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76–061 PDF 2012

S. Hrg. 112–597 

U.S. VULNERABILITIES TO MONEY 

LAUNDERING, DRUGS, AND TERRORIST 

FINANCING: HSBC CASE HISTORY 

HEARING 

BEFORE THE

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS 

OF THE

COMMITTEE ON 

HOMELAND SECURITY AND 

GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

VOLUME 1 OF 2 

JULY 17, 2012 

Available via the World Wide Web: http://www.fdsys.gov 

Printed for the use of the 

Committee on Homeland Security and Governmental Affairs 

( 

(II) 

COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS 

JOSEPH I. LIEBERMAN, Connecticut, Chairman 

CARL LEVIN, Michigan 

DANIEL K. AKAKA, Hawaii 

THOMAS R. CARPER, Delaware 

MARK L. PRYOR, Arkansas 

MARY L. LANDRIEU, Louisiana 

CLAIRE MCCASKILL, Missouri 

JON TESTER, Montana 

MARK BEGICH, Alaska 

SUSAN M. COLLINS, Maine 

TOM COBURN, Oklahoma 

SCOTT P. BROWN, Massachusetts 

JOHN MCCAIN, Arizona 

RON JOHNSON, Wisconsin 

JOHN ENSIGN, Nevada 

ROB PORTMAN, Ohio 

RAND PAUL, Kentucky 

JERRY MORAN, Kansas 

MICHAEL L. ALEXANDER, Staff Director 

NICHOLAS A. ROSSI, Minority Staff Director 

TRINA DRIESSNACK TYRER, Chief Clerk 

PATRICIA R. HOGAN, Publications Clerk 

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS 

CARL LEVIN, Michigan, Chairman 

THOMAS R. CARPER, Delaware 

MARY L. LANDRIEU, Louisiana 

CLAIRE MCCASKILL, Missouri 

JON TESTER, Montana 

MARK BEGICH, Alaska 

TOM COBURN, Oklahoma 

SUSAN M. COLLINS, Maine 

SCOTT P. BROWN, Massachusetts 

JOHN MCCAIN, Arizona 

RAND PAUL, Kentucky 

ELISE J. BEAN, Staff Director and Chief Counsel 

ROBERT L. ROACH, Counsel and Chief Investigator 

LAURA E. STUBER, Senior Counsel 

CHRISTOPHER BARKLEY, Staff Director to the Minority 

KEITH B. ASHDOWN, Chief Investigator to the Minority 

MARY D. ROBERTSON, Chief Clerk 

(III) 

C O N T E N T S 

Opening statements: Page 

Senator Levin .................................................................................................... 1 

Senator Coburn ................................................................................................. 7 

Prepared statements: 

Senator Levin .................................................................................................... 85 

Senator Coburn ................................................................................................. 91 

WITNESSES 

TUESDAY, JULY 17, 2012 

Hon. David S. Cohen, Under Secretary for Terrorism and Financial Intelligence, U.S. Department of the Treasury ......................................................... 10 

Leigh H. Winchell, Assistant Director for Programs, Homeland Security Investigations, U.S. Immigration and Customs Enforcement, U.S. Department 

of Homeland Security .......................................................................................... 13 

David B. Bagley, Head of Group Compliance, HSBC Holdings plc, London, 

England ................................................................................................................. 21 

Paul Thurston, Chief Executive, Retail Banking and Wealth Management, 

HSBC Holdings plc, Hong Kong ......................................................................... 23 

Michael Gallagher, Former Executive Vice President, Head of PCM North 

America, HSBC Bank USA, N.A., New York, New York .................................. 24 

Chiu Hon ‘‘Christopher’’ Lok, Former Head of Global Banknotes, HSBC Bank 

USA, N.A., New York, New York ....................................................................... 25 

Irene Dorner, President and Chief Executive Officer, HSBC Bank USA and 

HSBC North America Holdings, Inc., New York, New York ............................ 47 

Stuart A. Levey, Chief Legal Officer, HSBC Holdings plc, London, England .... 49 

Hon. Thomas J. Curry, Comptroller of the Currency, U.S. Department of 

the Treasury ......................................................................................................... 65 

Grace E. Dailey, Former Deputy Comptroller for Large Bank Supervision, 

Office of the Comptroller of the Currency .......................................................... 67 

Daniel P. Stipano, Deputy Chief Counsel, Office of the Comptroller of the 

Currency ............................................................................................................... 67 

ALPHABETICAL LIST OF WITNESSES

Bagley, David B.: 

Testimony .......................................................................................................... 21 

Prepared statement .......................................................................................... 111 

Cohen, Hon. David S.: 

Testimony .......................................................................................................... 10 

Prepared statement .......................................................................................... 94 

Curry, Hon. Tomas: 

Testimony .......................................................................................................... 65 

Prepared statement .......................................................................................... 150 

Dailey, Grace E.: 

Testimony .......................................................................................................... 67 

Prepared statement .......................................................................................... 150 

Dorner, Irene: 

Testimony .......................................................................................................... 47 

Prepared statement .......................................................................................... 130 

Gallagher, Michael: 

Testimony .......................................................................................................... 24 

Prepared statement .......................................................................................... 124 

Page

IV 

Levey, Stuart A.: 

Testimony .......................................................................................................... 49 

Prepared statement .......................................................................................... 137 

Lok, Chiu Hon ‘‘Christopher’’: 

Testimony .......................................................................................................... 25 

Prepared statement .......................................................................................... 127 

Stipano, Daniel P.: 

Testimony .......................................................................................................... 67 

Prepared statement .......................................................................................... 150 

Thurston, Paul: 

Testimony .......................................................................................................... 23 

Prepared statement .......................................................................................... 116 

Winchell, Leigh H.: 

Testimony .......................................................................................................... 13 

Prepared statement .......................................................................................... 99 

APPENDIX 

Report by the Permanent Subcommittee on Investigations Majority and Minority Staff entitled ‘‘U.S. Vulnerabilities to Money Laundering, Drugs, 

and Terrorist Financing: HSBC Case History,’’ July 17, 2012 ......................... 169 

EXHIBIT LIST 

1. a. Matters Requiring Attention (MRAs) and Recommendations in OCC 

Supervisory Letters for HSBC Bank USA, N.A., January 2005–July 

2009, chart prepared by the Permanent Subcommittee on Investigations .............................................................................................................. 575 

b. HBMX Compliance Failures, chart prepared by the Permanent Subcommittee on Investigations ....................................................................... 576 

c. Disclosed v. Undisclosed Iranian U.S. Dollar Payments Sent by HSBC 

Foreign Affiliates to U.S. Banks, Including HSBC Bank USA, chart 

prepared by the Permanent Subcommittee on Investigations .................. 577 

d. Excerpts from emails of David Bagley re HBUS awareness of Iranian 

transactions, 2003–2004 .............................................................................. 578 

e. Ratings Used in OCC Report of Examinations, chart prepared by the 

Permanent Subcommittee on Investigations ............................................. 579 

f. 31 USC § 5318(h)—Anti-Money Laundering Programs ............................. 580 

General Documents: 

2. a. HSBC Group News, HSBC Group Chief Executive Stuart Gulliver 

letter to all HSBC employees. [PSI–HSBC–76–0001–0002] .................... 581 

b. HSBC Group Circular Letters (GCL), GCL 120014—HSBC Global 

Standards. [PSI–HSBC–75–0001] .............................................................. 583 

c. HSBC Group Standards Manual, Chapter 5 Legal, Compliance and 

Reputation ..................................................................................................... 585 

3. HSBC internal email, dated September 2008, re: Kyc hires (. . . still 

grappling with some of the grim realities of the present—the upcoming 

OCC exam in November being one of those grim realities.). [HSBC OCC 

0616352–356] .................................................................................................... 587 

4. 30 Day Observations and Recommendations Report from AML Director 

(Extremely high risk business model from AML perspective * * * AML 

Director has the responsibility for AML compliance, but very little control 

over its success). [HSBC–PSI–PROD–0065332–334] ..................................... 592 

5. HSBC internal email, dated October 2009, re: OFAC resources (. . . not 

good in that we don’t get the staffing levels we need.). [OCC–PSI– 

00162661] .......................................................................................................... 595 

6. HSBC internal email, dated February 2010, re: Received a call from 

Kathy G this am. (we are in dire straights right now over backlogs, 

and decisions being made by those that don’t understand the risks or 

consequences of their decisions!!!!). [OCC–PSI–00165898] ............................ 597 

7. HSBC internal email, dated February 2010, re: Bco Nac Angola (We 

don’t appear to be on the same page as to who owns the risk.). [OCC– 

PSI–00165932] .................................................................................................. 599 

Page

V 

Documents Related to HBMX and HSBC Mexico: 

8. HSBC internal email, dated July 2002, re: BITAL (There is no 

recognisable compliance or money laundering function in Bital at present 

. . .) [HSBC OCC 8877797–798] ..................................................................... 605 

9. HSBC internal email, dated August 2002, re: HIGH NOON, attaching 

copy of Group Internal Audit, Due Diligence Review—Project High Noon). 

[HSBC OCC 8873843–855] .............................................................................. 607 

10. HSBC internal email, dated November 2002, re: COMPLIANCE DUE 

DILIGENCE TRIP BY JOHN ROOT, BITAL (MEXICO CITY)—4– 

8NOV02. [HSBC OCC 8877800–807] .............................................................. 620 

11. May 2004 Group Audit of HBMX (In our opinion, based upon the foregoing, the Direction of Money Laundering Deterrence is operating with 

a BELOW STANDARD level of Control Risk.). [HSBC OCC 8874376– 

381] .................................................................................................................... 628 

12. HSBC internal email, dated January 2005, re: COMPLIANCE EXCEPTION (. . . 3 members of the Compliance function within HBMX have 

alleged that senior persons within the Compliance function fabricated 

records of certain mandatory anti-money laundering meetings . . . * * 

* There appears little doubt that the transaction is a breach of the relevant 

OFAC sanction on the part of HBUS, . . .). [HSBC OCC 8873671–673] .... 634 

13. HSBC internal email, dated December 2005, re: OFAC (Some Western 

authorities allege more sinister purposes, e.g. the funding of terrorist 

Hizbollah activities . . .). [HSBC OCC 8876612–613] .................................. 637 

14. HSBC internal email, dated March 2007, re: Subject redacted by HSBC 

(This is a very serious, and high profile, case which has potential 

reputational damage to the HSBC Group, and must be given the highest 

priority.). [HSBC OCC 8874315–326] ............................................................. 639 

15. HSBC internal email, dated March 2007, re: Travellers Cheques (. . . 

in the year through 3Q04, HBMX has sold over USD 110 million of 

travellers cheques, an amount that eclipses that of HBEU here in the 

UK, . . .). [HSBC OCC 8876645–646] ............................................................ 644 

16. HSBC internal email, dated April 2007, re: GROUP AUDIT COMMITTEE—APR07 (Lack of a compliance culture, evidenced (in the most 

serious way) by the number of staff defalcations and (in a more widespread general negligence) in the number of fines we receive from the 

regulators for avoidable errors . . .). [HSBC OCC 8874328–330] ................ 646 

17. HSBC internal email, dated April 2007, re: Managerial Letter: HBMX 

(. . . process he initiated over a month ago following the seizure of the 

arms and money from our customer’s premises. . . . * * * Not a happy 

story.). [HSBC OCC 8875010–014] .................................................................. 649 

18. a. HSBC Bank USA, National Association Office Memorandum, dated 

May 1, 2007, re: Wall Street Journal Article Regarding Wachovia 

(Sigue Corp.—A money service business that allegedly processed $24.7 

million in suspicious money remittances related to drug-trafficking proceeds.). [OCC–PSI–01358514–517] ............................................................. 654 

b. Excerpt from Sigue Corporation Deferred Prosecution Agreement, January 24, 2008 ............................................................................................... 658 

19. HSBC internal email, dated July 2007, re: Weekly Compliance Report 

(It looks like the business is still retaining unacceptable risks and the 

AML committee is going along after some initial hemming and hawing.). 

[HSBC OCC 8875925–927] .............................................................................. 673 

20. HSBC internal email, dated July 2007, re: Subject redacted by HSBC 

(The principal factor here is that the quality of response from the CMB 

team has not been of the standard that leads me to believe that they 

are on top of the compliance risks here.). [HSBC OCC 8875132–135] .......... 676 

21. HSBC internal email, dated October 2007, re: CNBV Inspection (This 

is disturbing and clearly we will need to look at the management structure 

and practices.). [HSBC OCC 8873338–342] .................................................... 680 

22. HSBC internal email, dated November 2007, re: Mexico (. . . there are 

numerous cases of accounts with multiple SARs (16 in one case!!) in 

Mexico that remain open.). [HSBC OCC 8875423] ......................................... 685 

23. HSBC internal email, dated December 2007, re: Warren Learning HBMX 

DEC Visit Issues (Sinaloa massive money-laundering scheme (+USD 100 

million). [HSBC OCC 8875837] ....................................................................... 686 

Page

VI 

24. 12/2007 Audit of HBMX-Money Laundering Deterrence (MLD), GROUP 

AUDIT MEXICO, AUDIT REPORT SUMMARY SCHEDULE (Main control weaknesses identified during the audit . . .). [HSBC OCC 8876347] ... 687 

25. HSBC internal email, dated January 2009, re: US Issues—Various (. . . 

if they were contacted by US authorities then they should have thought 

to advise HBUS.). [HSBC OCC 8873759] ....................................................... 688 

26. HSBC internal email, dated December 2006, re: OFAC—Wire payments 

blocked from HSBC offshore entities—USD 32,000 (re SDGT) and USD 

2,538,939.33 (re Sudan) (How is it that these payments continue to be 

processed by our affiliates in light of the GCLs?). [HSBC OCC 3407608– 

609] .................................................................................................................... 689 

27. HSBC internal email, dated February 2008, re: CNBV (. . . Mexico is 

suffering a major problem with drugs dealers and the Government is 

being very robust. . . .). [HSBC–PSI–PROD–0198508–509] ......................... 691 

28. HSBC internal email, dated February 2008, re: Subject redacted by 

HSBC (. . . in spite of the seriousness of this case and the issues involved, 

CMB is proposing to retain this relationship.). [HSBC OCC 8875139– 

141 and HSBC OCC 8875020–021] ................................................................. 693 

29. HSBC internal email, dated February 2008, re: CONFIDENTIAL— 

CNBV/FIU Meeting (This is most disturbing and we will need to have 

the most thorough of investigations.). [HSBC OCC 8966014–018] ............... 698 

30. HSBC internal email, dated March 2008, re: HBMX (The comments made 

by Leopoldo are quite concerning, and it would appear that he was more 

aware of the weaknesses, and the concerns of the CNBV, than Ramon 

has indicated.). [HSBC OCC 8874821–825] ................................................... 703 

31. HSBC internal email, dated July 2008, re: HBMX Visit Update (The 

report . . . concluded that KYC control was ‘‘below standard.’’ A sampling 

showed that 15% of the customers did not even have a file. For the 

files that could be found, there were serious failures in following Group 

procedures.). [HSBC OCC 8873487–489] ........................................................ 708 

32. HSBC internal email, dated July 2008, re: HBMX—Cayman Accounts 

(. . . it appears that our CAMP monitoring system identified significant 

USD remittances being made by a number of customers to a US company 

alleged to have been involved in the supply of aircraft to drugs [sic] 

cartels.). [HSBC OCC 8874829–833] ............................................................... 711 

33. HSBC internal email, dated September 2008, re: Cayman Accounts (Account opening documentation is generally poor or non-existent and there 

is a lot of work to do. Money-laundering risk is consequently high.). 

[HSBC OCC 8876784–787] .............................................................................. 716 

34. HSBC internal email, dated November 2008, re: Seriously consider restricting the product Dollars accounts in the zona frontera Product 63 

Cuenta Maestra en Dolares P.F. (In the same way we have already restricted new Caiman Island accounts from opening, due to the massive 

misuse of them by organised crime . . .). [HSBC OCC 8875736–738] ......... 720 

35. HSBC internal email, dated November 2008, re: Mexico (What I find 

most frustrating is the way in which new issues constantly emerge however much time is spent with HBMX.). [HSBC OCC 8875605–607] ............. 723 

36. HSBC internal email, dated December 2008, re: Mexico Visit (. . . significant backlog (3,659) of accounts to be closed. . . . 675 accounts pending 

closure were ordered to be closed by the CCC on suspicion that they 

are used for money laundering activity. . . . 16 accounts that were sent 

for closure in 2005, . . .). [HSBC–PSI–PROD–0197874–876] ...................... 726 

37. a. HBUS Banksnotes NY–USD Bought from or Sold to Customers in 

Mexico: 3 Month Period (Nov-06 to Feb-07). [OCC–PSI–00151506] ........ 729 

b. BANKNOTES–NY Selected Customers’ Activity Alerts & Traders’ Explanations for USD Purchases & Sales from 2005–2009, prepared by 

OCC. [OCC–PSI–00005890–904] ................................................................ 730 

38. OCC internal email, dated June 2010, re: HSBC (. . . this has the makings of potentially being a major criminal case . . .). [OCC–PSI– 

00928756–758] .................................................................................................. 745 

39. HSBC Presentation, Conducting an Enhanced KYC for Grand Cayman 

Accountholders, undated (* * * almost no progress has been made in 

enhanced KYC completion * * * success rate in file completion is approximately 25%). [HSBC OCC 8874560–566] ........................................................ 748 

Page

VII 

Documents Related to HSBC Affiliates—Circumventing OFAC Prohibitions: 

40. HSBC internal email, dated May 2001, re: BANK MELLI (I wish to 

be on the record as not comfortable with this piece of business.). [HSBC– 

PSI–PROD–0096138–142] ................................................................................ 755 

41. HSBC internal email, dated July 2001, re: Bank Melli (With the amount 

of smoke coming off this gun, remind me again why we think we should 

be supporting this business?). [HSBC OCC 8876128–136] ............................ 760 

42. HSBC internal email, dated October 2001, re: OFAC SANCTIONS (. . . 

bear in mind pending US legislation which will in effect give the US 

extra-territorial authority over foreign banks, particularly if we are unfortunate enough to process a payment which turns out to be connected 

to terrorism.). [HSBC OCC 8873890–893] ...................................................... 769 

43. HSBC internal email, dated October 2002, re: IRAN (Your already processing USD payments from two existing accounts held in London.). [HSBC 

OCC 7687373–377] ........................................................................................... 773 

44. HSBC internal email, dated January 2003, re: USD Payments from Iranian Banks (As you may recall, it was agreed that our London/Middle 

East office would put together a business case regarding plans for providing USD payment services to Iranian Banks . . .). [HSBC OCC 

3407510–515] .................................................................................................... 778 

45. HSBC internal email, dated February 2003, re: BUSINESS CASE—US 

PAYMENTS FROM IRANIAN BANKS/ENTITIES (The business case includes a number of express references to practices which may constitute 

a breach of US sanctions, including the OFAC provisions, and could 

provide the basis for action against the HSBC Group . . .). [HSBC OCC 

8876487–488] .................................................................................................... 784 

46. HSBC internal email, dated October 2003, re: IRAN—STRATEGY DISCUSSION PAPER (. . . there remain serious political and reputational 

risks within the USA if they proceed with this . . .). [HSBC OCC 

8873941–947] .................................................................................................... 786 

47. HSBC Document, IRAN—STRATEGY DISCUSSION PAPER, undated, 

(The Iranian market offers substantial untapped potential for the HSBC 

Group.). [HSBC OCC 8873949–956] ............................................................... 793 

48. HSBC internal email, dated October 2003, re: USD Clearing—Iranian 

Banks (. . . HBEU have been manually intervening in the processing 

of Iranian bank payment instructions by removing the remitter’s name 

and country to prevent the probable trigger of a filter in the US, and 

the subsequent declaration to OFAC (and possible freezing) of the funds.). 

[HSBC OCC 8875217–218] .............................................................................. 801 

49. HSBC internal email, dated October 2003, re: Iran (The practice of 

amending instructions is clearly a long standing one which has hitherto 

continued despite the RMs believing it had ceased some years ago.). 

[HSBC OCC 8874660–663] .............................................................................. 803 

50. a. HSBC internal email, dated December 2003, re: COMPLIANCE— 

OFAC ISSUES IN GENERAL AND SPECIFIC TO IRAN (I currently 

feel that we may be exposing ourselves to unnecessary and unacceptable 

Reputational and Operational Risk when we are handling payments 

originating from FIs domiciled in or who are a local branch of an 

FI domiciled in an OFAC regulated country.). [HSBC OCC 3407517– 

522] ............................................................................................................... 807 

b. HSBC internal email, dated June 2003, re: PLC—Re ‘‘do not mention 

our name’’ (When Funds Transfer staff noted the messages in the 

BBI field stating ‘‘do not mention our name’’ the payment was rejected, 

per our policy, due to concerns about evasion issues under the OFAC 

regulations.). [HSBC OCC 8873922–928] .................................................. 813 

c. HSBC internal email, dated May 2005, re: Wire Payments Suspended 

(Wire payment suspended re ‘‘Iran’’—USD 6,912,607.82). [HSBC OCC 

8874710–712] ................................................................................................ 820 

d. HSBC internal email, dated February 2008, re: Rami Makhlouf (Please 

be advised that we currently maintain a relationship with Sellor, 

Mohamad Makhlouf in our capacity as Trustee and the individual 

named in your search request (Rami Makhlouf) is actually a beneficiary of the Trust . . .). [HSBC–OCC–8878838–840] ............................ 823 

Page

VIII 

51. HSBC internal email, dated March 2004, re: BankMarkazi Payment (. . . 

I remain extremely uncomfortable with the practice of amending Iranian 

payment orders for whatever means.). [HSBC OCC 8873979–982] .............. 826 

52. HSBC internal email, dated March 2004, re: Bank Markazi Payment 

(The complexity of the OFAC regulations, and the fact that HBUS were 

unaware that any arrangements existed with Iranian Banks, has made 

speedy resolution of this issue difficult.). [HSBC OCC 8873985–986] .......... 830 

53. HSBC internal email, dated April 2004, re: Iran Correspondent Banking 

Services—OFAC (. . . the most pressing issue to be resolved is that relating to the limited number of existing relationships that we have (for 

two small Iranian Banks) where I suspect that HBUS are not aware 

that payments may be passing through them.). [HSBC OCC 8873994– 

997] .................................................................................................................... 832 

54. HSBC internal email, dated June 2004, re: Iran (. . . there are very 

compelling commercial reasons which need to be borne in mind when 

making this decision, not least of which is the threat to the Group’s 

position in and business with Iran over the medium term.). [HSBC OCC 

8874001–004] .................................................................................................... 836 

55. HSBC internal email, dated June 2004, re: Iran (. . . our interpretation 

was that we were being asked to ‘‘fudge’’ the nature of the payments 

to avoid the U.S. embargo and seizure . . .). [HSBC OCC 8873999] ........... 840 

56. HSBC internal email, dated July 2004, re: HBEU Iranian Payments 

Business (. . . we are being asked to amend instructions or, assume responsibility that the contents of the payment message do not attract the 

fed’s attention and seize the payment. . . .). [HSBC OCC 8876861–863] .... 841 

57. HSBC internal email, dated November 2004, re: U-turns (. . . initially 

there were concerns about the potential intentional removal of wording 

‘‘off limit payments’’ from these payments.). [HSBC–PSI–PROD–0096165– 

167] .................................................................................................................... 844 

58. HSBC internal email, dated December 2004, re: U-turns (Attached are 

the conditions under which HBUS will accept U-Turn transactions.). 

[HSBC OCC 3407526–527] .............................................................................. 847 

59. HSBC internal email, dated June 2005, re: IRANIAN PAYMENTS (. . . 

HBME is currently seeking to open a USD account with JP Morgan 

Chase as our first choice . . . in order to process Iranian related USD 

payments.). [HSBC OCC 8878026–029] .......................................................... 849 

60. HSBC internal email, dated May 2006, re: TP GATEWAYS (I would 

have thought the US regulators would have taken a dim view of routing 

stuff around the US.). [HSBC OCC 7687437–438] ........................................ 853 

61. HSBC internal email, dated May 2006, re: U Turns (I anticipate that 

you would prefer to see Field 72 completed, but this will mean more 

hits in the filters even if they will then be passed.). [HSBC OCC 3243782– 

787] .................................................................................................................... 855 

62. HSBC internal email, dated January 2007, re: Transactions with Iran/ 

Cuba, etc (. . . let’s set up a completely different Swift address to help 

avoid any problems with Cuba and Iran.). [HSBC OCC 8876921–931] ...... 861 

63. HSBC internal email, dated June 2007, re: Iran (There are further complications surrounding the process of closure with all Iranian banks as 

we have some USD 9m in reimbursements due from Sepah, where we 

are running off trade lines . . .). [HSBC OCC 8878214–216] ....................... 872 

64. HSBC internal email, dated June 2007, re: GROUP MESSAGING GATEWAY FOR LAM—CLEAR CHOICE REPORT (We have not engaged with 

CI and Nassau as we have no leadership responsibility for this geography.). [HSBC OCC 8874349–355] ................................................................ 875 

65. HSBC internal email, dated June 2008, re: OFAC processing in GSC’s 

(. . . we’re strapped and getting behind in investigations (on OFAC cases) 

and have some of our key managers in the queues releasing items . . . 

I cannot hire first level staff unless it’s offshored . . .) [HSBC OCC 

0616349–350] .................................................................................................... 882 

66. HSBC internal email, dated December 2009, re: OFAC Payments (. . . 

we could use 5 or 6 people for 10 days who can review payments to 

clear the 700 and building backlog of payments that have been held 

over and need to be worked to process.). [HSBC OCC 7688668–670] ........... 884 

Page

IX 

67. HSBC internal email, dated August 2010, re: Project Topaz US Urgent 

Requirements (We need to move quickly to reduce the AML alerts and 

the connected KYC issues as it is impossible to plan the required capacity 

* * * Attached is a list of 121 international banks that we can no longer 

support and need to exit. * * * the US requirements cut across business 

lines and it is crucial that the strategies of PCM, TSC and FIG are 

aligned to prevent this situation occurring in the future.). [HSBC OCC 

8876104–106] .................................................................................................... 887 

68. Excerpt from Deloitte Review of OFAC transactions, RESULTS OF THE 

TRANSACTIONS REVIEW—UK GATEWAY, March 29, 2012. [HSBC– 

PSI–PROD–0197919, 930–931, 940, 968–969, 976, 980] ............................... 890 

69. Excerpt from March 29, 2012 Presentation, prepared by Sullivan & Cromwell LLP and Cahill Gordon & Reindel LLP on OFAC compliance by 

HSBC Bank USA. [HSBC OCC 8966113, 118, 143] ...................................... 898 

70. HSBC Group Circular Letters (GCL): 

a. GCL 050047—Compliance with sanctions (28/Jul/2005) [HSBC OCC 

3407560–561]; ............................................................................................... 901 

b. GCL 060011—US Dollar Payments (06/Apr/2006) [HSBC OCC 

3407587]; ...................................................................................................... 905 

c. GCL 060041—US OFAC Sanctions against Iran—U-Turn Exemption 

(25/Oct/2006) [HSBC OCC 3407606]; ....................................................... 907 

d. GCL 070049—Sanctions Against Iran (24/Sep/2007). [OCC–PSI– 

00141530–531]. ............................................................................................ 909 

Documents related to other countries: 

71. a. HSBC internal email, dated September 2005, re: OFAC sanctions (In 

particular regard to the Sudanese payments, but also to a lesser extent, 

Cuban and Burmese, there are a considerable number of USD denominated transactions.). [HSBC OCC 8877213–214] 912 

b. HSBC document prepared May 2007. INFORMATION REQUESTED 

IN CONNECTION WITH: NORTH KOREA, CUBA, AND MYANMAR 

(We were notified that there are relationships with Cuban and North 

Korean customers.). [HSBC OCC 8876093–095] ....................................... 914 

c. HSBC internal email, dated October 2005, re: GCL 050047—Compliance with Sanctions (I note HBMX continues to process USD payments 

involving Cuba. It is very important this is stopped immediately as 

the regulators are getting very tough and the cost to the Group could 

be considerable if a breach occurs, both in terms of the fine and in 

the rectification work which is likely to be a pre-requisite to any settlement. If this identifies further breaches, the cost could spiral.). [HSBC 

OCC 8874357–362] ...................................................................................... 917 

d. Excerpt from Deloitte, Transaction Review Progress and Results Reporting, 18th & 19th October 2011 (Correspondent and other accounts 

. . .). [HSBC–PSI–PROD–0096628, 649] ................................................... 923 

Documents Related to Al Rajhi Bank—Disregarding Links to Terrorist Financing: 

72. HSBC internal email, dated January 2005, re: Al Ra[jh]i Trading/Al 

Ra[jh]i Banking (. . . Group Compliance has recommended that the US 

businesses sever ties with these clients based on the current regulatory 

environment and the interest of US law enforcement.). [HSBC OCC 

1884218] ............................................................................................................ 925 

73. HSBC internal email, dated March 2005, re: Al Ra[jh]i Guidance Clarified (Looks like you’re fine to continue dealing with Al Rajhi. You’d 

better be making lots of money!). [HSBC OCC 3114022] ............................... 926 

74. HSBC internal email, dated May 2005, re: Al Rajhi (After the OCC 

close out and that chapter hopefully finished, could we re-visit Al Rajhi 

again. London compliance has taken a more lenient view . . .). [OCC– 

PSI–00144350] .................................................................................................. 927 

75. HSBC internal email, dated August 2005, re: Al Rajhi (We’ve gotten 

push back from OCC on Al Ra[jh]i Trading, which is less controversial 

than the bank.). [OCC–PSI–00343527] ........................................................... 929 

76. Excerpt from HBUS Global Banknotes—Purchases & Sales USD—2008 

vs 2009. [HSBC OCC 5364770, 784, 793, 794] ............................................... 932 

Page

X 

77. HSBC internal email, dated November 2006, re: Al Rajhi Banking (. . . 

the PCM Regional Sales Manager at HBME in Bahrain . . . has called 

to say that Al Rajhi has now run out of patience waiting for us to 

re-start our banknote trading relationship . . .). [HSBC OCC 3280505] ..... 936 

78. HSBC internal email, dated November 2006, re: Al Rajhi Banking (At 

the end of the day, its Compliance who’s the key.). [OCC–PSI–00150795] ... 937 

79. HSBC internal email, dated November 2006, re: Alrajhi [sic] (To cancel 

the Amanah business is much bigger than not dealing with banknotes.). 

[OCC–PSI–00150798] ....................................................................................... 939 

80. HSBC internal email, dated December 2006, re: Al Rajhi Bank (. . . 

the notion of ‘no smoke without fire’ is one we must bear in mind and 

any business unit dealing with this entity must acknowledge the associated risks.). [OCC–PSI–00150892] .................................................................. 942 

81. HSBC internal email, dated July 2007, re: Al Rajhi Bank in Saudi 

Arabia (This article on Al Rajhi Bank & TF was in the Wall Street 

Journal today.). [HSBC OCC 2830874–879] .................................................. 943 

82. HSBC internal email, dated November 2007, re: ISLAMI BANK BANGLADESH LIMITED (. . . the money is there and we should go for 

this account.). [HSBC OCC 0739987–991] ...................................................... 949 

83. HSBC internal email, dated November 2007, re: ISLAMI BANK BANGLADESH LIMITED—Bangladesh (. . . the Al-Rajhi family has been 

associated with Islami Bank, Bangladesh Limited, since its inception.). 

[OCC–PSI–00154139] ....................................................................................... 954 

84. a. HSBC internal email, dated August 2009, re: EDD Report of Findings 

[redacted] Bank Ltd in Bangladesh (BN-SP & PCM) (I support Hersel’s 

stance that this is such a large bank hence malfeasance is expected.). 

[HSBC OCC 7688017–024] ......................................................................... 958 

b. HSBC internal email, dated September 2005, re: Report of Findings— 

[redacted] Bank—FIG (Yes, corruption can be rampant in this bank. 

. . .). [HSBC OCC 7690024–032] ............................................................... 964 

85. HSBC Know Your Customer Profile for Al Rajhi Banking & Investment 

Corp, October 2010. [HSBC–PSI–PROD–0102310–324] ............................... 967 

86. HSBC Know Your Customer Profile for Islami Bank Bangladesh Limited, 

June 2011. [HSBC–PSI–PROD–0117222–237] .............................................. 982 

87. a. Islami Bank Bangladesh Ltd. responses to questions from the U.S. 

Senate Permanent Subcommittee on Investigations, July 4, 2012. 

[PSI–IBBL–01–0001–003] ........................................................................... 998 

b. Social Islami Bank Ltd. responses to questions from the U.S. Senate 

Permanent Subcommittee on Investigations, July 10, 2012. [PSI– 

SIBL–01–0001–004] .................................................................................... 1001 

Documents Related to Hokuriku Bank—Cashing Bulk Travelers 

Checks: 

88. HSBC internal email, September 2008, re: Hokuriku Bank Ltd—Compliance query (Information from Hokuriku Bank regarding some of the car 

dealerships they do business with that we questioned. Its very limited 

information that took us over a month to get.). [OCC–PSI–00409214– 

216] .................................................................................................................... 1005 

89. HSBC internal email, dated November 2008, re: Hokuriku Bank (This 

use of cash letter is inappropriate and the Committee has concluded 

that PCM should no longer allow Hokuriku to send traveler’s checks 

through cash letter.). [OCC–PSI–00808695] ................................................... 1017 

90. HSBC internal email, dated December 2008, re: Hokuriku Bank—information needed (They have been good enough to provide information so 

far but as you may understand from bank secrecy view point, they should 

not or cannot disclose customer information.). [OCC–PSI–00811358] .......... 1024 

91. HSBC internal email, dated December 2008, re: SK Trading (. . . we 

uncovered huge amounts of [redacted] travelers’ checks (daily averages of $500M to $700M per day) being processed by HSBC for their correspondent Hokuriku Bank in Japan.). [OCC–PSI–00888526] ..................... 1037 

92. Hokuriku Bank, Ltd. responses to questions from the U.S. Senate Permanent Subcommittee on Investigations, June 26 and 29, 2012. [PSI– 

HokurikuBank–01–0001–005 and PSI–HokurikuBank–02–0001] ............... 1038 

Page

XI 

Documents Related to HBUS Private Bank Americas—Offering Bearer 

Share Accounts: 

93. HSBC internal email, dated August 2007, re: Bearer Share Companies 

(The following is our current policy for Bearer Share Corporations in 

NY . . .). [OCC–PSI–00318438] ...................................................................... 1044 

94. HSBC internal email, dated December 2007, re: Bearer Share Corporation 

Policy (IPB Miami maintains existing accounts for 1,679 Bearer Share 

Corporations of which 126 are considered High Risk.). [OCC–PSI– 

00226652] .......................................................................................................... 1059 

95. Transcript of 4/25/2007 telephone conversation between HBUS Claude 

Mandel and Mauricio Cohen (Mr. Cohen: But I can’t put that, otherwise 

I have to declare them in the United States? I can’t do that, I don’t 

want to declare . . . otherwise, I have to close the accounts with you 

and go to Geneva.). [HSBC–PSI–PROD–0024791–795] ................................. 1062 

96. a. HSBC internal email, dated June 2007, re: Waiver Request (The two 

accounts are bearer shares. The client does not want neither to register 

nor custodize the shares, and they do not want to sign the BOL.). 

[OCC–PSI–00214516] .................................................................................. 1067 

b. HSBC internal email, dated June 2007, re: Waiver Request (I would 

do it without going to Geneva but audit wrote up DPB on a similar 

situation.). [OCC–PSI–00214534] ............................................................... 1071 

97. Documents related to Peruvian Family: 

a. HSBC internal email, dated June 2007, re: [redacted] Family (I spoke 

to Susan Wright, Group Head of AML. She is reluctant to grant the 

exception but will consider it.). [OCC–PSI–00214880] .............................. 1073 

b. HSBC internal email, dated June and July, 2007, re: [redacted] Family (This is too important a family in Peru for us not to want to 

do business with, . . .). [OCC–PSI–00215211] ......................................... 1075 

Documents Related to OCC—Exercising Ineffective AML Oversight: 

98. HSBC internal email, dated February 2010, re: OCC Meeting (In light 

of the extent of our alert backlogs, Sally indicated that they will shortly 

be issuing a Supervisory Letter . . .). [HSBC OCC 3405315–316] ............... 1081 

99. HSBC internal email, dated June 2009, re: GMO business reviews— 

LATAM (The inherent AML risk in Mexico is still very high . . .). [HSBC 

OCC 8874895] ................................................................................................... 1083 

Additional Documents: 

100. Correspondence from the Comptroller of the Currency (OCC) to the 

Permanent Subcommittee on Investigation, September 20, 2012, on actions taken by the OCC since the Subcommittee’s July 2012 hearing. 

[PSI–OCC–45–0000010–016] ......................................................................... 1084 

101. Responses to supplemental questions for the record from HSBC, September 11 and 25, 2012. [PSI–HSBC–80–000001–006, PSI–HSBC–81– 

000001–003] .................................................................................................... 1100 

VOLUME 2 

102. Documents cited in footnotes to U.S. Vulnerabilities to Money Laundering, Drugs, and Terrorist Financing: HSBC Case History, the Report 

released in conjunction with the Subcommittee hearing on July 17, 

2012. A Document Locator List provides Bates numbers and document 

descriptions of the documents cited in the Report. Not included are 

documents related to Subcommittee interviews, which are not available 

to the public, and widely available public documents ................................. 1109 

(1) 

U.S. VULNERABILITIES TO MONEY 

LAUNDERING, DRUGS, AND TERRORIST 

FINANCING: HSBC CASE HISTORY 

TUESDAY, JULY 17, 2012 

U.S. SENATE,

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS,

OF THE COMMITTEE ON HOMELAND SECURITY

AND GOVERNMENTAL AFFAIRS, 

Washington, DC. 

The Subcommittee met, pursuant to notice, at 9:36 a.m., in room 

SD–342, Dirksen Senate Office Building, Hon. Carl Levin, Chairman of the Subcommittee, presiding. 

Present: Senators Levin and Coburn. 

Staff Present: Elise J. Bean, Staff Director/Chief Counsel; Mary 

D. Robertson, Chief Clerk; Laura E. Stuber, Senior Counsel; Robert 

L. Roach, Counsel and Chief Investigator; Eric Walker, Detailee; 

Kristin Gwin, Congressional Fellow; Christopher Barkley, Staff Director to the Minority; Keith B. Ashdown, Chief Investigator to the 

Minority; Adam Henderson, Professional Staff Member; Dennis 

Bogucz, Congressional Fellow; Brian Egger, Detailee; Beth Baltzan, 

Congressional Fellow; Noah Czarny, Law Clerk; Bill Gaertner, Law 

Clerk; Curtis Kowalk, Law Clerk; Lane Powell, Law Clerk; Arielle 

Woronoff, Law Clerk; Sofia Knutsson, Intern; and Jacquelyn Jones, 

Law Clerk. 

OPENING STATEMENT OF SENATOR LEVIN 

Senator LEVIN. Good morning, everybody. Today’s hearing will 

examine the money-laundering, drug-trafficking, and terrorist-financing risks created in the United States when a global bank uses 

its U.S. affiliate to provide U.S. dollars and access to the U.S. financial system to a network of high-risk affiliates, high-risk correspondent banks, and high-risk clients. 

Most international banks have a U.S. affiliate. They use it in 

part to compete for U.S. clients and business, but also to provide 

themselves with access to the U.S. financial system. Global banks 

want access to U.S. dollars because they are accepted internationally, they are the leading trade currency, and they hold their value 

better than any other currency. They want access to U.S. wire 

transfer systems because they move money across international 

lines quickly, securely, and to the farthest corners of the Earth. 

They want to clear U.S. dollar monetary instruments like travelers 

checks, bank checks, and money orders. And they want the safety, 

efficiency, and reliability that are the hallmarks of U.S. banking. 

2 

The problem here is that some international banks abuse their 

U.S. access. Some allow affiliates operating in countries with severe money-laundering, drug-trafficking, or terrorist-financing 

threats to open up U.S. dollar accounts without establishing safeguards at their U.S. affiliate. Some operate in secrecy jurisdictions. 

Some allow poorly managed or corrupt foreign banks to make use 

of an affiliate’s U.S. dollar account. Others allow high-risk clients 

to use those accounts without taking adequate anti-money laundering (AML) steps. Some even allow their affiliates to pressure 

their U.S. cousins to ease up on U.S. AML restrictions or look the 

other way when they spot suspicious activity. 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 consequences are the ones you would expect from operating 

a U.S. bank with inadequate safeguards against money laundering. 

The U.S. bank can end up aiding and abetting transactions that 

fund terrorists, drug cartels, corrupt dictators, and tax cheats, because all of them want access to the U.S. financial system, too, and 

for the same reasons. Wrongdoers can use U.S. dollars and U.S. 

wire transfers to commit crimes, arm terror groups, produce and 

transport illegal drugs, loot government coffers, and even pursue 

weapons of mass destruction. That is why our country has made 

combating money laundering and terrorist financing a national security imperative. 

For the last decade, this Subcommittee has contributed to the 

battle against money laundering and terrorist financing by exposing problems that increase U.S. vulnerabilities to abuse. In 2001, 

for example, this Subcommittee released a report showing how U.S. 

banks that offer accounts to foreign banks, engaging in what is 

known as correspondent banking, can become conduits for illegal 

proceeds involving organized crime, drug trafficking, or financial 

fraud. Back then, most U.S. banks opened a correspondent account 

for any foreign bank with a banking license. After our hearing, 

U.S. banks took a harder look and assessed the risks before opening a correspondent account. In 2002, Congress cited our hearings 

when enacting tougher AML laws in the PATRIOT Act, including 

in that Act a provision making it a legal obligation for U.S. banks 

to conduct a due diligence review before opening an account for a 

foreign bank. 

Tougher AML laws have helped deny criminals access to the U.S. 

financial system. But as our report that we are releasing today 

shows, enormous problems remain. 

To illustrate those problems, today’s hearing focuses on a case 

study involving HSBC, one of the largest banks in the world. 

Headquartered in London, HSBC has a network of over 7,200 offices in more than 80 countries, 300,000 employees, and 2011 profits of nearly $22 billion. HSBC has been among the most active 

banks in Asia, the Middle East, and Africa. It first acquired a U.S. 

presence in the 1980s; today its leading U.S. affiliate is HSBC 

Bank USA, sometimes called ‘‘H–BUS.’’ That HBUS affiliate now 

has 470 branches across the United States and 4 million customers 

here. 

3 

HBUS is the key U.S. nexus for the entire HSBC worldwide network. In 2008, HBUS processed 600,000 wire transfers per week; 

in 2009, two-thirds of the U.S. dollar payments that HBUS processed came from HSBC affiliates in other countries. One HSBC executive told us that a major reason why HSBC opened its U.S. 

bank was to provide its overseas clients with a gateway into the 

U.S. financial system. 

Now, add on top of that, HBUS’s history of weak AML controls, 

and you have a recipe for trouble. In 2003, the Federal Reserve and 

New York State Banking Department took a formal enforcement 

action requiring HBUS to revamp its AML program. HBUS, which 

was then converting to a nationally chartered bank under the supervision of the Office of the Comptroller of the Currency (OCC) 

made changes, but even before the OCC lifted its order in 2006, the 

bank’s AML program began deteriorating. In September 2010, the 

OCC issued a supervisory letter, 31 pages long, describing a long 

list of severe AML deficiencies, and followed in October 2010 with 

a cease and desist order requiring HBUS to revamp its AML program a second time. 

The OCC cited, among other problems, a massive backlog of 

unreviewed alerts identifying potentially suspicious activity; a failure to monitor $60 trillion in wire transfers and account activity; 

a failure to examine risks at HSBC’s overseas affiliates before providing them correspondent banking services; and a failure, over a 

3-year period, to conduct AML checks on more than $15 billion in 

bulk cash transactions with those same affiliates. 

To examine the issues, the Subcommittee issued subpoenas, reviewed more than 1.4 million documents, and conducted extensive 

interviews with HSBC officials from around the world, as well as 

officials at other banks, and with Federal regulators. HSBC has cooperated fully with our investigation. 

The Subcommittee’s work identified five key areas of vulnerability exposed by the HSBC history. The five areas involve the following: 

First, providing U.S. correspondent accounts to high-risk HSBC 

affiliates without performing due diligence, including a Mexican affiliate with unreliable AML controls. 

Second, failing to stop deceptive conduct by HSBC affiliates to 

circumvent a screening device designed to block transactions by 

terrorists, drug kingpins, and rogue nations like Iran; 

Third, providing bank accounts to overseas banks with links to 

terrorist financing; 

Fourth, clearing hundreds of millions of dollars in bulk U.S. dollar travelers checks, despite serious suspicious circumstances; 

And, finally, offering bearer share accounts, a high-risk account 

that invites wrongdoing by facilitating hidden corporate ownership. 

Let us take each in turn. 

First, the issue of high-risk affiliates. HSBC operates affiliates in 

80 countries, including jurisdictions facing major money-laundering, drug-trafficking, or terrorist-financing challenges as well as 

weak AML laws and oversight. Yet, until recently, HSBC’s Londonbased parent company, known as the HSBC Group, instructed its 

affiliates to assume that every HSBC affiliate met the group’s AML 

standards and automatically was told to provide it with corresponVerDate Nov 24 2008 14:41 Nov 19, 2012 Jkt 076061 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 P:\DOCS\76061.TXT SAFFAIRS PsN: PAT
4 

dent banking services. HBUS did as told and opened U.S. correspondent accounts for more than 80 HSBC affiliates, ignoring our 

law, the American law requiring due diligence reviews before opening U.S. accounts for foreign banks. 

HBUS’s dealings with an HSBC affiliate in Mexico illustrate the 

money laundering dangers. HSBC Mexico (HBMX), operates in a 

high-risk country battling drug cartels; it has had high-risk clients 

such as casas de cambios; and it has offered high-risk products 

such as U.S. dollar accounts in the Cayman Islands, a jurisdiction 

known for secrecy and money laundering. HBMX also has a long 

history of severe AML deficiencies. You add all that up and the 

U.S. bank should have treated HBMX, the Mexican affiliate, as a 

high-risk account for AML purposes. But it did not. 

Instead, HBUS treated HBMX as such a low-risk client bank 

that it did not even monitor their account activity for suspicious 

transactions. In addition, for 3 years, from mid-2006 to mid-2009, 

HBUS conducted no monitoring of a banknotes account used by 

HBMX to physically deposit billions of U.S. dollars from clients, 

even though large cash transactions are inherently risky and Mexican drug cartels launder U.S. dollars from illegal drug sales. Because our tough AML laws in the United States have made it hard 

for drug cartels to find a U.S. bank willing to accept huge unexplained deposits of cash, they now smuggle U.S. dollars across the 

border into Mexico and look for a Mexican bank or casa de cambio 

willing to take the cash. Some of those casas de cambios had accounts at HBMX, which in turn took all the physical dollars that 

it got, transported them by armored car or aircraft back across the 

border to HBUS for deposit into its U.S. banknotes account, completing the laundering cycle. Over 2 years, from 2007 to 2008, HBMX shipped $7 billion in 

physical U.S. dollars to HBUS. That was more than any other 

Mexican bank, even one twice HBMX’s size. When law enforcement 

and bank regulators in Mexico and the United States got wind of 

the banknotes transactions, they warned HBMX and HBUS that 

such large dollar volumes were red flags for drug proceeds moving 

through the HSBC network. In 2008, after warnings from regulators, HBMX stopped taking large deposits of U.S. dollars, but for 

years, HBUS provided an easy gateway into our financial system 

for suspicious cash from their foreign affiliate in Mexico. 

Next, a second problem involves actions taken by some HSBC affiliates to circumvent a U.S. ban on bank transactions involving 

designated drug traffickers, terrorists, or rogue regimes such as 

Iran. To enforce that ban, the U.S. Treasury Department’s Office 

of Foreign Assets Control (OFAC) has developed a list of prohibited 

persons which banks use to develop what is known as an ‘‘OFAC 

filter’’ to identify and stop prohibited or suspicious transactions. 

The Subcommittee found that for years HSBC affiliates in Europe and the Middle East acted to circumvent the OFAC filter 

when sending U.S. dollar transactions involving Iran through their 

accounts at HBUS. Although they viewed these transactions as 

legal under a U.S. exception for so-called ‘‘U-turn’’ transactions, the 

affiliates did not want to trigger the OFAC filter and undergo the 

individualized reviews required to make sure that they were legal. 

So they stripped out or omitted any reference to Iran from the paVerDate Nov 24 2008 14:41 Nov 19, 2012 Jkt 076061 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 P:\DOCS\76061.TXT SAFFAIRS PsN: PAT
5 

perwork. An outside auditor hired by HBUS has found that, from 

2001 to 2007, HSBC affiliates sent nearly 25,000 transactions involving Iran, worth over $19 billion, through HBUS and other U.S. 

accounts while concealing any link to Iran in 85 percent of the 

transactions. 

HSBC’s chief compliance officer and other senior executives in 

London knew what was going on, but allowed the deceptive conduct 

to continue. While some HBUS officials in the United States claim 

not to have known they were processing undisclosed Iranian transactions, documents show that key HBUS officials were informed 

early on. HBUS compliance and payment executives repeatedly told 

HSBC affiliates that they had to use fully transparent Iranian 

transactions, but when faced with evidence that the affiliates were 

secretly circumventing the OFAC filter, nobody in HBUS confronted those affiliates, brought the issue to a head, and forced the 

transactions to the light. Problems also arose when some HSBC affiliates tried to circumvent the OFAC filter to send potentially prohibited transactions involving other countries like Sudan or North 

Korea. 

OFAC programs are aimed at exposing and disabling the financial dealings of some of the most dangerous persons and regimes 

in the world, including terrorists, persons involved with weapons of 

mass destruction, drug traffickers, and rogue jurisdictions. The 

OFAC filter is the key to blocking prohibited transactions from polluting the U.S. financial system. Global financial institutions have 

a special responsibility to respect OFAC prohibitions, but that is 

not what happened here. While HSBC affiliates may have been 

aiming simply at avoiding processing delays, circumventing OFAC 

safeguards can also facilitate transactions undertaken by some of 

the world’s worst wrongdoers. 

A third issue involves the fact that HSBC is active in regions of 

the world with significant terrorism challenges while demonstrating a worrisome willingness to do business with banks that 

have links to terrorist financing. One example involves Al Rajhi 

Bank, the largest private bank in Saudi Arabia. After the September 11, 2001 terrorist attack on the United States, evidence 

emerged that the bank’s key founder was an early financial benefactor of al-Qaeda and that it provided accounts to suspect clients. 

In 2005, HSBC Group told its affiliates to sever ties with that 

bank, but they made an exception for HSBC Middle East. Four 

months later, without explaining why, HSBC Group reversed itself 

and said that all of its affiliates could decide whether to do business with Al Rajhi Bank. HBUS chose to close its Al Rajhi accounts. Over the next 2 years, however, its own bankers and bankers from other HSBC affiliates pressed HBUS to resume ties with 

Al Rajhi Bank. And in 2006, after Al Rajhi Bank threatened to pull 

all of its business from HSBC unless HBUS reinstated its U.S. dollar banknotes account, HSBC gave in. And over the next 4 years, 

HBUS supplied Al Rajhi Bank with nearly $1 billion in U.S. dollars, stopping only when HSBC made a global decision to exit the 

banknotes business altogether. 

The fourth area of concern involves HBUS’s willingness to clear 

suspicious bulk travelers checks for foreign banks. From 2005 to 

2008, on a regular basis, HBUS cleared $500,000 or more per day 

6 

in bulk travelers checks for the Hokuriku Bank of Japan. Routinely, these checks arrived in large stacks of sequentially numbered checks signed and countersigned with the same illegible signature. Forced by the Office of the Comptroller (OCC) of the Currency—to investigate, HBUS found the Japanese bank could not 

provide any ‘‘know your client’’ information or any explanation of 

why two dozen of its customers, supposedly in the used-car business, were often depositing $500,000 a day in U.S. dollar travelers 

checks purchased from the same bank in Russia. Under OCC pressure, HBUS stopped clearing the travelers checks in 2008, but kept 

open the correspondent account, despite the Japanese bank’s poor 

AML controls. In less than 4 years, HBUS provided over $290 million in U.S. dollars to a Japanese bank for the benefit of Russians, 

again, supposedly in the used-car business. 

Finally, there is HBUS’s willingness to offer accounts to bearer 

share corporations. These corporations are prime vehicles for 

money laundering and other illicit activity by providing anonymity 

through assigning legal ownership of the corporation to whoever 

has physical possession of its shares. Over a decade, HBUS opened 

accounts for 2,000 such corporations, despite warnings by internal 

auditors and outside regulators that the accounts posed high 

money-laundering risks. Documents show that the actual account 

owners deliberately pressured the bank to help hide their identities. One such account was used by a father-son team of Miami 

Beach hotel developers who were later convicted of tax fraud for 

hiding $150 million in assets. 

Bearer share accounts, suspicious travelers checks, banks with 

terrorist-financing links, hidden transactions dodging OFAC safeguards, and Mexican drug money—none of them represent the 

types of transactions we want in a U.S. bank. If the parent corporation of a global bank cannot do a better job policing its affiliates, 

we should not be providing a bank charter to their U.S. affiliate. 

If the U.S. affiliate cannot do a better job of standing up to affiliate 

pressures and safeguarding the U.S. financial system, Federal regulators should consider whether to pull its charter. 

HSBC Group recently issued a policy statement declaring that all 

of its affiliates would be subject to the highest AML standards 

among them; that its affiliates would start sharing information to 

strengthen their AML defenses; and that all affiliates would be 

subject to diligence reviews. HBUS has more than doubled the size 

of its AML compliance department, put in a new AML monitoring 

system, and closed over 395 high-risk correspondent accounts. 

These are all good steps, but we saw this movie before in 2003. The 

recent commitments are welcome. Apologies and commitments to 

improve are also welcome. But accountability for past conduct is essential, and that is what has been missing here. 

It is bad enough that a single bank such as HSBC exposes the 

U.S. financial system to multiple-money laundering risks. It is 

made worse when there is a failure of anti-money laundering oversight by the regulator which is supposed to oversee our biggest 

banks—the OCC. It is of great concern to the Subcommittee, and 

it should be of great concern to every American, that the OCC tolerated the mounting AML problems at HBUS for 5 years, without 

taking any formal or informal enforcement action. In addition, 

7 

when the OCC decided the problems had gone far enough, it lowered HBUS’s consumer compliance rating instead of its safety and 

soundness rating. Every other Federal banking agency treats antimoney laundering deficiencies as a matter of safety and soundness 

of the bank. Only the OCC treats anti-money laundering deficiencies as if they were a matter of consumer protection law. Antimoney laundering safeguards are not aimed at protecting bank customers; they are aimed at protecting the entire American public 

from wrongdoers seeking to misuse the U.S. financial system. 

The new leadership at the OCC needs to move swiftly to correct 

the previous oversight shortfalls and to assure that promised 

changes at HSBC are implemented promptly and effectively. 

Our report contains many recommendations to address the 

abuses that we have identified. Among the most important are the 

following: 

HBUS should identify which of its sister affiliates are high risk, 

subject them to enhanced monitoring, and in particular, review 

whether it should close the account of HSBC’s Mexican affiliate. 

HBUS should beef up its OFAC compliance program by auditing 

affiliate transactions to see if they are circumventing the safeguards that protect our country and other countries from terrorists, 

drug traffickers, and rogue jurisdictions. 

HBUS should close accounts with banks suspected of involvement in terrorist financing, revamp its travelers check controls, 

and eliminate bearer share accounts. 

HSBC should require affiliates to share information to strengthen their anti-money laundering defenses, and should continue to 

beef up its compliance program which was given short shrift in the 

past. 

At the OCC, the agency should follow the lead of other regulators 

and treat anti-money laundering compliance as a matter of safety 

and soundness of banks. 

The new OCC leadership needs to get the OCC moving against 

money laundering by identifying statutory violations, not just identifying failures of banks as Matters Requiring Attention, in the face 

of significant anti-money laundering deficiencies. 

Global banks have caused the world a lot of heartache. Our focus 

today is one global bank that failed to comply with rules aimed at 

combating terrorism, drug trafficking, and the money laundering 

that fuels so much of what threatens the global community. I want 

to thank my staff for their extraordinary work. I want to thank 

Senator Coburn for all of his support and for the work of his staff. 

And I now turn to him for his opening statement. 

OPENING STATEMENT OF SENATOR COBURN 

Senator COBURN. Thank you, Mr. Chairman. I normally submit 

an opening statement for the record and make a few short comments. I will not do that today because of the gravity of the problem that we face, and I want to make sure my words are heard and 

part of the record. 

I agree with most of what we heard Senator Levin say. I want 

to thank him for his tireless work on this issue. He is one of my 

favorite bulldogs in terms of when he gets a hold of something, he 

really does not let go of it. I do not always agree with the number 

8 

of teeth that he loses when he grabs hold of it, but the fact is that 

he does grab hold of it. 

I would also like to thank both the Office of the Comptroller of 

the Currency and HSBC Bank, and the reason I am thanking them 

is because in the years that I have been on this Subcommittee and 

this Committee, which is 8 years now, I have never seen the type 

of cooperation that we received both from a government agency and 

a private entity. OCC provided a number of people for interviews 

as well as essential documents about the regulatory process. HSBC 

Bank officials likewise sat for dozens of interviews and handed over 

millions of pages of documents. Some of today’s witnesses were 

flown in from posts around the world. 

As Chairman Levin laid out in his statement, the Subcommittee’s investigation into anti-money laundering and anti-terror finance efforts at HSBC has covered quite a bit of ground. PSI examined in detail the types of vulnerabilities our Nation faces from 

criminals and terrorists who want to take advantage and abuse our 

banking system and take away our freedoms. What we learned is 

that the United States faces some very unique risks, both because 

of our post-September 11, 2001 security needs and because of the 

strength of our financial system, which attracts worldwide attention. 

Every day, countless transactions denominated in U.S. dollars 

occur around the world. This is good for our economy, which benefits from a strengthened currency and increased economic activity. 

But criminals around the globe are also drawn to U.S. banks, 

which offer the attractive option of making illicit funds look legitimate. If they can pass criminal proceeds through a U.S. bank unnoticed and untouched, the funds are unlikely ever to be stopped 

or ever be recovered. 

This hearing raises the big and important questions. Banks want 

to obey the law, but also grow their businesses. What happens 

when the two goals conflict? Banks want to know their customers, 

but some customers want privacy. How do we resolve this? As we 

write AML policy, we should look for ways to get all boats rowing 

in the same direction, letting banks and government each do what 

they do best as we all work to combat crime and terror. 

At HSBC, we uncovered a number of troubling examples in 

which weak AML systems may have let criminal or terrorist funds 

pass through. In Mexico, for example, as the Chairman said, billions of U.S. dollars flowed from the HSBC affiliate in Mexico. The 

Mexico affiliate was the single largest exporter of U.S. dollars in 

Mexico to HBUS. U.S law enforcement and the regulatory entities 

have concluded that because of the volume of money, it likely came 

from proceeds of the illegal drug trade—not a far assumption. 

In another case, an Iranian bank was allowed to initiate U.S. 

dollar transactions that HSBC would process through the United 

States without explaining where they came from. At the time, however, there were severe legal restrictions on any payments coming 

from or going to Iran, most often meaning they would be manually 

inspected. HSBC’s affiliate in London coached the Iranian bank on 

how to get the payments through the United States without inspection and simply requested the bank send transactions that would 

not violate U.S. law. In effect, it relied exclusively on an Iranian 

9 

bank to comply with a law intended to catch payments from Iranian banks. The bank or the officials that made the decision were 

either naive or willfully blind. 

This is why tough AML laws are important. If illicit funds can 

be tracked and stopped, there are fewer places for criminals and 

terrorists to hide. And while our focus has been on the problems 

we found at HSBC Bank, we also have to emphasize that similar 

problems exist at other banks. For example, Citibank, Bank of 

America, Wachovia, Western Union, and others have come under 

scrutiny for laundering drug cartel profits. 

The purpose of this hearing, then, is not just to make an example 

of HSBC as if it were an anomaly. Rather, this hearing is to help 

Congress understand what kind of risks this Nation faces and what 

we should do to reduce them. If we can get a better handle on the 

risks by looking closely at the operations of a single bank, we can 

write better laws and achieve our true goals: Stopping crime and 

preventing terror. 

With that in mind, I believe there are several lessons we can 

learn from the problems that we uncovered at HSBC Bank. 

First, banks around the world operate under different laws, creating different sensitivities to money laundering. While this seems 

apparent, it was not clear how much this would affect a bank with 

worldwide affiliates until we took a closer look. In the case of 

HSBC, its bank in the United States operated differently even than 

its own affiliates in London, Mexico, and the Middle East. Failure 

to recognize this can lull us into thinking we can rely on foreign 

banks to carry out U.S. law. 

Second, bank regulators are sometimes better at identifying 

money-laundering vulnerabilities than knowing how to fix them. 

Throughout this inquiry, it became clear the Office of the Comptroller of the Currency was aware of many of HSBC’s AML weaknesses, which it frequently pointed out. It was often at a loss, however, to prescribe how HSBC could eliminate the weaknesses. And 

so its record of enforcement at HSBC resembles a lapdog rather a 

watchdog that we sorely need. 

We have also learned recently that investigators from Treasury’s 

own Office of Inspector General have cited OCC personnel for unethical practices. This, unfortunately, does not seem to be an isolated incident, and we will go into greater detail in that as we see 

the facts unfold. Taken together with our Subcommittee’s findings 

in this investigation, these conflicts are startling and suggest Congress should give closer scrutiny to the OCC’s actions. 

The purpose here is to stop criminals from hiding their illicit 

funds and preventing terrorists from having the freedom to plot 

and plan. The metrics we use to measure a bank’s AML compliance 

need to focus less on form and more on substance. How well are 

we achieving our goal? 

This Subcommittee has shown the kinds of vulnerabilities that 

we now face. Too often what we found left us very troubled, both 

for the risks to our Nation and for the level of effort we saw to 

eliminate them. HSBC made its share of mistakes, for which it is 

now being held accountable. 

But what we must all remember is that money laundering always begins with a crime, and this ultimately is what we mean to 

10 

1The prepared statement of Mr. Cohen appears in the Appendix on page 94. 

fight. To the extent that this hearing results in criminals and terrorists having fewer options to rob and harm the public, we will 

count it a success. 

It may be impossible to stop all money laundering. Most of what 

we call money laundering in a certain context is a benign transaction in another. Buying travelers checks is innocent behavior for 

the tourist, but suspicious behavior when they are purchased in 

bulk by terrorists or drug lords. This does not mean we should not 

try to stop criminals from laundering their money through U.S. 

banks, but we need to do so wisely. 

I appreciate the efforts that HSBC has made thus far to improve 

their AML systems, and I sincerely hope they stick. I look forward 

to hearing from their witnesses, as well as from the OCC, and appreciate their appearance before us today. 

Thank you, Mr. Chairman. 

Senator LEVIN. Thank you very much, Senator Coburn. 

I would now like to call our first panel of witnesses for this morning’s hearing: The Hon. David S. Cohen, the Under Secretary for 

Terrorism and Financial Intelligence at the U.S. Department of the 

Treasury; and Leigh Winchell, the Assistant Director for Investigative Programs at the U.S. Immigration and Customs Enforcement 

(ICE). I very much appreciate both of you being with us this morning. We look forward to your testimony. 

Pursuant to our Rule VI, all witnesses who testify before the 

Subcommittee are required to be sworn, so at this time I would ask 

you both to please stand and raise your right hand. Do you swear 

that the testimony you are about to give before this Subcommittee 

will be the truth, the whole truth, and nothing but the truth, so 

help you, God? 

Mr. COHEN. I do. 

Mr. WINCHELL. I do. 

Senator LEVIN. We will use a timing system today. About 1 

minute before the red light comes on, you will see the lights change 

from green to yellow. That will give you an opportunity to conclude 

your remarks. Your written testimony, of course, will be printed in 

the record in its entirety, so please try to limit your oral testimony 

to 7 minutes. 

Mr. Cohen, we are going to have you go first, followed by Mr. 

Winchell, and after we have heard your testimony, we will then 

turn to questions. Please proceed, Mr. Cohen. 

TESTIMONY OF HON. DAVID S. COHEN,1 UNDER SECRETARY 

FOR TERRORISM AND FINANCIAL INTELLIGENCE, U.S. DEPARTMENT OF THE TREASURY 

Mr. COHEN. Thank you, Chairman Levin and Senator Coburn. 

Thank you for inviting me to testify today. I am pleased to have 

the opportunity to discuss the importance of the Treasury Department’s efforts to identify and combat money laundering and terrorist financing in the U.S. banking sector. 

At the outset, it is important to recognize that the United States 

maintains one of the strongest and most effective anti-money laundering and counter-terrorist financing regimes in the world. This is 

11 

a testament to the work of the Congress, including this Subcommittee, the regulators, the enforcement agencies, and the financial institutions themselves. But the scale, efficiency, and sophistication of the United States’ financial system—particularly its 

banking sector—make it a prime target for those who seek to conceal and move illicit money. This involves not just money 

launderers, of course, but also terrorists, weapon proliferators, drug 

lords, and organized crime figures, who all at some point rely on 

the financial system to store, move, and launder the funds supporting or derived from their operations. 

Treasury’s ability to protect the integrity of the U.S. financial 

system from abuse and to combat critical threats to our national 

security and foreign policy depends to a significant extent on the 

implementation by U.S. financial institutions of robust programs to 

prevent money laundering, terrorist financing, and sanctions evasion. 

This morning I would like to briefly address why effective antimoney laundering, counter-terrorist financing, and sanctions compliance programs are so critical to our national security and the integrity of our financial system, as well as some of the steps we are 

taking, along with our partners in Congress, the Executive Branch, 

and internationally, to improve the effectiveness of our anti-money 

laundering, counter-terrorist financing, and sanctions compliance 

regime. 

Although it is difficult to measure with precision, by any estimate, the total amount of dirty money moved through and concealed within the U.S. financial system is massive—in the hundreds of billions annually. The sheer volume of money moving 

through the banking system in particular makes banks both the 

most vulnerable financial institutions for money laundering and 

terrorist financing and the most important line of defense against 

money laundering and terrorist financing. Our regulatory framework, overseen by Treasury’s Financial Crimes Enforcement Network (FinCEN), along with the Federal functional regulators, was 

built to require financial institutions to implement risk-based antimoney laundering programs, to collect and report useful information to law enforcement and national security authorities for the 

purpose of combating the full range of illicit finance. This regulatory framework assists banks in identifying and managing risk 

and creates the foundation of financial transparency required to 

apply targeted financial measures, such as sanctions against specific actors or prohibitions against specific activity. 

To implement targeted financial sanctions, banks must screen 

clients and transactions against the Specially Designated Nationals 

(SDN) list, maintained by the Treasury’s Office of Foreign Assets 

Control. This is a list of drug traffickers, weapons proliferators, terrorists, officials from rogue regimes, and other threats to our national security whose U.S. assets are frozen and who are generally 

forbidden from engaging in any transactions in the U.S. financial 

system. 

Despite the importance of robust anti-money laundering and 

sanctions compliance programs, recent civil enforcement actions by 

OFAC, FinCEN, and the Federal banking regulators illustrate that 

sometimes financial institutions fail to implement adequate proVerDate Nov 24 2008 14:41 Nov 19, 2012 Jkt 076061 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 P:\DOCS\76061.TXT SAFFAIRS PsN: PAT
12 

grams, exposing the U.S. financial system to significant risks of 

money laundering and resulting in illicit actors gaining access to 

the U.S. financial system. 

We have seen, for example, an instance where a bank failed effectively to monitor its correspondent banking relationship with 

high-risk customers, resulting the processing of $420 billion in 

cross-border financial transactions with 13 high-risk Mexican casas 

de cambio from 2004 to 2007. We have also seen several cases 

where foreign banks stripped out the names of Iran or other sanctioned entities in wire transaction messages routed through the 

United States, resulting in billions of dollars of benefits to sanctioned parties. 

These and other similar cases have resulted in criminal fines and 

forfeitures of more than $4.6 billion over the past 6 years. These 

cases raise important questions about vulnerabilities in the framework of anti-money laundering and counter-terrorist financing requirements that require immediate attention. As a result, Treasury 

is working closely with our interagency partners and the private 

sector to better understand the compliance challenges faced by financial institutions, clarify U.S. Government expectations of financial institutions, and strengthen the overall anti-money laundering 

and counter-terrorist financing regulatory structure. 

In addition to continuing to impose sanctions on weapons 

proliferators, narcotics traffickers, transnational criminals, human 

rights abusers, and terrorist financiers, my office is also focused on 

improvements to our regulatory framework. One of our most important initiatives is to examine whether the customer due diligence 

rules, the foundation of financial transparency, should be improved. 

Earlier this year, FinCEN issued an Advance Notice of Proposed 

Rulemaking suggesting ways to clarify, consolidate, and strengthen 

customer due diligence requirements for financial institutions, including an obligation to collect beneficial ownership information. 

We are also focused on combating the use of shell companies and 

other opaque legal structures that facilitate illicit financial activity. 

We strongly support legislation requiring disclosure of beneficial 

ownership information in the company formation process. And because strengthening anti-money laundering and counter-terrorist 

financing regimes internationally directly benefits the integrity of 

the U.S. financial system, my office works with others in the U.S. 

Government through the Financial Action Task Force, the International Monetary Fund, the World Bank, and the United Nations 

to encourage foreign jurisdictions to implement measures to combat 

illicit finance. 

I began my testimony this morning by noting that the United 

States is home to one of the strongest anti-money laundering and 

counter-terrorist financing regimes in the world. In order to continue as the world leader in financial integrity, something we can 

and must do, we are obligated to push ourselves to identify where 

we can do better and to work tirelessly to get there. Today’s hearing is one important step on this road, and I look forward to continuing to work with this Subcommittee to achieve this critical 

goal. Thank you. 

Senator LEVIN. Thank you very much, Mr. Cohen. Mr. Winchell. 

13 

1The prepared statement of Mr. Winchell appears in the Appendix on page 99. 

TESTIMONY OF LEIGH H. WINCHELL,1 ASSISTANT DIRECTOR 

FOR PROGRAMS, HOMELAND SECURITY INVESTIGATIONS, 

U.S. IMMIGRATION AND CUSTOMS ENFORCEMENT, U.S. DEPARTMENT OF HOMELAND SECURITY 

Mr. WINCHELL. Good morning, Chairman Levin and Senator 

Coburn. Thank you for the opportunity to appear before you today 

and discuss the efforts of the U.S. Immigration and Customs Enforcement to combat transnational criminal organizations and the 

illicit proceeds used to fund their criminal activities. 

Over the past two decades, transnational organized crime has 

transformed in size, scope, and impact, posing a significant threat 

to the national and international security. While the globalization 

of organized crime is not new, the magnitude, pace, and violence 

accompanying the illicit activities is alarming. 

For example, in the past 5 years, we have seen an unprecedented 

level of drug-related violence south of our border which has claimed 

over 47,000 lives since 2006. 

The fight against transnational organized crime is one of the 

highest priorities of ICE. With the most expansive investigative authority and the largest investigative force in the Department of 

Homeland Security (DHS), we work closely across agency and 

international boundaries with our law enforcement partners, creating a united front to disrupt and dismantle transnational criminal organizations. This is aided by our expansive global footprint. 

With a force of nearly 7,000 special agents assigned to more than 

200 U.S. cities in 71 offices in 47 countries worldwide, our domestic 

and international network of agents all work in concert to target 

transnational crime. 

One of the most effective methods of dismantling a transnational 

criminal organization is to attack the criminal proceeds that is the 

lifeblood of their operations. In fiscal year 2011, Homeland Security 

Investigation special agents initiated nearly 4,300 financial investigations, resulting in nearly 1,800 arrests, over 1,000 criminal convictions, more than 7,700 seizures worth approximately $359 million, including $331 million in currency and monetary instruments. 

In 2010, ICE initiated a financial investigative project in the 

State of Arizona following an increase in cash activity at financial 

institutions along the U.S. and Mexican international border. As a 

result of recent changes in Mexican financial regulations, many 

criminal organizations were forced to explore new ways to exploit 

legitimate financial systems in order to launder their proceeds. A 

new trend emerged, known as the repatriation of the U.S. dollar, 

and coupled with the Mexican black market peso exchange, has led 

to an increase in identified U.S. currency along the southwest border region, in the last year and a half or so, approximately twothirds of $1 billion in the form of outbound international wires or 

cashier’s check purchases from border branches of U.S. financial institutions, mostly to Mexico. 

In 2005, ICE initiated Operation Firewall as an effort to raise 

worldwide awareness of the dangers posed by the cross-border 

movement and smuggling of illicit funds. Operation Firewall targets methods used to move and smuggle currency by focusing on 

14 

all aspects of illicit cash movements. Since its inception, Operation 

Firewall has resulted in more than 5,700 arrests, totaling more 

than $553 million, and the arrest of 1,182 individuals. These efforts 

include 367 international seizures totaling nearly $258 million and 

253 international arrests. 

In August 2009, ICE officially launched the National Bulk Cash 

Smuggling Center (BCSC) as a 24/7 investigative support and operations facility. Since its inception, the BCSC initiated over 500 

criminal investigations, resulting in millions of dollars seized. The 

center has also provided training and outreach to over 21,000 Federal, State, and local law enforcement. 

ICE’s interaction with the financial institutions from an antimoney laundering perspective is multilayered. Through our Cornerstone Outreach Initiative, ICE HSI special agents share lessons 

learned, best practices, and money-laundering typologies with the 

AML personnel from financial institutions throughout the world. 

As part of these outreach efforts, special agents show how the bank 

systems and processes can and are being exploited. By sharing this 

information, the financial institutions are better able to understand 

the threats, inherent vulnerabilities, and build counter measures 

into their training and automatic monitoring systems. These outreach presentations take place at local branch bank locations as 

well as through speaking engagements at AML conferences such as 

those hosted by the Association of Certified Anti-Money Laundering Specialists (ACAMS). 

In late 2009, HSI expanded their working relationship with the 

private sector through ACAMS to assist bank AML specialists to 

better identify and monitor financial activity related to non-traditional criminal groups. This expanded working relationship allows 

the members to learn more about current active financial indicators related to those crimes. The members can then incorporate 

what they have learned into creating models and filters within 

their AML software to more accurately identify financial transactions indicative of those crimes. The CAMS certification, obtained 

through ACAMS, is the most widely recognized AML certification 

among compliance professionals worldwide. 

Since its inception, HSI special agents have conducted over 

11,800 Cornerstone presentations and trained over 243,000 participants worldwide. This outreach has resulted in the initiation of 

over 447 criminal investigations, led to the arrest of approximately 

330 individuals, 280 indictments, and over $666 million seized. 

Recognizing the magnitude of transnational organized crime, ICE 

will continue to work closely with our law enforcement partners as 

well as with the industry to identify potential vulnerabilities that 

could be exploited by terrorists and other criminal organizations to 

earn, move, and store their illicit proceeds. 

I want to thank you again for the opportunity to appear before 

you today, and I would be pleased to answer any questions at this 

time. 

Senator LEVIN. Thank you both. Let us start with a 7-minute 

first round. 

Mr. Winchell, in your prepared testimony you talk about bulk 

cash, and we will be seeing a lot of discussion of that, about drug 

cartels smuggling U.S. dollars from the United States into Mexico, 

15 

finding a Mexican bank or a casa de cambio willing to accept the 

cash, after which the financial institution brings or tried to bring 

the dollars back to the United States. 

Now, why would a drug cartel bother to smuggle U.S. dollars 

across the border into Mexico only to send those dollars or try to 

send those dollars back here again for deposit in our bank? Explain 

that circle. And why is it that process takes place? I tried in my 

opening statement to do it, but I would like to hear you try it also. 

Mr. WINCHELL. The laws that were initiated in Mexico involving 

the banking industry set certain limits on the amount of U.S. currency that could go into banks in any particular period of time; 

$7,000 for a business and $4,000 per individual per month, I believe, are what the figures are. Bulk cash is moved south across the 

border as the proceeds of their illicit activity in the United States 

and pooled in Mexico. They are sold then to money brokers anywhere between 4 to 7 percent discounted rate. That may be casas 

de cambios and others that they use then to move in bulk cash 

back across the United States border into U.S. institutions and 

then wired back into Mexico and exchanged at the current rate between Mexican dollars and pesos, and in essence completing the 

laundering process of cleaning the money. 

Senator LEVIN. But to put it simply, they cannot just directly deposit these drug sales money into U.S. banks because we have a 

Know Your Customer requirement. Is that correct? 

Mr. WINCHELL. That would be correct, sir. They have to find 

someone in Mexico that would be complicit with their activity. 

Senator LEVIN. But they want that money to be in U.S. banks, 

to get there and to be laundered. 

Mr. WINCHELL. Yes, sir. 

Senator LEVIN. So the short answer is they cannot do it directly, 

so they have to go through this process of sending it to a Mexican 

bank, if they can, and then having it returned cleansed. Is that correct? 

Mr. WINCHELL. That is correct. 

Senator LEVIN. Now, what is the relationship between the 

strength of a drug cartel and the ability of that drug cartel to launder money? Is it clear that the more it is able to launder its money, 

the stronger the cartel is? 

Mr. WINCHELL. Their profits fuel their activity. The more profit 

they have, in other words, the more legitimate money they can appear to have, the more they can fuel their illicit activity and then 

diversify their criminal activity. So the larger the cartel, the richer 

the cartel, the more powerful they get. 

Senator LEVIN. But also they will be more powerful if they can 

launder that money so that they can then diversify? 

Mr. WINCHELL. Absolutely. 

Senator LEVIN. All right. So that, again, we have all this huge 

violence on the border. We have drug cartels down in Mexico and 

drug groups here as well fighting for power, bringing violence to 

their streets and to our streets. And if they can successfully launder money, they are stronger. Is that accurate? 

Mr. WINCHELL. That would be very accurate. 

16 

Senator LEVIN. OK. Mr. Cohen, would you agree that the more 

a terrorist can get their money through our system, the stronger 

a terrorist group will be? 

Mr. COHEN. I would, Mr. Chairman. 

Senator LEVIN. All right. Now, even though they have new rules 

down in Mexico, as you have just pointed out, I think starting in 

2010, are illicit drug proceeds still being laundered into U.S. financial institutions, Mr. Cohen? 

Mr. COHEN. I think there is no question that there continues to 

be a problem with money laundering in U.S. financial institutions 

coming from Mexico, from the casas de cambio and other institutions in Mexico, as well as from other sources where illicit proceeds 

are placed into the U.S. financial system. 

Senator LEVIN. And, therefore, even though there have been 

changes in the laws, for instance, in Mexico and other efforts made 

to clamp down on the ability to launder money for these groups, 

the terrorist groups or drug cartels, it is still going on, and the efforts have continued. Can you give us some of the new efforts that 

are being made, the new challenges, Mr. Cohen, in this area of 

money laundering? 

Mr. COHEN. Well, to pick up on what Mr. Winchell was discussing earlier, with respect to Mexico, obviously there is a substantial amount of legitimate trade with Mexico and a substantial 

amount of legitimate U.S. dollars that are spent in Mexico. And 

what we see is these Mexican financial institutions working with 

casas de cambio and then working with U.S. financial institutions 

to take in U.S. dollars from the Mexican economy. Dirty money is 

layered in with legitimate funds and placed into U.S. financial institutions. That continues to be a serious problem even after the 

really very important and aggressive steps that the Mexican Government has taken to restrict the ability of businesses and individuals to deposit U.S. dollars directly into Mexican financial institutions. 

We have also seen some displacement of the money-laundering 

cycle, so instead of the drug dollars just moving into Mexico, because of the steps the Mexican Government has taken, we have 

seen some of these dollars move further south in coming back into 

the U.S. financial system from countries further into Central America. 

Senator LEVIN. Now, when law enforcement or bank regulators 

see a bank in a country with drug-trafficking challenges transporting large volumes of U.S. dollars to the United States, is a red 

flag that illegal drug proceeds might be involved? 

Mr. COHEN. I think financial institutions have in their antimoney laundering programs a whole series of factors that they look 

at to determine whether what is happening is normal, typical behavior or something out of the ordinary and whether it spikes in 

the amount of bulk cash coming in or other sort of anomalous activity. Those are the sorts of things that a well-tuned anti-money 

laundering program should identify and cause a financial institution to look at more carefully. 

Senator LEVIN. OK. Senator Coburn. 

Senator COBURN. Thank you. 

17 

Mr. Cohen, in your testimony, you stated that when safeguards 

are not stringently enforced, illicit actors are able to take advantage of the U.S. financial system. If they were all enforced 100 percent of the time, basically what I am hearing is they would still be 

able to take advantage of the U.S. financial system because when 

you blend good with bad from a legitimate organization—so what 

are the next steps to limit that down? 

Mr. COHEN. Well, Senator Coburn, I would draw a distinction between the OFAC list, the SDN list, and anti-money laundering programs in responding to this question. A properly functioning compliance program with respect to the SDN list should prohibit anybody on that list from getting access to any U.S. financial institution because banks can run the filter, run the names, and if a 

transaction is coming through from someone who is on the SDN 

list, it should be stopped. 

Preventing money laundering is a more difficult task, and the 

regulatory structure that we have implemented and that Congress 

has legislated through the Bank Secrecy Act and the PATRIOT Act 

and other amendments to Title 31 require a risk-based approach by 

financial institutions to have an anti-money laundering program 

that is appropriate given the risk that the bank faces across the 

range of its activities. 

Every bank is going to approach this in a slightly different way, 

and every bank has a slightly different risk profile given its customer base domestically and how they interact with affiliates and 

non-affiliates overseas. 

I do not think anyone expects to ever achieve a financial system 

where there is absolutely no money laundering, but it is also the 

case that when financial institutions do not implement robust antimoney laundering programs across the range of their activities that 

is appropriately tuned to the risk that they face, there is a greater 

opportunity for illicit acts to get access to—— 

Senator COBURN. So whose responsibility is it to see that the 

banks do just that? 

Mr. COHEN. Well, I think it is all of our responsibility—— 

Senator COBURN. No, but it is specific to the Treasury, right? 

Mr. COHEN. Sure. 

Senator COBURN. It is the Treasury Department. Who in the 

Treasury Department is responsible for that? What agency? 

Mr. COHEN. Well, my office is responsible for helping to set policy. We have obviously the OCC, which is part of the Treasury Department, that is a bank regulator. It undertakes its regulatory activities independently from the Secretary of the Treasury by statute. 

Senator COBURN. Right. 

Mr. COHEN. There are obviously other bank regulators as well 

that regulate other financial institutions. 

Senator COBURN. But it is not necessarily that we do not have 

enough good regulations. Part of the problem is that the regulations we have are not being monitored and enforced properly. 

Would you agree with that statement? 

Mr. COHEN. Senator, I think as we continue to work on the issue 

of money laundering, I think we need to look both at the regulatory 

structure itself and see whether there are modifications that would 

18 

be appropriate. And I also think we need to look at how effectively 

the regulators are overseeing financial institutions—— 

Senator COBURN. Well, I think we have seen that. Our investigation is going to show a lot of lack of effectiveness. As a matter of 

fact, it does show a lot of a lack of effectiveness. So the point I am 

trying to get to is we can write all the rules and regulations in the 

world, but if they, in fact, are not carried out by the bureaucracy 

assigned to do that, it does not matter. So the whole point is: Do 

we write a whole bunch more regs? Do we make it even more complicated? 

One of the questions I had for you I am not going to ask. I will, 

if I may, Mr. Chairman, send supplemental questions to both of 

these witnesses. Of the people that are doing it right—and I am 

going to ask HSBC this, too. What is the cost of compliance with 

this as a percentage of the volume in their banks? And is there 

going to become a point at which it is not worth dealing with us? 

In other words, can we do it more effectively and more efficiently? 

And are we doing the right things? 

Mr. COHEN. Well, Senator, I think we are looking at, as I said, 

whether the regulatory structure needs some modification, not to 

make it more complicated but to make it more effective. I think we 

are looking at whether the financial institutions themselves need 

to do a better job in complying with the regulations. And we are 

working very closely with the bank regulators across the spectrum 

of regulators, both bank regulators and the regulators in the securities industry, to talk about how we all can do a better job of overseeing compliance in the regulated industries. 

Senator COBURN. Thank you. 

Mr. Winchell, just one question. I am going to submit my questions for the record to both of you, if I might, and have you respond 

to them, hopefully in a timely fashion. You talked about your outreach efforts have resulted in the initiation of 950 criminal investigations. Did HSI agents identify the illicit funds or did the banks? 

Mr. WINCHELL. It was usually the banks that—I would think I 

would be safe in answering that question. Our outreach efforts are 

an attempt to educate them on the red flags, and then they would 

bring those to our—— 

Senator COBURN. So you are getting some response? 

Mr. WINCHELL. Yes, sir. 

Senator COBURN. All right. And does your Trade Transparency 

Unit include partnerships with countries other than Central and 

South America? 

Mr. WINCHELL. Our Trade Transparency Unit continues to grow. 

Senator COBURN. But where is it now? Is it mainly Central and 

South America? 

Mr. WINCHELL. It is primarily Central and South America, but 

it is expanding towards the Philippines and others, now. 

Senator COBURN. And one thing I will ask you. Prepaid cards 

and stored value devices seems to be a new, novel method. I would 

love in the response to my questions from both of you on that, how 

are we going to handle that one? That one seems even more difficult. 

Mr. WINCHELL. That one is a bit of a challenge for us; particularly as the individual crosses back and forth across the border in 

19 

bearer form, it is basically a bearer instrument. Of greater concern 

to us are the loadable and reloadable cards. 

Senator COBURN. All right. Thank you, Mr. Chairman. 

Senator LEVIN. Thank you very much, Senator Coburn. 

I just have one more question. You touched on this in the answer 

to Senator Coburn’s question. Just explain for us, if you would, Mr. 

Cohen, very simply, what the SDN list is, what the OFAC filter is, 

and how the OFAC filter relates to the SDN list and why these are 

important. 

Mr. COHEN. Sure. The SDN list is the compilation of individuals 

and entities that have been subject to sanctions under the range 

of sanctions programs that OFAC and the Treasury Department 

implement. These sanctions programs cover illicit actors like terrorist financiers, weapons proliferators, transnational organized 

criminal groups, narcotics traffickers, as well as rogue regimes— 

Iran, North Korea, Syria, and others. Everybody who is subject to 

sanctions under those sanctions programs appears on the SDN list. 

This is a list that is published by OFAC, available to every financial institution, and by and large, financial institutions incorporate 

this list into their compliance programs and screen transactions 

coming through their financial institutions against this list, because everybody who appears on that list is forbidden from dealing 

with any U.S. person, including any U.S. financial institution, and 

their assets are to be frozen. 

It is critically important that financial institutions run the OFAC 

list in their filters so that our sanctions programs are effectively 

implemented. We rely on financial institutions to ensure that those 

for whom we have applied sanctions are not able to access the U.S. 

financial system. That makes our sanctions programs, which at 

root are designed to pursue our most important national security 

and foreign policy objectives, as effective as they can be. 

Senator LEVIN. How effective is the OFAC filter, in your judgment? 

Mr. COHEN. There are some notable examples of situations where 

financial institutions have taken steps to try and evade the OFAC 

filter. We have over the course of the last 5 or 6 years entered into 

a number of significant settlements with major financial institutions that all have essentially the same fact pattern, which is that 

the foreign financial institution was stripping information from 

transaction messages running through the United States as a 

means to evade their U.S. partners’ OFAC filter. Those are very 

important cases for us and I think illustrate how seriously we take 

this issue. But, at the same time, I think by and large, U.S. financial institutions do a good job of incorporating into their compliance 

programs the list of names and entities that are on the OFAC SDN 

list and screening transactions to prevent access to their institutions by those who are subject to sanctions. 

Senator LEVIN. Will you put in your words now—I asked Mr. 

Winchell this before. Put in your words why it is that these entities 

we are trying to keep out of our financial system try to get into our 

financial system. Why is it that they make this effort, in your 

words? 

Mr. COHEN. I think the simple answer is if you can run money 

through the United States, it helps to create an air of legitimacy 

20 

to those funds that makes it easier for you to then make use of 

those funds for whatever purpose you want to put them to. And if 

this is dirty money that you are trying to portray as clean funds, 

being able to run it try the U.S. financial system helps you achieve 

that objective. 

Senator LEVIN. And makes you stronger. 

Mr. COHEN. It helps you achieve whatever illicit objective it is 

that you are trying to achieve, whether it is weapons proliferation, 

terrorist financing, or any of the other activities that are the subject of our sanctions, all of which we are trying to combat by weakening their financial support. 

Senator LEVIN. It helps you achieve the very activities that we 

are trying to stop. 

Mr. COHEN. It does. 

Senator LEVIN. Do you have any additional questions? 

Senator COBURN. No, but I would make one observation. The better we get, the more they are going to want to be here. That is one. 

And number two is it is hard for us to know what an excellent antimoney laundering system is because we can always do better. But 

I would remind us that the cost of that is borne by the banks, 

which is ultimately the American consumer. And so efficiency in 

how we do this and the worry about too much—in other words, for 

the next regulation, what are we achieving for it? Cost-effectiveness has got to be part of our concern as we look to handle this. 

Thank you, Mr. Chairman. 

Senator LEVIN. Thank you very much, Senator Coburn. 

There will be additional questions for the record for you both, 

and that will be true with all of our panelists this morning and 

afternoon. And talking about this afternoon, I think we have talked 

to your staff about it, Senator Coburn. The likelihood is that we 

will need to break at some point here for lunch. We will see how 

quickly the next panel goes. 

We thank you both. We thank you and your agencies for the 

work that you do. It is critically important to our Nation’s security, 

and you are excused. 

Mr. COHEN. Thank you, Mr. Chairman. 

Senator LEVIN. We will now call our second panel of witnesses 

for this morning’s hearing: David Bagley, the head of Group Compliance of HSBC Holdings in London; Paul Thurston, Chief Executive for Retail Banking and Wealth Management at HSBC Holdings in Hong Kong; Michael Gallagher, the Former Executive Vice 

President and Head of PCM North America for HSBC Bank USA 

in New York; and, finally, Christopher Lok, the Former Head of 

Global Banknotes at HSBC Bank USA in New York. 

We appreciate all of you being here this morning. We look forward to your testimony. And as you heard, we have Rule VI, which 

requires that all witnesses who testify before the Subcommittee are 

required to be sworn, so we would ask each of you to please stand 

and raise your right hand. Do you swear that the testimony that 

you are about to give will be the truth, the whole truth, and nothing but the truth, so help you, God? 

Mr. BAGLEY. I do. 

Mr. THURSTON. I do. 

Mr. GALLAGHER. I do. 

21 

1The prepared statement of Mr. Bagley appears in the Appendix on page 111. 

Mr. LOK. I do. 

Senator LEVIN. The timing system that we will be using today 

will give you a warning 1 minute before the red light comes on, and 

than it will shift from green to yellow. It will give you an opportunity to conclude your remarks. Your written testimony will be 

printed in the record in its entirety. Please try to limit your oral 

testimony to no more than 5 minutes each. 

Before you start, I want to thank HSBC for their cooperation. As 

I said in my opening statement, HSBC was totally cooperative with 

this investigation. We appreciate that. 

So, Mr. Bagley, I guess we are going to have you go first followed 

by Mr. Thurston, then Mr. Gallagher, and then Mr. Lok. And then 

we will turn to questions. So, Mr. Bagley, please proceed. 

TESTIMONY OF DAVID B. BAGLEY,1 HEAD OF GROUP 

COMPLIANCE, HSBC HOLDINGS PLC, LONDON, ENGLAND 

Mr. BAGLEY. Thank you. Good morning, Chairman Levin, Senator Coburn, and Members of the Subcommittee. My name is David 

Bagley. Thank you for the opportunity to be here today. I have submitted written testimony, but in the interest of time, I have confined my remarks to a few points. 

Since 2002, I have been the head of Group Compliance at HSBC 

Holdings plc, which is the global parent of HSBC. Having been a 

compliance officer for 13 years in a bank that operates in approximately 80 jurisdictions worldwide, I have dedicated my career—not 

only within HSBC but through my broader industry work as well— 

to meeting the significant challenges that confront global banking 

institutions in the world we live in. I have followed the work of this 

Subcommittee and have seen how your work has advanced important dialogues and helped the international banking community, 

including HSBC, identify and address potential vulnerabilities. 

My chief focus as the head of Group Compliance at HSBC has 

been promoting the values that we, as a bank, have set for ourselves and the values that you and our regulators, both in the 

United States and around the world, rightly expect from a global 

bank like HSBC. And while there have been successes on many 

compliance issues, I recognize that there have been some significant areas of failure. I have said before and I will say again: Despite the best efforts and intentions of many dedicated professionals, HSBC has fallen short of our own expectations and the expectations of our regulators. This is something that a bank seeking 

to conduct business in the United States and globally must acknowledge, learn from, and, most importantly, take steps to avoid 

in the future. 

The group has always had as a core element of its compliance 

policy a focus on both the letter and the spirit of laws and regulations, not just what is permissible but what is prudent and responsible. 

In hindsight, as I reflect on the dialogue from 2002 to 2007, and 

specifically the wider lessons learned out of both the OFAC and 

Mexico issues, I think we all sometimes allowed a focus on what 

was lawful and compliant to obscure what should be best practices 

22 

for a global bank. Transparency is a principle that HSBC and every 

bank should always make a top priority, even when it is not legally 

required. I think that with our revised structure and approach, this 

is where we are today. 

Indeed, we have learned a number of valuable lessons, and the 

bank is well along the way of converting those lessons into solutions. As I expect my colleague, Stuart Levey, to describe in some 

detail, HSBC is in the process of shedding the historical compliance 

model that the bank has outgrown. This departure from the old 

model is very significant. Our former compliance structure was a 

product of historical growth by acquisition, and it was a major factor behind some of the issues that I expect we will be discussing 

today. 

Under the former model, my mandate was limited to advising, 

recommending, and reporting. My job was not to ensure that all of 

our global affiliates followed the group’s compliance standards, and 

I did not have the authority, resources, support, or infrastructure 

to do so. Rather, final authority and decisionmaking rested with 

local line management in each of the bank’s affiliates. 

Now a major overhaul is underway. The new compliance model 

is a product of deep reflection and is tailored to address today’s 

challenges as well as the inevitable challenges of tomorrow. Significantly, the Group Compliance function now for the first time has 

authority over the compliance departments at every one of the 

bank’s affiliates. This is a stark break from the past. Now Group 

Compliance has both the mandate and the resources to ensure that 

affiliates are compliant. In other words, for the first time, Group 

Compliance is an advisory and a control function. In addition, personnel at the affiliates are now accountable to Group Compliance 

for their conduct. 

Second, under the new model, Group Compliance oversees the 

bank’s nearly 3,500 compliance officers worldwide and takes the 

lead on decisions about resource allocation, compensation, objectives, strategy, and accountability. 

Last, while I do not have the time to describe all of the recent 

enhancements, I would like to emphasize the creation of our assurance function. In short, the authority of the head of Group Compliance and, therefore, the function as a whole is greatly increased. 

As I have thought about the structural transformation of the 

bank’s compliance function, I recommended to the group that now 

is the appropriate time, for me and for the bank, for someone new 

to serve as the head of Group Compliance. I have agreed to work 

with the bank’s senior management towards an orderly transition 

of this important role. 

Thank you for your time. I welcome this opportunity to answer 

any questions. 

Senator LEVIN. Thank you very much, Mr. Bagley. Mr. Thurston. 

23 

1The prepared statement of Mr. Thurston appears in the Appendix on page 116. 

TESTIMONY OF PAUL THURSTON,1 CHIEF EXECUTIVE, RETAIL 

BANKING AND WEALTH MANAGEMENT, HSBC HOLDINGS 

PLC, HONG KONG 

Mr. THURSTON. Thank you and good morning, Chairman Levin, 

Senator Coburn, and Members of the Subcommittee. My name is 

Paul Thurston. I am the Chief Executive of Retail Banking and 

Wealth Management for the HSBC Group. I have submitted written testimony, but in the interest of time today, I will confine my 

comments to a few points as well. 

I have worked in the banking industry for 37 years, and I have 

served at various roles in HSBC around the world. I was the Chief 

Executive of HSBC for 14 challenging and stressful months beginning in February 2007. 

When I arrived in Mexico, I set out to find out the most important business issues and risks that there were in the business. I 

met with business heads, risk management, audit, and also with 

the regulators, and it became clear that a number of group systems 

and policies had been put in place by that time but that this was 

not HSBC as I knew it. There were significant weaknesses in the 

control infrastructure, and these weaknesses existed in Know-YourClient (KYC) and AML management and in other areas of the bank 

as well, including credit risk management, card fraud prevention, 

technology, and management information. 

As I investigated these issues and tried to assess why the problems persisted, I came to learn that they were exacerbated by a 

business model and a performance management system that we 

had inherited from the former Bital Bank that was heavily focused 

on business growth rather than control. 

I should add that we were operating in an external environment 

in Mexico that was incredibly challenging. Bank employees faced 

very real risks of being targeted for bribery, extortion, and kidnapping. And, indeed, there were many kidnappings during my tenure, 

and high levels of security were required for staff working in Mexico. In addition, unlike the United States, Mexico was a data-poor 

environment, making it difficult to verify the identity of customers. 

Some of the things I found, frankly, took my breath away. But 

every time I found a weakness, I tried to ensure that we took action, not just in dealing with the immediate issues but also in setting up programs to improve the infrastructure, processes, and 

business model for the future. I frequently requested audit and 

group compliance reviews to be scheduled so that I would have an 

independent review of progress, and I kept the board, the regional 

audit committee, and group management informed of everything 

that I saw and did. And I also ensured that we cooperated fully 

with the regulators, as indeed the group has done with this investigation. 

Effective AML depends upon properly knowing your customers, 

and this was a major area of concern to me, with substandard files 

and KYC documentation housed across a network of 1,300 

branches. I committed to invest in technology and people, to centralize the review of all files for all new and existing accounts, and 

to keep central records that could be used for ongoing alert manVerDate Nov 24 2008 14:41 Nov 19, 2012 Jkt 076061 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 P:\DOCS\76061.TXT SAFFAIRS PsN: PAT
24 

1The prepared statement of Mr. Gallagher appears in the Appendix on page 124. 

agement. I recognized that this would take time to develop and install, but it would give us a more robust platform, provide more reliable reports, and improve the quality and speed of remediation 

once implemented. 

I believe that we made real progress at HSBC Mexico during my 

short tenure. We changed the business model, the performance 

management systems, and we enhanced our compliance systems. 

But, clearly, after only a short period of time, there was still much 

work to be done upon my departure in April 2008, and the scale 

of the remediation work alongside an escalating drug war in Mexico and ever more adept criminals continued to raise challenges 

and new issues. 

After I left, further steps continued to be taken. Decisions were 

made to stop U.S. dollar cash handling in Mexico. We closed 

branches in areas where there was a high risk of money laundering. We are now in the process of closing all the HSBC Mexico 

accounts in the Caymans. We will continue to scrutinize our business in Mexico to determine how we can further mitigate compliance risk. 

We know that criminals operate globally, and as an international 

bank, we will be a target. We have to be sure that we have the best 

and strongest defense in place in every business, in every market 

in which we operate, regardless of the local challenges, and we are 

committed to doing this. We know we should have done this better, 

sooner. 

There are many learnings in our experience in Mexico for us and 

others, and I will be pleased to answer any questions that you 

have. 

Senator LEVIN. Thank you very much, Mr. Thurston. Mr. Gallagher. 

TESTIMONY OF MICHAEL GALLAGHER,1 FORMER EXECUTIVE 

VICE PRESIDENT, HEAD OF PCM NORTH AMERICA, HSBC 

BANK USA, N.A., NEW YORK, NEW YORK 

Mr. GALLAGHER. Good morning. Chairman Levin, Senator 

Coburn, and Members of the Subcommittee, my name is Michael 

Gallagher, and I reside in Lincroft, New Jersey. From 2001 until 

last year, I was an Executive Vice President at HSBC Bank USA, 

also referred to as ‘‘HBUS,’’ and I was responsible for the Payments 

and Cash Management Business in North America. On November 

21, 2011, I was subject to a reduction in force at the bank and, 

therefore, have not been a member of the bank for the past 8 

months. 

During my time at HSBC, PCM developed and marketed payments and cash management services to corporate middle-market 

clients as well as financial institutions, including HSBC-affiliated 

banks. While PCM generally did not manage the various operational units within PCM processing PCM products, we worked 

very closely with our operations colleagues to manage and maintain the expected standards of quality and control. 

I understand the Subcommittee is interested in HBUS’s antimoney laundering efforts. During my tenure at HBUS, my team 

25 

1The prepared statement of Mr. Lok appears in the Appendix on page 127. 

and I took compliance matters very seriously. We were active participants in the efforts of the compliance department to ensure 

safety and soundness. PCM assisted the compliance department operations as well as relationship managers in this regard. In instances, when PCM became aware of negative information regarding the client, PCM worked closely with the compliance department 

operations and the relationship managers to ensure that they received the information they needed. 

PCM also made resources available to relationship managers and 

the compliance department to assist in any way that we could. At 

various times, PCM made staff available or seconded these staff to 

different departments to assist in various projects and problem resolution. 

In summary, I would like to thank the Chairman of the Subcommittee for allowing me to speak at the hearing on these critical 

matters. Anti-money laundering, terrorism financing, and global 

access to the U.S. financial systems are issues of critical importance to the banking industry, to national security, and to me. 

HSBC and the banking industry as a whole have learned many 

important lessons over the past decade or so. I believe that HSBC’s 

experience, especially in light of its uniquely global footprint, can 

add real value to understanding more broadly the risks and opportunities for enhance safety in this industry. 

During my time at HSBC, there were steps taken to tighten antimoney laundering controls, and I understand that significant 

progress has been made in this regard since my departure. But 

with hindsight, it is clear that we did not always fully understand 

the risks of our businesses or the challenges of the global, crossborder nature of the business. It is clear that we could have done 

much more and done it more quickly. 

I appreciate the opportunity to provide this information to the 

Subcommittee, and I am prepared to answer any additional questions that the Subcommittee may have at this hearing. Thank you. 

Senator LEVIN. Thank you very much, Mr. Gallagher. Mr. Lok. 

TESTIMONY OF CHIU HON ‘‘CHRISTOPHER’’ LOK,1 FORMER 

HEAD OF GLOBAL BANKNOTES, HSBC BANK USA, N.A., NEW 

YORK, NEW YORK 

Mr. LOK. Good morning. Chairman Levin, Senator Coburn, and 

Members of the Subcommittee, I appreciate the opportunity to be 

here today. My name is Christopher Lok, and from 2001 until 2010 

I served as the global head of the banknotes business at HSBC. 

In my statement today, I will cover three topics. First, I will provide my background. Second, I will provide an overview of the 

banknotes business at HSBC. And, third, I will address some of the 

specific problems and issues that I believe the Subcommittee is interested in. 

For me, it is painful and embarrassing to talk about the areas 

where, in hindsight, we fell short. At the same time, it is valuable 

to do so in order to find constructive solutions and so that others 

do not make the same mistakes going forward. 

26 

I was born and raised in Hong Kong. In 1981, I started working 

in the banknotes business, and that is what I did for 29 years. During the entire time from 1981 through 2010, I worked for HSBC 

or a predecessor institution. For most of my career I was based in 

Asia, but I was privileged to have lived and worked in New York 

for a brief period in the 1990s and again from 2001 until 2010. 

Even though I am not a U.S. citizen, I had a wonderful experience 

living and working in this country, and I have a great admiration 

and affection for the United States. 

I would like to provide a brief overview of the banknotes business. In essence, the business is about the buying and selling of 

physical currency at the wholesale level. Our clients were banks 

and other financial institutions around the world. We employed 

about 275 people, including traders, back office staff, and people 

who focused on operations and logistics. We dealt with approximately 800 customers in over 100 countries, and we transacted in 

about 75 different currencies. These customers have natural demand for and supply of currency banknotes, driven by various economic activities. To them, HSBC was a safe and reliable 

counterparty, and I believe that we provided them with a valuable 

service. 

I understand that the Subcommittee is focused on some of the 

compliance challenges that we faced in the banknotes business. 

Let me start by emphasizing that compliance was a critical part 

of the HSBC banknotes business. Over a period of years, there 

were some occasions when I communicated with my colleagues in 

compliance in a manner that was unnecessarily aggressive and 

harsh. These communications were unprofessional, and I deeply regret them. 

In reality, the business line and compliance shared the same objective: To avoid the bank being used by inappropriate people for 

improper transactions. Despite my overly critical emails, I believe 

banknotes business and compliance people actually had a good 

working partnership. While I did not always communicate this, I 

had great respect for my colleagues in compliance, and I valued 

their work. 

With respect to banknotes transactions with customers in Mexico, up until December 2008 I was under the impression that 

HSBC’s Mexican affiliate, HBMX, was operating under HSBC 

group standards. In December 2008, HBMX announced that it 

would no longer be accepting U.S. currency in Mexico. I was surprised by this announcement, and I tried to find out what was the 

reason behind it. It was not until early 2009 that I learned, as a 

result of my own inquiries, that HBMX had gotten into problems 

because their anti-money laundering controls were seriously compromised. I was surprised and concerned about this news. I was 

not previously aware of the AML problems at HBMX. If we had 

known of these problems, I am certain that we, in the banknotes 

business, would have done things differently. 

As time went by, some questions were raised about the banknotes business in Mexico. In retrospect, we did not adequately appreciate the concerns being raised about the business environment 

in Mexico. While we did our best to deal with these inquiries, I am 

sorry to say that I did not understand what later became apparent. 

27 

1See Exhibit No. 1b, which appears in the Appendix on page 576. 

2See Exhibit No. 12, which appears in the Appendix on page 634. 

3See Exhibit No. 19, which appears in the Appendix on page 673. 

4See Exhibit No. 30, which appears in the Appendix on page 703. 

With the benefit of hindsight, it is now clear that we did not perceive the extent of the anti-money laundering deficiencies and the 

risks present in Mexico. Thank you very much. 

Senator LEVIN. Thank you very much, Mr. Lok. 

Let us have a 10-minute first round, if that is all right. Does that 

give you enough time? 

Senator COBURN. Yes. 

Senator LEVIN. Because we will have more than one round. 

Mr. Thurston, HBMX was a bank that had a longstanding severe 

money-laundering problem, and we describe this at length in our 

report. The bank was purchased in 2002. You did not arrive until 

2007. Take a look, if you would, at the exhibit book, Mr. Thurston, 

in front of you there, Exhibit 1b.1 What we have done here is we 

have put together a chart summarizing some of the exhibits. Just 

a few highlights from those exhibits, which are really a litany of 

money-laundering deficiencies at HBMX from 2002 to 2009. 

The first reference is to 2002 in this exhibit. Here is what the 

audit found: ‘‘There is no recognizable compliance or money laundering function’’ at Bital. That is the bank that you bought. That 

is 2002. 

Then in 2005, 3 years later now, ‘‘senior persons within the compliance function fabricated records of certain mandatory antimoney laundering meetings.’’ This quote is taken from Exhibit 12,2

but we put together these quotes on this Exhibit 1b. 

Now, the fabrications were ordered by the head of the antimoney laundering compliance program who was asked then to 

leave the bank. This email was sent by Mr. Bagley to Stephen 

Green, who was then CEO of the HSBC Group. 

Next, 2007. This is a quote from a July 7, 2007, email from a 

senior compliance person at HSBC Group, John Root. It is taken 

from Exhibit 19.3 It is an email to the head of HBMX compliance 

after finding out that the anti-money laundering committee allowed 

three different high-risk accounts with suspected illegal drug proceeds to stay open, and he writes, ‘‘What is this, the School of Low 

Expectations banking?’’ 

Then in 2008, this is a statement from HBMX’s own AML director who was leaving that Mexican affiliate, and he was participating in an exit interview with Mr. Bagley, and he said the following: That there were allegations of 60 percent to 70 percent of 

laundered proceeds in Mexico going through HBMX. He also stated 

that HBMX executives did not care about AML controls. That 

comes from Exhibit 30.4 This is 2008. 

And then another quote from Mr. Bagley in 2008: ‘‘What I find 

most frustrating is the way in which new issues constantly 

emerged, however much time is spent with HBMX.’’ 

In 2009, a statement from an email from Mr. Bagley to the CEO 

of HSBC Latin America, Mr. Alonso: ‘‘The inherent anti-money 

laundering risk in Mexico is still very high.’’ 

So this had been going on for 7 years, money-laundering problems at the HBMX bank, the Mexican affiliate. 

28 

1See Exhibit No. 36, which appears in the Appendix on page 726. 

So, Mr. Thurston, when you arrived in 2008, you began immediately making some changes. The problems that you faced had 

been longstanding. They were not corrected before you got there, 

and some of them, plenty of them, were not corrected until you got 

there, and then some remained and they were corrected, some of 

them, after you left. 

Why did you discover that these had festered for so many years? 

What was there about that bank, that culture that you discovered 

that allowed these things to go on and on and on? These are not 

thing which were discovered later. These were known at the time. 

Emails show that they were known at the time. A number of you 

have talked about hindsight. These are contemporaneous emails. 

This is not something discovered in hindsight or learned in hindsight. This is something that people knew was going on at that 

bank. Why was it allowed to continue? What did you find when you 

got there? 

Mr. THURSTON. Thank you, Mr. Chairman. My assessment was 

that starting from before the acquisition, this bank had been a fastgrowth bank. In fact, that was the reason why it got into trouble, 

and that was the reason that we were able to acquire it. It grew 

fast, but it had no controls. The business model was completely decentralized. All the files, all the decisions were taken in a distributed branch network. It was very difficult from the center to get 

controls, and there was a very strong incentive scheme that backed 

continued volume growth rather than quality of controls. 

A number of steps were taken to install group processes and 

group systems, but if you are confronted with that, as I said in my 

opening remarks, you need to address the business model that is 

underneath it and put something systemic in. So one of the steps 

that I took was to create this centralized platform where, instead 

of relying on 1,300 branches to do the KYC, we would have all of 

those papers imaged to a central site where we could check and see 

that we had all the documents, that we had all the papers, and if 

we did not, then we would not open the accounts. 

But that kind of investment takes time, and there was a significant remediation task to be done to put right the files from the 

past. So there were multiple problems that existed in the bank, as 

I saw it when I was there. 

Senator LEVIN. These were problems which were known for 

years. This is not something which was looking back. This is something which year after year after year, starting in 2002, was known 

by this bank. And yet these problems festered for years. 

Here is another email, Exhibit 36.1 This was an HSBC Group 

deputy head of compliance, a 2008 email. Now, he had been sent 

to Mexico to try to get a handle on money-laundering problems 

there. One of the problems discussed was a backlog of 3,600 accounts that were supposed to be closed but were not, including 675 

which had been identified as potentially involving money laundering that had been ordered closed by HBMX’s anti-money laundering committee, known as CCC, or Triple C. Here is what the 

email noted, and this is Exhibit 36: That of the 675 accounts, 16 

29 

1See Exhibit No. 19, which appears in the Appendix on page 673. 

had been ordered closed in 2005, 130 in 2006, 172 in 2007, 309 in 

2008. So it took 3 or 4 years to close a suspicious account. 

Now, is there any way that should have been allowed to have 

happened at the time? Forget the business case and anything else. 

Mr. THURSTON. No, Senator. 

Senator LEVIN. Now, another problem involving HBMX was the 

committee at the bank which was mandated under Mexican law 

and is composed of both business and compliance personnel 

charged with resolving anti-money laundering issues, such as what 

accounts should be closed. 

In July 2008, after the CCC committee decided to allow several 

suspect accounts to remain open, a senior compliance official at 

HSBC Group, John Root—so now this is the group now—sends a 

blistering letter to HBMX compliance head, Mr. Garcia, at Exhibit 

19.1 I am going to read from this exhibit. ‘‘A number of items jump 

out from your most recent weekly report . . . but everything pales 

in comparison with the [money-laundering] items on page 4,’’ he 

writes. ‘‘It looks like the business is still retaining unacceptable 

risks and the AML committee is going along after some initial 

hemming and hawing. I am quite concerned that the committee is 

not functioning properly. Alarmed, even. I am close to picking up 

the phone to your CEO.’’ 

‘‘What on earth is an ‘assumption responsibility letter’ and how 

would it protect the bank if the client is a money launderer? Please 

note,’’ he writes, ‘‘that you can dress up the USD 10 million to be 

paid . . . to the U.S. authorities as an ‘economic penalty’ if you 

wish but a fine is a fine is a fine, and a hefty one at that. What 

is this, the School of Low Expectations Banking? (‘We didn’t go to 

jail! We merely signed a settlement with the Feds for $10 million!’)’’ 

‘‘So,’’ he said, one problem was ‘‘strike one.’’ Another is ‘‘strike 

two. Let’s now look at strike three,’’ he writes. ‘‘(I hope you like 

baseball.)’’ 

‘‘The same person who is giving’’—this is his writing—‘‘the sacrosanct ‘assumption responsibility letter’ . . . is being asked by the 

CEO to explain why he retained Casa de Cambio Puebla relationship after USD 11 million was seized by the authorities in Puebla 

in an account with Wachovia in Miami. What?! The business was 

OK with this?’’ 

And then he says, ‘‘The [anti-money laundering] committee just 

can’t keep rubber-stamping unacceptable risks merely because 

someone on the business side writes a nice letter. It needs to take 

a firmer stand. It needs some cojones. We have seen this movie before, and it ends badly.’’ 

Why is it that the bank—the bank that is the group bank—that 

sees these kind of problems just does not flat out hold some folks 

accountable and fire some folks? I mean, they can write this kind 

of a letter, and they did, and we dug this out of the emails. Why, 

if the folks running this bank are so bad, why isn’t action taken 

against them by the parent bank? 

Mr. THURSTON. Mr. Chairman, in the time that I was in Mexico, 

we were very firm on discipline. We took strict disciplinary action 

30 

against many members of staff, even at senior management levels, 

including dismissals. So we were certainly taking it seriously within Mexico. 

Senator LEVIN. My time is up. Thank you. Senator Coburn. 

Senator COBURN. I want to go to Mr. Bagley for a moment, if I 

might. I think your testimony was that you were in charge of compliance, but you had no essential line authority to enforce that 

compliance. Is that correct? 

Mr. BAGLEY. That is right. The core responsibility of Group Compliance was to set policy, to report, to escalate issues when they 

were reported to us, but we did not manage and control the individual compliance departments in each one of the affiliates or subsidiaries. 

Senator COBURN. Those individual compliance departments in 

those subsidiaries reported to the head of whatever that subsidiary 

was, correct? 

Mr. BAGLEY. There were two reporting lines: One to the Group 

Compliance team for reporting and other reasons, and then another 

line to the local CEO or business head. 

Senator COBURN. And I think it was also your testimony that 

had now been changed and that there is a line function for compliance from corporate HSBC all the way down to every bank. Is that 

correct? 

Mr. BAGLEY. It has fundamentally changed in that the hardest 

line of reporting is now through the function, so I am accountable, 

responsible, and have authority over the whole function globally, 

3,500 people across the group, and that means I control resource, 

allocation, budget, remuneration, the performance and the function, and can ensure that the adequate resources, the right amount 

of money is spent on this effort. It is a radical shift, a significant 

change. 

Senator COBURN. There is the answer to the question you asked. 

In other words, there is no line authority—you can have a compliance officer all you want. If they have no line authority to cause 

people to change actions and the same people they are guiding 

have a line authority that says here is your profit, how well our 

affiliate or our subsidiary does, one of those is going to have more 

power than the other. Thank you. 

Mr. Gallagher, you said in your testimony, ‘‘But with hindsight, 

it is clear that we did not always fully understand the risks of our 

businesses’’ and ‘‘that we could have done much more and done it 

more quickly.’’ 

Looking at the whole of this, that to me is almost an unbelievable statement when you have things going on in Mexico, things 

going on elsewhere. It is almost like you were not aware that these 

things were happening? 

Mr. GALLAGHER. It is a fact that there are certain things that we 

were not aware were happening. Within certain entities that is 

true. 

Senator COBURN. What were the efforts made to try to become 

aware of what was happening? My natural inclination is to say you 

were not—did not fully understand the risk or you ignored reality, 

based on the testimony and the data that we have collected from 

31 

inside your own operations. Would you just expand on that a little 

bit so I can gain a clearer understanding? 

Mr. GALLAGHER. Yes, I appreciate the question, and I share your 

concern on this matter. One of the lessons we have certainly 

learned is the sharing of information not only throughout the organization across various operations and silos, as it were, but across 

geography is something that requires significant improvement. I 

am led to believe that has improved significantly since I left, and 

even during my time there, there was improvement in the process. 

But heretofore it was not easy to move information across organizations and to filter it down to the appropriate levels to get action. 

Compliance and monitoring was our first level of finding issues 

and looking after them, and whenever we found issues, in my experience, I believe we inquired, we reacted, and we pursued. So I 

think we did a lot at the time, but as has been said by others this 

morning, we have learned a lot as we have gone along. 

Senator COBURN. OK. Thank you. 

Mr. Thurston, in early 2007, right when you started, one of 

HBMX’s clients was Zhenli Ye Gon, a reported drug lord who got 

caught selling precursor chemicals for methamphetamine production for La Familia and the Sinaloa cartels. When you learned that 

Mr. Ye Gon was a client of HBMX, what was your reaction? What 

did you do? 

Mr. THURSTON. Well, I was horrified by the case, and this really 

exposed a whole series of weaknesses within the bank. So I personally conducted an investigation. I brought in the audit team. I 

brought in the security and fraud team. I brought in the compliance team. And we made a number of changes. This is where I 

found, for example, the business heads were overriding the people 

in the Compliance Department on decisions on accounts. So I put 

up an escalation process so that Compliance had a route to the 

chief operating officer and then to me if they were not comfortable 

with the decisions that were being made through that legal committee. 

I looked at the fact that we had here a business account that was 

being managed in the personal consumer part of the bank, which 

would make it very hard for people then to spot the underlying activity and compare it with normal activity. So we made a number 

of changes about that, and that is where we started to—we dismissed a number of people who had falsified visit records, not been 

to visit the premises when they said they had. That is when I realized that practice existed. 

We looked to see if there was any sign whatsoever of any collusion. We investigated all the staff’s accounts. And as a result of 

that, we found some incidents of staff lending to each other, so we 

created policies on that. 

