Senate PSI Discusses US Vulnerabilities to Money Laundering
AT TODAY’S PERMANENT SUCOMMITTEE ON INVESTIGATIONS HEARING, lawmakers heard from government officials, HSBC Bank executives, and regulators on money laundering violations within the U.S. banking sector.
In his opening remarks, Chairman Carl Levin (D-Mich.) said certain international banks abuse their access to the U.S. financial system through their affiliates, which operate in “high risk countries or with high risk customers.” He also criticized the Office of the Comptroller of the Currency (OCC) for failing to properly oversee anti-money laundering (AML) practices at HSBC affiliates. In closing, he called on the OCC to strengthen its AML oversight practices.
In his opening statement, Ranking Member Tom Coburn (R-Okla.) said banks that want to follow the law and still grow their business are often faced with a conflict of interest. He said the events at HSBC portray a difficulty in controlling money laundering given different global standards, and he questioned the effectiveness of regulatory agencies’ AML practices.
Panel I Testimony
In his opening statement, David Cohen, Undersecretary for Terrorism and Financial Intelligence for the Treasury Department, said the “scale, efficiency and sophistication” of the United States financial system strongly appeals to potential financial criminals. He detailed the Treasury Department’s efforts to support counter-terrorist financing within the banking sector, specifically citing work with interagency partners. He supported more disclosure litigation to combat the use of shell companies for money laundering purposes and stressed the need to create a global standard for AML practices.
In his opening statement, Leigh Winchell, Assistant Director for Investigative Programs at the Homeland Security Department, praised the launch of the National Bulk Cash Smuggling Center in analyzing bulk-cash movements, and supported the implementation of Operation Firewall in stopping border transfers. Winchell said increased usage of prepaid cards and changes in Mexican banking regulations are future areas of concern with regard to the rise of trade-based money laundering. Lastly, he commended the Department’s partnerships with the private sector through the Cornerstone Outreach Initiative in the ongoing work against money laundering.
Panel I Question and Answer
Levin asked if there are any new challenges in money laundering prevention. Cohen said laundered money is being layered with legitimate funds which are placed into U.S. financial institutions. He added that transfers are moving further south into Central America.
Levin asked Cohen to define the relationship between an SDN list and an Office of Foreign Assets Control (OFAC) filter, and to discuss the effectiveness of the system. Cohen said the Treasury Department relies on financial institutions to run SDN lists through the filter and most regulators do a good job of incorporating these filters into their compliance programs.
Coburn asked if every AML safeguard were in place, would money laundering practices still occur. Cohen said a properly functioning compliance system should prevent those on the SDN list from gaining access to the U.S. financial system, but preventing money laundering is a more difficult task because it requires a “risk-based approach” by financial institutions.
Coburn followed up by asking Winchell whether banks or regulators usually identify money laundering practices. Winchell said the banks themselves usually identify illicit practices.
Panel II Testimony
David Bagley, Head of Group Compliance for HSBC Holdings, acknowledged the “significant areas of failure” within the compliance department and discussed the bank’s current efforts in addressing those failures. He cited the lack of authority and resources within the former compliance model and noted that the new compliance model transfers authority away from local line managers, allowing the group to take the lead on “resource allocation, compensation, performance review, objectives, strategy, budget, and accountability” for all HSBC affiliates.
Paul Thurston, Chief Executive of Retail Banking and Wealth Management at HSBC Holdings, addressed the challenges faced upon his arrival in Mexico and the efforts made to correct those weaknesses. Thurston commented on the complications arising from infrastructure weaknesses that were “exacerbated by a focus on growth over control.” He detailed his attempts to address the problems through investments in technology.
In his opening statement, Michael Gallagher, Former Executive Vice President at HSBC Bank USA, N.A. (HBUS), voiced his team’s stance on compliance efforts during his tenure at HBUS, but conceded that “we did not always fully understand the risks of our business, and that we could have done much more, and done it more quickly”.
