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HSBC Holdings (HBC) Gets Charged with Money Laundering Allegations

By: , dated July 24th, 2012

Over the past month, the financial sector has been plagued by scandals, with Barclays’ (BCS: Charts, News) Libor rate manipulation and rogue trading by JPMorgan (JPM: Charts, News) shaking the faith of nervous investors. This week, London-based banking giant HSBC Holdings (HBC: Charts, News) joined these disgraced giants, as the latest financial institution to become tainted by scandal from unscrupulous business practices. HSBC, the second largest bank and publicly traded company in the world, has been charged with allegations of lax controls against money laundering, as well as knowingly dealing with wealthy clients with ties to terrorist cells and drug cartels.

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HSBC operates 7,200 offices across 85 countries, serving 89 million customers. Half of its business is headquartered in Europe, with the remaining half split between Asia and the Americas. The ongoing investigation, spearheaded by the U.S. Justice Department, reportedly consists of two criminal investigations into money laundering and tax evasion charges. The Office of the Comptroller of the Currency (OCC), which was tasked with overseeing these indiscretions, has also been accused of “systemic weakness” by the U.S. Senate for overlooking HSBC’s fundamentally weak anti-laundering procedures.

Between 2005 and 2010, 17,000 “potentially suspicious” alerts occurred at HSBC, with over $15 billion being moved in bulk-cash transactions with no anti-laundering controls enacted. During this time, 85 incidents were red-flagged as serious violations. However, the OCC didn’t enforce any degree of regulation against HSBC during those five years. Despite having a global workforce of over 16,000, HSBC only employed 200 workers as its compliance staff to ensure that the bank was following anti-laundering regulations. The bank cites the small size of its compliance staff as a “cost-cutting measure.”

HBMX, the bank’s Mexican arm, has also been charged with serious allegations. Despite only being the 5th largest bank in Mexico, over $7 billion was exported from HBMX to HSBC’s U.S. banks between 2007-2008. At the time, both American and Mexican officials expressed concerns that the volume of transactions was so high that it could only have included illegal drug money being laundered by cartels. In addition, HBMX has 50,000 clients using HBMX as a shell account for real accounts in the Cayman Islands. Meanwhile, 75% of HBMX accounts had incomplete client information, while another 15% had no account holder information at all.

Between 2001 and 2007, HSBC’s U.S. arm made 28,000 transactions with countries the U.S. government currently has sanctions against, with 25,000 of them with Iran. Two HSBC accounts in the U.K. were also found to be opened by the Taliban and associated organizations. Between 2006 and 2010, HSBC also sold $1 billion in U.S. dollars to Al Rajhl, a Saudi Arabian bank blacklisted by the international community for its alleged ties to terrorism. HSBC’s compliance staff was reportedly told to look the other way by an HSBC official, due to the revenue that Al Rajhl brought to the bank. An additional 2,000 U.S. HSBC accounts were opened by “bearer-share” corporations, with no true record of ownership.

HSBC had already made promises to reform its anti-laundering efforts in 2003, when it was first investigated for “suspicious transactions.” This week, in front of a Senate committee, HSBC executives made similar promises. The bank’s head of compliance also resigned this week.

Shares of HSBC have slumped 5% over the past month, but the stock has held up better than its battered peers in the financial industry. The stock is currently trading with a 0.94 price-to-book ratio with a forward P/E of 6.2, suggesting a possible bottom. Although the bank is highly exposed to Europe and Asia – two highly volatile markets – the current DOJ investigation is unlikely to permanently sink its shares. The stock pays a quarterly dividend of 45 cents – a 4.3% yield at current prices – a rarity in bank stocks these days.

Other News About HBC
HSBC’s Money Laundering Lapses
Has HSBC’s desire for revenue growth led it down a dark path?
Banking Suffers Another Blow as Scandals Pile Up
HSBC continues the streak of embarrassments for the banking sector.

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Leo Sun Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

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