So there were a whole series of actions that stemmed out of finding that incident. 

Senator COBURN. There was, in fact, significant attention from 

the compliance officer at that time, correct? Prior to your knowledge of it, that had been raised as an issue. 

Mr. THURSTON. That is correct, Senator Coburn. 

Senator COBURN. All right. Thank you. 

32 

During your tenure at HBMX, I understand that law enforcement in Mexico raised concerns about high-risk money laundering 

at HBMX. Why was it that the Mexican legal authorities think now 

today that your record was worse than any other bank in Mexico? 

Is it a fact or is there some assumptions there that the Subcommittee should know about? 

Mr. THURSTON. They found that whenever they wanted information from the banks, HSBC was one of the slowest to respond. So 

when they were conducting investigations, HSBC took longer to 

produce documents and had more challenges producing documents 

than most of the other banks. When we investigated that, again, 

we looked to see is this collusion, is this people deliberately trying 

to hold information from the authorities, and we found no sign of 

that whatsoever. But what we did find was a process where these 

things would go out to branches. Because all the files were held out 

in all the branches around the country and the quality was so poor, 

it would take a long time to collate effective information and get 

it back, and there were things that were missing, which is why the 

centralized program we had was so important. But we were also 

swamped with information requests. We had on average 1,000 a 

week coming from the regulators, not distinguishing between different types. 

So we then set up a direct line with the financial intelligence 

unit within Mexico so that where they were conducting urgent investigations, they could come through straight to the bank so that 

we could respond more quickly. 

Senator COBURN. OK. Thank you. I will yield back for right now. 

Senator LEVIN. Thank you. 

Mr. Thurston, you were at the bank there for a year, you have 

testified, and while there, you made some improvements. But the 

problems continued, and part of the reason was the nature of highrisk products and clients that the bank had, and I want to get to 

some of that issue by discussing with you the Cayman accounts. 

Now, when you bought the Mexican bank, when HSBC bought 

the Mexican bank, it found that HBMX kept open a so-called 

branch office in the Cayman Islands. Now, I say ‘‘so-called branch 

office’’ because my understanding is there was no actual building, 

no office, no employees. It was just a shell operation that offered 

U.S. dollar accounts. 

The branch, so-called, in the Caymans was run by HBMX itself 

using its own employees in Mexico. Any HBMX branch could open 

a U.S. dollar account for a client, and at one point 50,000 clients 

had these Cayman accounts, holding $2.1 billion in assets. 

Now, we have spent a lot of time on this Subcommittee raising 

questions about Caymans and other tax havens for tax avoidance 

purposes, but this is a little bit different, and this Subcommittee 

has a lot of interest in these issues involving the Caymans because 

they are shell corporations, and they pose significant money-laundering problems, and they do it as soon as they are organized because nobody knows who is behind those corporations. And here 

are a few of the highlights relative to the Caymans. 

33 

1See Exhibit No. 9, which appears in the Appendix on page 607. 

2See Exhibit No. 31, which appears in the Appendix on page 708. 

3See Exhibit No. 32, which appears in the Appendix on page 711. 

4See Exhibit No. 34, which appears in the Appendix on page 720. 

Exhibit 9 1 is a 2002 audit of HBMX, and that audit notes that 

41 percent of the accounts in the Cayman Islands had no client information. 

Exhibit 312 is a 2008 email by Mr. Root saying that ‘‘15 percent 

of the customers there did not even have a file.’’ 

‘‘Fixing the Cayman accounts will be a huge struggle.’’ He says, 

‘‘How do you locate clients when there is no file?’’ 

Exhibit 32 3 is a July 2008 email noting that HBMX has discovered ‘‘significant U.S. dollar remittances being made by a number 

of HBMX Cayman customers to a U.S. company alleged to be involved in the supply of aircraft to drug cartels.’’ 

A later email, November 2008, which is Exhibit 34,4 describes 

the Cayman accounts as having been frozen ‘‘due to massive misuse of them by organized crime.’’ 

So, Mr. Thurston, first of all, did you know that the Cayman 

branch was fictitious, just a shell? 

Mr. THURSTON. It is what is called a cat B license, I believe. 

Senator LEVIN. But did you know that it was just a shell company? There were no employees there, no office there. Were you 

aware of that? 

Mr. THURSTON. I know now, sir. 

Senator LEVIN. And did you know about the problems at the Cayman accounts that I have just read? 

Mr. THURSTON. Mr. Chairman, no, I did not during the time that 

I was there, and on reading your report, I was really angry to find 

there had been an audit report on these in the previous year, but 

that it had been closed off with no action. So when I got there and 

went through what are the top risks and the big audit outstanding 

items, these were nowhere to be seen. 

Senator LEVIN. All right. So you were unaware of the Cayman 

accounts at the time that you were head of that office? 

Mr. THURSTON. Correct, sir. 

Senator LEVIN. Now, Mr. Bagley, you indicated to the Subcommittee during an interview that although you were aware of 

the accounts since 2002, the Cayman accounts, you focused on 

them only after a July 2008 incident involving funds going to buy 

planes for drug cartels. Now, I do not know, given the history here, 

how you could possibly not know of the severity of the problems involving the Caymans until that time, but in any event, after that 

incident, the new head of HBMX decided—and this is, I think, 

2008 now—Mr. Pena decided to suspend opening new Cayman Island accounts. 

So under Mr. Pena, HBMX initiated a review of the accounts, 

eventually closed 9,000 of them. But as of the beginning of 2012, 

there were still about 20,000 accounts with $670 million in assets. 

So two-thirds of the money-laundering risk continues. 

So, Mr. Bagley, this Subcommittee really has found out that 

these kind of shell corporations in the Caymans and other places 

create all kinds of tax avoidance problems, but this is a different 

kind of an issue here. This is a money-laundering issue, and we 

34 

have now two-thirds of those accounts which were in the Caymans, 

with that many assets apparently still sitting there. What are you 

going to do about it? 

Mr. BAGLEY. Thank you. The point is that when we became 

aware of those Cayman accounts, the ones that remain have all 

been fully remediated. So when we became aware and focused on 

the Cayman accounts themselves, what we did as a group, what 

HBMX did was work through each and every one of those accounts, 

revised and refreshed the KYC to satisfy ourselves that there was 

an explanation for the monies and that we were satisfied with the 

source of the funds. And, therefore, what is left has been subject 

to revised and enhanced due diligence and a refreshment of all of 

the information that we are holding. 

Senator LEVIN. Does that mean 20,000 accounts now that you 

are going to keep there? 

Mr. BAGLEY. Well, actually, the group has recently arrived at a 

decision, which I support, which is to actually close all of those 

Cayman accounts. 

Senator LEVIN. ‘‘No.’’ Well, that is the short answer, a very welcome answer, and particularly I think this Subcommittee can really 

look at its work as contributing to this kind of pressure on you to 

do the right thing. 

Mr. BAGLEY. Sorry to interrupt. I should just be very clear that 

we are in the process of closing those accounts. They are not yet 

closed, but they will all be closed. 

Senator LEVIN. That is good news. 

Now, HBMX did not inform HBUS about the Cayman U.S. dollar 

accounts for many years. Is that correct, Mr. Gallagher? 

Mr. GALLAGHER. Yes, sir, that is correct. 

Senator LEVIN. So these transactions were run through the U.S. 

dollar correspondent account that HBMX had at HBUS. Would 

HBUS have wanted to know about these high-risk accounts in a secrecy jurisdiction? Would you have wanted to know that? 

Mr. GALLAGHER. Absolutely. 

Senator LEVIN. Do you know why you were not informed? 

Mr. GALLAGHER. No, sir, I cannot answer that question. 

Senator LEVIN. Maybe Mr. Bagley or Mr. Thurston. Why 

wouldn’t HBUS have been informed of those accounts? 

Mr. BAGLEY. It is a very appropriate question. I think there are 

two or three reasons. One is that at that stage neither HBUS, as 

your report reflects, was conducting affiliate due diligence. Second, 

we at that time did not do affiliate due diligence across the rest of 

the group. And as a consequence, the questions that you would normally expect to be asked by one affiliate of another, one correspondent bank of another, were not asked. They are now. 

Senator LEVIN. Under your new rules now, you are going to be 

notifying each of the affiliates of this kind of action? 

Mr. BAGLEY. What we are doing and have introduced and are in 

the process of rolling out is affiliate due diligence across the whole 

group, so every affiliate will do due diligence on its own affiliates. 

That will be to the same standard as we apply to an entirely independent third party. 

In addition, we have put in place a process that ensures that if 

there is a material AML deficiency or issue or risk in one affiliate, 

35 

1See Exhibit No. 40, which appears in the Appendix on page 755. 

that will be reported on a mandatory basis across the group and 

will automatically go to the head of compliance for each region. So 

what that will mean, when that work is complete, is that each affiliate will treat its affiliates at arm’s length, will ask all of the appropriate questions, will know everything that it needs to know 

about the risk profile that one affiliate presents to another. 

Senator LEVIN. And when will this be put in place? You said it 

is being put in place. When will this be accomplished? 

Mr. BAGLEY. We are rolling out—it will take a while, obviously, 

to complete those due diligence profiles. We will use the ones we 

have already completed for the United States in response to the 

cease and desist orders. We will do it as fast as we can. We have 

already put in place the mandatory reporting of AML deficiencies, 

and we have that up and running as a process. 

Senator LEVIN. When will it be completed, do you know? 

Mr. BAGLEY. I do not know exactly when it will be completed, but 

we will do the highest risk as quickly as we can. 

Senator LEVIN. All right. Will you let the Subcommittee know 

when it is completed? 

Mr. BAGLEY. I would be very happy to. 

Senator LEVIN. Thank you very much. Senator Coburn. 

Senator COBURN. Mr. Gallagher, if you would turn to Exhibit 

40.1 The Bank Melli in Iran, prior to September 11, 2001, HSBC 

had a relationship with this bank in Iran which, because of its 

home country, would get more scrutiny in the United States. HSBC 

in Europe helped coach Bank Melli to send payments through the 

United States without getting slowed down. 

Why was HSBC interested in doing business with this bank? 

Mr. GALLAGHER. I cannot speak specifically for all of the reasons. 

The business desire was coming out of Europe and the Middle 

East, not coming out of the United States. There was a memo that 

described some opportunities that they saw for growth in business 

generally, but HBUS was not driving that business decision. 

Senator COBURN. What was it exactly that made you say in this 

email, ‘‘I wish to be on the record as not comfortable with this piece 

of business’’? 

Mr. GALLAGHER. Yes, thank you. That is a very important question. I was very concerned about the lack of transparency in the 

proposal that had been put forward that described how the payments would flow. So in this particular case, there seemed to be 

an inability for the bank—that is to say, Melli—to describe in advance who its primary beneficiaries would be. That caused me to 

say we should not want to engage in business with a client who 

cannot provide that level of transparency to our system. 

Senator COBURN. So there was really no Know Your Customer 

here? 

Mr. GALLAGHER. I cannot speak to that because Know Your Customer would have been done on the European side. But when I became aware that there was seemingly a lack of transparency in one 

of my roles, I thought that was inappropriate and very strongly 

suggested we should not proceed. 

Senator COBURN. And so what was the response to that? 

36 

1See Exhibit No. 40, which appears in the Appendix on page 755. 

2See Exhibit No. 57, which appears in the Appendix on page 844. 

Mr. GALLAGHER. Well, ultimately the transaction never was approved. 

Senator COBURN. And do you know why? 

Mr. GALLAGHER. Discussion went on for some time back and 

forth across the regions and the world. I do not recall the specific 

reason, but I was delighted to know that my recommendation was 

part of the solution. 

Senator COBURN. Did you raise other concerns other than in this 

email that we have documented under Exhibit 40? 1

Mr. GALLAGHER. About Bank Melli specifically? 

Senator COBURN. Yes. 

Mr. GALLAGHER. I do not recall. 

Senator COBURN. OK. If you would turn to Exhibit 57,2 Iranian 

U-turn payments, in November 2004. This email suggests that 

some inside HSBC thought that all Iranian payments through the 

United States should be fully disclosed. Nonetheless, many payments still went through without full transparency, sometimes because information was removed by HBEU. This email says, ‘‘HBEU 

would be advised to not alter the payment details in any way.’’ 

Was it well understood within HSBC that information was being 

removed from payments before they arrived in the United States? 

Mr. GALLAGHER. I do not know how well understood it was, and 

I do not recall specifically some of these exchanges. But if I had to 

speculate, consistent with my earlier position, which was unchanged, regarding the importance of transparency in these messages, I am quite comfortable that the proper people were alerted 

and it was in the proper hands for resolution. But specific details 

on this I do not recall. 

Senator COBURN. But the decision went really against your advice? 

Mr. GALLAGHER. Yes. 

Senator COBURN. Because, in fact, they were altered, correct? 

Mr. GALLAGHER. It would seem so, yes. 

Senator COBURN. OK. Do you have any idea how HSBC intended 

to make sure all these payments complied with U.S. law? 

Mr. GALLAGHER. There was a view at the time that the team in 

London and/or subsequently elsewhere was going to ensure that 

the payments were going to be U-turn compliant before they got to 

the United States. 

Senator COBURN. Do you think they were? 

Mr. GALLAGHER. I do not honestly know specifically that they 

were not. Some of this information is slightly new to me in being 

involved in this investigation and catching up. So I do not know the 

specific answer to that question. 

Senator COBURN. Who would know the answer to that question? 

Mr. GALLAGHER. I would suggest either operational staff doing 

the work on the other side and/or possibly somebody in Compliance. 

Senator COBURN. Should they have relied on people in Iran to do 

that? 

37 

Mr. GALLAGHER. No. Certainly, in retrospect, we should not have 

relied on anybody but ourselves to ensure the soundness of the payments coming into our system. 

Senator COBURN. Mr. Lok, in your testimony, you said compliance was a critical part of the HSBC banknotes business. 

Mr. LOK. Correct, sir. 

Senator COBURN. Can you explain to me exactly what you mean 

by this? And tell me what it looked like. 

Mr. LOK. We have a system in place whereby customers are riskrated, and they are rated according to different categories, and 

then, therefore, the high-risk customers, we need to make sure that 

there is a process in place whereby the information about a client 

is laid out in the open so that people can come in, including the 

relationship managers, the business people, as well as compliance, 

so that we can evaluate the risk. And, finally, compliance has to 

be the final sign-off so that we can do business with these people. 

In other words, we consider compliance a very important partner 

in our business. 

Senator COBURN. Did you recognize certain vulnerabilities in 

your compliance strategy in the banknote business? 

Mr. LOK. At that moment, honestly, no. 

Senator COBURN. You would agree that there were, though, in 

hindsight? 

Mr. LOK. In hindsight, yes. Looking at all these documents, yes. 

The answer is definitely yes. 

Senator COBURN. Just for our educational purposes and given 

your broad experience, are there certain challenges that are different in the banknote business related to specific currencies over 

other currencies? 

Mr. LOK. I am sorry. Can you repeat the question? 

Senator COBURN. Are there specific challenges in the banknote 

business in terms of compliance related to one currency over another, not necessarily in terms of geographic location, but, for example, is it easier to run a scam or play the game with the U.S. 

dollar, the British pound, the euro, the Japanese yen, the 

renminbi? In other words, does the same compliance vulnerabilities 

that you see now in hindsight apply differently to different currencies and different geographic locations? 

Mr. LOK. At that moment, no, it did not strike me that there is 

a difference in terms of compliance risk because the policy itself 

spells out exactly how we run it, analyzing the risk. No, we were 

not—no. The answer is no. 

Senator COBURN. All right. I will yield back. 

Senator LEVIN. Let me ask some questions about the Sigue Corporation, which was a U.S. money service business that transmitted funds from U.S. clients to Mexico and Latin America. The 

Drug Enforcement Association undertook a sting operation in 2007 

in which its agents told Sigue’s operators that they wanted to send 

drug proceeds to Mexico, and more than two dozen of those Sigue 

operators obliged. 

In January 2008, Sigue entered into a deferred prosecution 

agreement with the U.S. Department of Justice, admitting the 

facts, for failing to have adequate money-laundering programs. 

HBUS determined that in 2007 alone it had processed 159 U.S. dolVerDate Nov 24 2008 14:41 Nov 19, 2012 Jkt 076061 PO 00000 Frm 00051 Fmt 6633 Sfmt 6633 P:\DOCS\76061.TXT SAFFAIRS PsN: PAT
38 

1See Exhibit No. 18a, which appears in the Appendix on page 654. 

2See Exhibit No. 30, which appears in the Appendix on page 703. 

lar wire transfers for Sigue involving about half a billion dollars, 

and they were all sent through the HBMX correspondent account 

with HBUS. 

Then if you would look at Exhibit 18a,1 Mr. Gallagher, this was 

a memo that was prepared by HBUS after a 2008 Wall Street Journal article on the Wachovia case. It talks about the Sigue case and 

its use of the HBMX account, but it also notes that Sigue was not 

added to the HBUS filter so that it could be subjected to enhanced 

anti-money laundering to identify suspicious activity. 

Now, you were the head of PCM at that time, Mr. Gallagher, and 

that handles wire monitoring. Do you know why HBUS did not 

subject Sigue to enhanced monitoring after the 2008 deferred prosecution agreement? 

Mr. GALLAGHER. No, Mr. Chairman, I do not know. Looking at 

the memo, I note that I am not addressed on the memo. I cannot 

honestly recall if I saw the memo. But the decision as to whether 

or not to add any name to enhanced monitoring or to a filter, etc., 

is a decision that would be taken in Compliance, not in PCM. 

Senator LEVIN. But you do not know why. You are saying it is 

not your department, but you just do not know why it was not 

added. Should it have been added? 

Mr. GALLAGHER. Seemingly, absolutely it should have been 

added. I do not know why it was not. 

Senator LEVIN. OK. In 2007—this is Exhibit 30 2—a man named 

Mr. Barroso, who was head of the HBMX anti-money laundering 

program, was leaving the bank. He had an exit meeting with you, 

Mr. Bagley, I believe, and according to a meeting summary that 

you wrote, Mr. Barroso told you that there were allegations that 

‘‘60 to 70 percent of laundered proceeds in Mexico went through 

HBMX,’’ and he did not think that senior management had any 

commitment to robust anti-money laundering controls. 

That memo, I believe, Exhibit 30, was written to you, Mr. Thurston, if I have that correct. 

Mr. THURSTON. That is correct, Chairman. 

Senator LEVIN. What was your reaction when you got that 

memo? 

Mr. THURSTON. Mr. Chairman, I was incredibly distressed. I do 

not think anybody wants to hear those sorts of things coming 

through, so we made sure that we investigated. We made sure that 

we took the points that were there. We had recently had discussion 

with the regulators in Mexico, and we made sure that we took account of those points within the remediation program that we were 

looking at in Mexico to make sure there was nothing new that we 

had missed. It also caused us to question whether our head of compliance was sufficiently good for the role as well. 

Senator LEVIN. All right. Let me now turn to the Iranian issue, 

which Senator Coburn asked some questions about as well. 

Now, Iran had been subject to sanctions in the United States for 

a long time as a rogue nation. It had long been on the U.S. SDN 

list, as we heard about this morning, as a prohibited country. Our 

laws consistently prohibited U.S. persons from doing business diVerDate Nov 24 2008 14:41 Nov 19, 2012 Jkt 076061 PO 00000 Frm 00052 Fmt 6633 Sfmt 6633 P:\DOCS\76061.TXT SAFFAIRS PsN: PAT
39 

1See Exhibit No. 41, which appears in the Appendix on page 760. 

rectly with Iran, but until 2008, U.S. banks were allowed to process 

transactions that might involve Iran but which were sent to the 

United States by foreign banks located outside of Iran. Now, those 

transactions were called ‘‘U-turns’’ because they went from Iran to 

a non-Iranian bank, a foreign bank, then to a U.S. bank and then 

back to a different non-Iranian foreign bank and then to the final 

party. So there was a U-turn that was made through the U.S. 

bank. 

The issue with HBUS is that the HSBC affiliates in Europe and 

the Middle East wanted to send U-turn transactions through their 

accounts at HBUS without triggering that OFAC filter or an individualized review to make sure that they were permissive U-turns. 

They wanted to remove any reference to Iran and to go through the 

HBUS systems without any manual or more detailed review. So 

this was a battle over transparency. 

The United States wanted full transparency so that it knew it 

was dealing with an Iranian U-turn and could make sure it complied with U.S. law. The affiliates did not want to trigger these reviews or to take the time for those reviews. So HBUS and the affiliates fought over this issue for 3 years, from 2001 to 2004. But 

while they were arguing, the overseas HSBC affiliates were sending undisclosed Iranian U-turns through their HBUS accounts, 

anyway. And to do that, the HSBC affiliate in Europe, HBEU, 

stripped out the references to Iran. Senior employees at HBEU protested in 2003 and 2004—and I believe one of these protests was 

read by Senator Coburn—that they did not want to be altering wire 

transfer documents for Iran. They even set two deadlines in 2004 

when they said that they would stop doing it, but both deadlines 

were ignored. 

HSBC issued group-wide policy statements on Iran in 2005 and 

2006, but neither resolved the U-turn issue. The issue was resolved 

only in 2007 when HSBC made a global decision to exit Iran. 

Now, I believe that Exhibit 41 was referred to by Senator 

Coburn, and if so, I will not read it again. 

Senator COBURN. I did Exhibit 40. 

Senator LEVIN. OK. So Exhibit 40 was read by Senator Coburn, 

which made reference to the statement about, ‘‘I wish to be on 

record as not comfortable with this piece of business.’’ 

Exhibit 411 was, ‘‘With the amount of smoke coming off of this 

gun, remind me again why we think we should be supporting this 

business?’’ So that is another HBUS employee describing the Iranian business. But at HBEU, the Europe branch, they were stripping payment information, so the United States was unaware of 

these Iranian payments. 

Senior officials at HSBC, at the headquarters in London from 

2001 to 2007, knew that affiliates in England and the Middle East, 

the HBEU and HBME, were sending undisclosed payments 

through their HBUS accounts but did not stop them or inform 

HBUS of the extent of the activity. So they knew that their affiliates were hiding key information from each other. 

Now, at HBUS, senior compliance officials were on notice as 

early as 2001 that this stripping was occurring but took no decisive 

40 

1See Exhibit No. 55, which appears in the Appendix on page 840. 

2See Exhibit No. 1c, which appears in the Appendix on page 577. 

3See Exhibit No. 45, which appears in the Appendix on page 784. 

4See Exhibit No. 48, which appears in the Appendix on page 801. 

action to stop it. They stopped occasional wire transfers from Iran 

with the words, ‘‘Do not use our name in New York.’’ 

So, first, Mr. Bagley, didn’t the European and Middle East affiliates—why weren’t those affiliates told, why wasn’t HBUS told, 

what possible justification is there for not telling an affiliate that 

key information to them so that they can comply with their own 

laws has been removed? 

Mr. BAGLEY. It is a very fair question, Senator. My understanding of the position was that HBEU was checking each one of 

those transactions to ensure that they were U-turn compliant, that 

I was always advised that they were U-turn compliant. When I 

first focused on this issue, which was, I think, in mid-2003, although there were indications in emails before that, I emphasized 

and recommended that there should be full transparency given to 

HBUS so that they could check the U-turn compliance—compliance 

with the U-turn themselves. 

Senator LEVIN. Was it? 

Mr. BAGLEY. It was not. 

Senator LEVIN. So as Exhibit 55 says so simply and eloquently 

and dramatically, your own people ‘‘were being asked to ‘fudge’ the 

nature of the payments to avoid the U.S. embargo and seizure.’’ 

That is Exhibit 55.1

Then you were not the only one that was uncomfortable, Mr. Gallagher, with this piece of business. People in this bank, this global 

bank, were being asked to fudge the nature of the payments to 

avoid the U.S. embargo and seizure. And it is pretty shocking stuff. 

Now, in 2002 and 2003, HSBC affiliates continued to send thousands of these undisclosed Iranian transactions through HBUS. Exhibit 1c 2 is a chart that shows the numbers. So even though the 

HSBC Group was on notice as early as 2001 that HSBC affiliates 

were sending these hidden Iranian transactions through their accounts in the United States, nobody did anything to stop it for 

years. 

Mr. Bagley, in 2003, you had recently become head of compliance 

for the entire HSBC Group. Earlier that month, the Middle East 

affiliate, HBME, sent HBUS a memo laying out the business case 

for it to process Iranian transactions. Why were they processing 

them? Because there was a substantial income opportunity, and 

here is what you wrote in 2003, Exhibit 45:3 ‘‘The business case includes a number of express references to practices which may constitute a breach of U.S. sanctions.’’ But then in October 2003—and 

this is Exhibit 48 4—one of your attorneys in Group Compliance, 

John Root, wrote to you that six banks were processing U.S. dollar 

payments and that these payments were being altered by HBEU 

before going to HBUS. He said HBEU was removing the remitter’s 

name. Breaching these U.S. sanctions is a serious matter, and as 

the head of Compliance, you were making that point. 

When you learned that HBEU was removing the names of Iranian banks, why was not the practice simply stopped right then? 

Why did it take so long to fix? 

41 

Mr. BAGLEY. Mr. Chairman, that is an absolutely appropriate 

question, and with the absolute benefit of hindsight, this clearly 

took far too long to resolve. 

What I can say is that when it came to my attention, I very 

clearly recommended that all transactions should be compliant, 

should be transparent, and should be made in a way which HBUS 

was comfortable with, and that recommendation went to the relevant parts of the group and ultimately was escalated to senior 

management within the group. 

Senator LEVIN. How long did it take? 

Mr. BAGLEY. I think as you have indicated, there were then various discussions between different parts of the group, and I think 

we progressively started to introduce transparency into the payments in 2006. 

Senator LEVIN. So that would be about what, 3 years? 

Mr. BAGLEY. Far too long. 

Senator LEVIN. But about 3 years? 

Mr. BAGLEY. Yes. 

Senator LEVIN. Senator Coburn. 

Senator COBURN. If a U-turn transaction is fully compliant and 

fully transparent, I would make the point it is legal, and nobody 

here is claiming illegality. But if one of these—and this is for you, 

Mr. Bagley. If one of these U-turn payments was not compliant 

with U.S. law, who is responsible? 

Mr. BAGLEY. Ultimately I anticipate that the transaction passing 

through the U.S. bank may expose the U.S. bank to risk. And if 

there was malign intent, then it could expose somebody else to risk 

as well. 

Senator COBURN. So in this great big organization called HSBC, 

is it fair for one profit center to put another profit center at that 

kind of risk? Not only is it fair, is it the right thing to do? 

Mr. BAGLEY. I neither think it is fair nor the right thing to do, 

which is why I urged transparency so that HBUS could satisfy 

itself. But I would like to stress that at all times we were told and 

believed that those transactions were compliant and lawful and 

that there was a process where people seriously tried to ensure 

within HBEU that the transactions that were sent were compliant. 

Senator COBURN. So it is your feeling—and you cannot know this 

for a fact because you have not looked at all of them. But it is your 

feeling that none of these transactions that HBUS saw no transparency on, it is your testimony that you feel that they all met the 

intent that our government says if you are going to run it through 

U.S. dollar banks, that you actually met that expectation? 

Mr. BAGLEY. I do not think I can say that all of those transactions were. What I was always told was that people were seeking 

to ensure they were compliant—— 

Senator COBURN. Who are those people? 

Mr. BAGLEY. The processing unit within HBEU. 

Senator COBURN. And who are those? Who is the head of the 

processing unit at HBEU? 

Mr. BAGLEY. I cannot recall the name. 

Senator COBURN. Who could recall the name? 

Mr. BAGLEY. I am sure we could find that name. 

42 

1See Exhibit No. 78, which appears in the Appendix on page 937. 

Senator COBURN. Would you do that for the Subcommittee, 

please? 

Mr. BAGLEY. Absolutely. 

Senator COBURN. I would love to have that name during our 

questioning this afternoon because that is a key point. Either they 

were legitimate U-turns or they were not. 

Mr. BAGLEY. I believe that the results of the lookback that has 

been conducted by Deloitte indicates that most, if not all, of those 

transactions were compliant, or a significant number, I believe. 

That is not a report I have seen, but that is my understanding. 

Senator COBURN. OK. And who has that report? 

Mr. BAGLEY. I believe the results of that report have been disclosed to the Subcommittee. 

Senator COBURN. OK. Thank you. 

Mr. Lok, on Al Rajhi Bank, Exhibit 78,1 if you would take a look 

at that. You were interested in carrying on a business relationship 

with this bank to sell it banknotes, as this email shows. Page 2 of 

the email also shows that one of your compliance people wrote, ‘‘I 

am not trying to be difficult,’’ but that she did not want to approve 

the business. 

What was your impression at the time why she would be concerned about being difficult? 

Mr. LOK. The way I read her message, ‘‘difficult’’ refers to her reluctance to sign off the profile, and she is saying here that she is 

not comfortable signing it because she does not know the client. 

Senator COBURN. Did she feel like she was being difficult because 

somebody was pressing her to approve something that she did not 

feel comfortable with? 

Mr. LOK. No, that is not my interpretation. It is just because she 

was asked, and then she turned it down. That could be interpreted 

as difficult. I think that is what she is referring to. 

Senator COBURN. All right. She also states, ‘‘I cannot answer 

questions if/when the Al Rajhi name appears in the U.S. media.’’ 

What kind of concerns were you aware of that would rise to that 

level? 

Mr. LOK. I know that this name had appeared numerous times 

in the papers, negative reports about the family members, and all 

sorts of allegations. So it is a very controversial name. 

Senator COBURN. All right. You also, on page 1 of this email, 

wrote it is compliance that is the key. Were you suggesting that 

you needed to convince somebody in compliance to approve the deal 

or that you were willing to submit to whatever compliance said? 

Mr. LOK. Because this is a very difficult case, it is not simple at 

all. When it was passed on to me by my colleague, on the one hand, 

there were these negative news in the paper, etc. But, on the other 

hand, there was this very supportive report coming out from the 

RMs based in Saudi Arabia. And at the same time, the Group Compliance had actually reversed its decision saying that they were 

happy to let individual entities resume doing business. 

So, to me, it is a balancing act where you have some very bad 

news, but, on the other hand, you cannot ignore the news that appeared to be favorable. So that is why I presented this to the comVerDate Nov 24 2008 14:41 Nov 19, 2012 Jkt 076061 PO 00000 Frm 00056 Fmt 6633 Sfmt 6633 P:\DOCS\76061.TXT SAFFAIRS PsN: PAT
43 

1See Exhibit No. 50a, which appears in the Appendix on page 807. 

pliance so that we can engage in an open dialogue, show it to a few 

more people for elevating the issue, so that more people who know 

this thing a lot better than me can engage in and arrive at a decision. 

Senator COBURN. And ultimately you did not do this deal? Is that 

correct? 

Mr. LOK. I am sorry. No. I think after a very long period of time, 

New York Compliance had agreed to letting us resume the relationship. I mean the U.S. side. But it took a long time, because I had 

read this file before coming here, the dialogue first started in May, 

and then a decision was made in New York that we could resume 

for trading, that this was in December 2006. 

Senator COBURN. OK. Thank you. 

Senator LEVIN. Thank you. 

Mr. Gallagher, take a look at Exhibit 50a,1 if you would, when 

Denise Reilly of HBUS writes to Teresa Pesce at HBUS, antimoney laundering director, that the so-called Eastwood memo, 

which was referring to alterations to remove references to Iran, 

that the memo was discussed at a meeting with you, Mr. Gallagher. 

This is dated December 17, 2003, so the question is—when you 

learned that HBEU was sending these hidden Iranian payments 

through their HBUS account, you saw it as a problem, you said so, 

and the real question is: What steps did you take to stop the practice? You objected to it. But what did you do beyond that? 

Mr. GALLAGHER. Yes, thank you for that. I have reread these 

documents as well, and while I do not recall the specific meeting 

that is discussed there, mentioned there, I feel very comfortable 

about two things: First, that my position on this with respect to the 

necessity for transparency and full compliance was unchanged 

throughout the process; and, second, that this was really in the 

right hands. Denise Reilly at the time was in Compliance, I believe 

already, and Terry Pesce was the head of AML Compliance. So all 

the right hands from an HSBC Bank USA perspective into which 

this needed to be elevated were, in fact, contained in this memo. 

I do not recall my specific discussions here, but I would have to 

speculate they would be consistent with my prior positions, which 

is an abundance of caution. 

Senator LEVIN. So you objected in 2001 to the practice. By 2003, 

you were the head of the HBUS’s Payments and Cash Management 

Division. Why not just pick up the phone in 2003, call the CEO of 

HBUS or somebody in the HSBC Group and just raise hell? Why 

not do that? 

Mr. GALLAGHER. Well, certainly with—— 

Senator LEVIN. I think you knew whoever was supposed to be 

taking care of it was not taking care of it. 

Mr. GALLAGHER. Yes. With the benefit of hindsight, that is exactly what I should have done, and I think we have all learned the 

lesson that we should have been louder sooner and more broadly 

in the organization. 

44 

1See Exhibit No. 84b, which appears in the Appendix on page 964. 

2See Exhibit No. 84a, which appears in the Appendix on page 958. 

3See Exhibit No. 82, which appears in the Appendix on page 949. 

Senator LEVIN. Mr. Lok, let me ask you about Exhibit 84b.1 You 

were the head of HBUS’s global banknotes business that supplied 

physical U.S. dollars to financial institutions around the world. 

Some of your clients, to put it mildly, did not inspire confidence 

and were either opposed by HBUS’s Compliance, the division there, 

or they sought to subject them to special anti-money laundering 

monitoring. But you often opposed those recommendations, and 

here are a few examples, 84b is one. 

This is an email exchange in 2005. This was about whether to 

classify a particular HBUS banknotes client as a special category 

client (SCC), which means that is a high-risk client that undergoes 

additional scrutiny. 

HBUS Compliance described the foreign bank as one in which, 

‘‘the bank’s senior management and employees have been involved 

in numerous significant instances of corruption, fraud, and embezzlement over the past few years,’’ and recommended that it be classified as a SCC. 

You responded as follows: ‘‘Yes, corruption can be rampant in 

this bank, but it is not unique’’ to that bank. So you opposed the 

SCC designation. 

Now, the HBUS compliance officer for banknotes, Daniel Jack, 

described a bank as ‘‘government-owned, in a high-risk country 

with a politically exposed person,’’ which is someone who requires 

enhanced due diligence, ‘‘and reputational risk due to corruption, 

etc.’’ This is now Exhibit 84a.2 And he recommended an SCC designation, and your response: ‘‘. . . this is such a large bank hence 

malfeasance is expected.’’ 

‘‘However,’’ you wrote, ‘‘I do not agree that just on these numerous breaches that the bank should be classified.’’ 

So your position was that malfeasance is to be expected at a 

large bank so do not even bother to do additional anti-money laundering monitoring. 

And then Exhibit 82 3—this is from 2007—in this email chain, an 

HBUS banknotes colleague asks if you—and, Mr. Lok, we are referring to you—would be willing to help open a banknotes account for 

Islami Bank Bangladesh, which was partly owned by Al Rajhi 

Bank, a Saudi Arabian bank whose account was closed by HBUS 

in 2005 for terrorist-financing reasons, although in part in 2007, 

because of your urging, HBUS reopened that account. 

Here is what you wrote: ‘‘I am happy to be the relationship manager if this is an account worth chasing. How much money can you 

expect to make from this name?’’ 

And then when you were told the account would produce about 

$75,000 in revenues per year, you wrote: ‘‘One, the money is there, 

and we should go for this account. Two, I will jump in and wear 

the [global relationship manager] hat.’’ 

So your test, apparently, for opening an account was, first, how 

much revenue it would produce, but what about the second test, 

Mr. Lok? What about a test is the bank involved in wrongdoing, 

whether it is terrorist financing, corruption, or malfeasance? Why 

45 

1See Exhibit No. 84b, which appears in the Appendix on page 964. 

2See Exhibit No. 84a, which appears in the Appendix on page 958. 

weren’t those factors enough for you to say we are not going to do 

it? 

Mr. LOK. Mr. Chairman, let me try to explain what had happened. Exhibit 84b,1 that was about classifying that particular client in China as a SCC. The thinking was China is a different country from a lot of other countries. It has its own characteristics. And 

this bank actually shared the same characteristics of the other big 

banks as well. So it is not one just on this particular bank. So my 

point at that time was if FIG, which is a unit within Compliance, 

wants to say that this should be SCC, that means the other banks 

should also be subject to the same rating. 

Senator LEVIN. Well, why not all banks that, in your words, 

where corruption is rampant? Why shouldn’t they all be subject to 

that rating? 

Mr. LOK. First of all, I have to apologize the colorful words I used 

that. It was not the appropriate—— 

Senator LEVIN. Apologize to whom? 

Mr. LOK. Well, that email give the impression that I was very 

tolerant of this malfeasance. That is why I said that the word itself 

is not the right word to use. 

Senator LEVIN. I am afraid it was the right word to use if you 

believed it. Corruption was rampant at that bank. Did you believe 

it was rampant? 

Mr. LOK. Well, it is a very large organization. I think just like 

other organizations, when you have such a large bank, yes, there 

are bound to be cases of malfeasance. 

Senator LEVIN. You did not really mean what you said, that it 

was rampant? Is that what you are saying? At the time you wrote 

it was rampant and that it was not unique to that bank. So were 

you inaccurate in your email? Did you express what you believed 

at the time? 

Mr. LOK. At that time, yes, but I need to qualify that statement, 

which is the email came forward, I was overwhelmed by this feeling that if this bank were to have been SCC, that means the other 

banks need to be SCC. And at that time China was a country that 

the group itself looked at as a very important market. So I wanted 

to elevate the issue. That is why I copied my colleagues in London, 

bring in Group Compliance, take a look at this. That was what I 

was trying to do at that time. 

Senator LEVIN. What about your Exhibit 84a? 2 Here you are recommending you proceed despite the fact that the compliance officer 

for banknotes, Daniel Jack, described this as a government-owned 

bank in a high-risk country with politically exposed persons that 

require enhanced due diligence and a reputational risk—that is to 

you, to your bank—due to corruption. And your recommendation 

was go ahead anyway. ‘‘It is a large bank. Hence’’—your word— 

‘‘malfeasance is expected. I do not agree,’’ you said, ‘‘that just on 

these numerous breaches the bank should be classified’’—in other 

words, given enhanced review. 

Did that reflect your view at the time? Did you believe what you 

wrote at that time? 

46 

Mr. LOK. At that moment, yes. 

Senator LEVIN. OK. What about this Bangladeshi bank? When 

you said—all you seemed to be interested in is how much money 

will it make for us, how much money can we expect. Then $75,000 

in revenues. And then you say, ‘‘We ought to go for it.’’ You will 

be happy to wear the hat, the global relationship hat. 

You are head of the Banknotes Department, and when your employees see those kinds of remarks in your emails from their boss, 

what kind of an impact do you think it has on their willingness to 

consider compliance issues when deciding whether to open an account for a potentially lucrative but a high-risk client? What do you 

think the effect of those words are on your employees? 

Mr. LOK. Mr. Chairman, I agree that this is not portraying a 

right image, not giving the right message, looking at the message 

right now. 

Senator LEVIN. Senator Coburn. 

Senator COBURN. Just for the record, the email that Mr. Lok sent 

did not say it was rampant. It actually said ‘‘can be rampant.’’ And 

some of the realism of the world we live in in global commerce, if 

you take this particular bank—and this is not a defense, but if you 

look at their own bank in Mexico, I would tell you it looked like 

it could be rampant there as well. And I think that Mr. Thurston 

certainly found that, that corruption could be rampant in that. 

I think we have a better understanding, Mr. Chairman, of what 

went on. Someone taught me a long time ago that greed tends to 

conquer all technologic difficulties, and so we are about anti-money 

laundering. That is what this hearing is about. And it is not the 

accusation of illegality. It is the accusation of poor judgment and 

mistakes and not good line authority inside a very large and very 

successful organization. 

I would just say, one, I appreciate the candor of the witnesses 

today. It is a very difficult issue. I am still concerned even though 

Deloitte said there are 79 accounts they could not account for in 

terms of U-turns. I still think it is a difficult issue when the world 

is dealing with a terrorist state like Iran and we are allowing them 

the flexibility. So my hope is that we can learn some things, and 

I know HSBC certainly has, and I appreciate our witnesses’ testimony. 

Senator LEVIN. Thank you, Senator Coburn. I think I read the 

email correctly. I will read it again. ‘‘Yes, corruption can be rampant in this bank, but it is not unique to’’ the bank.’’ And so I think 

it speaks for itself. If I at one point said that he said it is rampant 

instead of, ‘‘Yes, it can be rampant’’ and ‘‘it is not unique,’’ then 

your quote is exactly right, and the one I just read I think is also 

exactly right. But there is not much difference between ‘‘it can be 

rampant’’ and ‘‘it is not unique’’ to what the point was of this question and Mr. Lok’s answer. 

[Pause.] 

Senator LEVIN. We thank our witnesses, and, again, we appreciate the cooperation with this investigation of your bank. 

We are going to recess now until 2 o’clock. We thank our witnesses, and you are discharged. 

[Whereupon, at 12:34 p.m., the Subcommittee was recessed, to 

reconvene at 2 p.m., this same day.] 

47 

1The prepared statement of Ms. Dorner appears in the Appendix on page 130. 

Senator LEVIN. The Subcommittee will now come back to order. 

I would like to call our third panel of witnesses for this hearing, 

Irene Dorner, the President and Chief Executive Officer of HSBC 

Bank USA and HSBC North America Holdings in New York; and 

Stuart Levey, the Chief Legal Officer of HSBC Holdings in London. 

We welcome you both. We appreciate both of you being with us 

this morning. We look forward to your testimony, and we also want 

to tell you that we appreciate the cooperation of your bank. It has 

been consistently cooperative with us and we are grateful for that. 

Pursuant to Rule VI, all witnesses who testify before the Subcommittee are required to be sworn, so I would ask you both to 

please stand and raise your right hand. 

Do you swear that the testimony you will give before this Subcommittee will be the truth, the whole truth, and nothing but the 

truth, so help you, God? 

Ms. DORNER. I do. 

Mr. LEVEY. I do. 

Senator LEVIN. The timing system that we have will give you a 

red light after 5 minutes, but a minute before that it will shift from 

green to yellow to give you an opportunity to conclude your remarks. Your entire written testimony will be printed in the record. 

And we would, again, appreciate that you attempt to limit your 

oral testimony to 5 minutes each. 

Ms. Dorner, we will have you go first, followed by Mr. Levey, and 

then we will proceed to questions. But first, let me turn to Senator 

Coburn. 

Senator COBURN. Thank you. I privately greeted our witnesses 

and I would apologize. This afternoon, I will be in and out, but I 

will be here to ask my share of the questions. So if you are in the 

midst of your testimony and I leave, please forgive me. 

Senator LEVIN. Thank you very much, Senator Coburn. Ms. 

Dorner. 

TESTIMONY OF IRENE DORNER,1 PRESIDENT AND CHIEF EXECUTIVE OFFICER, HSBC BANK USA AND HSBC NORTH 

AMERICA HOLDINGS, INC., NEW YORK, NEW YORK 

Ms. DORNER. Thank you, Chairman Levin and Senator Coburn. 

My name is Irene Dorner and I serve as President and CEO of 

HSBC Bank USA and HSBC North America Holdings, Inc. I have 

led the bank in the United States since January 2010. 

I fully appreciate why we are here and believe that the discussion about controls at global banks is an important one to have. We 

deeply regret and apologize for the fact that HSBC did not live up 

to our own expectations, the expectations of our regulators, our customers, our employees, and the general public. 

HSBC’s compliance history as examined today is unacceptable. 

HSBC has learned some very hard lessons from the experience of 

the past few years, but we have taken very substantial steps to address the problems that we, our regulators, and this Subcommittee 

have identified. We have made fundamental changes in governance, culture, training, and funding to ensure that we can effectively deter illicit use of our bank in a manner that will be embedVerDate Nov 24 2008 14:41 Nov 19, 2012 Jkt 076061 PO 00000 Frm 00061 Fmt 6633 Sfmt 6633 P:\DOCS\76061.TXT SAFFAIRS PsN: PAT
48 

ded and sustained going forward. The process is ongoing and requires vigilance. 

As you know, these issues and challenges do not end at the 

water’s edge, so we are combining our efforts with reforms that 

apply throughout HSBC’s global businesses, and I am joined today 

by our new Chief Legal Officer, Stuart Levey, who is here on behalf 

of the HSBC group, and who will describe HSBC’s global compliance commitment. 

Given my experience working for HSBC in other parts of the 

world, I am cognizant of the risks and obligations that come with 

serving our customers who have a need for global banking services, 

and at an absolute minimum, we must have the proper controls 

and systems in place to ensure that we are doing the right business 

in the right places with the right customers and that our customers’ transactions are properly monitored. If, for any reason, a 

transaction appears to be unlawful or suspicious, then we scrutinize the customer and report this information to the authorities in 

a timely manner. 

As the Subcommittee has documented, we have fallen short in a 

number of serious ways. In October 2010, the U.S. bank entered 

into a consent order with the OCC. With the full support of our 

board and of the HSBC group, I took the lead in overseeing our remediation efforts and we have taken significant steps. 

First, we have worked hard to foster a new culture that values 

and rewards effective compliance and that starts at the top. By the 

end of 2010, we had a new U.S. senior management team in place. 

We overhauled our AML compliance function, improving the quality, coverage, and strength of our AML program through additional 

staffing and training. We have increased spending in AML compliance nine-fold from 2009 to 2011. And today, we have 892 full-time 

AML compliance professionals. 

Second, we have undertaken an enterprise-wide risk assessment 

and have exited customer relationships and businesses that do not 

represent acceptable manageable risks. This is an ongoing process 

and we continue to do a formal risk assessment twice a year. 

Third, we have made changes to our ‘‘know your customer’’ policies because proper KYC must be robust to be effective. We must 

know a significant amount about our customers to be satisfied that 

we want their business. Our new KYC policy delivers a critical look 

at each customer, including our own HSBC affiliates. We have also 

implemented a new customer risk rating methodology which takes 

a holistic view of customer risk. I chair the project to apply our new 

KYC standards to our entire customer base. Many of the changes 

we are making are being adopted as HSBC Global best practices. 

And finally, we have made significant investments in technology 

and we have built better controls around our automated monitoring 

system, although we recognize that there is more to be done. The 

intended consequence of these changes is to embed a new culture 

of responsibility, accountability, and deterrence within our U.S. 

bank. It has been my mission and the mission of my new senior 

team to make sure that compliance is on every employee’s mind at 

every level in the organization. 

In closing, let me say that I do appreciate this Subcommittee’s 

efforts to examine and improve the steps taken by industry and 

49 

1The prepared statement of Mr. Levey appears in the Appendix on page 137. 

government to address these challenges and the recommendations 

you have made. We are committed to fulfilling our responsibilities 

in an effective and sustained manner. 

Thank you, and I am happy to address any questions. 

Senator LEVIN. Thank you very much, Ms. Dorner. Now, Mr. 

Levey. 

TESTIMONY OF STUART A. LEVEY,1 CHIEF LEGAL OFFICER, 

HSBC HOLDINGS PLC, LONDON, ENGLAND 

Mr. LEVEY. Thank you, Mr. Chairman and Senator Coburn. My 

name is Stuart Levey. I am the Chief Legal Officer of HSBC, a position I have held for the past 6 months. I am pleased to be here 

at the Subcommittee’s request to participate in today’s hearing, 

and I would also like to express the appreciation to the Subcommittee staff for its hard work and professionalism. 

Some of the information discussed earlier today and in the Subcommittee’s report is sobering. It highlights serious historical problems at HSBC, and we have not shied away from that. In fact, we 

have gone to great lengths to cooperate, not only to be helpful to 

you, but to help us diagnose the problems and identify solutions. 

We obviously have a great deal of work to do. 

I know from experience that it is critically important to our safety and security to stop illicit actors from gaining access to the financial system. At HSBC, we must do everything in our power to 

prevent that access through our bank and we embrace that responsibility. That is why we are taking action not only to address the 

specific deficiencies the Subcommittee identified, but also to implement a global strategy to tackle their root causes. This is a complex 

undertaking, given the scale of our institution and our multinational footprint. But if we get this right, it will make a difference. 

At the beginning of 2011, there was a transition at HSBC to a 

new CEO, Stuart Gulliver, and our new Chairman, Douglas Flint. 

Our new leadership team understands these challenges and they 

approached me to join them to help drive the necessary changes. 

My views on these issues were public and well known and HSBC’s 

leadership wanted me to bring my experience and commitment to 

bear on their challenges. 

I would like to outline for you the path that we are on. First, beginning in January 2011, we have reorganized HSBC around four 

global businesses and 10 global functions. This means for the first 

time that the global head of a function, like myself, has authority 

over the operations and personnel of that function wherever we operate. This makes it easier to manage our risk globally. The historical decentralized corporate structure that concentrated authority 

on country heads has been replaced. 

Second, we have simplified our business model to make HSBC 

easier to manage. We are reducing our footprint and product lines. 

We have focused on selling and exiting non-core businesses, such 

as our global banknotes business. Over the past 18 months, we 

have sold or exited 31 businesses and are already withdrawing 

from nine countries. 

50 

Third, we have elevated and strengthened the role of group compliance so it is now in power to set standards across the organization and has the necessary authority to ensure that those standards are enforced. Our new Chief Risk Officer, Marc Moses, is also 

providing fresh leadership in this area. 

Fourth, on April 30 of this year, our CEO issued a directive to 

the entire bank requiring adoption of high uniform standards 

across the firm. We are adopting a highest common denominator 

approach, applying everywhere the highest standard that we must 

apply anywhere. That will most often mean that we will be applying U.S. standards globally. This means that instead of the United 

States taking on risk from abroad, as you discussed in your opening statement, Mr. Chairman, instead, high U.S. standards will be 

exported globally, thereby promoting the integrity of the financial 

system. 

Among other things, that directive, or group circular letter, also 

requires that we maximize information sharing for risk management purposes and that we apply a globally consistent approach to 

knowing and retaining our customers. The CEO has also directed 

the Chief Risk Officer and me to co-chair a steering committee, on 

which Ms. Dorner also sits, to drive implementation of this new approach. 

We have already begun our work. For example, we adopted a 

new global sanctions policy. We ordered global application of the 

obligation to conduct affiliate due diligence. And we adopted a new 

risk filter to reduce and better control the business we do in any 

high-risk country where we operate. This is the process under 

which we decided to close the Mexican Cayman accounts that were 

discussed this morning. 

This is the beginning of the journey and we have a long way to 

go, and we agree with you, as you say in your report, that the burden of proof is on HSBC to demonstrate progress on these reforms. 

In addition, in 2011, our CEO introduced a new values program 

under which all senior executives are evaluated on whether they 

adhere to the bank’s core values, including respect for compliance. 

In the end, sustainability of these reforms depends critically on 

the commitment of HSBC’s top leadership. I have confidence because I know our board and senior leadership are committed to seeing these reforms through. We understand that this is something 

that absolutely must be done for the long-term success of the bank. 

I appreciate the opportunity to speak to you today and I look forward to answering your questions. 

Senator LEVIN. Thank you very much, Mr. Levey. 

Let me start. We will have, I think, a 10-minute round. 

Senator COBURN. You may go 20 minutes. 

Senator LEVIN. OK. In 2003, HBUS was the subject of a formal 

enforcement order by its regulators at the time, the Federal Reserve of New York and the New York State Banking Department, 

and it required the bank to revise and revamp its AML program 

due to some very serious deficiencies. HBUS made a commitment 

at that time to correct the problems. And after 3 years, in 2006, 

the Office of the Comptroller of the Currency (OCC), lifted the enforcement action despite a host of unresolved issues. 

51 

1See Exhibit No. 2b, which appears in the Appendix on page 583. 

2See Exhibit No. 71d, which appears in the Appendix on page 923. 

Four years later, in 2010, the bank was right back in the soup, 

the subject of another enforcement action by its regulator, this time 

the OCC, requiring the bank to revamp its AML program due to 

severe deficiencies. And many of those were similar to the problems 

that had been identified in 2003, including many violations of Federal AML law, a backlog of over 17,000 un-reviewed alerts regarding possible suspicious activity, failure to conduct any anti-money 

laundering monitoring of $60 trillion annually in wire transfer activity by customers domiciled in countries rated by HBUS as lower 

risk, and failure to conduct any due diligence of HSBC affiliates. 

Now, on April 30 of this year, the HSBC group, as you have testified, issued a new group-wide policy that applies to all of its affiliates around the world, and that is Exhibit 2b.1 Now, this group circular letter requires all HSBC affiliates to meet the most stringent 

standards anywhere in the group, and it states that, ‘‘The bank 

and its affiliates will adopt and enforce the adherence to a single 

standard globally that is determined by the highest standard that 

we must apply anywhere. Often, this will mean adhering globally 

to U.S. regulatory standards. But to the extent another jurisdiction 

requires higher standards, then that jurisdiction’s requirements 

must shape our global standard.’’ 

That new policy statement could be a groundbreaking commitment that will force the entire HSBC network to improve, and I 

hope it does. I understand, Mr. Levey, that you are co-chairing a 

committee—you have just testified about that—aimed at implementing the new group circular letter. 

But here is what HSBC said in 1993. ‘‘Group members should 

comply with both the letter and spirit of all relevant laws, codes, 

rules, regulations, and standards of good market practice in each 

jurisdiction around the world where they conduct business.’’ 

The 2012 and the 1993 compliance policy statement have good 

sentiments and they sound very similar in a lot of regards. They 

promise the bank will adhere to high standards, and as I have said 

before, commitments and promises are welcome. But accountability 

for previous failures and conduct that has already taken place is 

essential as a deterrent, and it is that accountability that has been 

missing. 

My first question is the following, and either one of you can answer. Let me try you first, Ms. Dorner. Do you agree that given 

past commitments that have not been kept that the bank has a 

heavy burden of proof that they mean what they say, or you mean 

what you say, both as to changing behavior and as to changing the 

culture? 

Ms. DORNER. Thank you, Mr. Chairman. I can entirely understand these concerns. It is quite clear that we have had failures in 

the past, which we deeply regret, and I would agree that we have 

some way to go to regain the trust of our regulators and of yourselves on this Subcommittee. 

Senator LEVIN. Thank you. 

Exhibit 71d 2 is a chart which was prepared by an outside auditor at HBUS’s request. It lists accounts that are held by HSBC afVerDate Nov 24 2008 14:41 Nov 19, 2012 Jkt 076061 PO 00000 Frm 00065 Fmt 6633 Sfmt 6633 P:\DOCS\76061.TXT SAFFAIRS PsN: PAT
52 

1See Exhibit No. 50d, which appears in the Appendix on page 823. 

filiates in the United Kingdom and Hong Kong for banks in rogue 

regimes subject to U.S. sanctions, such as Iran, Iraq, North Korea, 

and Sudan, a total of 55 suspect banks with U.S. dollar accounts 

made possible by the HSBC affiliates’ correspondent accounts at 

HBUS. 

Basically, how could HSBC affiliates accept such clients and do 

you know whether HSBC told HBUS that it was servicing these 

type of clients? 

Ms. DORNER. Mr. Chairman, clearly, this predates my tenure of 

being in the United States and so I cannot comment specifically on 

this. I can tell you now that HBUS does not hold accounts for any 

of these names. 

Senator LEVIN. Thank you. 

One of the accounts that was in an HSBC affiliate is a U.S. dollar account for an Afghan bank on the SDN list from October of 

1999 through February 2002. It was on the SDN list because of its 

ties to the Taliban. It is incredible to me that an affiliate of HSBC, 

an affiliate which is located in the United Kingdom, could even 

consider owning an account for a Taliban-affiliated organization 

and continue the relationship after the September 11, 2001 attack. 

Now, there is another extraordinary example here, as well, and 

that is Exhibit 50d.1 That is an exchange of emails in 2008 between HSBC employees in the U.S. and the Cayman Islands. An 

AML compliance officer at HBUS received an inquiry from OFAC 

regarding a trust account in the HSBC Cayman affiliate which was 

administered by HSBC Geneva and which had been established to 

benefit a well-known international terrorist named Rami Makhlouf. 

He is from Syria. The exchange is stunning, if you will take a look 

at this one. 

The Internal Control Officer for Compliance in the Cayman Islands admits that the trust for Makhlouf exists and the Cayman 

affiliate is the trustee. In a subsequent email, she informs the 

HBUS AML officer that a year earlier, in 2007, concerns about this 

client were raised and the relationship was viewed at the group 

level, which decided to maintain it. In other words, people at HSBC 

headquarters made a conscious, knowing decision to maintain the 

account for the benefit of an international terrorist. 

So how is it that HSBC Geneva or its Cayman affiliate, or any 

affiliate in the HSBC system, could have maintained a trust benefitting a terrorist or gotten permission from group headquarters to 

service such an individual, and if you wish to comment, as well, on 

that account that was being held for a Taliban-affiliated organization, you can do so at the same time. Ms. Dorner. 

Ms. DORNER. Mr. Chairman, I am afraid I am not able to assist 

you on the account for Mr. Makhlouf because he is not a customer 

of HBUS and I am not acquainted with this chain of events. 

Senator LEVIN. Could you become acquainted and then give us 

your comment for the record? 

Ms. DORNER. I can look at the chain of emails, yes. 

Senator LEVIN. Will you do that? 

Ms. DORNER. I can do that. 

Senator LEVIN. OK. Mr. Levey, do you have a comment? 

53 

Mr. LEVEY. Naturally, this is long before my tenure. I do know 

who this individual is. He is someone that we designated when I 

was in the government. He was designated in 2008, I am pretty 

sure, under the sanctions program by the United States. I do not 

think this is the kind of thing that we need to change. I do think 

this is the kind of thing that we need to change. 

Senator LEVIN. You made reference to your service with the U.S. 

Government. If I remember, you were the Under Secretary of the 

Treasury for Terrorism and Financial Intelligence. Do I have it 

right? 

Mr. LEVEY. Yes, sir. 

Senator LEVIN. How would you have reacted if you knew that 

HSBC was engaged in such a practice and that an HSBC affiliate 

knew of the HSBC account and did not report it? 

Mr. LEVEY. I think that would be unacceptable. 

Senator LEVIN. Would it not be even stunningly unacceptable? I 

mean, a lot of things are unacceptable. But on degrees of 

unacceptability, is this not kind of shocking? 

Mr. LEVEY. I am not going to quarrel with you, Senator. Of 

course, this is exactly the kind of thing, I should say, that we are 

trying to change, where we are trying to make important compliance information mandatorily shared to compliance officers around 

the world. This would be the kind of thing that would, in my view, 

fall into that category. 

Senator LEVIN. Senator Coburn. 

Senator COBURN. Thank you. 

Ms. Dorner, as I understand from the report, you arrived to run 

the U.S. affiliate or the U.S. organization in 2010 and were handed 

a pretty good sized mess. But why, irrespective of these challenges, 

does HSBC choose to have a presence in the United States in the 

first place? I mean, what is the value to HSBC? You are in all 

these countries. You are worldwide. What is the value? Why are 

you here? 

Ms. DORNER. Senator, that is a great question. This is a terrific 

place to do business. There are more than 10,000 U.S. headquarters of international companies based here in the United 

States. We, as an international bank, it is our business to help our 

customers realize their aspirations. And so we have many United 

States companies who want to grow internationally and they use 

us and we help them to do that. We connect them with international business. 

And then there is incoming business, and, of course, as you 

know, we do have businesses in other parts of the world, and I am 

thinking particularly here of Asia and emerging markets, where 

many companies wish to do business and wish to invest in the 

United States. And it is the role of HSBC as an international bank 

to facilitate that. The United States is the biggest trading Nation 

in the world. It is a massive opportunity. 

Senator COBURN. So given the mess you have had and what you 

have seen, the consequences, both financial and from a business 

standpoint, as a result of the consent order with OCC, would you 

outline what the impacts have been on your organization, the latest 

consent order? 

54 

Ms. DORNER. The latest consent order has had a massive impact. 

Clearly, it happened just after I arrived, and I can tell you that 

what we have done is that we have changed the senior management here in the United States. We have changed our General 

Counsel. We have changed our Head of Compliance. We changed 

our AML Director. We have had a top-to-bottom overhaul of the 

way that we actually do AML compliance. We are burning the 

bridges to make sure nobody can get back to the way it was before. 

We have new governance in place. We have new structures. We 

have new policies. 

But actually, the processes and the policies are never enough. 

This is actually about the people. And so it is my job to make sure 

that the right way down the whole organization, the DNA of 

HBUS, we actually get compliance on the front foot in everybody’s 

mind. 

And in terms of fixing it, that is what CEOs do. I am clearly absolutely committed to fixing this. But the reality is, the change that 

will take place and is taking place is that this has to be fixed for 

the future. This has got to be BAU. So business as usual is not just 

about fixing the consent order. It is driving this through into the 

future as a full-scale remediation that will last. 

Senator COBURN. So you put all these steps forward and all these 

changes, but the real thing that you have to change is the culture. 

Ms. DORNER. That is correct, Senator. 

Senator COBURN. So how are you doing that? I mean, you have 

outlined the steps, but where is the leadership that is going to 

change the culture? Where is the example so far since you have 

been there changing the culture? When somebody has violated 

some of these policies, what has been the consequence? The only 

way you change a culture is if everybody in the organization sees 

when you violate the core values of the institution that there is a 

consequence. 

Ms. DORNER. Senator, I can tell you unequivocally since I have 

been here that I have fired people for not complying, that I have 

clawed back in terms of future remuneration, and I have reduced 

compensation. Of course, that is the negative side of things. Equally, we have celebrated success. We have examples of compliance officers who have been put onto our Internet to show people that this 

is where it is at that they should be looking at, these kind of standards to drive the way that we do business. It is quite clear that we 

need to make further changes. There is never enough done. We can 

always improve. But this has got to be on everybody’s lips, from top 

to bottom of the organization. 

And I would just say that one of the big changes that has helped 

me in this is that this group has changed in terms of how it wishes 

compliance to be viewed, and compliance now has a control function role within the whole group. And so I am totally supported by 

the HSBC group in this and by the HSBC group’s senior management. 

Senator COBURN. OK. I just have one more question for you. You 

mentioned the changes you made to ‘‘Know Your Customer’’ policies have enabled you to make better decisions about whether a 

customer fits your risk appetite. Would you describe what your risk 

appetite is at HSBC or HBUS? 

55 

Ms. DORNER. I can do that. I think that the thing about risk is 

it has to be taken at the highest level. You are trying to find the 

right customer, and so it is about understanding customers’ business, where they do business, why they do business, and what they 

want to do with us. And, therefore, when you put a KYC process 

in place, those are the things that you are looking for throughout, 

and not only are we looking for that in our future customers, we 

are actually remediating the existing customer base we have to 

make sure that the customers that we already have fit within the 

risk appetite that we have. And I can tell you now that we have 

exited, as a result of rolling out this remediation, in the order of 

14,000 customers because they simply did not fit our risk appetite. 

Senator COBURN. OK. Thank you. 

Mr. Levey, this was a 300,000 person organization. You have an 

impressive resume, but there is just one of you. And you have entered into an organization that has an admittedly poor record and 

presumably a poor culture for compliance to match that poor 

record. When you leave here today and resume business as usual, 

go back, what is going to be the impact of a hearing like this or 

a meeting with the government like this in terms of how it affects 

the bank, the bank operations, the structure, and the culture? 

Mr. LEVEY. Well, Senator, I can assure you that the top leadership of this company is very focused on your report, on this hearing, on all the information that has been developed in the course 

of this investigation. In fact, it was not just when the report was 

issued or we were coming to testify today that there was engagement from the top. As I said, the change began when the new CEO 

took office at the beginning of 2011 and they reached out to me 

soon thereafter to ask if I would come and help drive the change 

that they were pursuing. 

I believe that the culture and the tone at the top is excellent. We 

have risk management meetings where the top executives of the 

firm sit around the table and we share the information in ways 

that apparently did not happen as robustly before and make the 

kinds of decisions that are necessary for controlling these sorts of 

risks. 

I believe that this whole experience is one in which, as our CEO 

has said, we are going to be judged by how we respond to this sort 

of adversity, and he is absolutely committed to getting this right— 

in large part, because we think it is critical to our success. If we 

are going to be a successful, the leading international bank, which 

is our aspiration, we have to be successful at this. We have to lead 

in this area, as well. 

Senator COBURN. Is there a conflict within your board to—I am 

trying to think of the best way to phrase this—compliance here 

does not necessarily have to be difficult, but it has to be right, and 

there are some variables that affect that. How well do the regulators do? Are they fair? But are they trying to do the right thing, 

not just be right? Is there a conflict or tension between the potential, as Ms. Dorner outlined, of being a global bank with a large 

number of multinational countries here, and the cost of compliance, 

because I actually see that is where things really went awry. How 

do you manage that tension so that when they are looking—if this 

is a great business opportunity for HSBC, is this too much of a 

56 

1See Exhibit No. 50d, which appears in the Appendix on page 823. 

compliance hurdle or cost given the potential capital appreciation 

opportunities for your organization? 

Mr. LEVEY. Senator, I do not believe we view this as a tension 

or a tough call. We are going to have to get this right, whatever 

it takes to get this compliance in order. I do not think there is any 

ambivalence about that on our board. And we view it as our responsibility—quite aside from the regulators, candidly—it is our responsibility to get this right and we appreciate the help we have 

had from the Subcommittee and the recommendations, but we 

have—it is our responsibility to look at those and improve and also 

identify the improvements ourselves that we need to make. 

Senator COBURN. With the changes that Ms. Dorner has put in 

and with your expertise, is it your opinion that not only will you 

be better in terms of compliance, but you will be a better organization and a more profitable organization as a result of it? 

Mr. LEVEY. I agree with that entirely, Senator. I think that there 

is no conflict in the long run between those two things. Being compliant, having the right controls in place, is in our long-term financial interest. 

Senator COBURN. Thank you, Mr. Chairman. 

Senator LEVIN. I want to go back just for a moment to that situation with the Syrian terrorist. There was an inquiry from OFAC. 

We want to start with that. It was an inquiry regarding a trust account in the HSBC Cayman affiliate that was administered by 

HSBC Geneva. What happened then is that an AML officer at 

HBUS—and this, again, is Exhibit 50d 1—an AML officer at HBUS 

wrote the following, ‘‘that we have determined that accounts held 

in HSBC Cayman are not in the jurisdiction of and are not housed 

on any systems in the United States. Therefore, we will not be reporting this match to OFAC.’’ 

So HBUS knew the account existed, knew that there had been 

a request about this account from OFAC, knew that an HSBC affiliate maintained it, but was not going to get that information to 

OFAC based on this jurisdictional line. In effect, what the AML official decided to do is to use the affiliates’ separate entity status as 

a reason to not report a Syrian terrorist’s HSBC account to OFAC. 

So we have HSBC crossing international lines to establish and 

service the trust, to protect its assets, and to facilitate Makhlouf’s 

transactions. And this is 2008, by the way. And yet they rely on 

that technicality not to report the information to OFAC. 

And so my question to you folks is, if this same thing happened 

today, would you get that information to OFAC? 

Mr. LEVEY. Mr. Chairman, I am—obviously, this is, again, several years before I arrived. I do not know the details of what happened here. What I can tell you is that one thing we have done 

that would handle this kind of situation is that we have now adopted a global sanctions policy so that anyone who is designated by 

OFAC will be—we will search across the entire bank in all jurisdictions and all currencies to ensure that we catch all those situations 

and either freeze accounts if we are permitted to, because in 

some—if it is a U.S.-only designation, we may not be able to freeze 

57 

the account—or exit or reject transactions. I am not in a position 

to go into the details of transaction. 

Senator LEVIN. Well, I think you have answered the question, 

without going into details. You are saying that, first of all, every 

affiliate is going to apply the same catch mechanism. So, presumably, they would have caught this. 

Mr. LEVEY. Yes. What I do not know—— 

Senator LEVIN. If it would have been caught by HBUS, it would 

have been caught by Cayman. 

Mr. LEVEY. Right. 

Senator LEVIN. Right? OK. Presumably. 

Mr. LEVEY. Presumably, yes. 

Senator LEVIN. It should be. 

Mr. LEVEY. What I do not know is when Rami Makhlouf was actually designated. I do not have the date in my head. 

Senator LEVIN. Well, putting aside that, the question is, presumably, it will be caught by the same mechanism being applied in 

every one of your banks, wherever they are located. My question, 

though, is if for some reason it fails and if one bank knows that 

information is being sought by OFAC, will it make sure that the 

information is provided? 

Mr. LEVEY. Again, my view on this would be that we would give 

to any government as much information as we are legally permitted to do when we had a valid request. So I cannot tell you 

whether there will be some legal restriction, but we would do everything we could to get them the information. 

Senator LEVIN. Well, when you say what you are legally permitted to do, were you legally permitted by the Caymans, by their 

law, to provide this? Do you know, Cayman law will not allow this. 

They are a secrecy jurisdiction. 

Mr. LEVEY. I do not know, Senator. 

Senator LEVIN. Well, but you need to find out. 

Mr. LEVEY. Will I find out? 

Senator LEVIN. Are you going to be bound by a secrecy jurisdiction’s law that says you cannot share that information, or are you 

going to be carrying out your commitment here that you are going 

to treat all of your affiliates as though they are in one place globally and you are going to respond to law enforcement with their request? I mean, if you are going to say, if legally permitted by the 

Caymans or by any other country, you have tax havens, and so 

forth with secrecy jurisdictions, Caymans being one of them. Are 

you bound by that? Are you going to work with law enforcement 

or are you going to be bound by Caymans? 

Mr. LEVEY. We are going to do everything we can to cooperate 

with law enforcement. 

Senator LEVIN. Well, you say, though, that if it is legally permitted. That is your hedge word. U.S. law binds you to report to 

OFAC. What are you going to do, live up to Cayman law or U.S. 

law? 

Mr. LEVEY. I do not know if there would be a conflict there. 

Senator LEVIN. There is. Assume there is. 

Mr. LEVEY. If there is, we do everything we can to get it to 

OFAC. 

Senator LEVIN. To comply with U.S. law? 

58 

Mr. LEVEY. Yes. 

Senator LEVIN. Now, sharing information across international 

lines is not just an ancient problem at HSBC, it is still a current 

problem, and I am going to give you what has happened recently 

involving this Subcommittee. In 2010, in a hearing before this Subcommittee, we reviewed an incident in which an HSBC affiliate in 

the Bahamas was asked to open an account for the Central Bank 

of Angola. Email exchanges obtained by the Subcommittee made it 

clear at that time that the Angolan Central Bank wanted to use 

an offshore secrecy jurisdiction—that is the Bahamas—to hold its 

funds in order to avoid court orders that might lead to a freezing 

of its funds. At the 2010 Subcommittee hearing, I asked HSBC if 

the account was ever opened, and not surprisingly, HSBC refused 

to answer, citing jurisdictional constraints. 

Last week, HSBC informed us that the account had been opened 

and was opened at the time of our 2010 hearing, but that it was 

closed 45 days ago. HSBC also revealed that the only reason it 

could provide that information to the Subcommittee was because 

HSBC had received permission from the Central Bank of Angola. 

HSBC Bahamas could not release it to HBUS without the client’s 

permission, so that is the problem with what you are telling us 

today. It is the problem with HSBC’s word, the subject of being legally permitted, that description, which is a real big loophole, and 

it is a problem with other international banks. 

The international banking system established a financial system 

that enables them to facilitate financial transactions and move 

around the globe across jurisdictional lines in a matter of seconds, 

but when it comes time to sharing critical information with U.S. 

authorities about clients and their accounts and transactions, then 

things begin to grind to a halt and banks point to jurisdictional 

rules and local laws, sometimes using that argument disingenuously. But putting that aside, that is the reason given by HSBC 

not to share that information. 

Now, in the most recent group-wide policy, your GCL, on April 

30, you say that you will ‘‘maximize the sharing of information for 

risk management purposes amongst group companies and amongst 

global businesses and functions.’’ You have noted that HSBC is 

going to maximize the sharing of information to ‘‘the extent permitted by laws.’’ And that, again, is the rub. 

What policies are you going to enact or implement to ensure that 

you provide law enforcement and governmental officials in this 

country which has given HBUS a charter—rather than using jurisdictional constraints as the excuse to avoid sharing information, 

what are you going to do with your new rules and regulations to 

make sure that this government and the proper authorities are 

given information upon request? 

Mr. LEVEY. Mr. Chairman, as you indicate, we have committed 

within the company in the GCL to maximize the sharing of information for risk management purposes among our companies and 

functions. We have decided that is the value that we are going to 

pursue, which is that we need to share information. I think your 

report highlights the serious consequences that occur when we do 

not. 

59 

We have also decided through this policy that when there is—we 

are going to do everything we can to share information across borders. We have found, as you indicated in your question, that sometimes the secrecy jurisdiction was being used as a comfort, in a 

way. Well, no, we cannot share the information because of the jurisdictional rules. 

It is my job as the Chief Legal Officer to look at that, right, and 

to try to work that out and make sure that we are not using it as 

an excuse. But in the end, of course, we have to abide by the law 

wherever we operate. That is true of any multinational company. 

All we can commit to do is—whenever there is any discretion, to 

exercise it in favor of sharing information. I do not know that we 

can do more than that or that any multinational organization can 

do more than that. 

Senator LEVIN. Senator Coburn. 

Senator COBURN. Ms. Dorner, in how many locales does HSBC 

now have operations that have such agreements as the Bahamas? 

In other words, what percentage of HSBC’s locations throughout 

the world are tax havens or isolated places where jurisdictional differences preclude the sharing of information? 

Ms. DORNER. I am sorry, Senator. I cannot actually put a number 

on that for you. 

Senator COBURN. We have seen changes in Liechtenstein, for example, from pressure from this Subcommittee and others, where 

they have actually changed their laws. But could you get that to 

us? 

Ms. DORNER. I am sure that we could. I think it is fair to say 

that all countries have privacy rules of one sort or another. 

Senator COBURN. I understand, but we are talking about those 

countries that have privacy rules intended to not be transparent in 

the commission or the suppression of information that may or may 

not be, in fact, in the best interest of the global economy as a whole 

and may be associated with illicit activity. 

Ms. DORNER. I understand. I am sure we could do that. 

Senator COBURN. Thank you. 

Do you know of any history in your experience where a bank 

charter has been pulled for cross-jurisdictional violations or what 

was perceived as a violation, but what was also perceived as in the 

best interest of your company as a whole or in the best interest of 

transparency in terms of fighting illicit activity? 

Ms. DORNER. I am not aware of any. 

Senator COBURN. OK. Thank you. 

Back to Mr. Levey just for a minute. Do you believe there is sufficient oversight of the affiliates that make up the group compliance right now in your organization? 

Mr. LEVEY. I think we are on the path to getting there, Senator, 

but I do not think I can sit here today and tell you that we are 

at the end of the road. I think we are at the beginning of the journey and we do have our work cut out for us, but we are on the 

right path. 

Senator COBURN. As I said, I believe you have the best of intentions. This is not to question the new management at all, but I 

think some questions need to be asked. Do you know of any affiliates now that are not complying with the set standards? 

60 

Mr. LEVEY. Senator, I do not have knowledge of such a thing, but 

I also cannot sit here and tell you I am comfortable with the scope 

of this whole—— 

Senator COBURN. One further question along that line. If today 

you found out an affiliate that was not in compliance, what are the 

consequences? 

Mr. LEVEY. The consequence is they would have to improve immediately, and the new thing, though, is that information would be 

shared with all other affiliates so that Ms. Dorner here in the 

United States would not be blind to it in the ways that we saw in 

the examples in the report. 

Senator COBURN. You have powerful experience in the government and now applying that in the private sector. Do you have a 

recommendation for Senator Levin and I in terms of what we could 

do to make us both more effective, less burdensome, and more efficient as—even though you stated it is in your own best interest to 

be compliant, the point is, are there ways that we can help do that 

in a more efficient way that gets a better result. 

Mr. LEVEY. I have to say, that sounds like a dangerous question. 

I did not come here to give you recommendations. 

Senator COBURN. I have a reputation of being a straight shooter. 

I am asking that because I really want to know. I actually like to 

try to fix what is wrong with government rather than pile on another program that is supposed to do the same thing that is going 

to fail again. So if you would like to think about that and shoot me 

a short note, I would love to hear from you, but that was not meant 

in jest or as a trap—— 

Mr. LEVEY. No, I did not intend that. 

Senator COBURN. It is my intent to try to make government 

work, and too often, it does not. Having been on both sides of the 

wall, you have a perspective that not many people have and I think 

you could offer us lots of suggestions on how we might be better 

at what we are doing, much like we have made recommendations 

in our report. 

Mr. LEVEY. Well, I appreciate that, Senator. Of course, we have 

a lot to do to fix ourselves, but I do think that there are ways in 

which the sharing of information, which is the key here, right? The 

sharing of information is the key to these kinds of controls being 

effective and there are ways to improve that. There are changes 

that can be made in the way governments share information with 

the private sector and in which the private sector shares information amongst itself. That is ultimately what needs to be done. If we 

are going to really get these illicit actors, we are going to have to 

have better visibility. But I would be happy to try to follow up. 

Senator COBURN. Thank you. Which would mean you need better 

information from us on illicit conduct. You need a more robust PATRIOT ACT in the areas of this illicit conduct. And you also need 

access to beneficial ownership information from us. 

Mr. LEVEY. I agree with all of that. 

Senator COBURN. OK. Thank you. Mr. Chairman, I yield back to 

you. 

Senator LEVIN. I want to go back to the question about an affiliate that does not share information with you because of a local law 

that says that secrecy is the order of the day. These are the secrecy 

61 

jurisdiction entities, and Ms. Dorner, I guess you are going to give 

us how many of those jurisdictions there are affiliates in, is that 

correct? You were asked to do that and you are going to give us 

that for the record, I believe. 

Now, you are committed to do a whole bunch of things. You are 

going to police the HSBC affiliates that use your accounts. You are 

going to audit so-called cover payments sent by HSBC affiliates to 

see if they are circumventing the OFAC filter. I think you prepared 

in your new approach to look at affiliates’ internal audit findings 

to look for those with weak AML controls. I think you were just 

asked by Senator Coburn, what are you prepared to do if an affiliate does not provide information to you or to a law enforcement 

entity in a country that you have a charter, the United States. 

I guess one of the ways you could enforce it would be to deny a 

U.S. correspondent account to an affiliate. Do you know whether or 

not that has ever been done? Has HBUS ever said no to an HSBC 

affiliate? 

Ms. DORNER. The direct answer to your question is no, we have 

not. But we now have KYC at a level for all of our affiliates that 

we use for third parties and I can assure you that in the event that 

one of our affiliates did not pass the KYC as it stands now, I would 

have no hesitation in not opening an account or, indeed, closing an 

account. 

Senator LEVIN. And what about if they do not share information 

with you? That was the question which I believe Senator Coburn 

was asking. Is not one of the remedies you just simply say, we are 

not going to let you have a correspondent account with us? 

Ms. DORNER. The same rules would apply for any third party. If 

we asked for information and did not get it, we would close the account. 

Senator LEVIN. But you will apply that test to an affiliate? 

Ms. DORNER. We would. 

Senator LEVIN. OK. Talking about secrecy jurisdictions and beneficial owners, I think you and I talked about this issue before, but 

let me get you on the record in this setting, Mr. Levey, and that 

is should the U.S. Government get the beneficial ownership information for U.S. corporations? 

Mr. LEVEY. I believe so, Mr. Chairman, and it would also be 

helpful to banks—it would be helpful to us so that we could better 

know our customers because, as you know and you probably better 

than anyone, this is one of the obstacles that we sometimes face. 

Senator LEVIN. That is very helpful and we will be sure to be 

quoting you for that in different places. [Laughter.] 

I want to talk to you both about bearer shares. Bearer share corporations, so-called, are notorious vehicles for money laundering 

and for other illicit activity because they provide anonymity 

through assigning legal ownership of the corporation to whoever 

has the physical possession of its shares. There is no paper trail. 

There is no way of knowing who owns those corporations, just the 

way there is no way of knowing who is the real beneficial owner 

of a bank account unless we require people owning the accounts to 

tell us who the beneficial owners are. 

But at times over the last decade, HBUS maintained over 2,000 

bearer share accounts despite warnings by internal auditors and 

62 

1See Exhibit No. 95, which appears in the Appendix on page 1062. 

outside regulators that the accounts posed high money laundering 

risks. Internal bank documents show the account owners deliberately pressured the bank to help hide their identities, and Exhibit 95 1 is one example of that, of a phone conversation between 

a man named Mauricio Cohen and an HBUS banker in Miami. I 

made reference to that in my opening statement. 

I know that HBUS has reduced the total number of bearer share 

accounts, and I guess my question is why have any? 

Ms. DORNER. Mr. Chairman—— 

Senator LEVIN. Could I interrupt your answer, and forgive me for 

this. I want to just read one thing to you before you answer, and 

that is what the World Bank has had to say about these bearer 

share accounts in its report last year. It said that no bank with any 

sort of due diligence standards is willing to conduct business with 

a company that has free-floating bearer shares. That is what the 

World Bank said. So, now, please. 

Ms. DORNER. Thank you, Mr. Chairman. Entirely understand the 

concern with bearer shares, a matter of great concern to me. It is 

always very important for us to know our customer. We have 

changed our policy here in the United States. We have toughened 

it up. We do not really want to do this business. To the extent we 

do it at all, it is going to be done under very limited circumstances, 

only when we can hold the shares ourselves or get them into a custodial agent that we know so that we can actually understand the 

movement of the shares. 

I think that because this is such a matter of general concern, the 

group—we are considering, or the new Group Standards Committee, on which I sit with Mr. Levey, they are looking, or we are 

looking at the U.S. policy with a view to extending that around the 

world. 

Senator LEVIN. OK. That is really a step forward. 

Another issue that I raised in the opening statement was 

HBUS’s willingness to clear suspicious bulk travelers’ checks for 

foreign banks. From 2005 to 2008, on a regular basis, HBUS 

cleared up to a half-million dollars or more a day in bulk travelers’ 

checks from the Hokuriku Bank of Japan. They routinely arrived 

in large stacks of sequentially numbered checks signed and 

countersigned with the same signature, which was unreadable. 

HBUS found that the Japanese bank could not provide any ‘‘know 

your client’’ information or explain why two dozen of its customers 

were often depositing large stacks of U.S. dollar travelers’ checks 

all purchased from the same bank in Russia, allegedly for the used 

car business people. 

Now, this was under OCC pressure. HBUS stopped clearing the 

travelers’ checks in 2008, but it kept open the correspondent account despite that Japanese bank’s poor AML controls, and in less 

than 4 years, HBUS provided over $290 million in U.S. dollars to 

a Japanese bank for the benefit of unknown clients dealing with 

unknown Russians who, again, were allegedly in the used car business. 

63 

So I guess the real question is, would that happen again? Would 

that correspondent account be kept open again under your new 

rules? 

Ms. DORNER. Mr. Chairman, first, may I say I entirely understand the issue with travelers’ checks and I have asked the AML 

Director immediately to do a full review. 

As regards Hokuriku, they failed our new KYC standards in 

2012, which is why we have closed the account, and I have now 

exited, or we have now exited 326 correspondent banking accounts 

since we instituted the new KYC procedures. And, therefore, I 

would hope that we would close any bank such as this because they 

would fail the new KYC procedures. 

Senator LEVIN. A number of money laundering problems identified by the OCC in 2010 related to inadequate monitoring for suspicious activity. Among other problems, the failure to monitor for 

suspicious activity for the $60 trillion in wire activity, failed to 

monitor the bank notes accounts held by its affiliates, used poor 

procedures to identify who could get enhanced monitoring, and a 

backlog of alerts that were not reviewed, and the OCC provided 

several pages of criticism related to the weak parameters that the 

bank used to review wire and account activity. 

Now, one of the key provisions in that cease and desist order of 

the OCC in 2010 required HBUS to install a new AML monitoring 

system to replace its old one, called CAMP. The new one is called 

NORKOM, I believe, and the bank is supposed to ensure that it 

has useful parameters to identify potentially suspicious activity for 

review. Can you tell us whether or not that effort has been completed and whether you have fully met the requirements of the 

cease and desist order with respect to a new AML monitoring system? 

Ms. DORNER. Thank you, Chairman. The whole point about the 

system, and this is, I know, why you are interested in it, the whole 

point about installing a system is it has to be absolutely fit for purpose. It absolutely has to fit the parameters of the business. It 

must identify the correct risks. And we must be able to monitor it. 

We have installed NORKOM. It has been a huge investment. I 

would be the first to say that with all systems, as usual, improvements can always be made, and it has been pointed out to us that 

there are two ways that we need to improve this system. We entirely agree. We are on the front foot. We are taking these as a priority and we will fix it. I would imagine that we will be improving 

this system going forward forever because there are always new 

ways to fix these systems in such a way that they can deter illicit 

actors. 

Senator LEVIN. As I understand the history here, when this was 

not working properly by the deadline of 180 days, rather than seeking an extension of the 180 days, the implementation plan was 

modified and then ended up in noncompliance with the consent 

order. Is that accurate? 

Ms. DORNER. There are two MRAs that have been raised and 

they are very technical. They are very important because they are 

about the validation of the model and we will have to fix those two 

things. To the extent that the OCC have raised other issues, we 

64 

have replied in full and I believe that you have a copy of that letter. 

Senator LEVIN. Is there a new deadline? 

Ms. DORNER. There is not, to my knowledge, a deadline as such, 

but it is closely monitored and we are in day-to-day contact, literally, with the OCC, who are clearly very interested in getting 

this fixed. 

[Pause.] 

Senator LEVIN. OK. We have a vote on now, and I think what 

we will do is we will release this panel. We sure hope that you are 

going to carry out the commitments which have been made by this 

bank because our report raises just a lot of serious issues about 

international banking and this particular bank. Again, the bank 

has been cooperative, but we hope this visibility will actually help 

reform efforts at the bank. 

Again, as I have said a couple of times this morning, we welcome 

the commitments. We welcome the apologies. It is the change in 

culture and actions which are critical. But there is that nagging 

question of accountability which others are going to have to judge. 

We are not in the prosecution business here. We are in the oversight business. Others will have to judge the accountability issues. 

But it has been significantly missing, not just in this situation, but 

generally in a whole lot of other banking situations and other situations in modern times. We hope that, somehow or other, the hearing and the investigation will also lead to some greater accountability. 

But we will now release you and thank you. 

Ms. DORNER. Thank you very much. 

Mr. LEVEY. Thank you, Mr. Chairman. 

Senator LEVIN. And we are going to stand adjourned for 10 minutes or until Senator Coburn gets back, whichever comes earlier. 

[Recess.] 

Senator LEVIN. The meeting will restart. I am told Senator 

Coburn will be coming back, but he told me we should start if he 

was not back, so here we go. 

Let me now call on our next panel of witnesses, Thomas J. 

Curry, the Comptroller of the Currency; Grace E. Dailey, the 

former Deputy Comptroller for Large Bank Supervision at the Office of the Comptroller of the Currency; and finally Daniel Stipano, 

the Deputy Chief Counsel at the OCC. 

Mr. Curry, I am sure this is the first time that you have appeared before this Subcommittee and we welcome you and look forward to your testimony. 

Mr. Stipano, I believe you appeared before us about 8 years ago 

at our hearing on money laundering and foreign corruption. 

Mr. STIPANO. Yes, sir. 

Senator LEVIN. We welcome you back, and I think this is Ms. 

Dailey’s first appearance here. We welcome you, as well. We appreciate all of you being with us and we look forward to your testimony. 

I think as you have heard or are familiar with our rules, all witnesses who testify before this Subcommittee are required to be 

sworn, so I would ask that each of you stand and raise your right 

hand. 

65 

1The prepared statement of Mr. Curry appears in the Appendix on page 150. 

Do you swear that the testimony that you will give before this 

Subcommittee will be the truth, the whole truth, and nothing but 

the truth, so help you, God? 

Mr. CURRY. I do. 

Ms. DAILEY. I do. 

Mr. STIPANO. I do. 

Senator LEVIN. Under our timing system, you will get a red light 

a minute before a 5-minute—well, I guess now we are going to 

have a 10-minute testimony as the limit, so a minute before the 10 

minutes is up, it will go from green to yellow and then you could 

conclude your remarks, and we would ask that you do limit your 

oral testimony to no more than 10 minutes. I believe, Mr. Curry, 

you are going to be presenting the statement, of course, for the 

OCC, so please proceed. 

TESTIMONY OF HON. THOMAS J. CURRY,1 COMPTROLLER OF 

THE CURRENCY, U.S. DEPARTMENT OF THE TREASURY 

Mr. CURRY. Thank you, Chairman Levin, Senator Coburn, and 

Members of the Subcommittee. I appreciate the opportunity to appear before you today to discuss the OCC’s work in ensuring compliance with the Bank Secrecy Act and the work we are doing to 

improve our Bank Secrecy Act (BSA) and AML compliance program. 

The Subcommittee’s staff report has identified important concerns with the activities of HSBC and with oversight and enforcement of BSA and AML requirements by the OCC in the case of 

HSBC. As I will describe below, we agree with the concerns reflected in the report’s recommendations concerning the OCC and 

will fully implement those recommendations. 

In one of my first speeches after becoming Comptroller of the 

Currency just a little more than 3 months ago, I highlighted the 

importance of BSA compliance. I also noted that this is an inherently difficult area. It requires banks to sift through large volumes 

of transactions to identify those that are suspicious, a task that is 

complicated by the ingenuity that criminal and terrorist elements 

bring to bear in finding new ways to conceal the true nature of 

their transactions. 

In my speech on operational risk, I emphasized, and I want to 

reaffirm today, that no matter how difficult compliance is, I expect 

institutions we supervise to have effective programs in place to 

comply fully with the requirements of the BSA. We will insist on 

that. 

Our testimony today provides details about the OCC’s BSA and 

AML supervisory policies and practices. It further describes how 

the OCC monitors compliance with BSA requirements and ongoing 

supervision that we provide at the largest national banks and 

thrifts, as well as our current enforcement process when problems 

or concerns are identified through our supervision and our enforcement record for BSA. 

As requested in the invitation to this hearing, our written statement also discusses our supervision of HSBC. In 2010, the OCC 

issued a comprehensive cease and desist order against HSBC. As 

66 

our written statement details, with the benefit of hindsight, the 

OCC could have and should have taken this action sooner. But the 

issuance of this order does not conclude our activities with respect 

to the matters covered by the cease and desist order. We are now 

actively evaluating the bank’s compliance with the order and considering the assessment of monetary penalties. 

The Subcommittee’s report contains three specific recommendations focused on the OCC’s BSA/AML supervision. I agree with the 

concerns reflected in each of the recommendations and the OCC 

has begun taking actions in response. 

First, we have already identified a new approach that we will implement to assure that BSA/AML deficiencies are fully considered 

in the safety and soundness context and are taken into account as 

part of the management component of a bank’s CAMELS rating. 

We will direct our examiners to view serious deficiencies in a 

bank’s BSA/AML compliance area, including program violations, as 

presumptively adversely affecting a bank’s management component 

rating. We will also provide guidance on how to document application of this approach in determining the management component 

rating. 

Second, we are revising and clarifying the operation of our Large 

Bank BSA Review Team to enhance our ability to bring different 

perspectives to bear and to react on a more timely basis to circumstances where a bank has multiple instances of matters requiring attention or apparent violations of the required components of 

its BSA/AML program. We will also explore how we track and review relevant information in this regard and whether new initiatives are appropriate in that area, as well. 

Third, we will also revamp our current approach to citing BSA/ 

AML violations to provide more flexibility for individual pillar violations to be cited and we will identify what steps we can take in 

our examinations to obtain a holistic view of a bank’s BSA/AML 

compliance more promptly. One of the reasons for the current OCC 

approach is that it requires the OCC to focus on determining 

whether the deficiencies in a bank’s program amount to a BSA 

compliance program violation, which requires a mandatory cease 

and desist order. Therefore, in implementing changes on this point, 

it will be important not to create disincentives to making the necessary tough calls when there are BSA compliance program violations mandating the issuance of a cease and desist order. 

Finally, we will review other areas, such as training, staffing, recruitment, policies, and interagency coordination to make improvements in our BSA/AML supervision program. 

I am joined today by Dan Stipano, Deputy Chief Counsel, and 

Grace Dailey, who served as the Deputy Comptroller for Large 

Banks from 2001 until November 2010. The three of us share a 

commitment to a rigorous BSA/AML supervisory and enforcement 

program at the OCC and we are continually seeking ways to improve our supervision in this important area. 

I have asked Ms. Dailey and Mr. Stipano to introduce themselves 

to the Subcommittee, and then we will be pleased to answer your 

questions. Ms. Dailey. 

67 

1The prepared statement of Ms. Dailey appears in the Appendix on page 150. 

2The prepared statement of Mr. Stipano appears in the Appendix on page 150. 

TESTIMONY OF GRACE E. DAILEY,1 FORMER DEPUTY COMPTROLLER FOR LARGE BANK SUPERVISION, OFFICE OF THE 

COMPTROLLER OF THE CURRENCY 

Ms. DAILEY. Chairman Levin, Senator Coburn, my name is Grace 

Dailey and I have been with the OCC for 29 years as an examiner. 

I am currently the Examiner in Charge of a large bank in Minneapolis, where I oversee a team of examiners responsible for that 

bank’s supervision. 

From the end of 2001 through late 2010, I served as one of three 

Deputy Comptrollers in the OCC’s Large Bank Division. In that 

role, I oversaw the supervision of a portfolio of large national 

banks. That portfolio changed over time, but included HSBC Bank 

USA, N.A., from July 2004 through November 2010. Prior to becoming Deputy Comptroller for Large Banks, I held a variety of 

roles supporting bank supervision, including serving as Examiner 

in Charge and other field positions in Minneapolis, Chicago, and 

New York. 

I look forward to answering your questions. 

Senator LEVIN. Thank you very much, Ms. Dailey. Mr. Stipano. 

TESTIMONY OF DANIEL P. STIPANO,2 DEPUTY CHIEF 

COUNSEL, OFFICE OF THE COMPTROLLER OF THE CURRENCY 

Mr. STIPANO. Chairman Levin, Senator Coburn, and Members of 

the Subcommittee, my name is Daniel P. Stipano and I am one of 

two Deputy Chief Counsels at the Office of the Comptroller of the 

Currency. I have spent 27 years at the OCC, with the majority of 

that time working in enforcement and compliance. In my current 

role, I supervise the OCC’s enforcement and compliance, litigation, 

community and consumer law, and administrative and internal law 

divisions, as well as the OCC District Counsel staffs in the OCC’s 

Southern and Western Districts. 

Prior to becoming Deputy Chief Counsel, I served as the Director 

for Enforcement and Compliance at the OCC, where I was responsible for taking administrative enforcement actions against national banks and their institution-affiliated parties. From 1989 to 

1995, I was an Assistant Director in the Enforcement and Compliance Division after joining the OCC in 1985 as a Staff Attorney in 

the Division. 

Senator LEVIN. OK. We thank you all. 

Let us try 10 minutes for our first round of questions. 

Let me start with a question for you, Ms. Dailey. You were the 

OCC Deputy Comptroller for Large Banks from 2001 to 2010 and 

were in charge of the OCC’s supervision of a number of large international banks, including HBUS. When the OCC became HBUS’s 

primary regulator in July 2004, the bank was already under a formal enforcement action by the Federal Reserve Bank of New York 

and the New York State Banking Department for having an inadequate AML program. As a condition for allowing HBUS to become 

a nationally chartered bank, the OCC required HBUS to complete 

all of the corrective actions set out in the written agreement that 

was the result of the enforcement action. 

68 

1See Exhibit No. 1a, which appears in the Appendix on page 575. 

In 2006, the OCC determined that HBUS had fulfilled the requirements and terminated that agreement. Were you involved, 

first of all, in the decision to terminate the agreement? 

Ms. DAILEY. I was one of the recommending officials. I was not 

the final decisionmaker. 

Senator LEVIN. OK. Did you recommend that it be terminated? 

Ms. DAILEY. Yes, I did. 

Senator LEVIN. All right. Now, the Subcommittee has prepared 

a chart, Exhibit 1a,1 that tracks the 44 AML examinations conducted by the OCC at HBUS from 2004 to 2010. As you can see 

from the chart in your book—you will not be able to follow that 

one, but it is also in your book—the OCC conducted seven exams 

before it voted to terminate the 2003 agreement in 2006. Those 

seven exams all took place in about 1 year, from 2005 to 2006, and 

identified 35 matters requiring attention, or MRAs, which are practices that the OCC defines as deviating from sound fundamental 

principles and ‘‘may adversely impact earnings or capital, risk profile or reputation,’’ or ‘‘result in substantive non-compliance with 

laws.’’ 

First, are 35 MRAs, matters requiring attention, a high number 

for a bank to accumulate in 12 months? 

Ms. DAILEY. Yes, it is a high number to accumulate in 12 

months. 

Senator LEVIN. So the 35 MRAs identified in those first seven examinations found that in most instances that the bank was not following its policies, was not monitoring properly, was not conducting 

appropriate due diligence, that written policies were not adequate, 

and that staff needed training, all of that while the bank was still 

under the 2003 enforcement actions. So all of those are matters 

that the Bank Secrecy Act specifically identifies as pillars or key 

components that a bank must have for an effective Bank Secrecy 

Act program. So how could that bank, with all of those outstanding 

problems in 2006, be considered to have an effective AML program? 

Ms. DAILEY. Well, we did a lot of work in that time period, as 

you have pointed out by the chart, and we did find a lot of issues. 

Many of those issues—in fact, I think most of those issues—were 

corrected quite soon after they were detected. So some of the issues 

were not longstanding problems from the standpoint that it would 

take the institution a long time to fix, so they were corrected and 

when we made our determination, we went through the WSRC 

process. So it is a process to determine when we think a bank is 

in compliance with the articles, how to go about lifting that. Our 

examiners felt that the bank did have an adequate program at that 

time, was in technical compliance with the conditions, and we proceeded through our process, which is to take that through our 

WSRC process, which is members of management, and there was 

a recommendation and then a final decision was made. But I understand your concern that there were a lot of issues that were 

identified at that time. 

Senator LEVIN. Well, there not only were a lot of other issues 

identified, but 23 of the 35 identified issues were also identified in 

four supervisory letters written in January 2006. Now, all four of 

69 

those supervisory letters were dated within 20 days of the decision, 

February 6, 2006, to terminate the agreement. So it is hard—I do 

not know how you can say that most of them had been dealt with, 

and then you have those four supervisory letters written within 20 

days of the decision to terminate, and here are some of the issues 

that were listed in those four letters, again, within a 20-day period. 

Monitoring problems were noted in all four letters. Policies in 

need of enhancements were cited in all four letters. Not following 

policies was identified in three of the four letters. Customer due 

diligence issues in three of the four letters. And staff in need of 

training in three of the four letters. 

So I do not know how the OCC could rank and rate the bank’s 

AML program as satisfactory and how they could cancel the enforcement action. 

Senator LEVIN. I just do not understand it. 

Ms. DAILEY. In hindsight, we should not have. From what we 

know today, they did not have an effective BSA program, and in 

fact, many of the problems that we detected in our 2009 examination were in existence during this time. So in retrospect and from 

what we know now, we would not have lifted those conditions. 

Senator LEVIN. Well, but my point is that looking back now at 

what you knew then, it should not have been lifted, because what 

you knew then when you lifted it, 23 of the 35 matters requiring 

attention were still outstanding. 

Ms. DAILEY. We probably did not appreciate the systemic nature 

of some of those issues. I understand the concern. 

Senator LEVIN. Now, over the next 4 years, the MRAs or matters 

requiring attention did not stop. OCC examinations repeatedly 

found significant AML problems across a number of business lines, 

many of which were high risk and vulnerable to illicit activity. 

Fourteen of the examinations found AML monitoring problems. 

Eight found weak customer due diligence. Seven found insufficient 

staffing. Five found that the bank was not following its own policies. These problems existed in critical, high-risk business units 

such as banknotes, foreign correspondent banking, embassy, banking, international and domestic private banking, wire transfers, 

and pouch services. By 2009, HBUS had 83 MRAs, more than any 

other national bank. The next closest had 20 fewer. 

So with this kind of a record, the first question that one wonders 

is why the OCC never took formal enforcement action against 

HBUS prior to 2010. Do you know why it did not? 

Ms. DAILEY. Stepping back and looking at it, we should have. We 

could have and we should have taken action sooner. 

Senator LEVIN. I am talking about formal enforcement action, 

right? That is what we are talking about. 

Ms. DAILEY. Yes. I agree that we could have and should have 

taken formal enforcement action. With the benefit of hindsight, we 

should have. 

Senator LEVIN. Well, these words are the benefit of hindsight. 

Given what you knew then, should you not have taken enforcement 

action? 

Ms. DAILEY. Had we applied the process that we plan to apply 

going forward, which is to have the flexibility to cite pillar violations, we would have cited pillar violations in these instances and 

70 

we may have drawn a different conclusion then to cite a program 

violation. 

Senator LEVIN. What about informal enforcement action? Was 

there any informal enforcement action taken against HBUS prior 

to 2010? 

Ms. DAILEY. There was not. 

Senator LEVIN. This is pretty feeble enforcement. Mr. Curry, 

what do you think about this record that you inherited? 

Mr. CURRY. I would like to see going forward a much more aggressive posture by the OCC. If there is evidence of material weaknesses in a BSA/AML program, I would like to see, at the very 

least, a progressive remedial program being instituted and to use 

all the tools that are available to us, including cease and desist orders. 

Senator LEVIN. Did the OCC ever cite a violation of law for noncompliance with AML statutes prior to 2010? Do you know, Ms. 

Dailey? 

Ms. DAILEY. I do not believe we did prior to 2010. 

Senator LEVIN. Mr. Stipano, you are the Deputy Chief Legal 

Counsel for the OCC. You told the Subcommittee staff that you did 

not have much involvement with HBUS prior to 2009 because the 

Supervision Division was responsible for examinations and the 

Legal Department generally gets involved only in enforcement actions, investigations, or legal actions brought against the bank by 

the Supervision Division. But in the spring of 2009, the OCC was 

contacted by two Federal enforcement agencies regarding investigations that they were conducting of possible money laundering, 

going through accounts at HBUS, and the OCC met with representatives of those agencies in Washington, DC, on September 1, 

2009. When the meeting concluded, the OCC staff continued to discuss the HBUS situation. Was it at that meeting that you learned 

for the first time about the findings of previous AML exams of 

HBUS and that they had resulted in 83 MRAs? 

Mr. STIPANO. To the best of my recollection, that was the first 

time that I learned about the 83 MRAs. 

Senator LEVIN. Had you encountered some of the problems at 

HBUS before that? 

Mr. STIPANO. Yes. One situation I remember, and I do not have 

a date on it, was the agency was contacted by two former HSBC 

employees who were essentially whistleblowers and they had concerns about the way that the bank was managing its embassy 

banking business. At that time, I directed the Director of Enforcement to meet with Ms. Dailey, to set up a meeting and to have 

them come in and interview them and find out what the basis of 

their concerns were. That meeting did take place. I was not personally a participant. Following that, an examination was opened into 

the embassy banking area and I believe that findings were made 

and that supervisory actions were taken as a consequence. 

Senator LEVIN. When you learned that there were 83 MRAs that 

were specific to the Bank Secrecy Act, were you surprised by the 

number? 

Mr. STIPANO. Yes. 

71 

Senator LEVIN. And did you also learn that there had been two 

recommendations that cease and desist orders be issued against 

HBUS? 

Mr. STIPANO. I did learn that, but I do not recall whether I 

learned that following that meeting or if I learned that subsequently. But I was not aware of that, to my knowledge, prior to 

that meeting. 

Senator LEVIN. Did anyone ever explain why the Supervision Division never tried to elevate the issue and take some kind of regulatory action? 

Mr. STIPANO. I do not recall anybody explaining that to me. I 

think that judgments were made by bank supervision that the matter did not rise to the level of warranting a cease and desist order 

or another enforcement action up to that point. 

Senator LEVIN. And what was your reaction to that? 

Mr. STIPANO. I was very concerned. I think that learning what 

we learned both through our discussions with the law enforcement 

agents and what we learned from the examiners following the 

meeting, it was apparent to me that there was a serious problem 

in the BSA/AML area and that it needed to be addressed promptly. 

Senator LEVIN. Did you start an investigation in which both the 

Legal and Enforcement Divisions got involved at that time? 

Mr. STIPANO. Yes. I do not have precise dates, but shortly—— 

Senator LEVIN. About that time? 

Mr. STIPANO. Yes, shortly thereafter. 

Senator LEVIN. And did you then expand an ongoing AML exam? 

You set time tables, secured an order of investigation, helped craft 

the two supervisory letters to HBUS in 2010 which were the first 

to cite the bank for violations of AML laws and OFAC regulations? 

Did that happen? 

Mr. STIPANO. Yes, but there was an ongoing examination into the 

banknotes area, and this was something that the agency became 

concerned about following an enforcement action at Wachovia that 

concerned banknotes and bulk cash services. So the examiners 

were already looking into it, but I think that the consequence of 

the meeting with law enforcement and the information that we obtained at that time was to expand the examination and open a formal investigation. 

Senator LEVIN. Why did the Legal Department and the Enforcement Department have to get involved before some regulatory action was taken? Was that ever explained to you? 

Mr. STIPANO. I think that if we are talking about actually doing 

an investigation or taking an enforcement action, that really cannot be done without the participation of lawyers. Our investigations involve issuance of subpoenas, subpoenas for documents, and 

subpoenas for testimony. It is not something that examiners can do 

on their own, and the same thing with our enforcement actions. 

The document is a legal document. It is legally enforceable. The respondent bank or individual has due process rights. So the Legal 

and the Enforcement Division need to be involved. 

Senator LEVIN. But apparently, your level and the enforcement 

folks were not contacted until after the OCC was contacted by law 

enforcement agencies in the midst of a criminal investigation involving the bank. So you had all of this background, having all of 

72 

these unresolved issues, important issues, but yet you were not 

contacted and you just point out how important it is that the Legal 

Department and the Enforcement Department be contacted before 

some regulatory action was taken. But until that time, with all of 

the problems that were identified in the exams, which had been recurring and mounting for years, it did not reach your level, is that 

correct? 

Mr. STIPANO. That is basically correct. I mean, there could have 

been incidental contact. There could have been discussions. There 

is a senior counsel of the Law Department who works for me that 

is on the Large Bank Review Team. His role in that capacity is to 

review supervisory letters and conclusion memos. So it was not like 

nobody in the Legal Department ever spoke to anybody in Large 

Banks. But in terms of actually getting a referral or being brought 

in in order to conduct an investigation or take an action, that did 

not happen prior to 2009. 

Senator LEVIN. So, Mr. Curry, this was not a case where OCC 

examiners failed to do their job, by the way. They were identifying 

the AML problems at HBUS all along the way. The higher-ups 

were overly passive. They were waiting until the problems grew 

into a very huge one before taking any action, before there had to 

be criminal investigations that were begun, before there was any 

real referral to the enforcement folks or the legal folks. 

Now, you are new there. You are only there a couple months, so 

you may not know the answer yet to this question, but when a 

bank is exhibiting the kind of problems that this bank showed, the 

problems that continually occur in multiple business lines, do you 

not believe that the OCC should take some type of regulatory action before those problems become so great that they are the subject of a criminal grand jury, for instance? 

Mr. CURRY. One of the most troubling aspects of the Subcommittee’s report really is the issue of our ability to identify and act upon 

the cumulative effect of BSA/AML deficiencies and that is an area 

that I would like to see much greater clarity as to the posture of 

enforcement at the agency, and also is the rationale for the expansion of the Large Bank Review Team’s mandate to actually be the 

vehicle to look at the entire compliance posture of our largest institutions to take a holistic view and to react accordingly. 

Senator LEVIN. Are you ready, Senator Coburn? 

Senator COBURN. Yes. 

Senator LEVIN. OK. Senator Coburn. 

Senator COBURN. I apologize for being absent during your opening statements and your questions, so if I get ready to repeat a 

question that was already asked, I hope you will stop me. 

Senator LEVIN. Well, you may be getting a better answer. One 

never knows. [Laughter.] 

I think the answers have been responsive. I should not suggest 

otherwise. 

Senator COBURN. This is for Mr. Curry, how do you respond to 

the charge that the OCC, by giving such high scores to HSBC for 

so many years, became an enabler because it gave false comfort? 

Mr. CURRY. I think, again, judging on what I am familiar with, 

the Subcommittee’s record and from the information I have determined as Comptroller, the agency has been much too slow in reVerDate Nov 24 2008 14:41 Nov 19, 2012 Jkt 076061 PO 00000 Frm 00086 Fmt 6633 Sfmt 6633 P:\DOCS\76061.TXT SAFFAIRS PsN: PAT
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sponding and addressing what are significant weaknesses or violations at this institution. And going forward, I would hope that we 

would be much more nimble and take into account the entire picture, what we are looking at in terms of compliance. 

Senator COBURN. Knowing what you know now, I mean, what 

this Subcommittee’s report has exposed and what also was known 

by you at times, is it a matter of being nimble and more responsive, or is it a matter of competency? 

Mr. CURRY. I believe it is really a matter of being more nimble 

and recognizing the importance of BSA/AML compliance as both a 

national interest and in terms of it being a significant and serious 

safety and soundness issue. And my hope is that, going forward, 

we will react accordingly, which requires direct and progressive remedial action as supervisors. 

Senator COBURN. So have some of those actions taken place now? 

Mr. CURRY. Yes. We have begun to already implement the specific recommendations of the Subcommittee. We are also taking an 

independent look at how we recruit, train, our policies, and also 

how we can improve our coordination with both our fellow bank 

regulatory agencies and with law enforcement agencies. This is an 

opportunity for us to look at the big picture of how we are implementing our responsibilities under the Bank Secrecy Act and AML 

statutes. 

Senator COBURN. This kind of reminds me, but on a much larger 

scale, of the Homeland Security Oversight Subcommittee and Federal Financial Management Subcommittee in terms of the Defense 

Audit Agency. And what we found there is they never hired new 

blood. It was all promoted from within. And the vast majority of 

those auditors never had real experience auditing, and so you kind 

of got a downward trend of the least favorable aspects as they promoted people with lesser and lesser experience and no variety of 

their experience. 

How do you go about hiring people now? 

Mr. CURRY. It is a challenge to obtain people with the requisite 

skills that you need to assess bank operations and the specific legal 

requirements and regulatory requirements of the BSA and AML. 

That being said, I am committed in renewing a real effort to attract 

competent personnel from both within and outside the agency. 

Senator COBURN. Would not one source be people who have been 

very good at figuring out how to duck your issues and having them 

work for you? 

Mr. CURRY. Yes, and that is part of our training. We do seek to 

understand or have presentations by individuals who have experience with how the criminal element exploits our Bank Secrecy Act 

and AML—— 

Senator COBURN. Well, I was not talking about the criminal element. I was talking about the people who were on the other side 

on compliance in terms of recruiting them. 

Mr. CURRY. Yes, that would be a source of personnel. 

Senator COBURN. A lot has been said in our report about HSBC 

allowing drug cartels and terrorists to move money through its 

banks. Since you all knew all of this was happening and did not 

stop it, are you not somewhat complicit in it? 

74 

Mr. CURRY. I deeply regret that we did not act sooner and more 

decisively. 

Senator COBURN. So is that a yes? 

Mr. CURRY. Yes. Absolutely. 

Senator COBURN. This is a little harder question. Take a little bit 

longer time. But with as much specificity as possible, can you explain what a good AML system within a bank should look like? 

And I am not talking about pillars or principles. I am talking about 

the actuality of what a bank—what would you all ideally—I know 

what your regulations say. I know what we have recommended. 

What would you, if I came to you and I had a 150-bank operation 

and it is international and I said, what should my AML look like, 

what would you tell me? 

Mr. CURRY. I think the No. 1 principle or attribute would be having management and the board being committed to developing and 

funding a BSA/AML program that was appropriate for the business 

activities of that institution. That is probably the No. 1 thing. And 

then in a successful program, all other requirements would flow 

from that—hiring competent personnel with the requisite experience to implement a credible program, building the management 

information systems that are necessary to monitor BSA/AML activities, as well. And at the end of the day, it is a corporate commitment to compliance. 

Senator COBURN. Did you happen to hear Ms. Dorner and Mr. 

Levey’s testimony today? 

Mr. CURRY. I was able to hear the tail end of their testimony. 

Senator COBURN. Do you think they have put in place a good 

AML system? 

Mr. CURRY. That is our expectation as their primary supervisor. 

Senator COBURN. But based on what they said here today, is it 

your belief, if they carry out what they have said here today, that 

they will have a great AML system? 

Mr. CURRY. I would hope that is the case. I think we are in the 

position as their supervisor that we need to verify that and I do 

not believe we are in a position to do that right now. 

Senator COBURN. OK. So how do you know when somebody has 

a good AML system? 

Mr. CURRY. Personally, as the Comptroller, I am relying on the 

expertise and the supervision programs of our examinations staff. 

Senator COBURN. And so who directly under you is responsible 

for that? 

Mr. CURRY. The Senior Deputy Comptrollers of both our Large 

Bank Division and our Mid-Size and Community Bank Divisions 

are the primary people responsible for our BSA examination programs. We also have, which Mr. Stipano mentioned and I mentioned in response to an earlier question, a Large Bank Review 

Team, which is really the Washington-based clearing function for 

making sure that there is coordination and consistency within our 

supervision programs, and especially in the area of enforcement. 

Senator COBURN. I would be interested if you would get the videotape of Ms. Dorner and Mr. Levey and share with the Subcommittee your thoughts in terms—I know you have to prove and 

make sure, that is your responsibility, but I would love to hear 

your thoughts about what they said they were doing, how they 

75 

were doing it, how they were implementing it, how they were doing 

clawbacks, how they were holding people accountable, and how 

they were trying to change the culture within their organization. 

Mr. CURRY. I would be happy to do that, Senator, and to get back 

to you. 

Senator COBURN. Thank you. 

Ms. Dailey, our investigation found in 2007 that examiners recommended the OCC take formal enforcement action against HBUS 

for weakness in how it monitored how its pouch services report. 

That is on page 304. But the OCC decided to take no such action. 

Do you recall that? 

Ms. DAILEY. To the best of my recollection, that recommendation 

did not reach me. 

Senator COBURN. OK. Do you have any idea how high up it got? 

Ms. DAILEY. Generally, what would happen is an examiner would 

make a recommendation and present that to an Examiner in 

Charge. I do not know if that happened or not. 

Senator COBURN. Well, that would seem to suggest to me that 

some of the same problems are going on at the OCC that were 

going on at HSBC. We heard testimony from our first two panels 

of what was not happening, where information was not flowing 

that should be flowing, some of it for profit motive, some of it from 

incompetence. Is it possible that line-level examiners thought a 

tough enforcement action was needed but were overruled by their 

supervisors? 

Ms. DAILEY. I do not know that. I do not have any knowledge to 

that effect because it did not come to me. It could have been presented to the Examiner in Charge and they could have made a different determination once looking at the facts. Oftentimes, when 

the examiners make determinations, they sit down with the Examiner in Charge and go through the different criteria and the different facts and they could come to a different conclusion. I do not 

know that, though, because I was not part of any of those types of 

discussions. 

Senator COBURN. All right. And it is easy for us to arm chair 

quarterback it now, looking backwards, and I understand that. 

Does the agency or did the agency have any processes in place 

to make sure all proper enforcement actions were handled consistently across the various banks that OCC regulated? 

Ms. DAILEY. Yes. We have what we call a WSRC process in place, 

and what happens is whenever an enforcement action, whether it 

is informal or formal, is recommended, it goes through the examination team. It would be presented to the Large Bank Review 

Team. If the Large Bank Review Team agreed with those findings, 

it would be presented to the WSRC committee, and that committee 

is made up of members of across our agency in supervision, policy, 

enforcement, etc., and that committee is a recommending body for 

an informal or formal action and the final decision would be made 

by a Senior Deputy Comptroller. 

Senator COBURN. So as you look back through the past few years, 

where do you think you all have failed? I mean, just an honest assessment of where was our management not good? Where was our 

quality of instruction and direction, where were our employees not 

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lem here. Everybody agrees with that. So from just your viewpoint, 

where you sit, where do you think the problem was? 

Ms. DAILEY. I think we did a lot of work. We did a lot of examinations. We found a lot of issues. We received some corrective action along the way. But we did not probably step back as well as 

we should, and with the benefit of hindsight, we could have and 

should have taken action sooner. 

Senator COBURN. Mr. Chairman, that is the kind of answer we 

get all the time. The fact is, is what that means is things are going 

to be repeated, and what our whole goal is, is so that things are 

not repeated. 

Mr. CURRY. Senator Coburn, I think from my perspective as 

Comptroller, I really want to address the same issues that you 

asked me to look at how HSBC was addressing. I want to have a 

culture at the OCC in which examiners feel free to voice documented, well founded concerns about the performance of the banks 

that they are examined, to know that those concerns are going to 

be fairly and thoroughly reviewed, and at the end of the day, the 

appropriate action or, in some cases, inaction will be taken by the 

agency as a whole. 

Senator COBURN. So what happens right now when an examiner 

feels strongly that some action needs to be taken and the person 

in charge of that examination disagrees? Where is the outlet pressure for somebody to appeal without it costing them? 

Mr. CURRY. I would encourage them and they have the opportunity to appeal to me. We also have review functions, whether it 

is in the case of BSA and the Large Bank Review Team, or to contact our Committee on Bank Supervision or any one of the senior 

members of the agency. 

Senator COBURN. So how many times has that happened? 

Mr. CURRY. In my short tenure, I am not aware of that number. 

Senator COBURN. Has it happened? Has anyone called you? 

Mr. CURRY. No one has called me specifically, but I want to create a culture at the OCC, or to reinforce a culture that we are here 

to be bank supervisors and that we are to be fair and reasonable 

in how we approach that. But at the end of the day, we are to do 

what we are being paid to do. 

Senator COBURN. All right. I have gone over time. It is yours. 

Senator LEVIN. How many months have you been there? 

Mr. CURRY. A little over 3 months. 

Senator LEVIN. All right. Well, I would believe that in the next 

3 months, you will be getting some phone calls and it is important 

that line of communication be kept open, that people be able to appeal denials of their strong urgings after notifying their supervisor 

that they are going to do it. You have to be able to go around your 

supervisor, and if they do it privately, without notice to the supervisor, I guess they would become a whistleblower at that point and 

they have to be protected under our whistleblower laws because the 

stakes here are just too huge and the failures here are too massive 

to allow them to be repeated. 

