HSBC to Pay $1.92 Billion over Money Laundering ; Fearing Market Instability, U.S. Prefers a Financial Settlement to Indictment

By Ben Protess; Jessica Silver-Greenberg | International Herald Tribune, December 12, 2012 | Go to article overview

HSBC to Pay $1.92 Billion over Money Laundering ; Fearing Market Instability, U.S. Prefers a Financial Settlement to Indictment


Ben Protess; Jessica Silver-Greenberg, International Herald Tribune


After months of debate by the U.S. authorities over whether to indict HSBC, the record settlement was announced on Tuesday.

The state and federal authorities in the United States have reached a record settlement with HSBC in a money-laundering case but stopped short of indicting the bank over concerns that criminal charges could jeopardize one of the world's largest banks and ultimately destabilize the global financial system.

HSBC said Tuesday that it had agreed to the $1.92 billion settlement. The bank, based in Britain, faces accusations that it transferred billions of dollars for nations like Iran and enabled Mexican drug cartels to move money illegally through its American subsidiaries.

While the settlement with HSBC is a major victory for the government, the case raises questions about whether certain financial institutions, having grown so large and interconnected, are too big to indict. Four years after the failure of Lehman Brothers nearly toppled the financial system, regulators are still wary that a single institution could undermine the recovery of the industry and the economy.

But the threat of criminal prosecution acts as a powerful deterrent. If the authorities signal such actions are remote for big banks, the threat could lose its sting.

Behind the scenes, the authorities debated for months the advantages and perils of a criminal indictment against HSBC. Some prosecutors at the Justice Department's criminal division and the Manhattan district attorney's office wanted the bank to plead guilty to violations of the federal Bank Secrecy Act, according to the officials with direct knowledge of the matter, who spoke on the condition of anonymity. The law requires financial institutions to report any cash transaction of $10,000 or more and to bring any dubious activity to the attention of regulators.

Given the extent of the evidence against HSBC, some prosecutors saw the charge as a healthy compromise between a settlement and a harsher money-laundering indictment. While the charge would most likely tarnish the bank's reputation, some officials argued that it would not set off a series of devastating consequences.

A money-laundering indictment, or a guilty plea over such charges, would essentially be a death sentence for the bank. Such actions could cut off the bank from certain investors like pension funds and ultimately cost it its charter to operate in the United States, officials said.

Despite the Justice Department's proposed compromise, Treasury Department officials and bank regulators at the Federal Reserve and the Office of the Comptroller of the Currency pointed to potential issues with the aggressive stance, according to the officials briefed on the matter. When approached by the Justice Department for their thoughts, the regulators cautioned about the effect on the broader economy.

"The Justice Department asked Treasury for our view about the potential implications of prosecuting a large financial institution," David S. Cohen, the Treasury's under secretary for terrorism and financial intelligence, said in a statement. "We did not believe we were in a position to offer any meaningful assessment. The decision of how the Justice Department exercises its prosecutorial discretion is solely theirs and Treasury had no role."

Still, some prosecutors proposed that Attorney General Eric H. Holder Jr. meet with Treasury Secretary Timothy F. Geithner, people briefed on the matter said. The meeting never took place.

After months of discussions, prosecutors decided against a criminal indictment, but only after securing record penalties and wide-ranging sanctions.

The HSBC deal includes a deferred prosecution agreement with the Manhattan district attorney's office and the Justice Department. The deferred prosecution agreement, a notch below a criminal indictment, requires the bank to forfeit more than $1.2 billion and pay about $700 million in fines, according to the officials briefed on the matter. …

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