HSBC AND THE DOJ: WILL THERE BE AN ACT II

Posted in Anti-Money Laundering, cheating the public, corporate integrity, Crisis Litigation, Crisis Management, Crisis Mitigation, DOJ, DPA and statement of facts, Ethics and Crisis Management, HSBC, HSBC Compliance failures, HSBC fine. Was justice done?, Setting ethical standards on January 4th, 2013 by mnayor

The New York Times editorialized that “It is a dark day for the rule of law” when it was announced in mid-December that British bank HSBC would pay $1.9 billion in forfeitures and penalties, but would avoid criminal prosecution for laundering Mexican drug cartel money and engaging in prohibited transactions with Libya, Iran, Burma, Sudan and Cuba,. Instead HSBC Holdings, plc, HSBC North America Holdings, Inc. and HSBC Bank USA (together referred to as “HSBC” or “the bank”) entered into a Deferred Prosecution Agreement (DPA) that requires the bank to clean up its act. The prosecution is deferred for five years and requires a neutral monitor. If the bank conducts itself responsibly, there is no prosecution. None of its executives were cited.

 

In 2003  the Federal Reserve ordered HSBC to police itself better for suspicious money flows. HSBC efforts not only failed, but since 2005 the bank violated the Bank Secrecy Act and otherU.S.laws on a large scale. It ignored massive transactions, including bulk cash and banknote activities, failed to establish or follow review procedures, and created seriously flawed risk assessment policies and procedures. HSBC executives and employees in its money laundering and compliance division were  found to be incompetent. Worse, HSBC failed to generate or did not review its own anti-money laundering alerts or create and report suspicious activity reports (SARs) toU.S.authorities. The Federal Reserve, the Office of Foreign Assets Control, the Office of the Comptroller of the Currency and the Senate Permanent Subcommittee on Investigations all investigated HSBC for similar activities.

 

Undoubtedly there was criminal activity. Lanny Breuer, assistant Attorney General, explained that HSBC was being held responsible “for a stunning failure of oversight and worse”. Worse for sure given DOJ’s own investigation. The Statement of Facts which is incorporated into the DPA is damning. HSBC stipulates that the information contained in the Statement is true and accurate. The Statement runs thirty pages and is rife with allegations against and admissions by HSBC. For example, DOJ alleges and HSBC BankUSAadmits that it violated the Bank Security Act that makes it a crime to willfully fail to establish due diligence for foreign correspondent accounts.

 

DOJ deemed that the criminal Information it filed, without the accompanying Deferred Prosecution Agreement (DPA) would have been too disruptive, that in effect, HSBC and its subsidiaries were too big to fail. If that is the case, how effective is the DPA? While Breuer claims that it is a “sword of Damocles right over HSBC”, if the Bank is too big to be prosecuted now, it will be just that much bigger five years from now and DOJ will be even less willing to take decisive action if HSBC violates the DPA.

 

U.S.attorney Loretta Lynch stated that HSBC cooperated “immediately and extensively” and this was taken into account in deferring criminal prosecution. But that is not the case. HSBC has a paper trail, a track record that leads back to 2003. Nothing so far has seemed to work to get HSBC into line, and there are no concrete indications from insiders that this time it will be different.

 

There is some published speculation that Treasury and/or the Office of the Comptroller of the Currency put some pressure on DOJ to stop short of criminal prosecution in order to avoid significant disruption in the financial markets and perhaps to the world economy. Some say that HSBC would have been damaged, even “destroyed”, but there have been no specifics. This may merely be a bogeyman to convince the public that DOJ avoided a financial disaster. At the very least, DOJ could have wrung out criminal admissions from HSBC Mexico. This may have satisfied some. In the DOJ case against UBS for Libor manipulation the UBS Japanese subsidiary pleaded guilty to one criminal count of fraud. Looking at the bigger picture, the HSBC affair was an opportunity to fight the concept of “too big to fail”. Perhaps HSBC would have had to sell off some of itsU.S.banking operations, or even all of it. 25% of its total assets are located in theAmericasso we can assume thatU.S.assets account for less. It would not have been the end of HSBC. It is already selling assets in countries where it cannot compete and is in the process of eliminating a significant number of jobs.

 

HSBC is a behemoth As of mid-2012 HSBC was the world’s third largest bank, and had the second largest market capitalization on the London Stock Exchange. It was founded only in 1991 by the Hong Kong and Shanghai Banking Corporation which then enabled it to acquireUKbased Midland Bank. It remains the largest bank in Hong Kong and is now the largest international bank inChina. A guilty plea by HSBC in this case might have had serious consequences, but it would have survived in one form or another. For theU.S.government to essentially conspire with HSBC for the bank to remain “too big” is not in the best interests of theU.S.legal system, theU.S.banking system or the world banking system. Such  failure to fully enforce the statutes of theU.S.rightfully brings on criticism of our justice system. This was an opportunity to start whittling away at bigness, to begin to stop the tail wagging the dog. It was an opportunity lost.