My own belief is that part of the reason has been a culture, but 

the other part is that there has been just a lack of accountability. 

It was true, at least, inside this agency. 

77 

This is not a matter of hindsight, by the way. I would disagree 

with you here, Ms. Dailey. This is where at the time things were 

known and were not acted on. And that is what is so troubling 

here. We obviously want to use hindsight to improve. We always 

can use hindsight to benefit us. But what we have seen throughout 

this hearing today is that at the time, contemporaneously with 

these events, that there were people who knew better. There were 

sometimes efforts made that were ignored and squelched. But it is 

not just a matter of with the benefit of hindsight here. 

The testimony that you have given us today, Mr. Curry, is that 

the agency is reviewing the matter in which MRAs are reported to 

ensure that banks with high numbers of MRAs will receive additional supervisory attention and consideration of formal enforcement action and I would like to get some additional details on this 

matter, who is going to be involved in this revised approach, looking at matters requiring attention when there are a number of 

these that are issued. Who is going to be looking at it, just supervision, or are the Legal and Enforcement Divisions going to be in 

the mix? Give us some details on how this is going to work. 

Mr. CURRY. Initially, we are looking to expand the mandate of 

our Large Bank Review Team to take on that function. That is our 

initial response to the report’s findings. My hope is that we will 

have additional recommendations after we look at this matter further, as we examine our policies and procedures. There may be a 

more effective measure that we will employ. In any event, I will endeavor to keep this Subcommittee informed of the improvements 

that we will be making on an ongoing basis. 

Senator LEVIN. So that the enforcement folks and the legal folks 

are going to be involved in this new process early? 

Mr. CURRY. That is the intention. 

Senator LEVIN. Is the revised approach going to have some sort 

of thresholds that they are going to apply, maybe to different time 

frames, such as how many MRAs in a month, how many MRAs in 

a year, and so forth? 

Mr. CURRY. I cannot say that we will come up with an arithmetical floor, but we will have a process that looks at the totality of 

circumstances of which the number of MRAs will be a critical factor. 

Senator LEVIN. The Subcommittee investigation found that in 

some instances, the conclusion memos of exams at HBUS were a 

lot stronger than the supervisory letters that were sent to the 

bank. So in those instances, the real message about the seriousness 

of problems was not being delivered to the bank. Is your Large 

Bank Review Team going to get better information now than in 

prior years? 

Mr. CURRY. That particular practice has already been corrected. 

Both the conclusion memo and the supervisory letter draft will be 

reviewed by the Large Bank Review Team. 

Senator LEVIN. I am also encouraged by your testimony today 

and by the OCC’s willingness to look for ways to improve the exam 

supervision, and here is what our report noted, that there are some 

practices at the OCC that depart from the practices utilized by 

other Federal bank regulators, and more importantly, seem to act 

as a barrier to your examiners, your AML examiners. Those barVerDate Nov 24 2008 14:41 Nov 19, 2012 Jkt 076061 PO 00000 Frm 00091 Fmt 6633 Sfmt 6633 P:\DOCS\76061.TXT SAFFAIRS PsN: PAT
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riers made it difficult for your AML examiners to get the appropriate attention of their supervisors when AML problems were 

quite evident. In your testimony, you acknowledge that your agency 

does differ from other agencies with respect to including AML 

exam findings in the consumer compliance exam process and you 

are going to correct that. 

By the way, has anyone explained to you exactly why the antimoney laundering was inserted into customer compliance examinations and ratings? That was a longstanding process. It did not 

occur by happenstance. We are delighted today to hear that you are 

correcting that. Your testimony is very clear on that, that you are 

going to now follow the same practice that other examiners do in 

this regard. 

But was it ever explained to you why it was part of the customer 

compliance ratings? 

Mr. CURRY. I did ask why we deviated from the other Federal 

bank regulatory agencies in that regard. Personally, my view is 

that BSA/AML is a significant or serious safety and soundness 

issue and that it is appropriately addressed by looking at it in the 

context of the management component in the CAMELS rating system and that policy has been adopted at the agency already and 

we are simply in the process of communicating that decision and 

making appropriate changes to the examination procedures for our 

staff. 

Senator LEVIN. And when will the new AML exam process take 

effect? Will it take effect immediately? 

Mr. CURRY. It is immediate. There will be some lag in communicating the actual procedures to staff, but we will, again, keep you 

informed on that process, if you would like. 

Senator LEVIN. So the exams are going to be considered this year 

when assigning CAMELS management ratings? 

Mr. CURRY. Yes, as soon as possible. I would expect it to be sooner rather than later. 

Senator LEVIN. A matter of months? 

Mr. CURRY. Yes. Less than that, hopefully. 

Senator LEVIN. Good. Might this have implications for the current rating at some banks, including HBUS? 

Mr. CURRY. I believe our position is that serious and significant 

BSA violations should be presumptively a factor in an adverse 

management rating. 

Senator LEVIN. All right. And if it applies, if it has an impact on 

HBUS, so be it? 

Mr. CURRY. So be it. 

Senator LEVIN. The Subcommittee report also recommended that 

the OCC cite violations when a bank fails to meet any one of the 

statutory minimum requirements for an AML program. You state 

in your testimony that the OCC is going to ‘‘revisit its current approach in order to provide more flexibility for individual pillar violations to be cited.’’ Can you give us just a little bit more detail on 

what you mean by ‘‘revisiting our current approach’’? 

Mr. CURRY. We are looking to broaden the range and types of 

violations that examiners will be reporting in the reports of examination and in supervisory communications. The only reservation 

that we stated was we want to make sure that where there are 

79 

program violations, that is clear that they will result in a mandatory cease and desist order. 

Senator LEVIN. OK. Senator Coburn. 

Senator COBURN. Just a few more questions. Ms. Dailey, in September 2009, OCC officials, including you, met with officials from 

DHS, Immigration and Customs Enforcement who were investigating money laundering. After the meeting, the lead AML examiner for HBUS said he had twice recommended cease and desist orders against HBUS for AML weaknesses. Do you recall that? 

Ms. DAILEY. I recall the meeting afterward and I recall the gentleman discussing the MRAs. I do not recall whether he discussed 

or mentioned that there had been previous recommendations or 

not. 

Senator COBURN. Yes. So you cannot tell me whether that was 

an accurate statement he made to us? 

Ms. DAILEY. I do not recall that part of the conversation. 

Senator COBURN. Well, Mr. Stipano, a memo following that September 2009 meeting states that when learning of the cease and 

desist recommendations that were not followed, you said you were 

unaware of the recent history of HBUS and that you requested the 

thorough review. Is that right? 

Mr. STIPANO. Yes. My recollection, and Senator Coburn, we did 

talk about this a little bit when you were out of the room—— 

Senator COBURN. All right. 

Mr. STIPANO. But my recollection of it was that following the 

broader meeting with law enforcement, we had a smaller internal 

meeting and I learned at that point for the first time about the 83 

MRAs. I do not recall whether I also learned at the same time that 

there had been past recommendations for cease and desist orders. 

I did learn that at some point subsequent to that. It could have 

been at that meeting. It could have been later. I just do not remember. 

Senator COBURN. But the fact is, there were recommendations 

made for cease and desist orders from examiners, correct? 

Mr. STIPANO. We know that now. 

Senator COBURN. Yes. 

Mr. STIPANO. Yes. 

Senator COBURN. So back to Mr. Curry. Here is a prime example 

where recommendations were made and got squelched, essentially. 

Somebody made a decision that it was not going to happen. To me, 

I would use that as one of the learning models. Here is what we 

do not want to happen in the future, so here is how our policies 

and procedures are going to make sure this does not happen, because you obviously had a problem. Everybody agrees there was a 

problem. The examiner made probably the right recommendation, 

except nothing happened on it. The whole purpose of this is to 

learn, to get better, and to make the changes so that does not happen. Any disagreement with that? 

Mr. CURRY. No, none at all, Senator Coburn. I think it is important as a supervisor that when we detect significant weaknesses in 

any program, particularly BSA/AML, that the sooner that we take 

appropriate remedial action or corrective action, the better all of us 

are, both the institution, the agency, and the public. 

80 

Senator COBURN. You made an offer to communicate with this 

Subcommittee on your progress. I would hope that as you do that, 

that situations like this are specifically addressed. Here is what we 

have done to make sure that this does not happen. Here is the policies and procedures. And I know this is not easy stuff that you are 

tasked with. Let me say I understand that. But it also is not rocket 

science and key management metrics and culture change to where 

somebody can scream, something is going wrong here, and it is 

heard all the way to the top. 

Mr. CURRY. I agree with you completely, Senator Coburn. It is 

also clear that, from the top, that we be clear as to what the objective is and what the expectations are, and that is something that 

I intend to do, and to do forcefully. 

Senator COBURN. All right. I think my staff tells me the rest of 

this has been pretty well covered by you. And you have talked 

about the conflict of interest on bank examiners, on examiners 

while I was gone? 

Senator LEVIN. No. 

Senator COBURN. Well, let us just do that for a moment. Earlier 

this month, the Treasury Inspector General released a report detailing significant ethical breaches by an OCC national bank examiner. And I will not go into what those are, but the breaches occurred at times when he was supposed to be examining their bank 

and he was off doing something else other than that. Also, it was 

noted that he was dishonest on time sheets, etc. 

Based on this one finding, have you had time to look into this 

and to say, is this an isolated incident or is this occurring more 

than we might think, and does this put our examinations at risk? 

Mr. CURRY. This particular conduct, which I just recently became 

aware of, is totally unacceptable and reprehensible conduct by a 

bank examiner, and what I find particularly troubling is the potential for disrepute that it places on the many fine people, the 3,600 

people who work for the OCC. That is not our standard of ethical 

conduct. We take great pains to advise and to educate our staff 

about what conduct is expected from a bank examiner, particularly 

given the significance of their duties as examiners. So it is troubling to me. 

The preliminary information I have been able to gather from the 

Treasury IG data is that this appears to be a very isolated case. 

There were only six cases that were reviewed by the IG. And I 

might add that in this particular case, the agency itself referred it 

to the Inspector General of the Treasury to investigate. But only 

three of those six had any merit, and that was over a 3-year period. 

That is not the conduct that I or my colleagues at the OCC expect 

of an examiner. 

Senator COBURN. It speaks well for you, because the complaint 

was initiated by one of your other examiners and so there was responsiveness on the part of the OCC to that complaint. 

Mr. Chairman, I yield to you. 

Senator LEVIN. Thank you very much, Senator Coburn. 

Just a few more questions from me. The question was raised 

with the earlier panel about whether HBUS is complying with the 

2010 cease and desist order which was issued in October of that 

year. Article 9 of the order required the bank within 180 days to 

81 

install, test, and activate a new wire transaction monitoring system. I understand that there was a supervisory letter which was 

written by the OCC on May 25 of this year informing the bank that 

it was not in compliance with the order and you identified two 

MRAs that instructed the bank to address deficiencies. The two 

MRAs instructed the bank to implement an effective AML automated monitoring system and an effective automated alert risk 

scoring prioritization function to identify the more important 

alerts. 

They were supposed to do that in 180 days. It is now 2 years 

later. Are the bank’s deficiencies in how it is monitoring for suspicious activity a problem as far as the OCC is concerned? 

Mr. STIPANO. Chairman Levin, you are correct that the OCC did 

recently issue a supervisory letter that cited the bank for noncompliance with an article of the cease and desist order concerning 

their automated monitoring system for wire transfers. That is a 

matter that we are currently reviewing along with other current 

examination findings and will be taken into account in any subsequent enforcement actions that we may take. 

Senator LEVIN. Now, another article of the consent order required that the bank retain one or more independent consultants 

to conduct an independent review of account and transaction activities, a so-called look back, to determine whether suspicious activity 

was timely identified by the bank and, if appropriate, suspicious 

activity reports were timely filed with law enforcement. Are you 

satisfied that the requirement has been met? 

Mr. STIPANO. My understanding is that we are presently looking 

at all areas of potential noncompliance with the cease and desist 

order and we are in a process right now of making some determinations and we will take appropriate action. 

Senator LEVIN. Article 8 of that order required that the bank develop and implement appropriate policies and procedures for gathering customer due diligence for new and existing accounts. As part 

of that requirement, the OCC directed HBUS to identify accounts 

opened for offshore banks, in other words, for banks with a license 

that prohibits them from conducting banking activities with citizens of or with the local currency of the country which issued the 

license. I understand that the bank identified having accounts for 

57 offshore banks, of which it will close 23 and keep 33. Has the 

OCC reviewed that effort, and how high of an anti-money laundering risk is attached to those 33 banks? 

Mr. STIPANO. Chairman Levin, I am really not in a position to 

discuss details of the bank’s compliance beyond what I had said 

earlier. We are in the midst of a civil money penalty proceeding. 

We will be looking at the total record of compliance with the document in making our determinations. 

Senator LEVIN. Also, will you give us for the record, then, also 

whether you have reviewed these accounts where there is a socalled politically exposed person because in your order you required 

that the bank’s ‘‘know your customer’’ program identify and conduct an enhanced due diligence review of all accounts opened for 

political figures, which are referred to internationally as politically 

exposed persons. Will you give us for the record the status of that 

effort? 

82 

Mr. STIPANO. I cannot report on the details. I can tell you that 

our examiners, our supervisory staff, and our enforcement attorneys, are very much focused on the level of compliance with our 

document. We will do a thorough review and we will take appropriate action. 

Senator LEVIN. And will you let us know what that leads to? 

Mr. STIPANO. Yes, sir. 

Senator LEVIN. Has HSBC established an effective program to 

identify the beneficial owners of any bearer share accounts? 

Mr. STIPANO. I think that is something that we need to determine. 

Senator LEVIN. OK, and you are going to let us know that? 

Mr. STIPANO. Yes, sir. 

Senator LEVIN. Why should banks open accounts for bearer share 

corporations? Maybe I should ask you, Mr. Curry. Or any one of 

you can answer it. 

Mr. CURRY. Given the high-risk nature of those accounts, I do 

not know. 

Senator LEVIN. Will you take a look at that whole issue because 

it sort of continues. They have said they have taken some steps, 

and I take their word for it. The steps that they identified this 

morning were that they are going to hold those shares in escrow 

or put them with an agent, I believe they said, who would be a reliable agent. But there is a waiver provision in there and that waiver provision is an easy loophole, I am afraid. I did not ask the 

panel about that at the time. I forgot to do that, and I can ask that 

for the record, as a matter of fact. But take a look at that issue 

and see whether or not the loophole in that new step that they are 

going to take is acceptable to the OCC. 

Mr. CURRY. Yes. I would expect that would be a focus of our ongoing supervision. 

Senator COBURN. Mr. Chairman, I would just add one point. It 

is interesting. We have already established the fact that there was 

some complicity with OCC and HSBC. But there is some irony in 

the fact that this organization that is now going to fine them, I 

wonder who is going to fine you? 

Mr. CURRY. No, in terms of accountability, I am accountable and 

I will hold myself accountable and I know you will hold me accountable. Also, I want to emphasize that the vast majority of the 

people at the Office of the Comptroller of the Currency, particularly 

the supervisory personnel, are committed. They are very proud to 

be commissioned national bank examiners and that pride—we will 

appeal to that pride to make sure that it is evident in the work 

that we do going forward. 

Senator COBURN. I guess my point is, is there is no financial consequence when we have an agency responsible for something and 

yet fails, but there is a financial consequence to the people that 

were regulated by the agency that actually failed to do what the 

agency was supposed to hold them accountable not to do. That was 

the only point I was making. 

Senator LEVIN. I agree with that and I also agree that Congress 

has responsibility, too, in our oversight. 

Senator COBURN. And that is why we are here. 

83 

Senator LEVIN. That is exactly what this Subcommittee is about 

and other committees and subcommittees are involved in and 

should be involved in. The oversight function is critically important 

and that is our responsibility, to bring about accountability through 

oversight. But it has been missing in many places and in many 

places where it deserves to be applied. That is one of the results, 

I hope, of these hearings and what our Subcommittee has tried to 

do over the years is to promote accountability wherever it needs to 

be achieved. 

I do not have any further questions. Do you have any further 

questions, Senator Coburn? 

Senator COBURN. No. 

Senator LEVIN. Let me just summarize very briefly, and that is 

that we have seen today what the problems are, and our staffs, 

both of them working together so beautifully as they do, have put 

together a powerful report, a compelling report and it speaks for 

itself, but we have tried to summarize the best we could here 

today. 

HBUS and HSBC have made commitments to improve in a number of ways. They have improved by a big increase in the number 

of compliance personnel. The compliance resources have been increased. The affiliate due diligence requirements that they are putting in are extremely important. They sure were missing in the history so far. They have closed 325 correspondent accounts, including 

those accounts of 55 banks in sanctioned countries, such as Iran, 

Syria, and North Korea. They closed the Cayman accounts, and 

that is a real beginning of some action against these kind of hidden 

accounts kept secret from the world that can be put to such dubious purposes as we have seen here today. We have seen, in other 

words, the beginning, we hope, of the cleanup of this global bank, 

and if it happens, it is going to strengthen protections for people 

in countries around the world. 

The OCC has agreed to strengthen its anti-money laundering 

oversight. It is going to treat the failures as safety and soundness 

problems, not just consumer compliance problems. That is going to 

have a very strong impact and a deterrent impact on our banks. 

It will cite statutory violations for banks that fail to meet the requirements for the four mandatory components of an AML program. It has agreed as part of its strengthening of anti-money 

laundering oversight to have a large bank review whenever a bank 

hits a threshold of a certain number or approximate number of 

MRAs or violations. 

So if everybody carries out the violations—excuse me. If everyone 

carries out the commitments—they have already carried out the 

violations, so if folks carry out all the commitments which we have 

heard about here today, we are going to take a major step towards 

stopping terrorists, drug traffickers, and other wrongdoers from 

misusing and abusing the U.S. financial system for their nefarious 

purposes. 

I want to again thank my colleague and my friend, Senator 

Coburn, and our staffs for the way they worked together and put 

together an extremely powerful report and for helping us to understand a very complex area. 

84 

We want to thank you, Mr. Curry, because you have taken over 

a very difficult job. You have done it with gusto. You have brought 

in a real sense of newness and a freshness, a determination to 

clean up that situation at OCC. 

And with that, I will turn to Senator Coburn to see if he has any 

comments. 

Senator COBURN. I just want to thank you all for your cooperation with us for your straightforwardness. What you have in front 

of you is not easy. Nobody ever said it was easy, but it is really 

important. So I take you, Mr. Curry, at your word that you are 

going to continue to communicate with this Subcommittee because 

decisive action and follow through—it is not enough to have a plan 

to fix this, you have to have a plan that gets executed and then 

monitored, and my hope is that we see a vigorous OCC that is the 

right amount, does not overreact but it is the right amount to do 

what we can do to stop some of the things that are going on that 

really only benefit those of criminal intent. So I thank you for your 

testimony and your time and your patience. 

Thank you, Mr. Chairman. 

Senator LEVIN. Thank you all. The record will be kept open for 

questions of this panel and all of our other panels and we will 

stand adjourned. 

[Whereupon, at 4:49 p.m., the Subcommittee was adjourned.] 

(85) 

A P P E N D I X 


760612.354

J;'OR IMMEDIATE RELEASE 

July 17,2012 

Contact: Tara Andringa 202-228-3685 

OPENING STATEMENT OF SEN. CARL LEVIN: 

"U.S. Vulnerabilities to Money Laundering, Drugs and Terrorist Financing: 

HSBC Case History" 

Today's hearing will examine the money laundering, drug trafficking, and terrorist financing 

risks created in the United States when a global bank uses its U.S. affiliate to provide U.S. 

dollars and aecess to thc U.S. financial system to a network of high risk affiliates, high risk 

correspondent banks, and high risk clients. 

Most international banks have a U.S. affiliate. They use it in part to compete for U.S. clients and 

business, but also to provide themselves with access to thc U.S. financial system. Global banks 

want access to U.S. dollars, because thcy are acccpted internationally, are the leading trade 

currcncy, and hold their value bcttcr than any other currency. They want access to U.S. wirc 

transfer systems. because they move money across internationallincs quickly, securely. and to 

the farthest comers of the earth. They want to clear U.S. dollar monetary instruments like 

travelers chcques. bank cheques, and money orders. And they want thc safcty, efficiency, and 

reliability that are thc hallmarks of U.S. banking. 

The problem here is that some international banks abuse their U.S. aceess. Some allow affiliates 

operating in countries with sevcre money laundering, drug trafficking, or terrorist financing 

threats to open up U.S. dollar accounts without establishing safeguards at their U.S. affiliate. 

Some operate in secrecy jurisdictions. Some allow poorly managed or corrupt foreign banks to 

make use of an aflliialc's U.S. dollar account. Others allow high risk clients to use those 

accounts without laking adcquate anti-moncy laundering steps. Some even allow their affiliates 

to pressure their U.S. cousin to ease up on U.S. anti-money laundering restrictions or look the 

other way when they spot suspicious activity. The end result is that the U.S. affiliate can 

become a sinkhole of risk for an entire nctwork of bank affiliates and their clients around the 

world playing fast and loose with U.S. banking rules. 

The consequences are the ones you would expect from operating a U.S. bank with inadequate 

safeguards against money laundering. The U.S. bank can end up aiding and abetting transactions 

that fund terrorists, drug cartels, corrupt dictators. and tax cheats. Because all of them want 

access to the U.S. financial system, too, and for the sarne rea~ons. Wrongdoers can use U.S. 

dollars and U.S. wire transfcrs to commit crimes, arm terror groups, produce and transport illegal 

drugs, loot government coffers, even pursue wcapons of mass destruction. That's why our 

country has made combating money laundering and terrorist financing a national security 

imperative. 
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For the last decade, this Subcommittee has contributed to thc battle against money laundering 

and terrorist financing by cxposing problems that increase U.S. vulnerabilities to abuse. In 2001, 

tor example, this Subcommittee released a report showing how U.S. banks that offer accounts to 

foreign banks, engaging in what is known as correspondent banking, can become conduits for 

illicit proceeds involving organized crime, drug trafficking, or financial fraud. Back then, most 

U.S. banks opened a cOD'espondent account for any foreign bank with a banking license. After 

our hearing, U.S. banks took a harder look and assessed the risks before opening a correspondent 

account. In 2002, Congress cited our hearings when enacting toughcr anti-money laundering or 

AML laws in the Patriot Act, including a provision making it a legal obligation for U.S. banks to 

conduct a due diligencc review before opening an account for a foreign bank. 

Tougher AML laws have helped deny criminals access to the U.S. financial system. But as the 

rcport we're releasing today shows. enormous problems remain. 

To illustrate those problems, today's hearing !ocLlses on a case study involving HSBC, one of the 

largest banks in the world. Headquartered in London, HSBC has a network of over 7,200 offices 

in more than 80 countries, 300,000 employees, and 2011 profits of nearly $22 billion. HSBC has 

been among the most aetivc banks in Asia, the Middle East, and Africa. It first acquired a U.S. 

presence in the 1980s; today its leading U.S. affiliate is HSBC Bank USA, known as HBUS. 

liB US has more than 470 branches across the United States and 4 million customers. 

lIBUS is the key U.S. ncxus for the entire lISBC worldwide network. In 2008, it processed 

600,000 wire transfers pcr weck; in 2009, two-thirds of the U.S. dollar payments HBUS 

processed camc from HSBC affiliates in other countries. One HSBC executive told us that a 

major reason why HSIlC opened its U.S. bank was to provide its overseas clients with a gateway 

into the U.S. financial systcm. 

Add on top of that, HBUS' history of weak anti-money laundering controls, and you have a 

recipe for trouble. In 2003, the Federal Reservc and New York State Banking Department took a 

formal enforcement action requiring HBUS to revamp its AML program. HIlUS, which was 

thcn converting to a nationally chartered bank under thc supervision of the Office of the 

Comptroller of the Currency, or OCC, made changes, but cven before the oec lifted the order in 

2006, the bank's AML program began deteriorating. In Scptember 2010, the OCC issued a 

Supervisory Letter, 3 I-pages long, describing a long list of severc AML deficiencies, and 

followed in October 20 I 0, with a Cease and Desist order requiring HBUS to revamp its AML 

program a second time. 

The OCC cited, among other problems, a massive backlog ofunreviewed alerts identifying 

potentially suspicious activity; a failure to monitor $60 trillion in wire transfers and account 

activity; a failure to examine risks at HSBC's overseas affiliates before providing them 

correspondent banking services; and a failure, over a three-year period, to conduct anti-moncy 

laundering checks on more than $15 billion in bulk-cash transactions with those same affiliates. 

To examine the issues, the Subcommittee issued subpoenas, reviewed more than 1.4 million 

documents, and conducted extensive interviews witi1 HSBC officials from around the world, as 

well as officials at other banks, and with federal regulators. liS BC has cooperated fully with the 

investigation. 

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The Subcommittec's work identified five kcy areas of vulnerability exposed by the HSBC case 

history. The five areas involve: 

• Providing U.S. correspondent accounts to high risk HSBC affiliatcs without 

performing due diligence, including a Mexican at1iliate with unreliable AML 

controls; 

• Failing to stop deceptive conduct by HSBC affiliates to circumvent a screening 

device designed to block transactions by terrorists. drug kingpins and rogue 

nations like Iran; 

Providing bank accounts to overscas banks with links to terrorist financing; 

Clearing hundreds of millions of dollars in bulk U.S. dollar travelers cheques, 

despite suspicious circumstances; and 

• Offering bearer-share accounts, a high risk account that invites wrongdoing by 

facilitating hiddcn corporate ownership. 

Let's take each in turn. 

High Risk Affiliate. First is the issue of high risk affiliates. IISBC operates affiliates in 80 

countries, including jurisdictions facing major money laundering, drug trafficking, or terrorist 

financing challenges as well as weak AML laws and oversight. Yet, until recently, lISBe's 

London-based parent company, known as HSBC Group, instructcd its affiliates to assume that 

every HSBC atTiliate met the group's AML standards and automatically provide it with 

correspondent banking services. 1-!BUS did as told and opened U.S. correspondent accounts for 

more than 80 HSBC affiliates. ignoring thc U.S. law requiring due diligcnce reviews before 

opening U.S. accounts for foreign banks. 

l-IBUS' dealings with an HSBC affiliate in Mexico illustrate the money laundering dangers. 

HSBC Mexico or "HBMX" operates in a high risk country battling drug cartels; it has had highrisk clicnts such as casas de cam bios; and it has offered high risk products such as U.S. dollar 

accounts in the Cayman Islands, a jurisdiction known for secrecy and money laundering. HBMX 

also has a long history of severe AML deficiencies. Add all that up and the U.S. bank should 

have treated HBMX, the Mexican affiliate, as a high risk account for AML purposes. But it 

didn't. 

Instead, BBUS treated HBMX as such a low risk client bank that it didn't even monitor their 

account activity for suspicious transactions. In addition, for three years from mid-2006 to mid2009. l-IBUS conducted no monitoring ofa banknotes account used by HBMX to physically 

deposit billions of U.S. dollars from clients, even though large cash transactions are inherently 

risky and Mexican drug cartels launder U.S. dollars from illegal drug sales. Because our tough 

AML laws in the United States have made it hard for drug cartels to find a U.S. bank willing to 

accept huge unexplained deposits of cash, they now smuggle U.S. dollars across the border into 

Mexico and look for a Mexican bank or cas a de cambio willing to take the cash. Some of those 

casas de cam bios had accounts at HBMX. HBMX, in turn. took all the physical dollars it got 

and transported them by annored car or aircraft back across the border to HBUS for deposit into 

its U.S. banknotcs account, completing the laundering cycle. 

3 
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Over two years, from 2007 to 2008, HBMX shipped $7 billion in physical U.S. dollars to BBUS. 

That was more than any other Mexican bank, even one twice IIBMX's size. When law 

enforcement and bank regulators in Mexico and the United States got wind of the banknotes 

transactions, they warned HBMX and I-IBUS that such large dollar volumes were red nags for 

drug proceeds moving through the HSBC network. In 2008, after warnings trom regulators, 

HBMX stopped taking large deposits of U.S. dollars, but for years, HBUS provided an easy 

gateway into our financial system for suspicious cash from a foreign afliliate. 

Circumventing OFAC. A second problem involves actions taken by some HSBC affiliates to 

circumvent a U.S. ban on bank transactions involving designated drug traffickers, terrorists, or 

roguc regimes such as Iran. To enforce that ban, the U.S. Treasury Department's Office of 

Foreign Assets Control, or OFAC, has developed a list of prohibited persons which banks use to 

develop what's known as an "OFAC filter" to identify and stop prohibited transactions. 

The Subcommittee found that, for years, HSBC affiliates in Europe and the Middle East acted to 

circumvent the or AC filter when sending U.S. dollar transactions involving Iran through their 

accounts at BBUS. Although they viewed these Iranian transactions as legal under a U.S. 

exception for so-called "U-turn" transactions, thc affiliates didn't want to triggcr the OFAC filter 

and undergo the individualized reviews required to make sure. So they stripped out or omitted 

any reference to Iran from the paperwork. An outside auditor hired by BBUS has found that, 

from 2001 to 2007, HSBC affiliates sent nearly 25,000 transactions involving Iran, worth $19.4 

billion, through HBUS and other U.S. accounts, while concealing any link to Iran in 85% of the 

transactions. 

HSBC's ChiefCompliancc Oflicer and other senior executives in London knew what was going 

on, but allowed the deceptive conduct to continue. While some HBUS officials in the United 

States claim not to have known they were processing undisclosed Iranian transactions, 

documents show kcy HBUS officials were informed early on. HBUS compliance and payments 

executives repeatedly told HSBC affiliates they had to use fully transparent Iranian transactions, 

but when faced with evidence that the affiliates were secretly circumventing the or AC tilter, no 

one in HBUS confronted those affiliates, brought the issue to a head, and forced thc transactions 

to the light. Problems also arose when somc HSBC affiliates tried to circumvent the OFAC filter 

to send potentially prohibited transactions involving other countries like Sudan or North Korea. 

or AC programs are aimed at exposing and disabling the financial dealings of some of the most 

dangerous persons and regimes in the world today, including terrorists, persons involved with 

weapons of mass destruction, drug tra11ickers, and rogue jurisdictions. The OFAC filter is the 

key to blocking prohibited transactions from polluting the U.S. financial system. Global 

financial institutions have a special responsibility to respect OFAC prohibitions, but that's not 

what happened here. While HSBC affiliates may have been aiming simply at avoiding 

processing delays, circumventing OFAC safcguards can also facilitate transactions undertaken 

by some of the world's worst wrongdoers. 

Disregarding Links to Terrorist Financing. A third issue involves the fact that HSBC is active 

in regions of the world with significant terrorism challenges, while demonstrating a worrisome 

willingness to do business with banks that have links to terrorist financing. One example 

involvcs Al Rajhi Bank, the largest private bank in Saudi Arabia. After the 9/1 I terrorist attack 

on the United States, evidence emerged that the bank's key founder was an early financial 

benefactor of al Qaeda and that it provided accounts to suspect clients. 

4 
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In 2005, HSBC Group told its affiliates to sever ties with the bank, while making an exception 

for HSBC Middle East. Four months later, without explaining why, HSBC Group reversed itself 

and said all of its affiliates could decide whether to do business with Al Rajhi Bank. HBUS 

chose to close its Al Rajhi accounts. Over the next two years, however, its own bankers and 

bankers from other HSBC affiliates pressed HBUS to resume tics with Al Rajhi Bank. In 2006, 

after Al Rajhi Bank threatened to pull all of its business from HSBC unless HBUS reinstated its 

U.S. dollar banknotes account, HSBC gave in. Ovcr the next four years, HBUS supplied AI 

Rajhi Bank with nearly $1 billion in U.S. dollars, stopping only when HSBC made a global 

decision to exit the banknotes business altogether. 

Clearing Suspicious Bulk Travelers Cheques, The fourth area of concern involves HBUS's 

willingness to clear suspicious bulk travelers cheques for foreign banks. From 2005 to 2008, on 

a regular basis, HBUS cleared $500,000 or more per day in bulk travelers cheques for Hokuriku 

Bank of Japan. Routinely, these cheques arrived in large stacks of sequentially numbered 

cheques signed and countersigned with the same illegible signature. Forced by the oce to 

investigate, HBUS found the Japanese bank could not provide any "know your client" 

information or explanation why two dozen of its customers, supposedly in the used car business, 

were ollen depositing $500,000 a day in U.S. dollar travelers cheques purchased from the same 

bank in Russia. Under oee pressure, IIBUS stopped clearing the travelers cheques in 2008, but 

kept open the correspondent account, despite the Japanese bank's poor AML controls. In less 

than four years, HBUS provided over $290 million in U.S. dollars to a Japanese bank for the 

benefit of Russians supposedly in the used car business. 

Offering Bearer Share Accounts. Finally. there is I-IBUS's willingness to offer accounts to 

bearer share corporations. These corporations are prime vehicles for money laundering and other 

illicit activity by providing anonymity through assigning legal ownership of the corporation to 

whomever has physical possession of its shares. Over a decade, HBUS opened accounts for 

2,000 such corporations. despite warnings by intcrnal auditors and outside regulators that the 

accounts posed high money-laundering risks. Documents show the actual account owners 

deliberately pressured the bank to help hide their identities. One such account was used by a 

father-son team of Miami Beach hotel developers who were later convicted of tax fraud for 

hiding $150 million in assets. 

Bearer share accounts, suspicious travelers checks, banks with terrorist financing links, hidden 

transactions dodging OFAC safeguards, and Mexican drug money - none of them represent the 

types of transactions we want in a U.S. bank. !fthe parent corporation of a global bank can't do 

a better job policing its affiliates, we shouldn't be providing a bank charter to their U.S. affiliate. 

lfthe U.S. affiliate can't do a better job of standing up to affiliate pressures and safeguarding the 

U.S. financial system, federal regulators should consider whether to pull its charter. 

HSBe Group recently issued a policy statement declaring that all of its affiliates would be 

subject to the highest AML standards among them; that its affiliates would start sharing 

infonnation to strengthen their AML defenses; and that all at1iliates would be subject to 

diligence reviews. HBllS has more than doubled the size of its AML compliance department, 

put in a new AML monitoring system, and closed over 395 high risk correspondent accounts. 

All good steps, but we saw this movie before in 2003. The recent commitments are surely 

welcome. Apologies and promises to improve are also welcome. But accountability for past 

conduct is essential, and that's what's been missing here. 
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Exercising Ineffective AML Oversight. It is bad enough that a single bank such as HSBC 

exposes the U.S. financial system to multiple money laundering risks. It is made worse when 

there is a failure of AML oversight by the OCC which is supposed to oversee our biggest banks. 

It is of great concern to the Subcommittee, and should be of great concern to every American, 

that the OCC tolerated the mounting AML problems at HBUS for five years, without taking any 

formal or informal enforcemcnt action. In addition, when the OCC decided the problems had 

gone far enough, it lowered HBUS' consumer compliance rating instead of its safety and 

soundness rating. Every other federal banking agency treats AML deficiencies as a matter of 

safety and soundness; only the oce treats AML ddiciencies as if they were a matter of 

consumer protection law. AML safeguards aren't aimed at protecting bank customers, but rather 

the entire American public from wrongdoers seeking to misuse the U.S. financial system. 

The OCe" s new leadership needs to move swiftly to correct the previous oversight shortfalls and 

assure that promised changes at HSBC arc implemented promptly and effectively. 

Our report contains ten recommendations to address the abuses we've identified. Among the 

most important: 

I-fEUS should identify which of its sister affiliates are high risk, subject them to 

enhanced monitoring, and in particular review whether it should close the account 

ofHSBC's Mexican at1iliate. 

• HBllS should beef up its OFAC compliance program by auditing at1iliate 

transactions to see if they are circumventing the safeguards that protect our 

country and other countries from terrorists, drug traftickers, and rogue 

jurisdictions. 

• I-IBUS should close accounts with banks suspected of involvement in terrorist 

financing, revamp its travelers cheque controls, and eliminate bearer share 

accounts. 

• HSBC should require aftiliates to share information to strengthen their AML 

defenses, and continue to beef up its compliance program which was given short 

shrift in the past. 

• At the OCe. the agency should follow the lead of other regulators and treat AML 

compliance as a matter of safety and soundness. 

• The new OCC leadership needs to get the OCC moving against money laundering 

by citing statutory violations, not just identifying failures as Matters Requiring 

Attention, in the face of AML deficiencies. 

Global banks have caused the world a lot of heartache. Our focus today is one global bank that 

failed to comply with rules aimed at combating terrorism, drug trafficking, and the money 

laundering that fuels so much of what threatens the global community. I want to thank my stafT 

for their extraordinary work, Ranking Republican Scnator Coburn for all his support and the 

work of his staft~ and tum to him now for his opening statement. 

6 
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Opening Statement of Senator Tom Coburn 

Hearing of the 

u.s. Senate Permanent Subcommittee on Investigations 

"U.S. Vulnerabilities to Money Laundering. Drugs, and Terrorist Financing: 

HSI3C Case History" 

July 17,2012 

I would like to thank Chairman Levin for holding this important hearing and for his 

tireless work to raise the issue of safety and soundness within the banking industry. 

I would also like to thank both the Office of the Comptroller of the Currency and HSBC 

Bank for their full cooperation in this investigation. The OCC provided a number of 

people for interviews as well as essential documents about the regulatory process. HSBC 

Bank officials likewise sat for dozens of interviews and handed over millions of pages in 

documents. Some oftoday's witnesses were flown in from posts around the world. 

As Chairman Levin laid out in his statement, the Subcommittee's investigation into antimoney laundering and anti-terror finance efforts at HSBC has covered quite a bit of 

ground. PSI examined in detail the types of vulnerabilities our nation faces from 

criminals and terrorists who want to take advantage and abuse our banking system and 

take away out freedoms. What we learned is that the United States faces unique risks, 

both because of our post-9/ll security needs and because of the strength of our l1nancial 

system. which attracts worldwide attention. 

Every day, countless transactions denominated in U.S. dollars oeeur around the world. 

This is good for our economy. which benefits from a strengthened currency and increased 

economic activity. But. criminals around the globe arc also drawn to U.S. banks, which 

ofTer the attractive option of making their illicit funds look legitimate. Ifthey can pass 

criminal proceeds through a U.S. bank unnoticed and untouched, the funds are unlikely 

ever to be Slopped or recovered. 

This hearing raises big and important questions. Banks want to obey the law. but also 

grow their businesses - what happens when the two conflict? Banks want to know their 

customers, but some customers want privacy - how do we resolve this? As we write 

AML policy, we should look for ways to get all boats rowing in the same direction, 

letting banks and government each do what they do best as we all work to combat crime 

and terror. 

At HSBC, we uncovered a number of troubling examples in which weak AML systems 

may have let criminal or terrorist funds pass through. In Mexico, for example, billions of 

U.S. dollars flowed from the HSBC affiliate in Mexico. The Mexico affiliate was the 

single largest exporter of U.S. dollars in Mexico to HBUS. U.S Law enforcement and the 
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2 

regulatory entities have concluded that because of the volume of money, it likely came 

from proceeds of the illegal drug trade. 

In another case, an Iranian bank was allowed to initiate U.S. dollar transactions that 

HSBC would process through the U.S. without cxplaining where they came from. At thc 

time. however, there were severe legal restrictions on any payments come from or going 

to Iran. most often meaning they would be manually inspected. HSBC's affiliate in 

London coached the Iranian bank how to get the payments through the U.S. without 

inspection, and simply requested the bank send transactions that would not violate U.S. 

law. In effect. it relied exclusively on an Iranian bank to comply with a law intended to 

catch payments from Iranian banks. The bank or the officials that made that decision 

were either naIve or willfully blind. 

This is why tough anti-money laundering laws are important, if illicit funds can be 

tracked and stopped, there are fewer places for criminals and terrorists to hide. And 

while our focus has been on the problems we found at ESBC Bank. we also have to 

emphasize that similar problems exist at other banks. For example, Citbank, Bank of 

America. Wachovia, Western Union and others have come under scrutiny for laundering 

drug cartels protits 

The purpose of this hearing. then, is not just to make an example ofHSBC, as ifit were 

an anomaly. Rather, this hearing is to help Congress understand just what kind of risks 

this nation faces, and what we should do to reduce them. Ifwe can get a better handle on 

the risks by looking closely at the operations of a single bank. we can write better laws 

and achieve our true goals: stopping crime and preventing terror. 

With that in mind. I believe there arc several lessons we can learn from the problems we 

uncovered at HSBC Bank. 

First, banks around the world operate under different laws, creating different sensitivities 

to money laundering. While this seems apparent, it was not clear how much this would 

affect a bank with worldwide affiliates until we took a closer look. In the case of HSBC, 

its bank in the U.S. operated difTerently even than its own affiliates in London, Mexico 

and Middle East. Failure to recognize this can lull us into thinking we can rely on foreign 

banks to carry out U.S. law. 

Second, bank regulators are sometimes better at identifying money laundering 

vulnerabilities than knowing how to tix them. Throughout this inquiry, it became clear 

the Office of the Comptrollcr ofthe Currency (OCC) was aware of many ofHSBC's 

AML weaknesses, which it frequently pointed out. It was often at a loss, however, to 

prescribe how HSBC could eliminate the weaknesses. And so its record of enforcement at 

HSBC resembles a lapdog rather a watchdog that we sorely need. 
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3 

We have also learned recently that investigators from Treasury's own Oflice oflnspector 

General have cited OCC personnel for unethical practices. The IG found an OCC 

examincr-in-charge accepted gifts. meals and even golf fees from executives at banks he 

was actively overseeing. This unfortunately was not an isolated incident, but other OCC 

employees were involved in other ethical violations. Taken together with our 

Subcommittee's findings in this investigation, these conflicts are startling and suggest 

Congress should give closer scrutiny to the OCC's actions. 

That purpose here is to stop criminals from hiding their illicit funds and preventing 

terrorists from having the freedom to plot and plan. The metrics we use to measure a 

bank's AML compliance need to focus less on form and more on substance - how well 

are we achieving this goal? 

This committee has shown the kinds of vulnerabilities we face. Too often what we found 

left us troubled. both for the risks to our nation and for the level of effort we saw to 

eliminate them. HSBC made its share of mistakes, and for which it is now being held 

accountable. 

But we must all remember that money laundering always begins with a crime, and this 

ultimately is what we mean to fight. To the extent that this hearing results in criminals 

and terrorists having fewer options to rob and harm the American public, we will count it 

a success. 

It may be impossible to stop all money laundering. Most of what we call money 

laundering in a certain context is a benign transaction in another. Buying travelers checks 

is innocent behavior for the tourist. but suspicious behavior when they are purchased in 

bulk by terrorists or drug lords. This does not mean we should not try to stop criminals 

from laundering their money through U.S. banks, but rather we need to do so wisely. 

I appreciate the efforts made at ESBC to improve their AML systems, and sincerely hope 

that they stick. I look fiJrward to hearing from their witnesses, as well as those from the 

OCC, and appreciate their appearance before us today. 
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TESTIMONY OF DAVID S. COllEN 

UNDERSECRETARY FOR TERRORISM AND FINANCIAL INTELLIGENCE 

UNITED STATES DEPARTMENT OF THE TREASURY 

BEFORE THE 

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS 

OFTHE 

SENATE COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS 

U.S. VULNERABILITIES TO MONEY LAUNDERING, DRUGS, AND TERRORIST FINANCING: HSBC 

CASE HISTORY 

JULY 17,2012 

I. Introduction 

Chairman Levin, Ranking Member Coburn, distinguished members of the Subcommittee, thank 

you for inviting me to testify today. I am pleased to have the opportunity to discuss the 

importance of the Department of the Treasury's efforts to identify and combat money laundering 

and terrorist financing vulnerabilities in the U.S. banking sector. I would also like to commend 

this Subcommittee for the leadership it has demonstrated historically and again today by 

focusing much-needed attention on these critically important issues. 

At the outset, it is important to recognize that the United States maintains one of the strongest 

and most effective anti-money laundering and counter-terrorist financing (AMLlCFT) regimes in 

the world. But the scale, efficiency and sophistication of the United States' financial systemparticularly its banking sector-make it a prime target for those who seek to conceal and move 

illicit money. This involves not just money launderers, of course, but terrorists, proliferators, 

drug lords and organized crime figures. who must, at some point, rely on the financial system to 

move or launder the illicit funds supporting or derived from their operations. 

Recent enforcement actions against financial institutions in the United States are a powerful 

reminder to us that challenges remain. To meet these challenges, we closely monitor evolving 

threats and work to adapt and strengthen our anti-money laundering and counter-terrorist 

financing and sanctions policies, regulations and authorities. This work is a key component of 

our government's national security efforts-it serves to protect the integrity of our financial 

system from abuse by terrorists, drug traffickers and other illicit actors and gives us tools to 

impede and halt their dangerous activities. 

Several primary authorities and activities drive the Treasury Department's work to combat 

money laundering and terrorist financing. They include our role through the Financial Crimes 

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Enforcement Network (FinCEN) as administrator of the Bank Secrecy Act (BSA), which enables 

us to impose special regulatory measures and requirements to combat money laundering and 

terrorist financing on a broad array of financial institutions. They also include authorities 

delegated to us by Executive Orders issued pursuant to the International Emergency Economic 

Powers Act (IEEPA) to impose financial and economic sanctions, based on all-source 

intelligence, to disrupt and dismantle illicit financial networks, such as those that support 

weapons of mass destruction, proliferation, drug traffickers, transnational organized criminal 

groups and terrorists. Given the maturity, scope and depth of the anti-money laundering and 

counter-terrorist financing regime today, Treasury works closely with its interagency partners in 

the regulatory, law enforcement, and national security communities, as well as the private sector, 

to combat the various illicit financing threats we face. Furthermore, given the increasingly 

global nature of the financial system, our efforts to strengthen our own anti-money laundering 

and counter-terrorist financing regime rely on cooperation and collaboration with international 

counterparts. 

II. Nature and Scope of the Threat 

Financial crime and associated money laundering activity are difficult to measure with great 

precision. But by any estimate, the total amount of illicit money moved through and concealed 

within the U.S. financial system is massive-in the hundreds of billions --even ifit represents 

only a small percentage of the funds in the financial system. 

The sheer volume of money moving through the banking system makes banks the primary and 

most important line of defense against money laundering and terrorist financing. Therefore, our 

regulatory framework was built to require banks and other financial institutions to take a number 

of precautions against financial crime, including the establishment of AML programs and 

reporting and ~ecord keeping requirements to provide useful information to law enforcement and 

national security authorities for the purpose of combating the full range of illicit finance. This 

includes screcning clients and transactions against Treasury's Specially Designated Nationals 

(SDN) List-a list of drug traffickers, proliferators, terrorists and other illicit actors or entitiesto help ensure that funds associated with these actors do not enter the financial system. This 

regulatory framework aids banks in identifying and managing risk, provides valuable 

information to law enforcement, and creates the foundation of financial transparency required to 

apply targeted financial measures against the various national security threats that seek to operate 

within the financial system. 

However whcn these safeguards are not stringently enforced, money launderers, terrorist 

financiers and other illicit actors are able to take advantage of the U.S. financial system. Some 

recent civil enforcement actions by FinCEN and the federal banking regulators illustrate how this 

can occur: 

• In one case, failure to effectively monitor foreign correspondent banking relationships 

with high-risk customers and file suspicious activity reports (SARs) resulted in the 

processing of $420 billion in cross-border financial transactions with thirteen high-risk 

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Mexican casas de cambia from 2004-2007, through wire transfers, bulk cash and pouch 

and remote deposits, including millions of dollars subsequently used to purchase 

airplanes for narcotics traffickers. 

• In several cases, foreign banks "stripped" out the names oflran or other sanctioned 

entities in transactions routed through the United States, resulting in billions of dollars of 

benefits to sanctioned parties. A Swiss bank developed elaborate procedures to alter 

payments and used code names to disguise identities of sanctioned entities. A Dutch 

bank used misleading payment messages, shell companies and even advised sanctioned 

clients on how to conceal their involvement in U.S. dollar transactions. 

• One bank's failure to have a written AML policy and inadequate procedures to ensure the 

timely reporting of suspicious activity resulted in the processing of billions of dollars 

through accounts controlled by thirteen Mexican casas de cambia in just one year 

without filing suspicious activity reports. 

Inadequate AML staffing and procedures at another bank resulted in deficient monitoring 

and subsequent processing oflarge volumes of traveler's checks and third party checks 

indicative of money laundering, including through sequentially numbered instruments. 

On account of these and other substantial vulnerabilities in anti-money laundering and counterterrorist financing and sanctions compliance, the United States government has instituted 

criminal fines and forfeitures totaling more than $4.6 billion in approximately 20 BSA and 

IEEPA criminal prosecutions of financial institutions over the past 6 years. 

These civil and criminal enforcement actions reveal not only how illicit financiers abuse our 

banking system, but also how compliance with our anti-money laundering and counter-terrorist 

financing and sanctions requirements is critical to protecting our financial system from such 

abuse. 

III. Improving Our AML/CFT Regime 

These cases also point to significant vulnerabilities in the framework and enforcement of antimoney laundering and counter-terrorist financing requirements that require immediate attention. 

Trcasury is working together with its interagency partners and the private sector to better 

understand the anti-money laundering and counter-terrorist financing and compliance challenges 

faced by financial institutions, clarify U.S. government expectations of financial institutions, and 

strengthen the overall anti-money laundering and counter-terrorist financing regulatory regime. I 

will briefly outline just a few of our efforts. 

Ongoing Targeting of Illicit Actors 

One ofthe most important activities for which my office is responsible is the listing of illicit 

actors on OFAC's SDN list. As banks and financial institutions screen their business dealings 

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against the sanctioned entities on this list, they are able to prevent the entrance of terrorist funds, 

drug-trafficking proceeds or other illicit money into our formal financial system, or freeze 

transactions by designees where thcy occur. All major global banks, and many smaller foreign 

ones, screen transactions against the OFAC list to protect thcmselves, even though they are not 

required to do so. This markedly amplifies the impact of our sanctions by preventing the 

movement of illicit funds by terrorists, organized crime figures or proliferation networks outside 

of U.S. jurisdiction. We watch closely for illicit actors evading anti-money laundering and 

counter-terrorist financing controls at banks in the U.S. and abroad and for their attcmpts to scek 

"back door" entry into the financial system, including through the various evasive tactics evident 

in the cases describcd above. 

Customer Due Diligence Advance Notice of Proposed Rulemaking 

Customer due diligence, and the financial transparency it facilitates, is central to our efforts to 

combat all manner of illicit financial activity, from proliferation and terrorist financing to morc 

traditional forms of financial crime like money laundcring and securities fraud. Trcasury issued 

an Advance Notice of Proposed Rulemaking (ANPRM) on March 4 to clarify, consolidate and 

strengthen customer due diligence requirements for financial institutions, including an obligation 

to collect beneficial ownership information. This rulemaking will improve financial institutions' 

ability to detect suspicious activity and provide more useful information to law enforcement. 

The comment period for the ANPRM closed on June II and Treasury will hold the first in a 

serics of public hearings to collect additional commcnts on July 31. Our engagement with 

industry in the customer due diligence rulemaking process is facilitating a broad understanding 

of highcr risk type accounts and transactions with respect to money laundering and terrorist 

financing, and how wc can work with industry and our interagency partners to bettcr identify and 

manage such risks, including through more cffcctive anti-money laundcring and counter-tcrrorist 

financing safeguards. 

Enhancing Transparency in the Company Formation Process 

Criminals can casily disguise their ownership and control of illicit proceeds through shell 

companies and other seemingly impenetrable legal structures. Wc are working closely with you, 

Mr. Chairman, and other members of Congress to enact legislation requiring disclosure of 

beneficial ownership information in the company formation process. 

Promoting and Strengthening the Global AMLlCFT Framework 

Helping to strengthen anti-money laundering and counter-terrorist financing regimes abroad has 

a direct benefit to the safcty and integrity of the U.S. financial system, given the global nature of 

money laundering and the terrorist financing threat and the rclationships bctween banks abroad. 

The Officc of Terrorism and Financiallntelligcncc (TFI) works with others in the U.S. 

government to strengthen the global anti-money laundering and counter-terrorist financing 

framework as a foundation for the cffective implementation of sound financial controls 

worldwide. Several intergovernmental and international organizations, such as the Financial 

Action Task Force, the IMF, the World Bank, the United Nations, and various FA TF-style 

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regional bodies, collectively develop, assess and facilitate jurisdictional implementation of 

measures that are essential to combating various forms of illicit finance. Treasury and its 

interagency partners playa key leadership and participatory role in these organizations as well as 

other organizations that support our capacity building objectives, lending technical expertise in 

standard-setting, evaluation and policy recommendations related to the combating of money 

laundering, terrorist and proliferation financing. One of the key substantive accomplishments 

that we have achieved in developing the global anti-money laundering and counter-terrorist 

financing framework is to integrate targeted financial sanctions against terrorist financing and 

proliferation finance into the global standards for combating money laundering. This is some of 

the most innovative work my office conducts and an area in which we are able to urge the 

international community forward in highly constructive ways. 

IV. Conclusion 

I began today's testimony by noting that the U.S. is home to one of the strongest anti-money 

laundering and counter-terrorist financing systems in the world. In order to continue in this role, 

we must push ourselves to identify where we can do better, and work tirelessly to get there. 

I look forward to continuing work with this committee to this end. 

Thank you. 

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U.S. Immigration 

and Customs 

Enforcement 

STATEMENT 

OF 

LEIGH H. WINCHELL 

ASSISTANT DIRECTOR FOR PROGRAMS 

HOMELAND SECURITY INVESTIGATIONS 

U.S. IMMIGRATION AND CUSTOMS ENFORCEMENT 

REGARDING A HEARING ON 

"COMBA TfNO MONEY LAUNDERINO" 

BEFORE THE 

UNITED STATES SENATE 

COMMITTEE ON HOMELAND SECURITY 

AND GOVERNMENTAL AFFAIRS 

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS 

TUESDA Y, JULY 17,2012 -- 9:30 3.m. 

106 DIRKSEN SENATE OFFICE BUILDING 
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INTRODUCTION 

Chairman Levin, Ranking Member Coburn, and distinguished members of the 

Subcommittee: 

On behalf of Secretary Napolitano and Director Morton, thank you for the opportunity to 

appear before you today to discuss the efforts of U.S. Immigration and Customs Enforcement 

(ICE) to combat transnational criminal organizations (TCO) and the illicit proceeds used to fund 

their criminal activities. With expansive investigative authority, ICE is well-positioned, in 

partnership with U.S. Customs and Border Protection (CBP), to disrupt and dismantle 

transnational criminal networks and terrorist organizations that seek to exploit our borders and 

America's legitimate trade, travel, communications, and financial systems. 

ICE's expertise in combating TCOs that take advantage of vulnerabilities in the sea, air, 

and land environments has proven essential in countering the smuggling of narcotics, money, 

dangerous goods, people, and materials that threaten the well-being of the United States. Our 

law enforcement presence is global, and ICE's Homeland Security Investigations (HSI) has a 

wide network of agents in Attache offices at embassies and consulates worldwide, all working in 

concert to target TCOs. 

lllidl Finance and Bulk Currency 

One of the most effective methods for dismantling TCOs is to attack the criminal 

proceeds that are the lifeblood of their operations. HSI takes a holistic approach toward 

investigating money laundering, illicit finance, and financial crimes by examining the ways that 

individuals and criminal organizations earn, move, store, and launder their illicit proceeds. 

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The combination of successful financial investigations, reporting requirements under the 

Bank Secrecy Act (BSA) of 1970, and anti-money laundering compliance efforts by financial 

institutions has no doubt strengthened banking systems and forced criminal organizations to seek 

other means to diversify the movement of illicit funds, such as the use of money service 

businesses (MSB), prepaid access devices, and bulk cash smuggling. 

HSI's broad jurisdiction includes the enforcement and investigation of money laundering 

and bulk cash smuggling violations. In FY 2011, HSI special agents initiated more than 4,270 

financial investigations, resulting in: more than 1,770 arrests; over 1,070 criminal indictments; 

more than 1,040 criminal convictions; and more than 7,700 seizures worth approximately $359 

million, including $331 million in currency and monetary instruments. 

National Bulk Cash Smuggling Center 

On August 11,2009, HSI officially launched the National Bulk Cash Smuggling Center 

(BCSC), in cooperation with the El Paso Intelligence Center, as a 2417 investigative support and 

operations facility. The BCSC has undertaken a full assessment of the bulk cash smuggling 

threat and developed a strategic plan to address the problem. By analyzing the movement of bulk 

cash as a systematic process, HSI develops enforcement operations specifically designed to 

combat the various methodologies currently employed by trafficking organizations. This 

targeted approach allows us to more efficiently and effectively utilize our interdiction and 

investigative resources. 

Since its inception, the BCSC has initiated over 500 criminal investigations resulting in 

132 seizures totaling $65.8 million. These investigations have culminated in 

319 criminal arrests, 96 indictments, and 68 convictions in both Federal and state courts. The 

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SCSC has also provided training and outreach to over 21,000 state, Federal, and international 

partners. 

As an example ofa recent success, in April 2012, the SCSC coordinated with HSI field 

oftices in St. Louis, Missouri, and Greeley, Colorado, in support of a controlled delivery of 

illicit bulk cash proceeds of nearly $265,000. The initial seizure was the result of a traffic stop, 

but agents developed additional information based on this initial seizure to successfully execute 

a second controlled delivery ofthe currency, which resulted in the seizure of an additional 

$385,359 in U.S. currency, over seven kilograms of cocaine, two handguns, and five vehicles, 

and in seven arrests. 

Operation Firewall 

HSI's Operation Firewall disrupts the movement and smuggling of bulk cash en routc to 

the border, at the border, and internationally via commercial and private passenger vehicles, 

commercial airline shipments, airline passengers, and pedestrians. Since 2005, Operation 

Firewall has been enhanced to include surge operations targeting the movement of bulk cash 

destined for and crossing the U.S. borders with Mexico and Canada, and joint interdiction efforts 

and investigations with our forcign law enforcement counterparts. 

Through May 31, 2012, Operation Firewall has resulted in more than 6,700 seizures 

totaling more than $621 million, and arrests of over 1,400 individuals. These efforts include 480 

international seizures totaling more than $271 million and 310 international arrests. 

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Cornerstone Outreach Initiative 

In July 2003, ICE launched its Cornerstone Outreach Initiative to work in partnership 

with the private sector to systematically and strategically identify and eliminate vulnerabilities in 

financial systems through which criminals launder their illicit proceeds. Under this initiative, 

HSI builds both domestic and international partnerships by sharing law enforcement trends and 

methods with businesses and industries that manage the systems that terrorists and criminal 

organizations seek to exploit. 

To the extent pernlitted by law, HSI shares what we learn through our investigations with 

the private sector to assist them in identifYing and preventing attempts by criminal organizations 

to take advantage of weaknesses in financial systems. HSI special agents serve as subject matter 

experts in various types of money laundering methods, including fraudulent schemes, money 

service businesses, casinos, non-cash negotiable instruments, alternate remitters, charities, 

outbound currency initiatives, organized retail crime, and schemes to pay illegal alien workers. 

Through May 31, 2012, HSI special agents have conducted nearly 12,000 Cornerstone 

outreach and training presentations to 248,000 participants worldwide. Our outreach efforts have 

resulted in the initiation of 950 criminal investigations that led to 290 arrests, 270 indictments, 

228 convictions, and the seizure of nearly $668 million. 

Trade-Based Money Laundering (TBML) 

TBML is a money laundering method through which TCOs earn, move, and store illicit 

procecds by disguising them as legitimate trade. TCOs often exploit global trade networks to 

move value around the world, using the complex and sometimes confusing documentation that is 

frequently associated with legitimate trade transactions. To illustrate, Colombian drug cartels 

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use T8ML extensively to repatriate drug proceeds in a scheme commonly referred to as the 

8Iack Market Peso Exchange. 

Money and value transfer systems not subject to regulation or supervision, in violation of 

the international standards, such as underground banks and unlicensed money service businesses, 

are utilized by TCOs to move value via trade as settlement of a debt arising from remittances 

overseas. These organizations can accomplish settlement by purchasing commodities in one 

country and then transferring them to another country where the commodity is sold and the 

proceeds remitted to the intended recipient. 

HSI is uniquely positioned to disrupt and dismantle TCOs that seek to launder illicit 

proceeds through manipulation of international trade and financial systems. Through HSJ's 

Trade Transparency Unit (TTU), ICE is the only U.S. law enforcement agency partnering with 

foreign nations to exchange trade data. 

HSI currently has foreign lTU partnerships with Mexico, Panama, Brazil, Colombia, 

Ecuador, Argentina, Paraguay, and Guatemala. Through these partnerships, HS] is able to 

identifY, investigate, and prosecute TCOs engaged in TBML and other forms of illicit finance. 

HSl's lTU, our special agents, and intelligence analysts in the field, along with foreign customs 

and law enforcement agencies responsible for border control and enforcement of financial 

crimes, utilize a HS! TTU-owned and developed computer system called the Data Analysis & 

Research for Trade Transparency System (DARTTS) to analyze trade and financial data. 

DARTrS is capable of identifying international trade anomalies and financial 

irregularities indicative ofTBML, customs fraud, contraband smuggling, and other crimes. For 

example, DARTrs allows users to quickly analyze large amounts of data in a short period of 

time, thereby maximizing limited time and resources. lIS! field agents and analysts frequently 

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employ DARTTS' unique capability to conduct data research and analysis to initiate and or 

further criminal investigations. This analysis goes beyond conventional database queries and 

link analysis tools as part of HS I' s efforts to combat and address the global threat posed by 

TBML. 

TIV methodology has been highlighted in numerous V.S. Government publications 

including The National Money Laundering Threat Assessment, the V.S. Department of the 

Treasury's National Money Laundering Strategies, and the V.S. Department of State's 

International Narcotics Control Strategy Reports. It was also recognized as a "best practices 

approach" by the Financial Action Task Force, the international standard-setting body on 

countering money laundering and terrorist financing, originally established by the Group of 

Seven member states, the European Commission and eight other countries to examine and 

develop measurcs to combat moncy laundering and terrorists financing. 

Other countries have shown increased interest in establishing and devcloping their own 

TIU. Many of the TfVs established, most recently in Colombia and Guatemala, have benefited 

from the funding and support ofthe State Department's Bureau ofInternational Narcotics and 

Law Enforcemcnt Affairs. Future funding to expand the TTV network is under consideration. 

Other Evolving Methods Including Prepaid Cards and Stored-Value Devices 

The terms "prepaid card" and "stored value card" (collectively "prepaid access devices") 

are commonly used to refer to any card that represents money stored on or accessible by a card to 

facilitate a consumer's purchase of goods, services, or further conversion to cash through an 

ATM. These cards may be "open loop" or "closed loop." Open loop cards are usually network 

branded (such as Amex, Discover, MasterCard, or Visa), often reloadable, and can be used at 

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point of sale at terminals and ATMs anonymously. Closed loop cards, on the other hand, are 

designated for use at a specific merchant, typically have load limits, and cannot be converted 

back to cash. Examples of closed loop prepaid access dcvices include gift cards, mass transit 

cards, and prepaid phone cards. 

According to the 2007 U.S. National Money Laundering Strategy, "stored value cards 

(sometimes referred to as prepaid cards) are an emerging cash alternative for both legitimate 

consumers and money launderers alike." Of the two types, money launderers appear to prefer 

the open loop prepaid access devices because of their capability of being used at point of sale 

terminals, their wide acceptance by hotels and car rental agencies, and their portability. These 

cards enable the user to obtain cash from ATMs worldwide without going through a currency 

exchange. 

Additionally, cards issued by offshore financial institutions and, therefore, not subject to 

U.S. reporting requirements, are widely available on the Internet, including cards with very high 

load limits. Prepaid access devices may be attractive to money launderers and smugglers as an 

alternative to bulk cash not only because their small size and portability make them difficult to 

detect in the manner that we detect bulk cash, but also because they are not expressly defined as 

monetary instruments under U.S. statutes and regulations. Therefore, they are not yet expressly 

and specifically subject to the CMIR reporting requirements or the potential bulk cash smuggling 

and structuring violations that stem from this requirement. 

The Credit Card Accountability, Responsibility, and Disclosure Act of2009, signed into 

law in May 2009, mandated that the U.S. Department of the Treasury (Treasury), in consultation 

with OilS, address the risks associated with these cards. HSI has worked with our law 

enforcement partners and the Treasury Department's Financial Crimes Enforcement Network to 

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close vulnerabilities associated with prepaid devices. This resulted in the publication of a final 

rule that applies the Bank Secrecy Act to the domestic prcpaid device industry and the 

publication of a Notice of Proposed Rulemaking that proposed to classify prepaid access devices 

as monetary instruments for the purposes of cross-border declaration. This proposed rule is 

currently being finalized as Treasury reviews and addresses the public comments. We look 

forward to the final publication of this rule in the near future. 

One ofthe most significant developments in recent years was a change in Mexican 

banking regulations implemented in June 2010 that severely limits the amount of U.S. dollars 

that can be deposited within Mexican financial institutions. This change has ultimately proven to 

be a successful tool in combating drug trafficking and the Teos that control the movement and 

smuggling of drugs by causing them to change how drug proceeds are laundered. We believe 

that as a result of this change, Teos may seek to place these funds into U.S. financial institutions 

and then wire the proceeds back to Mexico. We continue to work closely with the Government 

of Mexico (GoM) to identifY emerging money laundering trends. 

Domestically, we have seen changes in how illicit proceeds are moved within the 

United States. In the last several years, we have seen domestic drug organizations attempt to 

place illicit funds into U.S. financial institutions to avoid currency transaction reporting 

requirements. In one version of this scheme, which is referred to as the "funnel account" model, 

drug organization members in destination cities make structured cash deposits into bank accounts 

opened in the United States. In tum, the accoullt holder (a nominee for the drug organization) 

will withdraw funds at various banking institutions in the United States and tum them over (often 

minus a small fee) to the drug organization. The scheme has been difficult for bank anti-money 

laundering personnel to identifY. 

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This tactic was initially identified in human smuggling organizations operating in 

Ar.izona, but we have since seen its usc expanded to domestic drug organizations. We believe 

that the emergence of this tactic came as a direct result of the successful enforcement focus on 

MSBs that were being used by human smugglers to receive payments from "sponsors" in the 

United States. When the ability to easily use MSBs was disrupted, a transition to the funnel 

account model was observed. HSI has worked with other U.S. Government agencies, including 

FinCEN, to educate the financial industry in order to promote the identification of this scheme 

and reporting to law enforcement. 

Illicit Pathways Attack Strategy (IPAS) 

Last July, the Administration took an important step in fighting transnational crime when 

it issued its Strategy to Combat Transnational Organized Crime (TOC Strategy). This strategy 

complements the current National Security Strategy, and other national strategies and plans 

related to traflicking in persons, money laundering, and other transnational crime affecting the 

United States, by focusing on the growing threat of international criminal networks. The 

strategy's single unifying principle is to build, balance, and integrate the tools of American 

power to combat transnational organized crime, and related threats to national security-and to 

urge our international partners to do the same. 

IIS1 designed the Illicit Pathways Attack Strategy (IPAS) to build, balance, and integrate 

its authorities and resources, both domestic and foreign, in a focused and comprehensive manner 

to target, disrupt, and dismantle TOe. As recognized in the TOC Strategy, resources are not 

limitless, and targets must be prioritized in a systematic manner. The IPAS will provide a 

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mechanism for ICE to prioritize threats and vulnerabilities within its mission and to coordinate 

its own efforts internally and within the interagency. 

The IPAS goes beyond the Nation's physical borders. By targeting the profits generated 

and used by criminal organizations and not just targeting the contraband being smuggled, the 

IPAS will protect financial systems and strategie markets by addressing how criminal 

organizations earn, move and store illicit proceeds. IPAS will target financial institution abuse, 

bulk cash smuggling and trade-based money laundering and aggressively pursue asset forfeiture. 

Working with Mexican Authorities 

Working with the GoM in its battle against the drug cartels and other TCOs requires 

strong coordination and cooperation. ICE continuously works jointly with the GoM to initiate 

and support investigations and operations targeting TCOs and their diverse list of illicit activities. 

ICE also actively participates in capacity-building programs and initiatives to strengthen and 

bolster the GoM counter-narcotics and counter-illicit finance efforts. 

On June 2, 20 I 0, DHS released the Department of State Bureau of International 

Narcotics and Law Enforcement-supported Di-National Criminal Proceeds Study at a 

UnitedStates-Mcxico Money Laundering Conference in Mexico City, which provided a 

strategic-level analysis of the processes and methods used by transnational criminals, particularly 

drug trafficking organizations, to repatriate illicit money from the United States to Mexico and 

other countries. Both the U.S. and Mexican Governments are using information collected from 

the study to conduct tactical operations that deny criminals the ability to move money, and to 

ultimately dismantle illicit operations. 

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ICE has strengthened its relationship with the GoM by increasing the number of liS I 

personnel in Mexico, who provide support to ongoing investigations ofTCOs operating on both 

sides of the border. In addition, the HSI Attache in Mexico City has created its own 

Transnational Criminal Investigative Unit consisting of fully vetted Mexican law enforcement 

officers. Through the HSI Attache office in Mexico City and associated sub-offices, IISI 

personnel, in conjunction with the law enforcement community, will continue working closely 

with Mexican authorities. 

CONCLUSION 

Thank you again for the opportunity to appear before you today to discuss our efforts to 

combat the money laundering threat to the United States and our response to the innovative 

techniques being used by TeOs. 

I would be pleased to answer any questions. 

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David Bagley 

Head of Group Compliance 

HSBC Holdings pic 

Written Testimony for Senate Permanent Subcommittee on Investigations 

July 17,2012 

Good morning Chairman Levin, Ranking Member Coburn, and members of the 

Subcommittee. My name is David Bagley. Thank you for the opportunity to be here today. 

Since 2002, I have been the Head of Group Compliance at HSBC Holdings pic - which is 

the global parent ofHSBC. J joined Midland Bank in 1992 and, later that year, after HSBC 

acquired Midland, I began work for HSBC in its Head Office in London, where I work today. 

Over the years, I have served in various positions in HSBC offices around the world. 

Having been a compliance officer for 13 years in a bank that operates in approximately 

80 jurisdictions worldwide, I have dedicated my career not only within HSBC but through my 

broader industry work as well- to meeting the sometimes significant challenges that confront 

global banking institutions in the world we live in. As this Subcommittee well knows, these 

challenges include money laundering by narcotics traffickers and terrorist financing, to name just 

a few. I have followed the work of this Subcommittee and have seen how your work has 

advanced important dialogues and helped the international banking community, including 

HSBC, identifY and address potential vulnerabilities. 

My chief focus as the Head of Group Compliance at HSBC has been promoting the 

values that we as a bank have set for ourselves and the values that you and our regulators, both in 

the United States and around the world, rightly expcct from a global bank like HSBC. And, 

while there have been successes on many complianc"e issues, I recognize that there have been 

some si"gnificant areas offailure. I have said before and I will say again: despite the best efforts 

and intentions of many dedicated professionals, HSBC has fallen short of our own expectations 

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and the expectations of our regulators. At the same time. this is something that a bank seeking to 

conduct business in the United States and globally must acknowledge, address, learn from, and, 

most importantly, take steps to avoid in the future. 

I know my time today is limited and there are a number oftopics to discuss. Let me 

touch on some of them briefly. 

First, we have learned a number of valuable lessons, and the bank is well along the way 

of converting those lessons into solutions. One of these lessons concerns managing growth. 

With the benefit of hindsight, it is now clear to many of us that the bank's business and risk 

profile grew faster than its infrastructure. We have learned that implementing the kinds of robust 

policies and practices expected of a global banking leader can take longer than anticipated. The 

bank underestimated some of the challenges presented by its numerous acquisitions, and despite 

efforts to meet these challenges, we were not always able to keep up. While many people at 

HSBC worked diligently to get it right, the bank simply must do better. 

How can we get it right? Let me touch briefly on a few of these changes. 

As I expect my colleague Stuart Levey to describe in some detail, HSBC is in the process 

of shedding the historical compliance model that the bank has outgrown. This departure from 

the old model is transfonnative. Our former compliance structure was a product of historical 

growth by acquisition and it was a major factor behind some of the issues that I expect we will 

be discussing today. 

Under the former structure, the bank's Group Compliance function based in London 

mirrored HSBC's overall global corporate structure - which is an international federation of 

affiliates around the globe. Many of these affiliates began as relatively small independent banks 

that HSBC acquired over the years with increasing frequency. As the bank's footprint grew 

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through these acquisitions, HSBC's structure evolved into one with a small corporate center, on 

the one hand, and numerous affiliates around the world operating with a significant degree of 

autonomy and varying levels of direct interaction among those aftlliates, on the other, 

Under the former model, the role of Group Compliance was an advisory one: we 

promulgated the baseline standards that all of the bank's affiliates were expected to follow. As 

the Head of Group Compliance, my mandate was limited to advising, recommending, and 

reporting. My job was not - and I did not have the authority, resources, support, or infrastructure 

- to ensure that all of these global aftlliates followed the Group's compliance standards. Rather, 

final authority and decision-making rested with local line management in each of the bank's 

aftlliates. 

This model worked for many years. But over time, HSBC's growth accelerated rapidly. 

Some of the new acquisitions had operations that at the time of acquisition fell far short of 

HSBC's own compliance standards and expectations and were in relatively lightly regulated but 

often high risk jurisdictions. At the same time, increased terrorism and narco-trafficking, and 

other financial sector developments, exposed the international banking system to new 

vulnerabilities and greater challenges. In addition. regulatory expectations both in the United 

States and abroad rightly continued to increase. With its roots in a far smaller bank in a very 

different global banking environment, HSBC's historic model, in retrospect, simply did not keep 

pace. Now, a major overhaul is underway. 

The new compliance model is a product of deep reflection and is tailored to address 

today's challenges as well as the inevitable challenges of tomorrow. Let me mention a few 

significant differences between the bank's prior compliance model and the new model. 

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First, the bank's Group Compliance function now, for the first time, has authority over 

the compliance departments at everyone of the bank's affiliates. The new model empowers 

Group Compliance to adopt and implement consistent compliance standards across the Group 

and to assess each of the bank's affiliates through a dedicated Assurance team so that the Group 

can have confidence that its affiliates are following and enforcing these standards. This is a stark 

break from the past. Now, Group Compliance has both the mandate and the resources to ensure 

that affiliates are compliant. In other words, now for the first time, Group Compliance is an 

advisory and a control function and personnel at the affiliates are now accountable to Group 

Compliance for their conduct. 

Second, the CEO of each affiliate previously controlled the allocation of resources and 

compensation associated with that affiliate's compliance function. That has changed as well. 

Under the new model, Group Compliance oversees the bank's nearly 3,500 compliance officers 

worldwide and takes the lead on decisions about resource allocation, compensation, perfonnance 

review, objectives, strategy, budget, and accountability across all of our worldwide compliance 

departments. This gives Group Compliance far more control over and understanding of the 

bank's global compliance efforts. 

Third, HSBC has made significant enhancements to the resources at the Group 

Compliance level. In 2002, when I took on the role of Head of Group Compliance, we had a 

staff of only eight people. Now we have close to 40 people working in Group Compliance in 

London, and that figure continues to grow. 

Fourth, the bank has adopted new robust diligence policies. Historically, unless required 

by the local jurisdiction, the bank did not mandate that HSBC affiliates perform due diligence on 

other HSBC affiliates. However, we now require affiliates to perform diligence on each other. 

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And, we are in the process of rolling out the enhanced Know-Your-Customer program at our 

U.S. bank on a global scale. This is a substantial task because HSBC has approximately 100 

million customer relationships worldwide. Nevertheless, it is an important one. It will enable 

the bank to make more informed and responsible decisions about its customers. 

While I will not touch on all of the recent enhancements to our model, I do want to 

elaborate on one of these changes, the creation of a dedicated Assurance team. The mission of 

this new function is both to review the etTectiveness of our compliance functions at all levels 

around the globe and to escalate compliance issues that need remediation. This team is charged 

with ensuring that our compliance efforts around the world meet Group standards, conducting 

proper monitoring, and meeting the expectations of their regulators. The team is also charged 

with ensuring that compliance issues are properly escalated to the Group level, that the business 

and compliance functions are working together to manage risk effectively and responsibly, and 

that every compliance team has the required skills and appropriate resources. This function, 

which is in addition to the continuing role of Group Audit in conducting audits of affiliates 

worldwide, has already provided substantial benefits. 

In conclusion, the authority of the Head of Group Compliance and therefore the function 

as a whole is greatly increased. We have split from the legal function and now form a part of a 

substantially empowered risk function. This will require affiliates to act on advice and 

recommendations quickly and effectively. 

* * * 

Despite the best intentions and efforts of so many dedicated compliance and business 

professionals, HSBC has in some important areas failed to meet our expectations and the 

expectations of our regulators. I am happy, however, to be able to say that the bank has learned 

from its past and is already on a path to becoming a better, stronger banking institution. The 

bank's structure is, in short, very dilTerent from what it was in 2002, when I agreed to serve as 

I-lead of Group Compliance. 

Thank you for your time. I welcome this opportunity to answer any questions. 

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Paul Thurston 

Chief Executive, Retail Banking and Wealth Management 

HSBC Holdings pic 

Written Testimony for Senate Permanent Subcommittee on Investigations 

July 17,2012 

I. Introduetion 

Good morning Chairman Levin, Ranking Member Coburn, and members of the 

Subcommittee. My name is Paul Thurston, and I currently serve as the Chief Executive, Retail 

Banking and Wealth Management for HSBC Group, based in Hong Kong. 

I have worked in the banking industry for my entire career. I joined Midland Bank in 

1975, and stayed when it was acquired by HSBC in 1992. Since then, I have served in various 

roles at HSBC around the world, including as CEO of HSBC Mexico ("HBMX") for fourteen 

months beginning in February 2007. 

I understand that we are here today in part to discuss HSBC's experience in Mexico and 

its impact on the U.S. and global financial systems. These are topics worthy of discussion, and 

which have had many learnings for our Group, and I am pleased to be here at the Committee's 

request. I want to address in my statement the challenges I faced when I arrived in Mexico, the 

steps my colleagues and I took to address the problems, and the lessons I believe we at HSBC 

have learned from our experience in Mexico. 

Emerging markets like Mexico are growing increasingly important in their contribution 

to the global economy and world trade, and international financial companies can play an 

important role to help their governments develop these markcts and their people to join the 

formal banking system. With large populations existing outside the formal economy and 

banking system, however, they also present real challenges. 

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I arrived in Mexico in early 2007 after having served as a general manager with 

responsibility for building the Group's personal financial service businesses across the Asia 

Pacific region. When I arrived, I reported to my predecessor, who, having completed the 

acquisition ofthe former Banco Bital and managed this business for 4 years, had also led the 

subsequent acquisition ofthe Banistmo Group of banks across Central America and been 

promoted to hcad up the Latin American region. 

To enable me to assess the business, I had meetings with members ofthe management 

team, the internal auditors, the external auditors, and the Board of HBMX. 1 also met with the 

regulators, each of whom were complimentary about the progress made by the bank since 

acquisition. It became clear to me, however, that there had been rapid growth of the business 

since the acquisition, and that there were still significant issues that needed to be addressed. 

These included rapidly growing credit and fraud losses in the consumer and small business 

lending businesses, technology problems, and weaknesses in management information. There 

was also a significant known compliance issue relating to the quality of customer Know-YourCustomer ("KYC") and customer files, all of which were decentralized across the network of 

more than 1300 branches, but where recent regulations required 1.8 million customer KYC 

records to be remediated to meet new local standards. 

Having thought that I would be continuing to build the business, my immediate priorities 

became to address these issues. Additionally, most of the management team ofthe bank in 

Mexico had also been promoted to regional positions to manage the now larger region, and I 

therefore had to fill key positions within the Mexican business to ensure that we retained a focus 

on managing this business. 

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As I began to get the team in place, additional issues arose, and it became clearer that 

HBMX lacked much of the sophisticated compliance, operational, and risk management 

capabilities with which I was familiar from my work in other parts of the Group. There was no 

credit fraud expertise, credit risk analytics were undeveloped, and provisioning modcls and 

scorecards were not robust. It also became apparent that decision-making processes concerning 

AML wcre not satisfactory. 

Over time, it also became clear that this was not only a question of process and 

technology, but that the underlying business model needed to be examined. Branch managers 

operated as local franchise owners, with considerable autonomy and a focus on business 

development, reinforced by an incentive compensation scheme which rewarded new accounts 

and growth, not quality controls. 

I should add that the external environment in Mexico was as challenging as any I had 

ever experienced. Bank employees faced very real risks of being targeted for bribery, extortion, 

and kidnapping in fact, multiple kidnap pings occurred throughout my tenure - and high levels 

of security were required for Bank staff working in Mexico. Unlike the United Statcs, Mexico 

was a data-poor environment, making it difficult to verify the identity of customers. 

Despite these substantial challenges, I fclt that with determined efforts, the Bank could 

make a positive contribution in Mexico. During my short tenure at HBMX, I worked hard to 

make progress towards this goal, and I drove many changes to both the business model and 

compliance systems. 

I pulled back on business expansion plans and focused on enhancing controls. I was 

particularly concerned with HBMX's significant operational and credit losses, especially in small 

business loans and credit cards, where fraud was rising rapidly. I brought in people with 

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expertise in managing emerging markets credit risk in Asia and fraud management from the 

Group to review our practices in those areas, tightened credit approvals, and brought in a new 

Head of Consumer Credit Risk. I also brought in a new CFO to develop improved management 

information capabilities. 

To address the compliance issues, I brought in a new COO who was well-regarded and 

exrerienced with Group standards. With his help, we made significant changes in AML and 

KYC processes, including addressing AML Committee weaknesses, ensuring that action items 

were properly followed up, and creating an escalation process when business and compliance 

disagreed. We launched new stafYtraining programs on AML and KYC standards, and 

introduced a zero tolerance policy regarding the site visit requirement. 

Recognizing the challenges of trying to affect proper remediation of files and upgrading 

account opening processes across a widespread branch network managed by local managers 

incentivized and historically managed for growth, we set up a program to centralize control of 

account opening documentation and KYC records. We also reworked the employee incentive 

scheme to reduce reward for volume growth and increase the focus on credit quality, customer 

service, and proper management of risk. We also removed senior management from the 

incentive scheme entirely. 

As you might expect, these changes were rainfullo the organization. For example, to 

rework the incentive scheme, at one point I had to stop payment of incentives altogether. This 

resulted in employees picketing the office. However, my team and I were determined to 

continue pushing forward with the improvements. 

All of the issues that I identified, and the actions taken to address them, were reported up 

to the regional head of Latin America and to Grour management. I requested Group Compliance 

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support to help review issues and people, and address cross-border issues. I also requested 

Group Audit to undertake audits of key processes, including the Money Laundering controls, to 

have an independent check of progress and help to surface other issues that had not previously 

been identified. The local Board, and the regional audit committee, which was chaired by the 

Group's Chief Risk Officer and head of Audit, were kept informed throughout. Reports were 

made to the Group Risk Management Meeting which included the heads of each of the regions. 

In December 2007, less than a year after I had arrived, I was asked by the Group Chief 

Executive to prepare to move to the U.K. to take responsibility for our retail business there in the 

face of issues that led up to global financial crisis and to recruit a successor in the local market. 

did this and left Mexico in April 2008. 

I believe that we made progress at HI3MX during my short tenure, but clearly there was 

still much work to be done upon my departure. I understand that further problems surfaced 

subsequently, which had to be addressed by my successor and Group management, and that 

progress was therefore not as smooth as we would have wanted. I understand however that there 

was a significant improvement in account opening standards, documentation, and reporting in the 

following years as the centralized system came into effect, which gave HBMX a better platform 

to establish enhanced control on account opening and remediate historic accounts. Decisions 

were made to put strict limits on the U.S. dollar business we do in Mexico, we closed branches in 

areas where we believe there is a high risk of money laundering, and we are now in the process 

of closing all the HI3MX Cayman accounts. The Group will continue to scrutinize our business 

there to determine how we can further mitigate compliance risk. 

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Many of the specific challenges I faced during my tenure, and the actions that I took, will 

likely be outlined more fully in your report. I will answer your questions to the best of my 

ability based on my time on the ground in Mexico, as I did with your statf several weeks ago. 

III. Lessons Learned 

We have learned much from our experience in Mexico, and I would like to discuss brict1y 

some of what I consider to be the key lessons. 

First, when a problem arises, it is imperative to do the right thing and to do it quickly. 

During my tenure in Mexico, I tried to follow this rule. For example, in response to compliance 

failures, I fired individuals involved in falsifying KYC records and announced a zero tolerance 

policy for similar conduct, and we closed customer accounts, despite the risk of adverse reaction. 

The Group is taking firm action today to close down businesses where the risks cannot be 

effectively managed, regardless of the impact on short term profitability, and have invested in 

increased compliance resourcing. 

Second, business expansion cannot be allowed to run ahead of putting in place 

appropriate controls and infrastructure. Without adequate controls, financial institutions face 

severe business and operational risks that are simply unacceptable. In retrospect, it is clear that 

in Mexico, the Group was overly optimistic about our ability to bring up to standards quickly an 

acquired entity that had little to no compliance and operational infrastructure when we acquired 

it. The Group today is working hard to reduce its complexity and risk profile, and to empower 

Global Functions, including Risk and Compliance, to have direct oversight of the key controls 

across our business. 

Third, operational and compliance risk cannot be addressed by systems and process 

alone. In Mexico, we made little progress by simply installing Group systems and creating 

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control functions until we addressed the culture of the bank and the underlying business model. 

Cultural change takes time, but getting the tone at the top right, and changing perfonnance 

management systems and rewards, are critical drivers to achieving higher standards. 

Fourth, when challenges arise, we must share information broadly across the Bank. 

During my tenure in Mexico, infonnation at HSBC flowed vertically but not horizontally. The 

Subcommittee is right to note that, as a result, a number of risks and challenges we faced in 

Mexico were not fully appreciated by our counterparts in other parts of the Group. We are 

changing this through formal reporting structures to ensure that we maximize the sharing of 

infonnation for risk management purposes amongst Group companies and amongst Global 

businesses and functions. 

Finally, we cannot be afraid to acknowledge and learn from our mistakes. We have 

directly acknowledged our shortcomings in Mexico and in the United States, and our Group 

CEO has set a clear policy that requires all parts of the Group to adopt and enforce a single 

global standard that is determined by the highest standard that must be applied anywhere and 

also requires us to maximize information sharing across the Group. This will help make us a 

better bank that effectively manages risk consistently on a global basis. 

IV. Conclusion 

Criminals operate globally and if we are to combat them and stop them from accessing 

and abusing the financial system, we must look at issues from a global perspective. Institutions 

which operate internationally, like HSBC, will be targeted by these criminals, and our experience 

in Mexico vividly demonstrates that you are no stronger than your weakest link. We have to be 

sure that we have the best and strongest defense in place, in every business, in every market in 

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which we operate, regardless of the local challenges. It is for this reason that I appreciate the 

opportunity to speak with the Subcommittee today. 

It is clear to us all that our anti-money laundering controls should have been stronger and 

more effective, and that we fell well below the standards that we should have achieved. We have 

co-operated fully with the PSI and other authorities to ensure that we learn from the mistakes that 

were made in the past. 

We are determined that drug dealers, terrorists, and all forms of criminals will not access 

the financial system through HSBC. The Group management team is committed to ensuring that 

we meet the highest standards in every aspect of our business in the future. 

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Michael Gallagher 

Former Executive Vice President 

HSBC BANK USA, N.A. 

Written Testimony for Senate Permanent Subcommittee on Investigations 

July 17, 2012 

Chainnan Levin, Ranking Member Coburn, and Members of the Subcommittee: 

My name is Michael Gallagher and I reside in Lincroft, New Jersey. From 2001 until last 

year I was an Executive Vice President at HSBC Bank USA, N.A. ("HBUS") responsible for 

Payments and Cash Management ("PCM"), North America. On November 21,2011, I was 

subject to a reduction in force at the bank. 

Anti-money laundering, terrorism financing, and global access to the U.S. financial 

system are issues of critical importance to the banking industry and to national security. 1 have 

prepared this written statement in order to address certain areas of inquiry outlined in the 

Subcommittee's correspondence dated June 29, 2012, and I will be pleased to answer any 

additional questions at the hearing that the Subcommittee might have. 

During my tenure at HBUS, PCM developed and marketed payments and cash 

management services to corporate and middle market clients as well as financial institutions, 

including HSBC amliated banks. At the time of my departure, there were five regional heads of 

PCM, including me, each of whom reported to the global head ofPCM. I generally had four 

teams within PCM that reported to me: sales, product management, client services, and central 

services. 

In addition, there were two periods of time during my tenure at HBUS when Wholesale 

Payments Operations (the team responsible for wire transfers) reported to me: approximately 

1998 to 2001 and approximately 2004 to 2007. Within its operations function, HBUS had a 

payments filter that was programmed to detect and flag transactions from sanctioned countries, 
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among other things. The payments processing team within operations would review each of the 

transactions stopped by the ftlter. To the best of my knowledge, if the transaction required 

further evaluation, it would be escalated to the Compliance department. 

In regard to the Subcommittee's interest in U.S. dollar transactions involving Iran, I recall 

that in approximately May 2001, I was informed by the head of Wholesale Payments Operations 

of a business proposal under consideration by HSBC Bank pic to provide U.S. dollar clearing 

services to Bank Melli, an Iranian bank. I responded to her, copying my manager, thc head of 

Corporate Banking, stating that I was not comfortable with the bank's pursuit of such a business 

arrangement. I was concerned with the regulatory, reputation ai, and operational risk associated 

with this business proposal, and particularly the fact that Bank Melli was unwilling to identify 

the main beneficiaries ofthe payments at issue. The head of Wholesale Payments Operations 

then forwarded my concern to the Compliance department. I was not privy to the outcome of the 

discussions regarding the Bank Melli proposal. 

I also understand that the Subcommittee is interested in the Global Banknotes business. 

In approximately early 2007, the Head of Global Banking and Markets asked if! would take on 

managerial oversight of Global Banknotes and serve as someone to whom Christopher Lok, the 

Head of Global Banknotes, could report. HSBCs Banknotes division bought, sold, and shipped 

banknotes around the world on behalf of its clients. HSBC had several banknotes vaults, 

including vaults in New York, London, Frankfurt, Tokyo, Singapore, and Hong Kong. 

Finally, I understand that the Subcommittee is interested in HBUS' anti-money 

laundering, or AML, efforts. During my tenure at I-IBUS, although the Compliance department 

was primarily responsible for HSBC's AML efforts, my team and I took compliance matters 

very seriously. PCM assisted the Compliance department, as well as relationship managers, with 

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regard to AML and related compliance efforts. In instances when PCM became aware of 

negative information regarding a client, PCM worked closely with the Compliance department to 

ensure that it received the information it needed. PCM also made resources available to the 

rclationship managers and the Compliance department to assist in any way that we could. 

In summary, [ would like to thank the Chairman and Subcommittee for allowing me to 

speak at the hearing on these critical matters. HSBC, and the banking industry as a whole, have 

learned a lot over the past decade or so. J believe that HSBC's experience can add value to 

understanding more broadly the risks and opportunities for enhanced safety in this industry. 

During my tenure at HSBC, there were steps taken to tighten anti-money laundering controls. 

But, with hindsight, it is clear that we did not always fully understand the risks of our business, 

and that we could have done much more, and done it more quickly. I appreciate the opportunity 

to provide this information to the Subcommittee. [am prepared to answer any additional 

questions that the Subcommittee may have during the hearing. 

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Testimony ofChiu Hon "Christopher" Lok 

Before the United States Senate 

Permanent Subcommittee on Investigations 

July 17,2012 

Chairman Levin, Ranking Member Coburn, and members of the Subcommittee, I 

appreciate the opportunity to be here today. My name is Christopher Lok, and from 2001 until 

2010 I served as the global head of the Banknotes business at HSBC. 

In my statement today, I will cover three topics. First, I will provide my background 

information. Second, I will provide an overview of the Banknotes business at HSBC. And third, 

I will address some of the specific problems and issues that I believe the Subcommittee is 

interested in. For me, it is painful and embarrassing to talk about the areas where, in hindsight, 

we fell short. At the same time, it is valuable to do so in order to find constructive solutions and 

so that others don't make the same mistakes going forward. 

I was born and raised in Hong Kong. In 1981, I started working in the Banknotes 

business, and that is what I did for 29 years. During the entire time from 1981 through 2010, I 

worked for HSBC or a predecessor institution. For most of my career I was based in Asia, but I 

was privileged to have lived and worked in New York for a brief period in the 1990s and again 

from 2001 until 2010. Even though I am not a U.S. citizen, I had a wonderful experience living 

and working in this country and I have a great admiration and affection for the United States. 

I'd like to provide a brief overview of the Banknotes business. In essence, the business is 

about the buying and selling of physical currency at the wholesale level. Our clients were banks 

and other financial institutions all around the world. We employed about 275 people, including 
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traders, back office staff, and people who focused on operations and logistics. We dealt with 

approximately 800 customers, in over 100 countries, and we transacted in about 75 different 

currencies. These customers have natural demand for and supply of currency banknotes, driven 

by various economic activities. To them, HSBC was a safe and reliable counterparty and I 

believe that we provided them with a valuable service. 

I understand that the Subcommittee is focused on some of the compliance challenges that 

we faced in the 13anknotes business. 

Let me start by emphasizing that compliance was a critical part of the HS13C Banknotes 

business. Over a period of years, there were some occasions when I communicated with my 

colleagues in compliance in a manner that was unnecessarily aggressive and harsh. These 

communications were unprofessional, and I deeply regret them. In reality, the business line and 

compliance shared the same objective - to avoid the bank being used by inappropriate people for 

improper transactions. Despite my overly critical emails, I believe 13anknotes business and 

compliance people actually had a good working partnership. While I didn't always communicate 

this, I had great respect for my colleagues in compliance and I valued their work. 

With respect to Banknotes transactions with customers in Mexico, up until December 

2008 I was under the impression that HSBC's Mexican affiliate, H13MX, was operating under 

HSBC group standards. In December 2008, HBMX announced that it would no longer be 

accepting U.S. currency in Mexico. I was surprised by this announcement, and I tried to find out 

what was the reason behind it. It was not until early 2009 that I learned, as a result of my own 

inquiries, that HBMX had gotten into problems because their anti-money-laundering controls 

were seriously compromised. I was surprised and concerned about this news. I was not 

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previously aware ofthc AML problems at HBMX. Ifwe had known of these problems, I am 

certain we in the Banknotes business would have done things di fferently. 

As time went by, some questions werc raised about the Banknotes business in Mexico. In 

retrospect, we did not adequately appreciate the concerns being raised about the business 

environment in Mexico. While we did our best to deal with these inquiries, I am sorry to say that 

I did not understand what later became apparent. With the benefit of hindsight it is now clear 

that we did not perceive the extent of the anti-maney-laundering deficiencies and the risks 

present in Mexico. 

Thank you very much. 

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Irene Dorner 

President and CEO 

HSBC Bank USA and HSBC North America Holdings, Inc. 

Written Testimony for Senate Permanent Subcommittee on Investigations 

July 17,2012 

I. Introduction 

Thank you Chairman Levin, Senator Coburn, and members of the Subcommittee. My 

name is Irene Dorner and I serve as President and CEO ofHSBC Bank USA ("IIDUS'') and 

HSBC North America Holdings, Inc. ("HNAH"). I have led the Bank in the U.S. since January 

2010. This is one of the many entities across the globe that forms HSIlC Group, which is 

headquartered in London. 

At the outset, let me state clearly that we deeply regret and apologize for the fact that 

HSBC did not live up to the expectations of our regulators, our customers, our employees, and 

the general public. HSBC's compliance history, as examined today, is unacceptable. Therefore, I 

fully appreciate why we are here and believe that this is an important discussion. HSIlC has 

learned some very hard lessons from the experience of the past few years. But we have taken 

very substantial steps to address the problems that we, our regulators, and this Subcommittee 

have identified. We have made fundamental changes in governance, culture, training, and 

funding to ensure that we can effectively deter illicit use of our bank. These changes will be 

embedded and sustained going forward. 

As you know, these issues and challenges do not end at the water's edge. So we are 

combining our efforts with reforms that apply throughout HSBC's global business. And I am 

joined today by our new Chief Legal Officer, Stuart Levey, who is here on behalf of the HSBC 

Group and who will describe HSIlC's global compliance commitment. Stuart and I sit on HSIlC 

Group's new Global Standards Steering Committee that is charged with establishing a uniform 

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set of high standards for all HSBC affiliates around the world. I sit on this Committee because 

senior leadership at HSBC Group recognizes that often U.S. standards will be the highest 

standard globally. We have taken the lessons we learned from our experiences in the U.S. and 

are applying them on a global basis. 

Today, I would like to address two topics. First, I would like to tell you about HSBC and 

describe the importance of an effective compliance program to an institution of our size and 

global reach. Second, I would like to talk about the work we have done to address our AML 

Compliance deficiencies. 

II. HSBC in the United States 

HSBC is in a unique position: we are among a handful of financial institutions with a 

truly global footprint. HSBC entered the United States in the 19805 when we acquired Marine 

Midland Bank and we have been building on this foundation ever since. Today, our U.S. 

business has 16,500 employees and serves about 3.5 million customers. We have four main 

business lines: Global Banking and Markets; Retail Banking and Wealth Management; 

Commercial Banking; and Private Banking. 

HSBC has a truly global footprint. Our customers have a need for global banking 

services. In the United States, HSBC is one of the largest dollar clearers; this is important 

because the U.S. dollar is the currency of trade and commerce virtually no matter where you are. 

When a U.S. manufacturer wants to sell its products to a retailer in Hong Kong, the transaction is 

settled in U.S. dollars. When a manufacturer in Singapore sells its goods to a purchaser in 

Germany, or a raw materials supplier in Brazil sells its products to a purchaser in Canada, 

chances are those transactions are settled in U.S. dollars as well. 

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This global reach gives us a tremendous opportunity to attract customers who are 

internationally focused. But it also brings with it a tremendous responsibility. Given my 

experience working for HSBC in other parts of the world, I am cognizant of the risks and 

obligations that come with serving our customers. At an absolute minimum, we must have the 

proper controls and systems in placc to ensure that we are doing the right business, in the right 

places, with the right customers, and that our customers' transactions are properly monitored. If 

for any reason a transaction appears to be unlawful or suspicious, then we scrutinize the 

customer and report this information to the authorities in a timely manner. 

In the world of banking, there is nothing more important than our reputation, not just for 

financial strength but also for trustworthiness and integrity. Not only is it important to our 

customers and our regulators, it's important to me, and it's important to my management team. 

have made clear that I expect every member of my senior management team 10 stand up for 

doing what is right. 

III. AML Compliance Remediation 

As the subcommittee has documented, we have fallen short in a number of serious ways. 

In October 20 I 0, the U.S. bank entered into a Consent Order with the OCC. The OCC criticized 

various aspects ofthe Bank's AML program, including failure to provide adequate resources for 

our AML Compliance function, gaps in automated monitoring of certain wire transfers and 

banknotes transactions, failure to conduct due diligence on our own HSBC affiliates, and an 

inadequate process ofrisk-rating certain customers. We had not invested what we should have in 

our AML resources and systems. With the full support of our Board and of HSBC Group, I took 

the lead in overseeing our remediation efforts, and we have taken significant steps forward. 

I want to turn now to highlight several of the changes we have implemented. 

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A. People and Culture 

We've worked hard to foster a new culture that values and rewards effective compliance, 

and that starts at the top. By the end of2010, we had a new U.S. senior management team in 

place, including myself as CEO, a new General Counsel, a new Head of Compliance, and a new 

AML Director. Previously the role of General Counsel and head of Compliance had been 

combined under one person. We also elevated the role of the AML Director, who now reports 

directly to the Chief Compliance Officer and regularly reports directly to the Board and senior 

management about the AML program. The Chief Compliance Officer and AML Director also 

have an independent line to a non-executive member of our Board of Directors. 

We have improved the quality, coverage, and strength of our AML program through 

additional staffing and training. We have worked to build an AML team that has the right 

subject matter expertise and the right operational expertise. 

The U.S. bank has made significant investments in our AML Compliance program over 

the past two years. We increased AML Compliance spending to $244 million in 2011, 

approximately nine-fold what we spent in 2009. A big part of this investment has been in hiring 

and retaining the right people: today we have about 892 full-time AML Compliance 

professionals. This includes our monitoring and alert review team, loeal compliance officers, 

Financial IntelJigence Unit team, sanctions screening team, and other AML subject matter 

experts. 

B. Policies and Procedures 

Another area we needed to address was that we did not adequately appreciate the risks of 

our businesses and of our customers. In early 2010, the HNAH Board undertook an enterprisewide risk assessment and made the decision to exit or scale back several businesses that we 

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decided presented significant compliance risk. Since 2010, we have closed down the Banknotes 

business, we have exited about 28 embassy banking relationships, and we have closed 326 

correspondent banking relationships. This is an ongoing process - we continue to do a formal 

Enterprise Risk Assessment twice a year to ensure that we are properly managing our risk 

entcrprise-wide. 

We also needed to make changes to our Know-Your-Customer ("KYC") policies. We 

had previously not been doing customer due diligence on our own HSBC affiliates. We now do 

the same level of customer due diligence on our own affiliates as we do on third-party customers. 

We have also improved the way we approach customer diligence for all our customers. We have 

developed and implemented new bank-wide KYC standards that apply to all our business lines to 

ensure consistency. Our new KYC policy forces a more critical look at each customer at the 

onboarding phase, which enables us to make better decisions about whether that customer fits 

within our risk appetite. 

I firmly believe that KYC is about more than just checking a box it's about really 

understanding who your customer is so that you know whether this is a customer you want to do 

business with. Importantly, we are enforcing this message across our entire employee team 

through robust and continual training, outreach, and communications. 

We also developed a new country risk-rating methodology, as wcll as a new customer 

risk-rating methodology. The new customer risk-rating methodology takes a holistic view of 

customer risk, evaluating risk based on country of residence, products and services utilized, legal 

entity structure, and type of business or customer. We now have a better way of identifying 

where our risks lie and we can make good decisions about whether we have the right controls 

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and the right level of diligence on a particular customer, and if we do not, we will either fix it or 

we will exit that customer. 

Once we had our new customer risk-rating methodology and KYC policy in place, we 

started rolling out a large-scale KYC remediation project across all our business lines, which I 

chair. Through this process, we have been reviewing our entire customer base, exiting certain 

customers, and remediating all our remaining customers up to our new KYC standards. Our 

KYC remediation project is a huge undertaking and this project has integrated our business 

people with our Compliance people in a way that did not happen before. Many of the changes 

we are making are being adopted as HSBC global best practices. 

C. Technology 

We also needed a more robust transaction monitoring system that was sustainable and 

had the right controls. We have made significant investments in technology and we believe that 

our new transaction monitoring system more effectively detects suspicious activity. We have 

also built better controls around that system so that any changes to the way we monitor are vetted 

by an independent team. 

In addition to improving our technology, we recognized that we needed the right structure 

around the technology so that we not only get better alerts, but are better able to analyze those 

alerts and report suspicious activity to law enforcement. So we looked not just at the numbers of 

analysts we needed to hire but the types of people we needed. We brought more subject matter 

experts into our monitoring team and have built out our Financial Intelligence Unit. 

While we have made real progress, we recognize that thcre is more to do. This is 

difficult, it is complicated, and it takes time to do it right. Our regulators recently raised issues 

about some aspects of our model validation process. Addressing these issues is a top priority. 

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IV. Slistainability 

We understand that we have to rebuild the trust of our regulators, our customers, and our 

other stakeholders. For this reason, the sustainability of our AML Compliance program is a top 

priority. The intended consequence of the changes I have discussed is to embed a new culture of 

responsibility, accountability, and deterrence within the U.S. bank. In many ways, an 

organization's culture is a product of the "tone at the top," and it has been my mission, and the 

mission of my new senior team, to make sure that compliance is on every employee's mind at 

every level in the organization. 

We understand that an effective AML Compliance program requires an ongoing process 

oflearning, adapting, and improving. There is no point at which we can just sit back and say, 

"Our program can't get any better." We need to evolve and improve constantly; we need to 

respond not only to regulatory changes but also to advances in technology and to the risks posed 

by the ingenuity of drug traffickers, money launderers, tax evaders, and others seeking to use our 

financial system for illicit purposes. We want our doors to be closed to these bad actors. We 

will never catch every single illicit transaction, but our goal must be to ensure that we are in the 

best position possible to do so. This is my goal and commitment, and this is the goal and 

commitment of the HSBC Group, supported fully by our Board of Directors. My commitment 

also extends to the thousands ofHSBC employees here in the U.S. who have been working 

tirelessly over many months to remediate compliance issues and create a sustainable compliance 

capability. 

V. Conclusion 

In closing, let me say that I appreciate this Subcommittee's efforts to examine and 

improve the steps taken by industry and government to address these challenges, and we are 

committed to fulfilling our responsibilities in an effective and sustained manner. 

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Stuart Levey 

Chief Legal Officer 

HSBC Holdings pic 

Written Testimony for Senate Permanent Subcommittee on Investigations 

July 17,2012 

I. Introduction 

Good afternoon Chairman Levin, Ranking Member Coburn, and members of the 

Subcommittee. My name is Stuart Levey and I joined HSBC Holdings pIc (or "Group") as its 

global Chief Legal Officer in January of this year. I am pleased to appear here, at the 

Subcommittee's request, to participate in today's hearing on combating money laundering. This 

Subcommittee has played a vital role in promoting sound policies and practices in the AML area. 

That work has made the global financial system stronger and increased the tools available to law 

enforcement in the campaign against those who would misuse the global financial system for 

money laundering, drug trafficking, terrorism, tax evasion, or other illicit purposes. 

We have worked closely with the staff durirlg the course ofthe investigation and 

cooperated as completely as possible to help provide a full picture of what happened. This 

process has highlighted some unacceptable shortcomings that HSBC deeply regrets. We have 

learned from this experience and are taking steps to change. 

Irene Dorner, our U.S. CEO, has spoken about the work we have done and continue to do 

to improve our AML compliance controls in the United States. However, we recognize that it is 

not enough to fix the specific issues that the Subcommittee has focused on; instead, we must 

implement a global strategy to tackle the root causes of our identified deficiencies. That is what 

we have begun to do and that is what I would like to talk about today. 

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II. Lessons I.earned 

We have learned some difficult lessons from our experiences in the U.S. and in Mexico. 

We have learned that our decentralized management model focused on country heads made it 

difficult to ensure that HSBC standards were being implemented consistently. While our old 

model served us well historically, it does not work in an interconnected world where transactions 

cross borders instantaneously and where weaknesses in one jurisdiction can be quickly exported 

to others. New acquisitions expanded HSBC faster than our infrastructure and controls could 

handle, especially given increasing regulatory expectations. In some instances, acquisitions were 

not sufficiently integrated into our operations and not brought up to HSBC standards quickly 

enough. We have learned, therefore, that HSBC affiliates could not assume that other HSBC 

affiliates with whom they did business were adhering to adequate standards. We have learned 

that our approach to compliance - and AML in particular - was not adequate to address the risks 

we face as a global institution. And we have learned that we did not share information 

effectively enough across our affiliates, with serious consequences. 

III. How We Are Reforming HSBC To Address These Shortcomings 

At the beginning of2011, there was a transition at HSBC to our new CEO, Stuart 

Gulliver, and our new Chairman, Douglas Flint. The new leadership team recognized that 

immediate action was required and sct out a strategy to make changes to the way HSBC operates 

around the world. Over the past eighteen months we have taken concrete steps to address each 

of the deficiencies I have described. The work we have undertaken is ambitious and complicated 

given our size and our global footprint, but we all recognize that it must be done. 

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A. Reorganization of HSBC's Structure and Business 

I. Global Businesses and Functions 

In early 2011, our new CEO, Stuart Gulliver, articulated the firm's new strategy. The 

decentralized system where country heads were dominant on all matters within that country 

would be eliminated and replaced. Instead, in order to make the firm more cohesive and better 

connected, we reorganized HSBC into four Global Businesses and ten Global Functions in 

addition to our pre-existing regional structure. We gave the heads of each business and function 

the authority over all personnel in their respective organizations all over the world, thus creating 

the ability to manage their business or function on a global basis, making it easier to implement 

consistent policies, standards, and processes. The Global Businesses are Global Banking & 

Markets ("GBM"), Commercial Banking ("CMB"), Private Banking ("GPB"), and Retail 

Banking and Wealth Management ("RBWM"). The Global Functions include Legal, Audit, and 

Risk and Compliance. The heads of each of the businesses and functions, together with the 

heads of each of the regions, are all members of our risk management committee, which is part 

of the Group Management Board. This group meets eleven times a year and each meeting is 

comprehensive, often lasting an entire day. What that means is that the most senior people 

responsible for managing HSBC globally sit around a table every month, look at our risks, and 

make decisions. 

Better global integration makes us better situated today to manage our risk on a global 

basis, better able to see where risk in one part of HSBC may impact another part, and better able 

for the first time to ensure that consistent compliance standards and practices are implemented 

across all of our affiliates. 

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2. Simplifying Our Business 

In May 20 II, we announced a second key component of our new strategy. We have put 

the entire business through five economic filters: international connectivity, economic 

development, profitability, cost efficiency, and liquidity. Businesses that do not fit are sold; 

countries that do not fit are exited. We are no longer trying to be everywhere and trying to 

provide all services to all customers. We have focused on selling or exiting non-core businesses, 

which added undue complexity and raised control risks. (An early example of this would be the 

Mexican U.S. dollar cash handling business that was terminated by our fanner CEO Michael 

Geoghegan in 2008. Eventually, the global Banknotes business was closed entirely.) 

Application of these filters was designed to make the firm more manageable, reduce risk, and 

focus on our strengths as an internationally connected bank. As a result, over the past 18 

months, we have sold or exited 31 businesses and are withdrawing from 9 countries. 

We believe that this new structure and focus allows us to more effectively manage HSBC 

on a global basis and puts us in a better position to both detect and address compliance risk 

globally. 

B. Increased Focus On Compliance 

Historically, Group Compliance served what was primarily an advisory function. 

Compliance in each country reported to the country CEO and implementation ofHSBC 

standards was the responsibility of each local Compliance group. This led to inconsistency and 

in some cases confusion about ownership and escalation responsibility. The top Group 

Compliance job at HSBC. which David Bagley has held for the past (en years, is undeniably 

difficult and our historical organizational structure meant that we did not invest in Group 

Compliance or empower it the way we should have. This has changed. 

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1. Strengthening Compliance 

We have elevated and strengthened the role of Group Compliance so that it is now a key 

control function, not just an advisory function. The Head of Group Compliance now has 

authority over the nearly 3,500 HSBC compliance officers worldwide. Group Compliance is 

responsible for resourcing decisions, perfonnance reviews, objectives, strategy, budget, and 

accountability within all the Regional and Global Business Compliance functions, as well as 

compensation for all Compliance officers globally. Under the new structure, Group Compliance 

is empowered to set standards across the organization and now has the necessary authority to 

reach down into affiliates and ensure that those standards are being met. 

We have significantly increased the resources devoted to Compliance across the finn. 

We have created a new independent Assurance team within Compliance that reviews the 

effectiveness ofthe Regional and Global Business Compliance functions, reports compliance 

issues for remediation, and tracks progress. We now have the tools to analyze and assess our 

affiliates, looking for compliance risk and problems, and to raise those up to senior members of 

Group Compliance and Group Risk, who are now responsible for ensuring problems are 

resolved. This gives us a transparency and accountability that was lacking before. 

In addition to shoring up our Compliance function, we have also enhanced the authority 

of our Global Risk function, so that it too is a strong control function that works in tandem with 

Compliance. Our Chief Risk Officer now has a broader mandate to control all types of risk 

globally and has oversight over every Risk officer in every affiliate. The Chief Risk Officer 

chairs the Risk Management Committee meetings and attends the full Group Holdings Board 

meetings, at which risk and compliance is a substantial focus. 

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2. Values Program 

In addition to adding resources and elevating the stature of Group Compliance, in 2011 

our new senior leadership introduced a values program that seeks to define the way everyone at 

HSBC should act. Under this values program, before any consideration of the business 

scorecard, our top executives are judged on being open, connected, and on their commitment to 

acting with integrity. In addition, all managers and senior executives are accountable for 

ensuring that business decisions and activities within their area are aligned to our values and 

business principles. This includes reviewing all products, services, policies, and practices to 

ensure that the values are embedded into our "business as usual" operations. Employees also are 

expected to understand the impact of the values and business principles on their day-to-day 

activities and, as part of performance reviews, employees are now assessed on their value-related 

behaviors. The compensation of all HSBC employees - from the most senior to the most junior 

- will be impacted if behaviors do not meet our expectations. 

So far, 332 senior managers have attended a 2-day workshop on HSBC values; 3,000 

executives have attended leadership training, and 43,500 employees have attended general 

training, both of which included sessions on HSBC values. 

3. New Chief Legal Officer 

It was in the context ofthese reforms that HSBC's leadership approached me about 

taking on a newly-created position of Chief Legal Officer. I had previously served nearly seven 

years as the Under Secretary of Treasury for Terrorism and Financial Intelligence under 

Presidents Bush and Obama. In our conversations, the Chairman of the Board and the new CEO 

were candid with me about the problems HSBC faced, the reforms they wanted me to help them 

implement, and the empowerment that I would need and have. I saw the opportunity as an 

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important challenge. HS BC is a great institution with a global footprint and tremendous scale. 

Helping HSBC successfully implement the kinds of reforms I am describing today will make a 

significant difference in promoting the overall integrity of the financial system. 

C. Designing and Implementing New Global Standards 

In April of this year, Stuart Gulliver issued a Group Circular Letter ("GCL") - which is 

the way our CEO communicates important policy changes throughout the Bank entitled 

"HSBC Global Standards." This directive states that in order to preserve and enhance our 

reputation, we must lead our industry in formulating and implementing global standards and 

controls to ensure that our conduct matches our values. The GCL sets forth some key principles. 

These are, among other things, that HSBC must: 

Adopt and en force adherence to a single standard globally that is determined by the 

highest standard we must apply anywhere. Often, this will mean adhering globally to 

U.S. regulatory standards, but to the extent another jurisdiction requires higher 

standards, then that jurisdiction's requirements must shape our global standard; 

Maximize the sharing of information for risk management purposes among Group 

companies and among Global Businesses and Functions; 

Apply a globally consistent approach to knowing and retaining our customers. When 

we conclude that any customer or potential customer poses an unacceptable 

reputational risk (or otherwise does not meet our standards), we should exit or avoid 

the relationship globally. 

The GCL also established a new Steering Committee on Global Standards, co-chaired by 

myself and our Group Chief Risk Officer, which is responsible for developing and overseeing 

the implementation of the new standards. Irene Dorner is also a member of the Committee, 

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because we recognize that often the highest standards will be U.S. standards and Irene's 

experience and expertise in that area will be invaluable. This will mean that rather than the U.S. 

bank being faced with the challenges of absorbing problems and deficiencies from abroad, more 

often than not it will be high U.S. standards that we will be exporting globally. By implementing 

this highest common denominator approach across HSBC we are requiring that all our affiliates 

be held to consistent high standards. Our new structure gives Group Compliance and our other 

control functions the ability to hold people accountable for following those standards in a way 

that was not possible before. 

Our Global Standards Steering Committee has already taken action on a number of 

issues, and we have purposefully set out to address several of the problems the Subcommittee 

has highlighted through its investigation. 

1. Information Sharing 

One of the first acts of the Steering Committee was to enact a new global standard 

designed to maximize the sharing of information, to the extent permitted by law, across all 

HSBC affiliates and all Global Businesses and Functions for risk management purposes. Key 

compliance-related information will now be shared horizontally with all Regional and Global 

Business Compliance Heads, including monthly reports detailing compliance issues in a region 

or business line. The reports from the new Assurance team's on-the-ground reviews of specific 

Regional Compliance Functions will also be shared horizontally. And importantly, any material 

or systematic AML control weaknesses at one affiliate are to be shared with all affiliates. 

Similar infonnation sharing protocols have been established for affiliate audit reports. We have 

seen what happens when infonnation is not shared effectively across our institution, and we 

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continue to look for additional opportunities to increase the flow of information throughout the 

firm. 

One difficult reality that global institutions like HSBC have to grapple with is that we 

face certain restrictions on sharing information across borders because we must adhere to the law 

wherever we operate. The Subcommittee is well aware of this issue and the challenges we face 

in this area. But at the same time we have recognized that we can significantly improve the flow 

of information from what occurred in the past and thereby improve our controls. 

The Steering Committee is also overseeing the establishment of a global Financial 

Intelligence Unit ("FlU") at the Group level to ensure we are able to analyze and act on 

infonnation submitted from around the firm and, subject to any legal restrictions, to share 

infonnation with relevant affiliates that are impacted. 

2. Affiliate Due Diligence 

Another early action of the Steering Committee was to globalize the practice of 

conducting appropriate due diligence on all of our HSBC affiliates. The risk of not doing so has 

been clearly illustrated by this investigation. While affiliate due diligence is only required by 

law in a few countries (and is not required by the Financial Action Task Force), we believe that 

best practice mandates that HSBC affiliates should know more about each other than they do 

about third-party customers, not less. This means that all HSBC affiliates are now required to 

complete due diligence on any other HSBC affiliate with which they have a correspondent 

banking relationship. 

3. Global Risk Filter 

In addition to the five business filters discussed above, the Steering Committee has 

decided to add a sixth filter to govern HSBC's activities in high risk jurisdictions. We are 

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implementing a new global risk filter that will standardize which countries are viewed as high 

risk by adopting the U.S. country risk ratings on a firm-wide basis. The risk filter will help us 

determine what business we arc comfortable doing in high risk places and what business we 

must avoid. We want to be in fewer places, with fewer clients, and with less risk across the 

board. Because the risk filter will be applied firm-wide, it will also bring consistency and 

enhance our ability to understand and manage our risk across affiliates. We do not view this as 

sacrificing business for compliance purposes. There is no conflict between our business 

objectives and compliance objectives in the long run or when viewed from a global firm-wide 

perspective. 