Christopher Lok, Former Head of Global Banknotes at HSBC, expressed surprise in his written statement over the compromised anti-money laundering controls in place at the time within the Mexican affiliate. “With the benefit of hindsight it is now clear that we did not perceive the extent of the anti-money-laundering deficiencies and the risks present,” Lok said.
Panel II Question and Answer
Levin asked Thurston why the money laundering practices have been so persistent over the past decade at HSBC Mexico’s (HBMX) branches. Thurston said from its beginning, HBMX had been a “very fast growing bank with decentralized controls.”
Levin said HBMX opened “shell operations” in the Cayman Islands that had neither employees nor offices, and said any HBMX branch could use them to open a dollar account. He asked Thurston whether he knew the accounts in the Cayman Islands were shell companies. Thurston said that he did not. Levin asked Bagley what HSBC plans to do about the accounts still in operation in the Cayman Islands. Bagley said HSBC plans to close all the Cayman Island accounts.
Panel III Testimony
In her opening statement, Irene Dorner, President and CEO of HSBC Bank USA and HSBC North America Holdings, said that she regrets HSBC did not live up to compliance expectations, and that their historical lack of proper due diligence is “unacceptable”. She outlined steps HSBC has taken to improve their AML and compliance standards, including changing leadership, Know-Your Customer (KYC) policies, strengthening due diligence, and improving technology that monitors transactions and analyzes risk. She said these steps show the bank’s commitment to strengthening their regulations of illicit practices.
In his opening statement, Stuart Levey, Chief Legal Officer, HSBC Holdings, said there is a history of compliance problems at HSBC, but the bank is addressing specific deficiencies that Congress has identified. He highlighted specific reforms HSBC has undergone including: centralizing the leadership structure ensuring consistent policies and standards, strengthening compliance practices, simplifying their business model, and closing HBMX’s Cayman Island accounts.
Panel III Question and Answer
Levin asked, given a conflict between U.S. law and Cayman Island law, what the bank would do. Levey responded that given the newly adopted global sanctions policy, the bank would provide as much information as it was legally permitted to do. Levey added the bank realized the importance in sharing information across borders. Dorner added that should an affiliate bank fail to share information, HBUS would have no hesitation in closing an account failing to pass KYC standards.
Levin expressed concern over bearer share accounts. Dorner said the bank is making efforts to address bearer share corporations by applying current U.S. standards worldwide.
Levin asked the panelists to comment on the new money laundering system put in place. Dorner responded that the bank has installed a new system, “upon which improvements can always be made.” She also said the bank is in day-to-day contact with the OCC.
Panel IV Testimony
In his opening statement, Comptroller of the Currency Thomas Curry, said the OCC agrees with Congress’s recommendations for BSA/AML supervision. He said the OCC is “revamping” their current approach to citing BSA/AML violations, and is considering the concerns voiced in the Subcommittee’s report that the “Matters Requiring Attention” (MRA) method is not a sufficient tool for enforcing AML practices. In reference to the HSBC reports, Curry said the bank failed to implement an efficient compliance and AML program, which led to unreported money laundering.
Panel IV Question and Answer
Levin asked why the OCC never took formal enforcement action prior to 2010 with regard to HSBC. Curry responded that going forward, stricter action will be taken.
Levin asked Curry how the OCC will respond to the Subcommittee’s Report. Curry said the large bank review team will be increased and efforts will be made to improve examination supervision and ratings for AML programs within months. The OCC will also broaden the exam approaches while continuing to monitor MRAs, Curry said.
Coburn asked if the OCC is currently implementing the reforms outlined in their testimony. Curry said they are in the process of implementing the Subcommittee’s recommendations.
Following up, Coburn asked Curry how a proper BSA/AML system should be structured. Curry said the most important principle should be commitment from the board and top managers to funding a BSA/AML program that fits the specific entity.
