UK And Japanese Banks Settle US Sanctions And Money Laundering Violations

Author:Mr Edward Krauland, Meredith A. Rathbone, Julia Court Ryan, Caroline G. Aiello, Charles J. Morris and Maury Shenk
Profession:Steptoe & Johnson LLP
 
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Introduction

On December 10, 2012, UK Banks HSBC and Standard Chartered Bank (SCB) entered into agreements with US enforcement authorities to settle civil and criminal charges relating to US economic sanctions, the Bank Secrecy Act, and the Foreign Narcotics Kingpin Sanctions Regulations. HSBC will forfeit a record $1.9 billion to US authorities, while SCB agreed to pay $327 million. Both have agreed to institute various compliance measures in their management and operations.

On December 12, 2012, the Bank of Tokyo-Mitsubishi UFJ, Ltd. (BTMU) agreed to pay $8,571,634 to settle potential civil liability for apparent violations of US economic sanctions.

The coordinated US enforcement actions highlight the importance of economic sanctions compliance to US foreign policy and national security interests. The HSBC, SCB and BTMU settlement agreements are discussed in detail below.

I. HSBC

US enforcement authorities recently announced coordinated settlement agreements with HSBC Holdings Plc (HSBC Holdings), HSBC Bank USA N.A. (HSBC USA), and HSBC North America Holdings (HNAH) to resolve allegations that inadequate compliance measures led to widespread sanctions and money laundering violations involving Iranian banks, Mexican drug cartels, and other sanctioned entities for more than ten years. To resolve the claims, HSBC will pay $1.9 billion in penalties to US authorities. The bank agreed to pay $1.256 billion in disgorgement to the US Department of Justice (DOJ), $375 million in civil penalties to the Department of the Treasury, Office of Foreign Assets Control (OFAC), a $500 million civil penalty to the Office of the Comptroller of the Currency (OCC), and a $165 million civil penalty to the Federal Reserve Board of Governors (Board of Governors). HSBC's OFAC penalty will be satisfied by payment to DOJ. The New York County District Attorney's Office (DANY) participated in the investigation and entered into a separate settlement. In addition, the UK Financial Services Authority has worked closely with US authorities on the investigation, but is pursuing a separate action.

Money Laundering-Related Violations

The DOJ criminal Information states that from 2006 to 2010, HSBC USA failed to dedicate adequate resources to its anti-money laundering compliance function and implement a compliance program capable of adequately monitoring suspicious transactions and activities among its affiliates. Under the Bank Secrecy Act (BSA), HSBC USA was required to establish and maintain an anti-money laundering compliance program that provided for: (1) internal policies, procedures, and controls to deter money laundering; (2) a compliance officer to coordinate and monitor BSA and AML compliance; (3) related training; (4) independent audit programs; and (5) due diligence policies, procedures, and controls reasonably designed to detect and report suspicious activity for correspondent accounts it maintained in the US for non-US persons.

Despite inherent money laundering risks associated with correspondent banking activities with affiliate HSBC Mexico, DOJ alleged that HSBC USA failed to conduct adequate due diligence on HSBC Mexico's operations as required by the BSA. Moreover, despite apparent awareness of narcotics-related money laundering risk associated with Mexican financial institutions, HSBC USA allegedly assigned HSBC Mexico its standard risk rating and neglected to monitor over $670 billion in wire transfers and $9.4 billion in US banknote purchases involving HSBC Mexico. In addition, it did not provide adequate staffing and other resources to maintain an effective AML program. As a result of these alleged compliance failures, HSBC USA laundered at least $881 million in Mexican drug cartel revenues through the Black Market Peso Exchange, a complex network designed to move cartel profits from drugs sold in the United States to foreign cartels.

DOJ alleged that HSBC Mexico did not maintain sufficient "Know Your Customer" (KYC) information, including addresses, reasons for maintaining US dollar-denominated accounts, and source of US dollars. HSBC Mexico executives also overruled recommendations from its AML committee to close accounts with suspicious activity, and failed to act on US and Mexican law...

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