The Justice Department investigation, still at the beginning stages, hopes to build cases against individual bankers at HSBC. “Prosecuting individuals is their number one priority,” a source close to the investigation told Reuters.
HSBC first came under scrutiny in August 2010, when the Office of the Comptroller of the Currency (OCC) criticized the bank for "highly suspicious activity" that could allow the unreported movement of dirty money. HSBC agreed to improve its procedures, and has not yet been issued with a fine.
Some reports have suggested that HSBC could face a record $500 million fine, suggesting that the Justice Department is determined to make an example of the bank.
U.S. authorities have faced heavy criticism for failing to crack down on the laundering of dirty money through the banking system. Mexico's drug trafficking gangs may launder up to $36 billion through its northern neighbor each year, according to some estimates. The ability to move dirty money, undetected, through U.S. banks continues to fuel Mexico's conflict, allowing drug gangs to collect their profits.
But negligent banks rarely receive more than a rap on the knuckles: they often need only pay a relatively painless fine and agree to revamp their practices.
The most well known example of this lax treatment is Wachovia. The bank has been accused of “serious and systematic” violations of banking regulations, which allowed a sum of $420 billion to pass through its accounts unmonitored. It was found to have laundered funds for the Sinaloa Cartel, one of Mexico’s biggest drug trafficking organizations, which were used in a number of cases to buy planes which smuggled drugs. Prosecutors accused the bank of “willfully failing” to implement anti-money laundering procedures between 2003 and 2008.
Wachovia -- later taken over by Wells Fargo -- managed to avoid prosecution altogether by paying a total of $160 million to U.S. authorities. No charges were brought against individual bankers, and the government agreed to defer prosecution of the bank itself. These charges were dropped altogether once Wachovia showed it had implemented the required reforms. The sum was made up of $110 million in forfeitures, to compensate for the $110 million the bank admitted that traffickers had laundered through its accounts, added to a $50 million fine -- a paltry sum relative to the bank’s earnings.
A report on the case by British newspaper The Observer points out that the total fine paid was under two percent of the bank’s 2009 profits, which came to $12.3 billion. Such measures offer banks little financial incentive not to deal with dirty money.
At the heart of the money laundering investigations are Mexico’s “casas de cambio,” exchange houses which are often used by Mexican criminal groups to launder funds. One common practice is for drug trafficking organizations to smuggle large amounts of hard currency, collected from U.S. sales, back over the Mexican border, then deposit it into these exchange houses. The funds are then wired by these institutions into U.S. bank accounts. In the case of Wachovia, one exchange house, Casa de Cambio Puebla, used these funds to purchase a number of airplanes on behalf of the Sinaloa Cartel.
After the probe into Wachovia began, Puebla simply shifted its accounts to HSBC, according to Mexican prosecutors. Puebla was headed by Pedro Alfonso Alatorre Damy, who is accused of handling the finances of the Sinaloa Cartel.
The use of U.S. banks to launder criminal proceeds goes back many years. Citibank was censured by the Senate in 1999 for failing to stop money laundering by individuals allegedly including Raul Salinas, brother of former Mexican President Carlos Salinas, who was accused of links to drug gangs. Other banks accused of laundering Mexican drug money include American Express Bank, which paid million in 1994 to avoid prosecution for charges that it laundered money for the Gulf Cartel. Two of its employees were convicted in connection to the case. The bank made a similar agreement with U.S. authorities in 2007, paying a $55 million fine and avoiding criminal charges over alleged money laundering.
Just as Mexican cartels can use their drug profits to corrupt and intimidate government officials and members of the security forces in Mexico, they can also persuade U.S. banks to look the other way as they process dirty money. One of the most important things the U.S. can do to help stop the violence erupting below its southern border is to tighten regulations and make sure violators face proper sanctions.
Mexico’s then-Attorney General Eduardo Medina Mora said in 2007 that U.S. efforts to counter money laundering by Mexican cartels, and stop the trafficking of weapons south, were more important than the $1.4 billion provided to his country through the Merida Initiative. Most funds allocated to this U.S.-funded program are targeted at boosting Mexico's law enforcement efforts through technology and equipment, with few measures aimed specifically at the issue of money laundering.
The Justice Department's reported determination to prosecute individuals who handle Mexican drug money could be a good step forward.