Final exam for Business Ethics Class

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(Un)Ethical Practices in Business
Investment Banking & Mexican Drug Cartels: The Failure of HSBC
Stacey Troup
Business Ethics/MGT-304
December 23, 2016
Dr. Kathleen Hargiss

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Investment Banking & Mexican Drug Cartels: The Failure of HSBC
In this Week 8 Signature Assignment, I will discuss the ethical implications which reside
in investment banking specific to the failure of HSBC, and its assigned entities, to adhere to and
follow specific Anti Money Laundering Laws as well as other international trade laws which
allowed for two Mexican drug cartels to launder money through its international banking
operations. In addition, I will discuss what could have been done to correct these problems
before they resulted in a large investment banking scandal, what HSBC did about the problems at
hand and, finally, what it cost HSBC in order to correct this. Ethical implications regarding
banking regulations will also be discussed in relation to the continuation of business practices
following a scandal of this magnitude as well as what the U.S. Justice Department is doing to
hold the hand of HSBC through this ethical dilemma in investment banking.
Anti-Money Laundering (AML)
In order to understand what went wrong with the investment arm of HSBC, we must first
understand the Anti-Money Laundering (AML) laws. The Anti-Money Laundering regulations
are a series of procedures, encompassing laws, handed down from regulators, both civil and
federal, designed to stop transactions which violate banking laws. Investments which violate
AML regulations usually involve transactions which manipulate the market, trade in illegal
goods, and tax evasion (Anti-Money Laundering, N.D.). Additionally, any new investor to a
firm must go through AML procedures as part of the company’s compliance review procedures.
This review includes things such as financial statements, tax returns and other pertinent financial
documents relating to their ability to invest “liquid” funds as well as confirm the source of funds
so that they do not violate AML regulations. The FINRA (Financial Industry Regulatory
Authority) issues licenses to AML professionals referred to as Series 8 and Series 63 Licenses to

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ensure that people handling compliance issues for their employer are properly educated in the
laws and requirements for the regulatory agencies.
Internal Regulatory Responsibilities (Domestic & Foreign)
Banks and financial firms such as hedge funds, retail brokerage firms and the like are
required to adhere to regulatory restrictions and laws during the course of business. Within the
U.S., the SEC, FINRA, FBI and other regulatory agencies exist to ensure ethical trades and
investments (Anti-Money Laundering, N.D.). Internationally, agencies exist in specific countries
to assist with these trade related issues. Within the UK, the FCA is the regulatory agency most
similar to the SEC in the U.S. (About Us, 2016). Every country where banking operations take
place are required to follow the trade rules of their local regulatory agency.
In order to assist regulatory agencies with the prosecution of firms who refuse to follow
the letter of the law during the course of business, the International Banking Act of 1978 was
established (International Banking Act of 1978, N.D.). This piece of legislation put international
banks who do business in the U.S. under the control of the U.S., requiring them to adhere to U.S.
banking regulations and AML standards (International Banking Act of 1978, N.D.).
The Bank Secrecy Act, which is the primary AML law, was amended to include certain
provisions of Title III of the U.S. Patriot Act. Among these provisions were safeguards to
protect banks from investments stemming from terrorist organizations through a process of
identification, deterrence, and detection of suspicious investments and investors (OCC: BSA and
Related Regulations, N.D.). In addition to the Bank Secrecy Act, several statutes have been
added into law which help both compliance departments as well as regulatory agencies in their
pursuit of illegal investments. Among these additional statutes are the Foreign Assets Control
Regulation (OFAC), (12 CFR 500), the Financial Recordkeeping and Reporting of Currency and

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Foreign Transactions (31 CFR 1010.310) as well as additional provisions to the U.S. Patriot Act
(OCC: BSA and Related Regulations, N.D.).
These acts resulted in stricter guidelines for Compliance professionals following the
terror attacks of September 11, 2001 and banks were forced to comply with the new regulations
in order to prohibit investors who had ties to terrorism, fraud, etc. as a result (Ensminger, 2002).
By following these provisions, which have grown in the last decade due to the increase in
fraudulent and terroristic activities, banks and financial firms are better equipped to protect
themselves from these types of illegal investments, investors and trades while keeping
themselves in the good graces of both the SEC and the Federal Government (M2 Presswire
(Coventry), 2014)
USA v. HSBC Bank USA, N.A. et al Case No. 1:12-cr-00763-JG
HSBC Bank US began its downward spiral of unethical behavior and trade related
illegalities in 2003 after failing to comply with their contractually obligated requirements to
correct operational AML issues required by their regulators. These corrections and subsequent
agreement were designed to help strengthen the Due Diligence process while allowing for
strengthening of a more compliant operational department, which were strictly adhering to
BSA/AML laws (DPA Attachment A Final, 2012).
The unethical and illegal behavior continued as HSBC USA allowed investments from
Mexican customers through its affiliate branch Groupo Financiero HSBC, S.A. de C.V. aka
“HSBC Mexico” which failed to adhere to BSA/AML programs designed to help identify
“suspicious transactions”. At the same time, they were also aware of the AML/BSA failures and
inadequicies of their HSBC Mexico branch yet did nothing to resolve them as they were
contractually obligated to do (DPA Attachment A Final, 2012).

