HSBC: How Simple Became Complicated, and costly

Wed Dec 12, 2012 8:12am EST
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By Steve Slater and Sinead Cruise

LONDON (Reuters) - HSBC takes its name from its roots as the Hongkong and Shanghai Banking Corporation, but there has long been a joke inside and outside the firm that the name stands for "How Simple Became Complicated".

That complexity in part explains how the London-based bank ended up with the biggest fine ever imposed on a financial firm by U.S. regulators on Tuesday - an eye-watering $1.9 billion - after a lengthy U.S. probe showed sweeping problems at the bank. Lax controls had left HSBC as the "preferred financial institution" for drug traffickers and money launderers, U.S. prosecutors said this week.

The concern is that HSBC, Europe's biggest bank, with more than 60 million customers across 84 countries, is unable to adequately monitor all its operations, a task made harder by its history of patchwork acquisitions.

HSBC said it has spent hundreds of millions of dollars to bolster compliance and simplify its control structure to address the lapses in anti-money-laundering controls, mainly in its Mexico and U.S. operations, which led to stinging criticism from politicians and the record punishment.

"(Chief Executive) Stuart Gulliver is doing a good job looking after the group, but at the end of the day it is an absolutely massive bank with branches everywhere; it is impossible to guarantee that there isn't something going on somewhere," said Jane Coffey, head of equities at Royal London Asset Management, an HSBC shareholder.

Gulliver restructured HSBC shortly after taking over at the start of 2011, setting up global businesses and functions to improve communication and operations across the group.

In the past, national heads ran all its businesses within each country, which could result in problems going unnoticed. The bank needed to improve its internal sharing of information to help cut down on illicit activity, U.S. Senator Carl Levin said when he published a scathing report on the bank in July.

In Mexico, where HSBC became one of the top banks with the 2002 purchase of Grupo Financiero Bital, a rapid expansion meant problems were missed. Between 2007 and 2008, HSBC's Mexican operations moved $7 billion into the bank's U.S. operations, and both Mexican and U.S. authorities warned the bank the amount of money could only have been so high if it was tied to illegal narcotics proceeds, the U.S. Senate report said.   Continued...

A sign is seen above the entrance to an HSBC bank branch in midtown Manhattan in New York City, December 11, 2012. REUTERS/Mike Segar