United Kingdom Prudential Regulation Authority Issues Second Warning to HSBC Over Non-Financial Risks

On November 7, Bloomberg reported that the United Kingdom Prudential Regulation Authority (PRA) warned HSBC Holdings, for the second year in a row, that HSBC has not done enough “to tackle concerns about how the bank handles risks including financial crime and staff conduct.”  In a conference call this week, Samir Assaf, CEO of HSBC Global Banking & Markets, reportedly told executives that the PRA, an arm of the Bank of England, “informed the firm that it was making insufficient progress on non-financial risks.”  As the article explained, non-financial risks “are unrelated to credit quality and include problems such as financial crime, staff misconduct, compliance breaches and issues related to a bank’s culture.”

Assaf also stated, according to Bloomberg, that the PRA has issued the warning last year and this year.  He considers it “an emergency requiring attention.”  Accordingly, HSBC Global Banking & Markets is scheduling “a summit of top executives this month to discuss the problems.”

One measure of the concerns facing HSBC is a confidential survey that the United Kingdom Banking Standards Board (BSBP) conducted in 2019.  The survey results showed — as Bloomberg reported based on nonpublic documents it reviewed — that “out of seven investment banks, HSBC’s ranked last when staff were asked about colleagues ‘acting honestly and ethically,’ ‘flexing ethical standards to make career progression’ and ‘turning a blind eye to inappropriate behavior, according to documents seen by Bloomberg.

N.B.:  Notwithstanding the other challenges that HSBC faces as it seeks to reshape its business, Assaf is right to consider the PRA’s more recent admonition an emergency.  For most of the past decade,  Bloomberg noted, “conduct issues have bedeviled HSBC,” as the following examples indicate:

  • 2012: HSBC paid nearly $2 billion in settlements with U.S. authorities in part for failing to maintain an effective anti-money laundering program and to conduct appropriate due diligence on its foreign correspondent account holders. Its settlement with the U.S. Department of Justice included a five-year obligation “to undertake enhanced AML and other compliance obligations and structural changes within its entire global operations to prevent a repeat of the conduct that led to [the U.S. investigation and] prosecution.”
  • 2017: HSBC entered into a civil settlement with the Justice Department, requiring it to pay $2.1 million, to resolve a complaint that it had submitted dozens of loans for payment on Small Business Administration (SBA) guarantees without disclosing to the SBA that those loans had been identified as fraudulent or potentially fraudulent.
  • 2018: HSBC Holdings entered into a deferred prosecution agreement with the Justice Department, requiring it to pay to pay a $63.1 million criminal penalty and $38.4 million in disgorgement and restitution, to resolve charges that HSBC had engaged in a “front-running” fraud scheme to defraud two bank clients.
  • 2018: HSBC agreed with the Justice Department to pay $765 million as a civil penalty, to settle claims related to its packaging, securitization, issuance, marketing and sale of residential mortgage-backed securities between 2005 and 2007.
  • 2019: HSBC’s Swiss private banking unit reached an agreement with Belgian prosecutors, requiring it to pay almost $336 million, to resolve prosecutors’ allegations “that HSBC helped and encouraged the avoidance of the [European Union] savings tax by creating offshore companies in Panama and other tax havens in the Caribbean for wealthy Belgian clients ‘with no other purpose but to hide money’.” Prosecutors reportedly stated that HSBC “has now made and committed to a significant overhaul of its practices to counter financial crime risks.”
  • 2019: The Hong Kong Securities and Futures Commission (SFC) imposed on HSBC a $2.1 million fine (based in part on HSBC’s self-reporting to the SFC and taking remedial action), for non-compliance with telephone recording requirements under the Code of Conduct governing SFC-registered entities.
  • 2019: HSBC Bank N.A. reached a settlement with the U.S. Commodity Futures Trading Commission, requiring it to pay a $650,000 civil penalty (reduced to reflect HSBC’s cooperation and remediation), for “failing to establish appropriate risk management systems for its swap activities or to properly report swap data in certain categories, for certain swap transactions, to a swap data repository.”

There is no question that global financial institutions face considerable challenges and costs in maintaining and improving effective financial-crimes compliance programs, and that even the best of those institutions sometimes run afoul of various statutory or regulatory requirements.  The range of criminal and civil sanctions imposed on HSBC, however, are at variance with HSBC’s professed aspiration “to set the industry standard for knowing our customers and detecting, deterring and protecting against financial crime.”

Such a statement can come back to haunt the bank unless it takes prompt action to demonstrate that it has made meaningful progress across the board on non-financial risk areas, including anti-bribery and corruption, anti-money laundering, and sanctions.  When HSBC is already down two strikes to the PRA, it would do well to avoid a third.

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