An exterior view of the HSBC facility is pictured in New Castle, Delaware on Friday.

NEW YORK: Executives of HSBC Holdings Plc and its U.S. subsidiary are scheduled to testify Tuesday before a Senate panel about how the London-based banking behemoth, after years of run-ins with U.S. authorities over alleged anti-money laundering lapses, has cleaned up its act.

In anticipation of the hearing, HSBC Chief Executive Stuart Gulliver sent a message to employees earlier this week: “Between 2004 and 2010, our anti-money laundering controls should have been stronger and more effective, and we failed to spot and deal with unacceptable behavior,” Gulliver wrote. “It is right that we are held accountable and that we take responsibility for fixing what went wrong.”

Gulliver’s memo implies that the bank’s problems ended in 2010. But a Reuters investigation has found persistent and troubling lapses in the bank’s anti-money laundering compliance since then.

Moreover, the problems arose in the very operation meant to show regulators that the bank could effectively monitor the trillions of dollars flowing annually through its offices in 80 countries and territories.

In a sprawling, low-rise building abutting pasture land in New Castle, Delaware, HSBC’s anti-money laundering staff review customer transactions and so-called alerts generated when the bank’s monitoring systems spot a suspicious transaction. It also housed the “look-back” at thousands of old transactions that the U.S. Comptroller of the Currency ordered in 2010, after citing the bank for multiple anti-money laundering failures.

Former employees in the New Castle office describe a febrile boiler-room environment overseen by managers uninterested in investigating transactions with possible links to drug trafficking, terrorist financing, Iran and other countries under U.S. sanctions, and other illegal activities. Instead, they say, the single-minded focus was on clearing out the paperwork as fast as possible.

“There were multiple backlogs” of alerts, said Everett Stern, who worked in the New Castle building from October 2010 to November 2011. “The name of the game was to close as many as you possibly can.”

Stern was a 26-year-old with a master of business administration degree when he joined HSBC as a compliance officer “to find suspicious activity,” as he put it. Within months, he was named a department specialist in Middle Eastern transactions.

“I’m not an expert” in money laundering in the Middle East, Stern said. His appointment, he said, was symptomatic of larger disregard for investigative rigor in the office. “Anybody who submitted their name for something basically got approved for that specialty.”

Stern said that in the course of his work, he came across many suspicious transactions. Some involved parties he suspected of having ties to Hezbollah and Hamas - Islamist groups that the U.S. considers to be terrorist organizations. When he alerted his superiors to these dealings, he said, his concerns were dismissed.

At one point, Stern said, he decided to take action on transactions linked to Palestine that he and some of his colleagues had noticed.

Stern sent an email to two superiors with the subject line, “Compliance error.” In the email, Stern wrote: “I believe investigators in the department are unknowingly making a major compliance error. Over the last couple of months investigators have approached me about cases in the Middle East, especially in Palestine.… It appears that most investigators do not understand that the government of Palestine is the terrorist organization Hamas.”

One of the bosses, Jeff Kraft, an anti-money laundering compliance manager, came bursting out of his cubicle. “Are you out of your f------ mind?” he said, according to Stern’s recollection. “I should fire you right now.”

Kraft insisted that Hamas was not a terrorist organization and that if government officials saw the email, the New Castle office would be shut down, according to Stern.

Hamas, which governs the Gaza Strip of the Palestinian Territories, has been designated a terrorist organization by the U.S. since 1995.

Kraft could not be reached for comment.

Stern was part of the New Castle operation employing regular HSBC staff to monitor current transactions and tackle a backlog of alerts. A second section comprised a task force - largely staffed with former law-enforcement officials working under contract - that was conducting the look-back the OCC ordered in 2010, investigating transactions up to several years old.

Several of these contractors, echoing Stern, said the effort was more cosmetic than concrete. One said that when an investigator couldn’t track down information on a counterparty to a particular transaction, the investigator was told to close the case even if it seemed suspect.

“I was extremely, extremely disappointed with the ethical part of how they were handling it,” said one former task force contractor. “It was just a factory the way it was handled. There was a lot of pressure to get investigations closed.”

The contractor added: “If Congress and the regulators actually knew what was going on, they would have a fit.”

Another contractor said supervisors “wanted quantity, not quality.”

In response to questions about the work at New Castle, HSBC spokesman Robert Sherman said: “The quality of work in Delaware has been and still is consistent with our high expectations. … We have had and continue to have very high quality control and assurance procedures.” Those procedures, he said, include regular reviews of the New Castle work by senior management and quality-assurance teams. A spokesman for the OCC, which ordered the look-back, declined to comment.

The Daily Sun/Bangladesh/ 15th July 2012