More than two years after agreeing to pay the largest money laundering fine in history, HSBC Holdings still has serious weaknesses in its anti-laundering controls, the Justice Department said Wednesday.
Stubborn resistance to reform and inefficient technology have slowed improvement, said Michael Cherkasky, an independent monitor of the London company's efforts to comply with the
record $1.9 billion settlement it reached with federal authorities in 2012. Justice filed a summary of his latest report in federal court Wednesday.
HSBC is expected to remove Patrick Nolan, a top U.S. executive, for trying to interfere with reforms. Thesummary did not name him, but it said that the bank's North American head of global banking and markets a role Nolan holds, according to the company website will be reassigned after he tried to tone down a critical report from the company's internal auditor. An HSBC spokesman declined to comment on the anticipated change.
While HSBC has made significant improvements to its compliance program, progress has not come fast enough, Cherkasky said, according to the summary. Cherkasky's full report, which is not public, was filed in January.
"Overall, the monitor believes that HSBC Group has made progress in developing an effective [anti-money-laundering] and sanctions-compliance program," Justice Department officials wrote. "However, in certain instances, the monitor believes that HSBC Group's progress has been too slow."
Under a deferred-prosecution agreement announced in late 2012, the bank agreed to put an effective AML system in place and pay $1.9 billion in fines in order to avoid criminal charges for laundering billions of dollars for Latin American drug cartels and others.
The company, in an emailed statement attributed to HSBC Chief Legal Officer Stuart Levey, said it was making progress and complying with the settlement.
"We continue to meet all of our obligations under the [deferred-prosecution agreement], and remain firmly committed to putting in place a robust AML and sanctions-compliance program," the statement read in part.
The monitor's report raises fresh questions about HSBC's compliance efforts, as well as the effectiveness of so-called deferred-prosecution agreements, under which a company agrees to fines and reforms in order to avoid prosecution. The Justice Department's settlement with HSBC has been heavily criticized for allowing the company to avoid prosecution despite the government's claims that it facilitated the transfer of billions of dollars to countries under sanction, terrorist groups and Mexican cartels.
HSBC's compliance efforts came under scrutiny again earlier this year when a group of investigative journalists reported that the company's Swiss unit had helped wealthy clients dodge taxes on a massive scale before 2007. And Chief Executive Stuart Gulliver came under fire personally after it was reported that he had received his pay in a Swiss account through an anonymously registered Panamanian company.
Since Gulliver became CEO in 2011, the $2.7 trillion-asset company has invested massively in improving its internal systems an expensive effort that has limited its profitability. HSBC said in February that it had nearly 25,000 employees handling risk management, almost 10% of its entire work force.
The Justice Department summary issued Wednesday suggests more investments are coming. The monitor flagged the bank's compliance technology as a "material weakness" because of its "fragmentation and lack of connectivity."
The bank's patchwork internal systems make it difficult to collect customer information and monitor suspicious activity, the report said. The bank has committed to improving these systems, but the fix will be "difficult, expensive and time-consuming," the report read.
The monitor also detailed HSBC's efforts to transform its compliance culture a fitful effort that has, at times, held back reform, according to Cherkasky.
The summary said that HSBC's top executives have "convincingly accepted responsibility" for improving the AML systems, but that pockets of resistance remain including in the company's U.S. operations.
"Notwithstanding the attitude of HSBC Group's senior executives, the monitor observed other indicators that some of HSBC Group's historical cultural deficiencies continue to pervade its operations today," the summary said.
A particular problem was the U.S. global banking and markets business, which "demonstrated a deficient culture that had not fully accepted the role and legitimacy of the internal-audit and control functions," the Justice Department officials wrote.
The head of that business will be reassigned and have his 2014 bonus cut by 50% after he "inappropriately pushed back" against a negative internal report on the company's compliance with "know your customer" rules. Another unnamed executive will also have his bonus cut over the incident, the summary said.
Nolan has been with HSBC since 1987, and his previous roles include global credit and lending head and head of U.K. corporate and institutional banking. Regulators still need to approve his replacement, and the bank has not decided where to reassign him yet, according to the summary.
After the pushback incident, Gulliver emailed all senior HSBC employees to emphasize that they must cooperate with auditors, even when they are critical, according to the Justice Department report.
"[E]mployees must respect internal audit's independent opinions," the email read in part. "Rudeness, cynicism, or any attempt to intimidate are not acceptable and will not be tolerated."