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These ethical dilemas within the AML requirements resulted in an estimated $881 million
in drug trafficing proceeds being deposited into the bank courtesy of Sinaloa Cartel (Mexico) and
Norte del Valle Cartel (Columbia), respectively. These deposits were done in order to launder
the money from the drug cartels into circulation using the bank as the main portal for this
purpose. HSBC allowed these deposits because of their failure to have proper Compliance
functions within their banking operations. According to the Docket filed against HSBC which is
currently on file with the U.S. Justice Department, ethical failures relating to HSBC USA’s
AML/BSA programs included, but were not limited to, “failure to obtain and maintain due
diligence information in HSBC Group Affiliates including HSBC Mexico”; “Failure to monitor
through compliatory regulations, the over $200 million in wire transfers from customers located
in countries HSBC USA classified as “Standard” or “medium risk” including over $670 billion
in wire transfers from HSBC Mexico”; “failure to properly monitor billions in Bank Note
transactions between July, 2006 and July, 2009 from HSBC Group Affiliates which totalled $9.4
billion”; and “failure to implement proper compliance and Due Diligence departments for AML
compliance” (DPA Attachment A Final, 2012).
On October 6, 2010, the OCC and the Board of Governers of the Federal Reserve Board
formally issued Cease and Desist orders to all HSB USA operations based on these unethical
behaviors in maintaining proper AML/BSA functions (DPA Attachment A Final, 2012).
Upon finding out from an employee within the Compliance department in April of 2009
that staffing concerns were present and more people were needed to properly handle the load of
AML transactions coming through the bank, a senior manager within that department ignored
mounting requests for additional help, thus, continuing unethical behavior within the bank
operation (DPA Attachment A Final, 2012).

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Finally, on July 1, 2013, the U.S. Justice Department filed paperwork for Federal charges
against HSBC Bank and HSBC Holdings, PLC, respectively, stemming from these unethical
business practices and violation of Federal law (HSBC Memorandum and Order 7.1.13, 2013).
The Aftermath
In the wake of the aftermath of this massive scandal which occurred in several countries,
HSBC has settled its U.S. financial obligations with the SEC by pleading guilty through a
Deferred Prosecution Agreement (DPA). This DPA saved a majority of the HSBC employees
from being prosecuted for criminal activity and turned the charges they would face toward the
company instead (Department of Justice, Office of Public Affairs, 2012).
With the U.S. settlement, HSBC was required to forefit $1.256 billion while agreeing to
pay $665 million in civil penalties ($500 million to the OCC and $165 million to the Federal
Reserve). In addiion to these financial penalities, HSBC was ordered into an agreement which
would require an AML resolution plan as part of their Plea Agreement (Department of Justice,
Office of Public Affairs, 2012).
Stuart A. Levy was hired to spearhead the bank’s legal department as part of the ordered
clean up effort and to reign in the AML controls required to become compliant (Ross, CFP,
2013). The ironic part of this entire scandal is that HSBC was found guilty of other AML and
trade related illegalities in the past and never made attempts to rectify these situations and just
continued on a path of destruction. Since the filing of Federal charges and subsequent plea
agreement they have also been found guilty of mortgage scams and employees sent to jail for
same (Ross, CFP, 2013).
Some ask why HSBC was not more widely charged on the criminal level and more of its
executives sent to jail yet the DOJ kept people out of jail as part of the plea agreement. This, in

