Monitor chides 'combative' HSBC managers

Senior managers in HSBC's US division were combative and "inappropriately pushed back" against auditors, according to a report accusing the bank of being too slow to strengthen its anti-money laundering and sanctions compliance programmes.

A summary of an independent monitor's report, filed with a US district court on Wednesday, cited managers' resistance as an example of the bank's corporate culture contributing to its slow compliance progress, though it added that HSBC had made strides in improving internal controls.

The report is another blow to a bank eager to show that it is cleaning up its act amid a rash of legal problems across the globe. Last month, France's financial state prosecutor recommended that HSBC's Swiss private banking arm face a criminal trial on charges that it helped wealthy clients dodge taxes.

The monitor's report is part of a 2012 US justice department settlement, which included a $1.9bn penalty to settle money-laundering allegations related to countries under US sanctions, such as Iran, and Latin American drug cartels.

As part of the deferred prosecution agreement, or DPA, HSBC agreed to install an independent monitor who would provide quarterly updates on the bank's compliance efforts. Wednesday's filing was a summary of a 1,000 page document detailing the first year of the monitorship.

The report is also politically sensitive because it was submitted by Loretta Lynch, the US attorney for the eastern district of New York who has been nominated to replace attorney-general Eric Holder as the country's top law enforcement official.

The Senate vote on her nomination has been held up because of wrangling over an unrelated abortion provision in a human trafficking bill. But some lawmakers have questioned her handling of the 2012 HSBC case.

Ms Lynch said the DoJ would closely monitor HSBC's progress in adhering to the DPA, which the agency is considering scrapping because of separate probes into possible tax evasion and manipulation of the foreign exchange markets.

Overall, the monitor found that HSBC had made progress in developing effective compliance programmes and was in a better position to detect financial crimes than in 2012.

"HSBC is now just two years into a five-year effort to transform its approach to financial crime compliance," the bank said. "We are continuing to meet all of our obligations under our Deferred Prosecution Agreement and are making steady progress towards putting in place a robust, sustainable [anti-money laundering] and sanctions compliance programme."

HSBC monitor Michael Cherkasky found that senior managers of HSBC's US global banking and markets unit resisted a 2014 review by HSBC auditors and compliance officials on its "know your customer" practices.

"The senior managers resisted the review in a manner that caused the final audit report to be more favourable to the business than it would otherwise have been," the summary report said. "Interactions with both internal audit and [compliance] were marked by combativeness, overblown complaints about factual inaccuracy, and a basic lack of co-operativeness."

"The monitor concluded that the [global banking and markets] business in the United States demonstrated a deficient culture that had not fully accepted the role and legitimacy of the internal audit and control functions."

However, senior executives who learnt of the problem addressed the issue, including reassigning the regional head of the Americas and imposing bonus cuts on certain employees.

The report found that HSBC's compliance technology was also an area of "material weakness" because it was too fragmented and disconnected, which prevented bank investigators from easily looking at customer histories when assessing possible suspicious activity.

Additional reporting by Martin Arnold

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