A man walks past a logo of HSBC Holdings PLC at the bank's headquarter in Hong Kong Monday, March 2, 2009. HSBC PLC plans to scale back its consumer lending operations in the United States and to close hundreds of branches there, British and U.S. newspapers reported Sunday. (Vincent Yu/AP)

The U.S. affiliate of global banking giant HSBC was for years a haven for foreign money laundering, drug-trafficking money and potential terrorist financing activities, largely because of the bank’s woefully inadequate monitoring practices, according to a 340-page Senate report scheduled for release Tuesday.

The report chastises the bank’s primary U.S. regulator, the Office of the Comptroller of the Currency, for failing to take more aggressive enforcement measures against the bank after the OCC became aware of illicit activities.

“Banks that ignore anti-money-laundering rules are a big problem for our country,” said Sen. Carl Levin (D-Mich.), who chairs the permanent subcommittee on investigations. “But also troubling is a bank regulator that does not adequately do its job.”

Both HSBC executives and top officials from the OCC are expected to encounter stiff questioning Tuesday when they face Senate lawmakers during a hearing on Capitol Hill. The report comes as HSBC, which has faced a string of alleged money-laundering lapses in the past, works to overhaul its practices and rehabilitate its image.

The Britain-based bank’s chief executive last week acknowledged in a memo to employees that the firm’s anti-money-laundering controls in recent years “should have been stronger and more effective, and we failed to spot and deal with unacceptable behavior.” In addition, the Wall Street Journal reported Monday that HSBC has been locked in settlement talks with the Justice Department over a probe into whether bank officials were complicit in laundering activities by Mexican drug cartels.

The year-long Senate investigation, which could serve as a blueprint for similar inquiries into other firms, involved interviews with scores of HSBC officials and bank regulators and a review of more than 1 million documents, including internal e-mails. Investigators focused primarily on HSBC’s U.S. affiliate, HSBC Bank USA (HBUS), which functions as a hub for the firm’s vast global network.

According to the report, investigators discovered a persistent lack of internal oversight that left the U.S. banking system vulnerable to abuse from bad actors around the globe. Said Levin: “HSBC’s compliance culture has been pervasively polluted for a long time.”

Among the findings:

●HBUS treated some high-risk affiliates like low-risk clients. A key example was HSBC Mexico, which despite its location in a country rife with money laundering and drug trafficking, was allowed to transport $7 billion in U.S. currency to HBUS between 2007 and 2008, raising suspicions that the money came from illegal drug sales.

●Some overseas HSBC affiliates circumvented government safeguards meant to block funding for terrorists, drug lords and unsavory foreign regimes. In one case, investigators found that HSBC allowed two foreign affiliates to shield the fact that thousands of transactions involved links to Iran. In addition, the investigation found that HBUS did business with certain banks in Saudi Arabia and Bangladesh, despite evidence of links to terrorist financing.

●HBUS cleared hundreds of millions of dollars in suspicious travelers checks for a Japanese bank that benefitted Russians claiming to be in the used car business. When the Japanese bank could not explain why its clients sometimes deposited more than $500,000 a day in sequentially numbered travelers checks, all bearing the same illegible signature, HBUS continued to clear the transactions, the report states. The bank eventually stopped cashing them under pressure from regulators.

Senate investigators also leveled harsh criticism at the OCC. The report states that the agency tolerated anti-money-laundering deficiencies for years and allowed national banks to delay or avoid correcting their internal problems. In October 2010, the OCC finally issued a “cease and desist” order requiring HBUS to overhaul its monitoring controls, but Levin insisted that the agency should have been more proactive and even draconian in cracking down on those shortcomings.

Comptroller Thomas J. Curry, who took office in April, said in a statement that his agency agrees wholeheartedly with the recommendations offered by Senate investigators and that anti-money-laundering compliance “is crucial to our nation’s efforts to combat criminal activity and terrorism.”

In a separate statement, HSBC said it takes such compliance “very seriously” and that the firm’s new management has taken “concrete steps” to change its culture.

“We will acknowledge that, in the past, we have sometimes failed to meet the standards that regulators and customers expect,” the company’s statement said. “We will apologize, acknowledge these mistakes, answer for our actions and give our absolute commitment to fixing what went wrong.”

Levin welcomed that sentiment, and said the bank had cooperated with the recent investigation. He also said that new leaders at both HSBC and the OCC have a chance to right past wrongs, but that the right words alone won’t be enough.

“Apologies are important,” Levin said. “But accountability is essential, and that’s what’s been missing here.”