 

Finally, in the UBS case, two traders were also charged with taking part in the scheme to manipulate Libor rates. It seems incredible that, at the very least, given the seriousness of the crimes committed at HSBC, that not one executive has been indicted. The Statement of Facts is riddled with the admitted words “knowingly” and “willfully”. What prosecutor, left to his/her own devices, wouldn’t love to have this case. These crimes were committed by individuals. DOJ investigations have been ongoing for several years. Surely a name or two has popped up. When asked whether there may be criminal cases brought against individual HSBC bankers, assistant AG Breuer said “There may be , but there may not be”. Let’s hope he’s merely playing coy because if no individual indictments are forthcoming it will be a travesty of justice. And Breuer has the weapons. The DPA provides that HSBC is obligated to use its good faith efforts to make available to DOJ at the bank’s expense all current and former executives, employees, directors and consultants, and further to provide any information, materials, documents, databases, etc, requested by the Department. There is no protection against prosecution for conduct that HSBC did not disclose prior to the DPA, and there is no protection against prosecution of any current or former officer, director, employee, agent or consultant for any violations committed by them, including conduct described in the Statement of Facts. These provisions in the DPA give the DOJ wide latitude to continue its investigation and take whatever action it deems necessary in its pursuit of justice. Obviously it is not necessary, as the assistant AG has stated, that any individual still be employed at HSBC. And it is not necessary that any individual be complicit with its customers in drug or terrorist activities. It is enough that acts were willfully perpetrated that are statutorily deemed criminal offenses. The Bank Secrecy Act, for example, provides for heavy penalties for individuals and institutions that fail to file SARs, currency transaction reports and money instrument logs. Penalties include heavy fines and prison sentences.

In order for DOJ to redeem itself it is clear that additional action needs to be taken. This may have to wait until the cast of characters inWashingtonchanges. The viewpoint of Treasury may certainly change when there is a new Secretary of the Treasury. Additionally, if the U.K does not remain silent about former executives who were active at HSBC during the times in question, our government may gain more courage. Take for example Stephen Green, now Lord Green. Lord Green  became chief executive of HSBC in June 2003 and was appointed chairman in 2006. According to the Huffington Post, in 2005 he was made aware of the bank’s alleged ties with “rogue” regimes in theMiddle East. The US Senate investigation released internal emails showing how in the same year Lord Green was warned by an internal whistleblower in the bank’sMexicosubsidiary that compliance staff had “fabricated records”. He was also told in 2008, two years after being appointed executive chairman, that the Mexican authorities had uncovered evidence of money laundering that “may imply criminal responsibility of HSBC”.

There is little question that the HSBC affair has left DOJ with a black mark against it. The DPA provides adequate remedies to monitor closely the activities of HSBC over the next five years and to take direct and effective action in case the DPA is violated. The DOJ also has the power to continue its investigation of individuals and to receive the cooperation of HSBC. If and when criminal activities are uncovered DOJ has the power and authority, and hopefully the will, to prosecute to the fullest extent of the law. It should take advantage of this opportunity in order to void the current impression that justice in this country is applied selectively.

 

 

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J&J: IT’S ABOUT TIME OR MORE OF THE SAME

Posted in a ggod reputation guarantees long term profits, Business Crises We Create, cheating the public, Corporate Crisis Management, corporate integrity, Crisis Management, Crisis Management Response, Doing the right thing, Ethics and Crisis Management, Hurting customers, J&J, Johnson & Johnson, Respect your customers, Taking Responsibility for actions of an organization or its employees, when the bottom line is more important than your customers, William Weldon on February 22nd, 2012 by mnayor

 In October of 2010 I highlighted many of the difficulties Johnson & Johnson had been going through since the early part of the decade, from tens of millions of dollars to settle claims against its product Ortho Evra, to product recalls including children’s Tylenol and contact lenses. Other telling issues involved a wrongful termination suit by a whistle blower and a resignation by a senior executive whose conscience would not allow him to remain at J&J knowing what he knew about Ortho Evra.

My conclusion was simply that J&J’s management had veered way off course and had sullied the reputation of one ofAmerica’s greatest corporations, one that was known and respected for its integrity and honesty. I ended with an expression of hope that the lessons learned would set management on the right course once again.

 This was not to be. Just this past week the press reported that J&J took a year to recall a version of its artificial hip after the FDA refused in 2009 to approve it because of its high rate of failures. The device was recalled in 2010, and J&J maintained until that time that the device was safe and its own studies refuted the allegations of professionals. J&J continued to market the hip in Europe and other overseas countries until the recall and sold another version of its hip that didn’t need safety approval in theU.S., even though the hip socket cup, which the FDA found to be flawed, was the same in both products.

 It is interesting to track the timeline of most of J&J’s recent woes to the timeline of William C. Weldon’s tenure as chief executive. Whether directly attributable to Weldon’s misfeasance or malfeasance is not the issue. The torrent of missteps, mistakes,  dishonesty, deception and manipulation has occurred on his watch. The least that can be said without pointing a finger directly at him is that he failed miserably to instill a sense of integrity within the company, a sense of integrity that transcends the needs of the short-term bottom line. So many executives foolishly sit at their desks with blinders on. Weldon and his followers allowed a culture to fester within their walls that calls for the good of the company to transcend the good of the public.

 No executive worth his title would allow the disintegration that has taken place at J&J. Thankfully, William Weldon will step down in April of this year although he will remain as chairman. Alex Gorsky will be the new CEO. Has the Board done the Company, its shareholders and the public a major disservice? Gorsky is cut from the same cloth as Weldon. They both cut their teeth in sales and both are sensitive to the bottom line and enhancing it above all else.  Hopefully Gorsky will recognize the need to build trust, and instill honor from which J&J can once again earn the widespread respect of the public. Build it and they will come. With that will come the financial success that Weldon’s crew tried to obtain on the cheap. If Gorsky has not learned from past mistakes, expect more of the same from J&J. We will all be witness to the transformation of a great American company into just another self-serving medical conglomerate that feeds off the public.

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