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no way, signifies the corrected plan of action for AML compliance for HSBC as after their five
year plan they were still unable to get a handle on their situation and a court ordered their AML
to be outsourced to offices which report findings to the courts and SEC directly (HSBC
Memorandum and Order 7.1.13, 2013; McLaughlin & Farrell, 2016).
The end is nowhere in sight for HSBC as charges on an international level, both
regulatory and criminal, continue to be coordinated for prosecution as international regulators
discover the fraud HSBC perpetrated in their countries (Department of Justice, Office of Public
Affairs, 2012) and while they continue to find new ways to defraud people in other countries
through mortgage scams and other vehicles of destruction.
Conclusion
While investment banks have a responsibility to maintain AML/BSA guidelines which
safeguard against illegal investments either in cash, check or wire form, many of these banks
ignore the laws they are required to uphold and merely act if they, themselves, are beyond the
letter of the law.
Given a multitude of opportunities to do the right thing as well as the ability to stay out of
jail given a fine paid and an agreement to clean up their AML procedures, they still failed to
follow through on these promises to the Department of Justice. They continue to find new ways
to get themselves into hot water legally both in the US and abroad as they have been brought up
on several charges since the original AML charge.
We have to ask ourselves, why are they being allowed to continue operations? Why are
they not ordered to liquidate for failure to follow the laws set fourth by the SEC and Federal
government? The idea that a company is “too big to fail” is a false cry that should be seriously
reviewed for real world implications to the people that their fraud affects.

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A mistake is forgiveable but even after paying over $1 billion dollars in fines in the U.S.
alone, HSBC has just proven that they still believe themselves to be above any law and pay fees,
all the while their customers are made to be the ones to pay the price for their illegal actions.
Ethics are an important part of any operation and especially in a financial services
industry through which people’s pension funds, mutual funds, stock trades, mortgages, savings
and other financial assets are held. Without the proper following of the laws and the ethics to go
with them, you mite as well do what HSBC did and just let the cartel handle your money for all
the sense it makes.
At one point HSBC even referred to themselves in Mexico as “the bank to the Cartel”,
boasting of the Cartel’s involvement in their investments rather than making things right and
reporting these insufficiencies to the proper authorities. People have to know who they are
giving their money to before opening any account or taking out any loan to ensure that they do
not fall prey to these unethical financial institutions.

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References
About Us. (2016, 04 21). Retrieved from Financial Conduct Authority:
https://www.fca.org.uk/about/the-fca
Anti-Money Laundering. (N.D.). Retrieved from FINRA: http://www.finra.org/industry/aml
Department of Justice, Office of Public Affairs. (2012, 12 11). HSBC Holdings Admits to Money
Laundering. Retrieved from US Department of Justice:
https://www.justice.gov/opa/pr/hsbc-holdings-plc-and-hsbc-bank-usa-na-admit-anti-
money-laundering-and-sanctions-violations
DPA Attachment A Final. (2012). Retrieved from United States Department of Justice:
https://www.justice.gov/sites/default/files/opa/legacy/2012/12/11/dpa-attachment-a.pdf
Ensminger, J. J. (2002). September 11 Brings New Anti-Terrorism and Anti-Money Laundering
Responsibilities to Financial Institutions. Review of Business. Retrieved from
http://web.a.ebscohost.com.lb-
proxy9.touro.edu/ehost/pdfviewer/pdfviewer?vid=9&sid=b44d2a70-558e-40da-80da-
f03034c63278%40sessionmgr4006&hid=4114
HSBC Memorandum and Order 7.1.13. (2013, 07 01). Retrieved from U.S. Department of
Justice: https://www.justice.gov/sites/default/files/usao-
edny/legacy/2015/04/06/HSBC%20Memorandum%20and%20Order%207.1.13.pdf
International Banking Act of 1978. (N.D.). Retrieved from Investopdedia.org:
http://www.investopedia.com/terms/international-banking-act-of-
1938.asp?ad=dirN&qo=serpSearchTopBox&qsrc=1&o=40186
M2 Presswire (Coventry). (2014, 05 16). Impact of AML Regulations Wealth Management
Industry. Retrieved from
http://search.proquest.com/docview/1708742468/fulltext/5E90FAB49B8341ABPQ/1?acc
ountid=14375
McLaughlin, D., & Farrell, G. (2016, 04 01). HSBC Hasn't Adhered to Terms of US Prosecution
Agreement. Retrieved from Bloomberg: https://www.bloomberg.com/news/articles/2016-
04-01/hsbc-hasn-t-adhered-to-terms-of-u-s-prosecution-agreement-imhzdm5q
OCC: BSA and Related Regulations. (N.D.). Retrieved from Office of the Comptroller of the
Currency, U.S. Department of Treasury: https://www.occ.gov/topics/compliance-
bsa/bsa/bsa-regulations/index-bsa-regulations.html
Ross, CFP, M. (2013, 01 29). HSBC's Money Laundering Scandal. Retrieved from Investopedia:
http://www.investopedia.com/stock-analysis/2013/investing-news-for-jan-29-hsbcs-
money-laundering-scandal-hbc-scbff-ing-cs-
rbs0129.aspx?ad=dirN&qo=investopediaSiteSearch&qsrc=0&o=40186