Wednesday, December 12, 2012


The United States Department of Justice Seal

On Tuesday, the US Department of Justice announced the civil settlement of a major pattern of criminal misconduct by HSBC Holdings plc and HSBC Bank USA for about $1.9 billion in fines and forfeitures. No criminal action will occur; instead under a deferred prosecution agreement HSBC promises to stop violating the law and allow compliance monitoring for 5 years.

"A four-count felony criminal information was filed today in federal court in the Eastern District of New York charging HSBC with willfully failing to maintain an effective anti-money laundering (AML) program [and] willfully failing to conduct due diligence on its foreign correspondent affiliates . . . . HSBC has waived federal indictment, agreed to the filing of the information, and has accepted responsibility for its criminal conduct and that of its employees." 

HSBC engaged in horrendously criminal conduct: "HSBC Bank USA violated the [Bank Secrecy Act] by failing to maintain an effective anti-money laundering program and to conduct appropriate due diligence on its foreign correspondent account holders.  The HSBC Group violated the [International Emergency Economic Powers Act ] and the [Trading with the Enemy Act] by illegally conducting transactions on behalf of customers in Cuba, Iran, Libya, Sudan and Burma – all countries that were subject to sanctions enforced by the Office of Foreign Assets Control (OFAC) at the time of the transactions."

For example, HSBC processed "over $670 billion in wire transfers and over $9.4 billion in purchases of physical U.S. dollars from HSBC Mexico during this period, when HSBC Mexico’s own lax AML controls caused it to be the preferred financial institution for drug cartels and money launderers."

"A significant portion of the laundered drug trafficking proceeds were involved in the Black Market Peso Exchange (BMPE), a complex money laundering system that is designed to move the proceeds from the sale of illegal drugs in the United States to drug cartels outside of the United States, often in Colombia."

According to DOJ: "In addition to forfeiting $1.256 billion as part of its deferred prosecution agreement (DPA) with the Department of Justice, HSBC has also agreed to pay $665 million in civil penalties – $500 million to the Office of the Comptroller of the Currency (OCC) and $165 million to the Federal Reserve – for its AML program violations."

As Professor Ellen Podgor argues, deferred prosecution agreements have their place, and they certainly are a tool for positively influencing corporate behavior. But, I fundamentally agree with Bill Black that the failure to indict the individuals who committed these serious felonies in the financial sector is ill-founded: "It's mind-boggling how they think you can have a financial system and allow this kind of impunity." HSBC "put the world at enormous risk." Corporations act only through agents; necessarily the charges against HSBC mean that numerous individuals participated in (and conspired to commit) felonies.

The failure to indict any individual in the face of HSBC's galactic criminality corrodes the rule of law throughout society and creates perverse incentives at the apex of our economy. After all when a corporation pays fines, it is innocent shareholders who pay. If senior officers and directors know they can fatten their compensation by generating illusory profits through criminal conduct at the expense of shareholders and the economy generally then the very viability of capitalism itself is at risk.

In Lawless Capitalism I argue that we have allowed those controlling the most wealth--like the megabanks--to rise above the law and escape traditional norms of criminal and civil accountability. The power of corporate and financial elites to subvert law and regulation drove the entire financial crisis of 2007-2009.

The HSBC catastrophe proves once again that the US (and capitalism generally) desperately requires a sturdier economic rule of law. While I articulate a number of mechanisms in Lawless Capitalism for imposing a real economic rule of law in the US, it must start with holding all economic actors to the same criminal standards (based upon a reasonable assessment of social costs) regardless of wealth or employment with a megabank.

There is no sound reason for failing to pursue criminals within the financial sector. The DOJ's decision to pursue HSBC through fines alone and allow individual crimes to go unpunished is certain to spawn more lawlessness. According to the New York Times the reason authorities brought no criminal charges revolved around concerns about the stability of the global financial system; yet, nothing can undermine confidence in the financial system and destroy capitalism with more speed and certainty than an official green light for even heinous financial crimes. The rule of law is dying in modern America as our corrupt governing elite arrogate more and more legal indulgences and prerogatives not available to all. The new potentates are now officially immune from white collar crime.


NY Times editorial 12/12/12: "IT IS A DARK DAY FOR THE RULE OF LAW."


  1. BAnks that are too big to fail and too big to jail is a recipe for economic disaster. How is it possible to distinguish the agents of HSBC who committed these crimes from the low level defrauders and financial crooks who, at least from time to time, see some jail time?

  2. This is all in line with the "race to the bottom" relaxing of fiduciary duties of large corporations. When the Enron scandal happened, there was a legal response, although arguably Sarbanes Oxley was gutted before it even was enacted, regulatory response has proved to be a step forward. Also, those responsible were held criminally accountable for their actions.

    Although that scenario was remarkably different than the one at hand with HSBC, what is amazing here is not a failure to convict those who are allegedly corrupt, but a failure to either conduct a competent investigation or an unwillingness to do so. The disdain one has for the accused money laundering is beyond the pale! the effects of the Mexican drug trade has proven to be disastrous for the Mexican population, Mexican government, and the United States (there is an opening to discuss the terrible failure of the war on drugs here, but that is tangential.)

    The scale of arrogance of the willingness to commit such acts is only matched by the scale of disregard for the law. Is it possible that these organizations are so large that they think they are above the law, or, does the consolidation of money and power that these massive organizations have truly have our government on a leash?

    The effects on the American public are horrible as well, as we seen what happened when massive financial institutions run freely in our last financial crisis. As impossible as it may sound, Glass Steagall-or something like it-needs to be put back in place.

    I look forward to seeing what Ramirez proposes in his book, this is out of hand.