HSBC’s fine stands as the first step on a lengthy journey

HSBC is to pay a settlement of around $1.9bn (£1.2bn) under the terms of a deferred prosecution agreement reached with the US Department of Justice. It is the largest settlement of its kind to date, dwarfing fines paid by financial institutions like Standard Chartered and Barclays.

But why is it so big? Firstly, it reflects the fact that the negotiations required dealing with so many different bodies. The $1.9bn figure covers agreements with a number of regulators and prosecuting bodies, including the Federal Reserve, the US Treasury, the Office of the Comptroller of Currency and the Financial Crimes Enforcement Network.

But most importantly, the scale reflects the perceived egregiousness of the alleged violations – failures by HSBC to establish and maintain appropriate internal controls to prevent money laundering by drug cartels, terrorists and tax evaders. HSBC’s conduct was described by the Department of Justice as a “stunning failure of oversight”. The bank’s chief executive has issued a full apology.

A number of HSBC’s clients were also alleged to have connections with Mexican money-laundering fraternities, and Mexico was wrongly designated a “low risk” by the bank. HSBC itself admitted that its controls were inadequate at Grupo Financiero Bital, a Mexican lender acquired by the bank in 2002.

A report, produced after a US Senate enquiry into the alleged failures, indicated that HSBC had failed to apply appropriate controls relating to cash transactions totalling $15bn over three years. It also stated that the bank’s compliance units were inadequately staffed and had high staff turnover. Maintenance of appropriate compliance systems is at the heart of protecting the integrity of the banking industry. It is the principal means by which financial institutions are supposed to ensure that they are not used as a means for laundering criminal property.

But it won’t end here for HSBC. Under the terms of the deferred prosecution agreement, the charges – including wilfully failing to maintain an anti-money laundering program and wilfully failing to conduct due diligence on its foreign correspondent affiliates – have been deferred in exchange for an acknowledgement of a need for a change its behaviour.

As part of the settlement, HSBC has agreed that an independent monitor will review and report on the development of its compliance procedures over the next five years. The bank has also implemented significant changes in its leadership, hiring a former US Treasury Department official as its chief legal officer.

While this may be sufficient to satisfy US regulators, the bank will also have to manage its relationship with the FSA. The British regulator has already proposed changes to HSBC’s monitoring structures, and has said it will be supervising compliance carefully. HSBC faces a long journey towards dealing fully with the implications of its record fine.

David McCluskey is a partner at Peters & Peters Solicitors.