For more information on this hearing please click here.
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AT TODAY’S PERMANENT SUCOMMITTEE ON INVESTIGATIONS HEARING, lawmakers heard from government officials, HSBC Bank executives, and regulators on money laundering violations within the U.S. banking sector.
In his opening remarks, Chairman Carl Levin (D-Mich.) said certain international banks abuse their access to the U.S. financial system through their affiliates, which operate in “high risk countries or with high risk customers.” He also criticized the Office of the Comptroller of the Currency (OCC) for failing to properly oversee anti-money laundering (AML) practices at HSBC affiliates. In closing, he called on the OCC to strengthen its AML oversight practices.
In his opening statement, Ranking Member Tom Coburn (R-Okla.) said banks that want to follow the law and still grow their business are often faced with a conflict of interest. He said the events at HSBC portray a difficulty in controlling money laundering given different global standards, and he questioned the effectiveness of regulatory agencies’ AML practices.
Panel I Testimony
In his opening statement, David Cohen, Undersecretary for Terrorism and Financial Intelligence for the Treasury Department, said the “scale, efficiency and sophistication” of the United States financial system strongly appeals to potential financial criminals. He detailed the Treasury Department’s efforts to support counter-terrorist financing within the banking sector, specifically citing work with interagency partners. He supported more disclosure litigation to combat the use of shell companies for money laundering purposes and stressed the need to create a global standard for AML practices.
In his opening statement, Leigh Winchell, Assistant Director for Investigative Programs at the Homeland Security Department, praised the launch of the National Bulk Cash Smuggling Center in analyzing bulk-cash movements, and supported the implementation of Operation Firewall in stopping border transfers. Winchell said increased usage of prepaid cards and changes in Mexican banking regulations are future areas of concern with regard to the rise of trade-based money laundering. Lastly, he commended the Department’s partnerships with the private sector through the Cornerstone Outreach Initiative in the ongoing work against money laundering.
Panel I Question and Answer
Levin asked if there are any new challenges in money laundering prevention. Cohen said laundered money is being layered with legitimate funds which are placed into U.S. financial institutions. He added that transfers are moving further south into Central America.
Levin asked Cohen to define the relationship between an SDN list and an Office of Foreign Assets Control (OFAC) filter, and to discuss the effectiveness of the system. Cohen said the Treasury Department relies on financial institutions to run SDN lists through the filter and most regulators do a good job of incorporating these filters into their compliance programs.
Coburn asked if every AML safeguard were in place, would money laundering practices still occur. Cohen said a properly functioning compliance system should prevent those on the SDN list from gaining access to the U.S. financial system, but preventing money laundering is a more difficult task because it requires a “risk-based approach” by financial institutions.
Coburn followed up by asking Winchell whether banks or regulators usually identify money laundering practices. Winchell said the banks themselves usually identify illicit practices.
Panel II Testimony
David Bagley, Head of Group Compliance for HSBC Holdings, acknowledged the “significant areas of failure” within the compliance department and discussed the bank’s current efforts in addressing those failures. He cited the lack of authority and resources within the former compliance model and noted that the new compliance model transfers authority away from local line managers, allowing the group to take the lead on “resource allocation, compensation, performance review, objectives, strategy, budget, and accountability” for all HSBC affiliates.
Paul Thurston, Chief Executive of Retail Banking and Wealth Management at HSBC Holdings, addressed the challenges faced upon his arrival in Mexico and the efforts made to correct those weaknesses. Thurston commented on the complications arising from infrastructure weaknesses that were “exacerbated by a focus on growth over control.” He detailed his attempts to address the problems through investments in technology.
In his opening statement, Michael Gallagher, Former Executive Vice President at HSBC Bank USA, N.A. (HBUS), voiced his team’s stance on compliance efforts during his tenure at HBUS, but conceded that “we did not always fully understand the risks of our business, and that we could have done much more, and done it more quickly”.