4. Global Sanctions Policy 

The Steering Committee has also moved to adopt a global sanctions policy, based on a 

review ofHSBC's current payment screening policies and procedures. We have identified a 

number of enhancements that can be made to that process, including additions to the sanctions 

lists used for both "real time" and "near time" payments screening. Among other things, this 

will mean that we will be screening for all illicit actors designated by OFAC in all jurisdictions, 

in all currencies. 

IV. Making Reforms Sustainable 

We understand that we also need a genuine commitment from the highest levels of the 

organization to institutionalize the reforms and foster a culture of compliance. That is being 

accomplished in part by formalizing the reforms I have described and embedding them in a 

governance structure. 

In the end, sustainability of these reforms depends critically on the commitment of 

HSBC's top leadership. The tone at the top of HSBC is, in my view, remarkably strong. Our 

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Board and senior leadership are committed (0 seeing these reforms through, and we understand 

that this is something that absolutely must be done for the long-term success of our bank. 

V. Protecting the Integrity of the Financial System 

The reforms! have laid out above, when fully implemented, will have a positive impact 

on the financial system. But beyond that, there are opportunities to improve collaboration both 

among financial institutions and between the financial sector and the government that would help 

protect the financial system from misuse. One lesson I learned during my Treasury service is 

that, in almost all cases, the private sector and governments share the same goals when it comes 

to preserving the integrity of the financial system. This is a difficult problem, and we are up 

against groups of people who are adept at evading controls. My experience at Treasury was that 

banks are eager to receive the type of information about illicit conduct that the government is 

able to provide and to engage with the government about mitigating that risk, and this is certainly 

true with respect to HSBC. HSBC wants to playa constructive role in this effort, and there are 

clearly opportunities for increased information sharing and collaboration. 

This Subcommittee helped create a valuable tool in the PATRIOT Act when it gave the 

industry 314(b), which permits financial institutions to share information with one another in 

order to identify and report to the federal government activities that may involve money 

laundering or terrorist financing. Increased sharing of such information would enable financial 

institutions - and law enforcement - to better connect the dots, identifY suspicious patterns of 

activity, and take appropriate action. Unfortunately, this provision has not been used as robustly 

as it might be. I know this Subcommittee has also been looking for ways to improve the 

effectiveness of this provision. 

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Another potential area for improvement is the sharing of information between financial 

institutions and government agencies. Law enforcement agencies and the intelligence 

community collect and analyze significant amounts of information regarding illicit activity, 

which often enables the government to identifY the names of individuals, companies, or other 

entities that facilitate or tolerate illicit activity. This information would be extremely valuable to 

financial institutions, and to the extent more of this information could be shared, that is 

something we at HSBC, and I am sure others in the industry, would support and encourage. 

Along these lines, it would be helpful to have more access to beneficial ownership 

information for companies. Provisions of the Levin-Grassley Incorporation Transparency and 

Law Enforcement Assistance Act would be a step in the right direction, particularly if beneficial 

ownership information were to be made more readily available not only to law enforcement but 

to financial institutions as well. The better banks know their customers, the more secure the 

entire system is from misuse. 

VI. Conclusion 

You have heard a lot today about what happened in the past and the reasons for it. We 

are in the process of applying the lessons learned from our experience throughout our institution. 

We have a long way to go on this journey, but I believe we are on the right path. We have work 

to do to regain the trust of our regulators, our customers, and other stakeholders. But I do want 

to say very clearly that the reforms we are undertaking reflect a real commitment to HSBC's true 

values. HSBC is a bank that has a long and proud heritage. Over its 147 year history HSBC has 

been an upstanding corporate citizen all over the world and has played a vital role in integrating 

emerging markets into the global economy. This is a bank that has helped thousands of 

individuals and small businesses realize their dreams. 

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This experience has been a very painful one for the vast majority of the HSBC family 

who have spent their careers at the bank doing the right thing every day. I know I speak for all 

ofHSBC senior management when I say that we are committed to doing what needs to be done. 

I appreciate the opportunity to speak to you today and I look forward to answering your 

questions. Finally, Mr. Chairman, I intend to answer the Subcommittee's questions as candidly 

and completely as I can today. However, as has been previously discussed with the 

Subcommittee's staff, there are certain potential questions or parts of questions - that I may not 

be able to answer because of either legal obligations attendant to my prior position in 

Government or ethical obligations associated with my present position as counsel for HSBC. 

hope that none oftoday's questions will implicate either of these areas where I cannot respond, 

but if they do I will let you know. 

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For Release Upon Del ivcr) 

9:30 a.m .. July 17. 2012 

TESTIMONY OF 

TilE OFFICE OF THE COMPTROLLER OF TilE CURRENCY 

Before the 

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS 

of the 

COMMITTEE ON HOMELAND SECURITY AND COVERNMENTAL AFFAIRS 

of the 

U.S. SENATE 

July 17,2012 

Statement required by 12 USc. 250: 

The views expressed herein arc those ofthe Office cfthe Comptroller of the Currency and do not 

necessarily represent the views of the President. 
151 


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I. Introd uction 

Chainnan Levin, Ranking Member Coburn, and members of the Subcommittee, the Office of the 

Comptroller of the Currency (GCC) appreciates the opportunity to appear before you today to 

discuss the importance ofefTective Bank Secrecy Act (BSA) compliance programs at U.S. 

financial institutions and the role the OCC- and the other financial institution regulators play 

in examining financial institutions for compliance in this area. As well, this testimony focuses 

on the OCC's supervision ofHSBC Bank USA, N.A. (HBUS or Bank) with respect to BSA 

compliance, our enforcement action against the Bank, and other matters in which the 

Subcommittee has expressed an interest. 

The OCC is committed to ensuring that the institutions under its supervision have efTectivc 

controls in place to safeguard them from being used as vehicles to launder money for drug 

traffickers and transnational and other criminal organizations, or t:1cilitate the financing of 

terrorist acts. 'fogether with the other Federal banking agencies, the banking industry, and the 

law enforcement community, the OCC shares the Subcommittee's goal of deterring money 

laundering, terrorist financing, and other crim inal acts and preventing the misuse of our nation's 

financial institutions. 

National banks and thrifts have been required to have a BSA compliance program since 1987, 

and to monitor, detect and report suspicious activity since the 1970s. However. regulatory 

requirements and supervisory expectations under the BSA have increased significantly since that 

time, with the result that most institutions have had to make substantial improvements in their 

BSA compliance programs. In response, many of the largest institutions have implemented 

highly sophisticated programs and systems that screen transactions to identify and report 

suspicious activity to law enforcement, and to ensure that such transactions do not involve 

entities subject to Office of Foreign Assets Control (OFAC) sanctions. The suspicious activity 

reports (SARs) that are filed have provided law enforcement with access to critical infonnation 

needed to initiate and conduct successful investigations and prosecutions. There are now 

approximately 5.6 million SARs in the centralized database that is maintained by the Financial 

Crimes Enforcement Network (FinCEN). The majority of these SARs have been filed by 

national banks and thrifts, 

However, as our financial institutions' BSA compliance programs have evolved and changed 

over time, so has the sophistication and determination of money launderers, terrorist financiers 

and other criminals in finding other ways to gain access to our financial institutions. The 

technology, products and services offered by our institutions to give customers bettcr and quicker 

access to financial services also are being used by criminals to instantaneously and anonymously 

move money throughout the world, sometimes through the simple click of a keypad. 

Consequently, banks, thrifts, and other financial institutions have had to devote increasingly 

larger amounts of resources to maintain effective programs. 

Comptroller Curry recently spoke on the operational risks that arc challenging financial 

institutions. One of the areas he spotlighted was BSA compliance. He noted that BSA 

compliance is inherently difficult combining the challenges of sifting through large volumes of 

transactions to identify featurcs that are suspicious, with the presence of criminal and possibly 

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terrorist elements dedicated to, and experts in, concealing the true nature of the transactions they 

undertake. Rendering BSA compliance more challenging is the fact that such risks are 

constantly mutating, as criminal and terrorist elements alter their tactics to avoid detection. They 

move quickly from one basc of operations to another. finding sanctuary in places where law 

enforcement. or sympathy for U.S. policy objectives, is weakest. Furthermore, money 

laundering and terrorist financing schemes are becoming more complex, involving entities and 

individuals located in numcrous jurisdictions worldwide. 

Comptroller Curry emphasized. and we reaffinn today, that notwithstanding these challenges, the 

acc expects the institutions we supervise to have effective programs in place to comply fully 

with the requirements orthe BSA. Primary responsihility for compliance with the BSA rests 

with the nation's financial institutions themselves. The acc and the other Federal banking 

agencies are charged with ensuring that these institutions have eflective systems and controls to 

detect and monitor for suspicious activity related to money laundering and terrorist financing. 

provide the necessary reports to law entorcement, and compile and maintain records that are 

useful to regulatory and criminal investigations. This is not a static area of compliance as new 

money laundering and terrorist financing risks emerge and as existing risks change. Therefore, 

the acc remains committed to continually improving our supervisory processes to help ensure 

the ongoing cffectiveness of national banks' and fcderal savings associations' (hereafter referred 

to as "banks") BSA compliance programs. 

The Subcommittee's Report (Report) contains three recommcndations focused on the aces 

BSAJAML supervision. We agree with the concerns rellected in each of the recommendations 

and will take actions in response. We have already identified a new approach that we will 

implement to assure that BSAJ AML deficiencies are fully considered in a satety and soundness 

context and arc taken into account as part of the "Management'· component ofa bank's 

CAMELS rating. We arc revising and clarifying the operation of our cross-functional Large 

Bank BSA Review Team (LB Review Team) to enhance our ability to bring different 

perspectives to hear and react on a more timely basis to circumstances where a bank has multiple 

instances of Matters Requiring Attention, or apparent violations of the required components of 

its BSA/AML program. We will also explore how we track and review relevant infonnation in 

this regard and whether new initiatives are appropriate in that area as well. We will also revisit 

our currcnt approach to citing BSAI AML violations in order to provide more flexibility for 

individual "pillar" violations to be cited, and we will identify what steps we can take in our 

examinations to more promptly obtain a holistic view ofa hank's BSA/AML compliancc. 

Finally, we will review other areas, such as training, statling, recruitment, policics, and 

interagency coordination, to make improvemcnts in our BSAlAML supervision program. 

II. oee BSA/AML Supervisorv Policies and Practice 

Recognizing the increasing and evolving challenges ofBSAlAML compliance, the ace has 

continually sought ways to enhance and improve our supervision. In 2005, we undertook a set of 

comprehensive initiatives to improvc our BSAI AML supervision. These initiatives were 

dcsigned to strengthen acc BSAlAML examinations; cnhance ace rcsources and expertise 

devoted to BSAI AML supervision; and provide clear and consistent communications about our 

BSAlAML supervisory expectations to the industry. Some of the key changes in our BSA/AML 

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supervision included the development and implementation of enhanced risk identification and 

analysis tools, such as the OCC's Money Laundering Risk Assessment system (MLR), which 

enables the OCC to identify potentially high-risk banks and activities that warrant increased 

scrutiny and supervisory resources. With the other Federal banking agencies, we finalized and 

issued the Federal Financial Institutions Examination Council's (fFIEC) Interagency BSAIAML 

Examination Manual (Manual) that provides consistent and comprehensive examination 

procedures for BSAIAML and OFAC. We also worked with the other Federal banking agencies 

to develop and issue a uniform policy on citing BSA compliance program violations and taking 

enforcement actions. And we created and filled a new Director-level position for the OCC's 

BSNAML Compliance Policy Department and augmented staff reporting to this new Director. 

In addition to the development and annual maintenance of the MLR information collection 

system, the OCC implemented a number of quality assurance processes to ensure that we arc 

consistent in identitying and communicating BSA issues. These initiatives include enhanced 

MRA tracking and the LB Review Team process. The LB Rcview Team was fanned in 2004 to 

ensure consistency in the area ofBSAIAML compliance for the largest banks under our 

supervision. The LB Review Team is comprised of the Director of the Enforcement and 

Compliance Division. the Director for BSAIAML Compliance Policy, and the Senior Counsel 

for BSNAML. 

The BSNAML Compliance Policy Department provides comprehensive BSA training to our 

examiners and organizes a BSA compliance conference every three years to infonn our 

examiners of emerging money laundering and terrorist financing threats and vulnerabilities. 

Representatives of the law enforcement eommunity are regular participants in these conferences 

and training sessions, establishing an on-going dialogue with our examiners concerning criminal 

typologies, schemes and arrangements. Such exchanges allow our examiners to be continually 

aware of the risks facing the banks. including those risks discussed here today, to scope 

c:-.aminations accordingly. and to provide timely guidance to the industry in addressing those 

risks. 

The BSNAML Compliance Policy Department also leads the OCC's National Anti-Money 

Laundering Group (NAMLG). which is an internal task force that serves as the tocal point for 

BSAIAML issues within the agency. The NAMLG facilitates intra-agency communication; 

promotes cooperation and infonnation sharing with national and district ollice AML groups; 

identifies emerging risks. best practices and possible changes in anti-money laundering policies 

and proccdures; discusses legislative proposals; and serves as a clearing house for ideas 

developed throughout the OCc. The NAMLG's resource sharing program initiative provides 

BSA policy expert resources to complex banks. higher risk banks, or examinations in need of 

specialized expertise. The resource sharing program promotes BSA!AML knowledge transfer. 

e:-.aminer development, and improves the allocation ofBSA resources. 

Globalization is a critical feature of the business activities of the large internationally-active 

banks. It provides them with access to new markets, customers and opportunities. However, it 

also increases their exposure to potential money laundering and terrorist financing risks. The 

OCC recognizes this challenge and the BSAIAML Compliance Policy Department works closely 

with the U.S. Treasury's Officc of Terrorism and Financial Intelligence CITI). FinCEN. and 

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OFAe to promote the implementation of sound international anti-money laundering and counter 

terrorist financing (AMLlCFT) standards. The OCC also annually hosts two AML schools to 

train our foreign counterparts, and we are active participants in the U.S. delegation to the 

Financial Action Task (FATF) that is led by TFI. 

The oee also works with the other FFIEe agencies, FinCEN and OFAC to review and develop 

BSA examination and enforcement policies and procedures. The publication of the Manual in 

2005 was an outstanding example of cooperation and coordination within the government. and 

bctween the government and the banking industry. The Manual reinforces the agencies' position 

that sound BSA/AMI. risk management enables a banking organization to identify BSAlAML 

risks and better direct its resources, with the ultimate goal of helping safeguard its operations 

trommoney laundering, terrorist financing, and other illicit activities. The Manual has been 

revised three times since its initial publication so that it remains current with the latest 

technological and payment system innovations and emerging threats and vulnerabilities. 

In fact, at the initiative of the OCC, the latest version of the Manual in 20 10 contained a new 

section on bulk cash repatriation that provides detailed guidance and examination procedures 

relating to this high risk product. Based upon our experience and expertise in the bulk cash and 

remote deposit capture (ROC) area, the oce took the lead in drafting thc bulk cash section of 

the Manual and the related examination procedures, and updating the section on ROC, The ncxt 

round of revisions to the Manual, which will be chaired by the oee, is currently in the planning 

stages and should be completed during the next year. We expect that the revised Manual will 

include expanded sections on ncw paymcnt systems such as prepaid access, mobile banking, and 

emcrging risks associated with new products, services and customcrs that the agencies have 

identified through our collective supervisory processes. 

The oee monitors compliance with the BSA and its implementing regulations by applying the 

examination procedures set forth in thc Manual. These procedures arc typically completed 

within each bank's examination cycle. Community banks are on eithcr 12 or 18 month 

examination cycles, and large banks and midsize banks arc on an allllual examination cycle. 

These procedures are risk-based and direct cxaminers to focus examination resources on highrisk areas within banks and high-risk banks. During an examination, examiners usc the 

procedures to assess the implementation and effectivencss of the bank's policies, procedures, 

systems, and controls. Every BSA/AML examination includes, at a minimum, a review oUhe 

bank's risk assessment and its BSAlAML compliance program (jocusing on internal controls, 

training programs, independent testing and BSA ofticer independence and qualifications). We 

also assess the effectiveness of the bank's OFAC compliance program. 

oce examiners perform ongoing supervision and conduct targeted testing in areas that may 

present higher money laundering and terrorist financing risks. The Manual also includes 

supplemcntal procedures that cover specific BSA requirements (e,g., currency transaction 

reporting, suspicious activity reporting, foreign corrcspondent bank, private banking, funds 

transfer recordkeeping) and specific examination procedures covering risks from products and 

services and persons and entities (e.g" corrcspondent banking, private banking, trade finance, 

electronic banking, third-party payment processors, bulk shipments of currency, pouch activities, 

politically exposed persons, business entities). The oee routinely downloads and analyzes BSA 

5 
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data, currency transaction reports and suspicious activity reports to identify unique risks and 

augment our risk-based examination processes, This information permits examiners to scope 

and plan examinations appropriately to ensure that the bank's higher risk activities arc evaluated. 

Such activities may be reflectcd in accounts associated with repetitive SAR tilings, significant 

cash activity, or activity that is inconsistent with the type of business of the customer, and are 

examples of the types of accounts that would be selected for transaction testing and further 

examiner investigation. In cases where examiners identify areas of concern, deficiencies or 

violations, they typically expand the examination scope and perfoml transaction testing in 

targeted areas to ensure they identify and evaluate all pertinent issues. This combination of our 

ongoing supervision and targeted examinations allows us to conclude on the adequacy of a 

bank's BSNAML compliance program. 

Currently, the OCC takes the findings from its BSNAML and OFAC compliance examinations 

into account in determining the bank's regulatory ratings in two ways: (i) compliance risk 

management (including BSA/AML) is a part of the Management component of the Unifonn 

Financial Institutions Rating System (UFlRS), more commonly referred to as CAMELS (Capital 

adequacy, Asset quality, Management, Earnings, Liquidity, and Sensitivity to market risk): and 

(ii) BSA/AML is taken into account as part of the compliance rating under thc Uniform 

Interagency Consumer Compliance Rating System. The oces approach offaetoring 

BSA/AML and OFAC compliance into the Consumer Compliance rating differs from the 

approach of the other Federal banking agencies, which incorporates consideration ofa bank's 

BSN AML and OFAC compliance only in the Management component of a bank's CAMELS 

rating.' 

We appreciate the concerns raised in the Subcommittee's Report about this approach and the 

need to ensure that deficiencies in BSAI AML compliance are considered in the context of safety 

and soundness and are taken into account in determining the Management component of the 

CAMELS rating. To address this concern, we are dcveloping directions to our examiners to 

view serious deficiencies in a bank's BSA/AML compliance area. including program violations, 

as presumptively adversely affecting a bank's Management component rating. We will also 

I In assigning this compliance fdting. O(,C examiners consider rnajor BSA/AML and OFAC examination tindings 

including. hut not limited to: 

• The current and historical adequacy oi'the bank's BSNAMLIOFAC compliance program: 

• The signilicance. volume. and history of program deficiencies and violations and whether they were 

accompanied hy aggri1\ <lting factors. such as highly suspicious activity creating a significant potential for 

money laundering. potcntiai1crrorist financing. and a pattern of structuring to evade reporting 

requirements: 

• Money laundering and terrorist financing risks posed hy the hank's customers. products and aClh itic~. 

• The adequacy of monitoring S) stems to detect and report suspicious activity: 

• The adequacy of "y~·aems to detect and report monetary transactions that require the filing of Currcne) 

Transaction Reports: 

• The adequacy of S) skms to comply with BSA rt'cord~eering requirements: 

• Evidence of insider complicity: and 

• Tht.! board of directors' and management's v,·illingncss amI ahility to administer an ef1ective BSA/AML 

and OFAC compliance program. 

The Ollice ofThrin Supervision. prior tn its merger "ilh 'he oee. used the same approach as the OCC by factoring 

BSMAML and OFi\C compliance into the Consumer Compliance rating and incorporating them within the 

Management rating. as appropriate. 

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provide guidance on how to document application of this approach in determining the 

Management component rating. 

III. OCC's BSAlAML Supervisory and Enforcement Process 

The oee uses a variety of methods to communicate problems or weaknesses in a bank's systems 

and controls, including BSA deliciencies, and to obtain corrective action. In most cases, 

problems in the BSA/AML area, as well as in other areas, are corrected by bringing the problem 

to the attention of bank management and obtaining management's commitment to take corrective 

action promptly. The Report of Examination or, in the case of large or midsize banks, the 

Supervisory Letter, documents the oees findings and conclusions with respect to its 

supervisory review of a bank. 

Problems or weaknesses are communicated to the bank's senior management and board of 

directors in the "Matters Requiring Attention" (MRA) section of the Report of Examination or 

Supervisory Letter. MRAs are conditions or issues that management is required to change or 

correct. MRAs are a serious consequence of the examination and they include practices that: (i) 

deviate from sound governance, internal control and risk management principles which may 

adversely impact the bank's earnings or capital, risk profile, or reputation ifnot addressed: or (ii) 

result in suhstantive noncompliance with laws and regulations, internal policies, controls or 

processes, oee supervisory guidance, or supervisory conditions imposed in an interpretive letter 

or licensing approval. Once MRAs are identified and communicated to the bank, the bank's 

senior management and board of directors are required to promptly correct them within the 

agreed upon time frame. oee examiner guidance specitically provides that supervisory 

strategies for banks with MRAs must include plans to follow up on the concerns. The plans need 

to be consistent with the seriollsness of the MRA and include activities to monitor progress and 

verify the effectiveness of the corrective actions. The oee does not deem an MRA corrected 

until the supervisory office has verified that the bank has adopted and implemented an effective 

corrective action. 

MRAs involving hanks in our Large Bank supervision program are tracked by the oee in a 

Large Bank data system that is continually updated by the examiners. On a quarterly has is, 

Large Bank supervision reports on the outstanding MRAs by hank and core function to ensure 

that corrective actions remain on track. 

When deficiencies in the BSAlAML area rise to the level ofa BSA compliance program 

violation (12 C.F.R. § 21.21), or when a bank fails to correct problems with the program that had 

heen previollsly reported to the bank (including through MRAs), a statutory mandate (12 U.S.c. 

18] 8(s)) requires the banking agency to use its cease and desist (e&D) authority to correct the 

problem. Section J 818(s) specifically provides that if an insured depository institution has failed 

to establish and maintain a BSA compliance program or has failed to correct any problem with 

the BSA compliance program previously reported to the institution hy the appropriate Federal 

banking agency, the agency shall issue a e&D order against the institution. 

To ensure that the oee's process for taking administrative enforcement actions based on BSA 

violations is measured, fair. and fully informed, in 2005, the oee adopted a process for taking 

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administrative enforcement actions against banks based on BSA violations. including situations 

where a bank fails to correct a problem that was previously brought to its attention, This process 

includes the following stages: 

(i) Preliminary assessment of the filets and discussion with bank management. 

(ii) Additional reviews by cross functional review groups. including the oces LB Review 

Team, 

(iii) Writtcn findings provided to the bank and an opportunity for the bank to respond. 

(iv) Washington Supervision Review Committee (WSRC) review, The WSRC reviews 

significant enforcement actions proposed to be taken by the OCe. including all cases 

involving BSA enforcement. all cases that are unique or highly visible. and those cases 

involving referrals to other agencies. 

(v) Final decision by the appropriate Senior Deputy Comptroller. 

As previously noted. the OCC also worked within the FFIEC to develop and issue an interagency 

policy on citing BSA compliance program violations and taking enforcement actions. and our 

enforcement decisions are framed by that policy. The Interagency Statement on Enforcement of 

BSAlAML Requirements (Interagency Statement) was issued in 2007 and it sets forth the 

Federal banking agencies' policy on the circumstances in which an agency will issue a C&D 

order to address noncompliance with certain BSA/AML requirements, particularly in light of the 

statutory mandate in Section 1818(s), The Interagency Statement providcs that a compliance 

program violation occurs where either of the following conditions exists: 

The bank fails to adopt or implement a written BSA compliance program that 

adequately covers the required program elements: (I) internal controls (including 

customer due diligence. procedures for monitoring suspicious activity or 

appropriate risk assessment); (2) independent testing; (3) designated compliance 

personnel; and (4) training; or 

The bank has detects in its BSA compliance program in one or more program 

clements indicating that either the written program or its implementation is not 

effective, For example, program deficiencies indicate ineffectiveness where the 

deficiencies are coupled with other aggravating factors such as evidence of: (i) 

highly suspicious activity creating a significant potential for unreported money 

laundering or terrorist financing; (ii) patterns of structuring to evade reporting 

requirements; (iii) significant insider complicity; or (iv) systemic failures to file 

currency transaction reports. suspicioLls activity reports. or other required BSA 

reports, 

A program violation may occur where customer due diligence, monitoring ofsuspieioLls activity. 

risk assessment. or other internal controls fails with respect to a "high risk area," or to "multiple 

lines of business that significantly impact the institution's overall BSA compliance." An agency 

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will also consider the application of the institution's program across its business lines and 

activities. In the case of institutions with multiple lines of business. deficiencies affecting only 

some lines of business or activities would need to be evaluated to detennine if the deficiencies 

arc so severe or significant in scope as to result in a conclusion that the institution has not 

implemented an effective overall program. 

The Interagency Statement also specifically addresses repeat problems for purposes of the 

statutory mandate for a e&D order in 12 U.s.c. § 18 I 8(s). It provides that in order to be 

considered a "problem" within the meaning of section 1818(s), the deficiency reported to the 

institution would ordinarily involve a serious defect in one or more of the required components 

of the institution's BSA compliance program or implementation thereof. In addition. it 

sometimes takes a considerable period of time to corrcct BSN AML deficiencics especially when 

large institutions merge system platit)fl1lS and infonnation technology changes are required. As a 

result. with regard to rcpeat problems. the Interagency Statement provides that a e&D is not 

required if the agency detennines that the institution has made "'acccptable substantial progress" 

toward correcting the problem at the time of the examination immediately following the 

examination where the problem was first identified and reported to the institution. 

The Report highlights and calls for change in the oeC's current practice of not citing violations 

of the individual required components of an effective BSA program (i.e., internal controls. 

independent testing. designated compliance personnel. and training) wherc the deliciencies fall 

short ofa program violation. We undcrstand the concerns reflected in the Report that the oeC's 

approach seems to limit examiners to using only MRAs to remedy identi1ied problems. and we 

will revisit our current approach in order to provide more flexibility for individual "pillar" 

violations to be citcd. One of the reasons for the current oce approach is that it requires the 

oce to focus on determining whether the deficiencies in a bank's program amount to a BSA 

compliance program violation. Therefore, in implementing changes on this point, it will be 

important not to ereatc disincentives to making the tough calls when there are BSA compliance 

program violations mandating the issuance ofa C&D order. 

While our practice in this regard has differed from that of the other Federal banking agencies, the 

OCC's public enforcement record is nonetheless strong. As shown in Section IV below. between 

2005 and 20 II, the oec issued BSA/AML focused C&Ds against banks at nearly twice the rate 

of the Federal Deposit Insurance Corporation (FDIC), the nearest other agency (per number of 

banks supervised). and issued CMPS at nearly four times the rate ofthe FDIC. The OCC also 

brought over 60 percent of the total dollar value of BSA penalty actions issued by the oec, the 

Board of Governors of the Federal Reserve System (Federal Reserve) and the FDlC. 2 Thus. the 

component violations being cited by these other agencies are not resulting in as many C&D 

orders or eMP actions (which are the most stringent types of actions taken), as compared (0 (he 

approach taken by the Oec. 

2 As set forth in the chans on the foll,)\\ ing page. between 2005 and 2011. the oec hrought 43 BSAi AML focused 

C&Ds against hanks as compared to 58 for the FDIC and 9 for the Federal Reserve. 10 addition. the oee issued 

eMPs against 14 haoks totaling $124 million, as compared to si, CMPs issued hy the FDIC totaliog $24.675 

million. and t"o CM]>s issued hy the Federal Reserve totaling $50 million. In 2011. the oce supervised 1.973 

hanks. the FDIC supervised 4.647 hanks. and the Federal Reserve supervised 826 banks and hank holding 

companies. 

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IV. oee BSAJAML Enforcement Actions and Industry Trends 

In recent years. the OCC has taken numerous formal actions against national banks to bring them 

into compliance with the BSA. These actions are typically C&D orders. The OCC has also 

taken formal actions against institution-affiliated parties who participated in BSA violations. 

Since September 11,200 I, the OCC has issued over 180 public fonnal enforcement actions 

based in whole. or in part. on BSAlAML violations (including formal agreements. C&D orders 

and civil moncy penalty (CMP) actions). As set forth in the following chalts. between 2005 and 

20 II. thc OCC brought BSA focused C&D orders and CMP actions against banks at a higher 

rate than the FDIC and the Federal Reserve (per number of banks supervised): 

Number of Bank BSA Focused C&D Orders by Agency 

Number of Depositorv Institutions Regulated by Agency 

2005 2006 2007 2008 2009 2010 2011 

OCC 1984 1762 1662 1559 1495 1418 1973 

FDIC - 5243 5200 5140 4987 4785 4647 

Federal Reserve - 896 877 875 846 826 826 

Number of Bank BSA CMP Actions by Agency 

Dollar Amoul)ts of Bank BSA CM? Actions by Agency (In Millions) 

2005 2006 2007 I 2008 2009 2010 2011 Totals 

OCC $27.75 $0.15 $10.75 I $15.2 $5.0 $50.2 $15.0 $124.05 

FDIC 0 $13.4 0 I 0 0 $.025 $11.25 $24.675 

Federal Reserve $30.0 0 $20.0 I 0 0 0 0 $50.00 

Some of the more significant recent cases were actions against Wachovia Bank. N.A .• Zions First 

National Bank, and Citibank, N.A. There are also many other examples where the oce 

identified BSA non-compliance or. in some cases, actual money laundering. took effective action 

to stop the activity. and ensured that accurate and timely referrals were made to law enforcement. 

The Wachovia. Zions, and Citibank actions are discussed below: 

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Wachovia Bank, N.A., Char/olle, North Carolina (Wachol'ia) - On March 17, 20 I 0, the oce 

assessed a $50 million penalty and issued a C&D order against this bank for violations of the 

BSA as part of a coordinated action with the Department of Justice, FinCEN, and other federal 

agencies. Wachovia also entered into a deterred prosecution agreement with the U.S. Atlorney's 

Office in the Southern District of Florida and the Department of Justice (DOJ) Asset Forfeiture 

and Money Laundering Section (AFMLS) and agreed to forfeit $110 million to the U.S. 

Additionally, FinCEN assessed a $110 million civil money penalty that was deemed satisfied by 

the forfeiture to the U.S. Government. 

The OCC found that Wachovia: (a) failed to implement adequate policies, procedures, or 

monitoring controls governing the repatriation of nearly $14 billion of U.S. dollar (USD) bulk 

cash for high risk cas a de cambio (CDC) and other foreign correspondent customers; (b) failed to 

conduct monitoring of high volumes of monetary instruments flowing through the CDCs and 

other foreign correspondent accounts in the form of ROC products, consisting of nearly six 

million checks worth approximately $41 billion; (c) failed to conduct adequate levels of due 

diligence of high risk CDC and foreign con'espondent customers; (d) failed to appropriately 

monitor traveler's checks in a manner that was consistent with the bank's policy limits over 

sequentially numbered traveler's checks for high risk CDC customers: (el failed to appropriately 

institute risk-based monitoring oCthe bank's foreign correspondent customers, primarily as a 

result of placing too much emphasis on staffing considerations when setting alert parameters; (I) 

failed to file timely SARs involving suspicious transactions conducted through certain foreign 

correspondent accounts at the bank; and (g) failed to adequately report cash structuring activity 

from review of alerts generated in the bank's Financial Intelligence Unit. Aller conducting a 

voluntary look back, the bank filed over 4,300 SARs involving suspicious transactions conducted 

through the bank by CDCs and high risk foreign correspondent customers. 

The OCe's enforcement action focused atlention on the bulk cash repatriation money laundering 

scheme. The OCC played a lead role in this case and linked remote cash letler instrument 

processing to the bulk cash scheme. As a result of the Wachovia investigation and findings, the 

OCC took the lead in integrating bulk cash processing and the ROC implications into the Manual 

and commenced horizontal reviews of bulk cash activity and ROC at all national banks in the 

OCCs Large Bank supervision program, including HSBC's banknote activity. 

Shortly after the Wachovia case, the government of Mexico implemented significant restrictions 

on U.S. dollar transactions at Mexican financial institutions and made significant changes to its 

AML laws and regulatory processes. In response, the drug cartels have adjusted their money 

laundering schemes and techniques to adapt to this change, and the OCC continues to work with 

law enforcement to identify new areas of vulnerability. 

Zions First National Bank, Salt Lake Citl', Utah (Zions) - On February I I, 20 II, the OCC 

assessed an $8 million penalty against Zions for failures involving correspondent banking and 

ROC. Concurrent with the OCCs penalty, FinCEN assessed an $8 million penalty against 

Zions. Both penalties were satisfied by a single $8 million payment to the U.S. Department of 

the Treasury. The OCC had commenced an investigation into the bank's f(lrmer foreign 

correspondent business and identified deficiencies in its BSA/AML controls, which resulted in 

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violations oflaw. In particular, the bank pioneered the development of a RDC product that 

enabled customers to deposit imaged items electronically from remote locations and marketed 

this product to high risk customers with insufficient regard for BSAJAML compliance 

implications. The bank exited the foreign correspondent line of business in early 2008, promptly 

conducted a voluntary look back, and reported suspiciolls activity. The significance of this case 

is that it presents a good example of how banks need to ensure that compliance issues are at the 

loreiront of technological developments and are not secondary issues to be considered after the 

product is launched and the volumes become unmanageable. 

Cifibank. N.A .. Sioux Falls. SOlllh Dakota (Cilibank) - On April 4, 2012, the OCC entered into a 

consent order with Citibank, N.A .. to address BSA deficiencies involving internal controls, 

customer due diligence, audit, monitoring of its RDC and international cash letter instrument 

processing in connection with foreign correspondent banking, and suspicious activity reporting 

relating to that monitoring. These findings resulted in violations by the bank of statutory and 

regulatory requirements to maintain an adequate BSA compliance program, file SARs, and 

conduct appropriate due diligence on foreign correspondent accounts. Among its requirements, 

the consent order directs the bank to: 0) ensure the independence ofthe bank's compliance staft: 

(ii) require new products and services be subject to high level compliance review, (iii) ensure 

that all customer due diligence processes are automated and accessible; and (iv) conduct a look 

back ofthe RDC cash lettcr activity. 

Each of these cases has been discussed extensively at public forums and they underscore the 

OCe's commitment to ensuring that all national banks and federal savings associations have a 

strong BSA! AML function that keeps pace with changing technologies and threats. 

Our examination and enforcement activities have identified a number of trends and concerns in 

the BSA/AML area that warrant continued attention by supervisors and banks: 

• Compliance Resources - Some cases have identified the lack of sul1icient stal1ing. high 

turnover rates, or the impact of compliance cuts on the program. In some cases, banks 

cut staffing and resources in the BSA area during the financial crisis. In other cases, 

banks' compliance department staff and expertise have failed to kcep pace with the 

growth of the institution. For example, a mid-size hank should not have the same 

compliance program and stafflevels that it had when it was a smaller community bank. 

• International Focus or Component - Forcign eorrcspondent banking, eross border funds 

transfers, bulk cash repatriation, remote deposit capture, and embassy banking have all 

becn high risk areas that some banks have not managed effectively. 

• New Teehnologies~· Some banKS have introduced new technologies and products without 

appreciating or understanding the compliance risks. In addition, somc products have 

evolvcd through technology and nced to be periodically re-evaluated (e.g., prepaid access 

moncy transfers, payroll cards). 

Third-Partv Relationships and Payment Processors The oec and the other banking 

agcncies have bcen reviewing closely third-party and payment proccssor relationships 

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and a number of enforcement actions have been taken in reccnt ycars. Banks need to be 

especially aware of the risks presented by payment proeessors and thc extent of their 

franchising relationships (RTN numbers. routing numbers. and ATM machines). 

• Evolving Payments Activities - Prepaid access, mobile phone banking. smart A TM 

machines and kiosks. mobile wallets. and Internet cloud-based payment processes arc all 

technologies that are dcveloping rapidly, and senior bank compliance personnel need to 

be engaged in the product development processes. OF AC monitoring is especially 

important and challenging in this area. 

• Migration to Smaller Banks As some large or mid-size banks have attemptcd to lower 

their risk profiles. money launderers have tried to enlist community banks to step in and 

provide key payments functions. This raises concern as these institutions may lack the 

resources and personnel necessary to successfu lly manage higher risk activities. 

Many of the practical problems seen in recent years with respect to BSA compliance can be 

summed up within four areas: (i) culture of compliance within the organization. (ii) commitment 

of sufficient and expert resources. (iii) strength of information technology and monitoring 

processes. and (iv) sound risk management. The OCC will continue to identifY these trends. 

communicate them to the industry. and ensure that BSA! AML supervision stays current. 

V. Improvements Undertaken to Improve BSA/AML Supervision 

The oec is committed to rigorous supervision, strong enforcement. and continuous 

improvement to our supervisory approach to BSA/AML compliance. While we have previously 

discussed herein some recent BSA/AML related initiatives. other current initiativcs include the 

following: 

• We are implementing changes to our LB Review Team process to make it more effective 

in supporting and ensuring consistency of the supervisory processes for the larger banks 

we supervise. 

• We are reviewing the manner in which MRAs are reported to ensure that banks with high 

numbers ofMRAs in one particular CAMELS/lTCC area are receiving additional 

supervisory attention and. in the case of BSA! AML. consideration of formal enforcement 

action. 

• The oeC's MLR database includes a detailed invcntory of the products and services 

being olTered by each community bank so that the OCC can assess the BSAI AML risks 

within each particular institution for use in scoping and starting examinations. We will 

annually update the information collection processes pertaining to this tool to ensure that 

it captures higher risk and novel products. We will also consider whether similar tools 

should be implemented to our Large Bank and Midsize Bank portfolios. 

As previously described. we are strengthening and reinforcing the expcctation that 

BSAI AML and OFAC dcficieneies are taken into consideration in detennining the 

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760612.432

Management rating. We will also instruct our examiners to cease the practice of 

factoring BSA! AML and OFAC compliance into the Consumer Compliance rating. 

As described in Section III, we will also look closely at the Report's recommendation 

concerning citing BSAlAML compliance violations. 

In addition, we arc committed to keeping abreast of how new technologies and payment systems 

may affect BSA/AML compliance and to provide the industry and examiners with guidance on 

these emerging risks. For example, in 2006 the OCC issued comprehensive risk management 

guidance for Automated Clearing House (ACH) transactions, and the OCC continues to work 

with the other regulators to ensure that international ACII transactions are properly monitored 

for both BSA/ AML and OFAC compliance. In June of last year, the OCC issued risk 

management guidance for prepaid access programs and continues to dcvelop guidance for banks 

with regard to this rapidly growing product. And earlier this month. the OCC worked with the 

FI:'IEC to issue a statement on outsourced Internet cloud computing services that discusses key 

risk considerations associated with outsourced cloud computing activities, including cloud based 

payment processes and systems, and identifies applicable risk mitigation considerations 

contained in the various booklets that comprise the FFIEC IT Examination Handbook. 

VI. Overview ofHSBC and OCT's BSA/AML Examinations 

HSBC North America Holdings Inc. (HNAH) is the holding company for HSBC's operations in 

the U.S. HNAH is controlled by HSBC pic, London. England (HSBC Group). a $2.5 trillion 

global banking company with hundreds of financial institution subsidiaries throughout the world. 

The principal subsidiaries of HNAH at December 3 I, 20 I I were HSBC USA Inc. (HUS!), 

HSBC Markets (USA) Inc, a holding company for certain global banking and markets 

subsidiaries. HSBC Finance Corporation, a holding company for consumcr financc businesses, 

and HSBC Technology and Services (USA) Inc, a provider of information technology and 

centralized operational and support services among the subsidiarics of IINAI-I. The Bank is a 

subsidiary ofHUSL "Group Entities" are foreign affiliates of the Bank in which HSBC Group 

holds a majority interest. 

The Bank serves 3.8 million customers through its personal financial services, commercial 

banking, private banking, asset management, and global banking and markets segments. It 

operates several hundred bank branches throughout the U.S., predominantly in New York State 

as well as branches and/or representative offices in California, Connecticut. Delaware, Florida, 

Georgia. Illinois, Maryland. Massachusetts, New Jersey. North Carolina. Oregon, Pennsylvania, 

Texas, Virginia, Washington, and the District of Columbia. The Bank has five mainlines of 

business as follows: 

(i) Retail Banking and Wealth Management provides a broad range of financial products 

and services including loans, residential mortgages. deposits, branch services and 

brokerage products and services; 

(ii) Commcrcial Banking offers global banking services, along with financial planning to 

companies, government entities and non-profit organizations. [n addition to deposits. 

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760612.433

services include payments and cash management (rCM), merchant services, trade, 

supply chain, receivables finance, corporate finance, global markets and risk advisory: 

(iii) Global Banking and Markets is an emerging markets-led and financing focused 

business that provides tailored financial solutions to government. corporate and 

institutional clients worldwide, and the Bank manages its Global Banking and Markets 

operations as a global business and maintains offices in more than 60 countries and 

territories; 

(iv) I-ISBC Global Asset Management is the core investment business of the HSBC Group 

managing assets totaling $429.4 billion; and 

(v) HSBC Private Bank, a division of the Bank, offers wealth management and specialist 

advisory services for high net worth individuals and families with local and 

international needs. 

On April 30, 2003, the then HSBC Bank USA entered into a written agreement with the Federal 

Reserve Bank of New York and the New York State Banking Department regarding its 

compliance with AML requirements. When HSBC Bank USA merged with HSBC Bank & 

Trust (Delaware) N.A., on July I. 2004, the OCc. as the regulator of the surviving national bank, 

made the merger conditional on the Bank's continuing compliance with the requirements of the 

written agreement. On February 6, 2006, the OCC determined that the Bank had satisfied the 

requirements of the written agreement and the agreement was tenninated. 

Between 2004 and 2009, on-site OCC examiners conducted numerous examinations and issued 

Supervisory Letters covering, among other areas, pouch activity, embassy banking, foreign 

correspondent banking. rCM, SAR monitoring systems, and risk assessment processes and 

systems. During these examinations, the OCC followed the FFiEC Manual examination 

procedures and eonducted transaction testing. Over the course of this five year period, the OCC 

issued Supervisory Letters that contained a significant number ofMRAs that the Bank 

committed to resolving. The MRAs addressed BSA/AML risk assessments, customer due 

diligence. compliance leadership, statTing, alert backlogs, and SAR monitoring processes and 

enhancements. 

As described earlier in this testimony, compliance with MRAs is tracked as part of the oces 

supervisory process. In this case, MRAs in the BSA/AML area were reviewed periodically, and 

determinations were made whethcr the MRAs had been addressed. 

In mid-2009, as a result of the bulk cash findings in the Wachovia investigation. the OCC 

launched horizontal examinations of bank note operations in other large national banks 

supervised by the OCC that included HSBC and its transactions with HSBC Mexico, After 

finding significant deficiencies in the Bank's oversight of its banknote operations and after 

meeting with law enforcement and obtaining additional infonnation on this activity, the OCC 

developed a detailed action plan to expand the scope of the ongoing examination of bank note 

customers. The expanded scope included evaluation of the Bank's compliance with all 

BSAI AML laws and regulations relating to foreign correspondent activity (including RDC 

15 
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760612.434

activity, pouch activity, and spccific fixcign correspondent relationships), OFAC compliance, 

and the effectiveness of management's efl(lrts to manage risk on an enterprise wide basis. 

The OCC conducted its expandcd examination during 2009-10. It encompassed, among other 

things, an evaluation of specific banknote clientele. The OCC rcvicwed internal bank policics 

and procedures, systems and controls, training initiatives. and documentation supporting the 

Bank's compliance efforts. The examiners reviewed know-your-customer 

documentation/information pertaining to the sample, customer due diligence 

documentationlinformation, enhanced due diligence documentation/information, related account 

statements, specific transactions, pouch activities. cash letter activities. wire transfer activities, 

audit report/processes. RDC activity, foreign exchange transactions, trade transactions. 

monitoring processes, alert processing. SAR and related processes. subpoena 

documentationlinfonnation, the Bank's OFAC program, and all other relevant bank 

documentation and correspondence from 2004 to the current period. 

As a part of the examination, the OCC notified the Bank in March 2010 that it had violated OCC 

regulations due to a significant backlog of unprocessed alerts. The Bank's subsequent review of 

the backlogged alerts led it to file a substantial number oflate SARs with law enforcement 

authorities. The OCC also identified a number of previously undisclosed bearer share account 

relationships. The OCC is currently assessing the consequences of this finding. and the Bank's 

implementation of corrective measures. 

The OCC ultimately determined that the Bank failed to adopt and implement a compliance 

program that adequately covered the required BSA/AML program elements including. in 

particular. internal controls fix customer due diligence, procedures for monitoring suspicious 

activity, and independent testing. The Bank's compliance program and its implementation were 

found to be ineffective, and accompanied by aggravating factors, such as highly suspicious 

activity creating a significant potential for unreported money laundering or terrorist financing. 

The number ofMRAs cited over the preceding years reflected a pattern where the Bank reacted 

when problems were identified by the oce, but failed to fulfill its fundamental responsibility of 

maintaining a program that effectively deterred money laundering and self-identifying and 

correcting deficiencies in its BSA/AML program. In addition. based on issues we had identified 

in our exams at other institutions, we began (0 drill down into specific areas (lfthe Bank's 

operations. As we did so. we discovered that the Bank had additional and severe pre-existing 

BSAI AML deficiencies -" beyond what we had previously understood. Our work in these areas 

triggered further discoveries of additional, severe deficiencies. As a result. in the fall of2010, 

we took forceful and comprehensive enforcement action. With the benefit of hindsight. the OCC 

should have taken this action sooner. 

VII. HSBC C&D Order 

The OCC issued a C&D order against the Bank in October 2010. Concurrent with the OCC's 

enforcement action, the Federal Reserve issued a C&D order upon consent with the Bank's 

parent company. HNAH. to ensure the adequacy oflhe parent company's finn-wide compliance 

16 
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760612.435

risk management program. The OCC and the Federal Reserve coordinated closely in drafting the 

respective orders. 

Some of the critical deficiencies in the Bank's BSAlAML compliance program cited in the 

oeC's order included the following: 

Lack of effective monitoring of wire activity. The Bank. in effect, exempted from 

automated monitoring wire transfers for customers domiciled in countries risk rated as 

standard or medium risk. This represented two-thirds of total dollar volume for reM. 

While the Bank employed other methods for monitoring wire transactions for customers 

located in countries risk rated standard or medium, these alternatives provided limited 

coverage, were not effective, and did not mitigate the BSAI AML risks posed. 

• From mid-2006 through mid-2009, the Bank did not perform any BSA/AML monitoring 

for banknote (or "bulk cash") transactions with Group Entities (affiliates). 

• The Bank did not maintain customer due diligence information on Group Entities. 

• The Bank failed to resolve its monitoring system alerts in a timely manner. leading to 

significant backlogs and late SAR filings. 

The Bank did not appropriately designatc customers as high risk lor purposes of 

BSA/AML monitoring, even where a eustomer's association with politically-exposed 

persons could haml the Bank's reputation. 

• Serious weaknesses in Bank's systems and controls constituted violations of 12 C.F.R. 

21.21 (program), 21.11 (SAR), and 31 CFR 103.176 (correspondent banking). 

As the oeC's order set forth, the violations and failures were the result of a number of factors, 

including: (i) inadequate staffing and procedurcs in the alert investigations unit that resulted in a 

significant backlog of alerts; (ii) the closure of alerts based on ineffective review; (iii) inadequate 

monitoring of Group Entities' correspondent accounts for purpose and anticipated activity, antimoney laundering record, or consistency between actual and anticipated account activity; (iv) 

unwarranted reliance on Group Entities' following HSBC Group BSAlAML policies; (v) 

inadequate monitoring of funds transfers; (vi) inadequate procedures to ensure the timely 

reporting of suspicious activity; (vii) failure to adequately monitor Group Entities' banknote 

activity; (viii) inadequate monitoring of correspondent funds transfer activity; and (ix) 

inadequate collection and analysis of customer due diligence information, including inadequate 

monitoring of politically exposed persons. 

The OC.T's C&D order requires the Bank to submit a comprehensive BSA/AML action plan to 

achieve full compliance and ensure that the Bank has sufficient processes, personnel and control 

systems to implement and adhere to the order. It requires the Bank to hire a qualified permanent 

regional compliance officer and a qualified, permanent BSA officer. It further requires the Bank 

to improve its BSNAML monitoring systems, including its funds transfer monitoring, and to 

develop and maintain a management infonnation system (MIS) program that compiles customer 

17 
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760612.436

due diligence and enhanced due diligence (know your customer) information that includes the 

identification of"ofTshore" correspondent accounts and the identification of politically exposed 

persons. The order also contains restrictions on growth, new products, and high-risk lines of 

business. and it requires oee approval to reenter the bu Ik cash repatriation business. 

The e&D order additionally required the Bank to hire an independent consultant to conduct a 

comprehensive account/transaction activity review (Look Back). The purpose of the Look Back 

was to determine whether suspicious activity was timely identified by the Bank and to 

supplement the OCe's investigation of specific account relationships. transactions, and products 

and services that had been identified as potentially problematic. (Transaction reviews and look 

backs arc routinely used by the oce and thc other Federal banking agencies to require banks to 

review past activities and tile SARs as necessary.) Some of the account relationships. 

transactions, and products and services included in the Subcommittee's report, were specifically 

covered within the scope of the Look Back. 

The Look Back required the Bank to review 3 J specific correspondent account relationships, 

including several HSBC affiliates and flSBC Mexico. over an eighteen month time period 

covering banknotes, wire. RDC, and pouch activities. 

The Look Back also required the Bank to review specific alerts that had been closed due to a 

reduction in a eountry's risk rating and over a two month time period, including: 

All alerts closed based on "positive internet information;" 

• Wire transfers originating in five standard and medium risk countries that were sent to 

seven high risk countries; 

• Wire transfers (originating or terminating) between several pairs of standard and medium 

risk countries: 

• International (cross-border) book entry transfers; 

All account activity during this period for accounts subjcct at any time during the period 

to requests pursuant to section 314(a) or section 314(b) of the USA PATRIOT Act, or to 

subpoenas relating to BSA/AMI, issues; and 

All alerts closed more than 60 days after generation of the alert including, without 

limitation. alerts closed in response to the OCe's Supervisory Letter (over a three month 

time period). 

The C&D order is a remedial document that is designed to obtain correction or violations of law 

and unsafe or unsound practices at the Bank. The issuance of the order does not preclude the 

acc from assessing a civil money penalty at a later time. The OCC is now actively engaged in 

evaluating the Bank's compliance with the C&D order and in considering the assessment of 

CMPs. 

18 
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760612.437

VIII. Cooperation with Law Enforcement/Regulatorv Agencies 

The OCC cooperates and coordinates on an interagency basis to address BSAJAML issues. We 

actively participate in several interagency groups focusing on BSA/AML compliance. including 

the Bank Secrecy Act Advisory Group (BSAAG). chaired by FinCEN. which is composed of 

policy. legal. and operations representatives from the major federal and state law enforcement 

and regulatory agencies involved in the fight against money laundering, as well as industry 

representatives; the FFIEC BSA Working Group which. similar to the FFIEC itselt~ has a 

rotating chairman and is composed of representatives of federal and state regulatory agencies; 

and the National Interagency Bank Fraud Working Group. chaired by the Department of .lust ice , 

and composed of representatives of the federal law enforcement and regulatory agencies (the 

OCC has been an active member of this group since its founding in 1984). 

To remain in the forefront of new technologies and payment systems, the OCC also participates 

in various interagency working groups. including the Interagency Cyberfi'aud Working Group. 

the Payments Fraud Working Group, the Financial Services Information Sharing and Analysis 

Center (FS-TSAC). the BSAAG Prepaid Card Subcommittee. and regularly participates in 

payments conterences and industry forums. 

In addition. the oee works on an international basis with the Financial Action Task Force. an 

inter-governmental body whose purpose is the development and promotion of policies to combat 

money laundering. We have participated in various State and Treasury Department missions to 

assist foreign govemments in their anti-money laundering efforts. We expect that these 

international efforts will continue. The oce also regularly provides information. documents. 

and expertise to law enforcement for use in criminal investigations on a case-specific basis. 

With respect to HSBC. the OCC has worked closely with the Federal Reserve. FinCEN and law 

enforcement in addressing the problems identified at HSBC and will continue to do so to ensure 

that all problems are identified and addressed. 

IX. Conclusion 

The OCC is committed to rigorous BSA/AML and OFAC supervision. strong enforcement, and 

continuing improvcmcnl in our supervision in this imporlant arca. We arc closely rcviewing the 

Subcommittee's Report and. as discussed earlier in this statement, we have already identified 

actions that we will take in response to its recommendations. 

The OCC will continue to work with Congress, the other financial institutions regulatory 

agencies. law enforcement agencies. and the banking industry to develop and implement a 

coordinated and comprehensive response to the threat posed to the nation's financial system by 

money launderers. terrorist financiers and criminal organizations. The OCC recognizes that the 

determination and ingenuity of those who commit financial crimes requires ongoing vigilance. 

We also recognize that technical innovations. new and more convenient financial services 

products, and globalization trends are rapidly changing the BSA/AML landscape. These are 

major challenges for both the financial services industry and its regulators and. for our part. we 

are committed to meeting them. 

19 
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76061.535

United States Senate 

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS 

Committee on Homeland Security and Governmental Affairs 

Carl Levin, Chairman 

Tom Coburn, Ranking Minority Member 

u.s. Vulnerabilities to Money Laundering, 

Drugs, and Terrorist Financing: 

HSBC Case History 

MAJORITY AND MINORITY 

STAFF REPORT 

PERMANENT SUBCOMMITTEE 

ON INVESTIGATIONS 

UNITED STATES SENATE 

RELEASED IN CONJUNCTION WITH THE 

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS 

JULY 17, 2012 HEARING 
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76061.536

SENA TOR CARL LEVIN 

Chairman 

SENA TOR TOM COBURN, M.D. 

Ranking Minority Member 

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS 

10/26/(2 

ELISE J. BEAN 

Staff Director and Chief Counsel 

ROBERT L. ROACH 

Counsel and Chief Investigator 

LAURA E. STUBER 

Senior Counsel 

ALLISON ABRAMS 

Detailee 

ERIC WALKER 

Detailee 

KRISTIN GWIN 

Congressional Fellow 

BRIAN EGGER 

Detailee 

ADAM C. HENDERSON 

Professional Staff Member 

CHRISTOPHER J. BARKLEY 

Staff Director to the Minority 

KEITH B. ASHDOWN 

Chieflnvestigator to the Minority 

JUSTIN J. ROOD 

Senior Investigator to the Minority 

JAMIE BENCE 

Law Clerk 

BILL GAERTNER 

Law Clerk 

CURTIS KOW ALK 

Law Clerk 

KATIE MARTINBROWNE 

Law Clerk 

WELLESLEY BAUN 

Law Clerk 

LAUREN ROBERTS 

Law Clerk 

MICHAEL WOLF 

Law Clerk 

ARIELLE WORONOFF 

Law Clerk 

TAMIR HADDAD 

Intern 

SOFIA KNUTSSON 

Intern 

NOELIA ORTIZ 

Intern 

JASW ANT SINGH 

Intern 

MARY D. ROBERTSON 

Chief Clerk 

Permanent Subcommittee on Investigations 199 Russell Senate Office Building - Washington, D.C. 20510 Majority: 2021224·9505 - Minority: 202/224·3721 

Web Address: http://v,ww.hsgac.senate.gov/subcommittees/investigations 
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76061.537

U.S. Vulnerabilities to Money Laundering, Drugs, 

and Terrorist Financing: HSBC Case History 

TABLE OF CONTENTS 

I. EXECUTIVE SUMMARY .......................... . 

A. Findings.... .................................... 12 

(1) Longstanding Severe AML Deficiencies. . . . . . . . . . 12 

(2) Taking on High Risk Affiliates. . .. . . . . . . . . . . . . .. 13 

(3) Circumventing OFAC Prohibitions.... ........... 13 

(4) Disregarding Terrorist Links. . . . . . . . . . . . . . . . . . . . 13 

(5) Clearing Suspicious Bulk Travelers Cheques. . . . . . . 13 

(6) Offering Bearer Share Accounts. . .. ............. 13 

(7) Allowing AML Problems to Fester. . . . . . . . . . . . . . . 13 

B. Recommendations............................... 14 

(1) Screen High Risk Affiliates. . . . . . . . . . . . . . . . . . . . . 14 

(2) Respect OF AC Prohibitions. . . . . . . . . . . . . . . . . . . . 14 

(3) Close Accounts for Banks with Terrorist Financing 

Links. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 

(4) Revamp Travelers Cheque AML Controls. . .. ..... 14 

(5) Boost Information Sharing Among Affiliates. .. ... 14 

(6) Eliminate Bearer Share Accounts. . .. ............ 14 

(7) Increase HBUS' AML Resources. . .. ............ 15 

(8) Treat AML Deficiencies as a Matter of Safety and 

Soundness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 

(9) Act on MUltiple AML Problems. . . . . . . . . . . . . . . . . 15 

(10) Strengthen AML Examinations. . . . . . . . . . . . . . . . . . 15 

II. GENERAL BACKGROUND ......................... 16 

A. Background on HSBC Group and HBUS ............ 16 

B. HBUS AML Program ............................ 24 

(1) HBUS Compliance and AML Leadership. . . . . . . .. 25 

(2) HBUS AML Program. . . . . . . . . . . . . . . . . . . . . . . .. 30 

III. HBMX: PROVIDING U.S. ACCESS TO A HIGH RISK 

AFFILIATE ....................................... 42 

A. HSBC Mexico. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 43 

B. Mexico......................................... 46 

(1) U.S. Assessment of AML Risk in Mexico. . . . . . . .. 46 

(2) HSBC Assessment of Risk in Mexico. . . . . . . . . . .. 50 

C. HBMX's History of Weak AML Safeguards......... 57 

D. HBMX High Risk Clients ......................... 95 

(1) High Risk Money Service Businesses ............ 95 
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76061.538

(a) Casa de Cambio Puebla . . . . . . . . . . . . . . . . . . .. 96 

(b) Sigue Corporation ........................ 102 

(2) Cayman Island U.S. Dollar Accounts. . . . . . . . . . . .. 109 

(3) Cashing U.S. Dollar Travelers Cheques. . . . . . . . . .. 119 

E. Bulk Cash Movements. . . . . . . . . . . . . . . . . . . . . . . . . . .. 125 

(1) HBUS' Global Banknotes Business .............. 126 

(2) HBMX U.S. Dollar Sales to HBUS .............. 128 

(3) Remedial Action. . . . . . . . . . . . . . . . . . . . . . . . . . . .. 132 

F. Analysis ........................................ 133 

IV. HSBC AFFILIATES: CIRCUMVENTING OFAC 

PROHIBITIONS ................................... 135 

A. Background on OFAC Prohibitions ................ 137 

B. Executing OFAC-Sensitive Transactions ............ 143 

(1) Transactions Involving Iran .................... 143 

(a) Overview ............................... 143 

(b) Concealing Iranian Transactions . . . . . . . . . . . .. 146 

(c) Pressuring HBUS on Iran .................. 155 

(d) Continuing Pressure on RBUS to Process Iranian 

Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 160 

(e) Reaching Agreement ...................... 172 

(f) Processing the Iranian Transactions .......... 181 

(g) Establishing Group-wide Policy ............. 187 

(h) Shifting Iranian Transactions from l-IBUS to 

JPMorgan Chase and Back Again . . . . . . . . . . .. 190 

(i) Getting Out. . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 195 

G) Looking Back. . . . . . . . . . . . . . . . . . . . . . . . . . .. 199 

(2) Transactions Involving Other Countries .......... 200 

(a) 2005 and 2006 GCLs ...................... 201 

(b) Transactions Involving Cuba. . . . . . . . . . . . . . .. 203 

(c) Transactions Involving Sudan ............... 206 

(d) Transactions Involving Burma .............. 208 

(e) Transactions Involving North Korea .......... 211 

(f) Other Prohibited Transactions ............... 212 

(3) HBUS' OFAC Compliance Program ............. 213 

(4) ServerIssues ................................ 219 

C. Analysis........................................ 225 

V. AL RAJHI BANK: DISREGARDING LINKS TO 

TERRORIST FINANCING .......................... 227 

A. Al Rajhi Bank. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 228 

B. Saudi Arabia and Terrorist Financing .............. 230 

C. Alleged AI Rajhi Links to Terrorism. . . . . . . . . . . . . . .. 233 

D. HSBC Relationship with Al Rajhi Bank . . . . . . . . . . . .. 244 

ii 
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76061.539

E. AI Rajhi Trading Establishment ................... 245 

F. 2005: Decision to Sever Ties with AI Rajhi Bank ...... 247 

G. 2006: HBUS Banknotes Account Reinstated ......... 252 

H. 2007 to 2010: Additional Troubling Information ...... 264 

I. Servicing Other Banks with Suspected Links to 

Terrorism ...................................... 269 

(1) Islarni Bank Bangladesh Ltd. ................... 269 

(2) Social Islami Bank Ltd. ....................... 275 

J. Analysis........................................ 286 

VI. HOKURIKU BANK: CASHING BULK TRAVELERS 

CHECKS .......................................... 288 

A. Hokuriku Bank ................................. 289 

B. Travelers Cheques ............................... 290 

C. 2005 Concerns About Hokuriku Travelers Cheques ... 292 

D. 2007 OCC Pouch Examination ..................... 294 

E. 2008 OCC Inquiry into Hokuriku Travelers Cheques 298 

F. Absence ofHokuriku Bank KYC Information ........ 301 

G. 2008 Decision to Stop Cashing Hokuriku Travelers 

Cheques ........................................ 302 

H. Hokuriku Bank's Continued Lack of Cooperation .... 304 

I. 2010 OCC Discovery of Hokuriku Account Activity ... 308 

J. Analysis ........................................ 309 

VII. HBUS PRIVATE BANK AMERICAS: 

OFFERING BEARER SHARE ACCOUNTS. . . . . . . . . . .. 311 

A. High Risk Corporate Accounts .................... 312 

B. Bearer Share Activity at HBUS .................... 315 

C. Two Examples of Bearer Share Accounts ............ 332 

D. Analysis........................................ 336 

VIII.OCC: EXERCISING INEFFECTIVE AML 

OVERSIGHT ...................................... 338 

A. Background .................................... 341 

(1) Key Anti-Money Laundering Laws .............. 341 

(2) AML Oversight In General. . . . . . . . . . . . . . . . . . . .. 343 

(3) OCC AML Oversight in General ................ 350 

B. OCC Oversight ofHBUS ......................... 359 

(1) Chronology ofOCC AML Oversight ofHBUS .... 359 

(2) Six Years of AML Deficiencies .. . . . . . . . . . . . . . .. 378 

C. OCC Systemic Failures ........................... 381 

(l) Treating AML Deficiencies As A Consumer 

Compliance Issue ............................ 381 

iii 
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76061.540

(2) Restricting Citations of AML Program Violations .. 384 

(3) Using Narrowly Focused Exams ................ 389 

(4) Failing to Use Enforcement Actions ............. 393 

(5) Issuing Weak Supervisory Letters ............... 395 

D. Analysis........................................ 400 

# # # 

iv 
175 


76061.541

U.S. VULNERABILITIES TO MONEY LAUNDERING, 

DRUGS, AND TERRORIST FINANCING: 

HSBC CASE HISTORY 

This Report examines the anti-money laundering (AML) and 

terrorist financing vulnerabilities created when a global bank uses its 

u.s. affiliate to provide U.S. dollars, U.S. dollar services, and access to 

the U.S. financial system to high risk affiliates, high risk correspondent 

banks, and high risk clients. This Report also offers recommendations to 

strengthen correspondent AML controls to combat money laundering, 

drug trafficking, and terrorist financing. 

I. EXECUTIVE SUMMARY 

Over the last decade, the U.S. Senate Permanent Subcommittee on 

Investigations has worked to strengthen U.S. AML efforts by 

investigating how money launderers, terrorists, organized crime, corrupt 

officials, tax evaders, and other wrongdoers have utilized U.S. financial 

institutions to conceal, transfer, and spend suspect funds. I In 2001, the 

Subcommittee focused, in particular, on how U.S. banks, through the 

correspondent services they provide to foreign financial institutions, had 

become conduits for illegal proceeds associated with organized crime, 

drug trafficking, and financial fraud. 2 Correspondent banking occurs 

when one financial institution provides services to another financial 

institution to move funds, exchange currencies, cash monetary 

instruments, or carry out other financial transactions. The 

Subcommittee's 200 I investigation showed not only how some poorly 

managed or corrupt foreign banks used U.S. bank accounts to aid and 

abet, commit, or allow clients to commit wrongdoing, but also how U.S. 

financial institutions could protect themselves and the U.S. financial 

system from misuse. 

In response to that investigation and the money laundering 

vulnerabilities exposed by the 9111 terrorist attack, Congress enacted 

stronger AML laws as part of the Patriot Act of 2002, including stronger 

! Sec, e.g., U,S. Senate Permanent Subcommittee on Investigations, "Keeping Foreign 

Corruption out of the United States," S.Hrg. 111-540 (Feb. 4, 2010); "Tax Haven Banks and U.S. 

Tax Compliance," S.Hrg. 110-614 (July 17 and 25, 2008); "Tax Haven Abuses: The Enablers, 

The Tools and Secrecy," S.Hrg. 109-797 (Aug. 1,2006); "Money Laundering and Foreign 

Corruption: Enforcement and Effectiveness of the Patriot Act," S.Hrg. 108-633 (July 15,2004); 

"Role of U.S. Correspondent Banking in International Money Laundering," S.Hrg. 107-84 

(March 1,2 and 6, 2001); and "Private Banking and Money Laundering: A Case Study of 

Opportunities and Vulnerabilities," S.Hrg. 106-428 (Nov. 9 and 10, 1999). See also U.S. Senate 

Committee on Homeland Security and Governmental Affairs, "'State Business Incorporation2009." S.Hrg. 111-953 (June 18 and Nov. S, 2009). 

2 "Role of U.S. Correspondent Banking in International Money Laundering," U.S. Senate 

Penmanen! Subcommittee on Investigations, S.lIrg. 107-84 (March 1,2 and 6, 2001)(hereinafier 

"200 I Subcommittee Hearing on Correspondent Banking"), at 1. 
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2 

provisions to combat the misuse of correspondent services.) Federal 

bank regulators followed with stronger regulations4 and examination 

requirements5 to guard against money laundering through correspondent 

accounts. In response, over the next ten years, U.S. banks substantially 

strengthened their correspondent AML controls. Before the 2002 Patriot 

Act, for example, most U.S. banks opened correspondent accounts for 

any foreign bank with a banking license; now, most U.S. banks evaluate 

the riskiness of each foreign bank's owners, business lines, products, 

clients, and AML controls before agreeing to open an account. They 

also routinely monitor account activity and wire transfers for suspicious 

activity, with enhanced monitoring of high risk correspondents. In 

addition, before the 2002 Patriot Act, some U.S. banks readily opened 

accounts for foreign shell banks, meaning banks without any physical 

presence in any jurisdiction; today, in accordance with the Patriot Ads 

ban on shell bank accounts, all U.S. banks take measures to ensure they 

don't provide services to such banks, the ban on shell bank accounts has 

become an international AML standard,6 and the thousands of standalone shell banks licensed by the Bahamas, Cayman Islands, Nauru, and 

other jurisdictions have virtually disappeared. 

At the same time, the money laundering risks associated with 

correspondent banking have not been eliminated. Correspondent 

accounts continue to provide a gateway into the U.S. financial system, 

and wrongdoers continue to abuse that entryway. This investigation 

takes a fresh look at the U.S. vulnerabilities to money laundering and 

terrorist financing associated with correspondent banking, focusing in 

particular on the operations of global banks with U.S. affiliates that 

enable foreign tlnancial institutions to gain access to the U.S. financial 

system. 

HSBC Case Study, To examine the current money laundering and 

terrorist financing threats associated with correspondent banking, the 

Subcommittee selected HSBC as a case study. ESBC is one of the 

largest financial institutions in the world, with over $2.5 trillion in 

assets, 89 million customers, 300,000 employees, and 2011 profits of 

nearly $22 billion. HSBC, whose initials originally stood for Hong 

3 See, e.g., Sections 312, 313, and 319(b) of the USA Patriot Act (requiring due diligence to be 

conducted when opening accounts for foreign banks, with enhanced due diligence for offshore 

banks and banks in high risk jurisdictions; prohibiting the opening of correspondent accounts for 

shell banks; and strengthening the ability of U.S. regulators to obtain correspondent account 

records). 

4 See, e.g., 31 CFR §§103.175,103.176, 103.177, 103.185. 

'See. e.g., 4129/2010 "Bank Secrecy Act/Anti-Money Laundering Examination Manual," issued 

by the Federal Financial Institutions Examination Council, "Foreign Correspondent Account 

Recordkeeping and Due Diligence," at 117-129, 183-187, 

http://www.ffiec.govlbsa_aml_infobase/documents/BSA_AML_Man_2010.pdf.Prior versions 

of this Manual were issued in 2005 and 2007. 

6 See "International Standards on Combating Money Laundering and the Financing of Terrorism 

& Proliferation: The FA TF Recommendations," issued by the Financial Action Task Force 

(2/2012), FATF Recommendation 13. 
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3 

Kong Shanghai Banking Corporation, now has operations in over 80 

countries, with hundreds of affiliates spanning the globe. Its parent 

corporation, HSBC Holdings pic, called'HSBC Group;'is headquartered 

in London, and its Chief Executive Officer is located in Hong Kong. 

Its key U.S. affiliate is HSBC Bank USA N.A. (HBUS). HBUS 

operates more than 470 bank branches throughout the United States, 

manages assets totaling about $200 billion, and serves around 3.8 

million customers. It holds a national bank charter, and its primary 

regulator is the U.S. Office of the Comptroller of the Currency (OCC), 

which is part ofthe U.S. Treasury Department. HBUS is headquartered 

in McLean, Virginia, but has its principal office in New York City. 

HSBC acquired its U.S. presence by purchasing several U.S. financial 

institutions, including Marine Midland Bank and Republic National 

Bank of New York. 

A senior HSBC executive told the Subcommittee that HSBC 

acquired its U.S. affiliate, not just to compete with other U.S. banks for 

U.S. clients, but primarily to provide a U.S. platform to its non-U.S. 

clients and to use its U.S. platform as a selling point to attract still more 

non-U.S. clients. HSBC operates in many jurisdictions with weak AML 

controls, high risk clients, and high risk financial activities including in 

Asia, the Middle East, and Africa. Over the past ten years, HSBC has 

also acquired affiliates throughout Latin America. In many of these 

countries, the HSBC affiliate provides correspondent accounts to foreign 

financial institutions that, among other services, are interested in 

acquiring access to U.S. dollar wire transfers, foreign exchange, and 

other services. As a consequence, HSBCs U.S. affiliate, HBUS, is 

required to interact with other HSBC affiliates and foreign financial 

institutions that face substantial AML challenges, often operate under 

weaker AML requirements, and may not be as familiar with, or 

respectful of, the tighter AML controls in the United States. HBUS' 

correspondent services, thus, provide policymakers with a window into 

the vast array of money laundering and terrorist financing risks 

confronting the U.S. affiliates of global banks. 

The Subcommittee also examined HSBC because of its weak AML 

program. In September 2010, the OCC issued a lengthy Supervisory 

Letter citing HBUS for violating Federal AML laws, including by 

maintaining an inadequate AML program. In October 2010, the OCC 

issued a Cease and Desist Order requiring HSBC to strengthen multiple 

aspects of its AML program.' The identified problems included a once 

massive backlog of over 17,000 alerts identifYing possible suspicious 

7 On the same day, in coordination with the OCC, the Federal Reserve issued a Cease and Desist 

order to HBUS' holding company, HSBC North America Holdings, Inc. (HNAH), citing HNAH 

for an inadequate AML program and requiring it to revamp and strengthen both its program and 

that of HBUS. 
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4 

activity that had yet to be reviewed; ineffective methods for identifYing 

suspicious activity; a failure to file timely Suspicious Activity Reports 

with U.S. law enforcement; a failure to conduct any due diligence to 

assess the risks of HSBC affiliates before opening correspondent 

accounts for them; a 3-year failure by HBUS, from mid-2006 to mid2009, to conduct any AML monitoring of $15 billion in bulk cash 

transactions with those same HSBC affiliates, despite the risks 

associated with large cash transactions; poor procedures for assigning 

country and client risk ratings; a failure to monitor $60 trillion in annual 

wire transfer activity by customers domiciled in countries rated by 

HBUS as lower risk; inadequate and unqualified AML staffing; 

inadequate AML resources; and AML leadership problems. Since many 

of these criticisms targeted severe, widespread, and longstanding AML 

deficiencies, they also raised questions about how the problems had been 

allowed to accumulate and why the OCC had not compelled corrective 

action earlier. 

During the course of its investigation into HSBCs AML 

deficiencies, the Subcommittee issued multiple subpoenas and collected 

and reviewed over 1.4 million documents, including bank records, 

correspondence, emails, and legal pleadings. The Subcommittee staff 

also conducted over 75 interviews with officials at HSBC Group, 

HBUS, and other HSBC affiliates, as well as with U.S. banking 

regulators. In addition, the Subcommittee received numerous briefings 

from HSBC legal counsel, initiated inquiries with foreign banks that had 

HSBC accounts, and consulted with experts on AML and terrorist 

financing issues. HSBC was fully cooperative with the inquiry, 

producing documentation and witnesses from around the world, 

including documents for which it could have claimed privilege. 

As a result of its investigation, the Subcommittee has focused on 

five issues illustrating key AML and terrorist financing problems that 

continue to impact correspondent banking in the United States. They 

include opening U.S. correspondent accounts for high risk affiliates 

without conducting due diligence; facilitating transactions that hinder 

U.S. efforts to stop terrorists, drug traffickers, rogue jurisdictions, and 

other from using the U.S. financial system; providing U.S. 

correspondent services to banks with links to terrorism; clearing bulk 

U.S. dollar travelers cheques despite signs of suspicious activity; and 

offering high risk bearer share corporate accounts. Avoiding the money 

laundering risks involved in these activities requires an effective AML 

program, with written standards, knowledgeable and adequate staff, the 

infrastructure needed to monitor account and wire transfer activity for 

suspicious transactions, effective AML training, and a compliance 

culture that values obtaining accurate client information. In addition to 

focusing on these five issues at HBUS, the Subcommittee investigation 
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5 

examined the regulatory failures that allowed these and other AML 

problems to fester for years. 

Servicing A High Risk Affiliate. In 2001, the Subcommittee's 

investigation debunked the notion that U.S. banks should open a 

correspondent account for any foreign bank with a banking license, 

establishing instead the need to use due diligence to evaluate the money 

laundering and terrorist financing risks posed by a specific foreign 

financial institution before opening an account. Today, some U.S. 

affiliates of global banks engage in an equally ill-advised practice, 

opening correspondent accounts for any affiliate owned by the parent 

holding corporation, with no analysis of the AML or terrorist financing 

risks. 

Until recently, HSBC Group policy instructed its affiliates to 

assume that all HSBC affiliates met the Group's AML standards and to 

open correspondent accounts for those affiliates without additional due 

diligence. For years, HBUS followed that policy, opening U.S. 

correspondent accounts for HSBC affiliates without conducting any 

AML due diligence. Those affiliates have since become major clients of 

the bank. In 2009, for example, HBUS determined that'HSBC Group 

affiliates clear[ed] virtually all USD [U.S. dollar] payments through 

accounts held at HBUS, representing 63% of all USD payments 

processed by HBUS:i HBUS failed to conduct due diligence on HSBC 

affiliates despite a U.S. law that has required all U.S. banks, since 2002, 

to conduct these due diligence reviews before opening a U.S. 

correspondent account for any foreign financial institution, with no 

exception made for foreign affiliates. 

One HSBC affiliate that illustrates the AML problems is HSBC 

Mexico, known as HBMX. HBUS should have, but did not, treat 

HBMX as a high risk correspondent client subject to enhanced due 

diligence and monitoring. HBMX operated in Mexico, a country under 

siege from drug crime, violence and money laundering; it had high risk 

clients, such as Mexican casas de cambio and U.S. money service 

businesses; and it offered high risk products, such as U.S. dollar 

accounts in the Cayman Islands. In addition, from 2007 through 2008, 

HBMX was the single largest exporter of U.S. dollars to HBUS, 

shipping $7 billion in cash to HBUS over two years, outstripping larger 

Mexican banks and other HSBC affiliates. Mexican and U.S. authorities 

expressed repeated concern that HBMX's bulk cash shipments could 

reach that volume only if they included illegal drug proceeds. The 

concern was that drug traffickers unable to deposit large amounts of cash 

in U.S. banks due to AML controls were transporting U.S. dollars to 

Mexico, arranging for bulk deposits there, and then using Mexican 

'See 9/9/2009 chart entitled, "HSBC Profile," included in "HSBC OFAC Compliance Program," 

a presentation prepared by HSBC and provided to the OCC, at HSBC OCC 8874197. 
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6 

financial institutions to insert the cash back into the U.S. financial 

system. 

In addition to its high risk location, clients, and activities, HMBX 

had a history of severe AML deficiencies. Its AML problems included a 

widespread lack of Know Your Customer (KYC) information in client 

files; a dysfunctional monitoring system; bankers who resisted closing 

accounts despite evidence of suspicious activity; high profile clients 

involved in drug trafficking; millions of dollars in suspicious bulk 

travelers cheque transactions; inadequate staffing and resources; and a 

huge backlog of accounts marked for closure due to suspicious activity, 

but whose closures were delayed. For eight years, from 2002 to 2010, 

HSBC Group oversaw efforts to correct HBMX's AML deficiencies, 

while those efforts fell short. At the same time, HSBC Group watched 

HBMX utilize its U.S. correspondent account, without alerting HBUS to 

the AML risks it was incurring. 

HBUS compounded the AML risks it incurred from HBMX 

through its own AML deficiencies, which included failing to investigate 

or evaluate HBMX's AML risks. HBUS also failed, from mid-2006 to 

mid-2009, to conduct any AML monitoring of its U.S. dollar 

transactions with HSBC affiliates, including HBMX, despite the obvious 

well-known risks attendant with large cash transactions. In addition, 

because HBUS deemed HBMX to be located in a low risk country, 

HBUS failed until 2009, to monitor HBMX's wire transfer or account 

activity. HBMX illustrates the money laundering and drug trafficking 

risks that result when the U.S. affiliate of a global bank serves as the 

U.S. gateway for a high risk affiliate allowed to operate with no initial 

due diligence or ongoing monitoring. 

Circumventing OFAC Prohibitions. The United States has 

devoted significant resources to stopping some of the most dangerous 

persons and jurisdictions threatening the world today from utilizing the 

U.S. financial system, including terrorists, persons involved with 

weapons of mass destruction, drug traffickers, and persons associated 

with rogue jurisdictions such as Iran, North Korea, and Sudan. To 

implement the law, the U.S. Treasury DepaJimenfs Office of Foreign 

Assets Control (OFAC) has developed a list of prohibited persons and 

countries which banks use to create an"OFAC filter"to identifY and halt 

potentially prohibited transactions. Transactions stopped by this filter 

typically undergo an individualized review to see if the transaction can 

proceed or the funds must be blocked. 

Because the OFAC filter can end up delaying or blocking 

transactions that are permitted under U.S. law or by other jurisdictions, 

some non-U.S. financial institutions have used tactics to circumvent it. 

Common tactics include stripping information from wire transfer 
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7 

documentation to conceal the participation of a prohibited person or 

country, or characterizing a transaction as a transfer between banks in 

approved jurisdictions, while omitting underlying payment details that 

would disclose participation of a prohibited originator or beneficiary. In 

the case ofIran, some foreign banks also abused what were known as"Utuni'transactions, which were allowable transactions under Treasury 

regulations prior to November 2008. In recent years, the United States 

has imposed steep penalties on banks that violated the OF AC 

prohibitions. 

At HBUS, documents provided to the Subcommittee indicate that, 

for years, some HSBC affiliates took action to circumvent the OF AC 

filter when sending OF AC sensitive transactions through their U.S. 

dollar correspondent accounts at HBUS. From at least 2001 to 2007, 

two HSBC affiliates, HSBC Europe (HBEU) and HSBC Middle East 

(HBME), repeatedly sent U-turn transactions through HBUS without 

disclosing links to Iran, even though they knew HBUS required full 

transparency to process U-turns. To avoid triggering the OFAC filter 

and an individualized review by HBUS, HBEU systematically altered 

transaction information to strip out any reference to Iran and 

characterized the transfers as between banks in approved jurisdictions. 

The affiliates' use of these practices, which even some within the bank 

viewed as deceptive, was repeatedly brought to the attention ofHSBC 

Group Compliance, by HBUS compliance personnel and by HBEU 

personnel who objected to participating in the document alteration and 

twice announced deadlines to end the activity. Despite this information, 

HSBC Group Compliance did not take decisive action to stop the 

conduct or inform HBUS about the extent of the activity. At the same 

time, while some at }-IBUS claimed not to have known they were 

processing undisclosed Iranian transactions from HSBC affiliates, 

internal documents show key senior HBUS officials were informed as 

early as 200 I. In addition, HBUS' OF AC tilter repeatedly stopped 

Iranian transactions that should have been disclosed to HBUS by HSBC 

affiliates, but were not. Despite evidence of what was taking place, 

HBUS failed to get a full accounting of what its affiliates were doing or 

ensure all Iranian transactions sent by HSBC affiliates were stopped by 

the OF AC filter and reviewed to ensure they were OF AC compliant. In 

addition, documents show that, from 2002 to 2007, some HSBC 

affiliates sent potentially prohibited transactions through HBUS 

involving Burma, Cuba, North Korea, Sudan, and other prohibited 

countries or persons. Other documents indicate that some HSBC 

affiliates may have sent non-U.S. dollar messaging traffic through U.S. 

servers in which the OF AC filter was not turned on or was restricted. 

An outside auditor hired by HBUS has so far identified, from 2001 

to 2007, more than 28,000 undisclosed, OF AC sensitive transactions that 

were sent through HBUS involving $19.7 billion. Of those 28,000 
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8 

transactions, nearly 25,000 involved Iran, while 3,000 involved other 

prohibited countries or persons. The review has characterized nearly 

2,600 of those transactions, including 79 involving Iran, and with total 

assets of more than $367 million, as'Transactions ofInterest'requiring 

additional analysis to determine whether violations of U.S. law occurred. 

While the aim in many of those cases may have been to avoid the delays 

associated with the OFAC filter and individualized reviews, rather than 

to facilitate prohibited transactions, actions taken by HSBC affiliates to 

circumvent OF AC safeguards may have facilitated transactions on 

behalf ofterrorists, drug traffickers, or other wrongdoers. While HBUS 

insisted, when asked, that HSBC affiliates provide fully transparent 

transaction information, when it obtained evidence that some affiliates 

were acting to circumvent the OFAC filter, HBUS failed to take decisive 

action to confront those affiliates and put an end to the conduct. HBUS' 

experience demonstrates the strong measures that the U.S. affiliate ofa 

global bank must take to prevent affiliates from circumventing OF AC 

prohibitions. 

Disregarding Links to Terrorism. For decades, HSBC has 

been one of the most active global banks in the Middle East, Asia, 

and Africa, despite being aware of the terrorist financing risks in 

those regions. In particular, HSBC has been active in Saudi 

Arabia, conducting substantial banking activities through affiliates 

as well as doing business with Saudi Arabia's largest private 

financial institution, Al Rajhi Bank. After the 9/11 terrorist attack 

in 200 I, evidence began to emerge that Al Rajhi Bank and some of 

its owners had links to financing organizations associated with 

terrorism, including evidence that the bank's key founder was an 

early financial benefactor of al Qaeda. In 2005, HSBC announced 

internally that its affiliates should sever ties with Al Rajhi Bank, 

but then reversed itself four months later, leaving the decision up 

to each affiliate. HSBC Middle East, among other HSBC 

affiliates, continued to do business with the bank. 

Due to terrorist financing concerns, HBUS closed the 

correspondent banking and banknotes accounts it had provided to 

Al Rajhi Bank. For nearly two years, HBUS Compliance 

personnel resisted pressure from HSBC personnel in the Middle 

East and United States to resume business ties with Al Rajhi Bank. 

In December 2006, however, after Al Rajhi Bank threatened to pull 

all of its business from HSBC unless it regained access to HBUS' 

U.S. banknotes program, HBUS agreed to resume supplying Al 

Rajhi Bank with shipments of U.S. dollars. Despite ongoing 

troubling information, HBUS provided nearly $1 billion in U.S. 

dollars to Al Rajhi Bank until 2010, when HSBC decided, on a 

global basis, to exit the U.S. banknotes business. HBUS also 

supplied U.S. dollars to two other banks, Islami Bank Bangladesh 
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9 

Ltd. and Social Islami Bank, despite evidence of links to terrorist 

financing. Each of these specific cases shows how a global bank 

can pressure its U.S. affiliate to provide banks in countries at high 

risk of terrorist financing with access to U.S. dollars and the U.S. 

financial system. 

Clearing Suspicious Bulk Travelers Cheques. Another AML 

issue involves HBUS' clearing more than $290 million in bulk U.S. 

dollar travelers checks in less than four years for a Japanese regional 

bank, Hokuriku Bank, despite evidence of suspicious activity. From at 

least 2005 to 2008, HBUS cleared bulk travelers cheques for Hokuriku 

Bank on a daily basis, at times clearing $500,000 or more in U.S. dollars 

per day. The cheques were in denominations of $500 or $1,000, 

submitted in large blocks of sequentially numbered cheques, and signed 

and countersigned with the same illegible signature. An oee 

examination which determined that HBUS was clearing travelers 

cheques with inadequate AML controls, discovered the stacks of 

Hokuriku travelers cheques being processed on a daily basis, and 

directed HBUS to investigate. When HBUS sought more information, 

Hokuriku Bank at first delayed responding, then provided minimal 

information, and finally declined to investigate further, claiming to be 

constrained by bank secrecy laws from disclosing client-specific 

information. HBUS eventually learned that the travelers cheques were 

purchased by Russians from a bank in Russia, a country at high risk of 

money laundering. HBUS also learned that the Japanese bank had little 

Kye information or understanding why up to $500,000 or more in bulk 

U.S. dollar travelers cheques purchased in Russia were being deposited 

on a daily basis into one of 30 different Japanese accounts of persons 

and corporations supposedly in the used car business. 

In October 2008, under pressure from the oee, HBUS stopped 

processing the travelers cheques, but continued the correspondent 

relationship, despite the Japanese bank's poor AML controls. Two years 

later, in 20 I 0, an oee examination uncovered the ongoing relationship 

between HSBe and Hokuriku, which the oee thought had ended. In 

2012, after the Subcommittee inquired about the account, HBUS closed 

it. Since travelers cheques have been misused by terrorists, drug 

traffickers, and other criminals, the HBUS experience shows how a U.S. 

affiliate with ineffective AML controls can end up clearing suspicious 

bulk travelers cheques and facilitating the movement of hundreds of 

millions of U.S. dollars across international lines to unknown recipients. 

Offering Bearer Share Accounts. Over the course of a decade, 

HBUS opened over 2,000 accounts in the name of bearer share 

corporations, a notorious type of corporation that invites secrecy and 

wrongdoing by assigning ownership to whomever has physical 

possession of the shares. At its peak, HBUS' Miami office had over 
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JO 

1,670 bearer share accounts; the New York office had over 850; and the 

Los Angeles office had over 30. The Miami bearer share accounts alone 

held assets totaling an estimated $2.6 billion, and generated annual bank 

revenues of$26 million. Multiple internal audits and regulatory 

examinations criticized the accounts as high risk and advocated that 

HBUS either take physical custody of the shares or require the 

corporations to register the shares in the names of the shareholders, but 

HBUS bankers initially resisted tightening AML controls, and regulators 

took no enforcement action. 

Two examples of the accounts illustrate the risks they posed. In 

the first, Miami Beach hotel developers, Mauricio Cohen Assor and 

Leon Cohen Levy, father and son, used bearer share accounts they 

opened for Blue Ocean Finance Ltd. and White bury Shipping TimeSharing Ltd. to help hide $150 million in assets and $49 million in 

income. In 20 I 0, both were convicted of criminal tax fraud and filing 

false tax returns, sentenced to ten years in prison, and ordered to pay 

back taxes, interest, and penalties totaling more than $17 million. A 

second example involves a wealthy and powerful Peruvian family which 

pressed HBUS to grant a waiver from its AML requirements that bearer 

share corporations either register their shares or place those shares in 

bank custody. Bank documents showed how HBUS bankers pressed 

Compliance personnel to grant the waiver to please a wealthy client. 

These accounts demonstrate the AML risks associated with bearer share 

accounts, whose owners seek to hide their identities. Today, following 

an initiative that concluded in 2011, HBUS has reduced its bearer share 

accounts to 26, most of which are frozen, while at the same time 

maintaining a policy that allows the bank to open new bearer share 

acco un ts in th e future. 

Regulatory Failures. HBUS' severe AML deficiencies did not 

happen overnight; they accumulated over time, even though its primary 

regulator, the OCC, conducted regular AML examinations. Part of the 

reason HBUS' AML problems were not cured is attributable to certain 

peculiar and ineffective aspects of the oces AML oversight effort. 

First, unlike other U.S. bank regulators, the OCC does not treat 

AML deficiencies as a matter of bank safety and soundness or a 

management problem. Instead it treats AML deficiencies as a consumer 

compliance matter, even though AML laws and consumer protection 

laws have virtually nothing in common. One consequence of this 

approach is that the OCC considers AML problems when assigning a 

bank's consumer compliance rating, but not when assigning the bank's 

management rating or its overall composite rating. As a result, AML 

deficiencies do not routinely lower the ratings that national banks 

receive as part of their safety and soundness evaluations, and so do not 

increase the deposit insurance that banks pay for incurring heightened 
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II 

risk, contrary to how AML problems are handled at other Federal 

banking agencies. At RBUS, after citing the bank for severe AML 

deficiencies, the oee lowered its consumer compliance rating but not 

its management rating. 

A second problem is that the oee has adopted a practice of 

foregoing the citation of a statutory or regulatory violation in its 

Supervisory Letters and annual Reports of Examination when a bank 

fails to comply with one of the four mandatory components of an AML 

program. The four minimum statutory requirements of an AML 

program are AML internal controls, an AML compliance officer, AML 

training, and independent testing of the effectiveness of its AML 

program. By consistently treating a failure to meet one or even several 

of these statutory requirements as a'Matter Requiring Attentiorl'instead 

of a legal violation, the oee diminishes the importance of meeting each 

requirement, sends a more muted message about the need for corrective 

action, and makes enforcement actions more difficult to pursue if an 

AML deficiency persists. In contrast, citing a violation of law when one 

critical component of a banJ(s AML program is inadequate sends a 

strong message to bank management that its AML program is deficient, 

does not meet minimum statutory requirements, and requires 

remediation to ensure compliance with the law. At RBUS, the oee 

identified 83 Matters Requiring Attention over five years, without once 

citing a legal violation of Federal AML law. It was only when the oee 

found RBUS' entire AML program to be deficient that the oee finally 

cited the bank for a legal violation. 

Additional problems illustrated by the RBUS case history include 

the oecs practice of conducting narrowly focused AML examinations 

of specific banking units without also assessing RBUS' overall AML 

program; the oecs reluctance, despite mounting AML deficiencies, to 

make timely use of formal and informal enforcement actions to compel 

improvements in RBUS' AML program; and the practice by some oee 

examiners to issue Supervisory Letters that sometimes muted AML 

examination criticisms or weakened recommendations for AML reforms 

atRBUS. 

While the oee insists that its AML approach has merit, the HSBe 

case history, like the Riggs Bank case history examined by this 

Subcommittee eight years ago/ provides evidence that the current oee 

system has tolerated severe AML deficiencies for years, permitted 

national banks to delay or avoid correcting identified problems, and 

allowed smaller AML issues to accumulate into a massive problem 

before oee enforcement action was taken. An experienced oee AML 

examiner told the Subcommittee:',! thought I saw it all with Riggs but 

9 See "Money Laundering and Foreign Corruption: Enforcement and Effectiveness ofthe Patriot 

Act." U.S. Senate Permanent Subcommittee on Investigations, S.Hrg. 108-633 (July 15,2004). 
186 


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12 

HSBC was the worst situation rd ever seen;'yet during the six-year 

period from 2004 to 2010, OCC officials did not take any formal or 

informal enforcement action to compel HBUS to strengthen its AML 

program, essentially allowing its AML problems to fester. In 2009, after 

learning of two law enforcement investigations involving AML issues at 

the bank, the OCC suddenly expanded and intensified an ongoing AML 

examination and allowed it to consider a wide range of AML issues. 

The OCC examination culminated in the issuance, in September 2010, 

of a blistering supervisory letter listing numerous, serious AML 

problems at the bank. In October 2010, the OCC also issued a Cease 

and Desist Order requiring HBUS to revamp its AML controls. 

In response, HBUS has announced a number of key organizational 

and policy initiatives to improve its AML program in the United States 

and globally. While those initiatives are promising, HBUS announced 

similarly promising AML reforms in 2003, when confronted with an 

AML enforcement action by the Federal Reserve Bank of New York and 

New York State Banking Department. Even before the OCC lifted that 

order in 2006, HBUS' AML program deteriorated. Both HBUS and the 

OCC will have to undertake a sustained effort to ensure the newest 

round of changes produce a better AML outcome. 

HSBC is the quintessential global bank, operating hundreds of 

affiliates in 80 countries, with its U.S. affiliate acting as the gateway into 

the U.S. financial system for the entire network. The OCC allowed AML 

problems at HBUS to build up until they represented major AML 

vulnerabilities for the United States. Going forward, HBUS needs far 

stronger controls to ensure it doesn't leave AML risks to the U.S. 

financial system unattended; and the OCC needs a much better approach 

to resolve AML problems in a more effective and timely manner. 

A. Findings 

This Report makes the following findings of fact. 

(1) Longstanding Severe AML Deficiencies. HBUS operated 

its correspondent accounts for foreign financial institutions 

with longstanding, severe AML deficiencies, including a 

dysfunctional AML monitoring system for account and wire 

transfer activity, an unacceptable backlog of 17,000 

unreviewed alerts, insufficient staffing, inappropriate country 

and client risk assessments, and late or missing Suspicious 

Activity Reports, exposing the United States to money 

laundering, drug trafficking, and terrorist financing risks. 
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13 

(2) Taking on High Risk Affiliates. HBUS failed to assess the 

AML risks associated with HSBC affiliates before opening 

correspondent accounts for them, failed to identifY high risk 

affiliates, and failed for years to treat HBMX as a high risk 

accountholder. 

(3) Circumventing OFAC Prohibitions. For years in 

connection with Iranian U-turn transactions, HSBC allowed 

two non-U.S. affiliates to engage in conduct to avoid 

triggering the OFAC filter and individualized transaction 

reviews. While HBUS insisted, when asked, that HSBC 

affiliates provide fully transparent transaction information, 

when it obtained evidence that some affiliates were acting to 

circumvent the OFAC filter, HBUS failed to take decisive 

action to confront those affiliates and put an end to conduct 

which even some within the bank viewed as deceptive. 

(4) Disregarding Terrorist Links. HBUS provided U.S. 

correspondent accounts to some foreign banks despite 

evidence of links to terrorist financing. 

(5) Clearing Suspicious Bulk Travelers Cheques. In less than 

four years, HBUS cleared over $290 million in sequentially 

numbered, illegibly signed, bulk U.S. dollar travelers cheques 

for Hokuriku Bank, which could not explain why its clients 

were regularly depositing up to $500,000 or more per day in 

U.S. dollar travelers cheques obtained in Russia into 

Japanese accounts, supposedly for selling used cars; even 

after learning of Hokuriku's poor AML controls, HBUS 

continued to do business with the bank. 

(6) Offering Bearer Share Accounts. Over the course of a 

decade, HBUS opened over 2,000 high risk bearer share 

corporate accounts with inadequate AML controls. 

(7) Allowing AML Problems to Fester. The OCC allowed 

HBUS' AML deficiencies to fester for years, in part due to 

treating HBUS' AML problems as consumer compliance 

matters rather than safety and soundness problems, failing to 

make timely use offormal and informal enforcement actions 

to compel AML reforms at the bank, and focusing on AML 

issues in specific HBUS banking units without also viewing 

them on an institution-wide basis. 
188 


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14 

B. Recommendations 

This Report makes the following recommendations. 

(1) Screen High Risk Affiliates. l-IBUS should reevaluate its 

correspondent relationships with HSBC affiliates, including 

by reviewing affiliate AML and compliance audit findings, 

identifying high risk affiliates, designating affiliate accounts 

requiring enhanced monitoring, and closing overly risky 

accounts. HBUS should conduct a special review of the 

HBMX account to determine whether it should be closed. 

(2) Respect OFAC Prohibitions. HSBC Group and HBUS 

should take concerted action to stop non-U.S. HSBC 

affiliates from circumventing the OFAC filter that screens 

transactions for terrorists, drug traffickers, rogue 

jurisdictions, and other wrongdoers, including by developing 

audit tests to detect undisclosed OFAC sensitive transactions 

by HSBC affiliates. 

(3) Close Accounts for Banks with Terrorist Financing 

Links. HBUS should terminate correspondent relationships 

with banks whose owners have links to, or present high risks 

of involvement with, terrorist financing. 

(4) Revamp Travelers Cheque AML Controls. HBUS should 

restrict its acceptance oflarge blocks of sequentially 

numbered U.S. dollar travelers cheques from HSBC affiliates 

and foreign financial institutions; identify affiliates and 

foreign financial institutions engaged in suspicious travelers 

cheque activity; and stop accepting travelers cheques from 

affiliates and foreign banks that sell or cash U.S. dollar 

travelers cheques with little or no KYC information. 

(5) Boost Information Sharing Among Affiliates. HSBC 

should require AML personnel to routinely share information 

among affiliates to strengthen AML coordination, reduce 

AML risks, and combat wrongdoing. 

(6) Eliminate Bearer Share Accounts. HBUS should close its 

remaining 26 bearer share corporate accounts, eliminate this 

type of account, and instruct financial institutions using 

HBUS correspondent accounts not to execute transactions 

involving bearer share corporations. U.S. financial regulators 

should prohibit U.S. banks from opening or servicing bearer 

share accounts. 
189 


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15 

(7) Increase HBUS' AML Resources. HBUS should ensure a 

full time professional serves as its AML director, and 

dedicate additional resources to hire qualified AML staff, 

implement an effective AML monitoring system for account 

and wire transfer activity, and ensure alerts, including OFAC 

alerts, are reviewed and Suspicious Activity Reports are filed 

on a timely basis. 

(8) Treat AML Deficiencies as a Matter of Safety and 

Soundness. The OCC should align its practice with that of 

other Federal bank regulators by treating AML deficiencies 

as a safety and soundness matter, rather than a consumer 

compliance matter, and condition management CAMELS 

ratings in part upon effective management of a bank's AML 

program. 

(9) Act on Multiple AML Problems. To ensure AML 

problems are corrected in a timely fashion, the OCC should 

establish a policy directing that the Supervision Division 

coordinate with the Enforcement and Legal Divisions to 

conduct an institution-wide examination of a bank's AML 

program and consider use offormal or informal enforcement 

actions, whenever a certain number of Matters Requiring 

Attention or legal violations identifying recurring or 

mounting AML problems are identified through 

examinations. 

(10) Strengthen AML Examinations. The OCC should 

strengthen its AML examinations by citing AML violations, 

rather than just Matters Requiring Attention, when a bank 

fails to meet anyone of the statutory minimum requirements 

for an AML program; and by requiring AML examinations to 

focus on both specific business units and a bank's AML 

program as a whole. 
190 


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16 

II. GENERAL BACKGROUND 

This section provides a general overview ofHSBC Group, HSBC 

Bank USA (HBUS), and the HBUS compliance and anti-money 

laundering (AML) program. 

A. Background on HSBC Group and HBUS 

HSBC Group is one of the largest financial institutions in the 

world, with over $2.5 trillion in assets, 89 million customers, and 2011 

profits of nearly $22 billion.lO Its parent corporation, HSBC Holdings 

pIc, often referred to by the bank as'HSBC Group;' is headquartered in 

London. Despite its London headquarters, the principal office of the 

Group Chief Executive is located in Hong Kong. ll Altogether, HSBC 

has about 300,000 employees and 7,200 offices in over 80 countries, 

including North America, Europe, Asia, Latin America, the Middle East, 

and Africa. 12 

United States Operations. Among other entities, the Group owns 

HSBC Overseas Holdings (UK) Ltd. (HSBC Overseas Holdings), which 

oversees its operations in the United States and Canada. HSBC 

Overseas Holdings owns, in tum, HSBC North America Holdings Inc. 

(HNAH, pronounced"HannaH), one of the ten largest bank holding 

companies in the United States. HNAH has assets of about $345 billion, 

is headquartered in New York City, and is overseen by the Federal 

Reserve.13 Through various subsidiaries, HNAH owns three key HSBC 

financial institutions in the United States: HSBC Bank USA N.A. 

(HBUS); HSBC Securities (USA) Inc. (HSBC Securities); and HSBC 

Finance Corporation. 

HBUS operates more than 470 bank branches throughout the 

United States, manages assets totaling about $210 billion, and serves 

around 4 million customers. 14 It holds a national bank charter and its 

10 See "HSBC Holdings pIc 2011 Results-Highlights," (2112112), at 1-2, http://www.hsbc.com/ 

liP A. esf-ca-app-content/contentiassets/invcstor .relations/hsbc20 l1am.pdf; "HSBC Holdings 

pic Annual Report and Accounts 20 II ," at 1, http://www.hsbc.comll/PA.esf-ca-appcontent/contentiassets/investor .relationsl hsbc20 II araO.pdf (hereinafter "HSBC Group 20 II 

Annual Report"). 

"See "HSBC Announces New Leadership Team," (9/24/10), media release prepared by HSBC, 

http://www.hsbc.com/I/2/newsroom/news/20 I O/hsbc-announces-new-Ieadership. 

l2 lISBC Group 2011 Annual Report at I; "HSBC Announces New Leadership Team," 

(912411 0), media release prepared by HSBC, http://www.hsbc.comlI/2/newsroom/news/ 

20 I O/hsbc-announces-new-leadership. 

!l See "HSBC North America Holdings Inc. Fact Sheet," at I, htlp:llwww.us.hsbc.comlIlPA .. 

083Q9FJ08A002FBPSSOOOOOOOO/contentiusshared/lnside%20HSBCI About%20HSBC/Corporat 

e%20lnformationiCorporate%20Factsihnah Jactsheet. 0911.pdf. 

14 "HSBC Bank USA, National Association Fact Sheet," at I, http://www.us.hsbc.comIlIPA 

.1.083 Q9F J08A002FBP 5 SOOOOOOOO/content/usshared/I nside%201lSB CI About%20HSBC/Corp 

orate%20Information/Corporatc%20Facts/hbusJactsheet. 0911.pdf (hereinafter "HBUS Fact 

Sheet"). 
191 


76061.557

17 

primary regulator is the Office of the Comptroller of the Currency 

(OCC), which is part of the U.S. Treasury Department. Because it holds 

insured deposits, its secondary regulator is the Federal Deposit Insurance 

Corporation (FDIC). HBUS is the principal subsidiary ofHSBC USA 

Inc. (HUSI), a bank holding company which is a wholly-owned 

subsidiary ofHNAH.!5 HBUS is headquartered in McLean, Virginia, 

and has its principal office in New York City.!6 

HSBC Securities is a licensed broker-dealer regulated by the 

Securities and Exchange Commission (SEC). HSBC Finance 

Corporation, formerly subprime lender Household International, 

provides credit cards, automobile loans, consumer lending, and 

insurance products, and is overseen by several U.S. regulators including 

the Consumer Financial Protection Bureau. 

HNAH also owns an Edge Act corporation in Miami, HSBC 

Private Bank International.!7 The Edge Act allows U.S. national banks 

to form U.S. subsidiaries designed to engage solely in international 

banking operations, including holding deposits for non-U.S. persons.!S 

Edge Act corporations are chartered and regulated by the Federal 

Reserve. In addition, HNAH sponsors the HSBC Latin American 

International Center, also referred to as'HSBC Miami Offshore;'in 

Miami. This center, like HSBC Private Bank International, is designed 

to help meet the needs of Latin American clients with banking needs in 

the United States.!9 

HNAH owns several other subsidiaries as well, including HSBC 

Trust Company, N.A., of Delaware, and HSBC Bank Nevada, N.A., of 

Las Vegas, Nevada. 

HBUS Major Lines of Business. HBUS has six major lines of 

business in the United States. 20 The first is"Retail Banking and Wealth 

Management' which provides deposits, checking, savings, mortgages, 

loans, brokerage products, and certificates of deposit (CDs) to 

customers?! HSBC Premier is a product within the retail bank that 

provides services for more affluent clients.22 

IS ld. 

"ld. at 2. 

" See "FAQs - HSBC Money Laundering Enforcement Action," attached to 10/6/2010 email 

from acc James Vivenzio to acc colleagues, "HSBC FAQs," aCC-PSI-0089884S-8S7. 

18 See the Edge Act, P.L. 102-242 (1919), codified at 12 U.S.c. § 611 et seq. 

19 See HSBC Latin American International Center website, https:llwww.us.hsbc.comIl/2/31 

hsbcpremier/miami-offshore. 

20 HBUS Fact Sheet at 1-2. According to the acc, HBUS has a total of32 lines of business 

altogether. Subcommittee interviews ofaCC examiners Joseph Boss (1/30/2012) and Elsa de la 

Garza (119/2012). 

21 See hltps:llwww.us.hsbc.com/1/2/}/hsbcpremier/miami-offshoreretail. 

II HilUS Fact Sheet at 1. 
192 


76061.558

18 

The HBUS "Private Banking" offers wealth management services 

for high net worth individuals and families with deposits of at least $1 

million.23 HSBC Private Bank provides banking, investment, custody, 

wealth planning, trust and fiducia~, insurance, and philanthropic 

advisory services to its customers. 4 Clients receive a dedicated 

"relationship manager" to manage their Private Bank aecounts. 

The HBUS "Commercial Banking" offers global banking services 

to financial institutions, companies, governmental entities, and nonprofit organizations worldwide.25 These services include deposits, 

checking, remote deposit capture, payments and cash management, 

pouch services, corporate loans and financing, merchant services, and 

insurance products. HBUS assigns each client a dedicated relationship 

manager to handle its accounts.26 

The HBUS "Global Banking and Markets" line of business, with 

offices in more than 60 countries, provides a wide range of "tailored 

fmancial solutions" to major government, corporate, and institutional 

clients.27 This line of business includes an extensive network of 

correspondent banking relationships, in which HBUS provides banks 

from other countries with U.S. dollar accounts to transact business in the 

United States. Due to its affiliates in over 80 countries, HSBC is one of 

the largest providers of correspondent banking services in the world. In 

20 I 0, it had about 2,400 correspondent customers, including for more 

than 80 HSBC affiliates. 28 Among other services, HSBC provides 

financial institution clients with access to the U.S. financial system by 

handling international wire transfers, clearing a variety of U.S. dollar 

instruments, including travelers cheques and money orders, and 

providing foreign exchange services. HBUS Payment and Cash 

Management (PCM) is a key banking division, located in New York, 

that supports HBUS' correspondent relationships.29 

In addition, as part of this line of business, until 2010, HBUS 

housed the Global Banknotes Department, which used offices in New 

York City, London, Hong Kong, and elsewhere to buy, sell, and ship 

23 1d. at 2; Subcommittee interview ofHSBC representatives (6/9/2011). 

" HB US Fact Sheet at 2. 

25 HBUS Fact Sheet at L 

261d. 

27 Id. 

28 See 91l 31201 0 acc Supervisory Letter HSBC-2010-22, "Bank Secrecy Act/Anti-Money 

Laundering CBSAlAML') Examination - Program Violation (12 U.S.C. § 181 8(s); 12 CF.R. § 

21.21)," aCC-PSI-00864335-365, at 7. [Sealed Exhibit] Subcommittee briefing by HSBC 

legal counsel (6/20/2012). 

29 9113/20 I 0 acc Supervisory Letter HSBC-20 I 0-22, "Bank Secrecy Actl Anti-Money 

Laundering ('BSAlAML') Examination - Program Violation (12 U.S.C § 1818(5); 12 CF.R. § 

21.21)," aCC-PSI-00864335-365, at 341-342 [Sealed Exhibit]; Subcommittee interview of 

Michael Gallagher (611312012). 
193 


76061.559

19 

large amounts of physical U.S. dollars.3D The Banknotes Department 

derived its income from the trading, transportation, and storage of bulk 

cash, doing business primarily with other banks and currency exchange 

businesses, but also with RSBC affiliates. 31 In addition, for a number of 

years, RBUS held a contract with the U.S. Federal Reserve Bank of New 

York (FRBNY) to operate U.S. currency vaults in several cities around 

the world to assist in the physical distribution of U.S. dollars to central 

banks, large commercial banks, and businesses involved with currency 

exchange.32 In June 2010, however, HBUS exited the wholesale U.S. 

banknotes line of business, later selling portions of the business to other 

banks.33 It also did not renew its contract to operate FRBNY currency 

vaults. 

The RBUS "Global Asset Management" line of business offers 

worldwide investment management services to clients, and currently 

manages nearly $400 billion in assets.34 It is one of the largest 

investment businesses in the world. Finally, "RSBC Insurance" 

provides a wide variety of insurance products to customers in the United 

States and Canada.J5 

In addition to these major lines of business, in recent years, HBUS 

has become a leader in providing banking services to foreign embassies 

with a presence in the United States. HBUS began this business after 

Riggs Bank and Wachovia Bank stopped providing those services in 

2005, and embassies began looking for a new financial institution. 36 

Through its correspondent banking and Payments and Cash 

Management (PCM) businesses, RBUS has become one of the largest 

facilitators of cash transfers in the world. Between 2005 and 2009, the 

total number ofPCM wire transactions at HBUS grew from 20.4 million 

to 30.2 million transfers per year, with a total annual dollar volume that 

climbed from $62.4 trillion to $94.5 trillion.37 In 2008, HBUS processed 

30 See 9113/2010 OCC Supervisory Letter HSBC-2010-22. OCC-PSI-00864335-365. at 341-342. 

ISealed Exhibit.] 

'Id. at OCC-PSI-00864342. 

32 See Form IO-Q filed by HSBC USA Inc. with the SEC for the quarter ending June 30, 2011, at 

9-10. 

33 Id. In 2010, HSBC Holdings pic sold its U.S. wholesale banknotes business in Asia to United 

Overseas Bank Limited (UOB) [or $11 million, and in 2011, sold its European banknotes 

business to HSBC Bank pIc. It recorded total closure costs of$14 million during 2010. Id. 

34 HBUS Fact Sheet at 2. 

35Id. 

36 See 1130/2006 OCC Supervisory Letter regarding HBUS Embassy Banking, OCC-PSI00107529-736, at 529-530; "HSBC to Open D.C. Branch, Pursue Embassy Clients," Washington 

Post, Terence O'Hara (101512004)(quoting Riggs spokesperson: "As a service to our remaining 

embassy clients, Riggs is working closely with HSBC to ensure a smooth transition. "), 

http://www.washingtonpost.com/ac2/wp-dyni A 7285-20040ct4 ?language=printer. 

37 See 9/13/2010 OCC Supervisory Letter HSBC-2010-22, "Bank Secrccy AcUAnli-Money 

Laundering CBSA/AML') Examination - Program Violation (12 U.S.c. § 1818(s); 12 C.F.R. § 

21.21)," OCC-PSI-00864335-365, at 7. [Sealed Exhibit.] 
194 


76061.560

20 

about 600,000 wire transfers per week.38 In 2009, PCM was the third 

largest participant in the CHIPS wire transfer service which provides 

over 95% of U.S. dollar wire transfers across U.S. borders and nearly 

half of all wire transfers within the United States, totaling $1.5 trillion 

per day and over $400 trillion in 2011.39 

HSBC Affiliates. HSBC has hundreds of affiliates located in over 

80 countries. At least 80 HSBC affiliates have turned to HBUS for 

access to U.S. dollars and the U.S. financial system. These affiliates 

typically interact with HBUS by opening a correspondent account at 

HBUS headquarters in New York. Many use the account to clear U.S. 

dollars wire transfers; some use the account to cash U.S. dollar 

instruments like travelers cheques or money orders; still others use the 

account for foreign exchange purposes. In addition, some opened a 

separate account to buy or sell physical U.S. dollars as part ofHBUS' 

wholesale banknotes business, until it was shuttered in 2010. 

HSBC affiliates have accounted for a large portion ofHBUS' U.S. 

dollar activities. In 2009, for example, HSBC determined that "HSBC 

Group affiliates clear[ed] virtually all USD [U.S. dollar] payments 

through accounts held at HBUS, representing 63% of all USD payments 

processed by HBUS.,,40 HSBC also calculated that, over an eight-year 

period, its U.S. dollar clearing business had increased over 200%, from 

processing an average daily amount of$185 billion in 2001, to $377 

billion in 2009.41 HBUS also executes transactions through HSBC 

affiliates in other countries. It has been estimated that, in 2009, HBUS 

processed 19.4 million transactions, involving $45.9 trillion, through 

HSBC affiliates. 42 

One of the largest HSBC affiliates is The Hongkong Shanghai 

Banking Corporation Ltd., which is incorporated in Hong Kong and is 

Hong Kong's largest bank.43 Established in 1865, when Hong Kong was 

part ofthe British empire, it is the founding member of the HSBC 

Group, but now operates as a subsidiary ofHSBC Holdings pic, the 

Group's parent corporation. With more than 71,400 employees, it 

oversees a network of hundreds ofHSBC affiliates in 20 countries 

38 See 712812008 OCC memorandum, "OFAC Examination - Payment and Cash Management 

(PCM)," OCC-PSI-01274962, at4. [Sealed Exhibil.] 

39 Jd. See also The Clearing House website, "About CHIPS," 

hltp:llwww.chips.org/about/pages/033738.php. 

40 See 9/912009 chart entitled, "HSBC Profile," included in "HSBC OFAC Compliance 

Program," a presentation prepared by HSBC and provided to the OCC, at HSBC OCC 8874197. 

41 ld. at "USD Payment Statistics - Fact Sheet," HSBC OCC 8874211. 

42 See 9113/2010 OCC Supervisory Letter HSBC-2010-22, "Bank Secrecy AcVAnti-Money 

Laundering CBSA/AML') Examination - Program Violation (12 U.S.c. § 1818(s); 12 C.F.R. § 

21.21)," OCC-PSI-00864335-365, at 7. [Sealed Exhibit.] 

43 See "Hongkong Shanghai Banking Corporation Limited Annual Report and Accounts 2011," 

at 2, http://www.hsbc.com.hkJl/PA I 3 S5/contcnt/aboutlfinancial-informationlfinancialrcports/bankJpdt/20 II report. pdf. - - -
195 


76061.561

21 

throughout Asia and the Pacific Region, including Australia, 

Bangladesh, China, India, Japan, Malaysia, New Zealand, Thailand, and 

Vietnam.44 It is sometimes referred to in internal HSBC documents as 

HBAP, an abbreviation for HSBC Bank Asia Pacific. 

A second key affiliate is HSBC Bank Middle East Ltd. (HBME). 

Incorporated in Jersey in the Channel Islands and owned through a chain 

of subsidiaries reaching back to the Group's parent corporation in 

London, HBME oversees a network of financial institutions throughout 

the Middle East and North Africa.45 With more than 5,000 employees, 

HBME provides banking services through nearly 45 branches in Algeria, 

Bahrain, Jordan, Kuwait, Lebanon, Oman, Pakistan, Qatar, and the 

United Arab Emirates.46 In 1998, HSBC Group established "HSBC 

Amanah," a "global Islamic financial services division" designed to 

"serve the particular needs of Muslim communities" in compliance with 

Islamic law.47 HBME offers Amanah banking services to many of its 

clients in the Middle East and North Africa. 

A third affiliate discussed in this Report is HSBC Mexico S.A. 

Banco (HBMX), the principal operating company of Grupo Financiero 

HSBC, S.A. de C.V., which owns HSBC's businesses in Mexico. 

HSBC's Mexican group is one of Mexico's largest financial service 

conglomerates, with over 1,000 branches throughout the country, nearly 

$2 billion in assets, and over 8 million c1ients.48 HSBC purchased 

HBMX in 2002, when it operated under the name of Banco 

Intemacional, S.A. and was part of Grupo Financiero Bital, S.A. de 

C.V.49 HBMX and its Mexican parent are headquartered in Mexico City 

and together have about 19,000 employees.5o 

HSBC Leadership. Over the last few years, HSBC leadership has 

undergone significant change. In 2010, HSBC Holdings pic appointed a 

44 ld. 

45 See "HSI3C I3ank Middle East Limited Annual Report and Accounts 20 II." 

http://www.hsbc.aell IP A ~ 1 ~ 083 Q9F J08A002FI3P 5 SOOOOOOOOlcontentiuae ywslpdflenlannual~ r 

er°rt~2011.pdf. 

4 See id. at 32. See also "HSBC Wins its Eighth Best Cash Management I3ank in the Middle 

East Award," http://www.hsbc.ae/I/2/about-hsbc/newsroomieighth-best-cash-management, 

viewed 4/21l2; "HSBC Research Picks Up More Regional Awards," (1/12/12), 

http://www.hsbc.ae/I/P A ~ I ~ 083Q9F J08A002FBP5S00000000lconten tluae yws/pdflenlnewsroo 

m1euromoney-research-awards-jan-12.pdf, viewed 41l21l2. HSBC provides banking services in 

Saudi Arabia through both HSBC Saudi Arabia, in which it is a 49% shareholder, and Saudi 

British Bank (SABB), in which it is a 40% shareholder. See "HSI3C Research Picks Up More 

Regional Awards," (11l 211 2), 

http://www.hsbc.ae/llP A ~ I ~ 083 Q9F J08A 002FI3P5S000000001 contentluae ywslpdflcnlnewsroo 

mleuromoney-research-awards-jan-12.pdf, viewed 41l21l2. 

