Earlier this summer, we found out — via a 334-page report released by a Senate subcommittee, most of which I can attest did not make for light reading — that HSBC, the huge British bank with extensive U.S. operations, had been doing a lot of very bad things, including helping Mexican drug cartels launder money and processing transactions involving Iranian banks, in violation of U.S. sanctions. The stuff HSBC was doing was so baldly illegal, the Senate report found, that its own executives were e-mailing each other things like, "I wish to be on the record as not comfortable with this piece of business."
Given all that had gone on at HSBC, U.S. law-enforcement officials had a few options when it came to punishing the bank for its misdeeds.
Some prosecutorial types, being prosecutorial types, wanted to go after maximum penalties, including indicting HSBC for criminal money-laundering. Other people (mainly Treasury officials, Fed regulators, and people at the Office of the Comptroller of the Currency) worried about the overall health of the financial system if that happened. They feared that making a criminal of one of the world's biggest international banks would seriously harm other institutions by essentially shutting HSBC's American operations down and forcing some big institutional investors to pull their money out all at once. And they proposed meting out slightly less harsh treatment — something that would punish the bank but not endanger the health of the larger economy.
As the New York Times reports this morning, the Treasury/Fed/OCC regulators won out. HSBC agreed to settle its entire slate of charges by forfeiting nearly $1.3 billion and paying a $650 million civil fine, along with getting a deferred prosecution agreement (which is basically probation for corporations) and admitting to violating laws with awesome names like the "Bank Secrecy Act" and the "Trading with the Enemy Act."
The Times continues:
As part of the deal, one of the officials briefed on the matter said, HSBC must also strengthen its internal controls and stay out of trouble for the next five years. If the bank again runs afoul of the federal rules, the Justice Department can resume its case and file a criminal indictment. An independent auditor will also monitor the bank’s progress to strengthen its internal controls, and will make regular assessments on the firm’s progress.
The total amount of HSBC's settlement — $1.9 billion — is a lot of money, even for a global bank. As The Wall Street Journal points out, the settlement "could knock about 11% off the bank's earnings for 2012." Still, HSBC's shares are up today, in large part because investors had anticipated a bigger penalty. Others are worried that by avoiding criminal charges, HSBC has been deemed, in the Times' words, "too big to indict."
The relationship between prosecutors at places like the Justice Department and the Manhattan D.A.'s office and financial regulators at places like the OCC and the Fed has never been simple. In huge cases involving potentially criminal acts and massive, too-big-to-fail financial institutions, prosecutors want to bring law-breaking banks to justice, and regulators want to bring law-breaking banks to justice while also making sure the financial system doesn't collapse.
In HSBC's case, it's hard to fault regulators for pushing for a settlement they feel will punish HSBC without also punishing the rest of the economy. But the resolution should also be entered as a data point in the debate about the proper size and function of global banks. When concerns about a fragile banking system come up against prosecutorial zeal, it seems the long-term interests of the banks are still winning out.