[ by Melanie Gretchen ]

The investigation into money laundering at HSBC has taken ahold of the British bank – and isn't letting go anytime soon.

The holding company continues to brace itself for damages related to a money laundering inquiry in the United States.  While negotiating with American authorities, the British bank has been setting aside billions of dollars in anticipation of findings by the U.S. government.  What may be driving HSBC: the prospect of criminal and civil charges in the United States, in addition to large fines.

Cash on Hand. Earlier this year, a United States government report accused the bank of helping clients to illegally bring money linked to drug trafficking activities – and from Middle Eastern banks with ties to terrorists – into the United States.  This is what HSBC has put aside a combined $1.1 billion for expenses connected to a continuing money-laundering investigation and a settlement over selling inappropriate financial products.  This includes a further $800 million provision to cover potential fines, settlements and other expenses related to a money laundering inquiry in the United States and said it continued to negotiate with American authorities.

All told, the bank has earmarked $1.5 million to cover potential fines, settlements, and other expenses related to a money laundering inquiry in the United States, not including legal costs.  In addition, the bank has set aside an additional $353 million set aside to compensate British customers who were inappropriately sold payment protection insurance weighed on the bank's third-quarter results.

"We deeply regret what took place took place in the United States and Mexico. A number of people have left the bank and have had clawbacks against their compensation." -- HSBC's CEO, Stuart Gulliver, on a conference call on Monday.

Not a Minority Report. HSBC joins several British banks, which have come under criticism:

• The British bank Standard Chartered agreed to a $340 million settlement with New York State's top banking regulator after authorities claimed the bank had moved hundreds of billions of dollars in tainted money and lied to regulators
• Just last week, the Federal Energy Regulatory Commission recommended a $470 million fine against Barclays in connection to past energy trading activity in the firm's North American operations.  For its part, Barclays, which has 30 days to respond to the commission, has said it would defend itself against the inquiry.
• In June, Barclays agreed to a $450 million in June to settle accusations that it had tried to manipulate Libor
• Royal Bank of Scotland and Lloyds Banking Group have set aside more cash to reimburse customers who were inappropriately sold insurance products.

At HSBC, third-quarter results have reflected the bank's woes:

• net profit in the 3 months ended 9/30 fell to $2.8 billion compared to $5.5 billion in the third quarter of last year
• the bank incurred a quarterly charge of $1.7 billion on the value of its own debt.
• pretax profit in the third quarter more than doubled, to $5 billion slightly, excluding adjustments
• shares in HSBC fell 1.5% in afternoon trading in London on Monday

Nevertheless, the bank was optimistic about the recovery of the Chinese and Latin American economies in 2013, to boost the firm's performance.  One recent bright light included the rising performance of the bank's core Tier 1 capital ratio, a measure of a firm's ability to weather financial shocks, rose slightly in the quarter, to 11.7%.

For further details, go to [Dealbook, 11/5/12].