47 See HSBC website, "About HSBC Amanah," http://www.hsbcamanah.com/arnanahlaboulamanah. 

48 See HSBC websitc, Grupo HSBC Mexico, http://www.hsbc.com.mxlI/2/grupo. viewed 412112. 

49 See "HSBC Consuma la Adquision de GF BITAL." (11125102), 

http://www.hsbc.com.mxlJlP A ~ I ~ 1 ~ S5/contentlhome ~ en/investor ~relations/press~releaseslinfpr 

esslhsbc consuma.pdf. 

50 See HSBC website, Grupo HSBC Mexico, http://www.hsbc.com.mx/I/2/grupo. viewed 412112. 
196 


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22 

new Chainnan of the Board of Directors, Douglas J. Flint, replacing 

Stephen Green, who had become a U.K. Cabinet Minister. 51 A new 

Group Chief Executive was also selected, replacing Michael Geoghegan, 

who retired, with Stuart T. Gulliver. In 2012, HSBC Holdings pic also 

appointed a new Chief Legal Officer, Stuart Levey, former 

Undersecretary for Terrorism and Financial Intelligence at the U.S. 

Treasury Department. Mr. Levey replaced the Group's General 

Counsel, Richard Bennett.52 

Also in 2010, Sandy Flockhart became Chairman of Europe, 

Middle East, Africa, Latin America, Commercial Banking; as well as 

Chainnan ofHSBC Bank plc. 53 Mr. Flockhart, who first joined HSBC 

in 1974, is an emerging markets specialist and, among other posts, 

headed HBMX in Mexico for five years, from 2002 to 2007.54 He was 

also appointed to the HSBC Group Board of Directors in 2008, and 

became a director ofHSBC Bank Middle East in July 2011.55 

HNAH Leadership. At HNAH, the U.S. bank holding eompany, 

the persons holding leadership positions have often overlapped with 

those ofHNAH's key subsidiaries, HBUS, HSBC Securities, and HSBC 

Finance Corporation. HNAH's current Chief Executive Officer (CEO), 

for example, is Irene Domer, who is also the CEO ofHBUS. 56 Her 

immediate predecessor at HNAH, for less than a year, was Niall Booker, 

who was preceded by Brendan McDonagh, former Chief Operating 

Officer (COO) ofHBUS. Before Mr. McDonagh, HNAH was headed 

by Siddharth (Bobby) N. Mehta, who was also head ofHSBC Finance 

Corporation, but left the bank when HSBC Finance Corporation's 

subprime mortgage portfolio incurred huge losses during the recent 

financial crisis. 

The current HNAH COO is Gregory Zeeman; the current General 

Counsel is Stuart Alderoty; and the current Chief Auditor is Mark 

Martinelli, each of whom currently holds the same position at HBUS. 57 

51 See "HSBC Announces New Leadership Team," (9/24/10), media release prepared by HSBC, 

http://www.hsbc.com/I/2/newsroomlnews/2010/hsbc-announces-new-Ieadership. 

""HSBC appoints Chief Legal Officer," (1/13/12), media release prepared by HSBC. 

http://www.hsbc.coml!/2/newsroominews/2012/chief-legal-officer.Mr. Levey held his position 

at the Treasury Department from .Tuly 2004 to February 2011. Id. Mr. Bennett had headed 

HSBC Group's Legal and Compliance department since 1998; in 2010, he had become General 

Counsel. 

53 See "HSBC Announces New Leadership Team," (9/24110), media release prepared by HSBC, 

http://www.hsbc.com/l 12/newsroomlnews/20 10Ihsbc-announces-new-leadership. 

54 See HSBC Group "Board of Directors," http://www.hsbc.comll!2/aboutlboard-of-directors 

(describing Mr. Flockhart as "a career banker, being an emerging markets specialist with over 35 

years' experience with HSBC in Latin America, the Middle East, US and Asia"). 15 1d. 

56 See "Leadership: HSBC North America Holdings Inc.," 

https:!I,,'WW.us.hsbc.com/ I 12/3/personal/inside/about/corporate-information/leadership/hnah. 

"ld. 
197 


76061.563

23 

HNAH's Chief Risk Officer is Mark Gunton who holds the same 

position at both HBUS and HSBC Finance Corporation. 

UBUS Leadership. Over the last ten years, HBUS has undergone 

numerous changes in leadership, with the head of the bank turning over 

four times.58 The current head is Irene Domer who serves as HBUS' 

Chairman of the Board, President, and CEO. She was appointed to those 

positions in 2010, after having served as the CEO of HSBC Bank 

Malaysia and as a director on the HBUS Board. Her immediate 

predecessor was Paul J. Lawrence who headed HBUS from 2007 to 

2010. His predecessor was Sandy L. Derickson who served in the post 

for less than one year and left the bank along with Mr. Mehta after 

HSBC Finance Corporation, where he was second-in-command, 

incurred substantial losses. His predecessor was Martin J.G. Glynn who 

headed HBUS from 2003 to 2006, and then retired. 

HBUS has a six-person Board of Directors. Its current members 

are Ms. Domer; William R.P. Dalton, former CEO ofHSBC Bank pic in 

London; Anthea Disney, former Executive Vice President of 

NewsCorporation; Robert Herdman, former SEC Chief Accountant; 

Louis Hernandez, Jr., CEO of Open Solutions Inc.; and Richard A. 

Jalkut, CEO ofTelePacific Communications. 

Within HBUS, the current Chief Operating Officer (COO) is 

Gregory Zeeman.59 His immediate predecessor was David Dew60 who 

was preceded by Brendan McDonagh, who served as the COO from 

2004 to 2006. Some other key HBUS executives are Marlon Young, 

the head of Private Banking Americas; Kevin Martin, the head of Retail 

Banking and Wealth Management; and Mark Watkinson, the head of 

Commercial Banking.61 Since 2007, the bank's Chief Auditor has been 

Mark Martinel1i. From 2000 to 2011, the head ofHBUS Payments and 

Cash Management (PCM) was Michael Gallagher. The head of Global 

Banknotes, from 2001 to 2010, was Christopher Lok. 

HBUS' current General Counsel is Stuart A. Alderoty.62 His 

predecessor was Janet Burak who served as the bank's General Counsel 

"Information on BBUS' leadership is taken from its SEC annual reports. 

59 See "Leadership: HSBC Bank USA, N.A .• " 

https:llwww.us.hsbc.comlI/2/3/personallinside/abouticorporate-infonnationlleadershiplhbus. 

60 Mr. Dew served as BBUS COO from March 2007 to 2008; prior to that, he served for a month 

as BBUS Chief Administrative Officer from February 2007 to March 2007; prior to that he 

served as audit head at HUSI and IISBC North America Inc. from 2006 to 2007, and as audit 

head of BSBC North America Holdings Inc. from 2004 to 2007. Mr. Dew currently works as 

Managing Director of the Saudi British Bank which is 40% owned by BSBC. Subcommittee 

interview of David Dew (3/5/2012). 

61 See "20 II HSBC Armual Report," 

http://www.us.hsbc.com/I/2/3/personallinside/about/corporatc-infonnationlleadershiplhbus, 

viewed 3/23112. 

62 See "Leadership: HSBC Bank USA, N.A.," 

htlps:llwww.us.hsbc.comll/2/3/personal/inside/about/corporate-infonnationlleadershiplhbus. 
198 


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24 

from 2004 to 2010. In 2007, she was also made the Regional 

Compliance Officer for North America.6J 

B. HBUS AML Program 

The compliance and anti-money laundering (AML) programs at 

RBUS have undergone continual organizational and leadership changes 

since 2005. In April 2003, the Federal Reserve and New York State 

Banking Department, which oversaw RBUS' predecessor bank, cited the 

bank for multiple, severe AML deficiencies and required it to enter into 

a written agreement to revamp and strengthen its AML program.

64 It 

was at that time that RBUS renamed itself and converted to a national 

bank charter under the supervision of the OCc. During its first year 

under OCC supervision, RBUS reorganized its AML program, 

revamping its AML controls, country and client risk assessment criteria, 

Know Your Customer (KYC) due diligence requirements, and systems 

for detecting and reporting suspicious activity.65 RBUS also acquired a 

new system for monitoring account activity, called the Customer 

Activity Monitoring Program (CAMP) and established criteria to 

produce alerts requiring additional reviews. In addition, RBUS created 

a system ofKYC client profiles with standard due diligence information 

requirements for each client and which was updated on a regular basis 

and had to be approved by compliance and other bank officials for an 

account to be kept open. RBUS also established a Financial Intelligence 

Group to conduct enhanced due diligence reviews. 

Although the OCC gave positive reviews to the bank's initial 

efforts,66 by 2010, the OCC issued a lengthy Supervisory Letter again 

citing the bank for numerous AML deficiencies and requiring RBUS to 

revamp its AML program a second time. In response, the bank issued an 

action plan to correct identified problems. RBUS has, for example, 

acquired a new AML monitoring system, NORKOM to replace CAMP, 

and is working to refine its parameters for detecting suspicious activity. 

In its first month of operation, NORKOM detected more than 100,000 

transactions needing further review, demonstrating its ability to catch 

many transactions that went previously unchecked under CAMP. 

RBUS has also revamped its approach to RSBC affiliates, which 

make up an important segment ofRBUS' corrcspondent banking, wire 

63 See 9/13/2010 OCC Supervisory Letter HSBC-2010-22, "Bank Secrecy Act/Anti-Money 

Laundering ('BSNAML') Examination - Program Violation (12 U.S.c. § ISIS(s); 12 C.F.R. § 

21.21)," OCC-PS1-00000230-259, at 256. [Sealed Exhibit.] 

64 See HSBC Bank USA. Federal Reserve Bank of New York, and New York State Banking 

Department, Docket No. 03-012-WNRB-SM (Board of Governors of the Federal Reserve 

~{'tem, Washington, D.C.), Written Agreement (4/30/2003), OCC-PSI-00907S03-SII. 

. See OCC Report of ExamInatIOn ofHBUS, for the exammatlOn cycle endmg March 31, 2005, 

OCC-PSI-00423650. [Scaled Exhibit.] 

66 Id. at 10-I I (describing the formal agreement). 
199 


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25 

transfer, and cash management businesses and previously operated 

without due diligence controls and at times with minimal or no AML 

monitoring. Among other changes, HBUS now requires all subsidiaries 

to conduct due diligence on all other HSBC affiliates, including by using 

internal audit information identifying their AML risks and AML 

controls; identifies affiliates posing high AML risks; and treats them 

accordingly, thus ending all policies exempting affiliates from standard 

AML account and wire transfer monitoring. In addition, HBUS has 

revamped its country and client risk assessment criteria, which now 

identify high risk clients in a more robust manner; reviewed its 

correspondent banking business to reduce the number of high risk 

financial institutions; and closed some high risk business lines including 

its U.S. banknotes program. HBUS has also hired new AML leadership 

and significantly expanded its AML staffing and resources. HBUS 

currently employs over 1,000 compliance personnel.67 

Some ofHBUS' changes have been criticized by the OCC as 

inadequate. HBUS has been informed by the OCC that it must do 

additional work on its monitoring system in order to implement the 

requirements of the 20 I 0 Cease and Desist Order. The individual hired 

by HBUS in 2011 to serve as its Chief Compliance Officer left after a 

little more than a year. Both HBUS and the OCC will have to work hard 

to ensure that the latest round of changes will produce a better AML 

outcome than the changes made in 2004. 

(1) HBUS Compliance and AML Leadership 

Over the last five years, HBUS has experienced high turnover in its 

Compliance and AML leadership, making reforms difficult to 

implement. Since 2007, HBUS has had four Compliance heads and five 

AML directors. Currently, both positions are held by the same person, 

Gary Peterson. Mr. Peterson has extensive AML experience and was 

hired in 20 I 0, to be the AML director, but after the Compliance head 

was asked to leave in 2010, has since held both posts. In 2012, Mr. 

Peterson is expected to relinquish his duties as AML director to his 

deputy, Alan Schienberg, so that the top Compliance and AML positions 

at HBUS will each have a full time professional.68 

The top compliance position at HBUS is the Chief Compliance 

Officer who oversees all compliance issues for the bank. In the AML 

field, HBUS has specified two posts which have been held by the same 

person, the Anti-Money Laundering (AML) Director who is tasked with 

ensuring bank compliance with U.S. AML laws and regulatory 

67 See 71l0/20l2 HSBC Group News, "HSBC to Testify at U.S. Senate Hearing." letter by 

HSBC Group Chief Executive Stuart Gulliver, PSI-HSBC-76-0001-002, at 002. 

68 See HSBC website, "Leadership: HSBC Bank USA, N.A.," 

https://www.us.hsbc.com/I/2/3/personal/inside/aboutlcorporate-information/leadership/hbus. 
200 


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26 

requirements. 69 HBUS' Compliance and AML leadership positions 

were relatively stable until 2007, after which the bank has struggled to 

hire and retain experienced compliance professionals. 

HBUS' Chief Compliance Officer from 2000 to 2008 was Carolyn 

Wind. Prior to that position, Ms. Wind worked for Republic Bank of 

New York as a compliance officer and, before that, as an OCC bank 

examiner. For the first three years she held the job, Ms. Wind also 

served as the AML Director. In 2003, the bank hired a separate AML 

Director, Teresa Pesce, who served in that post nearly four years, from 

2003 to March 2007. Before taking the position at the bank, Ms. Pesce 

was a Federal prosecutor with the U.S. Attorney's Office in New York. 

Ms. Pesce left the bank in 2007, after which Ms. Wind headed both the 

Compliance and AML Compliance functions until she left the bank in 

2008. As discussed below, Ms. Wind was dismissed by HBUS after 

raising the issue of inadequate AML resources with the audit committee 

of the board of directors of the bank's holding company, HNAH. 

In 2007, as part of a "Compliance Transformation Initiative," 

HSBC established a North America Compliance department at HNAH 

headed by a Regional Compliance Officer.70 HNAH appointed Janet 

Burak, then Regional Legal Department Head for North America, to also 

serve as the Regional Compliance Officer; she held both positions from 

2007 to 2010.71 At the time, HSBC Group Compliance head David 

Bagley expressed concern about combining the two roles, arguing that 

each required too much effort for a single person, but was overruled. 72 

Two years later, in March 2009, the Federal Reserve issued a negative 

critique of Ms. Burak's performance, noting in particular that she did not 

have an adequate understanding of AML risk or controls.73 The OCC 

69 The AML Director also serves as HBUS' Bank Secrecy Act Compliance Officer. 

10 See also Federal Reserve, at BOG-A-205485. 

11 See 9113/2010 OCC Supervisory Letter HSBC-2010-22, "Bank Secrecy Act/Anti-Money 

Laundering ('BSNAML') Examination - Program Violation (12 U.S.c. § 1818(s); 12 C.F.R. § 

21.21)," OCC-PSI-00864335-365, at 27. [Sealed Exhibit.] 

12 See 6/2112007 email from HSBC David Bagley to HSBC Richard Bennett, HSBC OCC 

8873871-5 (conveying to HSBC Group's most senior legal counsel, Richard Bennett, the 

concern ofHBUS compliance personnel about "the capability of one person to manage a very 

large legal function and a compliance function" and that "compliance will be pushed down 

below Legar'). See also 7/28/2010 email from HSBC David Bagley to HSBC Michael 

Geoghegan, IISBC OCC 8873871-75 (expressing to HSBC CEO Michael Geoghegan, that with 

regard to the 2007 decision to combine the two roles into one: "I fully accepted that Brendan 

[McDonagh], Paul [Lawrence] and Richard [Bennett] had the right to make this call, although as 

I said to you in Vancouver I now wish I had been more vociferous and in the current way my 

role operates 1 am confident that 1 would have a far stronger say."). 

13 The March 2009 Federal Reserve's Summary of Ratings stated: "Interviews conducted as part 

of our recent governance review revealed that Janet Burak, HNAH Legal and Compliance chief 

risk officer has only broad understanding ofBSA/AML risk and relies on the HNAH BSNAML 

oflicer [MidzainJ to manage the risk .... Midzain, as previously statcd has weak BSA/AML 

knowledge and industry experience. Burak1s heavy reliance on the inexperienced Midzain is a 

concern. An example of Burak's limited management oversight ofBSAJAML was revealed 

when we recently met with her to clarify a few items from our Governance review she was 

unable to respond to the question about the distribution and the purpose of annual AML 
201 


76061.567

27 

also later criticized her performance as well as the decision to combine 

the regional legal and compliance roles, noting in 2010, that Ms. Burak 

"has had to balance a wide range of legal and compliance duties, 

including establishing the strategic direction for both functions and 

representing both functions on senior committees at the Group level.,,74 

The acc stated that, as a consequence, Ms. Burak had "not regularly 

attended key committee or compliance department meetings" and had 

failed to keep herself and other bank executives "fully informed about 

issues and risks within the BSAIAML compliance program.,,75 It also 

placed some of the blame at her feet for a recently discovered backlog of 

17,700 alerts indicating possible suspicious activity at the bank, which 

had not been reviewed, noting that "[b ]acklogged alerts needed to 

receive the highest level of attention from senior bank management at a 

much earlier stage to ameliorate the problem.,,76 Soon after this critique, 

Ms. Burak left the bank. 

Tn the two years she held the regional posts, Ms. Burak oversaw 

three functional compliance teams at HNAH called "Compliance 

Advisory," "Compliance Center of Excellence," and "Compliance 

Shared Services Utility.,,77 Each team was headed by a senior 

Compliance manager: Curt Cunningham, Anthony Gibbs, and Lesley 

Midzain. 

Ms. Midzain was hired in 2007 to replace Carolyn Wind and so 

worked, not only for HNAH, but also for HBUS as both its Compliance 

head and AML director. She held these compliance posts for two years, 

from 2007 until 2009. Prior to being placed at the helm of the bank's 

AML program, Ms. Midzain had no professional experience and little 

familiarity with U.S. AML laws. Tn December 2008, HNAH's regulator, 

the Federal Reserve, provided a negative critique of Ms. Midzain's 

management of the bank's AML program. The Federal Reserve wrote 

that Ms. Midzain did "not possess the technical knowledge or industry 

experience to continue as the BSAIAML officer.,,78 It noted that she 

"was interviewed by acc examiners from another team and they 

supported the conclusion ofthe acc resident staffthat Midzain's 

knowledge and experience with BSAIAML risk is not commensurate to 

statements. She subsequently communicated via email that she docs not review the annual AML 

statements provided to her by the HNAH/BSAlAML officer (Midzain). Burak forwards the 

statements to Group." 3/25/2009 "Summary of Ratings for HSBC North America Holdings," 

Federal Reserve Bank ofChieago, OCC-PSI-00899234. 

74 9113/2010 OCC Supervisory Letter HSBC-2010-22, "Bank Secrecy Act/Anti-Money 

Laundering ('BSAlAML') Examination - Program Violation (12 U.S.C. § 1818(s); 12 C.F.R. § 

21.21)," OCC-PSI-00864335-365, at 27. [Sealed Exhibit.l 7l ld. 

16 ld. 

77 Id. See also Federal Reserve, at BOG-A-205485. 

7B Federal Reserve Bank of Chicago Summary of Ralings for HSBC North America Holdings, 

March 25, 2009, OCC-PSI-00899234. 
202 


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28 

HNAH's BSAI AML high risk profile, especially when compared to 

other large national banks.,,79 

In 2009, the OCC also concluded that Ms. Midzain did not have 

the requisite AML expertise for her position. An OCC Supervisory 

Letter echoed the criticisms leveled earlier by the Federal Reserve: 

"Ms. Midzain was selected as the Compliance Director and BSA 

Officer although she does not have the qualifications or the 

experience to manage a BSA program at an institution with the 

size and amount ofBSA compliance risk that HBUS has. She is a 

Canadian lawyer (a barrister and solicitor) who formerly worked 

for HNAH. She is also a member of Group's executive 

development program .... Ms. Midzain's assignment as HBUS' 

BSA Officer and Compliance Director has been her first 

assignment outside of Canada as a part of that program .... During 

its 2009 compliance management examination, the OCC 

determined that Ms. Midzain lacked the experience and expertise 

to be the BSA Officer, and the OCC included an MRA in its 

supervisory letter that required the bank to strengthen its 

BSAIAML compliance leadership by hiring a BSA Officer who is 

highly qualified and very experienced."so 

In response to the Federal Reserve and OCC criticisms, HBUS 

removed Ms. Midzain from the AML post, but retained her as head of 

HBUS' Compliance department. In the fall of2009, HBUS hired a new 

AML Director, Wyndham Clark, a former U.S. Treasury official, who 

assumed the post in the middle of an intensifYing AML examination by 

the OCC and a host of serious AML problems facing the bank. Mr. 

Clark was required to report to Curt Cunningham, an HBUS Compliance 

official who freely admitted having no AML expertise,S! and through 

him to Ms. Midzain, whom the OCC had also found to lack AML 

expertise. Shortly after he arrived, Mr. Clark began requesting 

additional resources.S2 After 30 days at the bank, Mr. Clark sent Mr. 

Cunningham a brief memorandum with his observations, noting that 

HBUS had an "extremely high risk business model from AML 

perspective," had seen recent high turnover in its AML directors, and 

granted only limited authority to the AML director to remedy problems: 

791d. 

80 911 31201 0 OCC Supervisory Letter RSBC·20 I 0-22. "Bank Secrecy Act! Anti·Money 

Laundering ('BSAlAML') Examination - Program Violation (12 U.S.C. § 1818(s); 12 C.F.R. § 

21.21)," OCC-PSI-00864335-365, at 28. [Sealed Exhibit.] 

Slid. at 28. 

82 See, e.g., 10/1912009 email exchange between RBUS Wyndham Clark and RBUS Debra 

Bonosconi, "OFAC resources," OCC-PSI-00162661 (Mr. Clark commented after Janet Burak 

had recently approved three new compliance personnel positions, "Clearly a positive, although I 

understand that these were requested quite a while ago. I hope that isn't the typical response 

time." Ms. Bonosconi responded: "Oh, this was express time. Trust me on that. Usually the 

response is 'no. "'). 
203 


76061.569

29 

"AML Director has the responsibility for AML compliance, but 

very little control over its success. 

Operate under 'crisis' mode, actions are reactive rather than 

forward thinking. 

AML Director unable to manage at high level. 

Several AML DirectorslBSA Officers in a short period oftime."s3 

As he continued his work, Mr. Clark grew increasingly concerned 

that the bank was not effectively addressing its AML problems. In 

February 20 10, Mr. Clark met with the Audit Committee of the HNAH 

board of directors and informed the committee that he had never seen a 

bank with as high of an AML risk profile as HBUS.84 He also informed 

them that AML resources were "insufficient versus current risks and 

volumes," and the bank's systems and controls were "inconsistent with 

AML risk profile.,,85 On May 10,2010, Mr. Clark wrote to a senior 

HBUS Compliance official that with regard to the bank's AML 

compliance program, "With every passing day I become more 

concerned ... ifthat's even possible.,,86 

In July 2010, less than a year after taking the post, Mr. Clark 

decided to resign. He sent an email to the head ofHSBC Group 

Compliance David Bagley explaining that he did not have the authority 

or support from senior compliance managers needed to do his job as 

AML director: 

"[T]he bank has not provided me the proper authority or reporting 

structure that is necessary for the responsibility and liability that 

this position holds, thereby impairing my ability to direct and 

manage the AML program effectively. This has resulted in most 

of the critical decisions in Compliance and AML being made by 

senior Management who have minimal expertise in compliance, 

AML or our regulatory environment, or for that matter, knowledge 

ofthe bank (HBUS) where most of our AML risk resides. Until 

we appoint senior compliance management that have the requisite 

knowledge and skills in these areas, reduce our current reliance on 

consultants to fill our knowledge gap, and provide the AML 

83 1011512009 HBUS memorandum from Wyndham Clark to HNAH Curt Cunningham, "30 Day 

Observations and Recommendations Report from AML Director," HSBC PSI PROD 0065332. 

84 Subcommittee interview of Wyndham Clark (1113012011); 2117120 I 0 "HNAH AML Program, 

Board Audit Committee Presentation," by HBUS Wyndham Clark to the Audit Committee of the 

HNAH board of directors, HSBC OCC 3800290. 

85 211712010 "HNAH AML Program, Board Audit Committee Presentation," by HBUS 

Wyndham Clark to the Audit Committee of the HNAH board of directors, HSBC OCC 3900290. 

86 511012010 email from HBUS Wyndham Clark to HBUS Anne Liddy, "AML Townhall," 

OCC-PSI-00672582. See also 5/9/2010 email from IlEUS Wyndham Clark to HNAH Curt 

Cunningham, "AML Townhall," OCC-PSI-00672571 ("Essentially AML decisions are now 

being made without AML SME [subject matter expertise]. This will be very apparent to the 

regulators."). 
204 


76061.570

30 

Director appropriate authority, we will continue to have limited 

credibility with the regulators."s7 

When asked about his experience at the bank, Mr. Clark told the 

Subcommittee that he did not have either the authority or resources 

needed as AML director.88 After his departure, the bank hired Gary 

Peterson, who was then an AML consultant to the bank, appointing him 

as HBUS' new AML director. 

Around the same time that Mr. Clark left the bank in 2010, Ms. 

Midzain also departed, leaving open the post of Chief Compliance 

Officer. That post remained vacant until 2011, when HBUS hired Eric 

Larson. He left after fifteen months on the job. 89 HBUS then asked 

Gary Peterson to serve, not only as HBUS' AML Director, but also as its 

Compliance head, and as HNAH's Regional Compliance Officer 

following Ms. Burak's departure in 2010. Mr. Peterson agreed and has 

served in all three posts since 20 I O. Altogether, these personnel changes 

meant that, over the last five years, l-IBUS has had four Chief 

Compliance Officers and five AML Directors. 

At HSBC Group, HBUS' parent organization, for nearly ten years, 

from 2002 to the present, David Bagley has served as the HSBC Group's 

head of Compliance. He is located in London and oversees both general 

and AML compliance issues. His second-in-command is Warren 

Learning, Deputy Head ofHSBC Group Compliance, who has been in 

that position since January 1,2007. Susan Wright serves as the head of 

HSBC's AML efforts. She is also located in London and has served in 

that position for more than a decade. John Root is a senior Group 

Compliance officer who has concentrated on compliance and AML 

issues, in part in Mexico and Latin America. Compliance personnel 

work with Matthew King who has served as the head ofHSBC Group 

Audit since 2002. 

(2) HBUS AML Program 

Federal law requires banks operating in the United States to have a 

minimum of four elements, an AML compliance officer in charge of the 

program, AML internal controls, AML training, and an independent 

testing ofthe AML program to ensure its effectiveness.9o HBUS' AML 

program must address a wide range of AML issues, from customer due 

diligence, to monitoring account and wire transfer activity, to reporting 

"7114/2010 email from HBUS Wyndham Clark to HSBC David Bagley, OCC-PSI-00676731. 

Mr. Clark formally left the bank in August 2010. Subcommittee interview of Wyndham Clark 

(11/30/20 II). 

88 Subcommittee interview of Wyndham Clark (11130/2011). Mr. Clark told the Subcommittee 

that, prior to his leaving, the bank finally approved a number of new AML hires. Id. 

89 Subcommittee interview ofOCC Examiner Teresa Tabor (5/17/2012). 

90 See3l U.S.c. §5318(h); 12 C.F.R. §21.21. 
205 


76061.571

31 

suspicious activity to law enforcement. It must also cover a wide range 

of business lines and products, including Correspondent Banking, 

International Private Banking, Domestic Private Banking, Embassy 

Banking, Payment and Cash Management, and Banknotes services. 

Inadequate Staffing. Despite its high AML risks, millions of 

customers, and employment of more than 16,500 employees overall, 

from 2006 to 2009, RBUS' entire Compliance Department numbered 

less than 200 full time employees; its AML Compliance staff was a 

subset of that and also included staff in India.91 RBUS personnel told 

the Subcommittee that inadequate AML staffing was one of the biggest 

problems they faced. 92 OCC examinations also routinely identified 

inadequate staffin~ as a key AML problem, including with respect to 

unreviewed alerts, 3 PCM processing,94 Correspondent Banking,95 

OF AC reviews,96 Embassy Banking,97 and the Compliance Review Unit 

that tested the bank's AML controls.98 

Bank documents show that Compliance and AML staffing levels 

were kept low for many years as part of a cost cutting measure. In 2007, 

RBUS announced a "1509 Initiative" to increase the bank's return on 

equity by 2009, largely through cost cutting measures. One component 

of the plan was to ensure that 2007 and 2008 headcounts remained flat. 

This hiring freeze caused RBUS Compliance and the AML staffing 

requests to be denied or unanswered. At one point, RBUS Compliance 

and AML management resorted to requesting temporary staff when 

persistent AML alert backlogs grew to unmanageable levels. In 2007, 

RBUS fired its longtime AML head after she raised resource concerns 

with the HNAR Audit Committee; an AML director hired in 2009 left 

after being denied the authority and resources he considered necessary to 

91 Subcommittee briefing by HSBC legal counsel (6/30/2011). 

92 Subcommittee interview ofHBUS Debra Bonosconi (11117/2011) (Ms. Bonosconi reported to 

the Subcommittee tbat staffing was her biggest issue and that by March 2008 it was evident that 

more staff was needed. She made several requests for additional resources.)~ Subcommittee 

interview ofHBUS Anne Liddy (2122/2012) (Ms. Liddy made a request for resources to Carolyn 

Wind, but was told that there was no appetite to bring on additional stafr.); Subcommittee 

interview ofHBUS Carolyn Wind (317/2012); Subcommittee interview of HBUS Teresa Pesce 

(3/30/2012) (Ms. Pesce asked for business to provide funding for more AML Compliance 

rositions because Compliance did not have the money.). 

3 3/3120lO OCC Supervisory Letter HSBC-2010-03, "Backlog of Monitoring Alerts and 

Enhanced Due Diligence Requests," OCC-PSI-008SI S42-S4S. [Sealed Exhibit.] 

94 311812009 oce Supervisory Letter HSBC-2008-40, "Payment and Cash Management 

BSA/AML Examination," OeC-PSI-OOI07624-62S. [Sealed Exhibit.] 95 3/3/2009 OCC Supervisory Letter HSBC-2008-34, "Correspondent Banking BSNAML 

Examination." OCC-PSI-00I07618-620. [Sealed Exhibit.] 

96 7/2812008 OCC memorandum, "OFAC Examination - Payment and Cash Management 

(PCM)," OCC-PSI-01274962; 1120/2009 OCC Supervisory Letter HSBC-2008-41, "Omce of 

Foreign Asset Control Examination," OCC-PSI-00000434-436. [Sealed Exhibits.] 

97 See 311912007 OCC Supervisory Letter HSBC-2006-30. "Government and Institutional 

Banking BSAlAML Exanaination," OCC-PSI-00I07567-571; 1130/2006 OCC Supervisory Letter 

regarding HBUS Embassy Banking, OCC-PSI-00I07S29-S36. [Sealed Exhibits.] 

98 See 6114/2006 OCC Supervisory Letter HSBC-2006-16, "Compliance Review Unit 

Examination," OCC-PSI-00000341-34S. [Scaled Exhibit.] 
206 


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32 

do his job. After the OCC issued its lengthy Supervisory Letter 

criticizing multiple aspects ofHBUS' AML program, bank management 

began to significantly increase AML staff and resources. 

AML Staffing Problems. In 2006, HBUS Compliance was 

already struggling to "handle the growing monitoring requirements" 

associated with the bank's correspondent banking and cash management 

programs, and requested additional staff. 99 In October 2006, HBUS 

Compliance officer Alan Ketley wrote that despite having very efficient 

processes, each month his Compliance team was "handling an average 

of3,800 [alerts] per person and [was] becoming overwhelmed thus 

potentially placing the business and the bank at risk.,,100 Despite 

requests for additional AML staffing, HBUS decided to hold staff levels 

to a flat headcount. 101 

1509 Initiative and Hiring Freeze. In 2007, against the backdrop 

oflosses stemming from its troubled acquisition of Household 

International and the beginning of the global financial crisis, HBUS 

launched the 1509 Initiative which sought to achieve a 15% return on 

equity for the bank by 2009, primarily by cutting costs. One facet of the 

1509 Initiative was the "$100 Million Dollar Cost Challenge," which set 

a goal of cutting costs of$1 00 million in 2007. 102 

The hiring freeze began in September 2007, when HBUS 

Compliance had a headcount of 198 full time employees, one below its 

December 2006 level. 103 When Compliance sought to fill six open 

positions, David Dew, HBUS Chief Operating Officer (COO), informed 

Compliance head and AML director Carolyn Wind that the positions 

could not be filled: 

"This increase will be almost impossible to justifY and therefore I 

must ask you to please cancel the open positions and ensure that 

your FTE as at 31 Dec 2007 does not exceed 199.,,104 

To make the case for increased staffing resources, in September 

2007, HBUS Compliance personnel reached out to compliance peers at 

99 See 10/3112006 email from HBUS Alan Ketley to HBUS Michael Gallagher, Denise Reilly, 

and Charles DelBusto, "Additional Compliance headcount needed to support PCM," HSBC 

acc 0616340·43, at 341. 

100 Id. at HSBC acc 0616342. 

101 See, e.g., 10/31/2006 email exchange between HBUS Michael Gallagher and HBUS Tony 

Murphy, Charles DelBusto, Alan Ketley, and others, "Additional Compliance headcount needed 

to support PCM," HSBC acc 0616340·343; 9/25/2006 email exchange between HBUS 

Michael Gallagher and HBUS Teresa Pesce, Alan Ketley, Charles DelBusto, and others, 

"Additional monitoring resources," HSBC acc 7688655·657. 

102 See HSBC internal presentation entitled, "1509," lISBC acc 06162241·242. 

10] 9114/2007 email from HBUS David Dew to HBUS Carolyn Wind, Janet Burak, and Kathryn 

Hatem, "HEADCaUNT," HSBC acc 0616262. 104 Id. 
207 


76061.573

33 

other banks and learned that at the three major banks that provided some 

information, each had a greater number of monitoring staff in the 

correspondent banking area than HBUS.105 In addition, HBUS 

Compliance personnel noted that HBUS Compliance filed many fewer 

Suspicious Activity Reports (SARs) than its competitors;106 while 

RBUS filed three to four per month in the correspondent banking area, 

its peers filed 30 to 75 per month, and one major international bank 

disclosed that it filed approximately 250 SARs per month. 107 Despite 

these statistics, the Compliance department and AML staff remained 

stagnant. 

Fired After Raising Staffing Concerns to Board. After being 

turned down for additional staff, Carolyn Wind, longtime HBUS 

Compliance head and AML director, raised the issue of inadequate 

resources with the HNAH board of directors. A month after that board 

meeting, Ms. Wind was fired. 

On October 24,2007, Ms. Wind met with the Audit Committee of the 

HNAH board of directors and, during the meeting, raised the staffing 

issue, particularly with respect to the Embassy Banking area which had 

been the subject of two recent OCC examinations uncovering severe 

AML deficiencies. Her supervisor, Regional Compliance Officer Janet 

Burak, also attended the Audit Committee meeting. The day after the 

meeting, in an email to RSBC Group Compliance head David Bagley, 

Ms. Burak expressed displeasure that Ms. Wind's comments had caused 

"inappropriate concern" at the Audit Committee: 

"I indicated to her [Ms. Wind] my strong concerns about her ability to 

do the job I need her to do, particularly in light of the comments made 

by her at yesterday'S audit committee meeting .... I noted that her 

105 On 9/6/2007, Mr. Ketley wrote: "Every bank that responded and provided information about 

monitoring staff has more than H8US." 9/6/2007 email from HBUS Alan Ketley to H8US Alan 

Williamson, Judy Stoldt, and George Tsugranes, "Correspondent survey," HS8C OCC 0616384-

385. See also 9/612007 H8US chart, "Correspondent 8anking Survey," HS8C OCC 3400666. 

[Sealed Exhibit.] See also emails indicating H8US Compliance personnel were not 

compensated at levels consistent with its competitors, and risked losing qualified personnel. See, 

e.g., 2/1/2007 email exchange among H8US Carolyn Wind, H8US Teresa Pesce and others, 

"MIP overages - URGENT," HS8C OCC 0616314-316, at 314 ("We are not at market with our 

current comp[ensationJ" and "[t]hese officers and AML officers can get new jobs in a 

heartbeat"); 2/27/2007 email from 1I8US Karen Grom to H8US Carolyn Wind, Denise Reilly, 

Teresa Pesce, David Dew and others, "HUSI Compensation Review," lIS8C OCC 0616318 

("The banks who are approaching our employees have deep pockets and are willing to pay to get 

the talent. ... In many cases, we are paying under the 'market data point' (50·h percentile)." and 

"The offers from head-hunters are in some cases double base salaries and double bonuses[.]") . 

• 

06 9/6/2007 email from H8US Alan Ketley to H8US Alan Williamson, Judy Stoldt, and George 

Tsugranes, "Correspondent survey," HS8C OCC 0616384-385 (Mf. Ketley wrote: "Our 

competitors all acknowledge filing more SARs than we do."); 9/6/2007 H8US chart, 

"Correspondent 8anking Survey," HS8C OCC 3400666. [Sealed Exhibit.] 

1078/27/2007 email from HBUS Alan Ketley to HBUS Michael Gallagher, Charles De18usto, 

Chris Davies, and Alan Williamson, "Addressing negative information," HS8C OCC 7688584-

587, at 587. 
208 


76061.574

34 

comments caused inappropriate concern with the committee around: 

our willingness to pay as necessary to staff critical compliance 

functions (specifically embassy banking AML support), and the 

position ofthe OCC with respect to the merger of AML and general 

Compliance."ID8 

A month after the board meeting, after seven years as HBUS' 

Compliance head, Ms. Wind was notified that she was being fired. In a 

January 22, 2008 letter to the head ofI-IBUS Human Resources, Ms. 

Wind wrote: 

"I was told on November 30, 2007 that I was being terminated 

effective 2/28/08, due to the fact that the Board had lost confidence in 

me. ... If the Board has lost confidence in me based on my 

comments at the October, 2007 Audit Committee, why have I been 

allowed to continue to run this critical department without additional 

supervision or any direct follow-up from Group Compliance?" 

Ms. Wind also wrote: "David [Dew] and I disagree on the extent to 

which my organization can withstand cost cuts and still maintain an 

effective compliance risk mitigation program. I also believe in an open 

dialog with the Board and its committees, which may go against the 

desires of some in the organization."lo9 When asked about this 

document, Ms. Wind told the Subcommittee that she believed she was 

fired for telling the HNAH board about the need for additional 

Compliance resources. IID 

Hiring Freeze Continues. After her departure, the hiring freeze 

continued throughout 2008. 111 In February 2008, prior to her leaving the 

bank, Ms. Wind discussed the staffing freeze with HNAH COO 

Anthony Gibbs: 

"HBUS Compliance has been required to manage down overall 

FTE [full time employees] while at the same time redeploying 

resources to priority needs. We also are in the midst of a 'hiring 

pause' which means that approval from appropriate EXCO 

members is required to fill any open position. I do not expect a lot 

108 10125/2007 email from Janet Burak to David Bagley, OCC-PS!-00704789. 

109 January 22, 2008 letter from Carolyn Wind to Jeanne Ebersole, HSBC OCC 7730334. 

110 Subcommittee interview of Carolyn Wind (3/07/2012). Anne Liddy also reported that Ms. 

Wind told her in 2007 that she had been terminated due to Ms. Wind raising resource concerns to 

the board's audit committee. Subcommittee interview of Arme Liddy (2/22/2010). Also see, 

Minutes of the Audit Committee Meeting, October 24,2007, HSBC OCC 3516806. 

IliOn 1117/08, Jeanne Ebersole, Executive Vice President HBUS Human Resources, wrote to 

the HBUS Executive Committee [EXCO], "Attached is a draft of the non-hiring freeze note to be 

sent to all GCBs 0, 1,2 and the final headcount report for 2007 which we will discuss tomorrow 

at EXCO." 1/1712008 email from HBUS Jearme Ebersole to HBUS Chris Davies, David Dew, 

Janet Burak and others, "Draft Materials for EXCO," HSBC OCC 0616259-260, at 259. 
209 


76061.575

35 

of support for overall HBUS Compliance headcount increasing 

even if a portion of the time is allocated to other affiliates." 1 12 

In June 2008, a senior PCM operations manager emailed senior 

HBUS Compliance official Anne Liddy about growing backlogs in the 

OF AC Compliance program: 

"I have put forth the suggestion of hiring up some first level 

checkers for OF AC processing in the GSC ... we're strapped and 

getting behind in investigations (on OF AC cases) and have some 

of our key managers in the queues releasing items ... I'm told I 

cannot hire first level staff unless it's offshored ... "I13 

An OCC examination later found that eight Compliance officers were 

under "rigorous pressure" to complete manual reviews of about 30,000 

OFAC alerts per week. 114 

In July 2008, however, HSBC Group senior management 

determined that the hiring freeze would continue to the end ofthe year. 

CEO Michael Geoghegan wrote to HNAH CEO Brendan McDonagh 

and others: "We have agreed that we will have a headcount freeze until 

the end of the year.,,115 

HBUS Compliance personnel, with the support of their business 

units, attempted to obtain an exception to the hiring freeze. In a 

September 2008 email, Michael Gallagher, PCM head at HBUS, 

requested additional Compliance staff, explaining: "I have expressed 

considerable concern for some time over the lack ofresources both in 

compliance and within pcm [Payments and Cash Management] to 

adequately support kyc [Know Y our Customer] and related regulatory 

requirements.,,116 Lesley Midzain, then HBUS Chief Compliance 

Officer, echoed his concerns and requested four additional full time 

employees: 

"Given the hiring freeze in global businesses, I understand that it 

may also need approval by Paul Lawrence, but this has continued 

112 211212008 email from HBUS Carolyn Wind to HBUS Anthony Gibbs, Curt Cunningham. 

Denise Reilly and others. "Organizational Changes," HSBC OCC 0616264. 

IIJ See 611912008 email exchanges among HBUS Anne Liddy and HBUS Nancy Hedges, 

"OFAC processing in GSC's," HSBC OCC 0616349-350, at 349. 114 712812008 OCC memorandum, "OFAC Examination - Payment and Cash Management 

(PCM)," OCC-PSI-01274962 ("the bank's Compliance teams are under rigorous pressure to 

process alerts and detennin[ e] a disposition in a timely manner"). [Sealed Exhibit.] 

15 712312008 email from HSBC Michael Geoghegan to HNAH Brendan McDonagh and others, 

"2nd Half Costs," OCC-PSI-00727922. 

116 See 91412008 email exchanges among HBUS Michael Gallagher and HBUS David Dew, 

Lesley Midzain, Andrew Long, Chris Davies and others, "Kyc hires," HSBC OCC 0616352-356, 

at 356. When asked about this document, Mr. Gallagher said that Mr. Dew had infonned him 

that broader concerns in the U.S. and at Group necessitated a flat headcount. Subcommittee 

interview of Michael Gallagher (611312012). 
210 


76061.576

36 

to be an area of notable risk and regulatory attention and which 

needs some stabilization for Compliance resources.,,117 

After expressing concern over how additional hires would impact 

operating expenses, Mr. Dew, HBUS COO, asked Ms. Midzain if"a 

couple of temps for two months" would "do the trick.,,118 

Hiring did not improve during 2009. Wyndham Clark, who had 

been hired in 2009, as the new HBUS AML director, noted in an email 

that Janet Burak had recently approved three new compliance positions. 

He wrote: "Clearly a positive, although I understand that these were 

requested quite a while ago. I hope that isn't the typical response time." 

A senior PCM operations officer responded: "Oh, this was express time. 

Trust me on that. Usually the response is 'no."'119 The Subcommittee 

was told that in September 2009, the HBUS Compliance degartment had 

130 full time employees handling AML compliance issues. 20 

OCC Examination. During late 2009 and the first half of 20 I 0, 

the OCC expanded and intensified its examination of the bank's AML 

program as a whole. Mr. Clark made increasing use of temporary 

employees and contractors to answer OCC inquiries and address AML 

deficiencies. In August, he left the bank. By then, he was using nearly 

100 temporary employees and contractors and had requested 50 

additional permanent full time Compliance personncl. 121 Even with 

those additional resources, the OCC's September 2010 Supervisory 

Letter identifying AML deficiencies at the bank criticized HBUS' failure 

"to provide adequate staffing and resources to implement and maintain a 

BSA/AML compliance program commensurate with the bank's high risk 

profile.,,122 The OCC Supervisory Letter also noted: "Management is 

still in the process of determining an appropriate level of resources as 

they consider recommendations from outside consultants and make 

strategic decisions about the business and risk on a prospective basis." 123 

By October 20 I 0, the Compliancc department had increased to over 400 

full time employees. 124 

AML Monitoring Deficiencies. In addition to AML leadership 

problems and inadequate AML staffing, another key component of 

HBUS' AML program involved its monitoring systems. During the 

ll1 1d. at IISIlC acc 0616354. 

118 Id. at HSBC acc 0616352. 

119 lOll 9/2009 email exchange between HBUS Wyndham Clark and HBUS Debra Bonosconi, 

"aFAC resources," aCC·PSI-00162661. 

120 Subcommittee briefing by HSBC legal counsel (6/30/2011). 

121 9/13/2010 acc Supervisory Letter HSBC·2010·22, "Ilank Secrecy Act/Anti-Money 

Laundering ('BSA/AML') Examination - Program Violation (12 U.S.C. § IS18(s); 12 C.F.R. § 

21.21)," aCC-PSI-00S64335-365, at 29. [Sealed Exhibit.] 

122 Id. 

123 Id. 

124 Subcommittee briefing by HSBC and HBUS executives (6/26/2012). 
211 


76061.577

37 

period reviewed by the Subcommittee, dating from 2004, HBUS used a 

monitoring system called the Customer Activity Monitoring Program 

(CAMP). This system had many limitations and often required manual 

reviews by HBUS Compliance and AML staff 

By 2006, as indicated earlier, HBUS Compliance was already 

struggling to handle the monitoring alerts generated by the bank's 

growing correspondent banking and cash management programs and 

described its personnel as "becoming overwhelmed.,,125 Backlogs of 

unreviewed alerts in different areas ofthe bank began to accumulate, 

including with respect to alerts generated by CAMP monitoring of client 

accounts and wire transfer activity; alerts triggered by the OF AC filter 

on transactions by potentially prohibited persons identified on OFAC 

lists ofterrorists, drug traffickers, and other wrongdoers; and alerts 

related to potentially suspicious activity in Embassy Banking accounts. 

With respect to the general CAMP system alerts for PCM, HBUS 

Compliance set a goal that no more than 2% of AML alerts should 

remain in the system for over 120 days without being resolved. In 

addition, the system notified increasingly senior management ifthe 

backlog exceeded certain thresholds. For example, when the CAMP 

alerts hit 3%, bank compliance officials like Anne Liddy were alerted; 

when it hit 4%, higher level compliance personnel such as AML director 

Lesley Midzain were notified; if the backlog hit 6%, HNAH's Regional 

Compliance Officer Janet Burak was notified.126 In November 2009, the 

percentage of AML alerts in the system for longer than 120 days spiked 

from 4% in October to 9%.127 The backlog remained at 9 or 10% for the 

next four months, from December 2010 to February 2010, and then 

stayed around 6 or 7% from March to May 2010. 128 In early 2010, as 

part of its expanded AML examination, the OCC discovered the CAMP 

backlog of more than 17,000 unreviewed alerts as well as a backlog of 

requests for enhanced due diligence (EDD) reviews. 129 On March 3, 

2010, an OCC Supervisory Letter ordered the bank to eliminate the alert 

and EDD backlog by June 30, 2010. 130 The bank met the deadline using 

"offshore reviewers in India, HBUS staff in Delaware, }IBUS temporary 

volunteers, [and] outside contractors.,,1Jl A subsequent review by the 

125 See 10/3112006 email from HBUS Alan Ketley to HBUS Michael Gallagher, Denise Reilly, 

and Charles DelBusto, "Additional Compliance headcount needed to support PCM," HSBC 

OCC 0616340-43, at 342. 

126 "Bankwide KRI AML Transaction Monitoring Alert Aging - K02854," HSBC OCC 

7688689. 

127 Id. 

128Id. 

t29 3/3/20 I 0 OCC Supervisory Letter HSBC-20 I 0-03, "Backlog of Monitoring Alerts and 

Enhanced Due Diligence Requests," OCC-PSI-0085 I 542. [Sealed Exhibit.] 

13°Id. 

131 911312010 OCC Supervisory Letter HSBC-2010-22, "Bank Secrecy Act/Anti-Money 

Laundering CBSNAML') Examination - Program Violation (12 U.S.c. § 1818(5); 12 C.F.R. § 

21.21)," OCC-PSI-00864335-365, at 9. [Sealed Exhibit.] 
212 


76061.578

38 

OCC, however, found "deficiencies in the quality of the work," and 

required an independent assessment. 132 The independent assessment 

found that 34% of the alerts supposedly resolved had to be re-done. 

As Ms. Wind reported to the board in October 2007, backlogs were 

also an issue in Embassy Banking. A 2008 OCC examination identified 

a backlog of over 3,000 alerts identifying potentially suspicious activity 

in Embassy accounts that had yet to be reviewed. 133 In response, RBUS 

initiated a concentrated effort to review and resolve those alerts prior to 

a followup OCC examination in July 2008. 134 The followup 

examination found a backlog of about 1,800 alerts, some of which dated 

from 2007. The OCC examiners recommended issuance of a Cease and 

Desist Order to the bank in part due to the backlog, but the OCC instead 

issued a Supervisory Letter, identified the backlog as a Matter Requiring 

Attention by the bank, and required the backlog to be cleared by 

September 15, 2008. 135 The bank met that deadline. 136 

A third category of alert backlog involved transactions that were 

stopped by the OF AC filter as possible violations of OF AC regulations. 

Each transaction had to be manually reviewed and resolved by two 4-

person OF AC Compliance teams in New York and Delaware. In July 

2007, RSBC introduced a new payment system, GPS, in the United 

States. 137 The system had undergone several adjustments just prior to its 

launch, including changes to its OF AC filters, which caused 

unexpectedly large backlogs. 138 RBUS assigned a team to assist with 

clearing the backlog, but the problem still took weeks to resolve. 

l32 Id. 

133 8114/2008 acc memorandum, "Government and lnstitutional Banking Update," aCC-PSI00899227-233, at 231. [Sealed Exhibit.] 

134 July 31, 2008 Memorandum from HBUS Debra Bonosconi to HBUS David Dew, Lesley 

Midzain, and Cam Hughes. aCC-PSl-00409095. Also see 7114/2008 Memorandum from 

HBUS Debra Bonosconi to HBUS David Dew, Lesley Midzain, Cam Hughes ("As shown in the 

chart below, we currently (as of 7115) have a total of 1,793 open alerts which is a reduction of 

1,519 from 3,312 on June 27'h There are a total of203 that are open in excess of 120 days and 

147 open in excess of90 days (350 combined) and we are concentrating our efforts on reducing 

those first. We are closing an average of 84 alerts daily (including Saturday) and based upon 

current projections, we should have total of 1,499 pending alerts when the acc arrives on July 

21,2008."), aCC-PSI-00285742 

135 See 9/4/2008 acc Supervisory Letter HSBC-2008-07, "Government and lnstitutional 

Banking BSA/AML Examination." aCC-PSJ-OOI 07607-6 I 1. [Sealed Exhibit.] 

136 911312010 acc Supervisory Letter HSBC-2010-22, "Bank Secrecy Act/Anti-Money 

Laundering ('BSA/AML') Examination - Program Violation (12 U.S.c. § 1818(s); 12 C.F.R. § 

21.21)," aCC-PSl-00864335-365, at 9. [Sealed Exhibit.] 

137 See, e.g., 712912007 email from HBUS Andrew Long 10 BBUS Michael Gallagher, "draft 

strawman," HSBC acc 7688680-682; 7/18/2007 email from BBUS Carolyn Wind to lIB US 

William Johnson, David Dew, Michael Gallagher, Andrew Long, David 13agley and others, 

"lIB US GPS Day 2 and 3 Update," HSBC acc 7688676-678, at 677. 

138Id. 
213 


76061.579

39 

In December 2009, RBUS' OF AC Compliance team in New York 

had accumulated a backlog of greater than 700 OF AC alerts. 139 The 

OF AC Compliance team requested five or six people from PCM for ten 

days to help clear the backlog. 14o PCM responded that it had no 

resources to loan, and suggested asking the Compliance team in 

Delaware for help. The OFAC Compliance team in New York indicated 

the Delaware Compliance staff was already "fully deployed" dealing 

with general alerts from the CAMP monitoring system: 

"We have considered all options at this point[;] the Compliance 

team in DE is already fully deployed dealing with wire camp alerts 

and bank examiner requests for the current exam. There is no 

bandwidth there at all[;] they are behind on the current alert 

clearing process which we are also dealing with.,,141 

Understaffed, RBUS Compliance and AML staff constantly battled 

alert backlogs while requesting additional resources. These requests, if 

answered, generally resulted in additional temporary staff dispatched 

only when backlogs grew to unmanageable levels. As the backlog 

increased, tensions grew, and in February 2010, Mr. Clark, the AML 

Director who had been on the job only a few months, wrote: "[W]e are 

in dire straights [sic] right now over backlogs, and decisions being made 

by those that don't understand the risks or consequences oftheir 

decisions!! ! !" 142 

The problems with RBUS' AML monitoring system were not 

limited to the backlogs. Additional issues involved an array of 

problematic decisions on what clients and countries should be 

designated high risk and subject to enhanced monitoring; what accounts 

and wire transfer activity should be subject to or excluded from routine 

AML monitoring; what parameters should be used to trigger alerts, 

including dollar thresholds, key words or phrases, and scenario rules that 

combine specified elements; and what "negative rules" should be used to 

decrease the number of alerts that would otherwise be generated for 

139 12111/2009 email exchange among HBUS Camillus Hughes and HBUS Michael Gallagher, 

Charles DelBusto. Sandra Peterson, Thomas Halpin, Chris Davies, and Lesley Midzain, "OFAC 

Payments," HSBC OCC 7688668-670, at 670. 14° ld. 

141 Id. at HSBC OCC 7688668. 

1422/26/2010 email from HBUS Wyndham Clark to HBUS Debra Bonosconi, OCC-PSI00165898. In another email the next day, Mr. Clark wrote: "At this point the businesses are not 

accepting that they own the risk, I can think of one exception, making the difficult decisions and 

taking the necessary steps to mitigate the risk. My view is the risks are being ignored by the 

business, and they are simply waiting for compliance to tell them what the risks are and to 

convince them as to what actions need to be taken. If they don't know what the risks are, then 

why are they opening accounts or continuing with the relationshipT' On the same day, Anne 

Liddy responded: "[W]e spend a lot of energy pushing our point and holding our ground and 

certainly Group member referred relationships/transactions have increased our HBUS risk." 

212712010 email exchange between HBUS Anne Liddy, Wyndham Clark, and Debra Bonosconi, 

OCC-PSI-OOI65932. 
214 


76061.580

40 

review. 143 The OCC's September 2010 Supervisory Letter identified 

multiple problems with each of these elements ofHBUS' AML 

monitoring systems. 144 

Current Status of HBUS AML Program. In the two years since 

the OCC issued its September 2010 Supervisory Letter and both the 

OCC and Federal Reserve issued October 2010 Cease and Desist Orders 

to HBUS and HNAH regarding the many AML deficiencies in their 

programs, both HBUS and HNAH, as well as HSBC, have made 

commitments to strengthen their AML programs, including by directing 

more resources to compliance needs. HBUS told the Subcommittee that 

Gary Peterson will remain as its Compliance head, and his deputy will 

take over the duties of AML director, to ensure both positions have a full 

time executive. 145 HBUS also informed the Subcommittee that as of 

July 2012, it had increased its Compliance and AML staff to over 1,000 

full time employees. 146 It is also in the process of replacing CAMP with 

an improved AML monitoring system, NORKOM. Additional reforms 

include scaling back its correspondent banking and embassy banking 

relationships by closing higher risk accounts, as well as closing its 

banknotes business in 2010. 147 With respect to HSBC affiliates, I-IBUS 

told the Subcommittee it has initiated due diligence reviews of all such 

affiliates to identifY those that are high risk, enabled all affiliates to 

obtain internal audit findings and other information to improve affiliate 

risk assessments, ended any limits on the monitoring of affiliates, and 

increased affiliate information sharing to strengthen AML 

compliance. 148 

In addition, on April 30, 2012, HSBC Group issued a new Group 

Circular Letter (GCL) 120014, announcing the intention of the bank to 

use the highest global compliance standards for every HSBC affiliate. 

The HSBC GCL stated: 

"We must adopt and enforce the adherence to a single standard 

globally that is determined by the highest standard we must apply 

anywhere. Often, this will mean adhering globally to U.S. 

regulatory standards, but to the extent another jurisdiction requires 

143 See 91l3i2010 OCC Supervisory Letter HSBC-2010-22, "Bank Secrecy Act/Anti.Money 

Laundering (,BSA/AML') Examination - Program Violation (12 U.S.c. § 1818(s); 12 C.F.R. § 

21.21)," OCC-PSI-0086433S·365, at 10·21. [Sealed Exhibit.] 144 Id. 

145 Subcommittee briefing by HSBC and HBUS executives (6/26/2012). 

146Id. See also, 7110/2012 HSBC Group News, "HSBC to Testify at U.S. Senate Hearing." 

letter by HSBC Group Chief Executive Stuart Gulliver, PSI-HSBC·76·0001·002, at 002. 

147 As of June 2012, HBUS had closed all banknotes accounts, 24 embassy accounts, and 326 

correspondent relationships. In August 201 0, as part of this review to exit relationships, HBUS 

CEO Irene Domer noted that she was recommending closing relationships with 121 intemational 

banks that "do not meet either risk or retum hurdles." 9/20/2010 email from Irene Domer to 

Andrew Long and others, HSBC OCC 8876104·106. 

148 Subcommittee briefing by HSBC and HBUS executives (6/26/2012). 
215 


76061.581

41 

higher standards, then that jurisdiction's requirements must shape 

our global standard.,,149 

This new GCL could represent a groundbreaking approach for the bank 

if it, in fact, pushes its affiliates toward uniform and high compliance 

standards. 

These reforms, like those announced in 2004 after the bank's last 

AML enforcement action, have the potential to resolve the AML 

deficiencies at the bank and push HBUS to an improved level of AML 

compliance. While HBUS has committed to making major changes, the 

bank made similar commitments under the 2003 enforcement action, 

which the OCC lifted in 2006, after which the bank's AML program 

quickly deteriorated. On many occasions since then, HBUS responded 

to AML problems identified by the OCC by instituting new policies and 

procedures that appeared to be effective remedies. However, it has often 

been the case that regulators would subsequently cite HBUS for failing 

to comply with its own policies and procedures. In 2006, for example, 

when the OCC lifted the AML enforcement action, HBUS had already 

incurred over 30 AML-related Matters Requiring Attention, many of 

which cited AML problems similar to those that had formed the basis of 

the written agreement. 

In addition, not all of the AML reforms proposed since 2010 have 

proceeded smoothly. The new compliance head hired by the bank left 

after fifteen months. The bank's new monitoring system has been the 

subject ofOCC criticisms aimed at whether its monitoring parameters 

have been correctly set to identifY suspicious activity and provide 

adequate AML oversight of client account and wire transfer activity. 150 

While the recent GCL could represent an important advance in requiring 

bank affiliates to adhere to the highest AML standards globally, as this 

report documents, it can take months, ifnot years, for HSBC affiliates to 

come into compliance with HSBC GCL directives. The burden of proof 

is on HSBC Group to show that its latest directive is taking hold and its 

affiliates are complying with the highest AML stands, and on HBUS to 

show that it is moving from an ineffective AML program to one that 

safeguards the U.S. financial system from abuse. 

149 GCL 120014 - HSBC Global Standards. 

150 See 5/25/2012 OCC Supervisory Letter HSBC-2012-19, "Payments and Cash Management 

(PCM); Bank Secrecy Act and Anti-Money Laundering (BSAIAML) System Examination," PSIOCC-37-0004. [Sealed Exhibit.] See also 6/2512012 HSBC response letter, Supervisory Letter 

HSBC 2012-19 "Payments and Cash Management (PCM); Bank Secrecy Act and Anti-Money 

Laundering (BSAIAML) System Examination," HSBC-PS!-PROD-020031 5-341. [Sealed 

Exhibit.] 
216 


76061.582

42 

III. HBMX: PROVIDING U.S. ACCESS TO A HIGH RISK 

AFFILIATE 

HBUS has opened correspondent accounts for approximately 80 

HSBC affiliates around the world, providing them with access to the 

U.S. financial system through clearing U.S. dollar wire transfers, 

cashing U.S. dollar checks, buying and selling physical U.S. dollars, and 

other services.15I Some of those HSBC affiliates operate in high risk 

countries, provide services to high risk clients, or offer high risk 

financial products. Until recently, HSBC Group policy, however, 

allowed its affiliates to assume that any HSBC affiliate owned 50% or 

more by the Group met Group AML standards, were low risk, and 

required no due diligence prior to opening a correspondent account. 152 

In conformance with that HSBC Group policy, for years, HBUS did not 

conduct any due diligence analysis or risk assessment of an HSBC 

affiliate prior to supplying it with a U.S. account. HBUS took that 

approach, even though U.S. statutory and regulatory requirements 

explicitly direct U.S. banks to conduct due diligence prior to opening a 

correspondent account for any foreign financial institution, with no 

exception for foreign affiliates. 153 

HBMX, an HSBC affiliate in Mexico, illustrates how providing a 

correspondent account and U.S. dollar services to a high risk affiliate 

increased AML risks for HBUS. HBMX was created when HSBC 

Group purchased a Mexican bank known as Bital in 2002. A prepurchase review disclosed that the bank had no functioning compliance 

program, despite operating in a country confronting both drug 

trafficking and money laundering. For years, HSBC Group knew that 

HBMX continued to operate with mUltiple AML deficiencies while 

serving high risk clients and selling high risk products. HSBC Group 

also knew that HBMX had an extensive correspondent relationship with 

ISlAs of February 2010, HBUS had about 2,400 clients in its Payments and Cash Management 

(PCM) department. See 9113/2010 OCC Supervisory Letter HSBC-2010-22, "Bank Secrecy 

Act/Anti-Money Laundering ('BSAlAML') Examination .. Program Violation (12 U.S.c. § 

1818(s); 12 C.F.R. § 21.21)." OCC-PSI-00864335-365, at 7. [Sealed Exhibit.] In June 2012, 

HBUS had a total of nearly 1,200 correspondent clients, of which 80 were HSBC affiliates. The 

HSBC affiliates had 395 HBUS accounts, of which 7 or 8 related to HBMX. Subcommittee 

briefing by HSBC legal counsel (6/20/2012). 

1S2 See, e.g., 419/2010 memorandum from OCC legal counsel to OCC Washington Supervision 

Review Committee, "Order of Investigation .. HSBC Bank USA, N.A., Ncw York, NY," OCCPSI-00899482-485, at 2 (citing HBUS's 1211/2008 AML Procedures Manual at 12: "The only 

exception to the KYC Profile requirement is any client who is an HSBC Group affiliate in which 

HSBC has an ownership interest of 50% or more."). After the Setember 2010 OCC Supervisory 

Letter criticizing its practice, HSBC Group changed its policy and now requires all affiliates to 

perform due diligence on all other affiliates. 

53 See, e.g., 41912010 memorandum from OCC legal counsel to OCC Washington Supervision 

Review Committee, "Order of Investigation .. HSBC Bank USA, N.A., New York, NY," OCCPSI-00899482-485, at 2 ("The Bank is obligated to conduct due diligence, and, where necessary, 

EDD [Enhanced Due Diligence], on foreign correspondent accounts. 31 U.S.C. § 5318(i)(I) .... 

Section 5318(i) does not exempt foreign correspondent accounts that a bank maintains for its 

affiliates."). 
217 


76061.583

43 

HBUS and that suspect funds moved through the HBMX account, but 

failed to inform HBUS of the extent of the AML problems at HBMX so 

that HBUS could treat HBMX as a high risk account. Instead, until 

2009, HBUS treated HBMX as low risk. 

Contrary to its designation, HBMX engaged in many high risk 

activities. It opened accounts for high risk clients, including Mexican 

casas de cambio and U.S. money service businesses, such as Casa de 

Cambio Puebla and Sigue Corporation which later legal proceedings 

showed had been used on occasion, from 2005 to 2007 for Puebla and 

from 2003 to 2005 for Sigue, to launder funds from illegal drug sales in 

the United States. HMBX also offered high risk products, including 

providing U.S. dollar accounts in the Cayman Islands to nearly 50,000 

clients with $2.1 billion in assets, many of which supplied no KYC 

information and some of which misused their accounts on behalf of a 

drug cartel. HBMX was also the single largest exporter of U.S. dollars 

to HBUS, transferring over $3 billion in 2007 and $4 billion in 2008, 

amounts that far outstripped larger Mexican banks and other HSBC 

affiliates. Mexican and U.S. law enforcement and regulatory authorities 

expressed concern that HBMX's bulk cash shipments could reach that 

volume only if they included illegal drug proceeds that had been brought 

back to Mexico from the United States. In addition, for a three-year 

period from mid-2006 to mid-2009, HBUS failed to conduct any AML 

monitoring of its U.S. dollar transactions with HSBC affiliates, 

including HBMX, which meant that it made no effort to identify any 

suspicious activity, despite the inherent risks in large cash 

transactions. 154 

HBMX conducted these high risk activities using U.S. dollar 

correspondent and banknotes accounts supplied by HBUS. HBMX used 

those accounts to process U.S. dollar wire transfers, clear bulk U.S. 

dollar travelers cheques, and accept and make deposits of bulk cash, all 

of which exposed, not only itself, but also HBUS, to substantial money 

laundering risks. HBMX compounded the risks through widespread, 

weak AML controls, while HBUS magnified them by omitting the due 

diligence and account monitoring it applied to other accounts. HSBC 

Group also compounded the AML risks by failing to alert HBUS to 

HBMX's ongoing, severe AML deficiencies. 

A. HSBC Mexico 

In November 2002, HSBC Group purchased Mexico's fifth largest 

bank, Banco Internacional, S.A., then part of Grupo Financiero Bital, 

154 See 9113/2010 OCC Supervisory Letter HSBC 2010-22, OCC-PSI-00000230, at 2. [SeaJed 

Exhibit.] 
218 


76061.584

44 

S.A. de C.V. (Bital), for about $1.1 billion. 155 At the time of the 

purchase, Bital had roughly 6 million customers and 15,400 staff. 156 

This acquisition significantly increased HSBC's banking presence in 

Mexico.157 HSBC later changed the name of the bank to HSBC Mexico 

S.A. Banco (HBMX) and the name ofthe holding company to Grupo 

Financiero HSBC, S.A. de C.V. (GF HSBC). GF HSBC is now one of 

Mexico's largest financial service conglomerates, owning not only 

HBMX but also a network of other financial firms. I 58 HBMX currently 

has over 1,100 branches, $2 billion in assets, and over 8 million 

clients. 159 HBMX and its Mexican parent are headquartered in Mexico 

City and together have over 19,000 employees. 160 HSBC typically 

refers to its Mexican operations as HSBC Mexico. 

Since the purchase of Bital, three persons have served as the head 

ofHSBC Mexico. The first was Alexander (Sandy) Flockhart who 

served as Chairman and Chief Executive Officer (CEO) ofHBMX, and 

later also as CEO ofHSBC's Latin America operations, from 2002 to 

2007. 161 After he was made Latin American regional head, 162 Paul 

Thurston took the post ofHSBC Mexico CEO and later also served as 

the HSBC Latin America CEO. 163 Mr. Thurston headed the Mexico 

operations for just over a year, from February 2007 to May 2008. When 

155 See "HSBC Consuma Ia Adquision de GF BIT AL:' (l1I2S/02). 

http://www.hsbc.com.mxlI/PA_I_I_SS/contentihome_ en/investor _relations/press Jeleases/infpr 

ess/hsbc_consuma.pdf; "HSBC Buys Mexican Bank BitaI;' CNN.com (8/2S/2002), 

http://archives.cnn.coml2002/BUSINESS/asiaJ08/2I/uk.hsbc. 

156 8/2 112002 "HSBC agrees to acquire Grupo Financiero BitaI," HSBC press release, 

http://www.hsbc.com/I/2/newsroom/news/2002/hsbc-agrees-to-acquire-grupo-financiero-bital. 

157 Two years earlier. in 2000, HSBC had acquired a smaller bank in Mexico, Republic National 

Bank of New York (Mexico) S.A. See 10/211201l"Doing Business in Mexico," HSBC 

publication, at 34, 

http://www.hsbc.comil/content!assetsibusiness_bankingllil 021_ doinL business jn _ mexico. pdf 

iss Among other entities, GF HSBC owns a securities finn, insurance company, and pension 

fund. See HSBC Mexico website, "Grupo HSBC Mexico," http://www.hsbc.com.mxlI/2/grupo. 

Former HBMX head Paul Thurston told the Subcommittee that HBMX experienced rapid growth 

from its purchase in 2002. Subcommittee interview of Paul Thurston (S/I/2012). 

II' See 10/21/2011"Doing Business in Mexico," HSBC publication, at 6, 

http://www.hsbc.com/licontentiassetsibusiness_ bankingllil 021_doing_ business_in _ mexico. pdf 

; "Grupo HSBC Mexico,"' HSBC website, http://www.hsbc.com.mxI1l2/grupo. 

160 See HSBC website, Grupo IISBC Mexico, http://www.hsbc.com.mxIl/2/grupo. viewed 

4/2112. 

161 He was Group General Manager, Chairman and Chief Executive Omcer ofHBMX from 

2002 to 2006, and Group Managing Director Latin America from 2006 to July 2007. See his 

biography on the HSBC website, http://www.hsbc.comil/PA_esf-ca-appcontentlcontent/assets/newsroomlmedia_ kitlbiogs/l 00223 _sandy _ flockhart.pdf. HSBC also has 

affiliates in Colombia, Panama, Peru, and Uruguay, among other Latin American locations. 

162 In July 2007, Mr. Flockhart was appointed CEO of The Hongkong and Shanghai Banking 

Corporation Limited. See his biography on the HSBC website, http://www.hsbc.com/IIPA_esfca-app-content/contentlassets/newsroomlmedia _ kitlbiogsll 00223 _sandy _ flockhart.pdf. 

163 In May 2008, Mr. Thurston was appointed head ofGF HSBC, and later co-head of the Latin 

American Region. See his biography on the HSBC website, http://www.hsbc.comil/PA_esf-caapp-contentlcontent! assets/newsroom/media _ kit/biogs/l 0 1210 _pau1.Jhurston.pdf; "HSBC 

makes key international appointments," (4I1S/2008), 

http://www.hsbc.com/I/2/newsroom/news/2008/hsbc-makes-kcy-international-appointments. 
219 


76061.585

45 

he was promoted and relocated to London,164 Luis Pena Kegel became 

the new HSBC Mexico CEO and remains in that post today.165 

Mexican banks, including HBMX, are regulated by the Comision 

Nacional Bancaria y de Valores (CNBV) which oversees Mexican banks 

and securities firms. The Mexican central bank, Banco de Mexico, the 

Mexican Ministry of Finance, the Mexican Treasury Department 

(SHCP), and the Mexican Financial Intelligence Unit (flU) also perform 

oversight functions. Mexico has a well-developed set of AML laws and 

regulations. Mexican regulators and law enforcement agencies work 

with their U.S. counterparts to combat drug trafficking and money 

laundering in both countries. 

HBMX is a large, sophisticated bank offering a full range of 

banking services, including deposits, checking, foreign exchange, 

commercial banking services, private banking and wealth management, 

and correspondent banking. HMBX offers correspondent accounts to a 

wide range of financial institutions. HBMX also maintains 

correspondent accounts for itself at other banks around the world, 

including in the United States. In 2002, at the time Bital was purchased, 

the bank had $647 million in correspondent banking deposits in Mexico, 

$700 million in the Cayman Islands, and $143 million in New York. 166 

According to CEO Paul Thruston, HBMX experienced rapid growth in 

the early years after its acquisition. 167 HBMX also operates a branch in 

the Cayman Islands, HSBC Mexico S.A, which was established by Bital 

in 1980, with authority to offer customers U.S. dollar accounts. 168 At its 

peak in 2008, the Cayman branch, which has no offices or employees of 

its own and is run by HBMX personnel in Mexico, had nearly 50,000 

client accounts and assets totaling $2.1 billion. 169 

HBMX has had an extensive relationship with HBUS, obtaining 

U.S. dollar services through both correspondent and banknotes accounts. 

HBMX used its HBUS correspondent account primarily to process 

164 In May 2008. Mr. Thurston was appointed Managing Director of UK Banking, in charge of 

HSBC's retail and commercial banking operations in the United Kingdom. See "HSBC makes 

key international appointments." (411512008). 

http://www.hsbc.com/1/2/newsroom/news/2008/hsbc-makes-key-intcrnational-appointments. 

165 Mr. Pena was appointed head ofGF HSBC. Id. Mr. Pena had previously headed Grupo 

Financiero Banorte and worked for 25 years at BanamaxiCitigroup in !V1exico. Id. Emilson 

Alonso was appointed Chief Executive of HSBC Latin America. Id. 

166"Compliance Due Diligence Trip by John Root: Bital (Mexico City) - 4-8 Nov02," prepared 

bI, HSBC John Root. HSBC OCC 8877802-807. at 5. 

I 7 Subcommittee interview of Paul Thurston (51112012). 

168 This branch operates under a "Class B license;' which is given by the Cayman Islands 

Monetary Authority to offshore banks authorized to do business only with non-residents of the 

Cayman Islands. See list of Cayman offshore banks at http://www.offshorelibrary.comlbankinglcaymanjslandslpage_3; Subcommittee briefing by HSBC legal counsel on 

the Cayman accounts (412012012). 

169 See chart at HSBC OCC 8876787, attached to 911212008 email from HSBC John Root to 

HSBC Adrian Cristiani, "Cayman Accounts," HSBC OCC 8876784. 
220 


76061.586

46 

international wire transfers and clear U.S. dollar monetary instruments 

such as travelers cheques. It also made use ofHBUS' Remote Deposit 

Capture service which enabled HBMX to send monetary instruments to 

HBUS electronically for processing. HBMX interacted at times with the 

HBUS Payment and Cash Management (PCM) division regarding this 

account. In addition, HBMX interacted with the HBUS Global 

Banknotes division, until the Global Banknotes business was 

discontinued in 20 10. HBMX used its banknotes account primarily to 

sell U.S. dollars received from its customers to HBUS, which HBMX 

typically transported to HBUS via armed car or aircraft. In one threemonth period from November 2006 to February 2007, HBMX shipped 

nearly $742 million in U.S. dollars to HBUS; at its peak, HBMX 

exported $4 billion in bulk cash shipments to HBUS over the course of 

one year, 2008. Until it sharply curtailed its U.S. dollar services in 

Mexico in January 2009, HBMX shipped more U.S. dollars to HBUS 

than any other Mexican bank or HSBC affiliate. 

B. Mexico 

To understand HBMX's AML risks and, therefore, the risks HBUS 

incurred as its U.S. correspondent, it is necessary also to understand the 

AML risks in its home country, Mexico. From 2000 until 2009, HSBC 

Group and HBUS gave Mexico their lowest AML risk rating, despite 

overwhelming information indicating that Mexico was a high risk 

jurisdiction for drug trafficking and money laundering. In May 2009, 

HBUS suddenly increased its risk rating for Mexico by three notches, 

from its lowest to its highest risk level, where it remains today. 170 

HSBC Group did not follow suit until 2012 when it raised its risk rating 

for Mexico from "cautionary" to "high risk.,,171 

(1) U.S. Assessment of AML Risk in Mexico 

INCSR Reports. In its annual International Narcotics Control 

Strategy Reports (INCSRs), which contain a country-by-country 

assessment of drug trafficking and money laundering risks, the U.S. 

State Department has consistently classified Mexico as a country of 

"primary" concern for money laundering, its highest risk rating. l72 In 

2002, the State Department described Mexico's drug trafficking and 

money laundering risks as follows: 

170 See 4/9/2010 memorandum from OCC legal counsel to OCC Washington Supervision 

Review Committee. "Order of Investigation _. HSBC Bank USA, N.A., New York, NY," OCCPSI-00899482-485, at 484. 

171 Subcommittee briefing by HSBC legal counsel (7/5/2012). 

172 See, e.g., "2000 International Narcotics Control Strategy Report," U.S. Department of State 

(hereinafter "2000 INCSR"), at 621; 2002 INCSR at XII·60; 2006 INCSR VoL II at 39; 2008 

INCSR VoL II at 62; 2012 INCSR VoL II, at 33. 
221 


76061.587

47 

"Mexico faces a myriad of drug-related problems that include the 

production and transshipment of illicit drugs, money laundering, 

consumption and illicit firearms trafficking .... The Government 

of Mexico's (GOM) longstanding commitment to combat drug 

trafficking and related crimes resulted in tangible successes against 

the Arellano Felix Organization (AFO), the Carrillo Fuentes 

Organization (CFO), and the Gulf Cartel widely considered the 

top three drug groups in the country .... Mexico remains a major 

supplier of heroin, methamphetamine, and marijuana, and the 

transit point for more than one half of the cocaine sold in the U.S. 

... The industrial-scale drug trade has transformed 

narcotrafficking into one of Mexico's deadliest businesses .... 

These organizations have demonstrated blatant disregard for 

human life as the executions oflaw enforcement personnel, 

government officials, and innocent bystanders have increased. 

In recent years international money launderers have turned 

increasingly to Mexico for initial placement of drug proceeds into 

the global financial system.,,17] 

The State Department also wrote: 

"The smuggling of bulk shipments of U.S. currency into Mexico 

and the movement of the cash back into the United States via 

couriers and armored vehicles, as well as through wire transfers, 

remain favored methods for laundering drug proceeds. Mexico's 

financial institutions engage in currency transactions involving 

international narcotics-trafficking proceeds that include significant 

amounts of U.S. currency or currency derived from illegal drug 

sales in the United States. Although drug trafficking continues to 

be the principal source of the laundered proceeds, other crimes 

including corruption, kidnapping, firearms trafficking, and 

immigrant trafficking are also major sources of illegal 

proceeds.,,174 

Equally negative assessments of Mexico's drug trafficking and 

money laundering risks appeared in the State Department's annual 

INCSR reports over the next four years. In 2006, for example, the State 

Department wrote: 

"The illicit drug trade continues to be the principal source of funds 

laundered through the Mexican financial system. Mexico is a 

major drug producing and drug-transit country. Mexico also 

serves as one of the major conduits for proceeds from illegal drug 

sales leaving the United States. Other crimes, including 

corruption, kidnapping, firearms trafficking, and immigrant 

173 2002 INCSR, at V-27-V-28. 

174 Id. at Xll-161. 
222 


76061.588

48 

trafficking are also major sources of illegal proceeds. The 

smuggling of bulk shipments of U.S. currency into Mexico and the 

movement of the cash back into the United States via couriers, 

armored vehicles, and wire transfers, remain favored methods for 

laundering drug proceeds. . .. 

According to U.S. law enforcement officials, Mexico remains one 

of the most challenging money laundering jurisdictions for the 

United States, especially with regard to the investigation of money 

laundering activities involving the cross-border smuggling of bulk 

currency from drug transactions. While Mexico has taken a 

number of steps to improve its anti-money laundering system, 

significant amounts of narcotics-related proceeds are still 

smuggled across the border. In addition, such proceeds can still be 

introduced into the financial system through Mexican banks or 

casas de cambio, or repatriated across the border without record of 

the true owner of the funds.,,175 

The State Department's relentlessly negative assessments of 

Mexico's drug trafficking and money laundering vulnerabilities 

continued unabated. In 2008, the State Department wrote that "U.S. 

officials estimate that since 2003, as much as U.S. $22 billion may have 

been repatriated to Mexico from the United States by drug trafficking 

organizations."J76 Four years later, in 2012, the State Department wrote 

that drug cartels were using Mexican and U.S. financial institutions to 

launder as much as $39 billion each year: "According to U.S. 

authorities, drug trafficking organizations send between $19 and $39 

billion annually to Mexico from the United States."m 

Warnings. The State Department is far from the only 

governmental agency to have warned about the money laundering risks 

in Mexico. The U.S. Congress has held repeated hearings over the years 

highlighting money laundering and drug trafficking problems in 

Mexico.178 Witnesses have included the U.S. Justice Department, 

175 2006 INCSR. at 268-269. 

176 2008 INCSR, at 327. 

m 2012 INCSR, at 140. 

178 See, e.g., "Money Laundering Activity Associated with the Mexican Narco~Crimc 

Syndicate," U.S. House Banking and Financial Subcommittee on General Oversight and 

Investigations, Serial No.1 04-72 (9/511996); "Drug Control: Update on United States-Mexican 

Counternarcotics Efforts," Senate Caucus on International Narcotics Control, S.Hrg. 106-60 

(212411999); "Federal Strategies to End Border Violence," Senate Judiciary Committee, S.Hrg. 

109-556 (3/1/2006); "Antidrug Package for Mexico and Central America: An Evaluation," 

Senate Committee on Foreign Relations, S.Hrg. 110-311 (1111512007); "Escalating Violence in 

Mexico and the Southwest Border as a Result of the Illicit Drug Trade," House Judiciary 

Subcommittee on Crime, TelTorism, and Homeland Security, Serial No. 111-25 (5/6/2009); 

"Exploring Drug Gangs' Ever Evolving Tactics to Penetrate the Border and the Federal 

Government's Ability to Stop Them," Senate Homeland Security and Governmental Affairs Ad 

Hoc Subcommittee on Disaster Recovery and Intergovernmental Affairs, S.Hrg. 112-384 

(3/3112011). 
223 


76061.589

49 

Homeland Security Department, Federal Bureau ofInvestigations, Drug 

Enforcement Administration (DEA), Financial Crimes Enforcement 

Network (FinCEN) of the U.S. Treasury Department, Internal Revenue 

Service (IRS), Customs and Border Patrol, and Coast Guard, among 

others. From 1996 to 2011, these hearings have painted the same grim 

picture drawn in the State Department's annual reports regarding the 

drug trafficking and money laundering threats in Mexico. 

In addition, warnings about money laundering problems in Mexico 

have been directed specifically to financial institutions operating in the 

United States. In 2005, multiple U.S. agencies worked together to 

produce a U.S. Money Laundering Threat Assessment which identified 

thirteen key money laundering methods and specifically identified 

Mexico as a high risk jurisdiction for several ofthem, including bulk 

cash smuggling, misuse of money orders, and suspicious funds sent 

through money service businesses.179 In 2006, FinCEN issued an 

advisory to all U.S. financial institutions to "better guard against an 

increasingly prevalent money laundering threat involving the smuggling 

of bulk U.S. currency into Mexico," warning in particular against "the 

abuse of their financial services" by Mexican casas de cambio. lso The 

advisory explained that drug traffickers were smuggling bulk cash from 

the United States into Mexico, then depositing the funds with casas de 

cambio who were sending the cash back to the United States via 

armored transport or by selling the U.S. dollars to U.S. banks. ISI The 

advisory also warned about multiple wire transfers that "bear no 

apparent business relationship" with a particular cas a de cambio, and 

U.S. deposits by casas de cambio of sequentially numbered monetary 

instruments. ls2 

Wachovia Prosecution. Criminal prosecutions also alerted U.S. 

financial institutions to the money laundering problems in Mexico. In 

2008, for example, news articles warned how Mexican drug cartels sent 

millions of dollars in illegal drug proceeds through a major U.S. 

financial institution, Wachovia Bank. 183 In 2010, the United States filed 

a deferred prosecution agreement detailing how Wachovia Bank had 

I7Q See Dec. 2005 "U,S, Money Laundering Threat Assessmcnt," issued by the Money 

Laundering Threat Assessment Working Group, which included the U,S, Departments of 

Treasury, Justice, and Homeland Security, Federal Reserve, and Postal Service. 

180 "Guidance to Financial Institutions on the Repatriation of Currency Smuggled into Mexico 

from the United States," FinCEN Advisory No, FIN-2006-A003 (4/28/2006), at 1. 

http://www,fincen,gov/statutesJegs/guidauce/pdf/advis04282006,pdf. 

18' Id. at 1-2, 

182 Id, at2, 

183 See, e.g., '''Wachovia Is Under Scrutiny in Latin Drug-Money Probe," Wall Street Journal, 

Evan Perez, Glenn Simpson (4/26/2008)(describing AML cases involving not only Wachovia 

Bank, but also American Express International Bank, which forfeited $55 million as part of a 

2007 Federal deferred prosecution agreement, aud Union Bauk of California, which forfeited 

$21,6 million as part of a 2007 Federal deferred prosecution agreement, both of which were also 

charged with inadequate AML programs and suspccted of being used by Mexican drug cartels to 

launder funds), 
224 


76061.590

50 

been used by Mexican foreign exchange businesses to launder at least 

$110 million in drug proceeds. 184 Filings in the case describe how, from 

2003 to 2008, Wachovia Bank provided a variety of services for 22 

Mexican casas de cambio (CDCs), despite evidence of suspicious 

activity. Those services included processing numerous U.S. dollar wire 

transfers for deposit into bank accounts around the world; 185 clearing 

large volumes of sequentially numbered U.S. travelers cheques; 186 and 

accepting numerous bulk cash shipments transported by armored car 

from the CDCs. 187 The filings report that, over a three-year period, the 

wire activity exceeded $374 billion and the bulk cash shi~ments 

exceeded $4.7 billion, far exceeding expected volumes. 18 Wachovia 

Bank also processed $20 million in sequentially numbered travelers 

cheques, the majority of which contained illegible names and unusual 

markings. 189 The deferred prosecution agreement and supporting factual 

statement charged Wachovia Bank with willfully failing to maintain an 

effective AML program,190 detailing numerous AML deficiencies 

including a failure to conduct due diligence on high risk clients; a failure 

to monitor wire transfers, pouch activities, and bulk cash shipments; and 

a failure to report suspicious activity to law enforcement. 191 To avoid 

prosecution, Wachovia Bank acknowledged responsibility for its 

conduct, paid $160 million in criminal and civil fines, and agreed to 

undertake significant AML reforms. 192 The Wachovia case received 

widespread media attention, providing further notice ofthe money 

laundering dangers in Mexico. 193 

(2) HSBC Assessment of Risk in Mexico 

Despite the overwhelming information available about substantial 

money laundering risks in Mexico, from 2002 until 2009, RBUS gave 

Mexico its lowest risk rating for AML purposes.1 94 As a consequence, 

184 See United States v. Wachovia Bank N.A., Case No. 10-20165-CR-Lenard (USDC SDFL), 

Deferred Prosecution Agreement (3116/2010) and Information (3112/2010). 

185 See id., Factual Statement, Exhibit A to Deferred Prosecution Agreement (3/16/20 I 0), at lI'll 

20,24(1). 

::: Id. at 'Il'll22, 24(2), 35. 

188 Id. at 'Il21, 24(3). 

ld. at 'Il23. 

189Id. at 'Il35. 

190 See United States v. Wachovia Bank N.A., Case No. 10-201 65·CR-Lenard (USDC SDFL), 

Deferred Prosecution Agreement (3116/2010), at ll'll3·4. 

191 See id .• Factual Statement, Exhibit A to Deferred Prosecution Agreement (3116/2010), at 'Il'll 

28,30·35. 

192 Id., at l'll38·40; Deferred Prosecution Agreement (3116/2010); "Wachovia Enters into 

Deferred Prosecution Agreement," U.S. Attorney's Office for the Southern District of Florida 

Wess release, (3fl7/201 0), http://www.justice.gov/usaolfls/ PressReleasesfl00317-02.html. 

9] See, e.g., "Wachovia is Under Scrutiny in Latin Drug·Money Probe," Wan Street loumal, 

Evan Perez and Glenn Simpson, April 26, 2008; "How a big U.S. bank laundered billions from 

Mexico's murderous drug gangs," The Observcr, Ed Vulliamy, (4/2/2011), 

http://www.guardian.co.uklworld/2011/apr/03/us-bank-mexico-drug-gangs. 

194 See, e.g., Feb. 2009 "Rating 2009," preparcd by HBUS, llSBC-PSI·PROD·0096390-397 

(rating over 235 countries and territories). [Sealed Exhibit.] 
225 


76061.591

51 

under HSBC Group policy, clients from Mexico were not subjected to 

enhanced monitoring by HBUS, unless they were also designated a 

Special Category Client (SCC), a relatively rare designation that 

indicates a client poses high AML risks. Had Mexico carried one of the 

two highest risk ratings, all Mexican clients at HBUS would have been 

subjected to enhanced due diligence and account monitoring. Instead, 

HBUS failed to conduct AML monitoring of most Mexican client 

account and wire transfer activity involving substantial funds. 

Risk Rating Process. Until recently, HSBC Group and HBUS 

issued AML country risk assessments using four categories of increasing 

risk, "standard," "medium," "cautionary," and "high." HSBC Group 

created a chart listing its country risk assessments, sent the chart to its 

affiliates characterizing its assessments as recommendations, and then 

allowed each HSBC affiliate to make its own assessment decisions. 195 

At HBUS, the country risk assessments were compiled every six months 

by an AML compliance officer who gathered information from a 

number of sources, assigned numerical scores to each source, and then 

compiled aggregate scores for over 200 countries. 196 

Those scores were then supposedly used to assign risk ratings. In 

fact, however, countries receiving similar scores often received different 

risk ratings. Those differences were attributable, in part, to an "HBUS 

discretion" factor which was listed as an official factor in the risk 

assessment process, included in the risk assessment chart, and used, 

according to the acc, to alter the risk ratings for over 60 countries in 

2009. 197 The acc noted that HBUS offered "no discussion or 

documentation as to what constitute[dl permissible reasons to change the 

risk rating" using the HBUS discretion factor. 198 The acc also found 

that HBUS did not apply its risk-rating methodology "in a consistent 

manner." The acc wrote that, in 2009, of73 countries that received a 

zero risk assessment score: 

"32 (44 percent) were rated standard, 32 (44 percent) were rated 

medium, I (I percent) was rated cautionary, and 8 (II percent) 

were rated Unclassified. The acc found no documentation or 

support for the difference between the final ratings and the scores. 

While the bank elevated the risk ratings versus the scores, the bank 

has not adopted a repeatable, standardized procedure.,,199 

195 Subcommittee interview of Ali Kazmy (2/29/2012). 

196 1d. See also Feb. 2009 "Rating 2009," prepared by HBUS, HSBC-PSJ-PROD-0096390-397. 

197 See 9/13/2010 OCC Supervisory Letter HSBC-2010-22, "Bank Secrecy Act/Anti-Money 

Laundering ('BSAlAML') Examination - Program Violation (12 U.S.c. § 1818(s); 12 C.F.R. § 

21.21)," OCC-PSJ-00864335-365, at 19. [Sealed Exhibit.] 19' Id. 

199 Id. 
226 


76061.592

52 

The OCC criticized the HSBC country risk assessment process for 

not taking into account readily available country-specific information on 

money laundering and drug trafficking risks, including in the annual 

State Department INCSR reports. 200 Although INCSR information was 

often included in HBUS KYC client profiles, the INCSR countryspecific risk ratings were inexplicably excluded from the official HBUS 

country risk assessment scoring matrix.201 

Still another OCC criticism was the HSBC Group's "unacceptable 

practice of assigning an overall risk rating to its non-SCC customers 

based solely on the risk rating that the bank has given the country where 

the customer is located. ,,202 One result of this practice, according to the 

OCC, was that HSBC had excluded from its routine AML monitoring 

"more than $60 trillion of wire transfers each year for customers 

domiciled in countries risk rated as 'standard' or 'medium,' representing 

two-thirds of the total dollar volume" of wire transfers at HSBC.203 

With respect to Mexico, the HSBC policy meant that, due to its low risk 

rating, all clients based in Mexico were considered low risk, unless rated 

an SCC, an outcome that the OCC viewed as a critical AML deficiency. 

One consequence was that high risk clients residing in low risk countries 

routinely escaped enhanced due diligence and account monitoring. 

2009 Change in Mexico Risk Rating. In February 2009, HBUS 

issued a chart with its latest country risk assessments.204 The chart 

provided risk scores and categories for 239 countries.205 It assigned a 

score of"2" for Mexico, which was one ofthe lowest scores. When 

asked about this low score, the HBUS compliance officer then 

responsible for country risk assessments, Ali Kazmy, told the 

Subcommittee that, since 2006, HBUS' assessments had inadvertently 

failed to take into account a 2006 FinCEN advisory related to Mexico 

that would have added 10 points to its score each year,206 As a result of 

its low score, Mexico was rated a "standard" risk, the lowest of the four 

risk ratings,z°7 

100 rd. 

201 See Feb. 2009 "Rating 2009," prepared by HBUS. HSBC-PSJ-PROD-0096390-397. 

202 9/13/2010 OCC Supervisory Letter HSBC-2010-22. "Bank Secrecy Act/Anti-Money 

Laundering ('BSAlAML') Examination - Program Violation (12 U.S.c. § 1818(s); 12 C.F.R. § 

21.21)," OCC-PSI-00864335-365. at 18. [Sealed Exhibit.] 

203 Jd. at2. 

204 See Feb. 2009 "Rating 2009," prepared by BBUS, HSBC-PSJ-PROD-0096390-397. 

205 Id. The risk scores ranged from 0 to 28, and produced ratings of standard, medium, 

cautionary, and high. 

206 Subcommittee interview of Ali S. Kazmy (2/29/2012). See also Feb. 2009 "Rating 2009," 

prepared by HBUS, HSBC-PSJ-PROD-0096390-397. Mr. Kazmy took over the country risk 

rating process from Lynda Cassell who left HBUS in mid-2006. The FiuCEN Advisory was 

issued in April 2006, just before Ms. Cassell left. 

207 Mexico had received the same standard rating in 2008. See 2008 HBUS Country Risk 

Assessment for Mexico at HSBC-PSI-PROD-0096398-441 and 422. 
227 


76061.593

53 

This low risk rating was awarded despite a May 2008 email from 

Susan Wright, AML Compliance head for the HSBC Group, singling out 

AML concerns related to Mexico. Referencing "RMM Country Risk," 

Ms. Wright wrote to HSBC Group Compliance head David Bagley and 

other colleagues: 

HI believe you have sight of our Country Reputational Risk Table 

but, as previously discussed, unless there are some specific 

concerns it is not proposed to highlight the highest risk countries as 

a matter of course. . .. 

Mexico - there are specific risks in relation to pressure from the 

US with regard to the laundering ofthe proceeds of drug 

trafficking through Mexican cas[a]s de cambios. HBMX have a 

number of customers who are cambios/money service businesses 

(MSBs) with links to the US and consequently payments from 

HBMX are made through RBUS. ... [T]hese are notoriously 

difficult businesses to monitor.... [TJhere is also US concern with 

regard to the amount ofUSD cash deposits and transactions 

between the US and Mexico and HBMX has been identified as one 

ofthe banks with the highest level of activity in this area.,,208 

This email shows that the head ofHSBC AML Compliance was aware 

of and communicated to other Compliance personnel the serious AML 

risks related to Mexico involving drug trafficking, suspect casas de 

cambio, and bulk cash smuggling, yet the February 2009 RBUS country 

risk assessments again assigned Mexico the lowest possible risk rating. 

Three months after issuing the country risk assessments in 

February 2009, however, on May 1,2009, HBUS suddenly revised 

Mexico's risk rating, increasing it by three notches from the lowest to its 

highest risk rating?09 When asked by the Subcommittee about the 

timing, Mr. Kazmy explained that, "in early 2009," he had been asked 

by his supervisor, Anne Liddy, to take another look at Mexico's risk 

rating due to acc concerns.210 

Ms. Liddy's request coincided with an intensifYing law 

enforcement interest in Mexican casas de cambio suspected of 

laundering illegal drug proceeds through U.S. financial institutions, 

including f-IBUS. In February 2008, and again in November 2008, as 

detailed below, Mexican regulators confronted HBMX with suspicions 

that drug proceeds were moving through its accounts at HBUS. In 

208 5114/2008 email from HSBC Susan Wright to HBUS David Bagley, HSBC Karl Barclay, 

HBEU Derek Leatherdale, and others, "R,VlM Country Risk," HSBC OCC 8873750. 

209 See 4/9/2010 memorandum from OCC legal counsel to OCC Washington Supervision 

Review Committee, "Order oflnvestigation - HSBC Bank USA, N.A., New York, NY." OCC· 

PSI-00899482-485, at 484. 

210 Subcommittee interview of Ali S. Kazmy (2/29/2012). 
228 


76061.594

54 

January 2009, according to an internal HBUS email.a U.S. Homeland 

Security Department's Immigration and Customs Enforcement (ICE) 

agent met with HBUS about a money laundering investigation involving 

one of their clients in Mexico.2I1 That same month, in response to 

Mexican AML regulatory concerns, HBMX stopped accepting U.S. 

dollar deposits at any of its Mexican branches. 

In June 2009, ICE also informed the OCC that ICE was 

investigating possible money laundering activity involving banknote 

accounts at HBUS. 212 ICE indicated that Mexican drug traffickers 

appeared to be using the black market peso exchange in New York to 

transfer funds through a particular Mexican financial institution, which 

then sent the funds through its U.S. correspondent account at HBUS.213 

Dan Stipano, OCC Deputy Chief Counsel, explained the scheme to the 

OCC Examiner-In-Charge at HBUS as follows: 

"The scheme ... is similar to activity that we have seen at Union 

Bank, Wachovia, and Zions. Basically, the way it works is that 

drug money is physically hauled across the border into Mexico, 

then brought back into the United States through wire transfers 

from casas de cambio or small Mexican banks, or else smuggled 

across the border in armored cars, etc., before being deposited in 

US. Institutions. According to AUSA [Assistant U.S. Attorney] 

Weitz, most U.S. banks, recognizing the risks involvcd, have 

gotten out of this business, but HSBC NY is one of the last 

holdouts (although, interestingly, he said that HSBC-Mexico will 

no longer accept U.S. currency).,,214 

What U.S. law enforcement officials had found was that, because drug 

traffickers in the United States were having difficulty finding a U.S. 

financial institution that would accept large amounts of cash, due to 

strict U.S. AML controls, many were instead transporting large volumes 

of U.S. dollars to Mexico, and depositing the dollars at Mexican 

financial institutions. The drug traffickers could then keep their deposits 

in U.S. dollars through the Mexican financial institution's correspondent 

account at a U.S. bank, or exchange the dollars for pesos. The Mexican 

211 See 111912009 email from HBUS Denise Reilly to HBUS Lesley Midzain. "HBMX 

Banknotes Business ~ HSBC Mexico Press Release and Q&A," HSBC acc 3633806·807. In a 

Subcommittee interview, HBUS AML Compliance officer Daniel Jack indicated that he attended 

the meeting, and the ICE agent expressed concern about possible money laundering through 

Consultoria, a former Mexican casa de cambia that had converted into a bank. Mr. Jack told the 

Subcommittee that HBUS closed the Consultoria account six months later. Subcommittee 

interview of Daniel Jack (311312012). 

212 See 912912009 email from Dan Stipanoto Sally Belshaw, at 3, acc·PS[·00928758; 

612812009 notes of telephone conversations, prepared by acc Jim Vivennzio, aCC-PSI00928759·761 (noting ICE agents had met with HBUS). [Sealed Exhibit.] 

2IJ See 612812009 notes of telephone conversations, prepared by Jim Vivenzio, aCC.PSI· 

00928759. [Sealed Exhibit.] 

214 See 912912009 email from Dan Stipanoto Sally Belshaw, at 3, aCC-PSI-00928758. 
229 


76061.595

55 

banks, casas de cambio, and other financial institutions that were the 

recipients of the cash typically shipped the physical dollars back to the 

United States for credit to their own U.S. dollar correspondent accounts 

at U.S. banks. HBUS' awareness of the increasing U.S. law 

enforcement and regulatory interest in Mexico may have contributed to 

its decision to review and, ultimately, in May 2009, to increase its risk 

rating for Mexico. 

One key consequence of the higher risk rating for Mexico was that, 

under Group AML policy, HBUS was required to conduct enhanced 

monitoring of all of its Mexican clients. HBUS' higher risk rating may 

have also put pressure on HSBC Group and other HSBC affiliates to 

boost their risk rating of Mexico as well. 

On June 18,2009, Ms. Wright sent an email to Ms. Liddy asking 

her about the higher rating for Mexico. Ms. Wright wrote: 

"It has been drawn to my attention that in the latest US Country 

Risk Assessment Mexico has gone from a lower risk to high. I 

have received a number of queries from around the Group as to the 

reason for what they see as quite a dramatic change. 

Whilst I appreciate the risks involved in doing business with 

Mexico I would be grateful for some further and more detailed 

clarification as to why the change has been so dramatic. This will 

enable me to deal with a number ofthese queries.,,215 

In response, Ms. Liddy asked Mr. Kazmy, the AML officer 

responsible for compiling the country risk ratings, to write up the 

reasoning for the higher risk rating. He wrote: 

"A number of sources are reviewed, a majority of which are 

government and international agencies, such as World Bank, IMF, 

FATF, CFATF, BIS, Central Banks, Transparency International, 

etc. in order to determine risk levels .... The U.S. Department of 

State issues detailed annual assessment[ s 1 of each country via the 

International Narcotics Control Strategy Report highlighting, inter 

215 611812009 email from HSBC Susan Wright to HBUS Anne Liddy, "Group CRRT and US 

Country Risk Assessments;' OCC·PS1-00652829. See also 6/9/2009 email from HSBC David 

Bagley to HBMX Emilson Alonso, copies to HSBC Michael Geoghegan and others, "GMO 

Business reviews - LATAM," HSBC OCC 8874895 ("I fully acknowledge the level of priority 

and focus that you and the team have given to these issues and the progress that has been made 

particularly in Mexico and have taken all of this into account. ... The basis for the rating is 

however: The inherent AML risk in Mexico is still very high and [t]here are not many other 

paris of the Group that have what is effectively a drugs war being conducted on the streets and 

also have the risk posed by potential sting and other operations by the US authorities. We have 

of course remediated our high risk accounts, but the historic weak account opening processes 

mean that we have overall lower levels ofKYC across the customer base as a whole.. Happy 

to discuss further."). 
230 


76061.596

56 

alia, money laundering, terrorist financing, corruption, and 

regulatory regime/oversight. An excerpt of such a report on 

Mexico ... is attached below .... 

As a result of events occurring in Mexico during the past several 

months with respect to drug trafficking and money laundering, as 

well as the general unrest these developments have caused, we 

have downgrade[d] Mexico to 'high' risk. The deteriorated 

situation is recognized by the Government of Mexico as evidence 

through the involvement of agencies tasked with the Anti-Money 

Laundering and Counter Financing of Terrorist (AMLlCFT) efforts 

towards drafting an AMLlCFT National Strategy ... expect[ ed] to 

be issued sometime during 2009 .... Our ratinf is in conformity 

with the view of the U.S. law enforcement.,,21 

Ms. Liddy asked him how Mexico had been rated by the State 

Department in 2009, and whether that rating was worse than in the 

previous report, apparently not realizing that the State Department had 

consistently given Mexico its highest risk rating for years.217 Mr. 

Kazmy told Ms. Liddy, incorrectly, that the State Department INCSR 

report did not rate countries for risk, but also provided numerous details 

from the 2009 INCSR report indicating that money laundering and drug 

trafficking risks had increased.218 

In 20 I 0, when the OCC sent HBUS a supervisory letter on AML 

deficiencies at the bank, the letter included criticism of its country rating 

system.219 Under the heading, "Inadequate and Ineffective Procedures 

for Country Risk Ratings," the OCC listed "significant flaws" with the 

scoring and risk rating methodology, as well as with HBUS' decision 

not to monitor wire transfer activity for foreign financial institutions or 

other clients located in a standard or medium risk country, unless 

designated as an SCC client. The OCC wrote: 

"The bank's country risk ratings for its PCM [Payment and Cash 

Management division] wire monitoring are critical, due to the 

bank's unacceptable practice of assigning an overall risk rating to 

its non-SCC customers based solely on the risk rating that the bank 

has given the country where the customer is located. However, 

compounding this deficiency, the bank's procedures for 

216 611912009 email from HBUS Ali Kazmy to HBUS Anne Liddy, "Group CRRT and US 

Country Risk Assessments," OCC-PSI-00652829. 

217 612212009 email from HBUS Anne Liddy to HBUS Ali Kazmy, "Group CRRT and US 

Country Risk Assessments," OCC-PSI-00652829. 

218 6/2412009 email from HBUS Ali Kazmy to HBUS Anne Liddy, "Group CRRT and US 

Country Risk Assessments," OCC-PSI-00652829. 

219 See 9113/2010 OCC Supervisory Letter HSBC-20 1 0-22, "Bank Secrecy Act/Anti-Money 

Laundering (,BSAlAML') Examination - Program Violation (12 U.S.c. § 1818(s); 12 C.F.R. § 

21.21)," OCC-PSI-00864335-365, at 18-20. [Sealed Exhibit.] 
231 


76061.597

57 

detennining the critical country risk ratings are inadequate and 

ineffective. 

To determine the country risk rating, the bank employs a point 

system based on fifteen factors. HBUS' methodology appears 

straightforward ... [h]owever ... there are significant flaws in the 

implementation of the point system .... 

The bank's failure to risk rate countries appropriately has a 

significant impact on HBUS' BSA [Bank Secrecy Act] 

compliance, because customers' risk ratings affect a number of 

variable requirements relating to due diligence for foreign 

correspondents. For example, these variable requirements include 

the frequency with which the bank conducts site visits (every 12 

months versus every 24 months) and the level of due diligence 

perfonned on beneficial owner and the senior management 

team.,,220 

When asked why past risk assessments of Mexico had been so low, 

Mr. Kazmy told the Subcommittee that he was unable to explain the low 

ratings prior to 2009. 221 He indicated that he first saw the 2006 FinCEN 

advisory on Mexico in 2009.222 He also indicated that, ifhe had known 

what he later learned, he would have increased the risk rating earlier. 223 

C. HBMX's History of Weak AML Safeguards 

In addition to the substantial money laundering and drug 

trafficking risks plaguing Mexico for a decade, HBMX itself had a 

history of weak AML controls and a poor compliance culture, which the 

HSBC Group worked for years to improve, with limited success. While 

HSBC Group officials in London were well aware ofHBMX's AML 

deficiencies and were immersed in an effort to strengthen them, it did 

not inform its worldwide affiliates, including HBUS, of the problems. 

From 2002 until recently, HBUS remained largely ignorant ofthe extent 

ofHBMX's AML and compliance deficiencies, despite providing 

HBMX with extensive correspondent services and giving it free access 

to the U.S. financial system. 

220 Id. at 18,20. See also 4/9/2010 memorandum [rom OCC legal counsel to OCC Washington 

Supervision Review Committee, "Order oflnvestigation - HSBC Bank USA, N.A., New York, 

NY," OCC-PSI-00899482-485, at 3·4. The problems with HBUS' country risk assessments 

extended beyond Mexico to other countries as well. Some of the countries that should have been 

rated as having a high risk of money laundering, but were instead rated standard or medium. 

included Antigua, the Bahamas, Cayman Islands, and Switzerland. See Feb. 2009 "Rating 

2009;' prepared by HBUS, HSBC·PSI·PROD-0096390·397. As a consequence, clients from 

those jurisdictions were treated as low risk, and wire transfers involving those countries were not 

routinely monitored by HBUS. 

221 Subcommittee interview of Ali S. Ka7Jny (2/29/2012). 222 Id. 

223 Id. 
232 


76061.598

58 

Non-Existent Compliance Function in 2002. In 2002, as part of 

its decisionmaking process to purchase Bital, HSBC Group reviewed 

Bital's compliance function, found it wholly inadequate, and determined 

that a major effort would be needed for the new bank to meet Group 

standards. In an email to his colleagues, David Bagley, head ofHSBC 

Group Compliance, put it this way: 

"Sandy [Flockhart, HSBC Mexico head,] acknowledges the 

importance of a robust compliance and money laundering function, 

which at present is virtually non-existent. ... There is no 

recognizable compliance or money laundering function in Bital at 

present.... Sandy thinks it is important to look both at issues 

affecting Mexico City, but also closer to the border where there 

appears to be substantial cross-border flows of monies, including 

USD [U.S. dollars] in cash.,,224 

His comments followed a July 2002 audit performed by HSBC 

Group auditor prior to purchasing the Mexican bank providing a 

negative assessment of the bank's compliance program. The HSBC 

internal audit report detailed a wide range of specific problems as well 

as broader AML deficiencies: 

• "FRBNY [Federal Reserve Bank of New York] review in 

12/2000 identified that 82 of the 248 accounts reviewed 

lacked full documentation. 

• A review ... of documentation of accounts booked at the 

target's Cayman Islands branch ... found that 41 % ofthe 

accounts reviewed (92 of224 reviewed) lacked full client 

information. 37 files had no client information .... 

• The [monitoring] system does not have any capacity to 

aggregate transaction activity for any period other than a 

given day ... [and] does not identify high risk clients as such. 

• Private banking operations per se, are not identified .... 

• GFB [Grupo Financiero Bital] was involved in Operation 

Casa Blanca, a US government undercover sting operation 

undertaken to combat drug trafficking and money laundering 

activities in the US and Mexico. A former GFB account 

executive was found willing to establish fictitious accounts 

and moved illegal money through them. ... GFB forfeited 

$3.l [million] to the US government in 1998 .... 

214 7110/2002 email from HSBC David Bagley to HSBC John Root. with copies to Sandy 

Flockhart and Richard Bennett. "Bilal." HSBC OCC 8877797-798. 
233 


76061.599

59 

Conclusions 

The GFB Compliance effort is weak, and it appears that the 

target organization does not have a strong Compliance 

culture. 

• GFB does not, in reality, have a Compliance 

Department and one would have to be established and 

implemented .... 

• Reviews of account opening procedures and client 

documentation are sporadic, and the reviews normally 

do not encompass large populations of client files or 

activities. This effort needs to be strengthened. 

• Client transaction and activity monitoring is very 

limited. The reliance on account managers to identifY 

and report unusual and suspicious transactions of their 

clients is a serious internal control shortcoming .... 

High risk clients receive no special monitoring 

coverage .... 

• Internal and external audit recommendations, and issues 

raised in regulatory reports do not receive proper 

respect and action .... 

• Measures to promote and ensure staff discipline are not 

satisfactory. GFB's Code of Conduct lacks content, 

detail and spirit. ... Appropriate staff related policies 

would have to be implemented immediately as part of 

the overall effort to install a dedicated Compliance and 

internal control culture throughout the organization.,,225 

Despite Bital's weak compliance function, HSBC Group completed the 

purchase on November 22, 2002.226 

Five Years of Effort. Over the next five years, from 2002 to 

2007, HSBC Group initiated a number of efforts to strengthen Sital's 

compliance and AML programs. While improvements were made, 

significant deficiencies persisted. 

In November 2002, immediately before purchasing Bital, John 

Root, a senior HSBC Group Compliance expert whom David Bagley 

asked to help work on AML issues at HBMX, visited the bank for a 

week and prepared a report cataloguing compliance issues and needed 

initiatives.227 Among other problems, his report noted the "lack of a 

225 July 2002 "Group Internal Audit: Due Diligence Review - Project High Noon," HSBC audit 

of BitaI, HSBC OCC 8873846 -852. 

226 See 11129/2002 minutes ofHSBC Holdings pIc Board of Directors, section 109.3, HSBCPSI-PROD-0198570. 

227 "Compliance Due Diligence Trip by John Root: Bital (Mexico City) - 4-8 Nov02," prepared 

by HSBC John Root, HSBC OCC 8877802-807. See also 11125/2002 email from HSBC John 

Root to HSBC Richard Bennett and HSBC Matthew King transmitting the report, HSBC OCC 

8877800 ("There is very little of what we would call a Compliance function .... I did not 
234 


76061.600

60 

'control culture' at Bital.,,228 The report also described a meeting with 

one of Bit ai's chief Mexican regulators who "was extremely critical" of 

the bank, repeating a number of times that controls "do not exist.,,229 

The report noted that "some of his harshest criticism" were directed at 

the Bital Legal Department "which he averred was 'not guilty of bad 

faith but extreme mediocrity.",2JO According to the report, the Mexican 

regulator recommended "sweeping changes in management.,,2JI 

The report noted that Bital had 83 correspondent relationships with 

other financial institutions, including 20 well known and reputable banks 

and some institutions that required additional KYC inforrnation.2J2 Mr. 

Root recommended obtaining that added KYC information or closing 

some of those accounts by March 2003. The report also noted that Bital 

had accounts lodged at its own Cayman branch office, which operated as 

an offshore shell entity and was managed by Bital employees in Mexico 

City. The report recommended undertaking an analysis of all of the 

correspondent banking deposits, "particularly those in the Cayman 

Islands," by June 2003. It also recommended an analysis of "all existing 

Private Banking, with particular attention to USD [U.S. dollar] accounts 

and fund transfers to New York and the Cayman Islands.,,2JJ In 

addition, it recommended developing a better electronic screening 

system for all account activity to identifY suspicious transactions and a 

better process for investigating suspicious activity "without any tipping 

off.'ma 

In 2002 and 2003, HSBC Group appointed a new Compliance head 

for HBMX, Ramon Garcia Gibson, formerly AML Director at 

Citibank's Mexican affiliate, Banamax; established an HBMX 

Compliance Department; hired additional staff; and installed a new 

monitoring system known as Customer Account Monitoring Program 

(CAMP) to detect suspicious activity. HBMX also hired a Money 

Laundering Deterrence (MLD) Director Carlos Rochin. Nevertheless, in 

2003, two inspection reports from Mexican authorities in January and 

August identified ongoing problems with the detection of suspicious 

transactions and the adequacy of the bank's Money Laundering 

encounter anybody at Bital who I thought immediately capable of building a Compliance 

department. "). 

228 "Compliance Due Diligence Trip by John Root: Bital (Mexico City) - 4-8 Nov02," prepared 

by HSBC John Root, HSBC OCC 8877802-807, at 1. 

229 Id. 

230 Id. 

231 Id. at 2. 

232 Id. at 4. 

2J3 Id. at 6. Mr. Root told the Subcommittee that he became aware of the HBMX Cayman 

accounts at that time, but thought they were servicing Cayman residents. Subcommittee 

interview of John Root (4/26/2012). 

234 ld. at 4-5. 
235 


76061.601

61 

Deterrence (MLD) handbook, which HSBC was then in the process of 

revamping. 235 

In January 2004, HSBC Group's Board of Directors met in Mexico 

to allow Board members to familiarize themselves with HBMX.236 

During the meeting, the Board's Audit Committee reviewed HBMX's 

ongoing internal control issues. The Audit Committee's minutes stated 

that, "after being part ofthe Group for some 15 months," HBMX had 

made "very significant progress in raising the standards of its controls. 

It will, however, probably take another two years to fully reach Group 

standards. From experience with other acquisitions this is not 

unexpected. ,,237 

Five months later, in May 2004, HBMX's internal auditors filed a 

report containing a number of criticisms of the bank's compliance and 

AML efforts, indicating that much still needed to be done to cure its 

AML deficiencies.238 Finding HBMX's AML function to be operating 

"Below Standard," the internal audit report stated: 

"HBMX has insufficient controls to detect money laundering 

transactions in all areas of the Group in a timely manner. The 

implementation of the CAMP system is in process yet it only 

includes the Bank's transactions that have been registered in the 

Hogan system and fails to monitor those registered in other IT 

systems/HBMX subsidiaries. 

Direccion de Prevencion de Lavado de Dinero [Direction of 

Money Laundering Deterrence] has identified high-risk areas of 

money laundering transactions, which are not being monitored. 

The communication between LCOs [Local Compliance Officers] 

and Compliance does not enable the timely detection of the needs 

and weaknesses of the areas and subsidiaries. 

There are inadequate internal controls over the IT systems used to 

send information to the regulator on suspicious or relevant 

transactions to authorities. 

235 See 1122 and 2612004 email exchanges among HBMX Ramon Garcia and HSBC John Root, 

Susan Wright, and David Bagley, "MLD Regulatory Report," HSBC GCC 8873393-394 

236 113012004 minutes ofHSBC Holdings pIc Board of Directors, section 0417. HSBC-PSIPRGD-0198571-5n. 

2.17 Id. at 572. 

238 May 2004 "Informe General de Auditoria HBMX GAQ 040026 Compliance-Money 

Laundering," prepared by HSBC Group's internal audit (Auditoria lnterna Del Groupo), HSI3C 

GCC 8874376-381. 
236 


76061.602

62 

In our opinion, based upon the foregoing, the Direction of Money 

Laundering Deterrence is operating with a BELOW STANDARD 

level of Control Risk.,,239 

Three months later, in August 2004, John Root, a senior HSBC 

Group Compliance officer, again visited HBMX to examine the status of 

its compliance and AML efforts, prepared a report, and sent it to senior 

officials at both HBMX and HSBC Compliance.24o The report indicated 

that, while substantial progress had been made over the past 18 months, 

AML deficiencies remained: 

"Senior management has made significant progress in introducing 

Group Compliance Policy and Standards in HBMX. The head of 

the Compliance department, Ramon Garcia Gibson, has set the 

foundation for an effective Compliance function. 

HBMX controls are much improved from the situation that existed 

12-18 months ago[.] However, Treasury back-office operations 

are a source of major regulatory concern, as is accurate and timely 

reporting to regulators .... 

[O]ne ofthe five commissioners ofthe CNBV ... states, 'In the 

business area [ofHBMX], the resources have arrived. In the area 

of controls, the resources have not arrived.' 

The CNBV gave us a 'fact sheet' in English with the following 

'main concerns' .... 

Anti-money laundering processes - Although 

improvements have been seen, some concerns remain 

regarding deficiencies in process (no system for unusual 

operations detection and a poor identification of public 

figures and high risk customers) and over control of 

Panama's branch operations .... 

In a wide-ranging discussion, CNBV regulators commented that 

any outsourcing must be able to be audited from Mexico. They do 

not want outsourcing to jurisdictions with strong banking secrecy. 

