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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THE CASCADING DECLINE AT THE BBC

Posted in BBC, Corporate Crisis Management, Covering for the organization, Crisis Management, Crisis Management Response, Crisis Mitigation, fix the problem, Protecting the organization at any cost?, the effect of ignoring a problem on November 14th, 2012 by mnayor

Covering for the organization rarely works. Neither does the belief that an organization is so strong and respected that it exits on a level all its own.PennStateofficials found that out recently and now the BBC is suffering from the same ill-advised mentality. Whistle-blowing is a separate but related topic but the concerted effort of many in positions of power at an organization to hide something or sweep it under the rug deserves special attention.

 

For many years a popular, long-time host at BBC, Jimmy Savile, was suspected of sexually abusing young people, sometimes even at the premises of the BBC. The Company recently came under blistering attack when it was learned that an investigation of Savile had been cancelled by the editor of BBC’s Newsnight program last year. Newsnight is an important current affairs program of the BBC. Mark Thompson, the BBC’s Director General until last month (and who is destined to join the New York Times shortly) claims to have had no knowledge of the accusations against Savile although there were many opportunities to delve into the matter if he chose to do so.

 

Within the last week and in a matter of weeks since Thompson’s departure, his successor, George Entwistle, resigned because of another flap, again involving Newsnight, which wrongly implicated a Conservative Party politician in a pedophile scandal inWales. And just yesterday the BBC’s Director of News, Helen Boaden and her deputy, Stephen Mitchell announced that they have “stepped aside”.

 

The upshot is that there is turmoil at the BBC. There is a lack of control and the Chairman of the BBC Trust has acknowledged that the organization is in a ghastly mess and in need of a thorough overhaul.

 

How does any organization get itself into this type of crisis and what types of crisis management are called for? First, hubris plays a significant role. When an organization attains a stratospheric reputation such as that of the BBC, those who personify it not only begin to believe in its infallibility but also in their own. Heightened reputations beget dizzying overconfidence. Secondly, there is a tendency of employees, whether they be worker bees or top management to put their employer above all else. Not many people want to be held responsible for the decline or unraveling of an organization. Most want to be team players, no matter what they know and no matter what they really think about their place of work.

 

Crisis management calls for continual checks and balances. An organization cannot continue to coast, as many do, on old and outdated reputations. It is incumbent on top management, and lower levels in turn, to clarify lines of responsibility and authority, to define the values of the organization, to impose clear lines of accountability and to review regularly issues that arise. Often, top management wishes to be insulated from bad decisions already made, and hard decisions that need to be made, even with the knowledge that, more often than not, the buck stops with them and they may be the sacrificial lambs regardless.

Crisis management does not just mean planning to avoid a crisis if possible. Nor does it just mean managing a crisis once it hits. It also means taking steps to mitigate a crisis in the works. A CEO and his/her lieutenants are charged with monitoring the ship as a captain of a vessel or plane would. Rectifying what is wrong is a vital part of the job. Time does not absorb and dissolve a bad decision. It only heightens the culpability of the parties who either made no attempt to rectify it or tried to white-wash it. This is a hard lesson for people such as the former President of Penn State and the late Joe Paterno. It is a hard lesson for the former and current management of the BBC.

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CRISIS MANAGEMENT VERSUS HUBRIS

Posted in Business Crises We Create, Business Crisis Management, Crisis Communication Failures, Crisis Management Services, Crisis Mitigation, David cameron, News of the World, reputation management, RUPERT MURDOCH on July 18th, 2011 by mnayor

Does history merely repeat itself instead of teaching us anything? Based on business news about movers and shakers one could deduce that many corporate executives just don’t get it and never will.

After the debacle of 2008 when many financial CEO’s were caught in the proverbial headlights, you would think that a tough lesson would have been taught – and learned. Instead even Teflon-coated Warren Buffet decided that his power, authority and standing in the world were enough to allow him to initially stonewall the public about his executive Dave Sokol’s purchase of Lubrizol stock. Not to be outdone Rupert Murdoch has raised the bar even higher.

In a scant two weeks his empire, headed by the subtly named The News Corporation, has experienced what many would not wish on their worst corporate rival. After approximately four years of an on-again, off-again Scotland Yard investigation of phone hacking by News of the World tabloid, that paper has folded, Murdoch’s attempt to acquire the remaining interest in British Sky Broadcasting (BSkyB) has been aborted, and a slew of his corporate executives have been arrested, resigned or otherwise had their reputations besmirched. Rebekah Brooks the CEO of News International, the parent of the late News of the World resigned in disgrace, after two attempts at resignation that were not accepted by Murdoch. Also, Les Hinton, publisher of the Wall Street Journal tendered his resignation the same day.

