HSBC executives probably hoped that paying a record $1.9 billion fine last year would close the books on its money-laundering violations.
But a former employee is alleging that the bank continued to break anti-money-laundering rules even as it claimed to be reforming its controls, and he has asked federal authorities to open a new investigation.
Everett Stern, who worked in HSBC Bank USA's anti-money-laundering division in 2010 and 2011, unveiled the allegations Thursday at a protest against the bank in New York. In March, Stern and the law firm Berger & Montague submitted his evidence which includes internal emails and other documents he collected while working at the bank to the Securities and Exchange Commission, the Justice Department and banking regulators, claiming that the bank continued to flout money laundering rules while he was employed there.
"What I am asking is for the United States government to reopen the case against HSBC, and not let the bank walk after sponsoring terrorism," Stern said during his speech at Thursday's protest, which was organized with the assistance of Occupy Wall Street. The rally later moved to the entrances to HSBC's New York offices, where protestors held signs that read "Too Big to Jail" and "Gangster Bankers."
In December, HSBC agreed to a settlement with five federal agencies under which it would pay $1.9 billion in penalties and would improve its anti-laundering controls. In exchange, the government agreed to defer criminal prosecution of the bank and its executives for five years, after which the charges would be dismissed if there are no further violations. Under the agreement, HSBC admitted the accuracy of the charges against the bank and its officers, including anti-money-laundering and sanctions violations.
A July 2012 congressional report claimed that from approximately 2001 through 2010, HSBC's U.S. bank circumvented anti-laundering controls and cleared billions of dollars of transactions connected to sanctioned entities including Mexican drug cartels and terrorist groups.
But while HSBC's deferred-prosecution agreement refers to the bank's conduct in 2010 and earlier, Stern claims he saw gross anti-laundering violations through the end of his employment in October 2011. The bank could still be prosecuted for these later violations, which would not be covered by HSBC's settlement, Stern claims in his submissions to federal authorities.
An SEC spokesman said the agency cannot comment on whether is investigating these claims. A Justice Department spokeswoman declined to comment on Stern's allegations.
HSBC responded to a request for comment about Stern's allegations with an emailed statement: "HSBC has made and continues to make substantial investments in people and systems to further improve compliance, as well as undertaking a comprehensive overhaul of HSBC structure, controls and procedures. In the U.S., this significant investment and overhaul started more than three years ago. We have had and continue to have very high quality control and assurance procedures."
HSBC hired Stern as an anti-laundering officer at its Newcastle, Del., office in October 2010, shortly after the Office of the Comptroller of the Currency issued a consent order requiring the bank to fix deficiencies in its anti-laundering program.
"I was part of the team that was supposed to fix the problem," Stern said.
Instead, he said, he found that his supervisors at HSBC seemed committed to maintaining lax controls, while addressing the OCC's concerns in a purely cosmetic way. Stern claims that, after HSBC sold its credit-card business to Capital One Financial (COF) in 2011, it rehired hundreds of former debt collectors from that business as anti-laundering officers even though they lacked compliance experience.
Stern's submissions allege that the bank systematically evaded internal controls to permit transactions to countries under sanction or entities under suspicion of terrorist ties. Stern said that HSBC employees would intentionally misspell the names of customers that were on a Treasury Department list of entities subject to controls, in order to avoid triggering internal alerts. Bank employees would add periods or dashes in the middle of a customer's name, Stern said, to avoid tripping the alerts.
"Because the [internal filter] only reads exact names and does not pick up misspellings or any slight variation in the name, these illegal money transfers were allowed to go through," Stern's submissions claim.
This technique, Stern claims, allowed "hundreds of millions" of dollars to move between Kairaba Supermarkets and Shopping Centers, a Gambian firm that is on the Treasury Department's list of sanctioned companies, and Tajco, a business in Beirut, Lebanon, whose owners the Treasury has designated as financers of terrorism. When Stern brought these concerns to his superiors, he says, they were ignored.
Furthermore, he said the bank encouraged its employees to approve suspicious transactions with a minimum of investigation. In an internal email, Jeffrey Kraft, a former HSBC assistant director in the anti-money laundering department, praised the Delaware AML officers for clearing a large number of transactions that had generated alerts, and listed the employees who had closed the most alerts in the past week. Kraft, who is now senior anti-money laundering manager of compliance at TD Bank, declined to comment on the email.
Stern left HSBC after signing a settlement agreement over his allegations that the company retaliated against him. He then began working as a server at PF Chang's, before founding a private intelligence company, Tactical Rabbit.
"I went from working at a Chinese bank to working at a Chinese restaurant," he said.
Stern joined with Occupy Wall Street for Thursday's protest in order to bring attention to HSBC's misconduct, he says, even though, as a self-described conservative Republican, he does not sympathize with many of the movement's goals.
"At least they're the ones making signs and holding protests," he says.