The Trusts department is struggling to improve the poor condition 

of its files. Notwithstanding a senior manager's optimism ['Most 

239 Id. at 4 (emphasis in original). 

240 "HBMX JulO4 GHZ CMP Visit Report," prepared by HSBC John Root, ESBC OCC 

8875567-575. See also 8/10/2004 email from HSBC John Root to HSBC David Bagley. Richard 

Bennett, Matthew King, David Leighton, and Susan Wright, and HBMX Sandy Flockhart and 

Ramon Garcia, transmitting the report, HSBC OCC 8875565-575. 
237 


76061.603

63 

of them, KYC is okay' and 'Most deficiencies are not related to 

KYC'], by far the greatest problem is missing KYC 

documentation. 

Of a total of 15,434 trusts, only 6,868 (41 %) have completed 

documentation. 2,955 (20%) of trusts have no documentation at 

all .... 

Around USD 16 billion arrive from the United States each year, 

mostly through the branch network. Money laundering risk is 

mitigated by several factors: (I) remittances are generally small 

(US200-300), according to two senior managers; (2) due diligence 

appears to be adequate on the AML procedures of US third-party 

money services businesses; and (3) CAMP Retail, a software 

programme to detect suspicious transactions, is scheduled to be 

installed in the branch network in NOV04. 

Recommendation: HBMX CMP [Compliance] should sample 

periodically remittances from the United States to determine if, in 

fact, remittances are generally small and in the ordinary course of 

business.,,241 

In September 2004, the CNBV conducted an inspection ofHSBC's 

AML efforts and, contrary to the more positive tone described by 

HBMX internally, found them unsatisfactory. According to an internal 

HBMX compliance report, a CNBV report summarizing the 2004 

inspection criticized HBMX for: 

"not considering the risk exposure ofthe customer to determine the 

appropriate visitation process, not implementing procedures to 

update annually the files of high-risk customers and politically 

exposed persons, not defining internal criteria to determine 

customers' risk exposure and a delay in formalizing the 

Communication and Control Committee ... responsible for sending 

SARs to the CNBV ... and issuing money laundering deterrence 

policies.,,242 

The Communication and Control Committee (CCC Committee, also 

called the Money Laundering Deterrence or MLD Committee), which 

was mandated by a 2004 Mexican law, was intended to act as the bank's 

primary internal unit to deter money laundering, so the delay in getting 

the committee underway was seen as a major AML deficiency. CNBV 

241 "HBMX JulO4 GHZ CMP Visit Report:' prepared by HSBC John Root, HSBC OCC 

8875567·575 (emphasis in original). 

242 "1 Q07 Compliance Report to the CIBM Audit Committee." prepared by the HBMX 

Corporate, Investment Banking and Markets (Private) Audit Committee, HSBC OCC 8873286-

287 (describing CNBV criticisms). 
238 


76061.604

64 

later fined HBMX more than $75,000 for the AML deficiencies 

identified in 2004, a fine which HBMX CIBM Compliance proposed 

contesting.243 

In early 2005, an internal HBMX whistleblower hotline disclosed 

that HBMX compliance officials had fabricated records of mandatory 

monthly meetings by the CCC Committee, and provided the false 

records to a local CNBV regulator. 244 An HBMX investigation 

determined that the false records consisted of attendance sheets and 

minutes for CCC meetings that should have taken place from July to 

December 2004, but did not.245 They were fabricated by ajunior 

employee at the direction of the HBMX Money Laundering Deterrence 

Director, Carlos Rochin, who then tendered his resignation and left the 

bank.246 Ramon Garcia, head ofHBMX Compliance and the CCC 

Committee chair, received a written warning and was barred from 

receiving what would have been a substantial bonus for his work in 

2004. David Bagley, head ofHSBC Group Compliance, wrote: 

"Overall RG [Ramon Garcia] has performed credibly, has worked 

very hard, and would otherwise be hard to replace. In the 

circumstances whilst we will need to keep his position under 

review at this stage I endorse the decision to retain his services 

given that his failure is limited to one of failing to supervise a very 

senior and trusted subordinate.,,247 

Mr. Bagley's internal report found that the HBMX AML staff was 

riven by dissension and resentment and may have "exact[ ed] retribution" 

against the MLD director for the dismissal of a colleague. His report 

concluded that Mr. Garcia would have to rebuild a "shattered Money 

Laundering Section.,,24s It also noted that CNBV "reiterated ... that, by 

comparison with other Mexican financial institutions, HBMX CMP 

[Compliance] appeared to be understaffed" and urged the bank to hire 

additional compliance personnel.249 

In May 2005, John Root, a senior HSBC Group Compliance 

officer, made another visit to HBMX for several days to evaluate its 

243 Id. 

244 See 112112005 email from HSBC David Bagley to HSBC Stephen Green and Richard 

Bennett. "Compliance Exception," HSBC OCC 8873671. 

245 Sce 211 612005 email from HSBC David Bagley to HSBC Stephen Green and Richard 

Bennett, "Disclosure Line - HBMX CMP," HSBC OCC 8873673; Feb. 2005 "HSBC 

Whist1eblower Item 15 - HBMX: Investigation Report - Executive Summary," prepared by 

Head of Group Audit Mexico (GAQ)(hereinaftcr "Whistleblower Report"), HSBC OCC 

8877877-885. 

246 Whistleblower Report at 5-6. 

247 2116/2005 email from HSBC David Bagley to HSBC Stephen Green and Richard Bennett, 

"Disclosure Line - HBMX CMP," HSBC OCC 8873673. 

248 Whistleblower Report at 7. 

2"ld. at 8. 
239 


76061.605

65 

compliance and AML efforts. As before, he later prepared a report and 

provided it to colleagues at HSBC Group and HBMX. In a separate 

email transmitting the report six weeks later, Mr. Root noted that the 

HBMX MLD director who resigned in January 2005, had not been 

replaced despite the passage of six months, and a new director needed to 

be appointed "as soon as possible in order to reorganize promptly a 

demoralized department and improve AML controls.,,250 The email 

noted the importance of "an independent, effective professional in the 

sensitive role of head of AML in Mexico." He also observed that 

"[p ]rojects are started but seldom completed, perhaps because of the 

many ministerial tasks that have accrued since the departure" of the 

MLD director. Mr. Root wrote: 

"As you of course know, the work has piled up in the Compliance 

department, and Ramon needs help with the backlog. It is true that 

we have increased staff in the department, but they are mostly 

entry-level analysts in need of direction. It is important we hire an 

MLCO [Money Laundering Control Officer] as quickly as 

possible, and perhaps also a sort of 'operating officer' for Ramon 

to enable him to bring the department up to Group Standards.',251 

Mr. Bagley forwarded the Root email to a colleague and commented that 

"until we have the right amount and mix of resources I cannot see [how] 

Ramon can make progress.',252 Later that year, Leopoldo R. Barroso 

was appointed MLD director for HMBX. 

In November 2005, Richard Bennett, then HSBC Group General 

Manager of Legal and Compliance and the person to whom David 

Bagley, head ofHSBC Group Compliance, reported, paid a brief visit to 

HMBX.253 While there, he met with the bank's CNBV regulators who 

raised a variety of compliance issues. According to an email sent by Mr. 

Bagley, the concerns included the nature of the HBMX accounts in the 

Cayman Islands; the referral of clients to Mexico by other HSBC 

affiliates, especially in France; and access to HBMX AML information 

from other countries, in particular the United Kingdom. 

In December 2005, HBMX's internal audit group produced a 55-

page report identifying a host of compliance and AML problems at the 

bank.25 It found that HBMX Compliance had improved, but still rated 

250 7/6/2005 email from HSBC John Root to HSBC David Bagley, Susan Wright, and David 

Leighton, "Visit to HBMX - 18 - 25 May 2005," HSBC OCC 8876670-671. 

251 Id. 

252 7/6/2005 email from HSBC David Bagley to HSBC Richard Bennett, "Visit to HBMX - 18 

25 May 2005," HSBC OCC 8876670. 

253 See 11115/2005 email from HSBC David Bagley to HSBC John Root, "HRMX - Compliance 

Issues," HSBC OCC 8873264-266. 

254 See Dec. 2005 "Informe de Auditoria General: HBMX - Direccion de Compliance," prepared 

by Mexico Group Audit, HSBC OCC 8876223-280. 
240 


76061.606

66 

it "Below Accepted Levels." Major deficiencies included a failure to 

make full use ofthe new CAMP monitoring system, a failure to ensure 

its monitoring parameters met local requirements, inefficient monitoring 

processes which made detection and analysis of alerts difficult, failure to 

apply CAMP to foreign remittances and HBMX subsidiaries, inadequate 

SCC risk grofiles, failure to complete a MLD work plan, and inadequate 

training? 5 

The audit report was actually issued to HBMX in the spring of 

2006, and its findings were hotly contested by the HBMX MLD 

Director, Leopoldo Barroso?56 He communicated his views to HSBC 

Group Compliance and complained that the bank would be required to 

forward the audit report to the CNBV, which would not only create a 

"misleading" impression, but also would contradict a recent rresentation 

HBMX had made on how its AML controls had improved.25 John 

Root, senior HSBC Group Compliance officer, forwarded HBMX 

AML's response to the audit findings to Susan Wright, head of AML 

and David Bagley, head of Compliance for HSBC Group.258 Mr. Root 

commented: 

"[T]he audit points are being strongly rejected by HBMX AML. 

AML is also alleging errors of procedure .... Many, ifnot most, of 

the recommendations were 'rejected' or downgraded in importance 

by AML, which is certainly a heartfelt, but rather unusual formal 

reaction, to an audit. Most of just accept audit recommendations, 

whether perceived to be 'fair' or not, and proceed to implement 

them. 

I have let the dust settle a bit, as AML management clearly feel 

aggrieved, but closer monitoring is warranted on the specific audit 

recommendations. . .. 

[T]he one that most sticks out is apparent lack of monitoring of the 

(relatively few) AML staff in the field. This raises a 'red flag' in a 

place like Mexico, where the drug cartels are very powerful and 

ubiquitous .... To aver, as the audit does, that 'we do not really 

know what our man in the field is doing' is a warning sign, if true. 

AML of course vigorously deny this." 

Mr. Barroso's email responding to the internal audit noted that HBMX 

MLD had also recently been audited by CNBV and expected to receive a 

255 Id., Executive Summary. 

256 See 5117/2006 email from HSBC John Root to HSBC Susan Wright and David Bagley, 

"Internal Audit Reports," attaching 5/8/2006 email from Leopoldo Barroso and a chart entitled, 

"Internal Audit Main Findings to MLD," HSBC acc 8874383-392. 

257 Id.392 

258 Id. 383. 
241 


76061.607

67 

satisfactory rating, with only two requirements for improvements and 

several recommendations.259 

HSBX's internal audit group continued to conduct compliance and 

AML examinations of HBMX offices and branches. In September 2006, 

for example, it examined operations at four HBMX district offices, each 

with more than 15 branches, located in the cities ofPuebla, Morelos, and 

Juarez.260 All four district offices were found to be operating "Below 

Standard" with respect to their risk controls, which was the same low 

rating each had received the prior year. For example, all four were 

found to have KYC and "file integrity" issues that "failed to comply 

with Group policies.,,261 One district office was found to lack 

knowledge of the procedures to identify Special Category Clients 

(SCCS).262 All four district offices had five or six repeat 

recommendations from prior audits that had yet to be resolved. All four 

summary reports were circulated to HSBC Group Compliance senior 

officials.263 

In October 2006, HBMX's Compliance head Ramon Garcia 

informed HSBC Group Compliance that HBMX's Money Laundering 

Deterrence (MLD) Committee had adopted a policy that would require 

HBMX to consider closure of an account after four Suspicious Activity 

Reports (SARs) had been filed with respect to an account's activity?64 

In response, John Root, senior HSBC Group Compliance officer, 

responded: "4 SARs seems awfully indulgent, even by local standards. 

At any rate, it is against Group policy, as Susan ~Wright] points out, so 

you will need to seek an official dispensation.,,26 A "dispensation" was 

needed, because HSBC Group Policy No. GPP25 required accounts to 

be closed after two SARs were filed. The next day, HBMX informed 

HSBC Group Compliance that, rather than seek an official exception, it 

259 ld. 384. 

260 See September 2006 "Group Audit Mexico Audit Report Summary Schedule: GHQ 

Reportable Audits," for PFS Puebla ZOI C31 District Office (with 17 branches), PFS Puebla ZOI 

C23 District Office (17 branches), PFS Morelos ZOI A20 District Office (19 branches and I 

Module), and PFS Ciudad Juarez Z03 B02 District Office (21 branches and I custom module), 

HSBC OCC 8876717-720. 261 1d. 

262 Id. at HSBC OCC 8876718. 

263 See 10/912006 email from HSBC David Bagley to HSBC John Root, forwarding message 

[rom HSBC Matthew King, "HBMX B/S and U Audit Report Summary for SEP06," HSBC 

OCC 8876715 (transmitting audit report summaries). See also August 2005 "General Audit 

Report: HBMX - PFS Torreon District (Z04 COl )," prepared by Group Audit Mexico, HSBC 

OCC 8876677-680 (finding a district office with 22 branches operating "Below Standard," with 

"In]o significant progress ... since the previous audits and 11 repeat recommendations"). 

2 4 See 10/17-18/2006 email exchanges among HBMX Ramon Garcia and Leopoldo Barroso 

and HSBC John Root, David Bagley, Susan Wright, and Emma Lawson, "2Q06 HBMX 

Compliance Report," and "Compliance with GPP 25," HSBC OCC 8876711-713. 

265 10/1712006 email from HSBC John Root to HBMX Ramon Garcia, with copies to HSBC 

David Bagley and Susan Wright, "2Q06 HBMX Compliance Report," HSBC OCC 8876713. 
242 


76061.608

68 

had decided to adopt the Group policy and would consider account 

closure after two SARS were filed, rather than four. 266 

Unimed and Ye Gon Scandal. In 2007, HBMX learned that one 

of its longstanding clients was accused of involvement with illegal drug 

trafficking. On March 15,2007, in ajoint effort with the U.S. Drug 

Enforcement Administration (DEA), the Mexican Government seized 

over $205 million in U.S. dollars, $17 million in Mexican pesos, 

firearms, and international wire transfer records from the residence of a 

wealthy Chinese-Mexican citizen, Zhenly Ye Gon. 267 The cash, which 

had been hidden in a secret locked room in the residence/68 was 

described as the largest cash seizure in a drug-related case in history.269 

Mr. Ye Gon, a prominent businessman, was the owner of three 

Mexican corporations involved in the pharmaceutical field, Unimed 

Pharm Chern Mexico S.A. de C.V.; Constructora e Inmobiliaria Federal 

S.A. de C.V.; and Unimed Pharmaceutical, S.A. de c.V.270 He was 

accused of using his corporations to import, manufacture, and sell 

chemicals to drug cartels for use in manufacturing methamphetamine, an 

illegal drug sold in the United States.271 He was also accused of 

displaying "significant unexplained wealth," despite reporting no gross 

income for his companies for the years 2005, 2006, and 2007.272 In June 

266 See 10117-1812006 email exchanges among HBMX Ramon Garcia and Leopolda Barroso 

and HSBC John Root, David Bagley, Susan Wright, and Emma Lawson, "Compliance with GPP 

25;' HSBC acc 8876711-713. GPP 25 stated: "Where the customer is the subject of more 

than one validated suspicious transaction/activity report, then serious consideration should be 

given to closure of the relevant account/s and any other connected accounts." Despite adopting 

the Group policy generally to close an account after two SARs, HBMX apparently did a poor job 

of implementation. In November 2007, Mr. Garcia revealed at an HSBC conference that HBMX 

had "'numerous cases of accounts with multiple SARs (16 in onc case!!) in Mexico that remain 

open." In response, Ms. Wright asked Warren Learning 10 "follow up with Ramon" 10 

strengthen compliance with the Group policy on closing accounts with SARs. 1111612007 email 

from HSBC Susan Wright to HSBC Warren Learning, copy to David Bagley, "Mexico," HSBC 

acc 8875423. 

267 See In re Zhenly Ye Gon, Case No.1 :07-cr-00181-EGS (USDC DC), Complaint for Arrest 

with a View Towards Extradition (9/15/2008) (hereinafter "Ye Gon Extradition Complaint"), at 

13; "Mexican Fugitive and Co-Conspirator Arrested on U.S. Drug, Money Laundering Charges," 

U.S. Drug Enforcement Administration press release (712412007), 

http://www.justice.gov/deafpubs/states/newsrelfwdo072407.htmI. 

268 See Yc Gon Extradition Complaint at 13. 

269 See, e.g., "Mexico seizes $20S.6M from luxury house," Associated Press, Joan Grillo 

(3/22/2007). 

270 Sec Ye Gon Extradition Complaint at 6. 

271 Id. aI6-15; "Mexican Fugitive and Co-Conspirator Arrested on U.S. Drug, Money 

Laundering Charges," U.S. Drug Enforcement Administration press release (7/24/2007), 

http://www.justice.gov/deafpubs/states/newsrelfwdo072407.htm!. See also DEA testimony, 

"Violence Along the Southwest Border," (3/24/2009), at 8, before the U.S. House 

Appropriations Subcommittee on Commerce, Justice, Science and Related Agencies (describing 

seizures from a "phannaceutical company CEO who facilitated the importation of metric-ton 

~uantities of ephedrine for the Sinaloa cartel's methamphetamine-manufacturing operations"). 

22 Ye Gon Extradition Complaint at 12. The extradition complaint stated that in addition to 

transferring millions of dollars in U.S. currency abroad, Mr. Ye Gon engaged in a "lavish 

lifestyle, which included purchasing expensive cars and jewelry, and gambling (and losing a net 

sum of approximately $125 million U.S. dollars) in Las Vegas, Nevada." Id. at 12-13. 
243 


76061.609

69 

2007, Mr. Ye Gon was indicted in Mexico on drug, firearm, and money 

laundering charges, but could not be 10cated.273 In July 2007, he was 

arrested in the United States, imprisoned, and indicted by U.S. Federal 

prosecutors for aidin~ and abetting the manufacture of 

methamphetamine.27 Two years later, in 2009, U.S. prosecutors 

dismissed the charges, after a witness recanted key testimony.275 Mr. Ye 

Gon has remained imprisoned, however, subject to proceedings to 

extradite him to Mexico to stand trial.276 Since his arrest, he has 

continually proclaimed his innocence.277 

Mr. Ye Gon and his corporations were longtime clients ofHBMX 

as well as other banks and casas de cambio in Mexico. One news article 

reported that the Mexican Ministry of Finance and Public Credit (SHCP) 

had determined that, from 2003 to 2006, Mr. Ye Gon and his companies 

moved $90 million through 450 transactions involving four major 

Mexican banks, HBMX, Banamex, BBV Bancomer, and Banco 

Mercantil Del Norte, and multiple currency exchanges, including Casa 

De Cambio Puebla and Consultoria Internacional Cas a De Cambio.27B 

The March 2007 seizure of cash and weapons from Mr. Ye Gon's 

residence triggered an intense review of his accounts by HBMX and 

HSBC Group.279 According to internal HBMX documents, the Unimed 

accounts were opened by Bital, retained by HBMX, and housed in 

HMBX's Personal Financial Services (PFS) division, even though the 

official clients were corporations and should not have been serviced by 

the PFS division?80 The accounts were not designated as high risk, 

despite unusual transactions that had attracted bank attention several 

times from 2003 to 2007.281 John Root told the Subcommittee that 

2JJ Ye Gon Extradition Complaint at 3-6 (describing Mexican Criminal Case No. 25/2007); 

"Mexican Fugitive and Co-Conspirator Arrested on U.S. Drug, Money Laundering Charges," 

U.S. Drug Enforcement Administration press release (7/24/2007), 

http://www.justice.gov/deaipubs/states/newsrellwdo072407.html. 

274 In re Zhenly Ye Gon, Case No. I :07-cr-00181-EGS (USDC DC), Indictment (7/26/2007). 

275 See id., Order (8/28/2009); "Mexico, the DEA, and the Case ofZhenli Ye Gon," Washington 

Post, Jorge Carrasco (I 0/29/2008), http://www.washingtonpost.com/wp-dynlcontent/article/ 

20081l 0/281 AR20081 0280 I 364..Jlf.html. 

276 See Ye Gon Extradition Complaint. 

277 See, e.g., "Mexico, the DEA, and rhe Case ofZhenli Yc Gon," Washington Post, Jorge 

Carrasco (10/29/2008), http://www.washingtonpost.com/wpdl.n/contentlarticle/200811 0/281 ARl0081 0280 1364..Jlf.html. 

2 , 10/13/2007 "Reportan ruta de Ye Gon para 'blanquear' dinero" ("Ye Gon reported path to 

'launder' money"), EI Universal, Francisco Gomez, 

http://www.eluniversal.com.mx/nacionl155016.html. cited in 711812008 Report of Findings 

(Update) for Consultoria Inemacional Banco, prepared by fIBUS Financial Intelligence Unit, 

HSBC OCC 1822420-434, at 422. 

279 See 41l9-20/2007 email exchanges among HBMX Paul Thurston, Sandy Flockhart, Grabam 

Tomson, Ramon Garcia, and others and HSBC David Bagley, Matrhew King, and others, 

"Management Letter: HBMX-[subject redacted by HSBC]," HSBC OCC 8875010-014. 

280 See 3/20/2007 email from HBMX Leopoldo Barroso to HSBC Paul Thurston, and others, 

"pubject redacted by HSBC)," HSBC OCC 8874315-16. 

2,1 See, e.g., 3/16/2007 email from HBMX Leopolda Barroso to HSBC David Leighton and 

HBMX Ramon Garcia, "[subject redacted by HSBC)," HSBC OCC 8874317-318; 4/20/2007 
244 


76061.610

70 

during the 2003-2004 timeframe, the Unimed account had attracted the 

attention ofHBMX regulators, and Susan Wright had instructed HBMX 

to terminate the relationship altogether.282 He said that the HSBC Group 

did not realize the account was still open, until he and Ms. Wright saw 

the press articles regarding Unimed in 2007. 

When the scandal broke, Paul Thurston, who had been appointed 

in February as HSBC Mexico CEO after the former head, Alexander 

Flockhart, was promoted, wrote: "This is a very serious, and high 

profile, case which has potential reputational damage to the HSBC 

Group, and must be given the highest priority.,,283 

Mr. Thurston personally oversaw an extensive review of the 

accounts and HMBX's AML controls.284 When the head ofHSBC Latin 

American internal audits, Graham Thomson, was asked to summarize 

the AML deficiencies that contributed to the bank's maintaining such a 

high risk account, Mr. Thomson wrote in part: 

"The main systemic weaknesses in HBMX, which I believe remain 

outstanding, are as follows: 

KYC as identified in branch and continuous audit reports. 

The lack of adequate documentation and filing systems which 

remain from the former Bital days .... 

Lack of a compliance culture .... ,,285 

His criticisms about the lack of a compliance culture and poor KYC 

documentation echoed the criticisms made five years earlier, when 

HSBC first purchased Bital. 

HBMX's internal review determined that, in 2005 and several 

times thereafter, concerns about suspicious activity involving the 

Unimed account had been brought to the attention of the HBMX Money 

Laundering Deterrence Communication and Control Committee (CCC 

Committee).286 The CCC Committee apparently initially advocated 

email from HSBC Matthew King to HSBC Michael Geoghegan. and copy to David Bagley, 

"Managerial Letter: HBMX-[redacted by HSBC]," HSBC OCC 8874762. 

282 Subcommittee interview of John Root (4/26/2012). 

283 312012007 email from HMBX Paul Thurston to Leopoldo Barroso. Sandy Flockhart, and 

others, [subject redacted by HSBC], HSBC OCC 8874316-317. 

284 See, e.g., March and April 2007 email exchanges involving HBMX Paul Thurston and 

multiple HBMX and HSBC colleagues, "[subjcct redacted by HSBC]," HSBC OCC 8874315-

326 and HSBC OCC 8875010-014. 

285 4/2/2007 cmail from HBMX Graham Thomson to HSBC Matthew King and others, "Group 

Audit Committee - APR07," HSBC OCC 8874328-329. 

286 See, e.g., 4/20/2007 email from HBMX Graham Thomson to HSBC Matthew King and 

others, "Management Letter: HBMX-[subject redacted by HSBC]," HSBC OCC 8875010-011; 

3/20/2007 email from HBMX Leopolda Barroso to HBMX Paul Thurston and others, "[subject 

redacted by HSBC]," HSBC OCC 8874315-16; 3116/2007 email from HBMX Leopoldo Barroso 

to HSBC David Leighton and HBMX Ramon Garcia, "[subject redacted by HSBC]," HSBC 

oce 8874317-318. 
245 


76061.611

71 

closing the account, but then relented, in part because the Personal 

Financial Services (PFS) division where the account was located had, as 

one HBMX email put it, "argued that the client was fine, properly 

documented, and known by the business.,,287 The key PFS official who 

vouched for the client apparently later claimed he'd been "lied to" by 

other bank personnel.28 The review also uncovered falsified "KYC visit 

reports," documenting site visits to the client which had not actually 

taken place.289 In addition, the review criticized poor analysis of the 

alerts which had spotted the "unusual" account activity.290 One email 

noted that other Mexican banks with Unimed accounts "had not reported 

the customer to the authorities, despite hosting apparently unusual 

transactions similar in nature to those recorded by HBMX.,,291 

As a result of the Unimed scandal, Mr. Thurston develo~ed seven 

action items to strengthen HBMX's AML and KYC efforts.29 They 

included reviewing the personnel assigned to the HBMX CCC 

committee and reminding CCC members ofthe need to take "an 

independent view" and to be "prepared to challenge their colleagues"; 

ensuring CCC minutes clearly identified the decisions taken; revamping 

KYC "analysis, assessment and reporting procedures" to ensure "higher 

risk cases are brought to senior management attention"; providing 

additional training on KYC assessment reports; transferring all 

corporations out ofthe Personal Financial Services division; and 

dismissing all branch staff involved with completing the falsified KYC 

reports.293 Mr. Thurston also described the need to bring individual 

initiatives to improve KYC procedures, account opening and file 

maintenance into "one coherent programme" with "appropriate 

emphasis.,,294 In addition, he described holding a special CCC 

Committee meeting within a week to review cases with similar patterns 

287 311 6/2007 email from HBMX Leopoldo Barroso to HSBC David Leighton and HBMX 

Ramon Garcia, "[subject redacted by HSBC]," HSBC OCC 8874317-318. 

288 4120/2007 email from HBMX Graham Thomson to HSBC Matthew King and oiliers, 

"Management Letter: HBMX-[subject redacted by HSBC]," HSBC OCC 8875010-011. See also 

411 8/2007 email from HSBC Matthew King to HBMX Graham Tomson, "Managerial Letter: 

HBMX-[redacted by HSBC]," HSBC OCC 8875013-014. 

'" See 4/20/2007 email from I!BMX Graham Thomson to HSBC Matthew King and others, 

"Management Letter: HBMX-[subject rcdacted by HSBC]," IlSBC OCC 8875010-011; 

4/18/2007 email from HSBC Matthew King to HIlMX Graham Tomson, "Managerial Letter: 

HIlMX-[redacted by HSBC]," HSIlC OCC 8875013-014; Subcommittce interview of Paul 

Thurston (511/2012). 

290 See 4/20/2007 email from HBMX Graham Thomson to HSBC Matthew King and others, 

"Management Letter: HIlMX-[subject redacted by HSBC]," HSBC OCC 8875010-011; 

4/1812007 email from HSBC Matthew King to HBMX Graham Tomson, "Managerial Letter: 

HBMX-[redacted by HSBC]," HSIlC OCC 8875013-014. 

2914/20/2007 email from HBMX Graham Thomson to HSBC Matthew King and others, 

"Management Letter: HBMX-[subject redacted by HSBC]," HSBC OCC 8875010-013. 

292 See 411 9/2007 email from Paul Thurston to multiple HBMX colleagues, "[subject redacted by 

HSBC]," HSBC OCC 8875011-014. 

293 Id. at HSBC OCC 8875012. 294 Id. 
246 


76061.612

72 

and other high risk cases?95 He also directed the internal audit group to 

conduct a review ofHBMX's AML and CCC processes.

296 

The most senior levels ofHSBC Group were kept informed about 

the case. On April 20, 2007, for example, Matthew King, head ofHSBC 

Group Audits, sent an email to HSBC Group CEO Michael Geoghegan 

with this update: 

"I am told the Mexican authorities are taking a relatively benign 

attitude to our involvement with this customer, which is fortunate 

because the review has revealed a number of weaknesses. A series 

of inaccurate, and possibly fabricated, visit reports seem to have 

been filed by the business which resisted any reporting of 

suspicions a number oftimes. For its part, the Moneylaundering 

Department failed to act as a proper check and balance. I have 

suggested a thorough review of processes within the 

Moneylaundering Department and of the Moneylaundering 

Committee to ensure they are robust. ... There are also a number 

of personnel decisions to be taken.,,297 

Neither HBMX nor HSBC Group informed HBUS about the case.298 

The Unimed scandal broke nearly five years after HSBC first 

began working to strengthen HBMX's AML controls and create a 

compliance culture. It showed that, while progress had been made, 

HBMX still had mUltiple AML deficiencies and a poor compliance 

culture. 

2007 AML Efforts. For the rest of2007, HSBC Group 

Compliance devoted attention and resources to strengthening AML 

controls at HBMX, with limited success. 

One step taken was to task the new HBMX Chief Operating 

Officer, John Rendall, with overseeing HBMX's KYC remediation 

effort for existing client files, an effOli mandated by CNBV authorities 

but far behind schedule.299 Mexican regulators had given Mexican 

banks until 2007, to update the KYC information in all customer files; 

295 ld. at HSBC OCC 8875012-13. HBMX did not identify any other corporate clients with a 

similar profile. Subcommittee interview of Paul Thurston (5/1/2012). 

196 This review produced an audit report in December 2007, discussed below. See Dec. 2007 

"General & Transactional Banking Audit: HBMX - Money Laundering Deterrence," prepared 

bl, Group Audit Mexico, HSBC OCC 8874802-810. 

1 7 4/2012007 email from HSBC Matthew King to HSBC Michael Geoghegan, and copy to David 

Bagley, "Managerial Letter: HBMX-[redacted by HSBC]," HSBC OCC 8874762. 

298 Subcommittee interview of Paul Thurston (5/112012). 

199 See, e.g., 212712008 email from HBMX Paul Thurston to HSBC Michael Geoghegan and 

others, "CNBV/FIU Update," HSBC-PSI-PROD-0198510-511. 
247 


76061.613

73 

HBMX had obtained an extension until May 2008, but expected to be 

hard pressed to meet the new deadline.30o 

In June 2007, David Bagley, HSBC Group Compliance head, 

visited HBMX for several days, met with CNBV officials, and circulated 

a report on the outstanding compliance and AML issues. In an email 

transmitting his report, Mr. Bagley wrote: 

"[T]here do appear to be a number of issues to be resolved, 

particularly those relating to accurate ongoing account opening, 

prompt effective and complete remediation in accordance with 

CNBV requirements for existing accounts, and completion of the 

recommended enhancements to the working of the MLD 

committee. ... [W]e will need on an ongoing basis to consider 

the nature and extent of the resources currently available in CMP 

[Compliance] .... I suspect we are already stretched given the 

apparent growth that has already, or is intended to take place in 

this area which appears to be growth of both volume and 

complexity.,,301 

His five-page report detailed a number of compliance and AML 

problems.1D2 First was HBMX's anticipated failure to meet a Mexican 

regulatory deadline for reviewing the KYC information for all existing 

accounts to ensure compliance with regulatory requirements. The report 

noted: "There appeared to be differing opinions as to how many 

accounts were affected, how many accounts were outstanding and 

therefore no real tracking of the progress being made." The report 

recommended reaching a consensus on the method for tracking accounts 

and completing the task. The report also expressed concern about KYC 

weaknesses in opening new accounts. It noted: "If we are opening new 

accounts badly it will only add to the remediation exercise required by 

CNBV .... Accurate and complete account opening is a key AML 

control, particularly in emerging markets." A third key issue was 

"confusion as to the stated aims and purpose of the MLD Committee." 

A fourth was that "the CAMP monitoring system produces significant 

numbers of 'false' alerts. This is a feature of all AML monitoring 

300 See 7/27/2007 minutes of LAM Regional Audit Committee, HSBC acc 8875086-088, at 3 

("CNBV has granted a I-year extension to MA Y08 for HBMX to regularize customer 

identification files for account[s] opened or contracts signed before MA Y04."); 12/2007 audit of 

"HBMX-Money Laundering Detcrrence (MLD)," No. HBMX GAQ 070086, prepared by HSBC 

Group Audit. Executive Summary, HSBC acc 8876347 ("HBM! has been given an extension 

by the Regulator from May 07 to May 08 to ensure that a portion of the client tiles (known as the 

UBA project - about 1.8m customers) are completed.'} 

301 6127/2007 email from HSBC David Bagley to HBMX Paul Thurston and others, "Visit 

Report." HSBC acc 8874967-968. Mr. Bagley visited Mexico and Panama from June II to 

June 14, 2007. See 7/27/2007 Minutes of LAM Regional Audit Committee, HSBC OCC 

8875086-090, at 3. 

302 June 2007 "Summary of Compliance Issues - Mexico," report prepared by David Bagley, 

HSBC OCC 8874970-974. 
248 


76061.614

74 

systems. Having said this, steps are being taken across the Group to 

seek to minimize this," and recommended that similar steps be taken in 

Mexico. A fifth concern was that the compliance team was "lightly 

resourced." 

The report also discussed a "cordial" meeting held with CNBV 

regulators. It said that the regulators were "overall extremely positive 

about the bank" but also "had a fairly lengthy list of issues," most of 

which focused on compliance matters other than AML issues.303 Paul 

Thurston, head of HSBC Mexico, thanked Mr. Bagley for the 

"constructive report." He wrote: 

"\ agree with your comment that we need to review the role and 

resources in the Compliance function .... For all Ramon's 

strengths, I have equally seen weaknesses in addressing key issues 

... and in my view the jury is out on his ability to do all that we 

need in HBMX, let alone try to oversee other countries in the 

region .... [W]e should review between the three of us in a few 

month's time, when we see what progress is being made.,,304 

The very next month, July 2007, John Root, a senior HSBC Group 

Compliance officer, sent a blistering email to Ramon Garcia 

condemning HBMX's CCC Committee for "rubber-stamping 

unacceptable risks": 

"A number of items jump out from your most recently weekly 

report (02JUL-06JUL) but everything pales in comparison with the 

ML items on page 4. It looks like the business is still retaining 

unacceptable risks and the AML committee is going along after 

some initial hemming and hawing. I am quite concerned that the 

committee is not functioning properly. Alarmed, even. I am close 

to picking up the phone to your CEO. 

[Redacted by HSBC] looks like another [UnimedJ05] type of 

situation - what on earth is an 'assumption responsibility letter' 

and how would it protect the bank if the client is a money 

launderer? Please note that you can dress up the USD I 0 million to 

be paid ... to the US authorities as an 'economic penalty' if you 

wish but a fine is a fine is a fine, and a hefty one at that. What is 

this, the School of Low Expectations Banking? ("We didn't go to 

jail! We merely signed a settlement with the Feds for $ 10 

million!") ... 

JOJ Id. at 3. 

l04 6/29/2007 email from HBMX Paul Thurston to HSBC David Bagley and John Rendall, "Visit 

Report," HSBC OCC 8874965. 

lOS Although the client name was redacted from the document by HSBC, John Root confirmed 

that Mr. Thurston was referring to Unimed. Subcommittee interview of John Root (412612012). 
249 


76061.615

75 

So, [Unimed306] is strike one. [Redacted by HSBC] is strike two. 

Let's now look at strike three. (I hope you like baseball.) 

The same person who is giving the sancrosanct 'assumption 

responsibility letter' for [Redacted by HSBC] ... is being asked by 

the CEO to explain why he retained the [Casa De Cambio 

Puebla307] relationshi~ after USCll million was seized by the 

authority in [Puebla3o ] account with Wachovia in Miami. What?! 

The business was okay with this? 

The AML Committee just can't keep rubber-stamping 

unacceptable risks merely because someone on the business side 

writes a nice letter. It needs to take a firmer stand. It needs some 

cojones. We have seen this movie before, and it ends badly.,,309 

Mr. Garcia responded that he was escalating the two cases 

involving high risk clients as part of a revised AML procedure in the 

CCC Committee.3lO He explained that Mexican law essentially required 

the CCC committee to give great weight to the opinion ofthe business 

side of the bank, because "they are the ones that really know the 

customer." He said that he had escalated the cases to the HBMX CEO, 

because MLD had "a different opinion" from the business "about 

reporting the case to authorities." Essentially, he said that the final 

decision belonged to the HBMX CEO, rather than the CCC Committee. 

The next week, Paul Thurston, HSBC Mexico CEO, supported the 

CCC Committee's recommendation to close one ofthe accounts, but not 

the other. He supported closing the account of Casa de Cambio Puebla, 

which had been a client for more than 20 years, but whose funds at 

Wachovia Bank had been seized by the U.S. Justice Department and 

Drug Enforcement Administration (DEA).311 Mr. Thurston cautioned 

John Rendall, the HBMX ChiefO~erating Officer, to alert CNBV and to 

ensure CNBV had "no objection." 12 Mr. Rendall also suggested 

alerting their U.S. counterparts since HBUS had the same relationship 

with the c1ient.3Il The second account involved a U.S. money services 

306 Id. 

307 Although the client name was redacted from the document by HSBC. the reference to a 

seizure 0[$11 million from Wachovia Bank in Miami indicates that the client is Casa de Cambio 

Puebla, See discussion below. l08 Id. 

3n9 7/1712007 email from HSBC John Root to HBMX Ramon Garcia, with copies to Susan 

Wright, David Bagley. and Warren Learning, "Weekly Compliance Report 02JUL-06JUL07." 

HSBC OCC 8875925-927. 

lIO 71I 8/2007 email from Ramon Garcia to HBC David Bagley, "Wcekly Compliance Report 

02JUL-06JUL07," HSBC acc 8875925. 

311 Sce July 2007 email exchanges among HBMX Paul Thurston, John Rendall, Ramon Garcia, 

and others, "[subject redacted by IISBe], HSBC acc 8875132-135. 

Ji2 ld. at 132. 

mId. 
250 


76061.616

76 

business, Sigue Corporation, which specialized in remitting funds from 

the United States to Mexico and Latin America. Mr. Thurston, on the 

advice ofMr. Rendall and the commercial banking division, kept that 

account open.

314 

Later in July, the HSBC Latin American (LAM) Regional Audit 

Committee held a meeting in Mexico.315 Participants included HSBC 

Group Compliance officials Brian Robertson, David Bagley, and 

Matthew King; LAM/HBMX officials Paul Thurston, Emilson Alonso, 

and Graham Thomson; HBMX Compliance head Ramon Garcia; and 

others from HSBC affiliates throughout Latin America. Mr. Thomson, 

head of LAM Internal Audit, discussed risk and compliance issues in 

several countries, and noted that Regional CEOs were now required to 

"take disciplinary action should a manager record 2 consecutive Below 

Standard control risk assessments or record significant repeat 

recommendations.,,]16 With respect to Mexico, Mr. Thomson noted that 

although 96% ofHBMX electronic records reportedly met regulatory 

requirements, there was a "high level of exceptions and variance 

between the paper and electronic records" which would require "a large 

rectification effort" to meet the regulatory deadline of May 2008.317 He 

also noted that branch offices were not sufficiently familiar with SCC 

requirements, and criticized the CCC Committee for failing to followup 

on instructions to close client accounts. Mr. Thurston noted that the 

CCC Committee was introducing an escalation process to senior 

management to resolve disputes over closing accounts.3lB Ramon 

Garcia also reported that automation problems were causing delays in 

the issuance of Suspicious Activity Reports (SARs), but that interim 

manual reviews had not detected activity requiring any SARs to be 

fiJed.319 He also described a new pilot project at 94 HBMX branches to 

centralize management and control of account documentation using 

electronically imaged documents. 

CNBV Escalates Concerns. Two months later, in October 2007, 

the CNBV asked to meet with Paul Thurston, the HSBC Mexico CEO, 

to express ongoing concerns about HBMX's compliance and AML 

314 See 21412008 email [rom HIlMX John Rendall to HBMX Paul Thurston, "[redacted by 

HSBC]," HSBC OCC 8875139-141 and HSBC OCC 8875020-021. Six months later, in January 

2008, Sigue Corporation entered into a deferred prosecution agreement with the U.S. Justice 

Department, admitting that some of its agents had been laundering drug proceeds. See United 

States v. Sigue Corp. and Sigue LLC, Case No. 4:08CR54 (USDC EDMO), Deferred 

Prosecution Agreement Factual Statement (112812008). HIlMX's relationship with Sigue 

Corporation is discussed further below. 

31S See 712712007 Minutes ofl.AM Regional Audit Committee, HSIlC OCC 8875086-090. 

316 Id. at 2. 

317 Id . 

.118 Id. Mr. Thurston explained that if compliance and business personnel disagreed over closing 

an account, the dispute would be escalated to the HBMX COO, and then to the CEO. In addition 

if a business wanted to close an account, a higher ranking Executive Director would have to 

make the decision. Subcommittee interview of Paul Thurston (511/2012). 

319 Id. at 3. 
251 


76061.617

77 

efforts. Mr. Thurston summarized the meeting in an email to the HSBC 

Group CEO Michael Geoghegan.320 He wrote: 

"At their request, I met today with the Head of Banking 

Supervision, and the Supervisor for HSBC, from our regulator, the 

CNBV, following their on site examination of various aspects of 

our business, including cards, money laundering, and treasury 

operations. . .. 

They walked me through a presentation pack which firstly set out 

specific points ... but then moved on to more general concerns of 

the CNBV with HSBC in Mexico. These centered on: 

- weaknesses in internal controls ... slow progress in tackling 

KYC data problems and anti money laundering procedures. 

- corporate culture, where they comment that ... HSBC has driven 

growth in credit products and launched new products without 

adequate controls .... 

They also expressed concerns at senior management having dual 

responsibilities for Mexico and the region, stating that 'there are 

many concerns on how management will be able to implement 

strong controls within the bank in Mexico, while keeping an eye on 

other countries.' ... 

I indicated to them we were aware of these issues and were 

progressively tackling them.,,321 

His email then outlined the steps he told CNBV that HBMX was 

taking, including new hires, "customer file centralizing and imaging 

which would give us more robust KYC data for anti-money laundering," 

and working to change the culture of the bank which "would not happen 

over night."m Mr. Thurston wrote that the CNBV officials told him 

that was "what they wanted to hear and that they would report back 

positively" to the head of the CNBV. Mr. Geoghegan responded: "This 

is disturbing and clearly we will need to look at the management 

structure and practices. ... I am copying this to the Group Chainnan and 

Matthew King for their information.,,323 

320 10/2312007 email exchange between HBMX Paul Thurston and HSBC Michael Geoghegan. 

"CNBV Inspection," HSBC OCC 8873338-342. 

321 ld. 

322 ld. at HSBC-OC-8873341. 

323 ld. at HSBC-OC-8873338. 
252 


76061.618

78 

In December 2007, the internal audit group for Mexico issued a 

report that had been ordered earlier on HBMXs AML efforts.324 It found 

HBMX's AML controls to be "Below Standard" and to pose an overall 

"high" risk.325 It detailed multiple problems, including "[r]egulatory 

breaches in KYC issues such as the large number of incomplete client 

files and the inadequate process of SCC identification and monitoring 

across the network.,,)26 It noted that HBMX had a May 2008 deadline 

for bringing files into compliance with KYC regulations set by the 

CNBV, and that regulators had been told 86% of client files already met 

regulatory requirements, while audit work over the past year suggested a 

much lower percentage, "as low as 46%." The audit report also noted 

that the KYC effort was remediating only 1.8 million files involving 

high risk, excluding another almost 6 million clients "that the Group has 

in Mexico which are subject to HSBC's own MLD policies.,,)27 

The 2007 audit report also disclosed SAR filing and alert review 

backlogs. It noted "4,890 accounts that reported unusual transactions 

that took place between APR [April] and AUG07," but which had yet to 

be reported to Mexican authorities, "thereby breaching the 

regulations.,,328 It attributed the delay to changed internal criteria for 

reporting transactions, resulting in an increase in the number of cases to 

be reported, and "slow decision-making.,,)29 The report also noted 7,217 

alert warnings of which 858 (12%) had not been reviewed at all, "posing 

a potential risk that criminal transactions may not be identified which 

may have an adverse reputational effect on the Institution.,,3)O The audit 

report stated that the failure to review these alerts had been going on for 

one year due to "insufficient Operations staffing." The report also 

criticized "Senior Management" for attending few AML committee 

meetings, delaying decisions on cancelling accounts, and delaying the 

imposition of sanctions when cases were not reported to the CNBV on 

time.331 The report also noted a lack of "sufficient understanding" of the 

AML IT systems and inadequate AML training as evidenced by the 

"failures regularly identified in branch audits. ,,332 In light of the 

"number and in many cases seriousness of the weaknesses identified," 

the report recommended creating an HBMX Money Laundering 

Committee to undertake the effort needed to address the widespread 

AML shortcomings. 

324 See 1212007 "General & Transactional Banking Audit: HBMX - Money Laundering 

Deterrence," No. HBMX GAQ 070086, prepared by Group Audit Mexico, HSBC acc 8874802·810. 

325 Id. at HSBC acc 8874810. 

326 Id. 

3271d. 

J28 Id. at HSBC acc 8874807. 

329 Id. at HSBC acc 8874807, 810. 

3)0 Id. at HSBC acc 8874808. 

))1 Id. at HSBC acc 8874807. 

332 Id. at IlSBC acc 8874810. 
253 


76061.619

79 

Confronted by this long list of AML deficiencies, HSBC Group 

sent Warren Learning, HSBC Group Compliance Deputy Head, to 

Mexico to help determine what should be done.333 

CNBV and FlU Dissatisfaction Deepens. As 2007 drew to a 

close, HSBC Group and HBMX worked to strengthen HBMX's AML 

efforts, but CNBV dissatisfaction with the bank seemed to deepen and 

the list of AML concerns broaden in 2008, encompassing for the first 

time concerns about HBMX's participation in bulk cash services. 

In February 2008, Mr. Thurston, HSBC Mexico CEO, met again 

with CNBV officials, at their request, along with the Mexican Financial 

Intelligence Unit (FIU).334 According to an email he sent summarizing 

the meeting, CNBV handed him a draft report detailing mUltiple 

compliance concerns.335 Mr. Thurston wrote: 

"It is clear in this that our Head of Compliance is not as highly 

regarded by the CNBV as had been thought by local and Group 

management, and indeed appears to have misled us about the 

extent to which the CNBV have been informed of, and/or are 

satisfied with, our actions.,,336 

HSBC Group CEO Geoghegan responded: "This is most disturbing and 

we will need to have the most thorough ofinvestigations.,,337 

The report provided by the CNBV stated that "[a]s a result of the 

increase in bank's 0Eerations, there has been an increase in deficiencies 

in internal control." 38 It described a variety of problems. With respect 

to AML issues, the report concluded that "little improvement" in AML 

controls had occurred since the prior year's on-site inspection.339 It 

noted that, of 110 client files reviewed, "55 files (50%) were 

incomplete," and 5 files were not provided at all. It noted a "[lJack of 

closer supervision to high profile risk clients"; a lack of risk criteria to 

J3] See. e.g .• 12/6/2007 email from HSBC John Root to HSBC Warren Learning and others. 

"Warren Learning HBMX DEC Visit Issues," HSBC acc 8875837 ("I am keeping a list of 

issues that you might want to raise during your December visit to HBMX," including 

deteriorating audits of treasury operations, resourcing concerns, "Sinaloa massive moneylaundering scheme (+USD 100 million)," "HBMX Trusts backlog," "Banistmo business in 

re,rulatory and tax havens," and '" AML systems integration"). 

JJ See 2118/2008 email from HBMX Paul Thurston to HSBC Michael Geoghegan, with copies 

to Richard Bennett and Matthew King, "Confidential- CMBV/FIU Meeting;' HSBC acc 8873331-333, 

JJ5 Id. at HSBC acc 8873333. 

116 2118/2008 draft report entitled, "Internal Control, HBC Mexico, S.A,," prepared by CNBV, 

HSBC acc 8966021-026, at 6. [Sealed Exhibit.] 

JJ7 2/18/2008 email from HSBC Michael Geoghegan to HBMX Paul Thurston and others, 

including HSBC Group Chairman Stephen Green, "Confidential- CMBV/FIU Meeting," HSBC 

acc 8873331. 

J38 2118/2008 draft report entitled, "Internal Control, HBC Mexico, S.A.," prepared by CNBV, 

HSBC acc 8966021-026, at I. [Sealed Exhibit.] 

119 Id. at 2. 
254 


76061.620

80 

classify clients during the account opening process; and missing client 

updates for high risk customers and politically exposed persons.340 

Another deficiency was that the CAMP and HOGAN monitoring 

systems did not collect transaction profiles for new accounts, as required 

by law, and the CCC Committee delayed closing suspicious accounts, 

citing the example of a $2.8 million account kept open for an entire year 

after it was supposed to be c1osed.341 

The report also described a number of AML deficiencies identified 

by the FlU, stating: "Evidence obtained by the Financial Intelligence 

Unit of Mexico (UIF) on a frequent basis has seriously raised its concern 

on the very high level ofML risk that HSBC may be incurring.,,342 It 

provided a chart showing that HSBC had much more bulk cash 

transactions using U.S. dollars than other Mexican banks, and expressed 

U.S. and Mexican law enforcement concern that the cash represented 

illegal drug sale proceeds from the United States.343 The FlU also noted 

that HBMX frequently failed to provide requested information, claiming 

the files or basic account documents could not be located, providing a 

chart showing HBMX's response record was worse than other Mexican 

banks.344 The FlU also noted that "in the majority of the most relevant 

ML cases" it had investigated in 2007, "many transactions were carried 

out through HSBC," and in some cases, the FlU detected ML 

transactions that HSBC had not reported.J45 The FlU also noted that it 

had been able to obtain copies of account documents that HBMX had 

claimed it could not locate. "These last cases may imply criminal 

responsibility ofHSBC and its personnel such as that relating to false 

statements to administrative authorities and complicity - that the law 

enforcement and judicial authorities must investigate.,,346 

Internal HBMX and HSBC Group documents indicate that senior 

management immediately began to investigate the allegations. HSBC 

Group CEO Michael Geoghegan spoke to HSBC Group Chairman 

Stephen Green, as well as senior HSBC Group and HBMX personnel, 

and asked David Bagley to lead the review ofHBMX Compliance.347 

Mr. Bagley left for Mexico immediately for a two-week stay. Mr. 

Thurston directed the head of Latin American Security to investigate 

certain allegations, and the head of Latin American internal audit to 

340 ld. at 3. 

341 Id. 

342Id. at 5. 

343 Id. 

344 Id. at 5-6. 

345 Id. at 6. Recent examples of such cases included Zhenly Ye Gon, Casa de Cambio Puebla, 

and Sigue Corporation. 

346 Id. 

347 2119/2008 email from HSBC Michael Geoghegan to Paul Thurston, Richard Bennett, 

Matthew King, with copies to Stephen Green and David Bagley, "HBMX - ML Review," 

HSBC-PSI-PROD-O 198506-507. 
255 


76061.621

81 

examine the other CNBV and FlU complaints.348 Mr. Thurston 

promised an updated report to Mr. Geoghegan prior to an upcoming 

HSBC Group Board meeting. 

Three days later, on February 22,2008, Matthew King composed a 

draft email as a way to organize the information that should be conveyed 

to Mr. Geoghegan in a telephone call, and circulated his self-described 

"brain dump" to Messrs. Thurston, Bagley, Bennett, and Graham 

Thomson for their thoughts.349 The email indicated that the AML 

concerns raised by the CNBV were "pretty similar" to issues raised 

earlier, but the CNBV had "suddenly become more aggressive." The 

email speculated on whether that was due to political pressure, flU 

concerns, or possibly a separate disagreement with the FlU regarding 

reimbursing a public utility for a fraud. Mr. King also wrote: "It is also 

the case that Mexico is suffering a major problem with drugs dealers and 

the Government is being very robust about dealing with them." 

The King email then went through the issues. It noted that the 

December 2007 internal AML audit ofHBMX was "Below Standard," 

and that the AML Director Leopolodo Barroso would be replaced, 

"albeit the FlU apparently regard him as trustworthy" so his replacement 

would have to be "carefully explained.,,35o The email said that the 

"biggest immediate concern" was account KYC, which had been "a 

systematic problem for some time." Among other matters, the email 

noted that a pilot project to centralize account documentation through 

electronic imaging was underway, but "Audit is continuing to identifY a 

high level of exceptions for that process also (around 30%). ,,351 Mr. 

King wrote: 

"Given the concerns now raised by the CNBV and FlU (which 

apparently includes tapes of a drug lord recommending HBMX as 

the place to bank) we now have to decide: whether the imaging 

process can be made to work to everyone'[s] satisfaction[;] how 

quickly it can be rolled ou[t] across the whole network[; and] in the 

meantime, whether we can continue to open accounts using the 

old, flawed process. ,,352 

The email also described account documentation as "a problem since we 

bought Bital," and noted that CNBV had again questioned having 

348 2119/2008 email from HBMX Paul Thurston to HSBC Michael Geoghegan and others, 

"HBMX - ML Review," HSBC-PSI-PROD-0198505-506. 

3492122/2008 email from HSBC Matthew King to HBMX Paul Thurston, HBMX Graham 

Thomson, with copies to HSBC Richard Bennett and HSBC David Bagley, "CNBV." HSBCPSI-PROD-0198508-509. 

350 Id.at l. 

351 Id. 

352 Id. at I -2. Both David Bagley and Paul Thurston told the Subcommittee that they asked the 

CNIl V for a copy of the purported tapes, but none was provided. Subcommittee interviews of 

David Bagley (511012012) and Paul Thurston (511/2012). 
256 


76061.622

82 

HBMX personnel handle comf:liance issues for the Latin American 

region in addition to Mexico.3 3 On "cross-border cash," the email 

indicated that trends still needed to be clarified, but he thought the 

United States had "a general concern rather than a specific one about 

us." 

The next day, February 23, 2008, Paul Thurston sent an email to 

Michael Geoghegan with additional information. He wrote: 

"Firstly, to answer your question of why is this being raised now? 

The intelligence that we have been able to gather is that with 

President Felipe Calderon declaring war on the drugs gangs, crime 

and corruption the judicial authorities have heightened the focus on 

financial investigations and have been putting increasing pressure 

on the bank regulators because the banks have been seen as not 

providing good enough support. ... HSBC has historically, and 

continues to have, a worse record than the other banks, so we have 

become a focus of attention. The new Head of the FlU has told us 

that his staff have told him that HSBC has been the most difficult 

bank to obtain accurate and timely data from for the past 4 

years.,,354 

Mr. Thurston wrote that HBMX had taken more corrective action 

than the regulators were aware of.355 He acknowledged an account 

documentation problem which would be addressed, in part, by a new 

centralized electronic imaging procedure which was taking effect 

Mexico-wide that month. In addition, he wrote that "stronger 

disciplinary procedures" were being put in place for branch managers 

who signed off on account 0tenings without personally ensuring all 

documents were obtained.35 He also noted that HBMX received more 

than 1,000 letters per week from the CNBV asking for account 

information, and that more resources had to be dedicated to responding 

to them. 

Finally, on the bulk cash issue, Mr. Thurston wrote that the United 

States had a general concern, "not aimed specifically at HSBC," about 

the flow of U.S. banknotes from Mexico and the potential linkage to 

drug related activity.,,357 He wrote that HBMX had undertaken its own 

analysis of the cash flows, and initial indications were that its handling 

353 rd. at 2. 

354 2123/2008 email from HBMX Paul Thurston to HSBC Michael Geoghegan, with copies to 

Stephen Green, Matthew King, Richard Bennet, and David Bagley, "CNBV/FIU Update," 

HSBC-PSI-PROD-O 1978 72-873. 

355 Id. at I. 

356 Id. at 1-2. 

351 Id. at 2. 
257 


76061.623

83 

of U.S. dollars "had been slowly declining in recent years, rather than 

rising.,,358 

On February 27, 2008, Mr. Bagley conducted an exit interview 

with the HBMX AML Director Leopoldo R. Barroso, who was being 

replaced. Mr. Barroso provided a negative view of HBMX AML 

performance. According to a meeting summary written by Mr. Bagley, 

Mr. Barroso said that, while in his position, he had felt civil and criminal 

"litigation exposure" due to "the continued poor controls in the bank, the 

fact that there were allegations of60% to 70% oflaundered proceeds in 

Mexico went through HBMX and because he did not think that senior 

management had any commitment to robust AML controls.,,359 Mr. 

Barroso indicated that "it was only a matter of time before the bank 

faced criminal sanctions and cited a number of cases." Mr. Bagley 

wrote: 

"It was clear that LRB [Leopoldo R. Barroso] felt very strongly 

that relevant business heads within HBMX had absolutely no 

respect for AML controls and the risks to which the Group was 

exposed and had no intention of applying sensible or appropriate 

approaches. Again he cited a number of examples where despite 

strong recommendations with the CMP [Compliance] business 

heads had failed or refused to close accounts or indeed on 

occasions file SARs. He thought that there was a culture that 

pursuing profit and targets at all costs and in fact had seen no 

recent improvement in the standard of controls or the types of 

decisions being taken. 

He was critical of the level of resources in his team and felt that his 

team had done much to keep the bank out of trouble by working 

extra hours against impossible deadlines and handling significant 

volumes of alerts including those from CAMP .... 

[H]e thought he needed at least 35 new headcount. ... 

He was extremely critical ofRG [Ramon Garcia] who he described 

as being indecisive, weak and desperate to retain his job and 

lacking any understanding of AML matters.,,360 

Mr. Bagley later forwarded his summary of the meeting to Mr. 

Thurston who responded that "the jury is still out on Ramon" and a 

J58 See also 212712008 email exchange between HBMX Paul Thurston and HSBC Michael 

Geoghegan. "CNBVIFIU Update,"' HSBC-PSI-PROD-0198510-512. 

359 212712008 "Meeting Attendance Note,"' prepared by David Bagley, HSBC OCC 8874824-

825. 

36° Id. 
258 


76061.624

84 

discussion was needed on structuring the Latin American regional and 

Mexican compliance responsibilities.361 

On March 3, 2008, HBMX issued a 12-page response to the 

internal control issues raised by the CNBV in its draft report of February 

27.362 The response detailed multiple "corrective actions" being taken 

by the bank to address each concern. Among the actions discussed were 

the new centralized process for ensuring account opening documentation 

was obtained and electronically recorded; a new effort to centralize PEP 

files, obtain missing documentation, and strengthen annual PEP reviews; 

new disciplinary procedures for opening accounts with incomplete 

documentation; the re-engineering and strengthening of the alert 

reporting process; replacement of the AML director; and strengthening 

of the AML staff. The response also indicated that management changes 

had been made to split responsibilities for Mexico from the rest of the 

Latin American region. On the issue of U.S. banknotes, the response 

indicated that HBMX U.S. dollar volumes had not increased, but were 

marginally lower than in 2003. It also announced a new policy, 

effective immediately, to deem all customers who deposit more than 

$100,000 in a month as SCC clients subject to enhanced due diligence. 

The response said that 312 customers met that criteria and were being 

subjected to a KYC review. 

Mr. Thurston and Mr. Bagley met with CNBV and FIU officials on 

March 4, 2008, to deliver the response and discuss the bank's actions. 

They reported to Mr. Geoghegan that the meeting was "extremely 

cordial" and the bank's corrective efforts were "well received.,,363 After 

Mr. Bagley returned to London, he also discussed the matter with the 

Financial Services Authority (FSA), HSBC's UK regulator, which had 

communicated with CNBV. Mr. Bagley reported that "CNBV 

confirmed that they were satisfied with the reaction and steps we have 

taken although will watch implementation c]osely.,,364 In April 2008, at 

a meeting of the HSBC Group Board of Directors, Mr. Bagley briefed 

the HSBC Group Audit Committee about HBMX, indicating that 

regulators had "expressed their satisfaction with the Group's 

reaction. ,,365 

Restoration Project. HBMX spent the next six months working 

to carry out the corrective actions outlined in its March response to 

.161 31712008 email exchange among HSBC David Bagley and HBMX Paul Thurston and John 

Rendall, "HBMX." HSBC OCC 8874821-822. 362 3/3/2008 "Internal Control, HSBC Mexico SA," prepared by HBMX, HSBC OCC 8966027-

038. 

363 3/5/2008 email from HSBC David Bagley to HSBC Michael Geoghegan and others, 

"CNBV IFIU Meeting," HSBC-PS!-PROD-0198513. 

364 31I5/2008 email from HSBC David Bagley to HBMX Paul Thurston and others, "CNBV," 

HSBC OCC 8875171. 

3654/25/2008 Board of Directors minutes for HSBC Holdings pic, HSBC-PSI-PROD-0198539-

540. 
259 


76061.625

85 

CNBV. HBMX also underwent personnel changes. In May 2008, Paul 

Thurston was promoted and returned to London, having spent a little 

more than one year in Mexico. Luis Pen a Kegel took over as HSBC 

Mexico CEO and head ofHBMX. Emilson Alonso was appointed head 

of HSBC Latin America, carrying out the commitment made to CNBV 

to split the two sets of responsibilities. In the summer of2008, a new 

HBMX AML director was also hired, Jaime Saenz.366 

One key AML activity undertaken by the bank was to work on 

bringing the KYC documentation for existing accounts into compliance 

with CNBV requirements, an effort HBMX deemed "Projecto 

Restauracion" or the Restoration Project. HBMX was supposed to have 

completed the KYC effort by May 2008, after having obtained a oneyear extension, but was far behind schedule. HBMX appointed John 

Rendall, HBMX COO, to oversee the new project. One step he took 

was to limit the project to high risk accounts.367 He also assembled a 

team and began pressing branch personnel to complete their KYC 

updates. John Root, a senior HSBC Group Compliance officer, attended 

a meeting of the Restoration Project team during a visit to Mexico in 

July, and was "very impressed" by the progress to date. 368 

Also in July 2008, Mr. Rendall provided a progress report to the 

Latin American regional audit committee on a number of AML and 

compliance efforts, outlining "9 workstreams." He described several 

milestones, including implementing the centralized account opening 

process for all HBMX branches, initiating the KYC Restoration Project 

"focused on high risk accounts," achieving a "90% reduction (from 

34,700 to 3,300)" in the 2008 CAMP alert backlog, requiring enhanced 

KYC for customers with over $100,000 in U.S. dollar deposits, and 

improving FlU response procedures.J69 

On a more negative note in July, HBMX's internal monitoring 

system generated a number of alerts identifYing "significant USD [U.S. 

dollar] remittances being made by a number of customers to a US 

company alleged to have been involved in the supply of aircraft to drugs 

cartels.,,370 The alerts highlighted account activity in the HBMX 

Cayman branch.371 As a "precaution" pending review of the account 

activity, HBMX stopped opening new Cayman accounts.372 The account 

366 See 7/3012008 email from HSBC John Root to HSBC David Bagley and others, "HBMX 

Visit Update,"' HSBC OCC 8873487-489. 

367 See 617120 I 0 email from HBUS Paul Lawrence to HSBC Michael Geoghegan, "Mexico 

Banknotes/High-level Timeline," HSBC-PSI-PROD-0198514-516. 368 Id. 

369 See 61712010 email from HBUS Paul Lawrence to HSBC Michael Geoghegan, "Mexico 

Banknotes/High-level Timeline," HSBC-PSI-PROD-O 1985 1 4-516. 

3707/31/2008 email from HSBC David Bagley to HSBC Richard Bennett with copies to HSBC 

Michael Geoghegan and others, "HBMX - Cayman Accounts," HSBC OCC 8874832-833. 

17I Id. 

372 Id. 
260 


76061.626

86 

activity also prompted HSBC Group to take a closer look at the Cayman 

accounts.373 HSBC Group Compliance head David Bagley wrote that 

the Cayman accounts should be included in the Restoration Project "as a 

priority area," and should "be seen as high-risk from an AML and 

reputational perspective.,,374 

In September 2008, HBMX's internal audit group reviewed the 

Restoration Project and quickly identified multiple, growing problems. 

[n an email describing the audit findings, Graham Thomson, head of the 

Latin American internal audit group, wrote: 

"The key issues ... include slow progress with remediating 

PEPs/SCCs and other high risk customers, with some 40% of the 

KYC records ofPEPs/SCC customer segment ... not yet 

remediated. These accounts are now in the process of closure by 

HBMX Legal. ... [C]hecks done by CMP [Compliance] on visit 

reports ... continue to reveal an unacceptable level of 

'manufactured' visit reports.,,375 

Mr. Alonso, head ofHSBC Latin America responded that the audit 

results were "disappointing" and "not what I was assured by HMBX 

management.,,376 

The audit report found that the Restoration Project had "major 

weaknesses ... that could potentially hinder regulatory compliance and 

the achievement ofthe project's overall goals.,,377 It said that resources 

dedicated to the project "appeared insufficient to deliver the quality and 

timeliness required," and clients engaged in high risk businesses "had 

not been identified for inclusion" in the project.378 It noted that visit 

reports were incomplete and, in some cases, "created without visits 

being made."J79 The audit report also stated: 

373 ld. 

374 ld. 

"The impact of account cancellation on the business, customers 

and costs should be analysed against the risks that have been 

mitigated and accepted, as this will allow having adequate balance 

between control and business, particularly where cancellations may 

be attributable to internal errors rather than to the customers.,,380 

J75 10128/2008 email from HBMXGrahamThomsonto HBMX Emilson Alonso, Luis Pena, 

John Rendall, and others, "HBMX - Projecto Restauracion," HSBC OCC 8873463-465. J76 ld. 

371 Nov. 2008 "Branch Audit Report: HBMX Special Review of Restoration Project," prepared 

by HBMX Group Internal Audit, HSBC OCC 8876417-424, at the Audit Report Summary 

Schedule. HSBC OCC 8876424. 378 1d. 

37'ld. 

380 ld. at HSBC OCC 8876419. 
261 


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87 

This recommendation appears to suggest that some high risk 

accounts not be closed, even where the bank was unable to review the 

account by the regulatory deadline and KYC deficiencies might exist. 

Mr. Thomson's email indicated, however, that unremediated files for 

PEP and SCC clients subject to the Restoration Project were already in 

the process of being c1osed.38J In addition, Mr. Rendall reported to the 

Latin American regional audit committee that "7,941 KYC files for high 

risk customers had been reviewed & updated, or scheduled for 

closure.,,382 Mr. Rendall also reported that in the second phase of the 

project, "47,000 accounts with various risk flags" were being reviewed, 

with plans for a third phase to examine "83,000 accounts with historic 

CAMP alert profiles." These figures were well below, however, the 1.8 

million in high risk accounts that were supposed to be reviewed to 

ensure KYC documentation met CNBV requirements. 

November Meeting with CNBV. On November 26, 2008, a high 

level meeting took place between HSBC and CNBV. Michael 

Geoghegan, HSBC Group CEO, traveled to Mexico to attend. Along 

with Emilson Alonso, head of HSBC Latin America, and Luis Pena, 

head ofHSBC Mexico, Mr. Geoghegan met with the President of 

CNBV, Guillermo Babtz; the head ofCNBV bank supervision, Patricio 

Bustamante; and the head of CNBV AML oversight, Pablo Gomez.383 

The focus of the meeting was expected to be the actions taken by 

HBMX to address the CNBV concerns identified in February 2008. 

According to an email prepared by the Deputy Head ofHSBC 

Group Compliance, Warren Learning, who had accompanied Mr. 

Geoghegan to Mexico and remained there for several days,384 the CNBV 

officials acknowledged the "significant progress" made by the bank, but 

remained "very concern[ed]" about the U.S. dollar accounts at HBMX's 

Cayman branch, the slow KYC review of those accounts, and the "sheer 

volume of US Dollars that HBMX repatriates" to the United States.385 

The email noted that, between January and September 2008, HBMX had 

repatriated $3 billion to the United States, which represented 36% of the 

market and double what the biggest bank in Mexico, Banamax, had 

repatriated, even though HBMX was only the fifth largest bank in the 

country.3R6 According to the email, CNBV officials were also 

38' 10/2812008 email from HBMX Graham Thomson to HBMX EmilsonAlonso, Luis Pena, 

John Rendall, and others, "HBMX - Projecto Restauracion," HSBC OCC 8873464-465. 382 61712010 email from HSBC Paul Lawrence to HSBC Michael Geoghegan, "Mexico 

Banknotes/High-level Timeline," HSBC-PS!-PROD-O 198514-516. 

383 See 1112712008 email from HSBC Warren Leaming to HSBC David Bagley and Richard 

Bennett, "Mexico," HSBC OCC 8875605-607. 

384 See 12/812008 email from HSBC Warren Learning to HBMX Ramon Garcia and John 

Rendall, "Mexico Visit," HSBC-PS!-PROD-OI97874 (indicating Me. Learning visited HBMX 

from Nov. 25 to Nov. 28). 

385 11127/2008 email from HSBC Warren Learning to HSBC David Bagley and Richard Bennett, 

"Mexico," HSBC OCC 8875606. 

386 Id. 
262 


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88 

"concerned that when-ever there is a serious MLD [Money Laundering 

Deterrence] scheme HSBC seems to be involved" and that "USA 

authorities are concerned at the very high levels.,,387 Mr. Geoghegan 

told the Subcommittee that his meeting with the Mexican regulators did 

not go as he had expected, he told the CNBV that HBMX would address 

the issues raised, and he immediately took action to ensure that 

happened.388 

Stopping U.S. Dollar Services. After the meeting, Mr. Alonso 

sent an email to Mr. Pena asking him to examine the "export of cash 

USD to the USA," including the volumes of U.S. dollars being exported, 

the types of clientele using the HBMX branch network to make U.S. 

dollar deposits for remittance to the United States, and the branches 

involved in more frequent deposits or higher volumes.389 He also called 

for the "[i]mmediate elimination of this kind of service in our branches. 

Corporate clients that require such service should be approved by you on 

a very exceptional basis.,,390 

Later that same night, Mr. Geoghegan sent an email to Mr. Alonso 

stating: "It occurs to me: We should stop any Dollar remittances or 

accept any Dollar payments unless they are done via a customer's 

account. We should stop shipping Dollars.,,391 He also wrote: "We 

should bench mark HBMX CAMP and other search engine systems with 

HBUS (they have some very sensitive behavior monitors) and see 

whether we are finding as many suspicious transactions as we should 

be." Mr. Alonso forwarded the email to Mr. Pena, who responded the 

next day: 

J87 Id. 

"The two immediate actions we are taking are: 

Starting December I. We will no longer buy or sell dollars in cash 

at ANY branch (customers or non customers). We will, as an 

alternative, offer travelers cheques to customers only. Also 

customers can withdraw dollars at HSBC ATMs located at airports 

or from any A TM in the world with their debit card. 

Starting January 1. We will no longer accept deposits of cash 

dollars to any dollar account at any branch. 

388 Subcommittee interview of Michael Geoghegan (5/24/2012). 

389 11/26/2008 email from HBMX Emilson Alonso to HIlMX Luis Pena. with copies to HSBC 

Michael Geoghegan and others, "Visit to CNBV - Findings and Required Actions," HSBC OCC 

8874846-847. 

390Id. 

391 11/26/2008 email [rom HSBC Michael Geoghegan to HBMX Emilson Alonso, "Money 

Launderying," HSBC OCC 8874849-850. Mr. Geoghegan told the Subcommittee that he made a 

unilateral decision to stop these U.S. dollar services. Subcommittee interview of Michael 

Geoghegan (5/24/2012). 
263 


76061.629

89 

We are quantifYing the impact oflost revenues. On the flipside, 

we will save the operating cost oftransporting and exporting dollar 

bills. 

This should take care of the problem."J92 

Mr. Pena also proposed continuing indefinitely the freeze on 

opening new U.S. dollar accounts through HBMX's Cayman branch, 

and prohibiting the acceptance of new cash deposits for the existing 

Cayman accounts. J9J HSBC Group Compliance Deputy Head Warren 

Learning noted in an email to his supervisor, David Bagley, that when 

Mr. Pen a commented that the actions being taken "could result in lost 

profits of many billions Mike[']s clear response [was] that nothing is 

worth risk to our reputation."J94 Mr. Learning also wrote that the 

proposed actions were "considered extremely sensitive here in Mexico 

and local management want to get their ducks in a row ... so it will be 

much appreciated if the above could not be ... disseminated without 

discussing further." 

Account Closing Backlog. Mr. Learning also noted that "there 

appears to be a huge back-log in closing accounts," with customers 

continuing to use accounts in November that had been ordered closed 

eight months earlier in March. He wrote that those accounts, which 

were still being used by customers, may be "part of the reasons for 

multiple SARs" being filed for some accounts, potentially putting 

HBMX in breach ofHSBC policy on account closure after multiple 

SARs. 395 

Mr. Bagley responded: "What I find most frustrating is the way in 

which new issues constantly emerge however much time is spent with 

HBMX.,,396 He continued: "The practice of changing USD in the 

branches pres[u]mably with little or no ID for non customers is in breach 

of Group policy. When looking at our USD exposure how can this have 

been missed." He also asked Mr. Learning to consider challenging the 

involvement of the Legal Department in the account closing process so 

that it could proceed more quickly. 

The next day, November 28,2008, Mr. Geoghegan sent an email 

to top HBMX and HSBC Group Compliance officials stating that it 

should be made clear to all HBMX personnel "that if there are persistent 

392 11127/2008 email from HBMX Luis Pena to HBMX Emilson Alonso, copy to HSBC Michael 

Geoghegan, "Money Launderying," HSBC acc 8874849. 

393 11/27/2008 email from HSBC Warren Learning to HSBC David Bagley and Richard Bennett. 

"Mexico," HSBC acc 8875605·607. 394 Id. 

39; Id. 

396 11I27/email from HSBC David Bagley to HSBC Warren Learning and Richard Bennett, 

"Mexico," HSBC acc 8875605. 
264 


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90 

breaches ofKYC in a particular branch, the branch will be closed and all 

staff dismissed regardless of how much business we will lose on account 

of it.,,397 He also required HBMX's compensation scorecard to include 

implementing the CAMP monitoring system to the maximum extent 

possible and closing accounts with two or more SARs. He wrote: "[I]f 

you demonstrate zero tolerance oflapses in implementing KYC then the 

operations standards ofthe whole business improves at the same time. 

What we are doing in Mexico needs to be copied everywhere else in the 

region.,,398 

AML Shock Plan. Mr. Pena responded that in January 2009, he 

was planning to close two branches and fire all staff "as exemplary 

measures" and was working to identifY the branches.399 This measure 

was later referred to as the "AML Shock Plan.,,40o Mr. Pena also wrote: 

"Last but not least, I will address the issue offunding. After all, 

Cayman and Mexican dollar accounts provide us with US$2.6 

billion of cheap funding. We are likely to lose a big portion ofthis 

if we tell customers we no longer receive dollar notes. We have to 

provide an alternative to our customers for this: Miami accounts 

may be an alternative but we will have to talk to RBUS of how we 

get this ch[eap] funding back to Mexico to lend.,,40I 

In December 2008, at the conclusion of his latest visit to Mexico, 

Mr. Learning drafted a letter to Mr. Pena summarizing a number of 

AML issues and sought input from other HBMX officials before 

finalizing it. 402 His draft letter discussed the late filing of SARs, the 

backlog in closing accounts, the failure to close accounts after two SAR 

filings, slow and weak decisions by the CCC Committee, the need to 

clarifY transaction limits, and the need for further refinement of the 

CAMP alert system. He noted that the account closing backlog 

consisted of over 3,600 accounts, of which 675 involved suspicion of 

money laundering and had been ordered closed by the CNBV, yet were 

still open. He also noted that 16 of the accounts remaining open had 

been ordered closed in 2005, 130 in 2006, 172 in 2007, and 309 in 2008. 

He wrote that he'd been advised that the law did not permit the accounts 

to be blocked pending closure, which meant account activity was 

397 1112812008 email from HSBC Michael Geoghegan to HBMX Emilson Alonso with copies to 

HSBC David Bagley, HBMX Luis Pena, and olhers, "Final draft for Mike's Letter," HSBC acc 8874857. 

398 Id. 

399 11/28/2008 email from HBMX Luis Pena to HBMX Emilson Alonso, who forwarded it to 

HSBC Michael Geoghegan, David Bagley, and Matthew King, "Final draft for Mike's Letter," 

HSBC OCC 8874856. 

40012/8/2008 email from HSBC Warren Learning to HBMX Ramon Garcia and John Rendall 

with copies to HSBC David Bagley, John Root, Susan Wright, and others, "Mexico Visit," 

HSBC-PS]-PROD-O 197874-876. 401 rd. 402 [d. 
265 


76061.631

91 

continuing. To speed up closures, he advised that his research had 

indicated the Legal Department did not have to participate and clients 

could be notified of the account closing by certified mail. Mr. Learning 

also noted that 3,000 Cayman accounts had been proposed for closure 

which would further stress the process. In addition, he warned that the 

switch from U.S. dollar deposits to travelers cheques could also raise 

AML concerns, advised lowering the $25,000 ceiling on the amount of 

travelers cheques that could be purchased by a customer, and creating a 

new limit on the amount of travelers cheques that could be deposited at 

one time to a client account. He recommended setting dollar limits on 

cashiers cheques as well. 

Later in December, HBMX prepared to implement the new AML 

policies and procedures and close suspicious accounts.403 December 22 

and 24 were set as the dates to close four HBMX branches "as 

disciplinary actions," with another 10 to 20 branches that, in January, 

would have all staff dismissed.404 January I, 2009 was set as the date to 

stop buying or selling U.S. dollars at HMBX branches.405 It was also the 

date set for closing all accounts opened by casas de cambio. January 31 

was set as the date to complete the Restoration Project and begin closing 

accounts that had incomplete documentation or were subject to at least 

two SAR filings. 406 

On December 22, 2008, an HBMX employee alerted the HBUS 

regional head ofBanknotes, Gyanen Kumar to the HBMX's plan to stop 

buying and selling U.S. dollars in the new year.

407 Mr. Kumar 

forwarded it to the Banknotes head Christopher Lok with the comment: 

"I have not been told anything firm as to why this decision is being 

taken as much as it is a drastic change. My instincts tell me that perhaps 

this has something to do with compliance.,,408 HBMX apparently did 

not explain, leaving HBUS uninformed about the compliance and 

regulatory pressures and AML risks behind HBMX's decision to end its 

U.S. dollar business. 

403 See 1211512008 email exchange among HBMX Ramon Garcia and HSBC Warren Learning. 

Susan Wright, John Root, David Bagley, and others. "Anti Money Laundering: Shock planUpdate 081215," HSBC acc 8875786-790; 1212312008 email from HSBC Warren Learning to 

HBMX Caterine Ilussery, with copies to lISBC David Bagley, John Root, and Richard Bennet, 

"Anti Money Laundering: Shock plan - Update 081215," HSBC OCC 8873474-476; 112712009 

email from HSIlC David Bagley to HSBC Susant Wright, with a copy to Warren Learning, 

"Press Release," HSBC OCC 8873485. 

4041211512008 email exchanges among Ramon Garcia to HSBC Warren Learning, Susan Wright, 

John Root, David Bagley, and others, "Anti Money Laundering: Shock plan - Update 081215," 

at HSBC OCC 8875786-787. 405 Id. 

406 Id. Mr. Learning expressed skepticism that the proposed closures could be completed by the 

January 31 deadline. Id. 

407 See 1212212008 email from HBMX Mario Langarica to HBUS Gyanen Kumar and others, 

"USD cash in Mexico," HSBC-PSI-PROD-0095869-870. 

408 1212312008 email from HBUSGyanenKumarto HBUS Denis O'Brien and Christopher Lok, 

"USD cash in Mexico," HSBC-PSI-PROD-0095869. 
266 


76061.632

92 

Law Enforcement and Regulators Converge. In January 2009, 

RBMX began implementing the planned AML changes. It stopped 

buying and selling U.S. dollars and began closing accounts held by casas 

de cambio.409 

That same month, U.S. regulators began contacting RBUS to get 

clarification about RBMX's decision to stop buying and selling U.S. 

dollars.4lo When asked, RBMX told RBUS the decision had been based 

primarily on cost considerations, without mentioning the compliance and 

AML concerns that led to the decision. 411 The regional head ofRBUS' 

Banknotes department, Gyanen Kumar, who was traveling to Mexico the 

next week, was asked by his colleagues to get more information.412 On 

January I3, RBMX sent RBUS a copy of its internal press release 

describing its decision.413 Based upon RBMX's actions, lIBUS decided 

to close banknotes accounts used by two Mexican clients, but to retain 

accounts with the same clients in the Payments and Cash Management 

(PCM) division.414 Closing the banknotes accounts meant that the 

Mexican clients could no longer make bulk cash sales of their U.S. 

dollars to RBUS, but the continued operation of their PCM accounts 

meant that both Mexican clients could still deposit U.S. dollars, execute 

U.S. dollar transactions, exchange U.S. dollars for Mexican pesos, and 

access the U.S. wire transfer system. 

Around the same time, the Immigration and Customs Enforcement 

(ICE) arm of the U.S. Department of Rome land Security (DRS) held a 

meeting with RBUS in New York, and informed it that ICE was 

conducting an investigation of a particular Mexican casa de cambio that 

had accounts at both RBUS and RBMX.415 RBUS apparently did not 

relay that information to RBMX. 

Five months later, in May 2009, RSBC Group increased its risk 

assessment for its Latin American operations to its highest risk rating.416 

409 An email suggests, however, that HBMX had decided to continue to offer U.S. banknotes 

products to several large reputable Mexican banks, Banamex, Banorte and Ixe, in effect making 

its first exceptions to the new policy. See 12/22/2008 email from HBMX Mario Langarica to 

HBUS Gyanen Kumar and others, "USD cash in Mexico," HSBC-PSI-PROD-0095869-870. 

410 See January 2008 email exchanges among HBUS Christopher Davies, Christopher Lok, 

Michael Gallagher, Paul Lawrence, Gyanen Kwnar, and others, "HBMX Banknotes business," 

HSBC acc 3633806-812. 

411 Id. at 810. 

412 Id. at 811. 

413 Id at 809. 

414 Id. at 811, 807. 

415 Id at HSBC acc 3633806. HSBC Group Compliance head David Bagley remarked near the 

end of January: "An obvious learning point for HBMX is that if they were contacted by US 

authorities then they should have thought to advise HBUS. They can go round the web, not just 

through the middle of the web. 1/30/2009 email from HSBC David Bagley to HSBC Susan 

Wright, "US issues - Various," HSBC acc 8873759. 

416 See 6/912009 email from HSBC David Bagley to HBMX Emilson Alonso, copies to HSBC 

Michael Geoghegan and others, "GMa Business reviews - LA TAM," HSBC acc 8874895. 
267 


76061.633

93 

When Emilson Alonso, HSBC Latin America head, protested, HSBC 

Group Compliance head David Bagley explained: 

"I fully acknowledge the level of priority and focus that you and 

the team have given to these issues and the progress that has been 

made particularly in Mexico and have taken all ofthis into 

account. ... 

The basis for the rating is however: 

The inherent AML risk in Mexico is still very high and [t]here are 

not many other parts of the Group that have what is effectively a 

drugs war being conducted on the streets and also have the risk 

posed by potential sting and other operations by the US authorities. 

We have of course remediated our high risk accounts, but the 

historic weak account opening processes mean that we have 

overall lower levels ofKYC across the customer base as a 

whole.,,417 

On May 1,2009, HBUS suddenly reclassified Mexico from its lowest to 

its highest risk rating. HBMX personnel in Mexico protested, but HBUS 

did not change its rating. One consequence was that its Mexican clients 

were automatically deemed to be located in a high risk country, 

triggering enhanced scrutiny. 

Later in June 2009, ICE contacted HBMX about its investigation 

into a particular Mexican casa de cambio that had an account at the 

bank.4ls A few days later, ICE contacted HBUS' primary U.S. 

regulator, the OCC, and alerted the OCC to its investigation.419 As a 

result, the OCC began intensifying its regulatory scrutiny ofHBUS, in 

particular with respect to its U.S. banknotes business, which U.S. 

regulators later said had increased as HBMX's decreased. 420 

At the same time, AML deficiencies continued to surface at 

HBMX. For example, in June 2010, HBMX noted that "certain 

transaction types were not being captured" by its AML account 

monitoring system, CAMP, and "therefore were not being 

monitored.,,421 HBMX also noted that the CAMP software had not been 

4J7 ld. 

418 See 6128-2912009 summary oftelephone conversations, prepared by OCC Joseph Boss, OCCPSI-00928759-761 . 4I9 Id. 

420 Paul Thurston told the Subcommittee that, in retrospect, while HBMX's banknotes business 

appeared to be declining. HBUS' banknotes business with Mexico had been increasing at the 

same time, due to its banknotes business with HBMX and former clients of HBMX. 

Subcommittee interview of Paul Thurston (5/112012). 

421 See 6118/2010 email from HBUS Michael Anderson to HBMX Ken Harvey, with a copy to 

Andrew Zissell, "RMM action point," HSBC OCC 8875492-493 (attaching Compliance Report 

on Mexico, numbered 53.2.1). 
268 


76061.634

94 

updated "since its installation in 2005." In September 2010, the OCC 

issued a Supervisory Letter detailing massive AML deficiencies at 

HBUS, derived in part from its dealings with Mexico. The OCC 

followed with a Cease and Desist Order in October. 

Eight Years of HBMX AML Deficiencies. HBMX and HSBC 

Group internal documents demonstrate that HBMX's AML deficiencies 

were longstanding and widespread. Audit after audit detailed long lists 

of problems, including inadequate compliance resources, missing KYC 

information, manufactured site visits, inadequate account monitoring, 

unread alerts, poor training on the monitoring system and assigning SCC 

designations, internal disputes over closing accounts with suspicious 

activity, accounts left open despite multiple SARs and orders to close 

them, a SAR filing backlog, and an account closure backlog that 

spanned three years. AML leadership at HBMX was also weak. One 

AML director was dismissed for manufacturing notes of AML 

committee meetings that never took place; another was dismissed for 

inadequate performance; several long periods went by without any AML 

director in place at all. Even AML projects with resources and high 

level backing were unsuccessful, such as the Restoration Project which 

reported in 2008, that 75% of high risk client files still had inadequate 

KYC documentation. 

The evidence obtained by the Subcommittee shows that HSBC 

Group was fully aware of the years-long, substantial AML and 

compliance problems at HBMX, originating with the bank's purchase in 

2002. The evidence also indicates that HSBC Group executives and 

compliance personnel worked to build a compliance culture, but 

repeatedly faced a workforce in Mexico that disregarded the Group's 

AML policies and procedures, delayed obtaining required KYC data, 

delayed closing suspect accounts, and delayed reporting suspicious 

activity to regulators. In 2009, under pressure from regulators, HSBC 

Group took drastic measures, including prohibiting HBMX branches 

from buying or selling U.S. dollars, shuttering entire branches with 

checkered histories, and scheduling for closure thousands of accounts 

with incomplete KYC documentation. Even with those actions, HSBC 

Group acknowledged internally that HBMX continued to pose a high 

risk of money laundering to the Group.422 

The evidence also indicates that while HSBC Group was fully 

informed about HBMX's AML and compliance deficiencies, little of 

that information was conveyed to HBUS, despite HBMX's extensive 

correspondent relationship with HBUS. When asked about the lack of 

communication, HBMX CEO Paul Thurston indicated that he reported 

422 See, e.g., 6/9/2009 email from HSBe David Bagley to HBMX Emilson Alonso. with copics 

to HSBe Michael Geoghegan and others, "OMO Business reviews ~ LA TAM," HSBe oee 

8874895. 
269 


76061.635

95 

HBMX's AML problems to HSBC Group and believed Group would 

communicate necessary information to HBUS.42J HSBC Group CEO 

Michael Geoghegan told the Subcommittee that HBMX problems were 

discussed at HSBC Group Management Business (GMB) meetings, 

which HNAH CEO Brendan McDonagh attended, so he thought HBUS 

was aware of the problems. 424 HSBC Group Compliance head David 

Bagley told the Subcommittee that Group Compliance could have 

informed HBUS Compliance about the problems at HBMX, but "we did 

not think ofit.,,425 Instead, he reported the information to HSBC 

Group's senior management. Several senior HBUS executives told the 

Subcommittee that the bank was not informed of the extent of AML 

problems at HBMX. The result was, at the same time HBUS was 

handling hundreds of billions of dollars in cash transactions for HBMX, 

processing u.S. dollar wire transfers, clearing U.S. dollar travelers 

cheques, and opening U.S. dollar accounts for HBMX clients, HBUS 

was left in the dark by its own colleagues about the extensive AML and 

compliance problems at HBMX. In addition, in conformance with 

HSBC Group policy and practice, HBUS conducted no due diligence 

assessment ofHBMX, did not evaluate its riskiness, did not review its 

audit findings, and did not monitor its wire transfers, cash letter activity, 

or banknotes transactions for suspicious activity. HBUS had rendered 

itself blind to the fact that it was servicing a high risk financial 

institution. 

D. HBMX High Risk Clients 

HBMX made extensive use of its correspondent relationship with 

HBUS. From its acquisition in 2002, HMBX worked with HBUS's 

Payments and Cash Management (PCM) division and, until 2010, with 

HB US' Global Banknotes division, both headquartered in New York. 

HBMX used its correspondent and banknotes accounts to process U.S. 

dollar wire transfers, clear U.S. dollar monetary instruments like 

travelers cheques, and deposit bulk cash shipments of U.S. dollars on 

behalf of itself and its clients. Three examples of HBMX high risk 

clients help illustrate how HBMX's AML deficiencies also created risk 

for HBUS. They include high risk Mexican and U.S. money service 

businesses, clients using offshore u.s. dollar accounts in the Cayman 

Islands, and purchasers of millions of dollars in u.s. dollar travelers 

cheques. 

(1) High Risk Money Service Businesses 

Mexican casas de cambio (CDCs) are money service businesses 

licensed by the Mexican Treasury Department (SHCP), through the 

m Subcommittee interview of Paul Thurston (51112012). 

'24 Subcommittee interview of Michael Geoghegan (5/24/2012). 

425 Subcommittee interview of David Bagley (5/10/2012). 
270 


76061.636

96 

CNBV, to exchange foreign currencies for a fee. In Mexico, CDCs are 

not licensed as banks and do not hold deposits, maintain checking or 

savings accounts, or provide other banking services.426 Instead, CDCs 

are typically limited to accepting currency from a customer, exchanging 

it for another currency, and then either handing it over to the customer or 

wiring it to a financial institution in another country, such as the United 

States.427 

Tn the United States, some money service businesses perform 

similar cross-border services, enabling individuals in the United States 

to wire U.S. dollars to Mexico, where the dollars may be converted into 

Mexican pesos and paid out to a designated recipient. Those U.S. 

money service businesses are sometimes referred to as money remitters. 

Both Mexican CDCs and U.S. money service businesses often perform 

their services for walk-in customers, although they may also have 

established customers who use their services on a regular basis. In both 

Mexic0428 and the United States, 429 CDCs and money service businesses 

are legally required to establish AML programs to safeguard against 

laundering criminal proceeds. 

(a) Casa de Cambio Puebla 

Until 2007, Casa de Cambio Puebla (Puebla) was a licensed casa 

de cambio, founded in 1985, with branch offices throughout Mexico.43o 

On May 16,2007, the United States obtained a warrant from a Federal 

court in Florida and froze or seized all Puebla funds on deposit with 

Wachovia Bank in Miami, as well as with Wachovia Bank in London, 

affecting funds totaling over $11 million.431 In July 2007, Puebla filed a 

civil complaint seeking the release of those funds. 432 Tn 2008, the 

United States indicted Puebla, two of its officers,433 and two other 

individuals on drug smuggling and money laundering charges.434 In 

2009, one of the defendants was arrested and, in 2010, pled guilty to 

conspiracy to launder money,435 and was sentenced to 14 months in 

prison, while the other defendants, including Puebla, were placed on 

426 See United States v. Wachovia Bank N.A., Case No. 1 0-20 165-CR-Lenard (USDC SDFL). 

Factual Statement, Exhibit A to Deferred Prosecution Agreement (31l6120 I 0), at ~ 12. 

421 Id, at~ II. 

428 See Article 95 bis ofthe General Law of Auxiliary Credit Organizations. 

429 See 31 USC § 5318(h)(l) and § 5312(1) and (R). 

430 Casa de Cambia Puebla, S.A. v. United States, Case No. 10-20165 (USDC SDFL), Petition 

for Return of Seized Funds (71l212007)(hereinafter "Puebla Petition"), at 4. 

431 Puebla Petition, at 2-3. 

432 Id. 

433 See id., at 19. 

434 See United States v. Casa de Cambia Puebla, S.A., Jose A. Gutierrez de Velasco Hoyos, 

Amador Cordero Vasquez, Pedro Alfonso Alatorre Damy, aIk/a "Pedro Barraza Uruguastegui," 

and Leonardo Vasquez E.strada, Case No. 08-20097-CR-Graham (USDC SDFL), Indictment 

(2/l/2008, unsealed 11/4/2009). 

435 Id., Plea Agreement (7/912010), at ~ 1. 
271 


76061.637

97 

fugitive status.436 In addition, in 2010, Wachovia Bank entered into a 

deferred prosecution agreement with the U.S. Department of Justice for 

having failed to maintain an effective anti-money laundering program437 

in connection with its casa de cambio business, including with respect to 

Puebla.438 Those legal proceedings, which involved a major Mexican 

CDC and major U.S. bank, received widespread attention.4J9 

Puebla was a longtime customer ofHBMX, having first begun a 

relationship with HBMX's predecessor, Bital, in the 1980s.440 In 2004, 

Puebla also opened a U.S. banknotes account with HBUS.441 By 2007, 

Puebla had several accounts at HBMX, as well as an outstanding loan.442 

After the United States seized the company's funds at Wachovia Bank in 

May 2007, HBUS suspended the Puebla account two weeks later and 

closed the account in June 2007.443 HBMX did not actually close the 

account until November 2007, and then only after the Mexican Attorney 

General served an order on the bank seizing Puebla funds. 

Puebla at HBMX. At the time ofthe May 2007 seizure of more 

than $11 million in Puebla funds at Wachovia Bank, HBMX was already 

reeling from another money laundering scandal involving a March 2007 

seizure of cash, weapons, and wire transfer records from the Mexican 

residence of longtime customer, Zhenly Ye Gon and his pharmaceutical 

companies, Unimed Pharm Chem, Constructora e Inmobiliaria Federal, 

and Unimed Pharmaceutica1.444 That seizure had triggered an intensive 

review by senior HBMX officials ofthe Ye Gon-related accounts as well 

as HBMX's overall AML program. The Puebla case added another high 

436 See id., docket entries 12, 34, 38-42. 

431 United States v, Wachovia Bank N.A., Case No. 10-20165-CR-Lenard (USDC SDFL), 

Deferred Prosecution Agreement (311612010), at ~ 3. 

4)Sld., Factual Statement, Exhibit A to Deferred Prosecution Agreement (3116/2010), at ~ II. 

439 See, e.g., "U.S. freezes Mexico exchange bureau accounts for money laundering," EFE News 

Services Inc. (6/9/2007); see also "Wachovia is Under Scrutiny in Latin Drug-Money Probe," 

Wall Street Journal, Evan Perez and Glenn R. Simpson, April 26, 2008. In addition, the U.S. 

State Department discussed the Puebla case in its 2009 International Narcotics Control Strategy 

Report. Sec 2009 International Narcotics Control Strategy Report, U,S. Department of State, at 

356-357. 

440 See, e.g., July 2007 email exchanges among HBMX Paul Thurston, John Rendall, Ramon 

Garcia, and others, "[subject redacted by HSBC], HSBC OCC 8875132-135. 

441 Sce 6/5/2007 email from HBUS Daniel Jack to HBMX Leopolda Barroso, "HSBC in Mexico 

-AML Compliance & Casa de Cambia," HSBC-PSI-PROD-0095913. 

442 See 5/l/2008 memorandum [carrying incorrect date of 51112007] from HBUS Judy Stoldt and 

Gloria Stazza to HBUS Denise Reilly, "Wall Street Journal Article Regarding Wachovia," OCCPSI-01358515. 

443 See 12/20/2007 HBUS Compliance Certificate, OCC-PSI-00227523, at 5. 

444 See ill re Zhenly Ye Gon, Case No. 1 :07-cr-00 181-EGS (USDC DC), Complaint for Arrest 

with a View Towards Extradition (9115/2008) (hereinafter "Ye Gon Extradition Complaint"), at 

13; "Mexican Fugitive and Co~Conspirator Arrested on U.S. Drug, Money Laundering Charges," 

U.S. Drug Enforcement Administration press release (712412007), 

http://www.justice.gov/deaipubs/states/newsrellwdo072407.html. 
272 


76061.638

98 

profile problem for HBMX, not least because Puebla also handled Ye 

Gon funds. 445 

In late May 2007, HBUS learned of the seizure ofPuebla funds at 

Wachovia Bank, and quickly suspended activity in the Puebla 

correspondent account at HBUS. 446 It is not clear when HBMX first 

learned ofthe seizure, but by early June, both banks were considering 

whether to close their Puebla accounts. On June 5, 2007, Leopoldo 

Barroso, HBMX's AML head, received an email from a senior AML 

Compliance officer at HBUS, Daniel Jack, asking ifMr. Barroso was the 

new AML director at HBMX and "wonder[ing] what relationships" 

HBMX had with Puebla.447 Mr. Barroso responded that HBMX had "a 

few DDAs [Demand Deposit Accounts] and a loan" with Puebla.448 He 

also indicated that HBMX planned to "decide within the next 5 days" 

whether to terminate its relationship with Puebla, and asked Mr. Jack to 

let him know ifHBUS decided to take that action.449 

Mr. Jack noted in a later email that he did not tell Mr. Barroso 

during the June 5 email exchange about "the DEA seizure or Wachovia 

closin~ [Pueblal acc[ounlts," although it is possible that HBMX already 

knew. 50 Mr. Jack also did not disclose that HBUS had already 

suspended Puebla's account activity a week earlier, on May 31, 2007.451 

Mr. Jack told the Subcommittee that, soon after the June 5 email 

exchange, he told Mr. Barroso that HBUS had shut down its account 

with Puebla.452 When Mr. Barroso asked ifHBUS could provide him 

with a list of their banknote customers in Mexico and the amount of U.S. 

dollars they exported from Mexico to the United States, Mr. Jack 

demurred, responding that there were "privacy issues" but that he would 

"see what info" he could share.45J This exchange between senior AML 

445 See 10/13/2007 "Reportan ruta de Ye Gon para 'blanquear' dinero" ("Ye Gon reported path 

to 'launder' money!'), EI Universall Francisco G6mezl www.eluniversaLcom.mx (reporting that 

the Mexican agency SHCP had deteffilined that, [rom 2003 to 2006, Mr. Ye Gon and his 

companies had moved $90 million through four major Mexican banks and multiple casas de 

cambio, including HBMX and Puebla), cited in 7/1812008 Report of Findings (Update) for 

Consultoria Internacional Banco, prepared by HBUS Financial Intelligence Unit, OCC·PSI· 

00247712. 

446 See 5/3112001 email [rom HBUS Alan Ketley to HBUS Gyanen Kumar and others, "With 

immediate effect we are suspending all activity with the subject client," HSBC PSI PROD 

0095908·910; 6/6/2007 email fromHBUSDanieIJacktoHBUSAlanKetley.Re: HSBC in 

Mexico _. AML Compliance and Casa de Cambia, HSBC·PSI·PROD·00959l2. 

4476/5/2007 email [rom HBUS Daniel Jack to HBMX Leopoldo Barroso, "HSBC in MexicoAML Compliance and Casa de Cambia," HSBC·PSI·PROD·0095914. 

448 6/6/2007 email fromHBUS DanielJacktoHBUS Alan Ketley, Re: HSBC in Mexico - AML 

Compliance and Casa dc Cambia, HSBC·PSI·PROD·0095912. 449 Id. 

45° Id. 

451 See 5/31/2007 email from HBUS Daniel Jack to HBUS Alan Ketley, "N·NY & Casa de 

Cambia Puebla in Mexico;' HSBC·PSI·PROD·0095908; 5/30/2007 email from HBUS Gyanen 

Kumar to "US Banlmote Dept Sales Team," "Casa de Cambia Puebla," HSBC OCC 7688742. 

452 Subcommittee interview of Daniel Jack (3/13/2012). 

453 6/612007 email from HBUS Daniel Jack to HBUS Alan Ketley, "HSBC in Mexico - AML 

Compliance and Casa de Cambio," HSBC·PSI·PROD·0095912. 
273 


76061.639

99 

Compliance personnel at HBUS and HBMX suggests that information 

sharing between the two banks was guarded, rather than automatic. 

In early July 2007, HBMX Compliance head, Ramon Garcia, 

disclosed in an internal weekly report that went to HSBC Group 

Compliance that the HBMX CCC Committee had considered closing the 

Puebla account, but decided instead to retain the client. In response, 

John Root, a senior HSBC Group Compliance officer, sent him a 

blistering email criticizing the CCC Committee for "rubber-stamping 

unacceptable risks." This email, cited earlier in a discussion ofHBMX's 

CCC Committee, is relevant again, because it applies to the Puebla 

account. Mr. Root wrote: 

"It looks like the business is still retaining unacceptable risks and 

the AML committee is going along after some initial hemming and 

hawing. I am quite concerned that the committee is not 

functioning properly. Alarmed, even. I am close to picking up the 

phone to your CEO.,,454 

Mr. Root's email went on to harshly criticize the CCC 

Committee's decisions to keep open accounts for Mr. Ye Gon and 

another accountholder under suspicion for money laundering, before 

describing as "strike three," the decision to retain the Puebla 

"relationship after USD 11 million was seized by the authority in 

[Redacted by HSBC] account with Wachovia in Miami." Mr. Root 

continued: 

"What?! The business was okay with this? The AML Committee 

just can't keep rubber-stamping unacceptable risks merely because 

someone on the business side writes a nice letter. It needs to take a 

firmer stand. It needs some cojones. We have seen this movie 

before, and it ends badly.,,455 

Mr. Garcia responded that he was escalating the decision on 

Puebla to the HSBC Mexico CEO, since the relevant HBMX business 

division had disagreed with a Compliance recommendation to close the 

account.456 The next week, HSBC Mexico CEO Paul Thurston agreed 

with closing the account.457 Mr. Rendall suggested alerting their U.S. 

4547117/2007 email from HSBC John Root to HBMX Ramon Garcia, with copies to Susan 

Wright, David Bagley, and Warren Learning, "Weekly Compliance Report 02JUL-06JUL07," 

HSBC acc 8875925-927. 455 Id. 

456 See 7118/2007 email from Ramon Garcia to HBC David Bagley, "Weekly Compliance Report 

02JUL-06JUL07," HSBC acc 8875925. 

457 See July 2007 email exchanges among HBMX Paul Thurston, John Rendall, Ramon Garcia, 

and others, "[subject redacted by HSBC], HSBC acc 8875132-135. 
274 


76061.640

100 

counterparts at HBUS, since HBUS also had a correspondent 

relationship with Puebla. 458 

Despite Mr. Thurston's July 2007 decision to close the Puebla 

account, HBMX did not actually close or freeze its Puebla account for 

another four months, allowing Puebla continued use ofHBMX's 

correspondent account at HBUS.459 HBMX finally closed the account in 

November 2007, after receiving a seizure warrant from the Mexican 

Attorney General seeking all funds in accounts opened in the name of 

Puebla or related parties.460 

The seizure warrant named 91 parties related to Puebla, of which 

81 were HBMX customers who presumably were also using the HBMX 

correspondent account at HBUS. 46 ! HBMX later determined that, from 

January 1 though October 31,2007, a period often months, 

approximately 650 wire transactions had cleared through the "HBSC 

Mexico correspondent account" at HBUS, where Puebla was either the 

originator or the beneficiary.462 Of those transactions, 170 wire transfers 

totaling $7.3 million were conducted by six individuals or entities linked 

to Puebla.463 All of those wires were later traced back to the Puebla 

accounts frozen at Wachovia.464 The OCC later observed: "[T]hese 

discoveries about the level of CDC activity should have raised concerns 

for HBUS and alerted the bank to the need to obtain basic due diligence 

for HSBC Mexico and other Group Entities.,,465 

Puebla at HBUS. While HBMX exposed HBUS to considerable 

money laundering risk through the transactions it conducted for Puebla, 

458 ld. 

459 See, e.g., 10/27/2007 Compliance Certificate, prepared by HBUS Compliance and provided 

to HSBC Group Compliance, HSBC PSI PROD 0095916-922, at 919 (listing major HBUS 

compliance issues, including "HBUS Ban[k]notes/Casa De Cambio Puebla (RED 3870): No 

transactions have been conducted with Casa de Cambio Puebla SA de CV in Mexico since 

lJlIN07. Although HBMX continues to deal with this Money Services Business, HBliS plans to 

formally terminate the Banknotes relationship soon."). 

460 See 12111/2007 email from HBMX Leopolda Barroso to HBliS Daniel Jack, "HSBC & Casa 

de Cambia Puebla in Mexico - Negative Press," HSBC OCC 7688750. The Attorney General 

identified 91 related parties. 

461 See 51112008 memorandum [carrying incorrect date of 511/2007] from HBliS Judy Stoldt and 

Gloria Stazza to HBliS Denise Reilly, "Wall Street Journal Articlc Regarding Wachovia," OCCPSI-01358515. 

462 Id.; 9113/2010 OCC Supervisory Letter HSBC-20 1 0-22, "Bank Secrecy Act/Anti-Money 

Laundering CBSA-AML') Exarnination- Program Violation (12 lI.S.C. §1818(s); 12 C.F.R. 

F1.21)," at 24. [Sealed Exhibit.] 

631d. See also 5/1/2008 memorandum [carrying incorrect date of 51112007] from HBliS Judy 

Stoldt and Gloria Stazza to HBliS Denise Reilly, "Wall Street Journal Article Regarding 

Wachovia," OCC-PSI-01358515. 

464 5/l/2008 memorandum [carrying incorrect date of 51112007] from HBliS Judy Stoldt and 

Gloria Stazza to HBliS Denise Reilly, "Wall Street Journal Article Regarding Wachovia," OCCPSl-01358515. 

465 9/13/2010, Supervisory Leuer HSBC-2010-22, OCC Sally Belshaw to HBliS Irene Dorner 

and David Bagley, Re: Bank Secrecy Act/Anti-Money Laundering ('BSA-AML') Examination 

- Program Violation (12 lI.S.C. §1818(s); 12 C.F.R. §21.21)," at 25. [Sealed Exhibit.] 
275 


76061.641

101 

I-IBUS also incurred risk from its own direct dealings with Puebla, 

including a U.S. banknotes account it opened for Puebla in 2004. Injust 

three years, Puebla substantially boosted its use of that U.S. banknotes 

account, swelling its sales of U.S. dollars to HBUS from $18 million in 

February 2005, to $113 million in March 2007, a tenfold increase.466 

When AML monitoring alerts raised red flags about the growing 

flood of U.S. dollars from Puebla, HBUS bankers provided a number of 

explanations for the increases, none of which considered whether Puebla 

might be accepting illegal drug proceeds that drug cartels were then 

smuggling into Mexico from the United States. For example, when 

Puebla's U.S. dollar volumes increased by $3 million between 

November 2005 and February 2006, an HBUS banker wrote that the 

"[c]lient is slowing [sic] growing its business volume as a result of better 

cash flow thanks to dealing with HSBC i.e., faster turnaround of 

banknotes.,,467 When the volume jumped by another $13 million the 

very next month, the HBUS banker offered the same explanation, typo 

and all: "[c]lient is slowing [sic] growing its business volume as a result 

of better cash flow thanks to dealing with HSBC i.e., faster turnaround 

ofbanknotes." This cut-and-paste explanation offers no evidence that 

the banker used due diligence to analyze the sudden multi-million-dollar 

increase. When the volume climbed again, by more than $20 million 

from April 2006 to September 2006, to over $76 million, the l-IBUS 

banker asked for an explanation wrote: "Mexico as a whole and more 

specifically [Puebla] is the premier country/msb [money service 

business] USD [U.S. dollar] remitter. There is [a] large population of 

Mexican[s] working in the U.S. during the summer months 

(Iandscapinr

) that send money back home (religiously) to their 

families.,,46 While that might have been true, it was equally true when 

Puebla transmitted just $27 million back to Mexico around the same 

time the previous year, a nearly $50 million difference.469 By the end of 

March 2007, the month before Puebla funds were seized at Wachovia 

Bank, its monthly U.S. dollar transactions at HBUS had exceeded $113 

million.470 

On May 30, 2007, two weeks after the seizure of Puebla funds on 

May \6, HBUS ordered all activity in the Puebla account to be 

suspended with "immediate effect.,,47! A week later, on June 5, 2007, 

HBUS AML Compliance officer Daniel Jack contacted HBMX to 

466 Spreadsheet: Banknotes NY Selected Customers' Activity Alerts & Traders' Explanations 

for USD Purchases & Sales from 2005-2009, OCC-PSI-0005890-894. 

467 Id. at 892. 

468 Id. at 893. 

469 Id. at 892. 

470 Id. at 893. 

471 5/31/2007 email from HBUS Gyanen Kumar to HBllS Alan Ketley and others, "Casa de 

Cambia Puebla," HSBC-PSI-PROD-009591 O. See also 5/31/2007, email from HBllS Daniel 

Jack to HBUS Alan Ketley, "N-NY & Casa de Cambia Puebla in Mexico." HSBC-PSI-PROD0095908. 
276 


76061.642

102 

ascertain whether Puebla also had accounts there, which would continue 

to expose HBUS to the money laundering risks associated with Puebla 

through the HBMX correspondent account.472 

HBUS terminated its Banknotes relationship with Puebla after 

conducting a site visit on June 11,2007.473 In June and July 2007, 

HBUS was contacted by multiple U.S. law enforcement agencies 

regarding its correspondent accounts with financial institutions in 

Mexico, including Puebla. On June 25, 2007, for example, the Drug 

Enforcement Administration and other law enforcement told HBUS of 

their interest in its "banknote trading with" Puebla.474 On July 17,2007, 

HBUS met with "an analyst from the National Drug Intelligence Center 

of the US Dep[artmen]t ofJustice to explain our business and AML 

program along with discussing cross-border issues.,,475 On July 20, 

2007, HBUS met with FinCEN specialists "to discuss our wholesale 

banknotes business with clients in Mexico as well as our AML program, 

CTR filing and related issues.,,476 The extent to which HBUS informed 

HBMX about the level of U.S. law enforcement interest in Puebla is 

unclear. 

(b) Sigue Corporation 

Another HBMX client that used HBMX's correspondent account 

at HBUS was Sigue Corporation (Sigue), a U.S. licensed money service 

business incorporated in Delaware but headquartered in California.477 

Sigue's primary business activity was transmitting funds on behalf of 

third parties from the United States to Mexico and Latin America.478 

Acting through its operating company, Sigue LLC, it arranged for the 

remittance of U.S. dollars through a network of more than 7,500 

"authorized delegates" or agents across the United States, most of which 

were small businesses under contract to offer Sigue's money 

transmission services.479 

On January 28, 2008, Sigue entered into a deferred prosecution 

agreement with the U.S. Department of Justice, Drug Enforcement 

Administration, and Internal Revenue Service, admitting that it had 

472 See 61512007 email from HBUS Daniel Jack to HBMX Leopoldo Barroso, "HSBC in Mexico 

- AML Compliance and Casa de Cambio," HSBC-PSI-PROD-0095914. See also 10126/2007 

memorandum from HBUS Carolyn Wind to HNAH Janet Burak and others, HSBC-PSI-PROD0095919. 

473 See 1212012007 HBUS Compliance Certificate, OCC-PSI-00227523, at 5. 

474 Id. 

475 Id. at 2. 

476 Id. 

477 See United States v. Sigue Corp. and Sigue LLC, Case No. 4:08CR54 (USDC EDMO), 

Deferred Prosecution Agreement Factual Statement (112812008), at l. 478 Id. 

479 [d. 
277 


76061.643

103 

failed to maintain an effective anti-money laundering program.

480 As 

part of the agreement, Sigue admitted to "serious and systemic" 

violations of U.S. AML requirements from 2003 to 2005, which 

"allowed tens of millions of dollars of suspicious financial transactions 

to be conducted through Sigue, including transactions involving funds 

represented by undercover U.S. law enforcement agents to be drug 

proceeds.,,48J The drug proceeds which U.S. undercover agents 

transmitted through Sigue totaled more than $500,000, and were sent 

through 59 separate Sigue agents in 22 states.482 The undercover federal 

agents had explicitly informed Sigue agents that they were transmitting 

illegal drug proceeds, structured the transactions to evade U.S. reporting 

obligations, and wired the funds to seven law enforcement agents in 

Mexico City, creating a money laundering pattern that Sigue should 

have detected and reported as suspicious activity, but did not.483 Sigue 

admitted its failure to adequately supervise and control its agents, 

"effectively monitor and investigate high risk transactions," "establish 

an effective risk-based AML program," and "exercise sufficient 

enhanced due diligence for high-risk transactions and customers.,,484 As 

part ofthe agreement to defer prosecution ofthe company, Sigue agreed 

to forfeit $15 million in suspect funds and spend $9.7 million to 

strengthen its AML program.485 

The day after the deferred prosecution agreement was made public 

in court, an article discussing Sigue's misconduct and "record penalty" 

for a money service business concluded that a "case such as that against 

Sigue gives banks yet another reason to treat MSBs [money service 

businesses] as pariahs.,,486 David Bagley, HSBC Group Compliance 

head, sent a copy of the article to Susan Wright, head of AML 

Compliance for HSBC Group, with a handwritten note: "Obvious 

question - I assume they are not our customer.,,487 His assumption, 

however, was incorrect. 

After learning that Sigue was, in fact, a client ofHBMX, on 

February 1,2008, Ms. Wright sent an email to HBMX Compliance head 

Ramon Garcia about the account.488 She noted that, despite the deferred 

prosecution agreement and Sigue's admission of wrongdoing, HBMX's 

480 [d. 

481 Id. 

482 [d. 

483 [d. at 1-3. 

484 1d. at 6. 

485 Id. at 12-15; Deferred Prosecution Agreement at ~~ 5, 9. 

486 "Money Laundering 'Sting' led to MSB's Record Penalty, Says Legal Pact," Complinet, Brett 

Wolf, (1/29/2008), reprinted at HSBC acc 8875020. 4" See handwritten note on copy of article, "Money Laundering 'Sting' led to MSB's Record 

Penalty, Says Legal Pact," Complinet, Brett Wolf, (1129/2008), HSBC acc 8875020. 

488 2/1/2008 email from HSBC Susan Wright to HBMX Ramon Garcia, with copies to HSBC 

Warren Learning and John Root, no subject line, l-ISBC acc 8875141. 
278 


76061.644

104 

commercial banking division wanted to retain the account. She warned 

that, if the account were retained, it: 

"will need to be closely monitored and subject to frequent reviews 

(recommendation for quarterly reviews in current circumstances). 

The actions by the US regulators should be used as a trigger event 

and our due diligence on this client updated. In this connection the 

high risk profile that is in place for Financial Institutions should be 

used .... If we only see batched transactions then we are relying on 

the screening undertaken by [Sigue]. It would be helpful to 

understand the nature of these transactions and currencies involved 

- could you provide me with an overview? We should also 

monitor the volume you mentioned that we are not [Sigue's] only 

bankers in Mexico. If, however, any of the other banks withdraw 

then we may well see the volume of transactions through us rise 

and our exposure/risk will increase with a corresponding increase 

in the cost of monitoring, etc.,,489 

Her email was forwarded to HSBC Compliance head David 

Bagley who, on February 4, 2008, forwarded it to HBMX CEO Paul 

Thurston and recommended closing the Sigue account.490 Mr. Bagley 

noted Sigue's "serious and systemic violations and a record fine" due in 

part to the fact that Sigue "had little control over its numerous agents." 

He wrote: "Whilst the company will now need to take steps to address 

these deficiencies this will inevitably take some time, and instilling the 

appropriate culture within the business even longer." 

Mr. Thurston forwarded Mr. Bagley's recommendation to John 

Rendall, HBMX COO, and asked for more information about the 

account.491 Mr. Rendall reminded him that "a couple of months back," 

HBMX Compliance had recommended closing the Sigue account, but 

was opposed by the HBMX commercial banking division (CMB) that 

wanted to keep the account open.

492 The issue was then elevated to Mr. 

Thurston who decided against closing the account.493 Mr. Rendall 

explained: 

489Id. 

"Our recommendation, which you supported, was to maintain this 

relationship. It was based on the following factors: A) our CMB 

team in Tijuana were relatively on the top ofthe case; B) the 

490 2/412008 email from HSBC David Bagley to HBMX Paul Thurston, [subject redacted by 

HSBC], HSBC acc 8875020-021. 

491 See 2/4/2008 email from HBMX John Rendall to HBMX Paul Thurston, "[redacted by 

HSBC]," HSBC acc 8875139. 

492 See 2/4/2008 emails from HBMX John Rendall and HBUS David Bagley, "[redacted by 

HSBC]," HSBC acc 8875139-40. 

493 See 2/412008 email from HBMX John Rendall to HBMX Paul Thurston, "[redacted by 

HSBC]," HSBC acc 8875139. 
279 


76061.645

105 

events for which [Sigue] have been fined were relatively historicfrom memory, 2-3 years ago, and significant improvements had 

been made since then.,,494 

Despite Sigue's admission of wrongdoing, its admission oflax controls 

over the actions taken by its agents, and the recommendation ofthe head 

ofHSBC Group Compliance to close the account, Mr. Thurston decided 

once again to retain it and to continue to provide Sigue with u.s. dollar 

transactions through the HBMX accounts at HBUS. 

Mr. Thurston told the Subcommittee that Sigue was one of the few 

accounts he decided to retain over the objection ofHBMX Compliance. 

He explained that he did so, because he believed the issues were in the 

past, and Compliance head Ramon Garcia had met with Sigue and 

believed it was meeting its commitment to strengthen its AML 

program.