The details of the outlandish accusations are certainly important but how they were handled by Murdoch is equally important and instructive. For a “media” guy, you would think he would know how to handle as big a story as this. Instead, up until yesterday we heard nothing from Murdoch – and then when we did, we heard the hrrumphing of a corporate big-wig instead of the measured pronouncements of a savvy media executive. Last week Murdoch flew to England from the U.S. Very quickly News of the World was closed, after a 168 year life. Yesterday he told a reporter for the Wall Street Journal that the matter was handled “extremely well in every way possible”. He further stated (apparently referring to his upcoming testimony before Parliament’s select committee on culture, media and sport on July 19th at which initially he and his son, James, declined to appear) that he was eager to address things said in Parliament some of which “are total lies”. Finally, he refuted the allegation that he might spin off his newspaper operations into a separate company as “total rubbish”. He did visit the family of Milly Dowler, the thirteen year old who was killed and whose phone was hacked; and extended apologies to the family. This last weekend he placed full page apology ads in British newspapers.

What kind of media executive fails so miserably in handling a business crisis like this? Who leaves a yawning time gap of two weeks before stating anything? If we assume the complete innocence of a CEO, we would then expect that leader to dig for the truth and let the public know immediately. Silence can only foster the impression of knowledge and guilt. An announcement that the matter is being extensively investigated and that such conduct is not tolerated in the organization goes a long way to safeguarding one’s reputation and possibly the organization itself (many pundits found the sudden closure of News of the World suspicious, based on protecting the Murdoch empire from legal liability). There were and may still be ways to staunch the bleeding, but it may now be very difficult to do. Clearly Murdoch did little or nothing immediately. As a result his empire is suffering and will continue to do so, as stakeholders in Britain and worldwide continue to question his tactics and the integrity of his enterprises.

Many people in the newspaper industry who have been interviewed about the phone hacking scandal find it implausible that editors and publishers wouldn’t know about the sources of stories. They must have known about the hacking and therefore it was both a bottom up and top down conspiracy. Rupert Murdoch may have had knowledge and thus the reason for the code of silence to date. It will be interesting to hear his testimony. At all costs he must avoid appearing out of touch with his businesses, imperious because of his power, or delusional that his connections will protect him. From David Cameron on down, the flight to high ground has begun.

Events seem to be gathering speed as this is being written for publication. Rebekah Brooks was arrested and released on bail. The leader of London’s Metropolitan Police Services, or Scotland Yard, Paul Stephenson, and his deputy have stepped down under growing allegations that the respected organization was very cozy with members and agents of the Murdoch empire; and more information is surfacing about David Cameron’s personal relationships and frequent meetings with similar individuals.

As individual reputations begin to crumble, little effort seems to be directed towards salvaging the Murdoch enterprises, some of which are very much worth saving. Placing someone who is untainted in a position of authority would appear to be necessary and Joel Klein would seem to be the man to take charge right now. The businesses must be separated from the personalities and be made to run as business as usual. There is no sense in allowing individuals – any individuals – to drag down an entire business empire. Klein has a good reputation (a lawyer who was head of the New York City School System until he joined Murdoch), and can direct the “clean” Murdoch business units on a steady course until the mess can be sorted out or until it at least simmers down.

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THE NEGATIVE PUBLICITY ENIGMA

Posted in Anticipating A Crisis, Business Crises of our own making, Business Crises We Create, Business Crisis Management, Corporate Crisis Management, Crisis Communication Strategy, Crisis Management, Crisis Mitigation, negative publicity on December 1st, 2010 by mnayor

Robert Walker wrote an article recently in the New York Times Magazine section entitled Good News, Bad News, about the negative publicity the GAP received over its attempt to change its iconic logo; and, in general, the fallout or lack thereof that can be expected from negative attacks.

He’s got a point. The old adage that any publicity, negative or positive, is good publicity is certainly not always true. But some forms of negative publicity don’t always do harm. Such is the case with the GAP logo fiasco.

What forms of negative publicity can hurt an organization? Clearly, reports of poor goods and/or services can be harmful. Reports of Johnson & Johnson’s tainted products over the last year have not helped its image. Reports of poor airline service have the effect of customers shopping for alternatives. A hotel devastated by a hurricane or earthquake or a terrorist incident has the same effect.

Stories about poor management will also turn customers off. Look at the banking and investment banking industry. All of these kinds of negative publicity have the effect of creating a crisis, and require skilled crisis management to counter the effects. The crisis management needed has to tackle two fronts: operationally to truly “fix” the problem and crisis communication to inform the public.

But there are other forms of negative publicity that don’t affect products, services or management, such as the GAP logo situation. True, some people were offended or reacted poorly to the proposed change, but what of it? It would take an extraordinarily sensitive GAP shopper or potential GAP shopper to boycott GAP because of this event.

