Banks are facing heightened investigation and steeper penalties from federal regulators and prosecutors for failure to comply with anti-money-laundering laws, an enforcement trend that may shave billions of dollars off bank balance sheets.
Global banking giant HSBC on Monday said it poured an additional $800 million into its reserves in the third quarter to cover potential fines, settlements and other expenses related to a money laundering probe by the Justice Department and banking regulators. The bank has $1.5 billion set aside, though it believes the costs may significantly exceed that amount.
HSBC is one of several banks, including Citigroup and Standard Chartered, being investigated by the government for allegedly allowing millions of dollars from drug traffickers, terrorists or countries under sanctions to illegally move through the U.S. financial system.
While some of these investigations have been in the works for years, banking attorneys say the level of scrutiny coming from the government has intensified. Some suspect regulators are reacting to congressional criticism that they have been slow to act. Others say government interest in money laundering never wavered, but that resources were redirected to address the financial crisis.
Either way, there is a clear difference between the anti-money-laundering enforcement of today and five years ago, said Michael Dawson, managing director of Promontory Financial Group, a financial consulting firm.
“The involvement of the Department of Justice in sanctions and enforcement actions is much greater now than it was five years ago,” he said. “And the size of the fines have increased by a factor of 10 or more.”
Financial firms have in the past primarily dealt with their direct regulators on managing money-laundering controls. But in the aftermath of the financial crisis, Justice has launched more criminal cases under the Bank Secrecy Act (BSA), a law requiring financial institutions and their employees to combat money laundering. Attempts to contact officials at the agency were not successful.
Justice exacted its biggest fine under the law in 2010, when Wachovia agreed to pay $110 million for failing to stop millions of dollars of Colombian and Mexican drug money from being laundered through accounts at the bank.
“There has been a bit of a criminalization of regulatory violations,” said Ellen Zimiles, head of the Global Investigations and Compliance practice at Navigant. “It’s not as if the statutes do not allow criminal cases, but the practice of bringing criminal actions for BSA violations ... has been limited to extreme cases.”
HSBC is facing criminal and civil charges. The bank’s troubles came to a head earlier this year when the Senate permanent subcommittee on investigations released a report accusing the bank of helping clients with drug trafficking and terrorist ties to bring money into the United States.
“We deeply regret what took place in the United States and Mexico,” Stuart T. Gulliver, chief executive of HSBC, told reporters on a conference call Monday. “A number of people have left the bank and have had clawbacks against their compensation.”
Months following the HSBC report, another London-based bank, Standard Chartered, was ensnared in a money-laundering scandal. New York’s financial regulator accused the bank of flouting sanctions and scheming with the Iranian government to launder $250 billion from 2001 to 2007, leaving the United States “vulnerable to terrorists.” Federal regulators are also investigating Standard Chartered’s activities.
“The multiplicity of agencies involved in these cases is staggering,” said Andrew L. Sandler, chairman of the law firm Buckley Sandler. “It is much more complicated to negotiate resolutions with agencies who sometimes have conflicting, or at least inconsistent, points of views.”
Sandler said the pile-on of agencies tends to create pressure for penalties to be higher than normal. “It’s enforcement dollar inflation,” he said. “Once numbers start going up, all of the agencies’ expectations of numbers start going up.”
Consider penalties at Treasury’s Office of Foreign Assets Control, which has hit 11 companies accused of money laundering or violating sanctions with a total of $623 million in penalties through October. That compares with $91 mllion in penalties handed down to 21 companies in 2011. Treasury officials declined to comment for this article.