A Guide to Anti-Money Laundering for Crypto Firms

Is HSBC Stopping Terrorist Money Laundering? Whistleblower Urges Federal Reserve to Reopen $1.9 billion Settlement

AML Compliance Knowledge & Training

In 2012, HSBC paid a record $1.9 billion fine to settle money-laundering accusations. Yet in a letter to the Federal Reserve, which he publicised this September, ex-employee Everett Stern (among a number of other weighty allegations) accused HSBC of ongoing illegal activity which enables terrorists to launder money.

Specifically, Stern refers to a discovery he made in 2011 in relation to the movement of funds through HSBC from Africa to Lebanon. Hundreds of millions of dollars were allegedly being passed between two OFAC-listed sanctioned companies based in these two locations. Stern claims the recipient (Tajco) was a company run by OFAC-listed persons who the US State Department determined to be terrorists and financiers of Hezbollah. Yet these transactions were not picked up by HSBC’s monitoring system

Why the Blind Eye?

Stern states that the transfers weren’t flagged up because HSBC used a “Wire Filter” system, which only reads exact names and does not pick up misspellings or slight variations in the name. Consequently, “Tajco” was apparently passing unhindered through HSBC’s compliance system as “Tajc.o.”.  In what the FBI subsequently dubbed “stripping the payments”, HSBC employees were allegedly slipping transactions under the compliance radar by adding these kinds of dots and dashes and different numeric codings to the actual payments.

On telling his superior, Stern claims he was criticised for spending so much time on his own excel analysis (in uncovering this), when he should have been focused on clearing alerts. Moreover, although he notified the CIA that this was happening, Stern also “believes this illegal activity still continues to this day”.

Pinch of Salt

Stern left HSBC in 2011, so how he could know whether this activity continues is unclear.

Stern also has plenty of personal incentive to demonise the present day HSBC. He is currently running for the US senate, with the message “I stood up against giants and won. I am responsible for shaking up Wall Street to its core and holding irresponsible bankers accountable for terrorist financing”. This also means this story is only likely to get more publicity in the U.S., as a central part of Stern’s campaign.

As part of its 2012 settlement, HSBC agreed to a 5 year deferred-prosecution agreement (DPA), promising to clean up its AML procedures. Early this year, the Monitor (with a staff of 60) produced his first full-year report card on HSBC’s progress, regarding this DPA.  This was reviewed by Prosecutors in April who concluded that HSBC has “made progress” in “developing an effective AML and sanctions compliance program”

Remaining Concerns

The Monitor’s report, does not, however, dispel concern. It explicitly warns that HSBC “must redouble its efforts if it is to have any appreciable chance” of developing lasting compliance and anti-money laundering programs.

The Monitor has stated that the bank is acting in good faith, but that there is much work to be done. In particular, in relation to the bank’s IT systems, which need better coordination.

With the DPA sword of Damocles hanging over it, HSBC exemplifies the urgent need for effective, innovative financial technology in the compliance sphere.  It may be that Stern’s latest allegations are unfounded. Even so, patching the flaws in HSBC’s compliance system is an indisputably challenging task. Like many of its fellow banks and financial institutions, HSBC has a lot to gain by actively engaging with the RegTech revolution in its attempts to find solutions.

Originally published December 18, 2015, updated May 5, 2022

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