Smith: 2008 crash era liquidity funded by organised crime

HSBC and its US affiliate exposed the US financial system to money laundering, drug trafficking and terrorist financing risks due to poor money laundering controls an official probe found in 2012

February 12, 2015

World Finance speaks to Dr Benjamin Smith from the University of Warwick to see if, three years on, the banks have cleaned up their act.

World Finance: Benjamin, how did this scandal come to light in 2012, and how big a problem was it?
Dr Benjamin Smith: The Officer of the Control of the Currency in the US actually kind of knew about very poor compliance and regulation in HSBC Mexico for many years, and they’d warned them repeatedly on a pretty much annual basis and told them to clean up their act. But they did very little to enforce this.

However, by about 2010, HSBC had about a 17,000 alert on different customers that had had absolutely no compliance or regulation. The US OCC started to up its investigations. When it really exploded was when a plane stashed with cocaine was captured, and it transpired that it had been bought through an HSBC Mexico account.

World Finance: A lot of illegal funds came from Mexico. How did this work exactly?
Dr Benjamin Smith: HSBC bought a bank called Bital which was relatively notorious for its links to the cartels. HSBC and the head of HSBC Mexico, a guy called Sandy Flockhart, did absolutely no investigations into the bank whatsoever.

HSBC and the head of HSBC Mexico, a guy called Sandy Flockhart, did absolutely no investigations into the bank whatsoever

They set up something called HSBC Cayman Islands, which was a dollar account. Now, what you could do it walk into an HSBC branch with a mass of dollars, put them into this HSBC Cayman Islands branch, it seems you didn’t have to give even a real name and address, and by I think 2010 there were around 50,000 clients holding $2.1bn in assets. 15 percent of these didn’t even have a file on them.

World Finance: Wow, well just how in bed were the banks with the cartels?
Dr Benjamin Smith: For example, Antonio Maria Costa, who was the head of the UN office on drugs and crime, claims that he’s seen evidence that during the crash of 2008. frankly the only liquidity in the market was the money from organised crime. His claim is that, in 2008, around £352bn worth of drug and organised crime money were absorbed into the system.

World Finance: So HSBC didn’t do anything wittingly illegal though, did they?
Dr Benjamin Smith: Given that I’m on TV, I’ll say no. At best then they were systematically incompetent, at worst they systematically ignored OCC compliance orders. None of the major players in HSBC, however, were ever prosecuted. In actual fact they’ve got off remarkably well and have very comfy jobs in the finance industry to this day.

For example, David Bagley, who was Head of Compliance and was massively incompetent, is now Head of Compliance at the Co-Op Bank in the UK. Sandy Flockhart, who was in charge of HSBC Mexico and made the purchase of Bital with no investigation into it, is now Chairman of a group called B and C. And Rona Fairhead, who is also being sued in a class action lawsuit in New York, is Head of the BBC.

World Finance: Following the probe, HSBC agreed to pay $1.9bn and enter into a five year deferred prosecution agreement to settle allegations including that it failed to catch at least $881m in drug trafficking proceeds laundered through its US bank. So three years on, and where does the bank stand now in regards to this?
Dr Benjamin Smith: Well it seems to be doing better, and the OCC alerts seems to have gone down radically, partly I imagine this is because they don’t want to incur another fine, and they’ve got rid of chronically incompetent people within their organisation, and given them to other organisations.

World Finance: Are there still weaknesses in the system where illegal proceeds can slip through?
Dr Benjamin Smith: In terms of banking, perhaps less so. So in 2010, Mexico actually set restrictions on dollar deposits, which seems to have gone a long way to eradicating this. However, there are other ways that one can launder money.

A year ago, 1000 police raided the garment district in Los Angeles and seized about $65m in cash and arrested about 10 people. According to the court document, the garment businesses were helping drug dealers ferry their proceeds from sales back to Mexico. Basically what would happen is a black market peso broker would contact Mexican importers who wanted to buy goods form these garment businesses within Los Angeles. The peso broker would then find the gang, which would pay the bill on behalf of the Mexican importer using dollars from drug trades.The importer then paid the broker in pesos. The broker took a cut and then passed it along the remainder back to the gangs.

World Finance: How is HSBC’s response of increasing its monitoring for money laundering affected its legitimate customers.
Dr Benjamin Smith: Those in Mexico probably have to go through the requirements that many of us would have to go through in a UK bank if we started to deposit large amounts of unclaimed for cash that’s not from our legitimate job.

This is somewhat problematic in Mexico because a) there is a very large informal cash economy, and secondly because much of this cash economy is actually in dollars because of remittances. There are about 11 million Mexicans within the US, many of whom do try and bring their cash back to Mexico.

World Finance: Money laundering is a problem all banks face and it seems that criminals are always one step ahead of the banks when it comes to this. So how do you say is ultimately responsible, financial institutions or governments?
Dr Benjamin Smith: The responsibility of both, but there is a degree of complicity involved, where I think governments realise that things like the market needs liquidity and liquidity can be garnered through the proceeds of organised crime. At the same time it seems that the bank turns a blind eye when it’s making large amounts of money.