[ by Melanie Gretchen ] HSBC Holdings Plc set aside a $700 million provision in July for any U.S. fines after a Senate Committee found it had given terrorists and drug cartels access to the U.S. financial system.  It may need at least that amount as Europe's largest bank by market value heads in to settle an investigation by U.S. regulators.  They charge that HSBC entered  into laundering funds of sanctioned nations including Iran and Sudan, according to two people with knowledge of the case.

"This is an epidemic of banks willfully, consistently violating economic sanctions.  It calls for more serious sanctions than a monetary fine for an individual bank that does nothing more than harm shareholders." -- Jimmy Gurule, a former undersecretary for enforcement at the U.S. Treasury, on sanctioned-nation money laundering.

Could Be a Record Win. CEO Stuart Gulliver said the $700 provision may increase.  However, that amount alone would set a new record for the largest U.S. settlement reached over such allegations.  [C-I Note: In June the biggest Dutch financial-services company, ING Groep NV, paid $619 million in penalties and forfeitures.]

• HSBC handled so-called U-turn transactions through U.S. financial institutions that involved funds from Iran to non-U.S. banks, altering its transaction records to obscure information about its clients, according to U.S. Senate testimony in July.
• Some 25,000 transactions with Iran worth more than $19.4 billion were made with about 90% passing through the U.S., according to an audit by Deloitte LLP.  Senate investigators documented similar transactions with North Korea, Cuba, Sudan and Burma, which along with Iran are subject to sanctions administered by the Office of Foreign Assets Control.
• HSBC also dealt with Al-Rajhi Bank (RJHI), a Saudi Arabian client whose account the bank closed in 2005 over alleged terrorist financing before reopening it in 2007, according to the Senate testimony.
• From 2000 to 2009, HSBC gave its lowest risk rating to Mexico despite "overwhelming information" that it posed a high risk for drug trafficking and money laundering, Senate investigators wrote in their report.

Precedent. The multi-year probe into money-laundering have produced settlements with Lloyd’s Banking Group Plc, ABN Amro Bank NV, Barclays Plc, Credit Suisse Group AG, and ING.  In those cases, the banks agreed to pay or forfeit money under so-called deferred prosecution agreements that mandate improved compliance systems, to avoid criminal prosecution.

• Aside from ING’s record payment, ABN Amro paid $500 million in 2010, Barclays paid $298 million in 2010, Credit Suisse paid $536 million in 2009, and Lloyds paid $350 million in 2009.
• BNP Paribas and Credit Agricole have both disclosed probes into potential U.S. sanction violations in their annual reports since 2009, and added new disclosures in 2011 to indicate that outcomes would be difficult to predict.

Will payments or the forfeiture of money suffice at HSBC?  Former undersecretary Mr. Gurule thinks not:

"It’s time to reexamine the audit function of federal regulators.  It’s bad and the system is not working." -- Mr. Gurule, of U.S. regulations meant to enforce sanctions.

For further details, go to [Bloomberg, 8/24/12].