Christopher Lok, Former Head of Global Banknotes at HSBC, expressed surprise in his written statement over the compromised anti-money laundering controls in place at the time within the Mexican affiliate. “With the benefit of hindsight it is now clear that we did not perceive the extent of the anti-money-laundering deficiencies and the risks present,” Lok said.
Panel II Question and Answer
Levin asked Thurston why the money laundering practices have been so persistent over the past decade at HSBC Mexico’s (HBMX) branches. Thurston said from its beginning, HBMX had been a “very fast growing bank with decentralized controls.”
Levin said HBMX opened “shell operations” in the Cayman Islands that had neither employees nor offices, and said any HBMX branch could use them to open a dollar account. He asked Thurston whether he knew the accounts in the Cayman Islands were shell companies. Thurston said that he did not. Levin asked Bagley what HSBC plans to do about the accounts still in operation in the Cayman Islands. Bagley said HSBC plans to close all the Cayman Island accounts.
Panel III Testimony
In her opening statement, Irene Dorner, President and CEO of HSBC Bank USA and HSBC North America Holdings, said that she regrets HSBC did not live up to compliance expectations, and that their historical lack of proper due diligence is “unacceptable”. She outlined steps HSBC has taken to improve their AML and compliance standards, including changing leadership, Know-Your Customer (KYC) policies, strengthening due diligence, and improving technology that monitors transactions and analyzes risk. She said these steps show the bank’s commitment to strengthening their regulations of illicit practices.
In his opening statement, Stuart Levey, Chief Legal Officer, HSBC Holdings, said there is a history of compliance problems at HSBC, but the bank is addressing specific deficiencies that Congress has identified. He highlighted specific reforms HSBC has undergone including: centralizing the leadership structure ensuring consistent policies and standards, strengthening compliance practices, simplifying their business model, and closing HBMX’s Cayman Island accounts.
Panel III Question and Answer
Levin asked, given a conflict between U.S. law and Cayman Island law, what the bank would do. Levey responded that given the newly adopted global sanctions policy, the bank would provide as much information as it was legally permitted to do. Levey added the bank realized the importance in sharing information across borders. Dorner added that should an affiliate bank fail to share information, HBUS would have no hesitation in closing an account failing to pass KYC standards.
Levin expressed concern over bearer share accounts. Dorner said the bank is making efforts to address bearer share corporations by applying current U.S. standards worldwide.
Levin asked the panelists to comment on the new money laundering system put in place. Dorner responded that the bank has installed a new system, “upon which improvements can always be made.” She also said the bank is in day-to-day contact with the OCC.
Panel IV Testimony
In his opening statement, Comptroller of the Currency Thomas Curry, said the OCC agrees with Congress’s recommendations for BSA/AML supervision. He said the OCC is “revamping” their current approach to citing BSA/AML violations, and is considering the concerns voiced in the Subcommittee’s report that the “Matters Requiring Attention” (MRA) method is not a sufficient tool for enforcing AML practices. In reference to the HSBC reports, Curry said the bank failed to implement an efficient compliance and AML program, which led to unreported money laundering.
Panel IV Question and Answer
Levin asked why the OCC never took formal enforcement action prior to 2010 with regard to HSBC. Curry responded that going forward, stricter action will be taken.
Levin asked Curry how the OCC will respond to the Subcommittee’s Report. Curry said the large bank review team will be increased and efforts will be made to improve examination supervision and ratings for AML programs within months. The OCC will also broaden the exam approaches while continuing to monitor MRAs, Curry said.
Coburn asked if the OCC is currently implementing the reforms outlined in their testimony. Curry said they are in the process of implementing the Subcommittee’s recommendations.
Following up, Coburn asked Curry how a proper BSA/AML system should be structured. Curry said the most important principle should be commitment from the board and top managers to funding a BSA/AML program that fits the specific entity.
For more information on this hearing please click here.