HSBC India staff under scrutiny by US Senate in money laundering case

Employees of banking giant HSBC — most probably from its back-office in Pune — are under scrutiny of the US Senate in a money laundering probe.

A probe by the subcommittee on investigations of the Senate found that the UK bank’s anti-money laundering compliance department, which included employees in India, was inadequately staffed.

Also, a 340-page report by the subcommittee said deficiencies were found in the work done by HSBC’s “offshore reviewers in India”, who were used for clearing a major backlog of suspected transaction alerts at the bank.

Essentially, analysts said, this would mean Indian reviewers of transactions may have missed red-flagging many of the transactions that were found to be money laundering operations.

HSBC was “pervasively polluted for a long time”, said the subcommittee, “as it allowed funds to be shifted to and from its branches in the United States as far afield as Mexico, Syria, the Cayman Islands, Iran and Saudi Arabia.”

A senior official of an international consultancy firm based in Mumbai said lately there has been a lot of focus on the procedures followed by different banks in regulatory compliance. “There has to be some standardisation, because not all banks follow all the parameters involved. They put different weightages to different parameters based on their risk perception. There needs to be some standardisation,” he said.

HSBC’s anti-money laundering unit, which consists of less than 200 employees including those in India, was required to clear alerts in the internal system. The bank’s aim was that no more than 2% of the alerts would remain in the system for more than 120 days without being resolved.

In addition, the system would notify increasingly senior management if the backlog exceeded certain thresholds. For instance, if the backlog hit 6%, the regional compliance officer would be notified.

In November 2009, the percentage of alerts in the system for longer than 120 days spiked to 9% from 4% in October. The backlog remained at 9-10% for the next four months, and then stayed around 6-7% from March to May of 2010, the report says.

“Banks classify customers according to low and high-risk segments. It is possible that a majority of these alerts came from low-risk customers, which the bank may have ignored. However, this is only one of the possibilities,” another consultant said.

The bank’s India representatives chose to not comment on the developments.

However, Stuart Gulliver, chief executive of HSBC, did issue an apology in front of the US Senate, saying, “We have sometimes failed to meet the standards regulators and customer expect… we take responsibility for fixing what went wrong.”

Management from Britain’s biggest bank were required to appear before the US Senate on Tuesday and David Bagley, chief of compliance at the bank, stepped down from his position. With inputs from agencies.