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HSBC money laundering drug cartel trusts know your customer carl Levin senate Trust Regulatory News A.M. Publishing Garbo Lack of KYC Documentation at HSBC Trust Operation

(July 18, 2012 --Chicago, IL) -- Regardless of economic problems in the U.S., our banking system is seen as a secure haven in which to keep funds. The vast sums of money controlled by corrupt foreign leaders and drug cartels is causing some financial institutions to turn a blind eye, according to reports of the Senate’s Permanent Subcommittee on Investigations. The committee's most recent report focuses on anti-money laundering weaknesses at HSBC. However, the report reserves some of its most severe criticism at U.S. bank regulators.

In its 340-page report, U.S. Vulnerabilities to Money Laundering, Drugs, and Terrorist Financing: HSBC Case History, the Senate committee asserts the bank gave terrorists, drug cartels and criminals access to the U.S. financial system by failing to guard against money laundering. In particular, it focuses on huge sums of Mexican drug money, which it says almost certainly passed through HSBC.

"The problem here is that some international banks abuse their U.S. access," says Senator Carl Levin (D-Mich.), who chairs the subcommittee. "The end result is that the U.S. affiliate can become a sinkhole of risk for an entire network of bank affiliates and their clients around the world playing fast and loose with U.S. rules." The report argues that this "access" puts the country at risk.

While the report focuses heavily on banking transactions, it found weaknesses in trust operations as well.

The trust department of one HSBC affialiate, notes the report, "is struggling to improve the poor condition of its files." Worse, the report stresses that senior management's optimism regarding implementation of AML policy appeared myopic. In particular, senior management's belief in implementing Know Your Customer (KYC) rules.

While management believed that most AML deficiencies were not related to KYC, audit results proved just the opposite.

Of a total of 15,434 trusts: only 6,868 (41 percent) have completed documentation, while 2,955 (20percent) had no documentation at all.

Regardless of HSBC weaknesses, the report is extremely critical of Office of the Comptroller of the Currency's oversight.

According to the report, the OCC does not treat AML deficiencies as a safety and soundness matter. As a result, AML problems are not discussed in the analysis of safety and soundness issues in a bank's report of examination. Additionally, the OCC does not routinely take AML deficiencies into account when assigning the bank a CAMELS component rating for management or its overall composite rating.

The report, in short, asserts that the OCC knew about HSBC weaknesses but did little to nothing about them.

For more on this topic, see Trust Regulatory News.

No statement in this issue is offered as or should be construed as legal opinion or advice or as an indicator of future performance.
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