495 

Also on February 4, 2008, after reviewing an earlier media report 

identifying HBMX as a "pay partner" for Sigue,496 the OCC AML 

Examiner then reviewing HBUS' AML program "requested HSBC 

management to determine what, if any, involvement HSBC had with 

Sigue.,,497 The OCC inquiry triggered an inquiry into the Sigue account 

by HBUS, which had not been privy to the exchanges between HSBC 

Group and HBMX about the account.498 

On February 5, 2008, HBUS informed the OCC AML Examiner 

that while Sigue was not an HBUS client, it was a client ofHBMX and 

had executed U.S. dollar wire transfers through HBMX's correspondent 

accounts at HBUS.499 In an internal memorandum summarizing the 

information, the OCC AML Examiner wrote that HBUS "acts as a passthrough for wire transfers for Sigue.,,50o He noted that, for "the period of 

January through December 2007 159 wire transfers passed through 

HSBC originated by Sigue for the benefit of' HBMX, involving more 

494 See 1/2/2008 email from HBUS Susan Wright to HBMX Ramon Garcia, "[redacted by 

llSBC]," HSBC acc 8875141. 

495 Subcommittee interview of Paul Thurslon (5/1/2012). 

496 See "California MSB Faces Record Fine From Justice Department in AML Case," Fortent 

Inform, Brian Monroe (III I12008); see also 2/5/2008 OCC memorandum to files, "HSBC 

MonitoringlReputation Risk," aCC-PSl-01416736 [sealed exhibit]. 

497 2/5/2008 acc memorandum to files, "HSBC MonitoringlReputation Risk," aCC-PSI01416736, at 2. [Scaled Exhibit.] 

498 The acc Examiner noted internally allhe time: "Although HSBC management was 

previously aware of media reports concerning Sigue, up to the time of our request, HSBC 

management had not conducted any enhanced due diligence andlor in-depth analysis to 

determine HSBC's potential exposure resulting from the prosecution ofSigue." ld. at 2 

(emphasis in original omitted). 

499 See 2/5/2008 ace memorandum to files, "HSBC Monitoring/Reputation Risk," aCC-PSI01416736, at 3. [Sealed Exhibit.] 500 Id. 
280 


76061.646

106 

than $485 million.50l Re wrote that RBUS management had agreed that 

those wires should have triggered a review of the account activity.502 

The OCC AML examiner saw the events surrounding the Sigue 

account as emblematic of a broader problem involving inadequate 

monitoring and weak AML investigations by RBUS of clients using 

correspondent accounts to conduct suspect transactions. In the internal 

memorandum, the OCC AML examiner wrote: 

"Over the past few years, there have been a number of instances 

where the OCC has brought to the attention of RSBC management 

negative media events, publicized indictments, etc., resulting in the 

need for RSBC management to conduct ad-hoc reviews to 

determine potential reputational risk. In the majority of these 

instances, RSBC management was either not aware of these events 

or had not been pro-active in determining the level of potential 

exposure due to these events. ,,503 

Re concluded that if he had "not intervened it is highly unlikely that 

RSBC management would have performed the proper level of due 

diligence, [or] determined the potential exposure to risk" in the Sigue 

matter.504 

Two months later, on April 26, 2008, a major U.S. newspaper 

published an article describing an ongoing Federal probe of allegations 

that Wachovia Bank was laundering drug proceeds supplied by Mexican 

casas de cambio.505 The article also mentioned Sigue, triggering a 

second round of inquiries at I:IBUS into the status of the Sigue account 

which remained open at RBMX and continued to execute U.S. dollar 

transactions through the RBMX correspondent account at RBUS. 

RBUS AML Compliance officer Judy Stoldt and RBUS 

investigator Gloria Stazza sent a memorandum to their supervisor 

Denise Reilly, a senior RBUS AML Compliance officer, summarizing 

the article and discussing RBUS' exposure to the casas de cambio 

named in the article.506 The memorandum began: 

"RBUS does not hold any account for any casa de cambio 

mentioned in the WSJ article. The only RBUS connection to 

501 Id. HBUS apparently provided this wire transfer information to the ace, in response to the 

acc request for more infonnation about HBUS' involvement with Sigue. 502Id. 

503 Id. 

504 Id. at I. 

505 See "Wachovia Is Under Scrutiny in Latin Drug-Money Probe," Wall Street Journal, Evan 

Perez and Glenn Simpson (4/26/2008). 

506 See 5/l/2008 memorandum [carrying incorrect date of 5/1/2007] from HBUS Judy Stoldt and 

Gloria Stazza to HBUS Denise Reilly, "Wall Street Journal Article Regarding Wachovia," acc- PSI-013585I6-517. 
281 


76061.647

\07 

activity involving those named casas de cambio is activity that was 

conducted through our correspondent accounts, and most notably 

through our account with HSBC Bank Mexico (HBMX)."S07 

The May 2008 memorandum described Sigue as a money service 

business that had allegedly processed $24.7 million in "suspicious 

money remittances related to drug-trafficking proceeds."so8 It explained 

that HBUS had first taken note ofSigue when it entered into a record 

$25 million settlement with the Justice Department in January 2008, 

and, as a result, conducted a review of the Sigue accounts, wire transfer 

activity, and whether either Sigue or its founder, Guillermo de la Vina, 

had been "the subject of any other negative news or law enforcement 

activity."so9 The memorandum reported that, despite having no direct 

account with Sigue, a "wire review" found that, during 2007, Sigue had 

sent 159 wire transfers for $485 million through HBMX's correspondent 

account, all of which were originated by Sigue and sent to its own 

account at HBMX, which HBUS viewed as suspicious.slO The 

memorandum noted that HBUS had contacted HBMX to discuss Sigue, 

and HBMX disclosed that it had imposed "parameters" on its 

relationship with Sigue, including limiting Sigue to "conducting 

transactions for individual customers to $2,000 USD per transaction."SI J 

The memorandum did not explain, however, how that $2,000 limit 

affected the actual wire activity in 2007, in which each wire transfer 

apparently batched numerous underlying wires without identifYing 

individual client transactions. The memorandum also stated that fIBUS 

had found that a Sigue employee had been indicted for assisting drug 

traffickers with money laundering,Sl2 and on another occasion Sigue was 

507 Id. at I. 

508 Id. at 3. See also 1/28/2008 "Sigue Corporation and Sigue LLC Enter into Deferred 

Prosecution Agreement and l'orfeit $15 Million to Resolve Bank Secrecy Act Violations," press 

release issued by U.S. Dcpal1mcnt of Justice, 

http://www.jllstice.gov/opaipr/200R/.lanllary/08.erm_068.html(stating that "more than $24.7 

million in suspicious transactions were conducted through registered agents of Sigue, including 

transactions conducted by undercover U.S. law enforcement agents using funds represented to be 

~roceeds of drug trafficking"). 

09 51112008 memorandum [carrying incorrect date of 51112007] from HBUS Judy Stoldt and 

Gloria Stazza to HilUS Denise Reilly, "Wall Street Journal Article Regarding Wachovia," accPSI-0!358516-517, at 3. 

SlO Id. at 4. The memorandum did not mention that this wire analysis was compiled for the acc, at its request, in February 2008. According to Sigue, altogether during 2007, it sent a total of 

more than $1.8 billion in wire transfers through its HBMX account to a Sigue affiliate in Mexico. 

Subcommittee briefing by Sigue (7/2512012). 

511 51112008 memorandum [carrying incorrect date of 51112007] from HBUS Judy Stoldt and 

Gloria Stazza to HilUS Denise Reilly, "Wall Street Journal Article Regarding Wachovia," accPSI-OIJS8S16-S17, at 4. 

512 ld. at 3. The Subcommittee has not obtained evidence of an instance in which a Sigue 

employee has been indicted for assisting drug traffickers with money laundering; however, in 

2006, a Sigue agent pled guilty to money laundering and conspiracy to distribute illegal drugs, 

and a factual statement supporting his guilty plea described his use of Sigue wire tr.msfers to 

launder illegal drug proceeds from 2003 to 200S. See United States v. Gerardo Alvarado 

Alvarado, Case No. I :OSCR3S4-1 (USDC MDNC). Plea Agreement (2/24/2006) and Factual 

Basis in Support of Guilty Plea (2/2412006). 
282 


76061.648

108 

described as having allowed $295,000 to be transferred from an account 

at another bank to an illegal alien deported to Mexico,5IJ while also 

noting that Sigue itself had not been implicated in either matter. Despite 

this cascade of troubling information, for the next two years, little or no 

action appears to have been taken by HBUS or HBMX with respect to 

the Sigue account at HBMX. 

On January 30, 2009, having determined that Sigue satisfied the 

requirements ofthe Deferred Prosecution Agreement the Justice 

Department requested and the court granted dismissal of the criminal 

case against the company.5J4 

In 20 I 0, as part of an OCC AML examination, an OCC AML 

examiner reviewed the May 2008 memorandum regarding Sigue and 

asked what followup actions had been taken in response to it, in 

particular whether Sigue had ever been added to the HBUS "wire filter" 

for purposes of enhanced due diligence and whether any further analysis 

had been done ofSigue account activity.5J5 HBUS personnel responded 

that Sigue had not been added to the wire filter, the 2008 memorandum 

had not been "passed to anyone," and the HBUS Financial Intelligence 

Group had not conducted any additional due diligence with respect to 

Sigue.516 HBUS explained that "Sigue was not added to the wire filter 

as Sigue entered into a written agreement with the Department of Justice 

to enhance its AML program and was not (per the investigative search) 

the subject of any other money laundering investigations.,,517 

Essentially, despite Sigue's deferred prosecution in 2008, admission of 

wrongdoing caused in part by an inadequate AML program, past HBMX 

alerts flagging unusual transactions, past HBUS wire transfer analysis 

identifYing suspicious activity, past recommendations by Compliance to 

close the account, and past regulatory inquiries, HBUS did not conduct 

any enhanced monitoring or analysis of the Sigue account. 

513 51112008 memorandum [carrying incorrect date of 51112007] from HBUS Judy Stoldt and 

Gloria Stazza to HBUS Denise Reilly, "Wall Street Journal Article Regarding Wachovia," OCCPSI-01358516-517, at 3-4. The memorandum referred to an article as the source ofthis 

information. Id. at 3; see also "'Suspicious wire transfers, documents lead to raids in NW Ark," 

Associated Press, Jon Gambrell (512512007). The referenced matter involves criminal 

proceedings in which the employee ofa Sigue agent (who had been deported to Mexico) was 

charged with conducting an unlicensed money transmitting business and supporting illegal aliens 

in the United States; no drug proceeds were involved. See United States v. Honorato Pedroza, 

Case No. 5:07-cr-50050-JU! (USDC WDAK), Indictment (612712007). 

514 See United States v. Sigue C~nd Sigue LLC, Case No. 4:08CR54 (USDC EDMO), Order 

for Dismissal with Prejudice (113012009). 

515 See 2116-1812010 exchange of em ails among Federal Reserve Patricia Brunner, HBUS Denis 

O'Brien, Judy Stoldt, and others and OCC Joseph Boss, "June 2008 Audit - Payment Services," 

OCC-PSI-00378989. 

516 Id. 

517 51112008, memorandum [dated 511/2007, sic] from HBUS Judy Stoldt and HBUS Gloria 

Stazza to HBUS Denise Reilly, Re: Wall Street Journal Article Regarding Wachovia, OCC-PSI01358517. 
283 


76061.649

109 

HBMX's relationships with Puebla and Sigue, a Mexican cas a de 

cambio and a U.S. money service business that remitted funds to Mexico 

and Latin America, demonstrate its tolerance for high risk clients, and 

how those clients subjected, not only HBMX, but also HBUS to 

substantial money laundering risks. The accounts also disclose how 

both banks failed to conduct effective monitoring of some financial 

institution accounts and transactions, even when faced with evidence of 

lax AML controls and criminal proceedings involving money 

laundering. They also expose an absence of regular information sharing 

and coordinated AML efforts between HBUS and HBMX to address 

common AML problems, including limited communications about 

particular clients and actions taken to restrict or close accounts. 

(2) Cayman Island U.S. Dollar Accounts 

A second example of high risk HBMX clients posing money 

laundering risks to HBUS are the tens of thousands of U.S. dollar 

accounts maintained by HBMX through its branch office in the Cayman 

Islands. This branch office is a shell operation with no physical 

presence in the Caymans, and is managed by HBMX personnel in 

Mexico City who allow Cayman accounts to be opened by any HBMX 

branch across Mexico. Total assets in the Cayman accounts peaked at 

$2.1 billion in 2008. Internal documents show that the Cayman accounts 

had operated for years with deficient AML and KYC controls and 

information. An estimated 15% ofthe accounts had no KYC 

information at all, which meant that HBMX had no idea who was behind 

them, while other accounts were, in the words of one HBMX 

compliance officer, misused by "organized crime." Because a primary 

feature of the Cayman accounts is their use of U.S. dollars, HBMX has 

maintained the account assets and conducted account transactions 

through its U.S. dollar correspondent accounts at RBUS. There is no 

documentation showing that RBUS knew or was informed that, by 

providing HBMX with correspondent accounts, it was also providing 

access to the U.S. financial system to high risk accountholders in the 

Caymans. By moving the Cayman transactions through its RBUS 

accounts, RBMX exposed not only itself, but also HBUS to the money 

laundering risks inherent in its Cayman clients. 

Cayman Accounts. HSBC acquired the Cayman branch through 

its purchase ofBital in November 2002. According to a letter from 

HSBC legal counsel: 

"Bital received authorization from Mexican and Cayman 

authorities to offer Cayman USD [U.S. dollar] accounts to its 

customers in 1980. BitaI's license and authorization to offer 
284 


76061.650

110 

Cayman USD accounts was inherited by HBMX when HSBC 

acquired Bital in 2002.,,518 

After the acquisition, the Cayman branch of Bital was renamed HSBC 

Mexico S.A. and continued to operate under a Cayman Class B banking 

license, restricting the branch to operating only "offshore" and open 

accounts exclusively for non-Cayman residents.519 From its inception, 

the branch had no physical office or employees in the Ca6'man Islands, 

and operated in that jurisdiction solely as a shell entity.52 The Cayman 

accounts were actually opened and maintained by HBMX personnel in 

Mexico. Any HBMX branch across Mexico had the authority to open a 

Cayman account for a client.521 

To enable the Cayman branch to provide U.S. dollar accounts to 

clients, HBMX used its correspondent accounts at HBUS to supply the 

needed dollars, process U.S. dollar wire transfers, cash U.S. dollar 

travelers cheques, and perform similar U.S. dollar services. HBMX did 

not open a separate correspondent account for the Cayman branch, but 

included Cayman account transactions within its general correspondent 

account at HBUS. The documents and other evidence reviewed by the 

Subcommittee contain no indication that, until recently, HBMX ever 

informed HBUS about its Cayman branch or the Cayman U.S. dollar 

denominated accounts being serviced through the HBMX correspondent 

accounts at HBUS.522 

The number of accounts and the volume of assets held in the 

Cayman accounts have fluctuated over time. Documentation associated 

with the 2002 Bital purchase do not indicate how many Cayman 

accounts then existed or the total amount of assets they held. A 2006 

audit of the Cayman accounts reported just 1,500 accounts in 2005, with 

no mention of the account balances.523 In September 2008, HBMX 

reported a remarkable increase, over 60,000 Cayman accounts for nearly 

518 6/5/2012 letter from HSBC legal counsel to the Subcommittee, at 4. 

519 See, e.g .• 7/31/2008 email from HSBC David Bagley to HSBC Richard Bennett, "HBMXCAYMAN ACCOUNTS," HSBC OCC 8874827-33. See also list of Cayman offshore banks at 

http://www.offshore-library.com/banking/cayman jslands/page _3. According to HSBC, HBMX 

policy is not to offer the accounts to either Cayman or U.S. residents. See 615/2012 letter from 

HSBC legal counsel to the Subcommittee, at 5. 

520 See, e.g., 7/3112008 email from HSBC David Bagley to HSBC Richard Bennett, "HBMXCAYMAN ACCOUNTS," HSBC OCC 8874827·33. 

521 See, e.g., 112006 "General Audit Report, HBMX - KYC ofUSD Current Accounts in Grand 

Cayman," prepared by Group Audit Mexico. HSBC OCC 8874307·310, at I. This audit 

reviewed files for Cayman accounts that had been opened by 26 HBMX branches in Mexico 

City.ld. 

522 Michael Gallagher, for example. who headed the HBlJS PCM division that helped handle 

correspondent accounts, told the Subcommittee he had been unaware of the U.S. dollar Cayman 

accounts at IIBMX. Subcommittee interview of Michael Gallagher (6/13/12). 

523 See 112006 "General Audit Report, HBMX - KYC ofUSD Current Accounts in Grand 

Cayman," preparcd by Group Audit Mexico, HSBC OCC 8874307-310, at 1. 
285 


76061.651

III 

50,000 customers, with total assets approaching $2.1 billion.524 Three 

years later, however, those totals dropped significantly. According to 

HSBC legal counsel, as of January 2012, the Cayman branch held about 

24,000 Demand Deposit and Term Deposit Accounts for nearly 21,000 

customers, with a total dollar value of approximately $657 million.525 

About 9,000 Cayman accounts had been closed in 2009, due in part to 

insufficient Know Your Customer (KYC) information for the accounts 

as well as regulatory concerns about their high risk nature. 

Inherent Riskiness of Accounts. HBMX and HSBC Group were 

well aware that the Cayman accounts had an inherently higher AML risk 

than other Mexican accounts, since they were offered in an offshore 

jurisdiction with strong secrecy laws and a limited tax regime, and 

permitted accountholders to hold assets in U.S. dollars in contravention 

of normal Mexican legal restrictions. 

In 2008, HSBC Group Compliance head David Bagley noted in an 

email to senior HSBC Group officials that Mexican regulators knew of 

the Cayman accounts, which apparently circumvented certain Mexican 

banking regulations, but nevertheless allowed them to operate: 

"The [Cayman] license, inherited from Bital, allows HBMX to 

provide USD-denominated services to persons domiciled in 

Mexico. Mexican regulation apparently prohibits individual 

Mexicans (Le. non-corporate) to hold USD-denominated deposit 

accounts in Mexico. ... Although HBMX were recently fined 

USD50,000, for the inappropriate promotion ofthese services in 

Mexico,l am advised that CNBV are aware of the existence of the 

accounts and services and have raised no concerns.,,526 

Mr. Bagley also warned: 

'There continues to be a real focus on the level ofUSDdenominated activity in Mexico by CNBV and other bodies, and 

the extent ofHBMX's activity in this area. This account base has 

to therefore be seen as high-risk from an AML and reputational 

perspective. ,,527 

In November 2005, an email from HBMX Compliance head 

Ramon Garcia to senior HSBC Group Compliance officer John Root 

524 See chart at HSBC OCC 8876787, attached to 9/12/2008 email from HSBC John Root to 

HSBC Adrian Cristiani, "Cayman Accounts," HSBC OCC 8876784. 

525 See 615/2012 letter from HSBC legal counsel to the Subcommittee, at 5. 

526 7/3112008 email from HSBC David Bagley to HSBC Richard Bennett, with copies to HSBC 

Michael Geoghegan, Matthew King, and HBMX Emilson Alonso, Luis Pena, and John Rendall, 

"HBMX-CA YMAN ACCOUNTS," at HSBC OCC 8874832. 

527 Id. 
286 


76061.652

112 

flagging compliance issues at HBMX provided this explanation for the 

Cayman accounts: 

"There is a Cayman Island branch for HBMX. Since there is a 

restriction by Mexican Law to open accounts to nationals in USD 

except for those residing in the Mexico's border, as an alternative, 

[Bital] decided to open this branch where cheques accounts to 

Nationals could be opened in USD. It is also known that these 

USD accounts were issued also to non Mexican Nationals."s28 

A January 2006 HBMX internal audit report explained the demand 

for the accounts this way: "HBMX offers their clients the option to open 

USD current and investment accounts in Grand Cayman so that clients 

profit [from] the advantages ofthat country, such as tax free 

investments, under confidentiality terms."S29 In a 2007 email discussing 

the sale of cross-border financial products in Mexico, HSBC Group 

Compliance Deputy Head Warren Learning also noted: "Because 

Mexico's tax scheme is relatively penal (worldwide income) there is a 

high demand for off-shore products."s3o 

Below Standard AML and KYC Controls. The riskiness ofthe 

Cayman accounts was magnified by weak AML controls and inadequate 

KYC information. Those AML deficiencies meant that HBMX had little 

real knowledge about the customers using the Cayman accounts. 

HSBC Group knew about the weak state of the Cayman AML and 

KYC controls from the time Bital was purchased in 2002, and it 

inherited the Cayman branch. An audit prior to the acquisition found 

that Bital had no functioning Compliance Department, limited client 

transaction and activity monitoring, and no KYC focus on high risk 

clients.531 The audit specifically noted the poor state ofKYC 

information in the Cayman accounts: "41% of the accounts reviewed 

(92 of224 reviewed) lacked full client information. 37 files had no 

client information.,,5J2 

In 2004, Mexico strengthened KYC requirements for Mexican 

financial accounts and required Mexican banks to update the KYC 

information in all customer accounts by 2007. In January 2006, 

HBMX's audit group conducted an audit of the KYC controls in place 

m 1112212005 email from HBMX Ramon Garcia to HSBC John Root, "HBMXCOMPLIANCE ISSUES," HSBC OCC 8873261. 529 112006 "General Audit Report, HBMX - KYC ofUSD Current Accounts in Grand Cayman." 

prepared by Group Audit Mexico, HSBC OCC 8874307-310, at I. 

30512412007 email from HSBC Warren Learning to HSBC David Bagley, "He advises that his 

own compliance team are advising him that such cross border activities should cease.-HBMX," 

HSBC OCC 8875007. 

531 July 2002 "Group Internal Audit: Due Diligence Review - Project High Noon," prepared by 

HSBC internal audit group, HSBC OCC 8873846-852. 

532 Id. at HSBC OCC 8873847. 
287 


76061.653

113 

for the Cayman accounts and rated them "Below Standard."S33 Of the 

Cayman accounts reviewed, the audit found that 13% of the files lacked 

material KYC information; more than 50% lacked a visit report with the 

client; some foreign clients were incorrectly described as Mexican 

nationals; and 15% of the account files were missing altogether: 

"More than 50% of account files that were reviewed lacked the 

relevant visit report, which weakens the position ofHBMX in 

terms ofKYC process for these types of accounts (Grand 

Cayman), particularly those accounts opened by foreigners. In 

addition, in 13% of files reviewed the visit reports failed to include 

material information enabling to have adequate KYC. 

Weaknesses were noted in the supervision over the account 

opening process, which also impeded to detect promptly any 

information missing in account files or inconsistencies between the 

information produced by the client and the data captured in CisHogan [[HBMX data system]. ... In addition, the auditors 

indentified foreign clients who were input to the system as 

nationals. 

In addition to the foregoing, c[irca] 15% (10) of account files were 

not found at the Branches. No actions had appeared to be taken to 

instruct RMs [Relationship Managers] to complete client's file 

again. 

In particular the auditors indentified that for accounts opened by 

foreign clients these had produced expired immigration forms and 

that Branch staff did not maintain a copy of all the pages 

composing such a document. This situation was due, in part, to the 

fact that circular letter Depvist045 (procedure to open current and 

term accounts) is not clear in the procedure to open these types of 

accounts (Grand Cayman)."S34 

The audit concluded with the recommendation: "Branch should ensure 

that KYC and account opening documentation is complete and in 

compliance with regulations.,,535 

The 2006 audit uncovered severe AML and KYC deficiencies in 

the Cayman branch requiring remedial action to comply with the 

Mexican deadline for improving customer file KYC information, but 

those audit results appear to have been ignored. The audit 

recommendations were recorded in HBMX's electronic system, but later 

m 1/2006 "General Audit Report. HBMX - KYC of USD Current Accounts in Grand Cayman," 

prepared by Group Audit Mexico, HSBC OCC 8874307, at 1 (emphasis in original). 

\34 ld. at 3. 

535 Id. a14. 
288 


76061.654

114 

closed out without any apparent actions having been taken in response, 

which does not comport with Group policy.536 Two years later, in 2008, 

John Root, senior HSBC Group Compliance officer, rediscovered the 

2006 audit when examining KYC problems in the Cayman accounts. He 

wrote: "The real surprise was the existence of an HBMX audit in 

January 2006 on KYC for the USD Cayman accounts. It is not clear 

who in AML responded, and how. Blank looks all around.,,537 His 

supervisor, Mr. Bagley, later jokingly remarked to the Head of Group 

Audit for Latin America and the Caribbean, Graham Thomson: "I do 

find it surprising that there can have been no response and yet the audit 

was closed out. Is this a breach or are you in audit becoming softer. ,,538 

Project Restoration. As the 2007 deadline approached for 

completing the KYC updates mandated by Mexican law and internal 

reports showed that HBMX's KYC documentation remained in poor 

condition, HBMX obtained a year-long extension from Mexican 

regulators, to May 2008, to clean up its files, including client files for 

the Cayman accounts.539 

In February 2008, Mexican regulators met with the HBMX CEO 

and, among other issues, criticized the bank's poor KYC documentation, 

leading HBMX to initiate "Project Restoration" to intensify its KYC 

remediation efforts.54o John Rendall, HBMX Chief Operating Officer, 

was put in charge of the project with the understanding that files 

containing inadequate KYC would be closed. 54 I Project Restoration was 

closely monitored by senior HBMX and HSBC Group officials. 

At first, the Cayman accounts were excluded from the project. 

Then, in July 2008, HBMX's monitoring system suddenly began 

generating alerts for a number of Cayman accounts. These alerts, which 

highlighted suspicious account activity, were brought to the attention of 

senior Compliance personnel. The head ofHSBC Group Compliance 

David Bagley told the Subcommittee this incident was the "first point 

that the Cayman Islands were brought into sharp focus" for him.542 He 

sent an email informing senior HSBC Group and HBMX officials about 

the alerts which had identified "significant USD [U.S. dollar] 

536 See 7/30/2008 email from HSIlC John Root to HSIlC David Bagley, "HBMX Visit Update," 

HSIlC acc 8873487-489; 8/5/2008 email exchange among HSIlC David Bagley, HSBC John 

Root and HIlMX Graham Thomson, "HBMX - Cayman accounts," HSBC acc 8874829-830. 

537 7/30/2008 email from HSBC John Root to HSBC David Bagley, "HBMX Visit Update," 

HSIlC acc 8873487-489. 

538 8/5/2008 email from HSBC David Bagley to HBMX Graham Thomson, "HBMX Cayman 

accounts," at HSBC acc 8874829. 

539 See 7/27/2007 minutes ofHSBC LAM Regional Audit Committee, HSBC acc 8875086-090 

(noting extension of time for the KYC effort until May 2008). 

540 See 615/2012 letter from HSBC legal counsel to the Subcommittee, at 2. 

541 See, e.g., 10/28/2008 email from Graham Thomson to Emilson Alonso, Subject: "HBMXProjecto Restauracion," HSBC acc 8873464. 

542 Subcommittee interview of David Bagley (5110/2012). 
289 


76061.655

115 

remittances being made by a number of [HBMX Cayman] customers to 

a US comfany alleged to be involved in the supply of aircraft to drug 

cartels."s4 The company was Cabello Air Freight Inc. ofMiami.s44 Mr. 

Bagley wrote that "[a]s a precaution HBMX have issued instructions 

that no new [Cayman] accounts be opened pending a review of these 

activities.,,545 This step was taken with respect to the Cayman accounts, 

in the words of one HBMX compliance officer, "due to the massive 

misuse of them by organized crime.,,546 

The decision to suspend new Cayman accounts was made by then 

HBMX CEO Luis Pen a who did not specifY when the suspension would 

be lifted.547 He also instructed HBMX staffto engage in "a process of 

enhanced due diligence KYC" for all Cayman accountholders to "end by 

December I." He wrote: 

"After this date we will cancel all the accounts that we were not 

able to complete files on and will send cashiers checks to all the 

respective customers. For the future, Mexicans who wish to open 

a dollar denominated account will undergo a referencing process, 

in which the accounts will be ... opened by the bank's staffin a 

proper offshore book as we do in our Premier offering .... 

Unfortunately we will likely lose some deposits as we do not 

expect the KYC process to succeed 100%, but we will offset a 

significant control and regulatory risk."s48 

Also in July 2008, after reviewing the 2006 audit of the Cayman 

accounts, Mr. Root informed Mr. Bagley that "a sam,Rling showed 

that 15% ofthe customers did not even have a file." 5 9 Mr. Root wrote: 

"Fixing the Cayman accounts will be a struggle. How do you locate 

clients when there is no file?" Missing client files, combined with 

accounts misused by drug cartel operatives, provided stark evidence of 

the high risk character of the Cayman accounts and the need for HBMX 

543 7/3112008 email from HSBC David Bagley to HSBC Richard Bennett, with copies to HSBC 

Michael Geoghegan, Matthew King, and HBMX Emilson Alonso, Luis Pena, and John Rendall, 

"HBMX-CAYMAN ACCOUNTS," HSBC OCC 8874832-33. 

544 See also Sealed Exhibits. 

545 713112008 email from HSBC David Bagley to HSJ3C Richard Bennett, with copies to HSBC 

Michael Geoghegan, Matthew King, and HBMX Emilson Alonso, Luis Pena, and John Rendall, 

"HJ3MX-CAYMAN ACCOUNTS," HSBC OCC 8874832-33. 

546 lll2712008 email from HBMX employee to HBMX Jaime Saenz and Ramon Garcia, 

"Seriously consider restricting the product Dollars accounts in the zona frontera Product 63," 

HSBC OCC 8875736-738. 

547 See 7/31/2008 email from HBMX Luis Pena to HBMX Emilson Alonso, HSBC David 

Bagley, and others, "HBMX - CAYMAN ACCOUNTS," HSBC OCC 8873503-504. See also 

undated HSBC presentation, "Conducting an Enhanced KYC for Grand Cayman 

Accountholders: Proposal to Update the Strategy to Control Risk arising from Grand Cayman 

Accounts," HSBC OCC 8874561. 

548 7/3112008 email from HBMX Luis Pena to HBMX Emilson Alonso, HSBC David Bagley, 

and others, "HBMX - CAYMAN ACCOUNTS," HSJ3C OCC 8873503-504. 

549 7/30/2008 email from HSBC John Root to HSBC David Bagley, "HBMX Visit Update," 

HSBC OCC 8873487-489. 
290 


76061.656

116 

to get a better sense of the clients using them. In the meantime, the 

documents contain no indication that either HSBC Group or HBMX 

informed HBUS about the suspect account activity or the Cayman KYC 

deficiencies, even though the Cayman accounts were 0Eerating solely 

through the HBMX correspondent accounts at HBUS.5 0 

As a result of the AML alerts regarding money laundering 

involving some of the Cayman accounts and re-discovery of the 2006 

audit exposing the poor state ofthe Cayman account files, the Cayman 

accounts were added to the Restoration Project.551 Mr. Root told the 

Subcommittee that, in July 2008, the Cayman accounts "went to the top 

ofthe list" at the project.552 

One of the first steps taken with regard to the Cayman accounts 

was that HBMX Compliance personnel analyzed their risk levels, and 

sorted customers into three categories: red, yellow, and white. Red 

status indicated that a customer was a "Special Category Client" (SCC), 

on a "black list," or the subject of a SAR; yellow status indicated that a 

customer had been flagged by HBMX's internal AML monitoring 

system with one or more alerts, but no SAR had been filed; white status 

indicated that the customer had no such derogatory information on 

tile. 55J Out of a total of 49,935 customers with 61,586 accounts worth 

about $2.1 billion, HBMX categorized 1,314 customers as "red" status, 

representing 2,240 accounts worth about $205 million. HBMX also 

flagged 2,027 customers as "yellow" status, representing 2,084 accounts 

worth about $180 million.554 HBMX then largely limited its KYC 

remediation efforts to the 3,341 "red" and "yellow" customers. The 

other 46,000 accountholders were not included in the project.555 

Two months later, in September 2008, senior HSBC Group 

Compliance officer John Root offered a negative assessment of the KYC 

remediation efforts directed at the Cayman accounts: 

550 Another example of a Cayman U,S, dollar account that HSBC Group and HBMX were aware 

of and expressed concerns about, but apparently did not inform HBUS, were accounts opened for 

two embassies, one of which was for a country in the Middle East. See 12/2/2005 email 

exchange between HSI3C David Bagley and John Root, "OFAC," HSBC OCC 8876612-613, 

Mr. Bagley told the Subcommittee that although there was no indication of any "sinister" 

activity, these accounts were later closed, because the bank "did not want the risk." 

Subcommittee interview of David Bagley (5/10112). 

55J Subcommittee interview of David Bagley (5/10/12), 

552 Subcommittee interview of John Root (4126112), 

553 See 9112/2008 email from HBMX Ramon Garcia to HSBC John Root, "Cayman Accounts," 

HSBC OCC 8876784. 

554 See Attachment to 9112/2008 email from HI3MX Ramon Garcia to HSBC John Root, 

"Cayman Accounts," HSBC OCC 8875462-465, at 465, 

555 See undated HSBC presentation, "Conducting an Enhanced KYC for Grand Cayman 

Accountholders: Proposal to Update the Strategy to Control Risk arising from Grand Cayman 

Accounts," HSBC OCC 8874560-566, at 561 ("It is considered that it will not be possible to 

complete 50,000 enhanced KYC by OlDEC08,"), 
291 


76061.657

117 

"The HBMX 'Restoration' project chaired by John Rendall, 

HBMX COO, is endeavoring to regularize these accounts on a 

risk-basis. Account opening documentation is generally poor or 

non-existent and there is a lot of work to do. Money-laundering 

risk is consequently high.,,556 

An HSBC presentation, which is undated but appears to have been 

prepared in October 2008, summarized the ongoing Cayman KYC 

problems and presented a new strategy to address them. 557 The 

presentation was entitled, "Conducting an Enhanced KYC for Grand 

Cayman Accountholders: Proposal to Update the Strategy to Control 

Risk arising from Grand Cayman Accounts.,,558 One key slide noted 

that "almost no progress [had] been made in enhanced KYC 

completion" and that only 25% of the files would have complete KYC 

information by December 1,2008: 

". The Bank has been recently been fined for offering this product 

in Mexico, and money laundering red flags have been identified. 

• On 28JUL, CMP [Compliance] gave instructions to suspend this 

product. 

• On 3IJUL08, Segment Directors were requested by CEO that an 

enhanced KYC will be completed for all Grand Cayman accounts 

before OIDEC08. 

• As of JUL08, in Grand Cayman CDAIDDA 49,937 customers, 

and its portfolio was approximately USD 1,500 million.559 

• Currently, this product is expected to be re-opened, as long as 

necessary adjustments to systems, processes and documentation 

are made, with stricter controls, and if Group Compliance's signoff is obtained. 

• On 26SEP, Segment directors reported that almost no progress 

has been made in enhanced KYC completion. In addition, a 

central validation of enhanced KYC quality is not in place. 

556 9!l212008 email from HSBC John Root to Adrian Cristiani and others. "Cayman Accounts;' 

HSBC OCC 8875462-465, at 462. 

557 Undated HSBC presentation, "Conducting an Enhanced KYC for Grand Cayman 

Accountholders: Proposal to Update the Strategy to Control Risk arising from Grand Cayman 

Accounts," HSBC OCC 8874560-566. Because of dates mentioned in the presentation, it seems 

to have been completed between September 27 and October 30, 2008. 

5SS Undated HSBC presentation, "Conducting an Enhanced KYC for Grand Cayman 

Accountholders: Proposal to Update the Strategy to Control Risk arising from Grand Cayman 

Accounts," HSBC OCC 8874560. 

559 The figure of $1 ,500 million seems to refer to the Cayman certificates of deposit and does not 

include additional funds in Cayman Demand Deposit Accounts. 
292 


76061.658

118 

• According to Remediation Project results, success rate in file 

completion is approximately 25%. This means that if this strategy 

is followed, it will not be possible to complete more that 25% of 

required enhanced KYC forms by 0 IDEC08.,,56o 

This October 2008 assessment indicates that at least 75% of the Cayman 

files still had incomplete KYC information six years after HBMX 

assumed control of the accounts. 

Despite this grim assessment, the Strategy also noted efforts 

underway to allow new Cayman accounts to be opened. 56 I As Graham 

Thomson, head of Group Audit for Latin America and the Caribbean, 

explained in an email to colleagues, the accounts needed to continue due 

to the income they produced: 

"Currently the business owner and compliance are still discussing 

with GMO CMP [Compliance] the product parameters that are to 

be applied to lift the current embargo and relaunch the CI [Cayman 

Island] product. It is important that these discussions result in 

practical product parameters as the CI portfolio is an important 

source of funds for HBMX and it is hoped the replacement product 

will be shortly submitted to the new products committee and then 

relaunched.,,562 

Internal documents show that HSBC Group and HBMX officials 

considered a variety of criteria to determine when a new Cayman 

account could be opened, including requirements that the client be an 

existing HBMX customer for six months, complete an "enhanced KYC 

Questionnaire," undergo screening against the OF AC list and other 

"blacklists," and agree to limits on cash deposits.563 

u.s. Dollar Restriction. In November 2008, HSBC Group CEO 

Michael Geoghegan traveled to Mexico and met with senior Mexican 

regulators who were highly critical ofHBMX's AML and KYC efforts, 

the huge volume of U.S. dollars that HBMX was exporting to the United 

States, and the possibility that a portion of those funds were associated 

with drug trafficking and money laundering.564 The regulators explicitly 

560 Undated HSBC presentation, "Conducting an Enhanced KYC for Grand Cayman 

Accountholders: Proposal to Update the Strategy to Control Risk arising from Grand Cayman 

Accounts," HSBC OCC 8874560-566, at 561. 

561 Id. at 561. 

56210/20/2008 email from Graham Thomson to HSBC Emilson Alonso and others, "HBMXProjecto Restauraeion," HSBC OCC 8874595-600, at 596-597. 

563 See Sept.-Oct. 2008 email exchanges among HBMX Ramon Garcia. John Rendall, Maria 

Salazar and HSBC David Bagley, Warren Leaming, Susan Wright, John Root, and Adrian 

Cristiani, HSBC OCC 8875818-829, at 829. 

564 See 2118/2008 email from HBMX Paul Thurston to HSBC Michael Geoghegan, with copies 

to Richard Bennett and Matthew King, "Confidential- CMBV IFIU Meeting," HSBC OCC 
293 


76061.659

119 

mentioned the U.S. dollars sent from the Cayman accounts. 565 In 

response, Mr. Geoghegan proposed prohibiting all HMBX branches, 

including the Cayman branch, from offering U.S. dollars to customers, 

except at automated teller machines in Mexican airports.566 Since the 

Cayman accounts relied on U.S. dollars, the proposed new policy 

directly impacted Cayman accountholders. HBMX CEO Luis Pena 

nevertheless agreed with the proposal, and also ordered the freeze on 

opening new Cayman accounts to continue indefinitely and prohibiting 

new cash deposits for existing Cayman accounts.567 Mr. Pena noted 

that the new measures would cost HBMX a lot of money: "Cayman and 

Mexico dollar accounts provide us with US$2.6 billion of cheap 

funding. We are likely to lose a bi§Jortion of this if we tell customers 

we no longer receive dollar notes." The new policies took effect in 

January 2009. 

9,000 Accounts Closed. According to HSBC's legal counsel, 

HBMX took nearly another year to complete KYC remediation of the 

Cayman accounts, finally completing the work in July 2009.569 As part 

ofthat KYC effort, HBMX closed approximately 9,000 Cayman 

accounts, due in many cases to incomplete KYC information. 570 At the 

same time, HBMX allowed the Cayman branch to remain in operation 

and lifted the ban on new accounts. Today, over 20,000 HBMX clients 

have over $657 million in Cayman U.S. dollar denominated accounts. 

Because the HBMX Cayman branch continues to offer U.S. dollar 

accounts, despite a history of poor KYC controls and deficient KYC 

documentation, and despite the inherent riskiness associated with 

operating offshore accounts in a secrecy tax haven, the Cayman accounts 

continue to pose ongoing money laundering risks to HBUS. Because 

HBUS is now aware of the Cayman accounts, it will have to evaluate the 

risk and determine whether to continue to process Cayman account 

transactions through the HBMX correspondent account. 

(3) Cashing U.S. Dollar Travelers Cheques 

A third example of how HBMX has introduced risk into HBUS 

involves its issuing and cashing millions of dollars in U.S. dollar 

8873331-333; 2118/2008 draft report entitled. "Internal Control, HBC Mexico, S.A.," prepared 

bt; CNBV, HSBC acc 8966021-026.. . 

5 . See, e.g., 11126/2008 emarl from HSBC DavId Bagley to HSBC RIchard BeMett and Warren 

Learning, "Mexico," HSBC acc 8875605-607, at 607. 

566 See 11/26/2008 email from HSBC Michael Geoghegan to HBMX Emilson Alonso, "Money 

Launderying," HSBC acc 8874849-850. 

567 See 11127/2008 email from HSBC Warren Learning to HSBC David Bagley and Richard 

Bennett, "Mexico," HSBC acc 8875605-607, at 606. 

568 11/2812008 from HBMX Luis Pena to HSBC Emilson Alonso, HSBC acc 8874856. 

569 6/5/2012 letter from HSBC legal counsel to the Subcommittee, at 5. 570 1d. 
294 


76061.660

120 

travelers cheques through its correspondent accounts at HBUS, at times 

under suspicious circumstances. 

Travelers cheques are paper monetary instruments which, for a fee, 

are issued and administered by a financial institution. They can be 

issued in a variety of currencies and denominations, and carry serial 

numbers so that, if the cheques are lost or stolen, the issuing financial 

institution can trace back the purchase and either replace the cheques or 

refund the money used to purchase them. Individuals often use travelers 

cheques to minimize carrying hard currency while traveling and as a 

way to safeguard their funds. Some financial institutions issue such 

cheques only to pre-existing customers; others issue the cheques to 

anyone who pays the fee. U.S. financial regulators have long warned 

financial institutions about the money laundering risks associated with 

travelers cheques, especially when purchased with cash by a noncustomer and used to move substantial funds across international borders 

in ways that are difficult to trace. 571 Travelers cheques have been used 

by terrorists,572 drug traffickers,573 and other criminals.574 

HBMX has issued a large number of U.S. dollar travelers cheques, 

at times selling them to anyone willing to pay the fee and cashing them 

for customers and non-customers alike. In 2004, John Root, senior 

HSBC Group Compliance officer, sent an email to HBMX's 

Compliance head, Ramon Garcia, and AML head, Carlos Rochin, noting 

the huge volume of travelers cheques pouring in from Mexico and 

seeking assurances that HBMX was on guard against money laundering: 

57J See. e.g., Federal Financial Institutions Examination Council (FFIEC) Bank Secrecy 

Act/Anti-Money Laundering (BSAIAML) Examination Manual. "Core Overview: Purchase and 

Sale of Monetary Instruments," (6/23/2005) at 59; FFIEC BSNAML Examination Manual, 

"Purchase and Sale of Monetary Instruments-Overview," (S/24/2007) at 212 ("The purchase or 

exchange of monetary instruments at the placement and layering stages of money laundering can 

conceal the source of illicit proceeds. As a result, banks have been major targets in laundering 

0Eerations because they provide and process monetary instruments through deposits."). 

5 2 See, e.g., United States v. al-Haramain Islamic Foundation Inc., Case No, 6:05-cr-6000S-HO 

(USDC Oregon) Indictment (2/1712005); "Fonner U,S, Head of AI-Haramain Islamic 

Foundation Sentenced to 33 Months in Federal Prison," U.S. Attorney's Office for the District of 

Oregon press release (9/27/11) at I (describing how the convicted defendant cashed $130,000 in 

U.S. dollar travelers cheques at a bank in Saudi Arabia and then provided the funds to support 

violent extremists in Chechnya). 

57J Sec, c.g., United States v. Wachovia Bank N.A., Case No. I 0-20 I 65-CR-Lenard (US DC 

SDFL), Factual Statement, Exhibit A to Defcrred Prosecution Agreement (3/1612010), at ~ 35 

(describing how Wachovia Bank processed $20 million in suspicious travelers cheques, some 

portion of which was suspected to include illegal drug proceeds); "How a Big U.S. Bank 

Laundered Billions from Mexico's Murderous Drug Gangs," The Guardian, (4/212011), 

http://www.guardian.co.uklworld/2011/apr/03/us-bank-mexico-drug-gangs. See also Albajon v. 

Gugliotta, 72 F. Supp. 2d 1362, 1365 (S.D. Fla. 1999) (admitting travelers cheques as evidence 

of drug trafficking proceeds); United Statcs v. $41.305.00 in Currency & Travelers Checks, S02 

F.2d 1339, 1343 (lith Cif. 19S6) (finding travelers cheques could be seized as drug trafficking 

p.roceeds). 

74 See, e.g., Folk v. State, 192 So. 2d 44, 46 (Fla. Dist. Ct. App. 1966) (upholding conviction for 

signing a false name on travelers cheques and cashing them); United States v. Sebaggala,256 

F.3d 59, 63 (lst Cif. 2001) (upholding conviction for using undeclared travelers cheques to 

attempt to move money fraudulently through U.S. customs). 
295 


76061.661

121 

"I note that in the year through 3Q04 [third quarter of2004], 

HBMX has sold over USD I IO million of travelers cheques, an 

amount that eclipses that ofHBEU [HSBC Europe] here in the 

UK, and that is several orders of magnitude higher than any other 

non-UK entity, including Hong Kong and the US. In fact, it 

represents one-third of the Group's total global traveller's cheque 

business (with the UK representing another third). 

Could you kindly prepare a report for GHQ [Group Headquarters] 

summarizing the money laundering procedures currently in place 

for such a booming business. Please include in this report KYC 

controls, number of SARs in the YTD [year to date], breakdown 

by region and branch, etc., etc.,,575 

Mr. Garcia responded with preliminary information and a recent case 

involving travelers cheques, but in response to Mexican legal 

requirements regarding client-specific information, HSBC has so heavily 

redacted copies of those documents, as well as a longer report requested 

by Mr. Root, that they do not provide additional information.576 

In 2008, when HBMX decided to stop offering U.S. dollars at its 

branches in most cases, the HBMX CEO Luis Pena recommended 

greater use of U.S. dollar travelers cheques instead, sold only to preexisting customers.577 In response, the Deputy Head ofHSBC Group 

Compliance, Warren Learning, warned that travelers cheques also raise 

AML concerns, and advised lowering the existing $25,000 ceiling on the 

amount of travelers cheques that could be purchased by one customer at 

a time, and creating a new limit on the amount of travelers cheques that 

could be deposited at one time to a client account. 578 

In 2009, after CNBV expressed concerns about HBMX's weak 

AML controls, among other steps, HBMX tightened its policies on 

travelers cheques. As of January 1,2009, HBMX determined that it 

would sell its travelers cheques only to pre-existing customers and 

would place a limit on the amount that could be sold to anyone 

575 11/8/2004 email from HSBC John Root to HBMX Ramon Garcia and Carlos Rochin, with 

copies to HSBC David Bagley and Susan Wright, "Travellers Cheques," HSBC OCC 8876645-

646. 

576 See 11/30/2004 email from HBMX Ramon Garcia to HSBC John Root, David Bagley, Susan 

Wright, and HBMX Carlos Rochin, "Travellers Cheques," HSBC OCC 8876645-664. 

577 See 11/27/2008 email from HBMX Luis Pena to HBMX Emilson Alonso, copy to HSBC 

Michael Geoghegan, "Money Launderying," HSBC OCC 8874849. 

578 See 12/8/2008 email fTom HSBC Warren Learning to HBMX Ramon Garcia and John 

Rendall with copies to HSBC David Bagley, John Root, Susan Wright, and others, "Mexico 

Visit," HSBC-PS!-PROD-OJ97874-876. 
296 


76061.662

122 

customer at a time. 579 Warren Learning, Deputy Head ofHSBC Group 

Compliance, who supported those changes, noted in an email: "There 

remain AML issues in respect of travellers cheques which historically 

are very high risk from an AML perspective and accordingly we would 

expect that the limits are reasonably low and that there are very strong 

controls in place to ensure that branches do not abuse the rules."s8o 

At HBUS, the documents reviewed by the Subcommittee indicate 

that, despite their large volume, HBMX travelers cheques attracted little 

AML review or attention, even though the travelers cheques would have 

been presented for payment at HBUS' processing centers in New York 

and subjected to review. The HBUS processing centers segregated and 

reviewed all travelers cheques and were required to send blocks of 

sequentially numbered cheques exceeding $10,000 to HBUS AML 

Compliance for review. 58! At the same time, the processing centers had 

no information on expected account volume, conducted no trend 

analysis to identifY suspicious transactions, and conducted no due 

diligence on the persons cashing the cheques. 582 A 2007 OCC 

examination ofHBUS' pouch activities, which included clearing U.S. 

dollar travelers cheques, identified numerous deficiencies in the AML 

policies and procedures and called for stronger AML controls, but it did 

not appear to result in any greater review of the HBMX travelers 

cheques. 583 To the contrary, a 2007 HBUS policy change appears to 

have further limited AML reviews of travelers cheques presented by 

HSBC Group affiliates in non-high risk countries, restricting them to 

cases where the deposits exceeded $1 million. 584 At that time, lIDUS 

deemed both Mexico and HBMX to be at low risk of money laundering. 

In 2009, the OCC conducted a second review ofHBUS' pouch 

activities, including procedures to clear U.S. dollar travelers cheques.585 

579 121812008 email from HSBC Warren Learning to HBMX Ramon Garcia and John Rendall, 

with copies to HSBC David Bagley, Susan Wright. John Root, and others, "Mexico Visit," 

HSBC-PSI-PROD-O 197874-876. 58° Id. 

581 See 612612008 OCC memorandum, "Pouch Transactions - Hokuriku Bank and SK Trading 

Company Ltd," OCC-PS1-0088S828, at 1 [Sealed Exhibit.]. HBUS' AML policies and 

procedures regarding travelers cheques are discussed in more detail in the Report Section on 

Hokuriku Bank: Cashing Bulk Travelers Cheques,!illNl!. 

582 Sec 412712007 email from HBUS Robert Guthmuller to HBUS Alan Ketley, "Visit to 

Brooklyn OpsLink," OCC-PSI-00312153, at 4. 

58) See 313 I12007 OCC Report of Examination, OCC-PSI-00304077 [Sealed Exhibit]; 911312007 

OCC Supervisory Lettcr, "Pouch Services and Middle Market at HBUS," OCC-PSI-00000391-

394. [Sealed Exhibit.] 

584 Sce SI7I2007 email from HUBS George Tsugranes to 1-!BUS Alan Ketley and others, "Visit to 

Brooklyn Ops," OCC-PSI-00312IS3, at 3. 

585 See, e.g., 211S120lO email from HBUS Jane Burak to HBUS Lesley Midzain, "Advice 

Requested," OCC-PS1-00256833 (describing banknotes examination that included reviews of 

travelers cheques); 211112010 minutes ofa "occ & Chicago FED update Meeting," prepared by 

HSBC, OCC-PSI-00256916 (noting that HSBC made a presentation to the OCC on 2191201 0, on 

enhancements to its cash letter process and an "intemallook-back of cash letter activity for 

Travelers Checks and Money Orders"). 
297 


76061.663

123 

As part of that examination, HBUS produced to the OCC a lengthy 

description of its AML policies and procedures for foreign financial 

institutions that present items for processing through a correspondent 

account, including travelers cheques.586 Those procedures contained a 

number of restrictions or conditions, but did not impose a ceiling on the 

amount of money that HBUS would provide to a correspondent client 

through the cash letter process. The procedures did, however, require 

transactions over a certain amount to be reported to HBUS AML 

Compliance before processing. The reporting triggers were linked to the 

risk rating ofthe foreign financial institution presenting the monetary 

instrument for payment. The five relevant risk ratings, from highest risk 

to lowest, were: Special Category Client (SCC), high risk, cautionary 

risk, medium risk, and standard risk. The reporting triggers were as 

follows: 

For SCC customers - $1,000 for an individual item, and $10,000 

in total deposits. 

For high risk customers - $10,000 for an individual item, and 

$100,000 in total. 

For cautionary risk customers - $50,000 for an individual item, 

and $200,000 in total. 

For standard and medium risk customers - $50,000 for an 

individual item and $250,000 in total. 

Clients seeking to cash travelers cheques in excess of the reporting 

threshholds were not automatically prohibited from proceeding; instead, 

their transactions were reported to HBUS AML Compliance which was 

then supposed to make a case-by-case decision on whether to allow the 

transactions to proceed. 

By 2009, Mexico and HBMX were considered high risk and, due 

to the large volume ofHBMX travelers cheques it sold, HBMX cheques 

should have regularly triggered the AML reporting requirement and 

AML reviews. In addition, HBMX travelers cheques should have 

produced numerous alerts due to the large amounts, sequentially 

numbered cheques, and structuring patterns involved. Instead, the 

documentation suggests that few alerts issued and very little review of 

HBMX travelers cheques took place. 

As part of its 2009 examination, the OCC expressed concern that, 

based on samples taken from 2007, 2008, an'd 2009, HBUS' monitoring 

oftravelers cheques required too few AML reviews and was inadequate 

586 See undated "Request No.7," prepared by lISBC. aCC-PSI-00000075-195 at 123-130 

(providing detailed information in response to acc questions regarding HBUS' remote deposit 

capture and cash letter pouch transactions). [Sealed Exhibit.] 
298 


76061.664

124 

to detect suspicious activity.587 In response, HBUS undertook a detailed 

review of all cash letter items in 2009.588 HBUS determined that 280 

items had been flagged for review, a tiny number in comparison to the 

huge number of transactions cleared per year. In addition, according to 

HBUS, of those 280 items, less than a handful contained information 

suggesting suspicious activity.589 While HBUS presented that result as 

evidence of minimal AML risk, it is possible that the criteria used to flag 

transactions for review were too narrow to catch suspicious transactions. 

One reason to think the latter might be the case is that, from 2007 

to 2012, other financial institutions have reported significant instances of 

suspicious activities involving U.S. dollar travelers cheques either issued 

or cleared by HBMX.590 These reports generally describe coordinated 

teams of individuals, each of whom purchased large numbers of 

travelers cheques from HBMX, and then cashed or deposited the 

cheques in suspicious patterns. Some of the U.S. dollar travelers 

cheques identified by these financial institutions had a combined value 

in excess of$I million, and some of the suspicious activity occurred 

over an extended period oftime. Many of the suspicious transactions 

involved sequentially numbered cheques, illegible signatures, or difficult 

to understand markings or numbers on the cheques. In some cases, 

groups of cheques were made payable to the same health food business, 

toy company, or automobile auction house. 

Four examples illustrate the issues. In the first example, nearly 

1,500 U.S. dollar travelers cheques were purchased from the same 

HBMX branch in Mexico over a seven-month period from 2007 to 2008, 

and cashed shortly thereafter at several automobile auctions in the 

United States. Money launderers have been shown in the past to utilize 

the purchase of expensive, but liquid items, such as cars to hide illicit 

funds. The travelers cheques had a combined value of $900,000. In a 

second instance from 2008, on four occasions over a period of 16 days, 

individuals purchased from an HBMX branch in Mexico travelers 

cheques which, each time, had a combined value of $20,000 to $30,000, 

and altogether added up to $109,000. All of the cheques were then 

signed and countersigned with the same illegible signature, and made 

payable to the same toy business in Mexico. Ten months later, in a 

coordinated effort over a two-week period, all of the cheques were either 

cashed or deposited. In a third instance, 188 travelers cheques in 

denominations of $500 and $1000, totaling $110,000, were purchased in 

nine large blocks of sequentially numbered cheques from a major U.S. 

bank. Then, over a three-month period from April to June 2011, all 188 

587 See 2/15/2010 email from HBUS Janet Burak to HBUS Lesley Midzain, "Advice Requested," 

OCC-PSI-00256833. 

588 Id. 

589 Id. 

590 See Sealed Exhibits. 
299 


76061.665

125 

cheques were negotiated for payment at the same HBMX branch in 

Mexico, using illegible signatures so that the cheques provided no 

information about the payees. 

In the fourth instance, two men purchased groups of travelers 

cheques from the same HBMX branch in Mexico. On 14 occasions over 

a three month period in 20 11, the two men purchased the travelers 

cheques in batches which, each time, had a combined value of$IO,OOO, 

and altogether added up to $140,000. All of the cheques were then 

signed with the same illegible signature. Over time, small groups ofthe 

travelers cheques, often with consecutive serial numbers, were cashed or 

deposited, with the majority of cheques failing to bear a stamp indicating 

exactly where they were negotiated. The 2011 transactions were part of 

a larger pattern in which the same HBMX branch sold travelers cheques 

to the same two men over a three year period from 2009 to 20 II, for a 

combined value of$1.9 million. 

While HBMX has tightened its travelers cheque policies by 

restricting the sale of travelers cheques to pre-existing customers and 

limiting the dollar amount of travelers cheques that can be provided to 

one customer at a time, HBMX travelers cheques continue to surface in 

reports of suspicious activities filed with U.S. authorities. Because 

many if not all of the cheques are cashed through the HBMX 

correspondent accounts at HBUS, HBMX continues to expose HBUS to 

money laundering risks through its issuance and cashing of U.S. dollar 

travelers cheques. 

HBMX's money service business clients, Cayman accountholders, 

and travelers cheque purchasers all relied on the U.S. dollar services that 

HBMX was able to provide through its correspondent accounts at 

I-IBUS. In some cases, it appears those HBMX clients used HBMX's 

U.S. dollar correspondent account at HBUS to commit criminal acts. 

For its part, HBUS should have known of the money laundering risks it 

was incurring from those and other high risk HBMX clients, accounts, 

and products. Because HBMX was an HSBC affiliate and was also 

categorized for many years as located in a low risk jurisdiction, 

however, until recently, HBUS did not perform the KYC due diligence 

or account monitoring needed to uncover HBMX's high risk activities. 

E. Bulk Cash Movements 

In addition to using HBUS correspondent accounts to execute wire 

transfers, clear cash letter instruments, and conduct other U.S. dollar 

transactions, in 2007 and 2008, HBMX used its HBUS banknotes 

account to supply more physical U.S. dollars to }·IBUS than any other 

Mexican bank or HSBC affiliate. The documents indicate that both 

HBMX and HBUS were unaware ofthe flood of dollars HBMX was 
300 


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126 

pouring into the United States through HBUS, in part because HBUS 

had stopped monitoring HSBC affiliates' banknotes accounts for a threeyear period, from mid-2006 to mid-2009. HBUS policy was also 

consistent with the HSBC Group policy of not performing due diligence 

or account monitoring for HSBC affiliates. When, in 2008, Mexican 

and U.S. regulators began pressing both HBMX and BBUS to explain 

the huge flow of U.S. dollars from Mexico and whether the funds 

included illegal drug proceeds, both banks were caught by surprise and 

eventually took action to tum off the spigot. In 2009, HBMX stopped 

accepting U.S. dollar deposits at its branches in Mexico, and then in 

2010, BBUS exited the banknotes business. 

(1) HBUS' Global Banknotes Business 

Prior to its exit, BBUS operated a very large U.S. banknotes 

business which the Federal Reserve estimated in 2010, to be worth 

approximately $300 billion annually.591 As part of that business, BBUS 

supplied physical U.S. dollars and accepted bulk cash shipments from 

financial institutions around the world, including over two dozen HSBC 

affiliates.592 

Bulk cash shipments typically use common carriers, independent 

carriers, or U.S. Postal Service carriers to shW U.S. dollars by air, land, 

or sea to a bank located in the United States. 3 Shipments have gone 

via airplanes, armored trucks, ships, and railroads. Most shipments are 

transported via containerized cargo. Shippcrs may be "currency 

originators," such as businesses that generate cash from sales of goods 

or services; or "intermediaries" that gather currency from originators or 

other intermediaries to form large shipments. Intermediaries are 

typically ccntral banks, commercial banks, money service businesses, or 

their agents.594 Bulk cash shipments can be made directly to a bank in 

the United States, or to a U.S. Federal Reserve Bank or branch, which 

will accept the cash and credit it to the account of the intended recipient 

bank.595 Banks that receive bulk cash shipments via common carriers or 

the Postal Service have no obligation to report the amount of the cash 

received to U.S. authorities, though they still must report any suspicious 

activity.596 

591 111212010 memorandum from the Federal Reserve, "US Department of Justice Investigation 

of HSBC Bank USA NA's CHSBC Bank USN) Bank Note Business (Revised)," BOG·SR· 

000442-443,001402-409. [Sealed Exhibit.] 

592 See 911312010 OCC Supervisory Letter HSBC-2010-22, OCC-PSI-00864335-365, at 342. 

[Sealed Exhibit.] 

93 111212010 memorandum from the Federal Reserve, "US Department of Justice Investigation 

ofHSBC Bank USA NA's (,HSBC Bank USN) Bank Note Business (Revised)," at BOG-SR001404. [Sealed Exhibit.] 594 ld. 

-59 5 Id. 

596 Id., citing 31 CFR §103.23. 
301 


76061.667

127 

Until 2010, HBUS was one of about 30 U.S. financial institutions 

that bought and sold physical currency on a wholesale basis around the 

world.597 The headquarters ofHBUS' Global Banknotes business was 

located in New York, headed by Christopher Lok, with offices in 

London, Hong Kong, Singapore, and other locations.598 Until 2010, 

HSBC was also one of a relatively small number of international banks 

that contracted with the Federal Reserve Bank of New York (FRBNY), 

under the Extended Custodial Inventory (ECI) Program, to manage the 

FRBNY's U.S. currency vaults. The ECI Program facilitates the 

international distribution of U.S. dollars, repatriates old dollars, 

circulates new designs, and provides information on the international use 

of U.S. currency.599 HSBC operated FRBNY currency vaults in 

London, Frankfurt, and Singapore.6oo The currency in those vaults 

remained on the books of the Federal Reserve, and was used to fill 

orders from third parties or the operator itself. 601 When distributing U.S. 

dollars, HSBC was obligated to comply with U.S. AML and Office of 

Foreign Assets Control (OFAC) requirements. 602 

While bulk cash shipments are a normal and legitimate part of 

international banking, they are also vulnerable to misuse by money 

launderers and other criminals. In 2001, the U.S. Congress made 

smuggling large amounts of physical U.S. dollars across U.S. borders a 

crime. 60J In 2005, a U.S. Money Laundering Threat Assessment 

identified bulk cash smuggling as a key method used to launder criminal 

proceeds and highlighted how drug traffickers were smuggling U.S. 

dollars obtained from illegal U.S. drug sales across the border into 

Mexico and then using various means to arrange for their deposit into a 

U.S. bank. 604 In 2006, the U.S. Financial Crimes Enforcement Network 

(FinCEN) issued an advisory to U.S. financial institutions warning them 

597 Id. at BOG·SR-OOI405. [Sealed Exhibit.] 

598 See I l/2006 HBUS presentation, "Banknotes Trading A Global Reach Organizational Chart 

as of November 2006," OCC-PSI-00000501-512. 

599 11121201 0 memorandum from the Federal Reserve, "US Department of Justice Investigation 

of HSBC Bank USA NA's (,HSBC Bank USA'Bank Note Business (Revised)," at BOG-SR001405. [Sealed Exhibit.] 600 1d. 

601 1d. 

602 1d. 

G03 See Section 371 of the USA Patriot Act, P.L. 107-56, codified at 31 U.S.C. §5332 (outlawing 

the smuggling or attempted smuggling of over $10,000 in currency or monetary instruments into 

or out of the United States, with the specific intent to evade U.S. currency reporting 

requirements). 

604 See Dec. 2005 "U.S. Money Laundering Threat Assessment," issued by the Money 

Laundering Threat Assessment Working Group, which included the U.S. Departments of 

Treasury, Justice, and Homeland Security, Federal Reserve, and U.S, Postal Service, Chapter 5 

on "Bulk Cash Smuggling" ('"Upon leaving the country, cash may stay in Mexico, continue on to 

a number of other countries, or make a U-tum and head back into the United States as a deposit 

by a bank or casa de cambio."). 
302 


76061.668

128 

in particular about money laundering associated with bulk cash 

shipments from Mexican casas de cambio.60s 

As of2010, 29 HSBC affiliates had banknotes accounts with 

HBUS.606 Some of those affiliates operated in high risk countries 

plagued by drug trafficking, corruption, money laundering, or other 

criminal enterprises, including Angola, Bangladesh, Colombia, 

Democratic Republic of Congo, Haiti, Mexico, Panama, Paraguay, Saudi 

Arabia, and Ukraine. HBUS did not distinguish, however, between high 

and low risk affiliates with banknotes accounts.607 

(2) HBMX U.S. Dollar Sales to HBUS 

For a three-year period, from mid-2006 until mid-2009, HBUS 

accepted more than $15 billion in physical U.S. dollars from other 

HSBC affiliates, but failed to conduct any AML monitoring of the bulk 

cash transactions. 60S J-IBUS had performed AML monitoring both prior 

to and following that time period. J-IBUS personnel have been unable to 

explain why all AML monitoring of its banknotes accounts ceased 

during that period and then resumed later, but the OCC has noted that 

the monitoring ceased when a formal AML oversight agreement 

applicable to HBUS expired, and resumed when an OCC AML 

examination of the banknotes operations was launched in July 2009.609 

The absence of AML monitoring meant that HBUS did not track for 

AML purposes its growing dollar traffic with HBMX, which reached $3 

billion in 2007, and then jumped another 25% in 2008 to $4 billion.6lO 

In February 2008, Mexican regulators held a private meeting with 

HBMX CEO Paul Thurston and informed him that HBMX was 

repatriating more U.S. dollars to the United States than any other 

Mexican bank - more than each of the four largest Mexican banks, all of 

which were larger than HBMX.611 The CNBV also informed Mr. 

Thurston that the Mexican Financial Intelligence Unit (FIU) was very 

605 4/2812006 "FinCEN Guidance to Financial Institutions on the Repatriation of Currency 

Smuggled into Mexico from the U.S.," No. FIN-2006-A003. 

606 See 9/1312010 OCC Supervisory Letter HSBC-2010-22. OCC-PSI-00864335-365, at 342. 

!Sealed Exhibit.] 

07 ld. at OCC-PSI-00864336. 

608 ld. at 336. 

609 See id. at 360. When asked why HBUS stopped monitoring its affiliates' banknotes activity, 

HBUS personnel offered conflicting reasons. Daniel Jack, in charge ofHBUS compliance for 

banknotcs, thought that his supervisor, Alan Ketley, had approved the decision to stop 

monitoring affiliates, but Alan Ketley did not recall the decision. Neither did their superior, 

Teresa Pesce. David Bagley called the decision to stop monitoring banknotes for affiliates 

"inexplicable." Subcommittee interviews of Daniel Jack (3/13/2012), Alan Ketley (2/1612012), 

Teresa Pesce (313012012) and David Bagley (4/12/2012). 

610 Id.; 6/2912009 OCC notes oftelcphone conversations, prepared by OCC AML Examiner 

Joseph Boss, OCC-PSI-00928760. 

611 See 2/18/2008 draft report entitled, "Internal Control, HBC Mexico, S.A.," prepared by 

CNBV, HSBC OCC 8966021-026, at 5. 
303 


76061.669

129 

concerned about the "high level ofML [money laundering] risk" 

involved.612 The FlU indicated that in the "majority of the most relevant 

ML cases" they had investigated in 2007, "many transactions were 

carried out through" HBMX.613 

In November 2008, the CNBV and FIU held a second private 

meeting, not only with the HBMX CEO, then Luis Pena, but also with 

the HSBC CEO of Latin America, Emilson Alonso, and the CEO of the 

HSBC Group, Michael Geoghegan.614 Again, the regulators expressed 

their alarm at the volume of U.S. dollars that HBMX was sending to the 

United States and described law enforcement concerns about the extent 

to which those dollars may be the proceeds of illegal drug trafficking in 

the United States. A November email from the HSBC Group 

Compliance Deputy Head summarizing the meeting stated that, between 

January and September 2008, HBMX had repatriated $3 billion to the 

United States, which represented 36% of the market volume and double 

what the biggest bank in Mexico, Banamax, had repatriated, even though 

HBMX was only the fifth largest bank in the country.615 According to an 

internal OCC document, the Department of Homeland Security's 

Immigration and Customs Enforcement (ICE) division conveyed that, 

within Mexico, HBMX "led the market in cash repatriation in 2007 and 

2008," with "$3.2 billion repatriated in 2007 and $4.2 billion repatriated 

in 2008.,,616 

A quick analysis undertaken by HBMX immediately after the 

November meeting found that while HMBX was "very good at 

buying/acquiring dollars," it did "not seem to sell them and hence our 

very high repatriation figures.,,617 The analysis also determined that 

"80% of our dollars come from money exchange business at 

branches.,,618 It noted further that "there is no limit on the amount of 

dollars that c[u]stomers can convert to pesos," and that with respect to 

non-customers, HBMX branches would "convert up to 3000 dollars, and 

do not require any KYC.,,619 HSBC Group Compliance head David 

Bagley responded: "The practice of changing USD in the branches 

pres[ u ]mably with little or no ID for non customers is in breach of 

612 Id. 

613 ld. at 6. Examples of these cases included Zhcnly Ye Gon, Casa de Cambio Puebla, and 

Sigue Corporation. 

614 See 11127/2008 email from HSBC Warren Leaming to HSBC David Bagley and Richard 

Bennett, "Mexico," HSBC acc 8875605-607. 

61511127/2008 email from HSBC Warren Leaming to HSIlC David Bagley and Richard Bennett, 

"Mexico," HSBC acc 8875605-607, at 606. 

616 6/29/2009 acc notes of telephone conversations, prepared by acc AML Examiner Joseph 

Boss, aCC-PSI-00928760. 

617 11127/2008 email from HSBC Warren Learning to HSBC David Bagley and Richard Bennett, 

"Mexico," HSBC acc 8875605-607, at 606. 618 1d. 

6I9 Id. 
304 


76061.670

130 

Group policy. When looking at our USD exposure how can this have 

been missed.,,620 

At HBUS, an undated analysis was conducted of its banknotes 

traffic with Mexican financial institutions over a three-month period, 

from November 2006 to February 2007. 621 The analysis disclosed that 

HBUS was doing far more business with HBMX than any other 

Mexican financial institution. It showed that during the three-month 

period: 

HBUS had purchased about $470 million in U.S. dollars from 

Banco Mercantil Del Norte, a major Mexican bank, while 

selling it only about $22 million in U.S. dollars. 

HBUS had purchased about $281 million in U.S. dollars from 

BBV A Bancomer, another m~or Mexican bank, while selling it 

only about $5 million. 

HBUS had purchased about $196 million in U.S. dollars from 

Case de Cambio Puebla, and $194 million from Consultoria 

International, without selling either any U.S. dollars. 

During the same period, I-IBUS had purchased about $742 

million in U.S. dollars from HBMX, while selling it only a little 

more than $ 1.3 million. 

These figures indicate that HBMX was, by far, HBUS' largest banknotes 

customer in Mexico. 

In July 2009, the OCC initiated an AML examination ofHBUS' 

global banknotes operations, and soon discovered that the bank was not 

monitoring the banknotes activities of its affiliates.622 That same month, 

HBUS resumed monitoring its banknote accounts.623 In September, the 

OCC requested documentation related to banknotes accounts for 25 

Latin American financial institutions, including ten in Mexico. In 

November 2009, the examination team added examiners from the 

Federal Reserve. Additional requests for information were made, 

including with respect to HSBC affiliates with banknotes accounts, 

620 11127/2008 email from HSBC David Bagley to HSBD Warren Learning, copy to Richard 

Bennett, "Mexico," HSBC acc 8875605. 

621 See undated "HBUS Banknotes NY - USD Bought from or Sold to Customers in Mexico: 3-

Month Period (Nov-06 to Feb-O?)," prepared by HBUS, aCC-PSI-00I51506. See also undated 

"Banknotes-NY Selected Customers' Activity Alerts & Traders' Explanations for USD 

Purchases & Sales from 2005-2009," prepared by HNAH, aCC-PSI-00005890-904. 

622 See 2/6/2010 email from HBUS Janet Burak to HBUS Brendan McDonagh, "Expanded 

'Banknates Exam,'" OCC-PSI-00787479 (summarizing the banknates examination effort). See 

also Subcommittee interview of Joseph Boss (1/30/2012). 

62J See 9/13/2010 acc Supervisory Letter HSBC-201 0-22, aCC-PSI-00864335-365, at 360. 

I Sealed Exhibit.] 
305 


76061.671

131 

HBMX, Mexican casas de cambio, and HBMX's U.S. dollar accounts in 

the Cayman Islands. 

In August 2009, the acc summarized some of the information in 

an internal memorandum.624 According to the acc, due to transaction 

costs, banknotes transactions at HBUS typically occurred only about 

once per month and involved large shipments. 625 In addition, transaction 

volumes often fluctuated on a seasonal basis, increasing during holidays 

or tourist seasons.626 According to the acc, HBUS said that it 

conducted AML monitoring on a monthly basis, examining banknotes 

transactions by customer and inquiring when significant changes in the 

volume of U.S. dollar sales or purchases took place.627 

When the acc conducted tests on the 2009 HBUS banknotes data, 

however, it determined that the volume data was not always accurate, 

and HBUS did not keep records of its reviews or actions: 

"When volumes changed significantly, the bank did not seem to be 

aware of these changes, and it does not appear that the bank took 

any action as a result. For example, even though transactions 

volumes for customers in Mexico increased significantly from the 

first 6 months of2008, over the first 6 months of2009, there was 

no documentation in the files that the bank noted the change or 

took any action .... Bank employees ... assured us that adequate 

monitoring takes place within the business line and Compliance. 

However, we were unable to find anything in the files that this was 

the case. They also cautioned that too much documentation results 

in increased legal risk. We explained to the bank that written 

documentation is necessary, for institutional memory, and to 

ensure that controls are exercised. We noted the bank's appetite 

for risk, as well as the risk inherent in the Banknotes business. The 

business line seemed to resist this message, but Compliance staff 

seemed to eventually grasp the importance of better 

documentation.,,628 

As the data confirmed that HBMX was the single largest supplier 

of U.S. dollars to HBUS, transferring billions of dollars that far 

outstripped the volumes being supplied by larger Mexican banks and 

other HSBC affiliates, Mexican and U.S. law enforcement and 

regulatory authorities continued to express concern that HBMX's bulk 

cash shipments could reach that volume only if they included illegal 

624 See 811312009 acc memorandum to acc AML Examiners from the acc Compliance Risk 

Analysis Division, "HSBC Global Banknotes, Compliance RAD assistance," aCC-PSI00846642. [Sealed Exhibit.) 

62s ld. at 4. 

6"ld. 

fo271d. 

62B Id. at 4-5. 
306 


76061.672

132 

drug proceeds. In a January 2010 meeting, U.S. law enforcement and 

regulators also expressed concern that the problem extended beyond 

Mexico: 

"The bulk cash receipts by HSBC's Bank Note Business from 

certain correspondent accounts based in Central and South 

America exceed reasonably expected volumes ofUSDs that should 

be within those countries from tourism, foreign business, etc.,,629 

(3) Remedial Action 

In response to the concerns expressed by regulators and law 

enforcement, HBMX took a number of steps to gain a better 

understanding and control of its U.S. dollar transactions. The first set of 

actions, in February 2008, focused on gaining better information. 

HBMX announced a new policy, effective immediately, to deem all 

customers who deposited more than $100,000 in a month as SCC clients 

subject to enhanced due diligence. HBMX identified 312 customers that 

met that criteria and subjected them to a KYC review. 630 HBMX also 

undertook a review of its branches to identify the nature and volume of 

their U.S. dollar transactions,63I and a review of its money service 

business clients to determine whether each relationship should 

continue.632 Still another action HBMX took was to change its account 

monitoring criteria to increase scrutiny of U.S. dollar deposits by 

customers.633 

In November 2008, after another meeting with regulators critical of 

its U.S. dollar transactions, HBMX went further. It ordered its branches 

to stop providing physical U.S. dollars to customers and non-customers 

alike, other than through A TMs at airports.634 It also prohibited 

629 1111/2010 meeting memorandum. prepared by the Federal Reserve Bank of Chicago, "DOl 

Concerns with HSBC Bank Notes Activities." BOG-SR-001402-1409, at 402 [Sealed Exhibit.] 

6JO See undated "Actions taken since 18FEB," prepared by HBMX, HSBC OCC 8875040-

041 (describing actions taken after a Feb. 18,2008 meeting with the CNBV); 3/312008 "Internal 

Control, HSBC Mexico SA," prepared by HBMX, HSBC OCC 8966027-038. But see 7/28/2008 

email from HBMX Luis Alverez to HSBC John Root and HBMX Ramon Garcia, "Major Issues 

Outstanding," HSBC OCC 8873598 ("In order to mitigate risk in HBMX, lOOK process was 

implemented (customers which make USD cash deposits exceeding lOOk within a one·month 

period). It has been identified that 974 customers made cash deposits for a total amount of 

USD308 Million from Jan to May. These customers are classified in our monitoring systems as 

high-risk customers and an enhanced KYC must be performed for them. If any customers do not 

meet requirements, accounts are closed. "). 

631 See, e.g., undated "Rectification Programme ~ 12 major projects in 6 categories," prepared by 

HBMX, HSBC OCC 8875046 (listing as item 5, on "USD Banknotes": "Review of USD 

intensive customers" and "Analysis of transaction patterns through branches"), 

6J1 7/28/2008 email from HBMX Luis Alverez to HSBC John Root and HBMX Ramon Garcia, 

"Major Issues Outstanding," HSBC OCC &&73598. 

OJ) Undated "Actions taken since 18FEB," prepared by HBMX, HSBC OCC 8875040-

041 (describing actions taken after a Feb. 18,2008 meeting with the CNBV). 

634 See 11/27/2008 email from HBMX Luis Pen a to HBMX Emilson Alonso, copy to HSBC 

Michael Geoghegan, "Money Launderying," HSBC OCC 8874849. 
307 


76061.673

133 

branches from accepting U.S. dollar cash deposits from customers.635 In 

addition, HBMX stopped opening new U.S. dollar accounts at its 

Cayman branch, and prohibiting the acceptance of new cash deposits for 

existing Cayman accounts.636 All ofthese actions led to a steep drop in 

the number and volume ofHBMX U.S. dollar transactions. 

As HBMX cut back dramatically on its U.S. dollar business 

beginning in early 2009, OCC AML examiners found that HBUS 

appeared to be increasing its U.S. dollar transactions with Mexican 

clients, including some of the high risk casas de cambio that could no 

longer engage in the same volume of U.S. dollars with HBMX.637 

HSBC Group Compliance knew about HBUS' Mexican casa de cambio 

clients. Rather than press HBUS to close the accounts, however, HSBC 

Group Compliance head David Bagley merely observed to a colleague 

in Janu::2; 2009: "I am surprised that HBUS still have cambio 

clients.,,6 8 

A year later, in June 2010, HBUS decided to exit the U.S. 

banknotes business. It closed the Global Banknotes offices in New 

York, London, Hong Kong, and Sin&apore, and later sold portions of the 

banknotes business to other banks.63 HBUS also declined to renew its 

contract to operate U.S. currency vaults for the Federal Reserve Bank of 

New York when that contract expired in 2010. In September 2010, the 

OCC issued a supervisory letter identifying multiple AML deficiencies 

at HBUS, including with respect to its banknotes business, and followed 

with a cease and desist order in October. 

F. Analysis 

Over the years, HBUS maintained correspondent accounts for at 

least 80 HSBC affiliates and banknotes accounts for at least 29 HSBC 

affiliates, which accounted for a large portion of its U.S. dollar activities. 

In 2009, for example, HSBC determined that "HSBC Group affiliates 

clear[ed] virtually all USD [U.S. dollar] payments through accounts held 

at HBUS, representing 63% of all USD payments processed by 

HBUS.,,640 HSBC also calculated that, over an eight-year period, its 

635 ld. 

636 11/27/2008 email from HSBC Warren Leaming to HSBC David Bagley and Richard Bennett, 

"Mexico," IISBC OCC 8875605-607. 

6J7 See, e.g., 911/2009 OCC memorandum to the Files, "Washington Meeting," OCC-PSI01416833 ("[O]nce HSBC Mexico ceased its operations, HBUS began significant volume of 

Banknote activity directly with some ofHSBC Mexico's former Banknote clientele."), [Scaled 

Exhibit] 

638 1/27/2009 email from HSBC David Bagley to HSBC Susan Wright and Warren Learning, 

"Press Release," HSBC OCC 8873485, 

639Id, In 2010, HSBC Holdings pic sold its U.S, wholesale banknotes business in Asia to United 

Overseas Bank Limited (UOB) for $11 million, and in 2011, sold its European banknotes 

business to HSBC Bank pic, It recorded total closure costs of $14 million during 2010. ld. 

640 See 9/9/2009 chart entitled, "HSBC Profile," included in "HSBC OFAC Compliance 

Program," a presentation prepared by HSBC and provided to the OCC, at HSBC OCC 8874197. 
308 


76061.674

134 

u.s. dollar clearing business had increased over 200%, from processing 

an average daily amount of$185 billion in 2001, to $377 billion in 

2009.641 HBUS functioned as the U.S. nexus for the entire HSBC global 

network of financial institutions. Some of those institutions used their 

access to the U.S. financial system as a selling point to attract clients. 642 

Not all of those affiliates operated in high risk jurisdictions like Mexico; 

not all had high risk clients like casas de cambio; not all had high risk 

products like U.S. dollar Cayman accounts; and not all had weak AML 

controls. But some HSBC affiliates operated under those circumstances, 

and HBMX provides a case history of the money laundering risks that 

followed. HBMX illustrates how the U.S. affiliate of a global bank can 

better protect itself by conducting careful due diligence of fellow 

affiliates, as already required by law, identifying higher risk institutions, 

and understanding their high risk clients, high risk products, AML 

controls, and money laundering vulnerabilities. HBMX also illustrates 

the need for ongoing, effective account monitoring to detect, prevent, 

and report suspicious activity. Effective monitoring and SAR reporting 

require adequate resources and personnel. Still another lesson is that 

AML personnel at the parent and affiliates of a global bank should 

consider all legal avenues for systematically sharing information with 

each other about suspicious clients and transactions in order to combat 

misuse of their network by drug traffickers, organized crime, and other 

wrongdoers. 

641 Id. at "USD Payment Statistics - Fact Sheet,'· HSBC OCC 887421l. 

642 Subcommittee interview of Michael Geoghegan (5/42/2012). 
309 


76061.675

135 

IV. HSBC AFFILIATES: CIRCUMVENTING OFAC 

PROHIBITIONS 

The United States prohibits doing business with certain persons 

and entities, including terrorists, persons engaged in nuclear 

proliferation, drug kingpins, and persons associated with rogue 

jurisdictions such as Iran, North Korea, and Sudan. To implement the 

law, the U.S. Treasury Department's Office of Foreign Assets Control 

(OFAC) has developed a list of those prohibited persons and countries 

which banks use to create an "OFAC filter" to identifY and halt 

potentially prohibited transactions. Transactions stopped by an OFAC 

filter typically undergo an individualized review to see if the transaction 

can proceed. 

Foreign banks that engage in U.S. dollar transactions typically 

execute them through the account ofa bank in the United States, subject 

to the U.S. bank's OFAC filter. While most processing takes less than 

24 hours, transactions stopped by the OF AC filter for further review 

may undergo substantial processing delays and, in some cases, payments 

may be blocked and held for years. Because of the additional time and 

expense involved when transactions are SUbjected to review, some 

foreign banks have developed a variety oftactics to avoid the OF AC 

filter. Common tactics included intentionally stripping information from 

the transaction documentation to conceal the participation of a 

prohibited country or person, or using "cover payments." In the context 

ofIranian transactions, cover payments are transfers between 

correspondent banks in non-sanctioned jurisdictions which lack 

underlying payment details, including information about a party that is a 

prohibited country or person. In the case ofIranian U.S. dollar 

transactions, some banks used one or both of these practices when 

conducting so-called "U-turn" transactions, a type of transaction that 

was allowed under OF AC regulations prior to November 2008, but 

because the transactions referenced Iran, routinely triggered the OF AC 

filter and required an individualized review which delayed the 

transaction's processing. In recent years, U.S. law enforcement has 

penalized some international banks that used willfully deceptive tactics 

to circumvent the OF AC filter and process prohibited transactions. 

The Subcommittee conducted a review of issues related to the 

sending of OF AC sensitive transactions through I-IBUS' correspondent 

accounts from 2000 to 20 I 0, by HSBC affiliates. The evidence indicates 

that, for years, some HSBC affiliates sending OF AC sensitive 

transactions involving Iran through their U.S. dollar correspondent 

accounts at HBUS took steps to conceal them, including by deleting 

references to Iran from the payment instructions or by characterizing the 

transaction as a transfer between banks in permitted jurisdictions without 

disclosing any Iranian connection. More specifically, from at least 2001 
310 


76061.676

136 

to 2007, two HSBC affiliates, HSBC Europe (HBEU) and later HSBC 

Middle East (HBME), repeatedly conducted U-turn transactions 

involving Iran through HBUS, many of which were not disclosed to the 

bank, even though they knew HBUS required full transparency to 

process U-turns. To ensure HBUS cleared the transactions without 

delay, HBEU routinely altered transaction documentation to delete any 

reference to Iran that might trigger the OF AC filter at HBUS and also 

typically characterized the transaction as a transfer between banks in 

permitted jurisdictions. The aim of the affiliates' efforts appeared to be 

to ensure the Iranian transactions utilized HBUS' automated processing 

procedures and avoided any human intervention or manual review, a 

process known as straight through processing or STP. Internal bank 

documents also indicate that the affiliates viewed the U-turns they sent 

through HBUS' accounts as permitted by OF AC rather than prohibited 

transactions under U.S. law, but their failure to provide full transparency 

prevented any individualized review by HBUS to confirm their legality. 

Internal bank documents show that HSBC Group Compliance 

knew ofHBUS' insistence on full transparency for U-turns and the 

practice of HSBC affiliates to conceal the Iranian transactions sent 

through their U.s. dollar correspondent accounts at HBUS. HSBC 

Group Compliance, as well as other senior HSBC Group executives, 

allowed the HSBC affiliates to continue to engage in these practices, 

which even some within the bank viewed as deceptive, for more than 

five years without disclosing the extent of the activity to HBUS. The 

bank documents show that, from 2000 to 2005, the practice of altering 

U-turn transaction documentation was repeatedly brought to the 

attention ofHSBC Group Compliance, including by HBEU personnel 

who objected to participating in the alteration of documents and twice 

announced deadlines to end the activity. Despite receiving this 

information, HSBC Group Compliance did not stop HSBC affiliates 

from sending concealed Iranian transactions through HBUS' accounts 

until the bank decided to exit Iran altogether in 2007. 

At the same time, while some at HBUS claimed not to have known 

they were processing undisclosed Iranian transactions from HSBC 

affiliates, internal documents show key senior HBllS officials were 

informed as early as 2001. In addition, on several occasions, HBUS' 

OF AC filter stopped Iranian transactions that HBUS had indicated 

should be disclosed by HSBC affiliates, but were not. Despite the 

evidence of what was taking place, HBUS failed for years to demand a 

full accounting of what HSBC affiliates were doing. While HBUS 

insisted, when asked, that HSBC affiliates provide fully transparent 

transaction information, when it obtained evidence that some affiliates 

were acting to circumvent the OFAC filter, HBllS failed to take decisive 

action to confront those affiliates, stop the conduct, and ensure all 

Iranian U-turns were subjected to individualized reviews to gauge 

whether they complied with the law. 
311 


76061.677

137 

In addition to Iranian transactions, HBUS documents indicate that, 

from at least 2002 to 2007, some HSBC affiliates also sent potentially 

prohibited transactions through HBUS involving Burma, Cuba, North 

Korea, or Sudan, although none of the affiliates employed the same type 

of systematic effort used for transactions involving Iran. In recent years, 

HBUS' OFAC compliance program as a whole has also displayed AML 

deficiencies. 

In 2010, HBUS hired an outside auditor, Deloitte LLP, to identifY 

and examine the OF AC sensitive transactions involving Iran and other 

prohibited countries or persons that went through the bank.643 That 

review, which is ongoing and has yet to review all relevant transactions, 

has so far identified, over a seven-year period from 2001 to 2007, more 

than 28,000 OFAC sensitive transactions sent through HBUS involving 

a total of$19.7 billion. Of those 28,000 transactions, more than 25,000 

totaling more than $19.4 billion involved Iran, while 3,000 involved 

other prohibited countries or persons. The Deloitte review characterized 

2,584 of those transactions, involving assets in excess of$367 million, 

79 of which involved Iran, as "Transactions of Interest" requiring 

additional analysis to determine whether violations of U.S. law 

occurred. 644 HBUS is currently in the process of analyzing those 

transactions, which could lead to financial penalties if it is found to have 

violated OF AC regulations. 

Finally, another issue involves actions taken by some HSBC Latin 

American affiliates, with the approval ofHSBC Group Compliance, to 

send non-U.S. dollar payment messages through a U.S. server whose 

OF AC filter was not turned on to screen them for terrorists, drug 

kingpins, or other prohibited persons. HSBC Group Compliance 

allowed those payment messages to move through the United States and 

utilize U.S. facilities while bypassing the OFAC filter, despite HBUS 

concerns that such messaging traffic might require OF AC screening to 

block transfers involving terrorism, drug trafficking, or other 

wrongdoing. The transactions were later screened by HSBC Group's 

WOLF filter. 

A. Background on OFAC Prohibitions 

OFAC. The Office of Foreign Assets Control (OFAC) within the 

U.S. Department of Treasury administers and enforces economic and 

trade sanctions stemming from U.S. foreign policy and national security 

goals, and other threats to the foreign policy, national security, or 

economy ofthe United States. 645 The office was formally established in 

64} See Deloitte Review of OFAC transactions, "Results of the Transactions Review - UK 

Gateway, March 29, 2012," HSBC-PSI-PROD-0197919 -989, at 930. 

64'ld. 

645 See U.s. Department of Treasury Office of Foreign Assels Control (OFAC), 

http://www.lreasury.gov/aboul/ organizalional-slruclureiofficeslPagesiOffice-of-Foreign-AsseISControLaspx. 
312 


76061.678

138 

December 1950, when President Truman blocked all Chinese and North 

Korean assets subject to U.S. jurisdiction.646 Its programs seek to 

prohibit U.S. persons and entities from engaging in trade or financial 

transactions with terrorists, persons engaged in activities related to the 

proliferation of weapons of mass destruction, international narcotics 

traffickers, and rogue jurisdictions. 

OFAC's regulatory authority is exercised under Presidential 

national emergency powers and laws enacted by the U.S. Congress to 

impose controls on transactions and authorize the freezing of assets 

under U.S. jurisdiction. According to OFAC, "[m]any of the U.S. 

sanctions are based on United Nations and other international mandates, 

are multilateral in scope, and involve close cooperation with allied 

governments.,,647 The freezing of assets "immediately imposes an 

across-the-board prohibition against transfers or dealings of any kind 

with regard to the property," and the owner of the asset must contact 

OF AC directly to request the release of a frozen asset. OF AC 

prohibitions support U.S. and international efforts to combat terrorism, 

nuclear proliferation, drug trafficking, and other wrongdoing. 

OFAC administers both comprehensive and selective sanctions 

programs. The comprehensive U.S. programs apply to persons and 

entities within a designated jurisdiction and have applied to Burma 

(Myanmar), Cuba, Iran, Sudan, and Syria. The non-comprehensive 

programs target specific individuals and entities rather than impose 

broad prohibitions involving an entire country. These programs have 

applied at times to persons and entities associated with Iraq, Libya, 

North Korea, Somalia, and Zimbabwe. To carry out U.S. sanctions 

programs, OFAC has developed a list of Specially Designated Nationals 

and Blocked Persons (SDN). The SDN designation covers both 

individuals and entities in which SDN persons have a direct or indirect 

ownership interest of 50% or more. The SDN designation applies to 

covered entities whether or not the entity is named on the SDN IiSt.648 

U.S. persons are prohibited from dealing with persons and entities on the 

SDN list, and all SDN assets in the United States are supposed to be 

blocked. OF AC also has authority to grant general and specific 

"licenses," which authorize exceptions for certain categories of 

transactions, such as those related to humanitarian efforts. 649 

646Id. OFAC is the successor to the Office of Foreign Funds Control (the "FFC") that was 

established at the beginning "fWorld War II in 1940. However, the Treasury Department 

administered sanctions as far back as the War of 1812 when sanctions were imposed against 

Great Britain. [d. 647 Id. 

648 See OFAC website, FAQ #10: http://www.treasury.gov/resourcecentcr/faqs/Sanctions/Pagcs/ques_index.aspx. 

64'ld. 
313 


76061.679

139 

OF AC regulations apply to all U.S. persons, both citizens and 

permanent resident aliens, regardless of where they are located, as well 

as all persons and entities within the United States, and all U.S. 

incorporated entities and their foreign branches.650 Fines for violating 

U.S. sanction laws and OF AC regulations can be substantial. Criminal 

penalties can result in fines ranging from $50,000 to $10 million and 

imprisonment for 10 to 30 years for willful violations. Civil penalties in 

various matters range from $250,000 or twice the amount of each 

underlying transaction to $1,075,000 for each violation.65 ! 

Iran and U-turn Transactions. For more than thirty years, dating 

back to 1979, the United States has applied sanctions programs to Iran, 

enforced by OFAC. 652 These programs have generally prohibited U.S. 

persons from engaging in transactions with anyone associated with Iran, 

and the OF AC filter has stopped any financial transaction including an 

Iranian reference. 

Between 1995 and November 10, 2008, however, OF AC 

regulations also included an exception to the prohibition on Iranian 

transactions commonly referred to as "U-turns." U-turn transactions 

were authorized by OFAC under regulations issued in 1995. In that 

year, President Clinton declared that Iran was an international threat for 

its attempt to obtain a nuclear weapon as well as its role in undermining 

ongoing peace talks in the Middle East. As such, U.S. financial 

institutions were generally barred by OFAC from processing 

transactions involving Iran. In their place, OF AC allowed only those 

Iran-related transactions that began and ended in non-Iranian foreign 

banks. According to Treasury: 

"This is commonly referred to as the 'U-turn' authorization. It is 

so termed because it is initiated offshore as a dollar-denominated 

transaction by order of a foreign bank's customer; it then becomes 

a transfer from a correspondent account held by a domestic bank 

for the foreign bank to a correspondent account held by a domestic 

bank for another foreign bank; and it ends up offshore as a transfer 

650 See OF AC website, FAQ #11: http://WW\V.treasury.govlresourcecenter/faqs/Sanctions/Pages!answer .aspx# I 0 

651 See U.S. Department of Treasury Office of Foreign Assets Control (OFAC), 

http://www.treasury.gov/about/ organizational-structure/offices/Pages/Office-of-Foreign-AssetsControl.aspx. 

652 See 31 C.F.R. Part 535, Iranian Assets Control Regulations, and 31 C.F.R. Part 560, Iranian 

Transactions Regulations, which together comprise the Iranian sanctions program. Initial Iranian 

sanctions regulations, now detailed in Part 535, were created on November 14, 1979, after U.S. 

diplomats were taken hostage in Tehran, and President Carter blocked assets located in the 

United States belonging to the Government ofiran. On October 29,1987, following Iran's 

expressions of support for international terrorism and aggressive actions against non-hostile 

shipping in the Persian Gulf, President Reagan issued Executive Order 12613, the predecessor to 

Part 560. From 1995 to 1997, President Clinton issued three additional Executive Orders, 

numbered 12957, 12959, and 13059, which culminated in a prohibition of nearly all trade and 

investment activities with Iran by U.S. persons, regardless oflocation. 
314 


76061.680

140 

to a dollar-denominated account of the second foreign bank's 

customer. ,,653 

In essence, the new regulations only allowed U.S. financial 

institutions to clear U.S. dollar transactions involving non-Iranian 

intermediaries, even if they involved Iranian clients. This restriction 

meant transactions involving Iran could be processed only if the 

beginning and ending points were non-Iranian foreign banks. The 

purpose of U-turn transactions was to allow U.S. dollar-denominated 

transactions to continue throughout the world benefitting both U.S. 

commerce and the value of the dollar but to prevent U.S. citizens and 

institutions from doing business with Iran. This goal was accomplished 

by ensuring that the only point such transactions touched the United 

States was in clearing them for foreign banks. 

The U-turn exception was widely used to carry out U.S. dollar 

Iranian transactions in the United States for many years. In November 

2008, the exception was revoked, and it was no longer legal under 

OF AC regulations to clear Iran-linked transactions even for foreign 

banks, although U.S. banks were still permitted to handle Iranian funds 

in limited circumstances, including transactions supporting humanitarian 

relief.654 U.S. persons were explicitly prohibited, however, from 

engaging in any transaction or dealing in any property or property 

interest with any Iranian bank designated under the Nonproliferation of 

Weapons of Mass Destruction or Specially Designated Global Terrorist 

programs.655 

The U-turn exception for Iran in OF AC regulations until 2008 does 

not appear in any other OF AC regulation, and so does not affect 

transactions involving any other prohibited country or person. 

Prosecutions for OFAC Violations. In recent years, a number of 

large, international banks have been prosecuted for systematically 

violating OF AC prohibitions. In most cases, the violations involved the 

practice of stripping information from wire transfer documentation to 

hide the participation of a prohibited person or country, and executing 

the prohibited transaction through a U.S. dollar account at a U.S. 

financial institution. For example, in December 2009, Credit Suisse was 

fined $536 million by the Department of Justice for altering wire transfer 

documentation from 1995 to 2006, in transactions involving Burma, 

Cuba, Iran, and Libya. That same month Lloyd's Bank was fined $217 

653 See Treasury website, http://\\'WW.treasury.gov/resourcecenterlsanctions/Documents/fr73_.66541.pdf; OFAC website, 

http://www.treasury.gov/about/organizational-structure/oflices/Pages/Oflice.of-Foreign·Assets· 

Control.aspx, at 2. 

654 See OFAC website, http://www.treasury.gov/about/organizationalstructure/offices/Pages/Office·o f· Foreign· Assets-Contro l.aspx, at 2. 

65s ld. at 2. 
315 


76061.681

I 

141 

million for stripping information from wire transactions over a ten-year 

period, from the mid 1990s through September 2007. In May 2010, 

ABN Amro was fined $500 million for removing information from wire 

transfers involving OFAC sanctioned countries between 1995 and 2005. 

Most recently, on June 12,2012, the U.S. Justice Department and 

New York County District Attorney's Office entered into a deferred 

prosecution agreement with ING Bank N.V. and imposed the largest fine 

ever levied against a bank for OFAC violations.656 For processing more 

than $2 billion in transactions on behalf of Cuban, Iranian, and other 

prohibited persons, ING Bank agreed to a criminal forfeiture of $619 

million. The Treasury Department's press release revealed that ING 

Bank had "intentionally manipulated financial and trade transactions to 

remove references to Iran, Cuba, and other sanctioned countries and 

entities.,,657 It noted that ING Bank's methods included not referencing 

a payment's origin, utilizing "misleading" payment messages, and using 

shell companies. According to court filings, between the early 1990s 

and 2007, ING Bank processed more than 20,000 transactions in 

violation ofOFAC prohibitions, "with the knowledge, approval and 

encouragement of senior corporate managers and legal and compliance 

departments.,,658 

A summary of recent prosecutions and legal actions related to 

OFAC violations follows. 

Recent Prosecutions and Legal Actions Related to OFAC Violations 

Bank Date Fine Link Brief Summary i 

ING 6/12/2012 $619 • DO] Press Release The Department ofJusiice and the --1 

Bank million (http://www.treasury.gov New York County District Ipress-ceoter/pressN.V. releases/Pages!tg 1612. Attorney's Office entered into , I aspx) 

simultaneous deferred prosecution I 

agreements with ING Bank relating 

to 20,000 transactions totaling $1.6 

billion processed through the U.S. 

financial system on behalf of 

Cuban and Iranian entities from the 

early 1990s through 2007. 

656 See, e.g. United States v. Ing Bank, N.V., Case No. 1:12cr136 (USDC DDC), Information 

(6/1212012) and Deferred Prosecution Agreement (611212012). 

6576112/2012 "lNG Bank N.V. Agrees to Forfeit $619 Million For Illegal Transactions With 

Cuban and Iranian Entities," Treasury press release, WW\V,treasury.gov/press-center/pressreleases/Pages/tg 1612.aspx. 

6"[d. 
316 


76061.682

142 

Barclays 8118/2010 $298 • DOJ Press Rele"se The Department of Justice and the I 

Bank million (http://www-justice.gov/o New York County District 

I 

palpr/20 1 0/ Augustil 0-

crm-933.html) Attorney's Office entered into 

• Wall Street Journal deferred prosecution agreements 

Probe Circles Globe with Barclays Bank for activity 

to Find Dirty relating to transactions illegally 

Money conducted for customers in Cuba, (http://online.wsj.comfarti 

de/S81 000 14240527487 Iran, Libya, Sudan, and Burma 

034316045754680940907 

00862.html) from the mid-1990s until 

September 2006. 

ABN 5110/2010 $500 • DO] Press Release The Department ofJustice entered 

Amro million (http://www.justice.gov/o into a deferred prosecution palpr/2010/May/IO-crmBank 548.html) agreement with ABN Amro Bank 

• Wan Street Journal, for removing information from 

RBS, DO.l to End wire transfers from 1995-2005 for 

Deferred Prosecu~ customers in Iran, Libya, the tion Agreement 

over ABN Amro Sudan, Cuba, and other OFAC-

(http://blogs.wsj.com/corr listed countries. uption-currents/20 III 

!2/28Irbs-do}to-enddeferred-prosecutionagreement-over-abn 

amra!) 

Credit 12/16/2009 $536 • DOJ Press Release The Department of Justice entered 

Suisse million (hnp://www.justice.gav/o into a deferred prosecution paJprJ2009/December/O9-

Bank ag-J 358.html) agreement with Credit Suisse. The 

• DOJ Statement of fines related to alterations on wire 

Facts transfers from 1995 to 2006 from 

(http://www.justice.gov/c Iran, Cuba, Burma, and Libya. riminalipr/documents/12-

16-09-CreditSu issefactualstatement.pdf) 

, Lloyd's 01109/2009 $217 • DOJ Press Release The Department of Justice and the 

Bank million (hnp:llwww.justice.gov/o New York County District pal pr!200 91 January /09· 

crm-023.html) Attorney's Office entered into 

deferred prosecution agreements 

with Lloyd's Bank for wire 

stripping transactions from the mid1990s through September 2007. 

Australia 8/24/2009 $5.75 • Treasury Settlement The Treasury Department entered 

and New million Statement into a settlement with the Australia (http://www.treasury.gov! 

Zealand resource-center/sanctions and New Zealand Bank Group 

Bank /OF AC-Enforcementl relating to currency exchanges Documents/anz," 

Group 08242009.pdQ from 2004 to 2006, for transactions 

Ltd. _t ofufo=mffi' 

processed through U.S. 

Documents correspondent accounts for 

(http://www.treasury.gov! customers in Cuba and Sudan. l __ 1"--~-·oo, IOFAC-EnforcementiDo 

~. __ cuments/o8242009.pdQ .. 

Prepared by the U,S. Senate Permanent Subcommittee on Investtgattons 
317 


76061.683

143 

HSBC is currently under investigation by the U.S. Justice 

Department and several Federal financial regulatory agencies for 

engaging in similar practices in possible violation of OF AC 

regulations.659 In October 2010, an internal Federal Reserve email 

discussing HSBC's decision to hire an outside auditor to review its 

records "presumably to find problematic transfers," noted that "HSBC 

was one of the two major UK banks for Iranian banks during the early 

2000s (Lloyds being the other), so we can imagine what will be 

found.,,660 

B. Executing OFAC-Sensitive Transactions 

(1) Transactions Involving Iran 

(a) Overview 

Documents collected by the Subcommittee do not pinpoint when 

undisclosed Iranian transactions began moving through HBUS in 

potential violation ofOFAC regulations. HSBC officials were aware of 

the practice generally as early as 2000, as seen in an email discussion 

between HSBC Group's Compliance head, then Matthew King, and 

AML head Susan Wright. Ms. Wright criticized actions taken by a bank 

client to alter transaction documentation to disguise a wire transfer 

moving through the United States, but their email exchange does not 

disclose whether such transactions were already taking place at 

HBUS.661 By 200 I, they clearly were, as described in an email from 

HBEU to HBUS.662 

In 2001, when HSBC Europe (HBEU) raised the issue of 

processing U-turn transactions through its U.S. account in compliance 

with U.S. requirements, HBUS personnel made it clear that any such 

transactions would need to be fully transparent and include all 

underlying payment details to enable HBUS to evaluate whether they 

qualified as permissible U-turns. From at least 2001 to 2007, however, 

despite repeated HBUS requests for full transparency, HBEU and later 

HSBC Middle East (HBME) sent transactions involving Iran through 

their U.S. dollar correspondent accounts at HBUS without full disclosure 

of the transaction details. In some instances, the HSBC affiliate simply 

stripped the identifYing Iranian information from the transaction 

659 See 212712012 HSBC Holdings pIc 6-K filing with the Securities and Exchange Commission, 

item 13, 

http://sec.gov/Archives/edgar/datalI089113/000119163812000216Ihsba201202276k7.htm. 660 10107/2010 email from Federal Reserve Stephen Meyer to Federal Reserve Kwayne Jennings, 

and others, "HSBC OF AC." 

661 Sec 611 6/2000 email from HSBC Susan Wright to HSBC Matthew King, HSBC OCC 

8875191-92. 

662 See 6/28/2001 email from HBEU John Wilkinson to HBUS Denise Reilly and others, "Bank 

Melli," HSBC OCC 8876132-133, discussed below. 
318 


76061.684

144 

documentation. In others, the HSBC affiliate also sent the transaction as 

a transfer between banks in permitted jurisdictions, a tactic sometimes 

referred to as a "cover payment," since the bank-to-bank transfer acted 

as a cover for the underlying transaction.663 Both methods sought to 

ensure that a transaction would not be stopped by HB US' OF AC filter 

and delayed for individualized review to determine whether it, in fact, 

qualified as a permissible U-turn, but would instead benefit from 

"straight through processing" or STP. 

From 2001 until 2005, the two HSBC affiliates frequently 

discussed processing Iranian U.S. dollar transactions for various Iranian 

financial institutions and entities through their HBUS correspondent 

accounts. Numerous emails among HBEU, HBME, HBUS, and HSBC 

Group discuss whether HBUS would be willing to process Iranian Uturn transactions and, if so, how. At the same time, HSBC Group, 

HBEU and HBME bankers were pushing to expand contacts with Iran. 

The Senior Payments Manager in HBUS reported being told in a July 

200 I conference call that the HSBC Group, with backing from the 

Chairman, was seeking to "significantly grow our presence in Iran.,,664 

In 2003, an HBME business proposal estimated that processing 700 U.S. 

dollar payments for Iranian banks per day using U-turn transactions 

would produce income of$4 million, while failing to process them 

would threaten HSBC's current Iranian business which produced annual 

bank income of $2 million.665 HBME also noted that it already had a 

"number of existing USD accounts for Iranian banks.,,666 

Even though discussions with HBUS over processing the 

transactions continued in 2002 and 2003, documentation shows that 

HBEU had already begun to send U-turn transactions throug,h HBUS 

without disclosing an Iranian connection for many of them. 67 Some 

HBUE compliance and payments personnel objected to altering payment 

instructions in connection with the Iranian transactions, and a key 

payments official even announced deadlines in January 2004 and 

September 2004, after which no Iranian payment instructions would be 

altered, but both deadlines were ignored. HBUS finally approved a 

663 The cover method utilizes the MT202 SWIFT message or payment instruction fonnat, which 

provides a U.S. bank with the names of the foreign banks acting as the originator or beneficiary 

of the immediate transfer~ but is not required also to provide the underlying origination and 

beneficiary customer infonnatioD. 

664 7/12/2001 email from HBUS Denise Reilly to Douglas Stolberg and others, "Bank Melli," 

I-lSBC acc 8876128-129. HSBC legal counsel told the Subcommittee that the I-lSBC affiliates 

were already doing business with Iran, but they wanted to increase that business by doing it with 

Bank Melli. Subcommittee meeting with HSBC legal counsel (6/20112). 

665 112003 memorandum from HBME Rick Pudner to HBUS Denise Reilly, HBEU Malcolm 

Eastwood, and others, "Business Case·USD Payment From Iranian Banks/Entities," HSBC acc 8876490. 

666 1d. 

667 See, e.g., 12/30/2002 email from Protomastro to Carolyn Wind and others, HSBC acc 8873909. 
319 


76061.685

145 

protocol to process transparent U-turns in December 2004.668 Even after 

that protocol was approved, however, HBEU continued to send 

undisclosed U-turn payments through HBUS using cover payments, 

failing to provide requested information to its own affiliate. 

At HBUS, during the same time period, internal documents show 

that, as early as 2001, senior HBUS payments, compliance, and business 

managers were informed that Iranian u.s. dollar payments were being 

sent by HBEU through HBUS after deleting references to Iran. They 

were also informed of an HBEU proposal to streamline the processing of 

U-turn transactions by omitting references to Iran so the transactions 

would not be halted by the OFAC filter in the United States. Emails at 

the time show that senior HBUS officials expressed discomfort with the 

HBEU proposal, but took no other action to stop or prevent the activity 

already occurring.669 In addition, HBUS' OFAC filter occasionally 

caught an Iranian-related transaction, sent by an HSBC affiliate, in 

which the identifYing information had not been fully removed, 

demonstrating that undisclosed U-turns continued to be sent through 

HBUS correspondent accounts, but again, no HBUS personnel took 

further action to stop the activity. In 2003, the Iranian issue was 

discussed again when a new HBUS AML Director arrived, but once 

more, no decisive action was taken to put a stop to undisclosed U-turns. 

Although HSBC Group Compliance was aware ofHBUS' 

concerns, HBEU's practice of stripping information or using cover 

payments to conceal U-turn transactions involving Iran, and the fact that 

such undisclosed transactions were routinely slipping through HBUS 

accounts, HSBC Group did not prohibit the practice for years. In July 

2005, HSBC Group issued a Group-wide directive, Group Circular 

Letter (GCL) 050047, barring all HSBC affiliates from engaging in U.S. 

dollar transactions in violation of OF AC regulations, but continued to 

allow their use of cover payments for permissible U-turn transactions, 

which meant the transactions would continue to circumvent the OF AC 

filter and individualized review by recipient U.S. banks. In April 2006, 

HSBC Group issued a second Group-wide directive, GCL 0600 11, 

requiring HSBC affiliates and other financial institutions to use fully 

transparent payment instructions when sending transactions through 

HBUS accounts, but again allowed U-turns "to be made as cover 

payments." In 2007, HSBC Group decided to exit Iran. 

668 See 12/2/2004 email from HBUS Denise Reilly to HBUS Michael Gallagher and others, "UTurns," HSBC OCC 3407526-527; 12115/2004 email from HSBC David Bagley to HSBC 

Marilyn Spearing and HBME David Hodgkinson, "Iran - OFAC," HSBC OCC 8874039; and 

5/4/2005 email from HBUS Elizabeth Protomastro to HBUS Teresa Pesce and others, "Wire 

Payments Suspended," HSBC OCC 8874710. 

669 7Illl2001 email from HBUS Douglas Stolberg to HBUS Denise Reilly, HBUS Joe Harpster, 

and HBUS Michael Gallagher, "Bank Melli," HSBC OCC 8876129. 
320 


76061.686

146 

In recent years, OF AC has sent over a dozen so-called Cautionary 

Letters to RBUS about incidents in which it failed to block a prohibited 

transaction, including transactions involving Iran. 67o In 2010, RSBC 

Group employed an outside auditor, Deloitte LLP, to identifY and review 

OFAC sensitive transactions at RBUS over a seven-year period from 

2001 to 2007. That review has so far examined 58 million payment 

messages involving assets of$37 billion that passed through the key 

server, located in the United Kingdom, during that time frame and 

identified OF AC sensitive U.S. dollar transactions involving assets 

totaling $19.7 billion. The review identified almost 25,000 U.S. dollar 

transactions involving Iran, involving assets in excess of $19.4 billion.67 ! 

The vast majority ofthe Iranian transactions, ranging from 75% to 90% 

over the years, were sent through RBUS and other U.S. dollar accounts 

without disclosing any connection to Iran. While the affiliates may have 

viewed these U-turns as permissible under U.S. law, the absence of 

identifYing information meant they did not trigger the OF AC filter or an 

individualized review by RBUS to make sure. 

(b) Concealing Iranian Transactions 

2000 Notice Regarding Iranian Transactions. On June 9, 2000, 

the RSBC Group AML Compliance head Susan Wright learned in an 

email that a client bank was using deceptive practices to send OF AC 

sensitive U.S. dollar transactions through U.S. correspondent accounts 

while evading detection by the OF AC filter. 

In the June 9, 2000 email to Ms. Wright from an RSBC colleague, 

she was informed that a particular bank, whose name was redacted by 

RSBC from the email, was "automatically replacing a remitter's name 

with that of' the bank.672 The email stated that the bank planned to 

cease the practice by the end of June, but in the future, for OFAC 

sensitive transactions, would "arrange cover for the payment using 

MT202/203 remittances." "MT202/203" refers to the SWIFT message 

or payment instructions used to execute bank-to-bank transfers. The 

email explained that bank-to-bank transfers did not require identifying 

the underlying party who originated the transaction or the ultimate 

beneficiary of the payment.673 It also indicated that the bank planned to 

send a separate "MT I 00 message" to the recipient bank providing full 

payment details for the originator and ultimate beneficiary. The email 

stated: "In this way a payment, in US$ can be made for an individual or 

670 Department of the Treasury, Office of Foreign Assets Control (OFAC) Cautionary Letters 

sentto HSBC. September 2008 - April 2012. PSI-OF AC-O 1-000 1-015. 

671 Deloitte Review of OFAC transactions, "Results of the Transactions Review - UK Gateway, 

March 29, 2012," HSBC-PSI-PROD-0197919-989, at 930. 

612 6/9/2000 email from HSBC Bob Cooper to HSBC Susan Wright, "Significant Exception 

2QOO-04," HSBC OCC 8875192-193. 

673 Id. 
321 


76061.687

147 

company on the OF AC list, without the name being 'detected' by the 

OFAC filters that all US banks would apply.,,674 

Ms. Wright forwarded the June 2000 email to Matthew King, then 

head ofHSBC Group Compliance, describing the client bank's past 

procedure of altering transaction documentation when processing OF AC 

sensitive wire transfers. She wrote: "We advised them that this was 

contrary to SWIFT guidelines (drawn up to address FATF675 concerns re 

money laundering via wire transfers) which required that the full details 

(names and addresses) of remitters and beneficiaries are included.,,676 

She also described the client bank's future plan to conceal OF AC 

sensitive transactions behind bank-to-bank transfers. Ms. Wright wrote: 

"From a Group perspective I consider the continuation ofthis practice to 

be unacceptable and as a deliberate and calculated method to avoid the 

US OF AC sanctions has the potential to raise serious regulatory 

concerns and embarrass the Group.,,677 

Ms. Wright's reaction indicates that as early as 2000, HSBC Group 

Compliance learned of practices being used to avoid detection by the 

OF AC filter, and viewed them as "unacceptable" and raising potential 

regulatory concerns that were capable of embarrassing HSBC. 

2001 Bank Melli Proposal. Six months later, in January 2001, 

HBEU approached HBUS with a proposal to use its U.S. dollar 

correspondent account at HBUS to clear U.S. dollar transactions for 

Bank Melli, the largest commercial retail bank in Iran. 678 At that time, 

Bank Melli's London Branch maintained a U.S. dollar account with 

several other major international banks, but was interested in 

establishing a relationship with HSBC that would give the bank the 

majority of Bank Melli's U.S. dollar clearing business. HBEU 

conducted an extensive review, with advice from two outside U.S. law 

firms, to determine whether transactions originated by Bank Melli would 

meet the definition of a permissible U-turn transaction under OF AC 

regulations, and concluded that they would, in fact, be permissible. 

Even though the proposed U-turns would be permissible under 

OF AC regulations, HBEU proposed carrying them out in the form of 

bank-to-bank transfers, without any reference to the underlying 

originator or ultimate beneficiary and, so without any reference to 

674Id. 

675 FATF is the Financial Action Task Force, the leading international body that set standards for 

combating money laundering and terrorist financing. 676 611412000 email from HSBC Susan Wright to HSBC Matthew King, "Memo: Significant 

Exception 2QOO-04," HSBC OCC 8875/91-192. 

671 Id. 

67& HSBC had established a relationship with Bank Melli's office in Tehran in 1999. 711112001 

email lrom HBUS Carolyn Wind to HSBC Matthew King and others, "Bank Melli," HSBC-PSIPROD-0096130-132. 
322 


76061.688

148 

Iran.679 The aim was to ensure that the transactions would not be 

delayed by triggering an OFAC filter and having to undergo 

individualized review. HBUS compliance personnel responded that any 

such transactions would have to be done in a more transparent manner, 

with detailed payment information specifying the underlying originating 

and beneficiary customer information. HBUS employees expressed 

concern about using cover payments, since the limited payment 

instructions would not enable HBUS to know whether it was processing 

a valid U-turn transaction involving Iran or whether it was even 

processing a U-turn transaction at all. 68o It would see only two banks 

making the transfer on the payment instructions and would have no 

knowledge of the underlying customers for whom the transaction was 

being processed, including whether they were prohibited persons. 

Legal Advice. In January 2001, HBUS OFAC Compliance officer 

Elizabeth Protomastro asked outside legal counsel, Tom Crocker, for an 

opinion as to whether HBUS could process U.S. dollar transactions from 

HBEU on behalf of either Bank Melli or Iran's Central Bank, Bank 

Markazi.681 After extensive consultations involving two law firms and 

OF AC, HBUS was advised that the Bank Melli transactions could 

qualify as permissible U-turn transactions. 682 

679 Id. at 0096130. Under international banking practice, it was legal for bank-to-bank 

transactions to omit underlying payment details for the originator and ultimate beneficiary. 

Subcommittee briefing by OFAC (5/8/2012). 

680 Id. at 0096130-131. 

681 See 1I31/2001 email from Elizabeth Protomastro to Tom Crocker, HSBC OCC 8903860. 

682 On February 1,2001, HBEU provided Ms. Protomastro with more information about the type 

ofU,S. dollar transactions that would be sent through HBEU's correspondent account at HBUS, 

explaining that they would include 25 treasury-related payments involving about $750 million 

per day, 25 treasury-related receipts involving about $750 million per day, and 100 commercial 

payments involving $200 to $300 million per day, none of which would be related to letters of 

credit for military goods. (See 2/]/2001 email from HBEU Peter Blenk to HBUS Elizabeth 

Protomastro, "Centre I Bank oflran," HSBC OCC 8903864-865.) On February 2, 2001, Mr. 

