By Steve Slater and Sinead Cruise
LONDON (Reuters) - HSBC
That complexity in part explains how the London-based bank ended up with the biggest fine ever imposed on a financial firm by U.S. regulators on Tuesday - an eye-watering $1.9 billion - after a lengthy U.S. probe showed sweeping problems at the bank. Lax controls had left HSBC as the "preferred financial institution" for drug traffickers and money launderers, U.S. prosecutors said this week.
The concern is that HSBC, Europe's biggest bank, with more than 60 million customers across 84 countries, is unable to adequately monitor all its operations, a task made harder by its history of patchwork acquisitions.
HSBC said it has spent hundreds of millions of dollars to bolster compliance and simplify its control structure to address the lapses in anti-money-laundering controls, mainly in its Mexico and U.S. operations, which led to stinging criticism from politicians and the record punishment.
"(Chief Executive) Stuart Gulliver is doing a good job looking after the group, but at the end of the day it is an absolutely massive bank with branches everywhere; it is impossible to guarantee that there isn't something going on somewhere," said Jane Coffey, head of equities at Royal London Asset Management, an HSBC shareholder.
Gulliver restructured HSBC shortly after taking over at the start of 2011, setting up global businesses and functions to improve communication and operations across the group.
In the past, national heads ran all its businesses within each country, which could result in problems going unnoticed. The bank needed to improve its internal sharing of information to help cut down on illicit activity, U.S. Senator Carl Levin said when he published a scathing report on the bank in July.
In Mexico, where HSBC became one of the top banks with the 2002 purchase of Grupo Financiero Bital, a rapid expansion meant problems were missed. Between 2007 and 2008, HSBC's Mexican operations moved $7 billion into the bank's U.S. operations, and both Mexican and U.S. authorities warned the bank the amount of money could only have been so high if it was tied to illegal narcotics proceeds, the U.S. Senate report said.
In early 2008, a Mexican drug lord referred to the bank as the "place to launder money", U.S. prosecutors said this week.
Unlike the Libor interest-rate rigging scandal that rocked UK rival Barclays
Stephen Green, who was chief executive and then chairman from June 2003 until December 2010, is now UK Trade Minister and has faced calls to explain what he knew. He said in July he shared the "regrets" HSBC had about the failings. Michael Geoghegan was CEO from May 2006 until the end of 2010, and has not taken on any major new role.
Critics say the failures highlighted this week show the scale of the task facing Gulliver; he has simultaneously to improve returns for investors, meet tougher global regulations, cut costs and stay on top of potential problems.
For some, it is evidence that banks should be prevented from becoming too big, especially as HSBC didn't live up to earlier promises to change.
Back in 2003 New York regulators cracked the whip on HSBC Bank USA, ordering it to do a better job of policing itself for suspicious money flows.
The bank promptly hired a tough federal prosecutor to oversee anti-money-laundering efforts and installed monitoring systems for operations that had grown unwieldy during its big U.S. expansion. But in confidential documents that originate from investigations of HSBC's U.S. operations by two U.S. attorneys' offices there are allegations that from 2005 HSBC was not adequately reviewing hundreds of billions in transactions.
When the Senate issued its 400-plus-page report about how HSBC's lax controls had left it as a financier to clients in areas tied to drug cartels, terrorist funding and tax cheats, it accused the bank of having a "pervasively polluted" culture for a long time.
Gulliver said in a statement after Tuesday's fine: "The HSBC of today is a fundamentally different organisation from the one that made those mistakes."
Cormac Leech, banks analyst for Liberum Capital, said he thought HSBC had done enough to assure investors that it had dealt with its regulatory issues, pointing to its commitments to spend more on processes and better monitoring initiatives.
Compliance costs in North America increased by about $200 million in the first nine months of this year, and a review of customer files will cost about $700 million in the next five years. Gulliver has recruited senior former U.S. compliance experts to lead its efforts.
His attempts to streamline the bank and improve compliance is part of a wider three-year turnaround effort that has seen him sell dozens of businesses and target $3.5 billion in annual cost cuts. He is coming to the end of the second year.
"More could be done (to speed up change), but I think a lot has been done. HSBC was probably more at the incompetent rather than immoral end of the spectrum," said one of the bank's biggest 25 investors, who asked not to be named.
"It's like changing the civil service, changing HSBC. It's such a large organisation. I think there will be large parts of the group which are quite resistant," he said.
HSBC remains, however, a strong favourite with analysts. Of 33 covering the stock, 22 rate it a "buy", eight have a "hold" rating and just three consider it a "sell", according to Reuters data.
"I think a private client can be reasonably confident that the HSBC dividend is sustainable, that they have good management in place and that the bank is not unduly exposed to high-risk areas," said Algernon Percy, head of private clients and manager of the JO Hambro Investment Management Portfolio Fund and an HSBC shareholder.
(Additional reporting by Laura Noonan; Editing by Will Waterman)