A business crisis is one that effects a company’s reputation or bottom line. Did an unpopular proposed logo change genuinely affect GAP’s reputation? Did it affect the company’s bottom line? I think not. If it did, it was very short-lived and very ineffective. In fact, most stories about the incident stressed the many attributes about the business, its clothing products and its branding success. While GAP would most likely have opted for no publicity over its logo, no harm was done.

The moral of the story? Manage well. Provide excellent products and services. You may still be unable to avoid negative publicity or a crisis that is beyond your control but if your base is solid you will weather the storm.

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PREEMPTION: THE TWO EDGED SWORD IN CRISIS MANAGEMENT

Posted in Business Crises of our own making, Business Crises We Create, Crisis Communication Strategy, Crisis Litigation, Crisis Management, Crisis Mitigation, Liability Communications, Litigation Communications on November 3rd, 2010 by mnayor

 Crisis management and product liability are inextricably linked. Whenever a product fails and causes injury or damage to buyers, a crisis can erupt. The liability of manufacturers and vendors have tightened dramatically over the last hundred years, from the theory of caveat emptor or let the buyer beware, to today, in some cases, strict liability. State laws on matters of health (including the environment) and safety have provided consumers with greater and greater protections over the years.

Businesses of all kinds must be more diligent than ever. Even if negligence and/or misrepresentation are not at issue, a company can still find itself in a great deal of trouble. Accusations concerning causation, erroneous manufacturers’ claims, and customer-product incompatibility can raise the specter of liability and place a company at risk.

Not all products are 100% safe for all people at all times. Thus the concept of warning labels has taken on greater importance, especially in those situations where use may be abused, inappropriate or be accompanied by additional risks. We see this more and more in such industries as pharmaceuticals, foods, toys, automobiles and cosmetics. In today’s world some warnings may not be deemed sufficient because they are either not perceived as strong enough or not evident enough on packaging.

In recent years some companies and even whole industries have looked to preemption as a form of product liability protection from individual and class action suits. Federal preemption is the trumping of federal law over state law when that is the express or implied intention of Congress. Most product liability law is state law through a state’s police powers, and ultimately its state statutes, its common law and court decisions. Oftentimes, federal laws are not as tough as state laws and therefore afford more protection to business. Federal legislation, and even federal regulations, sometimes takes precedence. In fact several agencies of the federal government such as the U.S. Food and Drug Administration, The Federal Trade Commission and its Bureau of Consumer Protection, the Consumer Product Safety Commission, and the National Highway Traffic Safety Administration have declared that some of their specific regulations preempt state law and bar or limit consumer redress. 

Federal court decisions have been mixed. In one recent Supreme Court decision the Court ruled that a medical device manufacturer could not be sued by a consumer because the manufacturer had won FDA approval. But in another, the Court held that a patient was not barred from suing a pharmaceutical company for damages just because the product displayed an FDA-approved label.

Preemption may create a dilemma for a company. Certainly, successful preemption can provide the type of protection that can avoid financial calamity. On the other hand, combative and bellicose pursuit of a safe harbor can have an extremely negative effect on a company’s reputation. It is quite easy to appear as consumer-be-damned if preemption coverage is not handled discretely. Reputation management is equally as important, and a company must strike a balance between finding that safe harbor and doing the right thing, between securing financial escape and retaining and developing public support, respect and even admiration.

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THE CATHOLIC CHURCH AND CRISIS MANAGEMENT

Posted in Crisis Communication Failures, Crisis Management Response, Crisis Mitigation on April 5th, 2010 by admin
Sometimes it pays to come out fighting, with fists flailing away. Other times it looks mighty defensive, if not downright ridiculous.
To equate the current “persecution” of the Pope with the persecution of the Jews during the holocaust falls into the latter category. Furthermore it just digs the hole deeper. Now instead of appearing not to understand the seriousness of deviant sexual behavior within the Church, Rome makes itself look quite hardened to the death of six million Jews, lending truth to the many accusations of antisemitism over the years.
What to do? Presumably, direction is not coming from the top, but it should. A few competent souls need to plan and orchestrate a world response. This has to be done with great foresight and intelligence – and bravery and humility. The planning must be two-pronged. Not only must the words be chosen carefully and sensitively, but the actions must be carefully planned to prove to the world that the Church wishes to correct its mistakes and to make the Church a better place. The desire to make real corrections within the Church must be genuine.
Next, the bureaucracy has to muzzle self-appointed spokespersons who are inept. The spokesperson needs to be the Pope or someone with the stature to be taken seriously and as the final word on the subjects that are plaguing the Church. Of course Rome cannot muzzle individual priests but no one will mistake individual comments with the declarations from on high.
Creating window dressing and masking mistakes of the past haunt the Church. The expression of genuine regret, acknowledgement of past transgressions, the will to deal with issues head on and actually implementing changes and punishment of transgressors will help restore the Church. Otherwise Rome will be reigning over an ever more exclusive club whose membership will surely diminish as defections escalate.
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