HSBC money-laundering scandal to cost bank $700m

HSBC HAS admitted the bank’s failure to prevent money-laundering in Mexico and the US was “shameful, embarrassing and very painful”, as it took a $700 million charge to cover the cost of US regulatory fines.

The affair, compounded by $1.3 billion in charges related to compensating customers who were mis-sold payment protection insurance and derivatives products in the UK, helped push underlying profits at Britain’s biggest bank down 3 per cent in the first six months of the year.

Stuart Gulliver, chief executive, reiterated an earlier apology. “The firm clearly lost its way,” he said,“but we have changed. It is a priority for senior management to build on steps already taken to manage risk and ensure compliance more effectively.”

The scandals, which undermined healthy performance in much of HSBC’s operations, particularly in its Asian heartland, come as Britain’s banks face political criticism and a regulatory crackdown. They are also feeding concern about London’s reputation as a financial centre.

On Friday Barclays revealed it was the subject of another regulatory investigation, this time into the disclosure of fee payments relating to its 2008 capital raisings. This came only weeks after its £290 million settlement, relating to its involvement in the Libor borrowing rate scandal, triggered the resignation of the bank’s top three directors, including chief executive Bob Diamond.

Chairman of the Financial Services Authority Lord Turner said last week that the period had been reputationally “very bad” for Britain’s banks.

Mr Gulliver, commenting on HSBC’s $700 million provision, said the charge was the “best estimate” based on the bank’s current knowledge of the situation, but he said the cost could be “significantly higher”.

This month the US senate published a report about the bank’s alleged failure to prevent money laundering involving Mexican drug cartels. The affair is proving to be the biggest reputational risk to HSBC since its acquisition of consumer lender Household in the US cost it billions of dollars after the subprime lending crisis.

The bank said headline pretax profits for the six months to the end of June were up 11 per cent year on year at $12.7 billion.

On an underlying basis, pretax profits, which strip out adverse accounting from the improved valuation of the bank’s own debt, fell 3 per cent to $10.6 billion.

The bank’s remuneration committee is set to decide in coming months whether to seek “clawback” of up to £2 million of yet-to-vest bonus payments to Michael Geoghegan, former chief executive, and Sandy Flockhart, a former senior executive who ran the bank’s Mexican operations for four years until 2006. – Copyright Financial Times Limited 2012