U.S. prosecutors are considering a criminal charge against a unit of HSBC Holdings Plc related to conduct on its foreign-exchange desk, according to two people familiar with the matter, imperiling an earlier deal that let the bank avoid prosecution.
The Justice Department has already charged two people who were on the bank's foreign-exchange desk with improper trading and is asking whether the bank's internal review of that trading this year should have resulted in disciplinary action, the people said.
Prosecutors' fresh investigation of HSBC brings them closer to a step that has often been threatened but rarely taken -- tearing up a deferred-prosecution agreement if a company fails to walk the road of reform laid out by the Justice Department.
HSBC is essentially on probation: It admitted in 2012 that it helped Mexican drug cartels launder money and did business with Iran and other sanctioned nations. To avoid charges, it signed the so-called DPA, which required it to improve its internal controls and submit to an outside monitor.
If the Justice Department determines that the bank broke U.S. law after it entered into the agreement, it could invoke a section of the deal that says HSBC could be held responsible for the conduct it admitted to in 2012. Such a cascade of events could lead to a conviction in the laundering and sanctions case, threatening the bank's ability to move beyond its legal troubles.
HSBC declined to comment. But last year Rob Sherman, a spokesman for the bank, said, "We are continuing to meet all of our obligations under our deferred-prosecution agreement and are making steady progress" toward putting in place a strong and lasting money laundering and sanctions compliance program.
The Justice Department's 2012 decision to defer prosecution was assailed from the start by critics including Sen. Elizabeth Warren, a Democratic member of the Senate Banking Committee, who said it was wrong for HSBC to avoid charges after admitting to doing business with dangerous drug cartels and outlaw states.
The Republican chairman of the House Financial Services Committee, Rep. Jeb Hensarling, in July criticized former Attorney General Eric Holder for first suggesting to lawmakers that HSBC was too important to the global economy to prosecute and then walking back that claim.
As part of the 2012 agreement, HSBC paid $1.9 billion, a record penalty at the time, and pledged to cooperate with Justice Department probes for five years. In doing so, the bank was spared the stigma of a criminal record in the U.S. -- and the threat that it might lose access to some of its most lucrative institutional banking activities in the world's largest economy.
The subject of HSBC's deferred-prosecution agreement hasn't been raised formally among the various sections of the Justice Department that were involved in the 2012 settlement, including the Brooklyn U.S. attorney's office and the asset forfeiture and money laundering section, according to the people familiar with the matter. Any decision on a criminal charge against the bank would eventually be discussed with prosecutors in those units, one of the people said.
A Justice Department spokesman, Peter Carr, declined to comment.
The discussions about whether to file a criminal charge against HSBC started with a group of prosecutors who brought the fraud case in July against the former head of HSBC's foreign-exchange cash trading in London, Mark Johnson, and a former colleague, Stuart Scott, the people familiar with the matter said. The men were charged with conspiracy and wire fraud stemming from a foreign-exchange transaction in 2011 in which they allegedly manipulated prices to help the bank profit at their client's expense.
Johnson has pleaded not guilty. "We expect Mr. Johnson to be vindicated in court," said his lawyer, Frank Wohl. A lawyer for Scott declined to comment for this article, but last month his lawyers said that their client denied the accusations.
Prosecutors will consider many factors before deciding whether to file a criminal charge against the bank in the currency case, the people familiar with the matter said, including the severity of the conduct on the foreign-exchange desk and the extent to which the bank moved to address it.
A significant argument against charging the bank is that the foreign-exchange conduct on which the charge would be based appeared to be a one-time event that has not been linked to a wider pattern of behavior, several people familiar with the matter said. Also, the conduct on the foreign-exchange desk predated the 2012 agreement. Justice Department leaders have said that a deferred-prosecution pact should be overturned only after significant misconduct.
But prosecutors are concerned that a bank that had barely escaped criminal prosecution and was operating under an onerous monitorship didn't discipline the principal foreign-exchange trader involved in the conduct outlined in the complaint against Johnson and Scott, the people familiar with the matter said.
A decision to tear up the agreement wouldn't be entirely novel. Last year, the Justice Department voided a similar pact with UBS Group AG after the bank acknowledged unlawful conduct on its foreign-exchange desk. In 2012, UBS signed a non-prosecution agreement related to accusations that it and other banks attempted to rig benchmark interest rates that affected trillions of dollars of derivatives and loans.
Because Zurich-based UBS was the first bank to self-report its role in colluding to manipulate foreign-exchange rates, it was granted immunity from prosecution on antitrust grounds. Even so, Leslie Caldwell, chief of the Justice Department's criminal division, decided that the bank's conduct in the foreign-exchange matter was serious enough to justify voiding the earlier non-prosecution agreement, people familiar with the matter have said.
A UBS spokesman, Gregg Rosenberg, declined to comment.
In HSBC's case, if prosecutors determine that the bank should be held responsible for Johnson's alleged misconduct, then the bank could be charged alongside him, the people familiar with the matter said. Any unlawful activity by the bank after 2012 would breach the terms of the agreement.
It would be comparable to an individual who, while on parole for a previous crime, committed a new offense. In that scenario, the defendant could be charged with two crimes: the new offense, and the crime of violating the terms of his probation.
Law Firm's Review
Johnson's alleged infractions occurred in 2011, before the government struck its deal with HSBC. But the bank engaged a law firm to scrutinize its foreign-exchange trading practices after revelations that global banks had been distorting exchange rates in ways similar to the manipulation of interest rates.
Cleary Gottlieb Steen & Hamilton LLP was hired to conduct the review. The law firm has been working with authorities, including the Justice Department, on HSBC's behalf since late 2013, according to another person briefed on that matter. Early this year, the law firm provided information about the Johnson trades.
In the law firm's judgment, the conduct wasn't illegal, the person said. HSBC management apparently agreed, since Johnson was being transferred to a new job in the U.S. at the time of his arrest. Prosecutors in the U.S., however, came to a different conclusion, leading to the charges against Johnson.
A spokesman for Cleary Gottlieb didn't immediately respond to a request for comment.
Call for Cooperation
In public appearances, Caldwell, chief of the Justice Department's criminal division, has broadcast her willingness to walk away from deferred-prosecution agreements when the defendants violate the terms.
In a speech to a law group at New York University in April 2015, she said, "Let me be clear: the criminal division will not hesitate to tear up a DPA or NPA and file criminal charges, where such action is appropriate and proportional to the breach."
If the prosecutors in the current case and those from the 2012 settlement agree to file a criminal charge against HSBC and abandon the DPA, they will have to notify the bank and give it a chance to respond, according to the terms of that settlement. As was the case with UBS, lawyers for HSBC are also likely to appeal any such decision to Caldwell, who had the final say in last year's matter.
Because of the notoriety of the HSBC case, a decision to rescind the DPA might eventually be appealed to the deputy attorney general, Sally Quillian Yates, and even to Attorney General Loretta Lynch, whose signature is on the original 2012 pact because she was the U.S. attorney in Brooklyn at the time.