HSBC Scandals May Lead to Greater Regulation

04.05.15

HSBC Scandals May Lead to Greater Regulation

04.05.15
Associated PressAssociated Press

By Matthew Morgan for Global Risk Insights

A growing chorus of public outrage may prompt criminal prosecution of HSBC executives and spark a new wave of regulations in the financial sector.

HSBC has been dogged by scandal across the world for years. Money laundering investigations have been launched against it by federal authorities in India and Argentina. However, despite the seriousness of the charges in these cases, it was a far-reaching investigation by the US Department of Justice in 2012 that resulted in the greatest harm to HSBC’s reputation.

American investigators found that HSBC laundered at least $881 million in drugs proceeds through the U.S. financial system for international drug cartels and processed an additional $660 million for banks in US sanctioned countries such as Iran and Sudan.

Despite receiving the largest banking fine in US history, $1.9 billion US dollars, some decried the failure of the US government to launch criminal proceedings. Prosecutors admitted that their concern about the negative impact on financial markets if criminal charges were filed against HSBC executives influenced their decision to not pursue further legal sanctions against the bank.

While HSBC has so far avoided criminal prosecution a new set of scandals has raised its specter once again.

Herve Falciani, a former HSBC employee, has proved documentation which seems to show that HSBC has aided thousands of its customers in multiple countries with the creation of tax avoidance schemes.

The reaction across Europe and the United States has been swift. British MPs have called for the resignation of HSBC executives, while French authorities have launched criminal proceedings.

In the United States the nomination of Loretta Lynch for Attorney General has been stalled as she was the chief federal negotiator during the 2012 settlement and failed to consider pursuing criminal charges against HSBC. The US Department of Justice has started another investigation of HSBC, with prominent lawmakers calling for criminal charges to be filed.

A successful criminal prosecution of HSBC in the United States would result in the revoking of its corporate charter, leaving the bank unable to operate in the country. The winding down of HSBC’s American operations would have a massive impact upon the global financial system and would have to be managed extremely carefully by the US government. While this scenario is still unlikely, its probability has increased in light of the latest revelations of HSBC’s conduct.

Far more likely than the shuttering of the bank’s American operations, however, is further oversight and regulation of the banking sector as the public, unfavorably predisposed to banks since the 2008 global financial crisis, will demand consequences for their perceived malfeasance.

Under these circumstances, bank profits would be squeezed and layoffs in the financial sector would accelerate. While American banks have enjoyed record profits in recent years, a growing storm of outrage over HSBC continual legal violations makes the continuation of this trend increasingly doubtful.

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