HSBC Holdings PLC (HBC) said Tuesday that it reached a $1.9 billion settlement with U.S. state and federal authorities related to a money laundering investigation of the British bank. A deal with British regulators is also expected to be reached in the near term, according to HSBC. That deal with the United Kingdom Financial Services Authority will not include any financial penalties, but is meant to see HSBC tighten it compliance and be subject to greater monitoring in the future.
The U.S. penalties are broken down into approximately $1.25 billion in forfeiture of ill-gotten gains and about $655 million in civil penalties. The surrendering of the $1.25 billion is the largest penalty in history in a bank case.
Amongst other things, the federal probe focused on transfers of billions of dollars on behalf of nations, such as Iran, that could be linked to terrorist activities and monies transferred through U.S. banking systems belonging to Mexican drug cartels.
As part of the settlement, HSBC, the biggest bank in Europe by market value, will avoid further prosecution from the U.S. Department of Justice (known as a “deferred prosecution agreement”) if it meets criteria with reforms strengthening its internal controls to prevent any similar future events. The company has already taken numerous steps, including hiring Bob Werner, a former Treasury Department official, for a new role as Head of Group Financial Crime Compliance and Group Money Laundering Reporting Officer.
HSBC has disclosed that it has earmarked about $1.5 billion to meet the required business reformations.
The U.S. government also faces scrutiny in light of the money laundering activities as the report says that they knew about deficiencies in HSBC’s systems that allowed for the transactions to take place, but took no definitive action to see that the weaknesses were eliminated.
Stuart Gulliver, Group CEO of HSBC, said, “We accept responsibility for our past mistakes. We have said that we are profoundly sorry from them, and we do so again.” The chief executive also pointed-out that changes have been made and that the company is “fundamentally different” now compared to the organization that made those mistakes.
HSBC is not alone in this matter as regulators are cracking down on money laundering schemes. Barclays (BCS), Credit Suisse (CS), Dutch Bank ING, Wachovia Bank and Lloyds Banking Group (LYG) have all been all paid settlements in the hundreds of millions of dollars in the past three years for transferring monies of companies or individuals not sanctioned by the U.S.
Yesterday, another British bank, Standard Chartered – the second biggest bank if Britain by market value – inked a $327 million settlement deal with U.S. regulators related to allegations of illegal banking activities with the Iranian government.
The $1.9 billion blow to HSBC may not have the impact on corporate valuation that one might expect. Early in November, the company said that it was expecting the investigation to cost at least $1.5 billion, which could soften the impact.
Shares of HBC closed Monday trading at $51.54, down 14 cents, or 0.27%. Across 2012, shares are ahead by 34 percent.