorely need,” Coburn said.
Levin also blasted the Office of the Comptroller of the Currency, saying the agency “tolerated” HSBC’s weak controls against money laundering.
Stuart Levey, a former high-ranking Treasury Department official who joined HSBC in January as chief legal officer, said the bank in April put in new stricter oversight standards that apply to all its affiliates.
Levin said HSBC’s new policies “are all good steps.” However, he said, while apologies are welcome, “accountability ... is essential as a deterrent and that accountability has been missing.”
He cited instances in past years in which HSBC — after being sanctioned by regulators — had promised to fix deficiencies but didn’t carry through.
Levin said HSBC needs to identify which of its affiliates pose a high risk of problems and put them under close monitoring. The bank should consider closing the account of its Mexican affiliate, he said.
Drug violence had killed more than 47,500 people in Mexico since Mexican President Felipe Calderon started an offensive against Mexico’s cartels when he took office in December 2006.
Mass killings continue in parts of northern and western Mexico. In June, members of a drug cartel dumped 49 bodies without heads, hands or feet on a highway near the northern industrial city of Monterrey.
HSBC also should close its accounts with banks suspected of providing funding to terrorist groups, Levin said.
Some HSBC bank affiliates skirted U.S. government bans against financial transactions with Iran and other countries, according to the subcommittee’s report. And HSBC’s U.S. division provided money and banking services to some banks in Saudi Arabia and Bangladesh believed to have helped fund al-Qaida and other terrorist groups, the report said.
Tuesday’s hearing is unlikely to be the end of HSBC’s problems. The bank has disclosed in regulatory filings that the issues with money laundering also are being investigated by the U.S. Department of Justice and could lead to criminal charges and “significant” fines, which analysts have said could reach $1 billion.
The Justice Department said it is conducting a criminal investigation into HSBC’s operations but declined to confirm that the bank is in settlement talks.
Thomas Curry, comptroller of the currency, who appeared before the panel, agreed with Levin that his agency was too late in stopping HSBC.
“The [Office of the Comptroller of the Currency] could have, and should have taken this action sooner,” Curry said.
He said he will make changes recommended by the subcommittee to ensure that banks comply with antimoney laundering requirements.
Information for this article was contributed by Marcy Gordon of The Associated Press; by Nathaniel Popper of The New York Times; and by David Voreacos and Jesse Hamilton of Bloomberg News.
Front Section, Pages 1 on 07/18/2012