Crocker advised that the scenario outlined by HBUE did not appear to qualify for the U-turn 

exception as stipulated in the OFAC Iranian Transactions Regulations, because HBEU could not 

serve as both the originating and receiving foreign bank. (See 2/2/2001 email from Tom Crocker 

to HBUS Elizabeth Protomastro, "Central Bank of Iran," HSBC OCC 8903859-860.) 

In response to Mr. Crocker's opinion, on February 19, 200!, HSBC Group Compliance 

head Matthew King contacted a second law firm, Winthrop Bro\\fI1, to obtain a second opinion. 

(See 21l 9/200 1 email from HSBC Matthew King to Winthrop Brown and HBME John Richards, 

"Memo: OFAC constraints in the Central Bank of Iran operating a USD Clearing account with 

IISBC Bank pIc in London," HSBC OCC 8903876-877.) One of the firm's lawyers, John 

Simons, consulted with OF AC and obtained a copy of the payment processing procedure for 

qualified "U-Turn Dollar Clearing" transactions. He explained he was waiting to confirm with 

OFAC's Chief Counsel Office about whether a second U.S. bank was required to process 

permissible U-turn transactions. The email indieated that they had also determined that a 

requirement in Section 560.516 (b) for U.S. depository institutions to detennine if an underlying 

transaction was prohibited by OFAC, "prior to initiating a payment on behalf of any customer or 

crediting a transfer to the account on its books of the ultimate beneficiary," did not apply to Uturns. (See 2/2001 email from John Simons to Winthrop Brown, "Memo: OFAC constraints in 

the Central Bank ofIran operating a USD Clearing account with HSBC Bank pic in London," 

HSBC OCC 8903875-876.) 

In April 2001, Mr. Simons emailed Mr. King that OFAC had confirmed that a second 

U.S. bank was not required when processing permissible U-turn transactions and no specific 
323 


76061.689

149 

HSBC Group Compliance head Matthew King forwarded the legal 

advice to HBME officials Brian Richards and John Richards, stating: "I 

confirm I am happy for the business to be undertaken on this basis." He 

also wrote: "I am assuming this business will be booked in HBEU, 

hence I am copying Chris Couldrey. If any other Group entity is likely 

to be involved, could you let me knoW.,,683 Brian Richards responded 

the following day to confirm that payment orders from Bank Melli's 

account would originate from HBEU, and credits in favor of Bank Melli 

would be credited to their account at HBEU. He stated that the payment 

orders would not mention Bank Melli, and HBUS would not receive 

payment orders or receipts directly from an Iranian entity. Mr. Richards 

concluded that the payment chain would meet the U-turn definition 

provided by Mr. Simons.684 

HBEU Payment Instructions. HBEU, HBUS, and HSBC Group 

Compliance continued to discuss HBEU's proposal to process U.S. 

dollar transactions for Bank Melli. 

In a letter dated April 30, 2001, HBEU's Multicurrency Payments 

Department (MPD) sent Bank Melli a proposal to process their 

payments with "minimal manual intervention.,,685 The letter included 

payment templates with specific instructions on how to format U.S. 

dollar transactions so the paperwork would not have to be altered by 

HBEU. MPD proposed that Bank Melli use the provided templates to 

complete Rayments fields for both MT202 and MT I 00 SWIFT 

messages 86 and to test the proposal.687 In the letter, MPD Business 

Development Manager John Fowle advised the Bank Melli Cash and 

Payments Manager in London, Saeed Pourjam: 

"[F]ollowing tests in our payments environment we are confident 

that we have found a solution to processing your payments with 

minimal manual intervention. The key is to always populate field 

52 - if you do not have an ordering party name then quote "One of 

our Clients", never leave blank. This means that the outgoing 

payment instruction from HSBC will not quote "Bank Melli" as 

sender - just HSBC London and whatever is in Field 52. This then 

OFAC license was required to engage in U-turn transactions. (See 4/26/2001 email from John 

Simons to HSBC Matthew King and others, OFAC Iran," HSBC OCC 8903868-870.) 

683 4/26/2001 email from IlSBC Matthew King to HBME Brian Richards and others, "OFACIran," IlSBC OCC 8903868. 

684 412712001 email from HBME Brian Richards to HSBC Matthew King and others, "OFACIran," HSBC OCC 8903874. 

685 See 7111/2001 email from HBUS Carolyn Wind to HSBC Matthew King and others, "Bank 

Melli," HSBC OCC 8876130-136, at 135-136 (including a copy of the April letter). 

686 MT202 and MTlOO are examples of SWIFT messages used by financial institutions to 

facilitate payment processing. Different messages utilize specialized formats, dependent on the 

type of transaction, to process the payments. Subcommittee briefing by OFAC (5/8/2012); 

Subcommittee briefing by Deloitte (515112012). 

687 711112001 email from HBUS Carolyn Wind to HSBC Matthew King, "Bank Melli" HSBC 

OCC 8876130-136, at 133-136. 
324 


76061.690

150 

negates the need to quote "DO NOT MENTION OUR NAME IN 

NEW YORK" in field 72.,,688 

This email shows HBEU designed a payment method to avoid the 

OF AC filter by preventing the inclusion of information about the 

participation of the Iranian bank. The method developed by HBEU 

ensured that no language that would normally trigger an OFAC reviewsuch as "do not mention our name in New York" - appeared in the 

transaction documentation. 

On May 25, 2001, in an email to colleagues, Michael Gallagher, an 

HBUS senior official at the Payments and Cash Management (PCM) 

division, expressed discomfort with the Bank Melli proposal to 

colleagues, including his supervisor, Douglas Stolberg, head of 

Commercial and Institutional Banking (CIB): "I wish to be on the 

record as not comfortable with this piece ofbusiness.,,689 His statement 

did not elicit any immediate response. When interviewed, Mr. Gallagher 

told the Subcommittee that he sent this email to express his concerns to 

his colleagues, including his supervisor, and then left it to them to 

determine what should be done.69o 

In the meantime, HBEU had already begun processing Bank Melli 

U-turns through its account at HBUS, using cover payments so that the 

transactions would not trigger HBUS' OFAC filter. This fact was 

disclosed in a June 28, 2001 email from the HBEU Institutional Banking 

Relationsh~ Manager who handled the Bank Melli account, John 

Wilkinson. 91 In the email, he was discussing the Bank Melli proposal 

with the head ofHBUS' payment services, Denise Reilly. Mr. 

Wilkinson explained that once the proposal "goes live," Bank Melli was 

instructed "to alter the format" of their payments to achieve straight 

through processing. Mr. Wilkinson wrote: 

"[W]e have further asked them to only put 'One of our clients' in 

field 52, thus removing the chance of them inputting an 'Iranian 

688 Id. at 135 (emphasis in original). Two months earlier, on May 21, 2001, HBEU Institutional 

Banking (CIB IBL) conducted a call with Bank Melli to inquire about the names of the principal 

beneficiaries oftheir payments. The resultant call report indicated that '"as expected," Bank 

Melli was unable to answer with the reasoning that Iran imports from many countries and 

suppliers worldwide. This infonnation had been previously requested by a Senior Manager in 

Payment Operations at HBUS, Denise Reilly. An Area Manager within HBEU CIB IBL, Brian 

Richards, forwarded the response to Ms. Reilly the following day. Ms. Reilly then forwarded 

Mr. Richard's email to HBUS Compliance personnel. 5/2212001 email from HBUS Denise 

Reilly (0 HBUS Carolyn Wind and others, "Bank Melli," HSBC-PSI-PROD-0096138-J42. 

639 5/2512001 email from HBUS Michael Gallagher to HBUS Denise Reilly and Douglas 

Stolberg, "BANK MELLI," HSBC-PSI-PROD-0096 1 38. 

690 Subcommittee interview of Michael Gallagher (6113/2012). 

691 6/2812001 email from HBEU John Wilkinson to HBUS Denise Reilly and others, "Bank 

Melli," HSBC OCC 8876132-133, at 133. 
325 


76061.691

151 

referenced' customer name, that causes fall out of the cover 

payment sent to HBUS and a breach ofOFAC regulations.,,692 

He also explained that using "One of our clients" in field 52 "is a 

standard phrase used by MPD [HBEU's Multicurrency Payments 

Department] in these situations.,,693 Acknowledging Ms. Reilly's 

concerns following "a recent formatting error" detailed in an earlier 

email of June 15,2001,Mr . Wilkinson noted that Bank Melli had not yet 

begun to use the new formatting method detailed in the April letter: 

"Bank Melli are still formatting payments in their usual method, in 

this instance MPD failed to spot the poor input and did not follow 

their normal procedure of altering the payment, hence it was 

blocked. MPD have again confirmed the new formatting method 

will achieve straight through processing and overcome these 

difficulties. ,,694 

Mr. Wilkinson's email shows that Bank Melli was already processing 

undisclosed U-turn transactions through HBEU's account at HBUS, 

using what he calls "their usual method" for formatting the payments, 

prior to the proposed changes. His email also described HBEU's 

"normal procedure" as "altering" Bank Melli's payments to prevent the 

payments from being blocked. The proposed new procedure was aimed 

at eliminating those manual interventions on the part of HBEU to 

expedite payments, potentially saving time and therefore money. 

This June 2001 email put HBUS on notice that HBEU had at times 

altered transactions involving Bank Melli in Iran, a practice already so 

commonplace at HBEU it was called its "normal procedure." This email 

was sent to the head ofHBUS' payment service operations, who then 

alerted other HBUS executives. When asked about this document 

describing the alteration of documents being engaged in by an HSBC 

affiliate, senior HBUS Compliance official Anne Liddy, who oversaw 

HBUS' OF AC compliance program, told the Subcommittee that it 

would have been a problem if U-turns were being processed in 2001, 

since HBUS did not then have a process in place to conduct U-turns 

appropriately.695 

HBUS Objections. On July 11,2001, after HBUS Compliance 

head Carolyn Wind learned of the HBEU proposal, she sent an email to 

HSBC Group Compliance head Matthew King objecting to it.696 What 

followed was a growing consensus that HSBC should not be pursuing its 

692 Id. 

693 Id. 

694 ld. 

695 Subcommittee interview of Anne Liddy (2/2212012). 

696 711 112001 email from HBUS Carolyn Wind to HSBC Matthew King and others. "Bank 

Melli," HSBC OCC 8876130-136. 
326 


76061.692

152 

business in this fashion. Ms. Wind included the Wilkinson email from 

June and a copy of the April letter sent to Bank Melli providing payment 

message instructions. Ms. Wind expressed several concerns, including 

whether the transactions sent via the cover payments would be 

permissible under OFAC regulations and that "HBUS will not be able to 

confirm whether or not the underlying transaction actually meets the 'UTum' requirement." She noted further that it was "not apparent that 

HBEU will be able to confirm that each payment meets the 

requirements." She wrote: 

"In an effort to facilitate 'straight-through processing', it now 

appears that HBEU will train Bank Melli on formatting the 

payments and that we will be relying on Bank Melli to ensure that 

only qualifYin~fayments are processed through HBEU's account 

with HBUS." 9 

Ms. Wind also expressed concern about how it might appear to 

U.S. regulators that HBEU trained Bank Melli to write payment 

instructions in such away, pointing out that if OF AC were to identifY a 

transaction that did not qualifY as a permissible U-turn, OF AC might 

consider "HSBC's actions due to the non-disclosure as having involved 

willful disregard or evasion.,,698 

HBUS payment services head Denise Reilly forwarded Ms. 

Wind's email to Douglas Stolberg, head ofHBUS Commercial and 

Institutional Banking (CIB). He responded: "With the amount of smoke 

coming off of this gun, remind me again why we think we should be 

supporting this business?,,699 

Ms. Reilly responded by sending Mr. Stolberg a memorandum 

prepared by the HSBC Group Representative for Iran, John Richards, 

which stated that HSBC Group "with the backing of Bond" - referring to 

the HSBC Chairman of the Board of Directors - wanted to "significantly 

grow our presence in Iran" with current lines of credit reported to be 

$800 million, trade lines of$150 million, and growth anticipated in 

trade, cash management and Internet banking. The memorandum 

indicated that HSBC Group and HBEU wanted to expand the bank's 

presence in Iran and viewed clearing U.S. dollar transactions for Bank 

Melli as a profitable venture that could help win additional business in 

Iran, despite U.S. sanctions and HBUS concerns. 700 

697 Id. at 130. 

698 Id. at 131. 

699 See 7/1]/2001 email exchanges among HBUS Douglas Stolberg and HBUS Denise Reilly, 

Joe Harpster, and Michael Gallagher, "Bank Melli," HSBC acc 8876128-130. 

700 Id. at 128-129. 
327 


76061.693

153 

These email exchanges show that, by July 2001, senior HBUS 

compliance, payments, and business managers, as well as the HSBC 

Group Compliance head, were aware that Iranian U.S. dollar transaction 

documentation was being altered by HBEU and the transactions were 

being processed through HBUS.701 HBUS Compliance head Carolyn 

Wind complained to HSBC Group Compliance head Matthew King, but 

neither stopped the practice, nor did HSBC Group obtain a legal opinion 

about whether its U.S. dollar cover payments were in compliance with 

OF AC regulations. 

HBUS' Payments Proposal. In August 2001, HBUS offered its 

own proposed procedures to clear U.S. dollar transactions involving 

Bank Melli.702 Uncomfortable with the formatting solution proposed by 

HBEU a few months prior, HBUS proposed that Bank Melli be listed as 

the originator in the payment instructions and proposed establishing a 

segregated account for the transactions so HBUS could ensure that all 

Bank Melli payments would be stopped by the OFAC filter for further 

review and approval. 

On August 30, 2001, HSBC's John Richards expressed his support 

for the procedures, noting it would be the first time that an Iranian bank 

name was mentioned in the payment message.

703 

On September 6, 200 I, HBUS met with the Director ofthe Office 

of Foreign Assets Control (OFAC) to discuss clearing Bank Melli Utum transactions. Carolyn Wind commented that although OF AC did 

not approve or reject the proposal, she walked away from the meeting 

thinking that OF AC was "okay with it.,,704 

HBME's Iranian Transactions. While HBEU was processing Utum transactions for Bank Melli, a second HSBC affiliate, HSBC 

Middle East (HBME), was also carrying out OF AC sensitive 

transactions for other clients, using its own and HBEU's U.S. dollar 

correspondent accounts at HBUS apparently without alerting HBUS to 

the transactions. In an October 2001 email, David Bagley, then HBME 

Regional Head of Legal and Compliance, sought guidance from HSBC 

701 7/11/2001 email exchange among lIBUS Carolyn Wind, HBUS, Paul Lee, HBUS Anne 

Liddy, HBUS Douglas Stolberg, HBUS Michael Gallagher, and HBUS Denise Reilly, HSBC 

OCC 8876129. 

702 The procedures consisted of a two-step debit process and a five-step OF AC review process, 

and committed to same day processing for transactions determined to be V-tum compliant. The 

procedures required that Bank Melli transactions be segregated in an "'HBEU Special Account" 

with the account number entered into the OFAC nIter so that every Bank Melli transaction 

would be stopped in the OFAC queue for two reviews and two approvals prior to processing. 

Bank Melli would appear as the originator for all related transactions. 8/2912001 email from 

l-lBUS Denise Reilly to HBAP Alan Wilkinson and others, "Bank Melli," HSBC OCC 7687346· 

348. 

703 8/30/2001 email from HSBC John Richards to HBUS Denise Reilly and others, "Bank Melli," 

HSBC·PSI·PROD·0096147 ·148. 

704 Subcommittee interview of Carolyn Wind (317/2012). 
328 


76061.694

154 

Group Compliance head Matthew King about how OF AC sensitive 

transactions should be handled. 70S Mr. Bagley wrote: "As I understand 

the current position we do routinely, and across the Group, adopt 

differing approaches to payments potentially subject to OF AC 

sanctions." Mr. Bagley wrote that, at HBME, payments were not 

structured "against a specific request from the customer, rather we 

undertake this structuring as a routine," and that he was not clear about 

whether those procedures were viewed "as being inappropriate, and thus 

should be disallowed." He also noted: "I am advised that there may 

even be software in the UK which filters such payments for restructuring 

in the event that the original message has been structured in such a way 

that it will be caught by the OF AC filters." 

Mr. Bagley cautioned that subjecting all OF AC sensitive payments 

to the OF AC filter for further review and approval would likely hurt 

business. He wrote: "disallowing all payments which are potentially 

subject to the OF AC process," or the alternative offorwarding 

"messages in such a way that they would be caught," would have a 

"significant affect" upon HBME's business within the Middle East and 

the Group's business within correspondent banking. He also wrote: 

"given the likely volumes it is impractical to submit each payment to a 

process of referral to HBUS," as HBUS had proposed. He concluded 

with a request for clear guidance: "I would be grateful for your 

clarification as to whether what is currently going on is acceptable, or 

whether we should be adopting a different practice.,,706 

Mr. King responded that the September II, 2001 terrorist attack on 

the United States required a reassessment. He wrote: "some ofthe 

routes traditionally used to avoid the impact of US OFAC sanctions may 

no longer be acceptable." Mr. King indicated that an automated 

screening system was being looked into, and in the interim asked that 

OFAC sensitive payments be vetted manually.707 

Mr. Bagley's email alerted Mr. King to the fact that HBME, like 

HBEU, was routinely sending U.S. dollar transactions through its 

correspondent account at HBUS using methods intended to circumvent 

HBUS' OFAC filter. His email did not limit those transactions to 

Iranian U-turns, but sought broader guidance on acceptable practice. 

Mr. King wrote back: "all we can do is ask that payment from the 

affected countries are vetted manually.,,708 

705 10/10/2001 email exchange among HSBC Matthew King and HBME David Bagley and 

others, "OFAC Sanctions," HSBC OCC 8873890-893, at 892. 

706 Id. at 892. 

707 Id. at 890. 

708 ld. at 890-891. 
329 


76061.695

155 

(c) Pressuring HBUS on Iran 

In April 2002, HBME asked HBUS to re-circulate its proposed 

procedures for processing Iranian U-turn transactions,709 indicating that 

the two affiliates were still attempting to reach agreement on the 

procedures to be used. 71 0 

HBEU Draft Guidelines. While the HBEU Relationship Manager 

for Institutional Banking in HBME, John Wilkinson, was trying to 

streamline the cover payments procedure used to send Iranian U-turns 

through HBEU's correspondent account at HBUS, HBEU CompJiance 

was trying at the same time to put a stop to the practice altogether. On 

July 15,2002, an HBEU CompJiance officer forwarded draft guidelines 

for handling OFAC sensitive transactions to HBEU Compliance 

manager Julie Clarke and HBEU Multicurrency Payments Department 

(MPD) head Malcolm Eastwood and requested their approva1. 7Il The 

proposed guidelines stated in part that, although HBEU was not legally 

required to comply with U.S. OFAC prohibitions, "It is strongly 

recommended ... that RMs [Relationship Managers 1 do not deliberately 

take action aimed at assisting a customer to circumvent OFAC sanctions. 

For example payment instructions should not be amended by IBL staff." 

The proposed guidance also stated: "On no account should you 

deliberately guide, encourage or coerce the sender into amending the 

payment details so as to circumvent the OFAC sanctions .... We will 

simply process as instructed.,,712 The draft guidance relied on the 

following Group Policy: 

"Group members should comply with both the letter and spirit of 

all relevant laws, codes, rules, regulations and standards of good 

market practice in each jurisdiction around the world where they 

conduct business.,,7IJ 

709411512002 email from BBUS Denise Reilly to HBEU John Wilkinson and others, "Bank 

Melli," HSBC acc 7687376·377. 

710 According to Mr. Bagley, the HBEU Payment Services' December 2002 Compliance 

Certificate made explicit reference to its practice of altering Iranian U.S. dollar payments. 

Subcommittee interview of David Bagley (411212012). Compliance Certificates from affiliates 

are normally consolidated and sent to HSBC Group Compliance for review, which would have 

provided a formal channel for addressing the issue. David Bagley told the Subcommittee, 

however, that the reference to U-turn transactions in HBEU's 2002 certificate was not 

incorporated into the consolidated Compliance Certificate and therefore was not formally 

escalated to Group Compliance for review. Id. 

711 711512002 email from HBEU Paul Proctor to HBEU Julie Clarke, HBEU Malcolm Eastwood, 

and others, "Monitoring of payment transactions against sanctions," HSBC acc 8877103-106. 

712 Id. at 106. 

71] Id. at 105. The guidelines also noted that the responsibility for "policing payment and cheque 

clearings against sanctions" would move to Payment Services in the future. 
330 


76061.696

156 

These ~uidelines were later approved and became effective in the 

fall of2003. 14 They show that HBEU Compliance and business 

personnel were aware of and concerned about potentially deceptive 

practices some could use to circumvent OF AC prohibitions. 

HBME Negotiations. While HBEU Compliance developed the 

OF AC guidelines, Gary Boon, HBME Payment and Cash Management 

(PCM) sales manager in Dubai, spent the second half of 2002, making a 

concerted effort to reach agreement with HBUS on how to process Uturn transactions. On August 29,2002, Mr. Boon emailed Denise Reilly 

and Nancy Hedges in HBUS Payment Operations, to encourage HBUS 

to officially approve the processing of U-turn transactions involving 

Iranian banks. He wrote: "I can now confirm that HSBC Bank pic, 

London does not have any processing or compliance issues in respect of 

USD payments from existing or new opportunities with Iranian 

Banks.,,715 He also wrote that HBEU wanted "to ensure the payments 

are STP [straight through processing]," and HBEU would provide its 

clients with guidelines for formatting transactions to "ensure that our 

Iranian clients fully understand, when or how, payments could be 

rejected.,,7l6 He indicated that he was seeking HBUS' formal agreement 

to process the U-turn transactions, from both a resource and reputational 

risk standpoint, "before 1 attempt to sell a USD clearing proposition.,,7l7 

On October 8, 2002, Mr. Boon sent an email to senior l-fBUS 

Compliance official, Anne Liddy, seeking feedback on the HBEU 

proposal.718 Ms. Liddy responded that the position ofRBUS 

Compliance remained unchanged "in that all transactions involving 

Bank Melli must be fully disclosed and represented in one single 

transaction that reflects the complete flow offunds.,,719 Ms. Liddy noted 

that the HBUS proposed procedures had been approved by Legal 

Counsel as meeting OFAC requirements. She also stated that RBUS 

and HBEU needed to reach agreement on the payment procedures before 

HBUS Compliance would present an official proposal to HBUS' Senior 

Management Committee or OF AC for approval. Ms. Liddy was also 

clear that these steps had to be taken prior to HBEU's making any 

proposal to Bank Melli or another Iranian bank.720 

Mr. Boon responded on the same day that HBEU would soon be 

complying with the Financial Action Task Force (FATF) regulations 

714 See 9/8/2003 email from HBEU Julie Clarke to HBEU Paul Proctor and others, "OFAC 

sanctions evasion - Iranian payments," HSBC OCC 8876819-820. 

715 8/29/2002 email from HBME Gary Boon to HBUS Nancy Hedges, HBUS Denise Reilly, and 

others, "IRAN-USD PAYMENTS," HSBC OCC 0948193-195. 

716 Id. at 194. 

717 Id. 

718 Sec 10/08/2002 email exchanges among HBUS Anne Liddy, HBME Gary Boon, and others, 

"Bank Melli," HSBC OCC 7687374-375. 

719 Id. at 375, 720 Id, 
331 


76061.697

157 

requiring full disclosure of payment details on MT100/MT103 message 

formats, which was already part of the HBEU proposal since HBEU sent 

those messages to the bank receiving a U-turn payment in addition to 

sending a cover payment on a MT202 form. He indicated that the 

payments sent to HBUS fall into the category of permissible U-turn 

transactions, and noted that HBUS was already processing U.S. dollar 

transactions through two existing accounts in London.721 Mr. Boon 

wrote: "The majority of payments will be processed with HBEU 

sending a MTlOO/MTl03 to the beneficiary bank and HBUS will 

receive the MT202 cover payment (again your already doing this).,,722 

He indicated that, due to "massive opportunities," he would like to 

resolve the procedural issues prior to a scheduled visit to Iran in 

November 2002. 723 In response, Ms. Liddy reluctantly set up a 

conference call with Mr. Boon and included Carolyn Wind and Denise 

Reilly.724 

When asked about this email, Ms. Liddy told the Subcommittee 

that she did not understand his email and may have misinterpreted Mr. 

Boon's assertion that HBUS was already processing Iranian payments 

through existing accounts in London to mean that the issue affected 

London accounts, but not accounts in the United States. 725 She said that 

she became more concerned two months later, in December 2002, when 

a Bank Melli payment was caught in HBUS' OF AC filter. 726 Carolyn 

Wind told the Subcommittee that she was surprised by Mr. Boon's email 

and didn't know what his comments meant. Ms. Wind said that she 

contacted HSBC Group Compliance head Matthew King to follow-up, 

but didn't know what action he took, if any.727 

The results of the conference call between HBME and HBUS were 

discussed in email correspondence later that month. On October 28, 

2002, Mr. Boon wrote to Denise Reilly requesting an update. Ms. Reilly 

responded that HBUS had spoken with OFAC; the "MTlOO/MT103 and 

MT202 normal cover payment process has been deemed unacceptable"; 

and OFAC required "full disclosure ofthe transaction.,,728 Mr. Boon 

and Ms. Reilly then agreed that HBEU should open a separate "Special 

nostro account" for all U-turn transactions to ensure each transaction 

721 Id. at 374-375. 

mId. at 375. 

m ]011712002 email from Gary Boon to Anne Liddy, "IRAN," HSBC OCC 7687373. 

724 ]0/2l12002 email from Anne LIddy to Carolyn Wind and Denise Reilly, "IRAN," HSBC 

OCC 7687373. 

725 Subcommittee interview of Anne Liddy (2/22/2012). 

726 Id. See also 12/30/2002 email exchanges among HBUS Elizabeth Protomastro, HBUS 

Carolyn Wind, HBUS Anne Liddy, HBUS Denise Reilly, and HSBC David Bagley, "OFAC: 

PLC wire on behalf of Melli Bank PLe." HSBC OCC 8873909. 

727 Subcommittee interview o[Carolyn Wind (3/07/2012). 

728 ]012912002 email from HBUS Denise Reilly to HBME Gary Boon and HBUS Nancy Hedges, 

"IRAN-USD Payments," HSBC OCC 0948192-193. 
332 


76061.698

158 

would be caught by the OFAC filter for review and approva1.729 Mr. 

Boon requested confirmation that ifHBEU met those terms and the 

HBUS committee approved the proposal, that "HBUS would be in a 

position to potentially become Iran's USD Clearing Agent, HBEU 

would be their USD Correspondent Bank?,,730 Ms. Reilly responded that 

the current proposal was to "process transactions on behalf of Bank 

Melli" and ifthe proposal were broader "then it should be included in 

the business rationale that we requested in our conference call earlier 

this week for presentation to HBUS senior management.,,731 She 

indicated that the HBUS Senior Management Committee was comprised 

of the President of the bank, key business heads, and the head of key 

support units. While these emails suggest HBUS Compliance was 

poised to present the Iranian U-turn proposal to the HBUS Senior 

Management Committee, there is no indication in the documentation 

that the committee ever received or approved it. 

Eastwood Memorandum. In November 2002, HBEU 

Multicurrency Payments Department (MPD) head Malcolm Eastwood 

sent a memorandum to HBUS Payments Services head Denise Reilly 

and Geoff Armstrong expressing concern that HSBC was eXEosing itself 

to unnecessary risk by handling OFAC sensitive payments.7 2 He wrote: 

"I currently feel that we may be exposing ourselves to unnecessary 

and unacceptable Reputational and Operational Risk when we are 

handling payments originating from FIs [financial institutions] 

domiciled in or who are a local branch of an FI domiciled in an 

OFAC regulated country." 

Mr. Eastwood stated that HBEU's current process was to send OF AC 

sensitive payments to HBUS via the "cover" payment method that made 

no mention of Iran or other prohibited countries. 733 He noted that two 

payments, one from Iran and one from Cuba, had recently been caught 

by HBUS's OFAC filter. Mr. Eastwood stated that he wanted to resolve 

the situation, and "we therefore need to seek clarification of 

HBUS/OFAC's stance so that we can determine our future payments 

strategy.',734 

The Eastwood memorandum again put HB US on notice regarding 

HBEU's practice of concealing U-turn transactions behind cover 

payments and altering the payment instructions received from Iranian 

729 [d. at 192. 

730 rd. 

731 rd. 

732 1 III 4/2002 memorandum from HBEU Malcolm Eastwood to HBUS Denise Reilly and 

HBEU Geoff Armstrong, "Compliance - GFAC Issues in General and Specific to Iran," HSBC 

GCC 7688824. 

733 rd. at 825. 

134 rd. 
333 


76061.699

159 

banks. Mr. Eastwood wrote: "The Iranian banks continue to send us 

what I describe as conditional payment instructions which for HBEU 

require an element of amendment by ourselves.,,735 Mr. Eastwood 

warned: "If we cannot achieve this [a resolution on how to handle Utum transactions 1 I will have to recommend to my General Manager a 

view that processing these payments is 'unsafe' and that these items 

should be filtered out and cancelled. This would have severe 

repercussions for our Group relationship within the Iranian FIS.,,736 

That same day, HBUS Payments Services head Denise Reilly 

forwarded the Eastwood memorandum to HBUS PCM head Michael 

Gallagher and HBUS Compliance head Carolyn Wind, with the note: 

"We need to discuss."m HBUS records do not indicate whether that 

discussion took place. When asked about this email.Mr. Gallagher told 

the Subcommittee that he wasn't sure he received Mr. Eastwood's 

memorandum because he wasn't named on it.738 When shown another 

email indicating he had discussed the Eastwood memorandum again in 

December 2003, with the new HBUS AML head,739 he told the 

Subcommittee that he did not recall the memorandum, any discussion of 

it, or taking any action in response to it.740 When Carolyn Wind was 

asked about the Eastwood memorandum, she told the Subcommittee that 

HBUS kept "pushing back on U_turns.,,74! 

Do Not Mention Our Name. In late December 2002, HBUS 

OF AC Compliance officer Elizabeth Protomastro notified Carolyn 

Wind, Denise Reilly, and Anne Liddy that, on December 27, 2002, the 

HBUS OF AC filter had stopped and rejected a payment listing Bank 

Melli as the originator of the payment and containing a field that read, 

"Do not mention our name in NY." Ms. Protomastro advised rejecting 

all U-turn transactions containing such language. The language on the 

stopped transaction shows how information related to Iranian payments 

was intentionally withheld from HBUS. In response, Ms. Liddy went to 

Carolyn Wind's office and spoke with her, Denise Reilly, and Paul Lee, 

HBUS' Legal Counsel, about the transaction. She was told to alert 

David Bagley, who had become head ofHSBC Group Compliance in 

January 2002.742 That same day, Anne Liddy forwarded Ms. 

735 Id. at 826. 

736 Id . 

737 11114/2002 email from HBUS Denise Reilly to HBUS Carolyn Wind and HBUS Michael 

Gallagher. "Compliance OFAC Issues in General and Specific to Iran," HSBC OCC 7688822-

827. 

738 Subcommittee interview of Michael Gallagher (6/13/2012). 

739 See 121l7/2003 email from HBUS Denise Reilly to HBUS Teresa Pesce, "ComplianceOFAC Issues in General and Specific to Iran," HSBC OCC 3407517-522 ("Attached is the 

memo that we discussed yesterday in our meeting with Michael Gallagher."). 

740 Subcommittee interview of Michael Gallagher (6113/2012). 

141 Subcommittee interview of Carolyn Wind (3/7/2012). 

142 Subcommittee interview of Anne Liddy (2/22/2012). Mr. Bagley assumed the duties of 

HSBC Group Compliancc hcad in January 2002, but his appointment did not become official 

until May 2002, after the U.K. Financial Services Authority approved it. Subcommittee 
334 


76061.700

160 

Protomastro's email to Mr. Bagley.743 Ms. Liddy told the Subcommittee 

that she was concerned about the Bank Melli payment, because HBEU 

still had not obtained approval to do those types oftransactions.744 She 

told the Subcommittee that neither Mr. Bagley nor Ms. Wind provided 

any feedback on the incident, and she didn't know what action, ifany, 

Mr. Bagley took.745 

The 2002 Eastwood memorandum again put senior HBUS 

compliance and business officials on notice that HBEU was sending 

undisclosed OF AC sensitive transactions through its U.S. dollar 

correspondent accounts at HBUS. Again, HBUS officials alerted their 

superiors, but no further action was taken. 

(d) Continuing Pressure on HBUS to Process 

Iranian Transactions 

Although HBEU handled the Bank Melli account, it was HSBC 

Middle East (HBME) that was at the center of efforts to pressure HBUS 

to process Iranian transactions without triggering the OF AC filter. 

HBME took the lead in dealing with Iran and selling bank services to 

Iranian banks. In January 2003, HBME Group Relationship Manager 

for the Middle East, Nigel Weir, sent HBUS Payments Services head 

Denise Reilly and HBEU MPD head Malcolm Eastwood a memorandum 

entitled, "Business Case-USD Payments from Iranian BankslEntities.,,746 

This HBME memorandum laid out the "business case" for HBUS' 

processing Iranian transactions using the procedures proposed by HBEU 

back in August 2001.747 The memorandum stated: 

"Currently, it is estimated that Iranian banks issue up to 700 USD 

payments a day using their USD service providers, mainly banks in 

the UK and Europe, which in turn use their New York USD 

correspondents to effect the payments. It is believed that some 

interview of David Bagley (511012012); Subcommittee briefing by Cahill Gordon & Reindel LLP 

(6120/2012). 

74J See 12/30/2002 email exchanges among HBUS Elizabeth Protomastro, HBUS Carolyn Wind, 

HBUS Anne Liddy, HBUS Denise Reilly, and HSBC David Bagley, "OFAC: PLC wire on 

behalf of Melli Bank PLC," HSBC OCC 8873909. 

744 Subcommittee interview of Anne Liddy (2/22/2012). 

"Sid. See also 12/30/2002 email exchanges among HBUS Elizabeth Protomastro, HBUS 

Carolyn Wind, HBUS Anne Liddy, I-IBUS Denise Reilly, and HSBC David Bagley, "OFAC: 

PLC wire on behalf of Melli Bank PLC," HSBC OCC 8873909. 

746 1/2003 memo from HBME Rick Pudner to HilUS Denise Reilly and HBEU Malcolm 

Eastwood and others, "Business Case-USD Payments From Iranian Banks/Entities," HSBC OCC 

8876490-493; 1I21/2003 email exchanges among HBUS Anne Liddy, HBUS Carolyn Wind, 

HBUS Denise Reilly, and others, HSBC OCC 3407510. Nigel Weir and Rick Pudner were joint 

authors of the memorandum. 

747 ld. at 1. The memorandum stated: "This paper has been produced in order for the Senior 

Management Committee (SMC) of HSBC Bank USA (HBUS) to evaluate whether or not HBUS 

will process US dollar (USD) payments initiated by Iranian Banks via accounts held with HSBC 

Bank Pic (HBEU)." Id. 
335 


76061.701

161 

service providers amend the payments to ensure Iran is not 

mentioned in the body of the payment instruction to their USD 

correspondent. This process minimizes the risk of payment being 

referred to OFAC.,,74 

The memorandum did not state explicitly that both HBME and HBEU 

were already engaged in the same practice using their U.S. dollar 

accounts at HBUS. 

The HBME memorandum stated that HBME "believe[s] there is a 

substantial income opportunity to see a USD payments proposition to 

Iranian Banks," and provided an appendix detailing existing and 

potential business opportunities in Iran, while noting HBEU already had 

a "number of existing USD accounts for Iranian banks, which are used 

for payments clearing purposes.,,749 The memorandum concluded: 

"It is anticipated that Iran will become a source of increasing 

income for the group going forward and if we are to achieve this 

goal we must adopt a positive stance when encountering 

difficulties. We are aware of the concerns expressed by HBUS but 

strongly believe that by working together we can overcome them 

using means which are perfectly legitimate and in accordance with 

rules laid down by the relevant regulatory bodies. I hope we will 

be able to resolve this issue otherwise I fear we will destroy future 

value in a market which has substantial potential for the group.,,750 

HBME asked that the business case be presented to HBUS' Senior 

Management Committee at the earliest opportunity. 

On January 16,2003, Denise Reilly forwarded the HBME 

memorandum to BBUS Compliance officials Carolyn Wind and Anne 

Liddy.751 On January 21, 2003, Ms. Liddy forwarded it to Tom 

Crocker, the outside legal counsel advising BBUS on OFAC matters. 752 

When asked about the memorandum, Ms. Liddy told the Subcommittee 

she did not recall it or the outcome ofMr. Crocker's review.753 

748 [d. at 490. 

749 [d. at 493. [nternal bank documents indicate that HBEU cleared U.S. dollar transactions 

through its correspondent account at HBUS for at least six Iranian banks, Bank Melli, Bank 

Kesharvazi, Bank Markazi, Bank Sepah, Bank Tejarat, and the Export Development Bank of 

Iran. See, e.g., 10/23/2003 email from HSBC John Root to HSBC David Bagley and others, 

"USD Clearing -Iranian Banks," HSBC acc 8875217. HBEU senior payments official Rod 

Moxley told the Subcommittee that he believed seven or eight Iranian banks used HSBC for U.S. 

dollar correspondent services. Subcommittee interview of Rod Moxley (6/07/2012). 

750 1/2003 memo from HBME Rick Pudner to HBUS Denise Reilly and HBEU Malcolm 

Eastwood and others, "Business Case-USD Payments From Iranian Banks/Entities," HSBC acc 8876-493, at 492. 

751 Subcommittee interview of Anne Liddy (2/22/20 I 2). 

752 See Jl2J12003 email from HBUS Anne Liddy to External Counsel Tom Crocker and others, 

"USD Payments from Iranian Banks," HSBC acc 3407510-511. 

753 Subcommittee interview of Anne Liddy (2/22/2012). 
336 


76061.702

162 

On February 3, 2003, HSBC Group Compliance head David 

Baglers sent an email to HBME, where he used to work, discussing the 

issue. 54 He conveyed that he had asked senior Compliance official John 

Root to review the OF AC issue from a Group perspective. He also 

wrote that he "would be grateful if we could exercise greater care with 

regard to the content of written material" being sent to HBUS, 

explaining: "The business case includes a number of express references 

to practices which may constitute a breach of US sanctions, including 

the OF AC provisions, and could provide the basis for action against the 

HSBC Group for breach of those sanctions, or seeking to facilitate a 

breach.,,755 Mr. Bagley requested that future communications regarding 

this subject be cleared through him or John Root "to avoid relative 

sensitive references," prior to involving HBUS. 756 The recipient ofthe 

email, Nigel Weir, responded that the memorandum was intended to 

recommend pursuing a significant business opportunity, while 

complying with applicable regulations. 757 Mr. Bagley told the 

Subcommittee that this was the first time, in his role as head ofHSBC 

Group Compliance, he addressed the OFAC issue. He noted that 

HBME's actions could potentially "constitute a breach of US sanctions," 

yet it would take him two more years, until July 2005, to establish Group 

policy prohibiting such conduct. 

Again, there was no indication that a proposal for handling Iranian 

U-turn transactions was ever presented to or approved by HBUS' Senior 

Management Committee. At the same time, undisclosed transactions 

continued to be sent by HSBC affiliates through their correspondent 

accounts at HBUS. A later analysis performed by an outside auditor at 

HBUS' request found that, in 2002 alone, HBEU sent at least 1,900 and 

HBME sent at least 400 Iranian transactions through U.S. dollar 

accounts in the United States.758 

Caught in the OFAC Filter. On June 13, 2003, another Bank 

Melli transaction was caught in the HBUS OF AC filter, containing not 

only a reference to the bank, but also the words "do not mention our 

name.,,759 On June 16,2003, HBUS OFAC Compliance officer 

754 21312003 email from HBUS David Bagley to HBME Rick Pudner and others, "Business CaseUS Payments From Iranian Banks/Entities," HSBC OCC 8876487-488. 

755 Id. 

156 Id. at 488. 

7572/3/2003 email from HBME Nigel Weir to HSBC David Bagley and others, "Business CaseUS Payments From Iranian Banks/Entities," HSBC OCC 8876487. 

758 Deloitte, Results of the transactions Review - UK Gateway, March 29, 2012. HSBC-PSIPROD-O 197919, at 62. The Deloitte review examined HBEU and HBME Iranian transactions 

sent through U.S. dollar accounts at both HBUS and JPMorgan Chase. 

759 See 6117/2003 email from HBUS Elizabeth Protomastro to HSBC John Root and HBUS 

Carolyn Wind, "Re: PLC-Re "do not mention our name," at HSBC OCC 8873922. 
337 


76061.703

163 

Elizabeth Protomastro alerted both Carolyn Wind and Anne Liddy.760 

Ms. Wind forwarded the email to HSBC Group Compliance officer John 

Root, and Ms. Protomastro provided him with additional details about 

the payment, including that it involved $150,000. She explained that 

when the HBUS Funds Transfer staff saw the message "do not mention 

our name," they rejected the payment in accordance with HBUS polic;:, 

"due to concerns about evasion issues under the OF AC regulations.,,7 1 

Ms. Protomastro explained that HBUS would not process a payment 

containing such a message, even ifit qualified as a permissible U-turn 

transaction. 

On June 17,2003, Mr. Root forwarded the payment details to 

HSBC Group Compliance head David Bagley.762 Mr. Bagley responded 

by asking if they should allow a payment "with this sort of instruction to 

be passed to HBUS, regardless of the wider issue as to the applicability 

of OF AC to non us persons.,,763 

The June 2003 transaction once again made several senior officials 

at I·IBUS and HSBC Group aware that HSBC affiliates were sending 

undisclosed OF AC sensitive transactions through HBUS accounts, even 

though HBUS had yet to approve a U-turn protocol. When asked about 

this incident, Ms. Wind told the Subcommittee that she did not recall 

what HSBC Group Compliance said or did about the payment.764 She 

also did not recall whether there was an inquiry made to identifY similar 

transactions, whether the transaction was reported to OF AC, or whether 

a SAR was considered or filed. When asked who in I-IBUS was 

responsible for following up on the incident, she replied that from the 

business side, Denise Reilly and her supervisor Michael Gallagher, and 

from the compliance side, herself and Anne Liddy.765 When Mr. 

Gallagher was asked about the incident, he responded that it was not his 

responsibility to take action, because blocked payments are an 

operational and compliance effort, not a PCM issue.766 He stated that he 

would not have had the authority to either stop or release a suspect 

payment; operations staff, including Denise Reilly, did not report to Mr. 

Gallagher in 2003. 

Using "Selves" Instead of Client Names. In August 2003, 

internal bank documents show that Compliance personnel in HSBC 

Group and HBEU learned of, and objected to, the practice of some 

760 6/16/2003 email from HBUS Elizabeth Protomastro to HBUS Carolyn Wind and HBUS Anne 

Liddy, "PLC-Re "do not mention our name," HSBC OCC 8873925. 

761 6117/2003 email from HBUS Elizabeth Protomastro to HSBC John Root and HBUS Carolyn 

Wind, "Re: PLC-Re "do not mention our name," HSBC OCC 8873922-923. 762 Id. 

763 Id. 

764 Subcommittee interview of Carolyn Wind (3/7/2012). 76) Id. 

766 Subcommittee interview of Michael Gallagher (6/13/2012). 
338 


76061.704

164 

HBEU personnel, when sending Iranian U-turn transactions, to alter the 

payment instructions and identifY HBEU itself as the active party in the 

transaction, rather than use a client name that might trigger HBUS' 

OFAC filter. Despite their objections, the practice continued for years. 

On August 20, 2003, the head ofHSBC Group Audit Matthew 

King informed HSBC Group Compliance head David Bagley that 

"HBEU continues to send remittances to the US with 'selves' noted as 

the ordering party when the transfer would otherwise be filtered out for 

OF AC sanctions reasons.,,?6? He wrote: "I recall that this has been 

raised in the past, but I thought we had a~reed the practice would cease. 

Are you aware ofthe current position?"? 8 

On September 1,2003, Mr. Bagley forwarded Mr. King's email to 

John Root and asked him to investigate. 769 Mr. Bagley wrote that there 

is now "some clarity" that OFAC prohibitions do not apply to non-U.S. 

persons, even when payments are denominated in U.S. dollars.770 He 

also wrote that an established payment mechanism exists for bank-tobank transfers, which did not require underlying payment information 

and which might apply to HBEU transfers to HBUS. 771 Mr. Root agreed 

to look into the matter. 

On September 2, 2003, HBEU Compliance manager lulie Clarke 

sent an email to an individual whose name was redacted by HSBC 

seeking more information about the transactions that triggered the 

inquiry by HSBC Group Audit head Matthew King.772 The email 

recipient responded: 

"During the conversation, I mentioned that historically we used 

'selves' but that I had stopped the practice as soon as I had 

discovered it in mid-2000. He stated that it was still done in 

}IBEU. This was not in connection with [redacted] payments and I 

have no examples.,,773 

767 8/20/2003 email from HSBC Matthew King to HSBC David Bagley and others, "OFAC," 

HSBC OCC 8876504-505. 

768 ld. at 505. 

7699/1/2003 email from HSBC David Bagley to HSBC John Root and HSBC John Allison, 

"OFAC," HSBC OCC 8876504. 

77old. Mr. Bagley told the Subcommittee that the applicability ofOFAC prohibitions to nonU.S. persons was an undecided issue in 2003, with legal opinions ofTering differing conclusions. 

Subcommittee interview of David Bagley (4/12/2012). OFAC now takes the position that its 

r-rohibitions apply to all U,S. dollar transactions, including those involving non~U.S. persons. 

71 9/112003 email trom HSBC David Bagley to HSBC John Root and HSBC John Allison, 

"OF AC," HSBC OCC 8876504. As explained earlier, at that time, bank-to-bank transfers could 

be executed on forms which required information on the remitting and beneficiary banks, but not 

the underlying customers. 

772 9/2/2003 email from HBEU Julie Clarke to [redacted], "OFAC sanctions," HSBC OCC 

8876824-825. 

77l ld. at 8876824. 
339 


76061.705

165 

The following day Ms. Clarke forwarded the email to Rod Moxley in 

HBEU's Multicurrency Payment Department (MPD), and asked him for 

more information re,rarding the practice of using "ourselves" in a 

payment message.

77 

On September 8, 2003, Mr. Moxley responded to Ms. Clarke. 775 

He explained that the OF AC sanctions issue had been "under discussion 

for some time" within MPD.776 He forwarded to her an August email 

that he had sent to Pat Conroy, Malcolm Eastwood's supervisor, 

addressing various issues related to OF AC sensitive transactions. The 

August email indicated that a certain person, whose name was redacted 

by HSBC, had brought "our current practice regarding the alteration of 

the remitter field on Iranian payments to the attention" of Matthew King 

and David Bagley.777 The August email also stated that "[t]he specific 

issue with Iran had been formally raised with the RM [Relationship 

Manager], John Wilkinson" who had been "given a deadline of 31 

December 2003 to remedy this situation." The August email also noted: 

"Malcolm's stance, I understand, is that any payments after 31 

December 2003 will not be processed unless signed off at a very senior 

level.,,778 

That same day, September 8, 2003, Ms. Clarke forwarded the 

email chain to HBEU Compliance officer Paul Proctor and wrote: "It 

appears that John Wilkinson has been allowed to continue (to 31112/03) 

to use 'selves' as the remitter name for Iranian fayments which 1 believe 

contravenes your recently issued guidelines.,,77 Mr. Proctor responded: 

"This is the first time I have seen in writing, an admission that 

Payments Services are amending payments by removal of either 

the remitter's name or country to prevent the probable trigger of 

the US filter and the subsequent freezing of funds. 

You indicate that Group Compliance have now forbidden you to 

tamper with such payments, which I would fully support as it flies 

in the face of Group policy re complying with the spirit and letter 

etc.,,780 

714 9/3/2003 email Irom HBEU Julie Clarke to HBEU Rod Moxley and Chris Pollard. "OF AC 

Sanctions," HSBC OCC 8876824. 

77S 9/8/2003 email from HBEU Rod Moxley to HBEU Julie Clarke, "OFAC Sanctions," HSBC 

OCC 8876820-821. 

776 Id. at 8876821. 

777 8/22/2003 email from HBEU Rod Moxley to HBEU Pat Conroy, "Project Wolf," HSBC OCC 

8876821-822. 

J78 Id. 

719 9/8/2003 email from HBEU Julie Clarke to HBEU Paul Proctor and others, "OFAC sanctions 

evasion - Iranian payments," HSBC OCC 8876819-820. 

7&°9/8/2003 email from HBEU Paul Proctor to HBEU Julie Clarke and others, "Re: OFAC 

sanctions evasion -Iranian payments," HSBC OCC 8876818-819. 
340 


76061.706

166 

This email indicates that HBEU Compliance had not been aware that 

some HBEU personnel were continuing to alter documentation 

connected to OFAC sensitive transactions, in defiance of new guidelines 

prohibiting such conduct. The email also indicates that HSBC Group 

Compliance had instructed HBEU Compliance that HBEU personnel 

were "forbidden" to "tamper" with the documentation. 

When asked about these emails.Mr. Bagley told the Subcommittee 

that, in October 2003, Mr. Root reported to him that HBEU Compliance 

had admitted HBEU was still altering Iranian U-turn transaction 

documentation, despite a recommendation by HBEU Compliance that it 

cease.781 Mr. Bagley told the Subcommittee that HBEU had explained 

that it had been sued when payments were blocked by the HBUS filter, 

so it was using cover payments to avoid additional operationallosses.782 

Mr. Bagley also explained that neither HBEU Compliance nor HSBC 

Group Compliance could simply order a business unit to cease a 

particular practice; each could only "recommend" a course of action 

which it had done. 

The internal bank documents show that, in the fall of2003, Mr. 

Eastwood and Mr. Moxley in MPD, HBEU Compliance manager Julie 

Clarke and Compliance officer Paul Proctor, as well as the heads of 

HSBC Group Audit and Compliance, expressed repeated concern about 

actions taken by persons like the HBEU Relationship Manager for Bank 

Melli John Wilkinson to alter U-turn transaction documentation in a way 

that would avoid the OF AC filter; all agreed the practice should stop. 

HBEU Compliance took the step of issuing guidelines recommending 

against such conduct, but HBEU personnel apparently ignored the 

guidance. 

Proposal to Expand U.S. Dollar Clearing for Iranian Banks. In 

October 2003, HBME increased the pressure on HBUS to process 

Iranian transactions by proposing to expand its U.S. dollar clearing 

business in Iran. In early October, HBME Planning head Steve Banner 

circulated a document entitled, "Iran - Strategy Discussion Paper," to 

several senior bank executives, including HBME Deputy Chairman 

David Hodgkinson; HBME Global Relationship Manager for the Middle 

East Nigel Weir; HSBC Group Compliance deputy head Warren 

Learning, HBUS General Counsel Paul Lee, and HBUS Compliance 

head Carolyn Wind.783 The strategy essentially sought approval for 

HBME offering U.S. dollar payment services to more Iranian banks 

since, as the strategy noted, "the Iranian market offers substantial 

untapped potential for the HSBC Group.,,784 

781 Subcommittee interview of David Bagley (5110/2012). 

782 Id. 

783 Undated HSBC document, "Iran - Strategy Discussion Paper," HSBC OCC 8873949-956. 

784 Id. at 949. 
341 


76061.707

167 

The strategy listed "significant business wins" involving Iran, in 

the Project and Export Finance, Trade Finance, and Treasury and Capital 

Markets areas with an estimated $7 million per year in revenues 

generated by Iranian businesses for "various Group entities.,,785 In a 

section entitled, "Phase 1 - Immediate Opportunities," the strategy 

stated that Iran's annual international trade business was valued at $25 

billion, 80% of which was denominated in U.S. dollars. It stated that 

HBEU PCM currently offered U.S. dollar payment services to four 

Iranian banks, and could market the same services "to other Iranian 

commercial banks, including Iran's Central Bank (Bank Markazi)." It 

estimated the potential business as worth up to $4 million per year. 

The strategy also noted an upcoming change in U.K. law that 

would require U.K. bank-to-bank transfers to identify, not only the 

banks involved in the transfer, but also their underlying customers. It 

stated that the impending U.K. legislation, together with U.S. sanctions 

laws, would "significantly complicate the USD payments process for 

Iranian counter-parties," and if"the Group decides to pro-actively 

promote USD payments services to Iranian banks the payments will 

need to be processed by HB US with full details to satisfy OF AC 

requirements.,,786 To facilitate the process, the strategy said that HBME 

planned to prepare a paper for HSBC Group requesting an increase in 

the country risk limits for Iran.7B7 The strategy concluded by asking for 

HSBC Group's approval and HBUS' "no objection" to HBEU's 

providing U.S. dollar services to additional Iranian banks.78B 

The strategy stated clearly that, "HBEU PCM currently offer[s] 

USD [U.S. dollar] payment services to 4 Iranian banks.,,789 It once again 

alerted HBUS to the fact that HBEU was already processing U.S. dollar 

transactions for Iranian banks through its account at HBUS. The 

strategy was sent to both HBUS' legal counsel and top compliance 

officer. 

On October 15,2003, the HBUS CEO at the time, YoussefNasr, 

sent an email to HBUS PCM head Michael Gallagher noting that with 

regard to Iranian U-turns, "there remain serious political and 

reputational risks within the USA if they proceed with this and that he 

should ensure that Paul Lee is kept in the loop at all times because of the 

prior work he has done both on this and some recent approaches from 

Group offices about opportunities in Libya.',79o When asked if Mr. 

Gallagher discussed the strategy paper with Mr. Nasr, Mr. Gallagher told 

785 Id. at 951. 

786 Id. at 954. 

'" Id. at 952. 

788 Id. at 955. 

789 Id. at 952. 

790 lOll 5/2003 email fromHBUSYoussefNasrtoHBUSMichaeIGallagher ... Subject.Re: IranUSD Payments," HSBC acc 8873942. 
342 


76061.708

168 

the Subcommittee that he did not recall seeing it.79 ! On October 21, 

2003, HBUS General Counsel Paul Lee contacted HSBC Group 

Compliance head David Bagley "expressing some concerns" about the 

Iranian strategy.792 

On October 21, 2003, Mr. Bagley sent an email to HBME officials 

indicating several issues surrounding the U-turn transactions needed 

clarification and asked whether the costs associated with incurring U.S. 

legal fees made it worthwhile to continue the discussion. Mr. Bagley 

also wrote: 

"I am not sure that HBUS are aware of the fact that HBEU are 

already providing clearing facilities for four Iranian banks, 

presumably including USD [U.S. dollar] clearance. Bank Markazi 

is named in the OF AC sanctions as a government owned bank and 

thus on the face of it not able to benefit from U-turn 

exemptions.,,793 

On October 26, 2003, HBME Deputy Chairman David 

Hodgkinson sent an email in response to Mr. Bagley. He wrote: 

"HSBC earns USD7.5m a year from its business dealings with Iran and 

we believe that there is significant long-term potential for growth.,,794 

Mr. Hodgkinson indicated that he was willing to incur costs to 

investigate the options and find "an acceptable way to offer the 

maximum range of services possible without jeopardizing the Group's 

position in the U.S.,,795 Mr. Bagley then directed senior Compliance 

official John Root to work with Gary Boon at HBME on a payment 

solution.796 

Root Report. As he had been instructed to do by Mr. Bagley, 

John Root looked into the Iranian U-turn issue. On October 23, 2003, 

Mr. Root sent an email to Mr. Bagley, HSBC Group AML head Susan 

Wright, Money Laundering Control Officer John Allison, and HBEU 

Compliance officer Paul Proctor. Mr. Root wrote that the Iranian 

relationship at HBEU consisted of a U.S. dollar clearing service volume 

of approximately II payments every business day for six banks: Melli, 

Keshavarzi, Markazi, Sepah, Tejarat, and the Export Development 

Bank. 797 His email again confirmed that HBEU was altering the 

791 Subcommittee interview of Michael Gallagher (6113/2012). 

792 See 10/2112003 email exchange among HSBe David Bagley. HBME Steve Banner, and 

others, "Iran-Strategy Discussion Paper," HSBe oee 8873946-947. 79J Id. 

794 10/26/2003 email from HBME David Hodgkinson to HSBe David Bagley, "Iran-Strategy 

Discussion Paper," HSBe oee 8873959. 795 Id. 

796 Subcommittee interview of David Bagley (5/1 0/20 12). See also 10128/2003 email from 

HSBe David Bagley to HBME Ajay Bhandoola, "Memo: Iran-Strategy Discussion Paper," 

HSBe oee 8873958. 

797 Mr. Root identified two more banks than were referenced in the October Iran strategy paper. 
343 


76061.709

169 

payment documentation, despite HSBC Group Audit head, Matthew 

King's having expressed concerns about the practice, and the HBEU 

Compliance guidelines calling for the practice to stop by the end of the 

year. Mr. Root wrote: 

"EPS [the payment services team within MPD where Mr. 

Eastwood and Mr. Moxley worked] HBEU have been manually 

intervening in the processing ofIranian bank payment instructions 

by removing the remitter's name and country to prevent the 

probable trigger of a filter in the US, and the subsequent 

declaration to OFAC (and possible freezing) of the funds."798 

Mr. Root wrote that he believed EPS had been instructed by HBEU 

Compliance to cease this practice, but was unclear when the instructions 

were given or by whom. He noted that HBEU Institutional Banking 

(IBL) had negotiated an extension until December 31, 2003, due to 

"long-standing valuable relationships." After the December 31, 2003 

deadline, Mr. Root stated that cover payments would be considered 

unacceptable, and EPS would have to send HBUS fully formatted 

payment instructions on a MTI 0011 03 serial basis. 

Mr. Root also noted that Project WOLF, an HSBC Group project 

developing an automated payment filter to screen transactions for 

terrorists, would not ensure HBEU compliance with U-turn regulations 

in the United States. As a result, he said that HBUS would continue to 

be responsible for screening all U.S. dollar transactions with regard to 

OF AC prohibitions.799 

Moxley Deadline. The following day, John Root forwarded David 

Bagley, Susan Wright, and John Allison an email from Rod Moxley in 

HBEU's Multicurrency Payments Department (MPD) expressing Mr. 

Moxley's objection to participating in procedures designed to conceal 

U-turn transactions. In his October 24, 2003 email.Mr. Moxley first 

objected to the notion that the MPD procedures being used for Iranian 

transactions were new or unknown: 

"I have been alarmed by recent inferences that Payment Services 

have been amending the Iranian banks' payments without the 

knowledge or consent ofTBAI RlM or IBL Compliance. This has 

been a long standing practice and to avoid future doubt, I will 

reiterate the points made in Malcolm Eastwood's memo to Niger 

Weir of22 Jan. 03.,,800 

7981012312003 email from HSBC John Root to HSBC David Bagley and others, "USD Clearing 

-Iranian Banks," HSBC GCC 8875217. 

799 1d. at 217. 

'00 10/24/2003 email from HBEU Rod Moxley to HBEU John Wilkinson and others, "Iran," 

HSBC GCC 8874661-663. Mr. Moxley then outlined a new procedure that he advocated lor 
344 


76061.710

170 

Mr. Moxley also stated that the position of his office in terms of 

processing the Iranian payments was becoming "increasingly 

untenable." He wrote that HBEU Risk Management Servicessol would 

be controlling the new WOLF filter, but "we have been requested to find 

ways to circumnavigate our own and other institutions' compliance 

filters."S02 He described his role as protecting the bank from 

reputational risk, but "I now feel uncomfortable in compromising my 

position by leading IBL, PCM or Iranian counterparties down certain 

routes which may directly contravene the spirit ofthe Compliance 

framework."S03 Mr. Moxley warned that, given the internal HBEU 

deadline to stop processing concealed Iranian transactions, beginning 

January 1,2004, "no Iranian payments will be amended."s04 

On November 11,2003, HSBC Group Money Laundering Control 

Officer John Allison sent an email to HSBC Group AML head Susan 

Wright about his visit to HBEU's Multicurrency Payments Department 

(MPD) the week prior to discuss Iranian payments.805 He wrote that 

Iranian correspondent bank customers entered payment information on a 

form, and MPD staff were then expected to review the form to ensure 

the phrases "Iran," "do not mention Iran," or any other compromising 

reference were not included in the MT202 payment message transmitted 

to HBUS. He described this process as "established custom" rather than 

a documented procedure, "believed by MPD to be at the request of 

relationship management." He also wrote that the new MPD 

Compliance manager was "not comfortable with the custom which he 

has inherited, neither from a moral compliance perspective, nor from the 

operational loss/embarrassment factor." Mr. Allison also wrote that 

MPD Compliance is "very uncomfortable" about periodically being 

asked by Nigel Weir and Gary Boon in HBME whether a specific 

payment format will pass through an OF AC filter. S06 He stated that 

MPD Compliance viewed all of the Iranian payments they processed as 

meeting the requirements for a permissible U-turn transaction,807 and 

wanted to move toward the legitimate execution of these payments in 

Iranian payments, the result of which would be that the Iranian banks would enter the payment 

information instead of HBEU. 

80\ RMS was located within HBEU's Payment Services. Subcommittee interview of Rod 

Moxley (61712012). 

802 10/24/2003 email from HBEU Rod Moxley to HBEU John Wilkinson and others, "Iran," 

HSBC OCC 8874661-663. 

803 Id. at 662. 

80'ld .. 

805 11 /11/2003 email from HSBC John Allison to HSBC Susan Wright, "Iran payments." HSBC 

OCC 8877136-137. 

806 1d. at 136. 

807 Id. at 137. The email did not address the issue of whether Bank Markazi, as a government 

owned Central Bank, was unable to utilize the U-turn exception. Bank Markazi was added to the 

OFAC list in 2007. 
345 


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171 

light of what Mr. Root described as an "instruction" from Mr. Bagley 

"to cease processing Iranian bank payments.,,808 

On November 27, 2003, Mr. Moxley sent Ms. Wright a draft 

proposal to process Iranian U.S. dollar transactions. Although the 

proposal would prohibit altering a transaction document to remove the 

name of a prohibited country or town, and required a review for OF AC 

compliance, it did not require the transaction to include full payment 

details for the originator and ultimate beneficiary as outlined in the 

HBUS August 2001 U-turn payment procedure.809 

On December 10, 2003, after having consulted I-IBUS Compliance 

head Carolyn Wind, Ms. Wright sent Mr. Moxley an email updating him 

on the Iranian U-turn payment proposa1.810 Ms. Wright indicated that 

the issue of processing payments through HBUS had been "discussed at 

length" among HBUS Compliance, outside legal counsel Tom Crocker, 

HBUS payments personnel, and HBEU during the summer of2001. She 

indicated she had asked Ms. Wind to forward the 2001 HBUS proposal 

for consideration. The following day, Nigel Weir wrote to Ms. Wright 

that the HBUS proposal required a method for processing payments that 

was not HBME's preferred solution.8

!! He also expressed concern that 

HBEU would be unable to advise their customers of the proposed 

processing changes before the December 31 deadline and requested an 

extension. Ms. Wright forwarded the correspondence to Mr. Bagley. 

On December 12,2003, Mr. Bagley emailed Mr. Weir that if 

HBUS felt it could agree to processing the Iranian transactions only on 

the basis of fully transparent documentation, then its views would have 

to be taken into account. He also wrote that HBUS "must be 

comfortable" with the approach. 

HBEU continued, however, to object to the new payment 

procedure. On December 18, 2003, HBEU wrote to HSBC Group 

Compliance that HBUS' procedure, which it referred to as "the serial 

method," " requires a large amount of work prior to commencement, a 

disproportionate amount of expense and a higher than average risk to the 

banks reputation being damaged by a future payment.,,8!2 

808 Id. at 137. Although Mr. Root indicated that Me. Bagley had ordered the MPD payments to 

"cease," they continued for another two years. 

809 11/27/2003 email from HBEU Rod Moxley to HSBC Susan Wright, "Draft Iranian - USD 

Payment Procedures," HSBC acc 8875225-232. 

810 I21J 0/2003 email from HSBC Susan Wright to HBEU Rod Moxley and others, HSBC acc 8875508. 

811 See 121J 1/2003 email exchange between HSBC Susan Wright, HBME Nigel Weir, and 

others, "Iran - U-Turn Payments," HSBC acc 8877150-154. 

812 12/18/2003 email from HBEU Tony Collins to HSBC John Allison and others, "Memo: Re: 

Iran - U-Turn Payments," HSBC acc 8873974-975. Group Compliance John Allison and John 

Root sought legal advice from outside counsel Tom Crocker of Alston & Bird and Me. Crocker 

determined that "it is not clear that the cover payments meet the requirement of the U.S. Dollar 
346 


76061.712

172 

At the same time RBEU and RBUS were arguing over payment 

procedures, RBEU and RBME continued to send transactions involving 

Iran through their correspondent accounts at RBUS, the vast majority of 

which were undisclosed. A later analysis performed by an outside 

auditor at RBUS' request found that, in 2003, RSBC affiliates sent at 

least 5,400 Iranian transactions to U.S. dollar accounts in the United 

States, of which about 90% were not disclosed.813 

Also in December, RBUS payments services head Denise Reilly 

spoke with RBUS' new AML Director Teresa Pesce, who began work in 

September 2003, about the Iranian issue and sent her a copy of the 2002 

Eastwood memorandum describing how RBEU altered documentation 

and used cover payments to send U.S. dollar transactions involving Iran 

through their correspondent account at RBUS without RBUS' 

knowledge.814 Ms. Reilly's email indicated that Ms. Pesce had also 

discussed the issue with Mr. Gallagher the previous day, although Mr. 

Gallagher told the Subcommittee he did not recall either seeing the 

memorandum or discussing it with Ms. Pesce.815 

(e) Reaching Agreement 

Despite the RBEU deadline announced by Rod Moxley, that MPD 

would stop processing concealed Iranian transactions after December 31, 

2003, no agreement was reached by that date on how to process the 

transactions. Documents obtained by the Subcommittee indicate that 

RBEU did not adhere to its deadline, but continued to process Iranian 

transactions using cover payments and deleting any references to Iran in 

the payment instructions. 

On March 10, 2004, after an Iranian transaction was detected and 

halted in London, RBEU MPD head Malcolm Eastwood wrote: "I 

remain extremely uncomfortable with the practice of amending Iranian 

payment orders for whatever means.,,816 Mr. Eastwood advised RBEU 

Compliance and Institutional Banking to resolve the issue as soon as 

u-turn exception to the Regulations." 1I8!2004 memo from Thomas Crocker to John Root and 

John Allison, "Iranian V.S. Dollar V-Tum Transactions and Cover Payments," HSBC OCC 

8903992-000. 

813 Deloitte presentation, "March 29, 2012," HSBC-PSI-PROD-0197919, at HSBC OCC 

8966143. The Deloitte review examined HBEV and HBME Iranian transactions sent through 

V.S. dollar accounts at HBUS and other V.S. banks. 

814 See 12117/2003 email from HBVS Denise Reilly to HBUS Tercsa Pesce, "ComplianceOFAC Issues in General and Specific to Iran," HSBC OCC 3407517-522 ("Attached is the 

memo that we discussed yesterday in our mceting with Michael Gallagher."). Sce also 

11114/2002 memorandum from HBEV Malcolm Eastwood to HBVS Denise Reilly and HBEV 

Geoff Armstrong, "Compliance OFAC Issues in General and Specific to Iran," lISBC OCC 

7688824. 

815 Id . Subcommittee interview of Michael Gallagher (6/1312012). 

RI6 311012004 email from HBEU Malcolm Eastwood to MDBK (Midland Bank) Quentin 

Aylward and others, "BankMarkazi Payment," HSBC OCC 8873979-980. 
347 


76061.713

173 

possible and remarked that his Compliance certificate is "heavil~ 

caveated to reflect that we are not compliant in respect ofIran." 17 Mr. 

Eastwood sent a copy of his email to HSBC Group AML head Susan 

Wright who forwarded it to David Bagley. 

The following day, Mr. Bagley responded to Mr. Eastwood by 

writing that he understood and shared his concerns, but believed his 

comments underestimated "the complexity of the OFAC regulation, and 

the competing competitive pressures across the Group.,,818 Mr. Bagley 

also wrote that one reason for the slow resolution was that "HBUS was 

unaware that any arrangements existed with Iranian banks." 

On March 22, 2004, more than two years after becoming head of 

HSBC Group Compliance, David Bagley confronted HBME Deputy 

Chairman David Hodgkinson about the need to change how HBME was 

handling U.S. dollar clearing activity for Iranian banks.819 Mr. Bagley 

wrote that he was "uncomfortable with this activity in its current form," 

and "the amount of revenue may not justifY" the "additional work and 

investment" required, "nor would it justifY ru[n]ning the reputational 

and regulatory risk in the US." He expressed his willingness to discuss 

the issue further, but suggested "that any such conversation take place 

over the telephone, as we are seeking to avoid correspondence with 

HBUS on this sensitive issue other than through lawyers so as to 

preserve privilege.,,82o 

WOLF Filter Announced. On March 23, 2004, HSBC Group 

issued a new Group Circular Letter 040021 implementing a major new 

initiative on "Payment screening.,,821 The circular announced that HSBC 

Group had developed an internal filter called "WOLF" to screen against 

terrorists and sanctioned countries and persons. The circular explained: 

"As part of the international effort to combat terrorism, Competent 

Authorities in numerous countries have published lists of names 

that are known to be, or are believed to be involved in terrorist 

activity .... In addition ... sanctions against a number of countries 

and names are imposed.... Compliance with these sanctions and 

orders has to date relied upon manual processes to identifY when 

relevant names are contained in payment instructions. In order to 

ensure that compliance with the restrictions ... is achieved 

consistently across the Group, an automated payment screening 

817 Id. at 8873980. 

81R 3/11/2004 email from HSBC David Bagley to HBEU Malcolm Eastwood and others, "Bank 

Markazi Payment," HSBC acc 8873985·986. 

8193/22/2004 email from HSBC David Bagley to HBME David Hodgkinson and HSBC Warren 

Learning, "Iran - Correspondent Banking Services," HSBC acc 8873995·997. 

82°Id. 

821 3/23/2004 "GCL 040021: Payment screening," prepared by HSBC Group, HSBC acc 0953080·084. 
348 


76061.714

174 

utility named WOLF has been developed. When installed ... 

WOLF will, before execution, search all fields of a payment 

message for matches with listed terrorist/sanctioned names. Once 

a potential match with a word or words ... is identified, the 

unexecuted payments must be reviewed to establish whether the 

match is actually a true match, with appropriate action taken if it is. 

WOLF is the Group solution for real-time pre-execution payment 

screening. ,,822 

The circular indicated that globally, WOLF would screen against 

terrorists listed by the United Nations, United States, United Kingdom, 

European Union, and Hong Kong, as well as countries or persons 

sanctioned by the United Nations. It indicated that compliance and 

payment operations personnel in HSBC affiliates were responsible for 

ensuring WOLF was loaded with other sanctioned names that were 

applicable locally. 82J It indicated that the screening would be applied 

first to international transactions, and later to domestic ones. The 

circular required affected HSBC entities to install the WOLF filter by 

the end of2004. 

HBME Extension. On April 17, 2004, HBME Deputy Chairman 

David Hodgkinson contacted David Bagley about the unresolved issues 

involving HBME's U.S. dollar clearing business for Iran, because he 

anticipated having to explain HSBC's position to the Central Bank 

during a visit to Tehran in May. Mr. Hodgkinson noted: "The current 

position as briefed to me last week was that we have not yet found a way 

to handle major USD clearing business.,,824 He informed Mr. Bagley 

that he had directed his staff to develop a proposal to undertake this 

business while minimizing risk, "so that if circumstances change we 

know our preferred way forward." 825 

Mr. Bagley forwarded the email to his supervisor, HSBC Group 

legal counsel Richard Bennett. Mr. Bagley wrote: "[T]he most pressing 

issue to be resolved is that relating to the limited number of existing 

relationships that we have (for two small Iranian Banks) where I suspect 

that HBUS are not aware that payments may be passing through them. 

Do not believe that we can allow this situation to continue very much 

longer, which is the point I will make to David in my response.,,826 

822 Id. 

82J Id. HSBC added the OFAC SDN list to the WOLF filter in 2004, and added the OFAC 

country list in August 2005. Subcommittee briefing by Cahill Gordon & Rcindel LLP 

(612012012). 

824 411712004 email from HBME David Hodgkinson to HSBC David Bagley and HSBC Warren 

Learning, "Iran - Correspondent Banking Services," HSBC OCC 8874671. 

825 1d. at 671. 

826 411912004 email from HSBC David Baglcy to HSBC Richard Bennett, "Iran Correspondent 

Banking Services - OFAC," HSBC OCC 8873994 and HSBC OCC 8966146. Mr. Bagley had 

allowed these payments to continue by granting a dispensation since they ran afoul of Group 
349 


76061.715

175 

This email is the third827 in which Mr. Bagley indicated that HBUS 

might be unaware it was processing Iranian U-turn transactions that, in 

his own words, "may constitute a breach of U.S. sanctions," yet 

contained no indication that Mr. Bagley planned to inform HBUS about 

the risks it was incurring. 

Two days later, on April 19,2004, Mr. Bagley again pressed 

HBME to resolve the issue. In an email toMr.Hodgkinson.Mr. Bagley 

expressed concern about the correspondent relationships operating 

through HBME "which do not currently meet the requirement ofthe US 

Legal opinion that has now been obtained.,,828 He continued: "I have 

sanctioned the continuation of these services pending an early resolution 

ofthe way forward, but it is clear from your note that we are some 

distance away from finalizing our thinking such that we can go to HBUS 

with any proposal with regard to a way forward." Mr. Bagley warned: 

"I feel that there is little option other than for me to recommend to 

HBEU that the existing activity be discontinued given the risk that we 

are posing for HBUS, unless the solution under consideration at your 

end gives us a satisfactory option." 

HBME's Nigel Weir responded to Mr. Bagley's email at the 

request ofMr. Hodgkinson, stating that he had already spoken with Gary 

Boon at HBME and John Allison at HSBC Group to develop a solution. 

He also requested that Mr. Bagley extend the dispensation from the 

HBEU decision to stop altering Iranian documentation until June 30, 

2004.829 Two days later, Mr. Bagley told John Allison that he was 

reluctant to extend the dispensation "unless there is a clear and agreed 

solution with a definite and proximate imrclementation date," and 

requested an update the following week.8 0 Despite Mr. Bagley's 

indication that he would not grant an extension without an agreement, 

the same practices continued amid ongoing negotiations over the 

agreement's provisions. 

policy. However~ an increase in business, which is what HBME was seeking, was on hold 

pending an agreement between HBUS, HBEU. and HBME. 

27 The other two were a 10/21/2003 email from HSBC David Bagley to HBME Steve Banner, 

and others. "Iran-Strategy Discussion Paper," HSBC OCC 8873946-947 ("I am not sure that 

HBUS arc aware of the fact that HBEU are already providing clearing facilities for four Iranian 

banks. presumably including USD clearance."); and a 311 112004 email from HSBC David 

Bagley to HBEU Malcolm Eastwood and others, "Bank Markazi Payment," HSBC OCC 

8873985-986 ("The complexity of the OFAC regulations. and the fact that HBUS were unaware 

that any arrangements existed with Iranian Banks, has made speedy resolution of this issue 

difficult."). 

828 4119/2004 email from HSBC David Bagley to HBME David Hodgkinson, "IranCorrespondent Banking Services," HSBC OCC 8966135. 

'" 51212004 email from HBME Nigel Weir to HSBC David Bagley and others. "Iran 

Correspondent Banking Services," HSBC OCC 8874673-674. 

83D 5/4/2004 email from HSBC David Bagley to HSBC John Allison, "Iran - Correspondent 

Banking Services," HSBC OCC 8874673. 
350 


76061.716

176 

Second Moxley Deadline. About eight months after Mr. Moxley 

had raised strong objections to continuing to alter Iranian payments, no 

agreement had been reached among HSBC affiliates on increasing the 

transparency of the transactions. HBEU continued to delete references 

to Iran from the payment instructions, generate cover payments with 

incomplete payment information, and send undisclosed Iranian 

payments to HBUS. To break the impasse, in June 2004, outside legal 

counsel in the United States proposed a new payments solution, which 

essentially required that all U-turns be processed by HBUS in a 

transparent or "serial" manner that identified the underlying originators 

and beneficiaries. 

On June 9, 2004, HBEU senior payments official Rod Moxley 

reacted negatively to the proposal due to operational difficulties. At the 

same time, he wrote: "I feel very uncomfortable recommending that we 

continue to process Iranian payments.,,831 He requested a formal 

response by June 18, 2004, and stated that "unless compelling 

commercial reasons" approved by HSBC Group Compliance and I-IBUS 

exist, he would stop handling Iranian payments after September 30, 

2004.832 This email represented his second attempt to cut offIranian 

payments that MPD was uncomfortable processing. 

On June 30, 2004, Nigel Weir wrote to Mr. Moxley and asked him 

to revisit the issue and work with HSBC Group Compliance on a 

solution enabling HBEU to execute U.S. dollar payments for Iranian 

banks in accordance with U.S. regulations. 833 Mr. Weir told Mr. Moxley 

that if the payments were stopped, "we will be effectively insulting the 

Government and State ofIran." Mr. Weir stated that the bank had 

declined new U.S. dollar payment business from Iranian banks due to 

the sensitive political situation, "but to exit business which we have been 

conducting for many years would jeopardize all other existing business 

activities." He estimated that the Group profit from existing Iranian 

business activities amounted to $10 million per year. 

Also on June 30, 2004, HBME Deputy Chairman David 

Hodgkinson forwarded the correspondence between Mr. Moxley and 

Mr. Weir to then HBEU CEO Michael Geoghegan, asking for his 

"intervention and support" in positively resolving the long-standing 

issue, and noting Iran's "significant strategic importance" to the 

Group.834 Mr. Hodgkinson also noted that the volume ofIranian 

payments was small at 20 per day. When asked about this email.Mr. 

831 6/9/2004 email from HBEU Rod Moxley to HSBC John Allison and others. "Iran," HSBC 

acc 8874002-004. 

"'Id. 

833 6/30/2004 email from HBME Nigel Weir to HBEU Rod Moxley and others, "Memo: Re: 

Iran," HSBC acc 8874001-002. 

834 6/30/2004 email from HEME David Hodgkinson to HBEU Michael Geoghegan, "Memo: Re: 

Iran," HSBC acc 8874001. 
351 


76061.717

177 

Moxley told the Subcommittee that it resulted in HBEU and HBME's 

obtaining a "dispensation" from having to end the alteration ofIranian 

transactions until the end of 2004.835 When asked about the dispensation 

approval process, he said that he thought that HSBC Group Compliance 

approval was needed along with secondary approval from either HSBC 

Group Audit or another manager. 

Later that day, another HBEU official John Ranaldi sent an email 

to Mr. Geoghegan stating that he was aware of the Iranian situation and 

would get an update. He wrote: "[B]asically, our interpretation was that 

we were being asked to 'fud~e' the nature of the payments to avoid the 

U.S. embargo and seizure.,,8 6 When asked about this email.Mr. 

Geoghegan told the Subcommittee that he could not explain what Mr. 

Ranaldi meant by using the word "fudge," except that it related to 

Iran. 8J7 He said that, at the time, he was unaware that HBEU was 

altering transaction documentation or using cover payments. Having 

since learned what was going on, he told the Subcommittee that he 

assumed that's what Mr. Ranaldi was talking about. When asked 

whether it raised alarm bells at the time, he remarked that he got many 

emails and Mr. Ranaldi used colorful language. He said that he also 

knew Mr. Ranaldi would follow-up with him in a few days. 

HBEU Proposal. On July 6, 2004, HBEU's Rod Moxley 

produced a specific proposal as a potential way forward using his 

preferred solution of serial payments.838 The extensi ve proposal also 

shed light on existing practices at HBEU.839 

The proposal noted that HBEU had been trying to come up with a 

solution for two years after an HBEU compliance officer challenged the 

practice of altering Iranian payment instructions in June 2002. It noted 

that Bank Melli, Bank Markazi, Bank Tejarat, Bank Kesharvazi, and the 

Export Development Bank of Iran were the five Iranian financial 

institutions that took advantage of this practice to effect U.S. dollar 

payments with a daily volume estimated at between 10 and 50 payments 

per day at an approximate total value of$500,000 to $1 million. The 

proposal also noted that the Central Bank payments were much larger, in 

the range of$10 million, and were typically made at certain times of the 

835 Subcommittee interview of Rod Moxley (61712012). 

836 6/30/2004 email from HBEU John Ranaldi to HBEU Michael Geoghegan, "Memo: Re: Fw: 

Iran," HSBC OCC 8873999. 

837 Subcommittee interview of Michael Geoghegan (5/24/2012). 

838 See 712004 discussion paper. "HSBC Bank PLC Iranian Payment Processing Proposals." 

HSBC OCC 8874026-034. 

839 Id. For example, according to the document, the existing HBEU practice was that if an 

Iranian financial institution included a cautionary statement, such as "Do not mention Iran," in 

Field 72 of the payment instructions, the payment would drop out to what was called a repair 

queue. Once in the repair queue, HSBC personnel would alter the payment instructions by 

deleting any reference to Iran. 
352 


76061.718

178 

month. 840 The proposal stated that the "vast majority of payments are 

valid, falling within the U-turn exception.,,841 

The proposal discussed two potential payment options that would 

meet HBUS' requirement for transparency. It noted that HBEU 

preferred the "serial payment" option which would allow the Iranian 

banks to format their payments in a way that would not require 

intervention from HBEU. HBEU believed this aspect of the proposal 

would relieve it of any responsibility to review the payments, leaving it 

up to HBUS, or another U.S. bank where a payment was directed, to 

verifY that the payment met the U-turn exception requirements. The 

proposal indicated that HBEU would continue to utilize WOLF and 

other filters to screen the payments, but the Iranian financial institutions 

would be responsible for ensuring they submitted only valid U-turn 

payments "permissible under the terms of US legislation." The proposal 

indicated this solution would also transfer the risks associated with 

blocked payments to the Iranian banks.842 The proposal acknowledged 

that HBUS would need to agree to this solution, and HBEU and Group 

Compliance would need to "sign-off' on it prior to moving forward. 

On July 6, 2004, HBEU MPD head Malcolm Eastwood forwarded 

Mr. Moxley's proposal to John Ranaldi, noting that he continued to have 

serious concerns about the Iranian U.S. dollar clearing business.843 Mr. 

Ranaldi forwarded the email to then HBEU CEO Michael Geoghegan, 

writing: "reference your earlier query.,,844 According to Mr. Ranaldi, 

Mr. Eastwood's department was being asked to "amend instructions or 

assume responsibility that the contents of the payment message do not 

attract the Fed's attention and seize the payment." He explained that a 

"payment clerk is asked to judge upon a payment kicked out by the 

filtering system, whether to release, or return." He wrote, "there is an 

irony; someone could argue that by returning payments to Iran that we 

are contravening the ofac rules.,,845 Mr. Ranaldi characterized the risks 

associated with the existing practice as including operational losses due 

to payment seizure, threats to HSBC's reputation, and "incurring hefty 

fines." He told Mr. Geoghegan that L10yds Bank had been fined "and 

few if any u.k. banks are in the business." 

When asked about this email.Mr. Geoghegan told the 

Subcommittee that he was "puzzled" that he didn't act to stop the 

8407/2004 discussion paper. "HSBC Bank PLC Iranian Payment Processing Proposals." HSBC 

OCC 8874026-034. 

841 Id. 

842 Id. at 030. 

843 7/6/2004 email from HBEU Malcolm Eastwood to HBEU John Ranaldi and others, "HBEU 

Iranian Payments Business," llSBC OCC 8876861 

844Id. 

S45 7/6/2004 email from HBEU John Ranaldi to HBEU Michael Geoghegan, "HBEU Iranian 

Payments Business," HSBC oce 8876861. 
353 


76061.719

179 

practice immediately or get out ofthe business. He remarked that he did 

respond that way with Mexico, so thought it was odd that he didn't in 

this case. He couldn't recall whether he talked to any other senior 

HSBC Group executives about the issue.846 

Emails in early August 2004 show HBEU and HBME reviewing 

and discussing the Moxley proposal. 847 On August 6, 2004, Mr. Bagley 

commented: "My initial reaction is that the proposals are more robust, 

and therefore more likely to be acceptable that we originally 

contemplated or proposed.,,848 He also said the proposal had to be sent 

to HBUS' outside legal counsel for confirmation it would meet OFAC 

requirements.849 Later that day, the HSBC Global head of Payments and 

Cash Management, lain Stewart, forwarded Mr. Bagley's email to Mr. 

Geoghegan and Mr. Hodgkinson with a note: "Progress report. This 

will delay it a bit but we are getting there.,,85o When asked about this 

email.Mr. Geoghegan surmised that HBUS was involved and legal 

opinions were being obtained.8s1 

On September 22, 2004, HBEU Nigel White informed Mr. Stewart 

and others, including Mr. Bagley, that "all involved parties have signed 

off on the proposal," and the next step was for HSBC Group Compliance 

to obtain agreement from HBUS.852 At the same time these negotiations 

were ongoing, HBEU and HBME continued to send undisclosed Iranian 

transactions to HBUS with the tacit approval of HSBC Group 

Compliance. 

HBUS Approval. The revised Moxley proposal was sent to 

HBUS in November 2004. On November 30, 2004, HBUS' AML 

Director Terry Pesce, PCM head Michael Gallagher, and Payment 

Services head Denise Reilly met with HBUS CEO Martin Glynn, about 

HBUS processing U-turn transactions. Prior to the meeting, Ms. Reilly 

circulated the HBUS procedures that were developed in 200 I, "when the 

topic was last active.,,853 The internal emails suggest that one HBUS 

employee may have been under the impression that the processing of 

Iranian transactions had not yet begun and did not know that HBUS had 

846 Subcommittee interview of Michael Geoghegan (5/24/2012). 

847 See 8/412004 email exchanges among MDBK Phil Baines to HBEU Nigel White and others, 

"Iranian - Payment Processing Proposals," HSBC OCC 8874705-708. 

848 8/6/2004 email from HSBC David Bagley to HBEU Nigel White and others, "lranianPayment Processing Proposals," HSBC OCC 8874703-704. 849 ld. 

850 8/6/2004 email from HSBC lain Stewart to HBEU Michael Geoghegan and HBME David 

Hodgkinson, "Iranian - Payment Processing Proposals," HSBC OCC 8874703. 

851 Subcommittee interview of Michael Geoghegan (5/24/2012). 

852 9122/2004 email from HBEU Nigel White to HSBC lain Stewart and others, "Iranian U Turn 

Payments," HSBC OCC 8874023-034. 

853 11130/2004 email from HBUS Denise Reilly to HBUS Sandra Peterson and HBUS Michael 

Gallagher, "U-turns;' HSBC-PSI-PROD-0096166; 11/2912004 email from HBUS Denise Reilly 

to HBUS Michael Gallagher and others, "{J-tums," llSBC-PSI-PROD-0096167. 
354 


76061.720

180 

alread~ been processing Iranian U.S. dollar transactions for at least three 

years. 54 

A few days after the high level meeting among HBUS officials, 

Ms. Reilly sent Mr. Gallagher a description of "the conditions under 

which HBUS will accept U-Turn transactions.,,855 Those conditions 

included that transactions would be formatted to be fully transparent 

serial payments; HBEU would agree not to alter payment instructions 

and abide by the U-turn processing requirements; HBUS would not be 

liable for penalties resulting from OF AC sanction violations; a separate 

"HBEU Special Account" would be established at HBUS to handle 

Iranian originated transactions and the account number would be added 

to the HBUS OF AC filter so all transactions could be reviewed and 

approved prior to processing; HBUS would be reimbursed for the 

additional employees needed to handle review of these payments; and 

fees for the transactions would reflect the processes and risk. 856 

Whereas the 200 I protocol was specific to Bank Melli, this protocol 

applied to all Iranian transactions.857 

On December 15,2004, Mr. Bagley informed the HSBC Global 

Head ofPCM Marilyn Spearing and HBME Deputy Chairman David 

Hodgkinson that he had advised then HSBC Group CEO Stephen Green 

"that a compliant solution had been agreed in principle with HBUS." 

While this agreement was a significant milestone, Mr. Bagley said Mr. 

Green wanted to consider the issue and possibly discuss it with then 

HSBC Group Chairman John Bond. 

Mr. Bagley asked Ms. Spearing to provide him data on the 

potential commercial value of the Iranian U.S. dollar transactions to the 

Group, considering both existing and future business. He wrote: 

"I would not suggest that we seek to try and influence the debate at 

this stage .... but it might be helpful ifI was armed with the likely 

value to the Group if we are in effect making a reputational risk 

over possible reward type judgment.,,858 

'" See. e.g .• 11130/2004 email from HBUS Sandra Peterson to HBUS Denise Reilly and HBUS 

Michael Gallagher, "U-turns." HSBC-PSI-PROD-0096165 (Ms. Peterson: "Is this proposal for 

Bank Melli only or is the intent to grow this business? When this topic first arose it was to 

support Bank Melli but my understanding is that the business under discussion now is more 

~eneral, with no specific clients named to date.'"). 

55 12/212004 email from HBUS Denise Reilly to HBUS Michael Gallagher and others, "UTurns," HSBC OCC 3407526-527. 

856 Id. at 527. 

857 Subcommittee meeting with HSBC legal counsel (4112/12). 

858 1211512004 email from HSBC David Bagley to HSBC Marilyn Spearing and HBME David 

Hodgkinson, "Iran ~ OFAC," HSBC OCC 8874039. 
355 


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181 

Mr. Bagley concluded by writing that it would probably be "sensible" to 

"gently" proceed "assuming that we may get sign_off.,,859 

An internal OCC memorandum indicates that, in early 2005, 

HBUS contacted the OCC about a proposal to process Iranian Uturns.860 In the memorandum, an OCC examiner described how 

legitimate U-turns could be processed and wrote: "[W]e notified Ms. 

Pesce that we believed the transactions to be permissible. However, we 

also informed her that the bank would have to maintain extremely tight 

controls over the transactions as well as a comprehensive system of 

controls for monitoring purposes.,,861 Later in the same memorandum, 

the OCC examiner wrote: "[O]n February 23, 2005 Ms. Pesce informed 

the writer that the decision to process the u-turn transactions was not to 

go forward and that the area business had made the decision not to 

undertake such processing.,,862 

The documentation suggests that even after reaching agreement 

with HBUS on how to process Iranian transactions, HBEU and HBME 

continued to send undisclosed Iranian transactions through their HBUS 

accounts. A later analysis performed by an outside auditor at HBUS' 

request found that HSBC affiliates sent about 7,800 Iranian transactions 

through U.S. dollar accounts in the United States during 2004, of which 

more than 90% continued to be undisclosed.863 

(I) Processing the Iranian Transactions 

The 2004 agreement reached among HSBC affiliates on how to 

process Iranian U-turn transactions did not end the controversies or new 

developments afiecting those transfers. 

Considering an Exit. Four months after agreement was reached 

with HBUS on how to process Iranian transactions, on April 8,2005, 

David Bagley reached out to Mr. Hodgkinson to request an assessment 

of the nature and extent ofIranian business for an analysis Mr. Bagley 

was asked to prepare for the HSBC Group Chairman. It appears that at 

the top levels ofHSBC, there was some discussion about exiting the 

Iranian business entirely due to a "specific transaction for NPC" about 

which Mr. Bagley had spoken with Mr. Green.864 In the same email, 

Mr. Bagley wrote, "This is needed partly as part of the risk over reward 

859 Id. at 039. 

860 See 2/28/2005 OCC memorandum, "Issues Update." OCC-PSI-00903648-650, at 2. [Sealed 

Exhibit.] 

861Id. 

862 Id. 

863 Deloitte presentation, "March 29, 2012," HSBC-PSI-PROD-0197919, at HSBC OCC 

8966143. The Deloitte review examined HBEU and HBME Iranian transactions sent through 

U.S. dollar accounts at HBUS and other U.S. banks. 

864 4/8/2005 email from HSBC David Bagley to HBME David Hodgkinson and HBME Nasser 

I1omapour, "Iranian Business - OFAC," HSBC OCC 8874052. The reference to NPC is unclear. 
356 


76061.722

182 

equation, but also because we will need to both analyze each different 

type of business and assess how we will deal with legacy issues.,,865 He 

continued: "It is not all as bad as it seems as the conversation today 

gave some clear possible alternative approaches to an outright ban.,,866 

Two days later, on April 10, 2005, HBME official Ajay Bhandoola 

provided Mr. Bagley with a paper discussing payment alternatives for 

Iran. 867 The paper laid out two proposals for continuing payments from 

Iranian bank accounts with HSBC "to protect our Iranian franchise while 

minimizing any possible legal, regulatory or reputational risk to HBUS." 

The two alternative solutions provided were to use another U.S. dollar 

correspondent (other than HBUS) for HBME, and to limit U.S. dollar 

accounts for Iranian banks to specific purposes. 868 HBME did not 

explain why it was considering using a third party correspondent since 

HBUS had already agreed to process the Iranian transactions using 

transparent procedures.869 

Stopping Payments. On April 19, 2005, HBUS' OFAC filter 

stopped a $362,000 payment from Bank Melli because it contained the 

phrase "do not mention our name in New York.,,870 When asked in 

general about why payments would be stopped in the HBUS filter, Rod 

Moxley told the Subcommittee that messages like the one mentioned 

above should have been deleted in the processing area but was errantly 

left on the outgoing instructions.87I This incident indicated that HBEU's 

MPD was still altering Iranian payment instructions in April 2005, one 

year after Mr. Moxley had threatened to stop processing all payments if 

forced to continue altering them, and four months after HBEU and 

HBUS reached agreement on using fully transparent Iranian U.S. dollar 

transactions. HBEU resubmitted the payment on April 22, 2005, but 

HBUS stopped it again and sent a SWIFT message requesting full 

disclosure of the name and address of the underlying originator and 

ultimate beneficiary. Two follow-up requests were sent by HBUS on 

April 28 and May 4, 2005. As of May 5,2005, no response had been 

received. 872 

In early May 2005, a $6.9 million wire payment involving Iran was 

also stopped by HBUS because the payment details included the phrase, 

865Id. 

"6 Id. 

8674/10/2005 email from HBME Ajay Bhandoola to HSBC David Bagley and others, "Iranian 

Business - OFAC," HSBC OCC 8874051-057. 

868 Undated "Iranian Accounts and USD Payments," prepared by HBEU, HSBC OCC 8874055-

057. 

869 Id. at 056-057. 

8705/5/2005 email from HBUS Elizabeth Protomastro to HSBC John Allison and others, 

"Payment rejected re Melli Bank PLC - USD 362,000," HSBC-PSI-PROD-0096170-171. 

S7I Subcommittee interview of Rod Moxley (6/7/2012). 

872 5/5/2005 email from HBUS Elizabeth Protomastro to HSBC John Allison and others, 

"Payment rejected re Melli Bank PLC - USD 362,000," HSBC-PSI-PROD-0096170-171. 
357 


76061.723

183 

"Bank Melli Iran.,,873 RBUS OFAC Compliance officer Elizabeth 

Protomastro sent an email to RBEU, as well as RSBC Group, stating: 

"Though the payment appears to meet the U-turn under the Iranian 

Transactions Regulations, we require that the payments should be 

fully disclosed as to the originator and beneficiary information 

before processing. We know that this policy is in line with the 

stance of other U.S. financial institutions .... You are also aware, 

from past discussions, that this is required by RBUS. 

Let us know if you have any questions. Please advise on your side 

of the delay in processing.,,874 

The email chain regarding the stopped payment was forwarded to 

Mr. Bagley, who then contacted RBUS AML head Teresa Pesce to ask 

whether RBUS' action "denotes a change of policy and approach within 

RBUS to what I would normally expect to be cover payments." 875 Mr. 

Bagley wrote: 

"As you are aware, there are no Group standards which require that 

the originator and beneficiary details go in all payments. 

Accordingly, Group Operation globally will not habitually require 

or input this information if the underlying customer instruction is 

received on a basis permitted by the SWIFT format and by local 

regulation." 

Re noted that ifthe payment were suspended due to a reference to Iran, 

he understood. But if the action taken by RBUS denoted a change of 

policy on what information had to be included in payment instructions, 

that change may not have been communicated across the Group and 

vetted with business colleagues. This email was sent in 2005, by Mr. 

Bagley, after more than two years of negotiations to increase 

transparency with regard to Iranian transactions. 

Ms. Pesce forwarded Mr. Bagley's email to RBUS OFAC 

Compliance officer Elizabeth Protomastro and senior RBUS 

Compliance official Anne Liddy. Ms. Protomastro responded that "for 

the most part" the U-turns being processed by RBUS for RBEU had 

been fully disclosed in compliance with the conditions specified in 

December 2004.876 Ms. Protomastro stated that the remitter involved in 

873 51312005 email from HBUS Elizabeth Protomastro to HSBC John Allison. HSBC Susan 

Wright. HBEU Rod Moxley, and others, "Wire payment suspended re 'Iran' - USD 

6,912,607.82," HSBC OCC 8874710-712, at 711. 

874 Id. at 712. 

815 51412005 email from HSBC David Bagley to HBUS Teresa Pesce, "Wire Payments 

Suspended," HSBC OCC 8874710-711. 

876 51412005 email from HBUS Elizabeth Protomastro to I-lBUS Teresa Pesce and others, "Wire 

Payments Suspended," HSBC OCC 8874710. 
358 


76061.724

184 

the $6.9 million transfer was Credit Suisse Zurich, which was "well 

aware of the u-turn practices of other U.S. organizations and the 

requirement for full disclosure of the name and address of the originator 

and the beneficiary.,,877 

On June 3, 2005, Ms. Protomastro informed HSBC Group about 

two more HBEU transfers, for $1.9 million and $160,000, that had been 

stopped by HBUS due to the lack offull disclosure of the originator, 

beneficiary, and purpose of the payment. 878 HBEU responded that both 

payments were foreign exchange related, the originators were Bank 

Tejarat and Bank Melli, and the beneficiaries were Persia International 

Bank and Credit Suisse Zurich, respectively.879 Ms. Protomastro 

responded by requesting that HBEU follow up with the banks to obtain 

the names and addresses of the initial originators and ultimate 

beneficiaries, as well as confirmation of the underlying purpose of the 

payments, in accordance with the "agreement reached in the past" 

between HBUS and HBEU requiring full disclosure for U-turn 

payments. 880 According to information provided by Bank Melli through 

HBEU, the $160,000 payment denoted an internal transfer from Bank 

Melli's account with HBEU to Bank Melli's account with Credit Suisse 

Zurich.88t This information allowed the payment to be released.882 Mr. 

Marsden stated that he was in the process of contacting Bank Tejerat for 

additional information about the $1.9 million transfer. 

On June 6, 2005, Anne Liddy sent HBUS AML head Teresa Pesce 

the email correspondence about the two Iranian payments that had been 

suspended.883 She also informed Ms. Pesce that 44 ofthe approximately 

60 payments stopped by the HBUS OF AC filter the previous month, 

May 2005, and forwarded for review, referenced Iran. She remarked 

that this was "quite a lot." The following day, HBUS OFAC 

Compliance officer Grace Santiago-Darvish informed HBUS' Payment 

Services head Denise Reilly that they would be sending a message to all 

877 ld. 878 61312005 email between HBUS Elizabeth Protomastro and HSBC John Allison and others, 

"Wire payments from HSBC Bank PLC suspended - USD 1,900,000 and USD 160,000 (Iran)," 

HSBC OCC 3407547. 

8796/612005 email from HBEU Rod Moxley to HBUS Elizabeth Protomastro and others, "Re: 

Wire payments from HSBC Bank PLC suspended - USD 1,900,000 and USD 160,000 (Iran)," 

HSBC OCC 3407546-547. 

880 61612005 email from HB US Elizabeth Protomastro to HBEU Stephen Cooper and others. "Re: 

Wire payments from HSBC Bank PLC suspended - USD 1.900,000 and USD 160,000 (Iran)." 

HSBC OCC 3407544-545. 

881 61712005 email from HBEU Anthony Marsden to HBUS Grace Santiago-Darvish, "Re: Wire 

payments from HSBC Bank PLC suspended -- USD 1,900,000 and USD 160,000 (Iran)," HSBC 

OCC 3407543-544. 

882 61712005 email from HBEU Anthony Marsden to HBEU Rod Moxley and others, "Re: Wire 

payments from HSBC Bank PLC suspended - USD 1,900,000 and USD 160,000 (Iran)," HSBC 

OCC 3407544-545. 

883 61612005 email trom HBUS Anne Liddy to HBUS Teresa Pesce and others, "Fw: Wire 

payments from HSBC Bank PLC suspended - USD 1,900,000 and USD 160,000 (Iran)," HSBC 

OCC 3407537. 
359 


76061.725

185 

HSBC locations to remind them about the need to fully disclose 

underlying information in U-turn payments. She wrote: "We, in 

Compliance have noticed that, other locations could be more 

forthcoming about disclosing orig[inator], and bene[ ficiary] 

information. ,,884 

Switch from HBEU to HBME. On May 20, 2005, HBME 

Deputy Chairman David Hodgkinson sent an email to HSBC business 

heads that, after a meeting with the HSBC Group Chairman and Group 

CEO, a decision had been made to transfer all Iranian bank U.S. dollar 

accounts held by HBEU to HBME, and utilize a "third party 

correspondent in the US for cover and other valid U turn payments.,,885 

When asked about this decision, David Bagley told the Subcommittee 

that the processing of the payments was moved to HBME because that 

was where the locus of business was located.886 In addition, HBME set 

up a special team to review the transactions to ensure consistent 

treatment. Mr. Hodgkinson also informed HSBC business heads that 

they should suspend new business and the expansion of current activities 

with Iran until the political situation improved, but that "existing 

business and commitments with Iran" were allowed to continue.887 

JP Morgan Chase. On June 20, 2005, David Bagley informed 

David Hodgkinson that Iranian payments had been discussed in a 

meeting he had with HSBC Group CEO Stephen Green and HSBC 

Group legal counsel Richard Bennett.888 He wrote that it was decided 

that all U-turns, whether passing through HBUS or another U.S. 

correspondent, would have to comply with the U-turn requirements in 

OFAC regulations. He wrote that Mr. Green also wanted confirmation 

that the "agreed arrangements in relation to Iranian payments had been 

put in place," and that payments, including any cover payments, passing 

through the United States would comply with OF AC regulations. Mr. 

Bagley wrote: 

"Although I may have misunderstood our discussions I was not 

previously aware that this was a precondition nor did my original 

paper envisage that if we used a non-Group correspondent we would 

necessarily consider passing only U-turn exempt payments through 

them. In fact in such circumstances there would be no reason to use 

884 61712005 email from HBUS Grace Santiago-Darvish to HBUS Denise Reilly and others, "Re: 

Wire payments from HSBC Bank PLC suspended - USD 1,900,000 and USD 160,000 (Iran)," 

HSBC acc 3407536. 

885 5/20/2005 email from HBME David Hodgkinson to HBME Nasser Homapour and others, 

"Iran," HSBC acc 8874714. 

886 Subcommittee interview of David Bagley (4112/2012). 

887 5/2012005 email from HBME David Hodgkinson to HBME Nasser Homapour and others, 

"Iran," HSBC acc 8874714. 

8S8 6/20/2005 email from HSBC David Bagley to HBME David Hodgkinson, "Iranian 

Payments," HSBC acc 8878027-029. 
360 


76061.726

186 

anyone other than HBUS given that HBUS could not be criticized 

were it to carry out exempt payments.,,889 

Mr. Bagley's comments suggest that he was under the impression 

that using a non-Group correspondent would have allowed HSBC to 

process Iranian payments that did not meet the U-turn exception. 

However, after his discussion with Mr. Bennett and Mr. Green, he 

requested that Mr. Hodgkinson confirm they would be sending only 

compliant U-turn transactions through the United States, regardless of 

"whether or not through our own correspondent.,,89o 

On June 27, 2005, David Hodgkinson responded that HBME was 

attempting to open a U.S. dollar correspondent account with JPMorgan 

Chase (JPMC) for the purpose of processing Iranian U.S. dollar 

payments. Later in the email he wrote: "we never envisaged anything 

other than U-Turn compliant payments being processed," and confirmed 

agreement that "there is no reason to use anyone other than HBUS." He 

clarified that the only reason they had considered another U.S. 

correspondent for these payments was due to HBUS being unwilling to 

process them for reputational risk reasons.891 When Michael Gallagher, 

the head ofHBUS PCM, was asked whether he was aware that HBME 

opened a U.S. dollar account with JPMorgan Chase in 2005, he could 

not recal1.892 He further explained that HBME must have thought that 

HBUS' standards were higher ifthey went to IPMorgan Chase to do the 

same service. 

Despite that email, HBME did open a U.S. correspondent account 

with JPMC. Mr. Bagley alerted HSBC Group CEO Stephen Green to 

the account on September 19,2005, writing that HBME had opened a 

correspondent account with JPMC "through which the pre-screened 

compliant U-turn Iranian Payments can be made.,,89J A later analysis 

conducted by an outside auditor at HBUS' request found that HBME 

8" Id. 

890 ld. at 8878028. With regard to cover payments. Mr. Bagley wrote that failing to consider an 

entire transaction ("both the cover payment instruction and any linked bank to bank message"), 

which if considered together "would lead to a different determination in terms of that V-tum 

exemption," needed to be included in the risk determination. Mr. Bagley also referenced 

heightened concerns about the level of scrutiny from U.S. authorities regarding cover payments 

and OFAC compliance by "US banks offering correspondent banking services." stemming from 

discussions held at a recent Wolfsberg meeting. The Wolfsberg Group consists of major 

international banks that meet regularly and work together to combat money laundering. See 

htlp:llwww.wolfsberg-principles.com/index.html. 

8" 6/2712005 email from HBME David Hodgkinson to HSBC David Bagley and HSBC Richard 

Bennett. "Iranian Payments." HSBC OCC 8878026-027. 

892 Subcommittee interview for Michael Gallagher (6113/2013). 

893 9119/2005 email from HSBC David Bagley to HSBC Stephen Green and HSBC Richard 

Bennett. "GCL050047 "Compliance With Sanctions." HSBC OCC 8874360-361. 
361 


76061.727

187 

sent about 1,800 U-turns to its JPMorgan Chase account in 2005 and 

2006.894 

(g) Establishing Group-wide Policy 

In July 2005, HSBC Group Compliance issued a Group Circular 

Letter (GCL) that for the first time established Group-wide policy on 

processing OF AC sensitive transactions, including U-turns involving 

Iran. GCL 050047 explicitly barred all HSBC affiliates and offices from 

participating in any U.S. dollar transaction, r,ayment, or activity that 

would be prohibited by OF AC regulations.8 5 The GCL also explicitly 

acknowledged the U-turn transactions permitted under OFAC 

regulations and required all compliant U-turn transactions be routed 

through an HBME "Center of Excellence" in Dubai for processing. 

While the policy directed all HSBC affiliates to use only permissible 

Iranian U-turns, the GCL also allowed HSBC affiliates to continue to 

use cover payments when sending them through U.S. accounts for 

processing, which meant the transactions would continue to circumvent 

the OF AC filter and any individualized review by the recipient U.S. 

bank, including HBUS.896 

The 2005 GCL also required local U.S. dollar clearing systems, 

located in Hong Kong and the United Arab Emirates, to implement 

WOLF screening for all U.S. dollar payments to ensure that noncompliant payments were rejected. The GCL stated: "Any dispensation 

from the terms ofthis GCL requires GHQ CMP [Group Compliance) 

concurrence.,,897 Mr. Bagley described the GCL as being "necessary 

and urgent to protect the Group's reputation.,,898 

About a month after the GCL was issued, the HSBC Group head of 

Global Institutional Banking, Mark Smith, issued a managerial letter, in 

August 2005, providing guidance on implementing the new policy.899 

The letter provided a brief summary of Group's relationship with each of 

894 Subcommittee briefing by Cahill Gordon & Reindel LLP (6/20/2012); Deloitte presentation. 

"March 29, 2012." HSBC-PSI-PROD-0197919, at HSBC OCC 8966143. The Deloitte review 

examined HBEU and HBME Iranian transactions sent through U.S. dollar accounts at HBUS and 

other U.S. banks. 

895 See 712812005 GCL 050047, "Compliance with Sanctions," HSBC OCC 3407560-561. 

"6Id. 

89'ld. 

S98 712612005 email from HSBC David Bagley to HSBC Mansour Albosaily and others, "OFAC 

GCL," HSBC OCC 3407550-555. Upon receipt of the GCL, on July 26, 2005, Anne Liddy wrote 

that she would discuss the need for OF AC training with John Allison and Susan Wright at their 

monthly meeting the following day to ensure HBEU and HBME "clearly understand OFAC" and 

"how to identify a true U tum." 7/26/2005 email from HBUS Anne Liddy to HEUS Grace 

Santiago-Darvish and others, "OFAC GCL," HSBC OCC 3407549. 899 8125/2005 managerial letter from HSBC Mark Smith to HBUS Aimee Sentmat, HBME Alan 

Kerr, and others, "GCL050047 - Compliance with OFAC sanctions," HSBC OCC 3407565-569. 
362 


76061.728

188 

the OFAC sanctioned countries.90o With respect to Iran, Mr. Smith 

wrote: "Iran - extensive relationships with a number ofIranian 

institutions. Group Compliance had re-affirmed that OFAC sanctions, 

including the U-turn exception, apply to all transactions.,,901 The 

guidance also clarified that the revised policy applied only to U.S. dollar 

transactions and continued to permit non-U.S. dollar business with 

prohibited countries and persons on the OF AC list. 902 

Also in August 2005, HBUS circulated an email identifYing 

correspondent relationships affected by the new policy.903 The email 

identified the number of open correspondent accounts with financial 

institutions in affected countries, including Iran. It also explained: 

"The revised policy does not represent an automatic exit strategy 

with regards to affected clients. Non-USD business (and for Iran, 

U-turn exempt transactions) may continue to be undertaken .... 

Verbal discussions with affected clients would be preferable. Any 

written correspondent seeking to clarifY the Group's revised policy 

should be cleared with local Compliance.,,904 

Once the policy was in place, HSBC personnel took a closer look 

at some of the Iranian transactions. On August 10,2005, HBME sales 

manager Gary Boon sent John Root an email which included an excerpt 

from an email sent by David Bagley to David Hodgkinson.905 Init,Mr. 

Bagley noted that Mr. Hodgkinson had conveyed that a "significant 

number" of the trade and other transactions involving HBME would be 

U-turn compliant. In response, Mr. Bagley wrote: "I have to say that a 

number of potential payments resulting from trade transactions from 

other Group offices that John Root and I have looked at since the 

issuance of the GCL are not in our view U-turn compliant." 

In September 2005, HBEU senior payments official Rod Moxley 

completed an analysis of U.K. transactions over a ten day period that 

were stopped by the HSBC WOLF filter and involved prohibited 

countries, including Iran.906 He forwarded the results to senior HSBC 

900 8/25/2005 Managerial Letter from Mark Smith, "GCL050047 - Compliance with OFAC 

sanctions," HSBC OCC 3407565-569. 

90J Id. at 568. 

902 8/2512005 managerial letter from HSBC Mark Smith to HBUS Aimee Sentmat, HBME Alan 

Kerr, and others, "GCL050047 - Compliance with OFAC sanctions," HSBC OCC 3407565-569. 

903 See 8/25/2005 email ±i'om HBUS Alan Ketley to multiple HSBC colleagues, "GCL050047-

Compliance with OFAC Sanctions," HSBC OCC 3407565-569. 

004 Id. at 568. 

90S 8/25/2005 email from Gary Boon to John Root, IlSIlC OCC 8876581. See also HSBC OCC 

8876580. 

906 See 912312005 email from HBEU Rod Moxley to HSBC John Allison and HSBC John Root, 

"OFAC sanctions;' HSBC OCC 8877213-214. 
363 


76061.729

189 

Group Compliance officials John Root and John Allison, noting that 

over just ten days, 821 of the transactions had involved Iran.907 

In mid-September 2005, David Bagley provided an update to 

HSBC Group CEO Stephen Green on implementation of the July 2005 

GCL. He explained that the "required specialist 'U-turn' team" had 

been established at HBME in Dubai, and a correspondent account with 

IP Morgan Chase had been opened to process compliant U-turn 

payments. He indicated that HBME was also using HBUS to process Uturns, as was HBEU. Mr. Bagley stated that "a number of Group 

Offices" had opened U.S. dollar accounts with HBME for routing 

Iranian payments, but added that he was not convinced that all HSBC 

affiliates had done so. As a result, he issued a reminder to the Regional 

Compliance Officers to discuss the matter with their business heads and 

requested confirmation by September 23, 2005. 

Despite the issuance ofthe GCL and the existing arrangement with 

HBUS, an undisclosed Iranian-related transaction was discovered, 

leading an HBUS executive to believe the practice was ongoing. In 

November 2005, another bank stopped a transaction after HBUS had 

already processed it, without knowing the transaction had involved Iran. 

HBUS OFAC Compliance officer Elizabeth Protomastro notified Mr. 

Moxley at HBEU that, on November 7, 2005, a $100,000 transaction 

involving Bank Melli had been processed through HBEU's account at 

HBUS without transparent documentation. She wrote: 

"We are bringing this to your attention as this situation indicates 

that cover payment involving Iran are still being processed by PLC 

[referring to HBEUj. It was our understanding that Group 

payments involving Iran would be fully disclosed as to the 

originators and beneficiaries. ,,908 

The payment had not been stopped by the HBUS OFAC filter 

because it did not contain any reference to Iran. She explained that four 

days later HBUS received a SWIFT message from HBEU stating that 

after contacting the remitter, the correct SWIFT should have been 

"MelliRTH94." Since a U.S. bank cannot directly credit an Iranian 

bank, the payment was stopped and rejected by an unrelated bank. 

However, HBUS did not have the funds because Credit Suisse had 

already been paid through another correspondent bank owned by Credit 

Suisse. Ms. Protomastro explained that if the payment did involve Bank 

Melli, it met the U-turn exception. However, she wanted to know why 

907 9/2312005 email from HBEU Rod Moxley to HSBC John Allison and others, "OFAC 

sanctions," IISIlC OCC 8877213-214. 

908 11123/2005 email from HBUS Elizabeth Protomastro to HBEU Rod Moxley and others, 

"Cover payment processed to Credit Suisse re 'Bank Melli' - USD 100,000," HSBC OCC 

8876886-887. 
364 


76061.730

190 

HBEU continued to submit cover payments involving Iran which ran 

afoul of the new HBUS agreement.909 Mr. Moxley responded that the 

transaction had uncovered a transparency issue with their payment 

system, which HBEU would work to address.910 

A later review performed by an outside auditor at HBUS' request 

found that, even after the 2004 HBUS agreement, HSBC affiliates 

continued to send thousands of undisclosed Iranian U-turn transactions 

through their U.S. dollar accounts at HBUS and elsewhere. The 

auditor's review found that, from July 2002 to June 2005, HBEU and 

HBME together sent about 18,000 Iranian U-turn transactions through 

their U.S. dollar accounts of which about 90% did not disclose any 

connection to Iran.911 The review found that, from July 2005 to June 

2006, HBME sent about 3,000 Iranian U-turns through its U.S. dollar 

accounts of which about 95% were undisclosed. The comparable figures 

for HBEU were 1,700 U-turns of which 75% were undisclosed. 912 

(h) Shifting Iranian Transactions from HBUS to 

JPMorgan Chase and Back Again 

In 2006, HBME sent a number ofIranian U-turn transactions 

through its new U.S. dollar account at JPMorgan Chase. When 

JPMorgan Chase decided to exit the business later in the year, HBME 

turned to HBUS to process them. Again, most of the U-turns HBME 

sent 10 HBUS were undisclosed. 

GCL 060011 Barring Cover Payments. On April 6, 2006, less 

than a year after GCL 050047 was issued, HSBC Group issued another 

Group Circular Letter, entitled "U.S. Dollar Payments," essentially 

barring non-transparent cover payments for most OF AC sensitive 

transactions. It followed an enforcement action by the Federal Reserve 

Board on December 19, 2005, charging ABN AMRO Bank with OFAC 

violations for modifYing payment instructions on wire transfers used to 

make OF AC sensitive transactions and using special procedures to 

circumvent compliance systems used to ensure the bank was in 

909 Id. 

910 Id. Mr. Moxley explained that when a customer directly inputs a transaction through an 

approved electronic channel, such as Hexagon, and the transaction achieves straight through 

processing, the cover MT202s are automatically generated by the HBEU payments system by the 

time the transactions hit the HBEU WOLF queue. He explained that the WOLF team was 

reviewing these payments to ensure the U-turn requirements were met, but acknowledged the 

lack of transparency for HBUS and indicated that a paper had already been submitted to the 

Head of Payment Services, Malcolm Eastwood, regarding the matter. H 

911 Deloitte Review ofOFAC transactions, "March 29, 2012," HSBC acc 8966113.150, at 143. 

912 Id. at 143. The figures for 2005 alone, were that HBEU and HBME together sent about 

6,300 Iranian payments through U.S. dollar accounts in the United States, of which more than 

90% were undisclosed. Id. 
365 


76061.731

191 

compliance with U.S. laws. 913 About two weeks after the enforcement 

action, an email exchange among HBEU, HBME, HBUS, and HSBC 

Group Compliance officials revealed: 

"Group compliance is having a closer look at the [2005] GCL, with 

more specific reference to the recently published details ofthe 

ABN AMRO Enforcement Action. They are consider[ing] 

whether it is appropriate, for us to move to use of serial payment 

methodology. Group compliance needs to give opinion to Group 

CEO by next friday.,,914 

That same day, an HBUS Global Payments and Cash Management 

employee sent an email suggesting that commercial U.S. dollar 

payments be executed as "serial payments in which all payment party 

details are advised through HSBC Bank USA, your USD 

correspondent." The HBUS employee also wrote: "This will allow our 

automated transaction monitoring system to appropriately analyze all 

group transactions for suspicious activity that would otherwise be hidden 

with the cover payment method. This system goes beyond simple 

OFAC checking to detect repetitive transaction trends indicative of 

money laundering or terrorist financing. This will assure regulators we 

are doing everything possible to comply with their requirements.,,915 

913 See 1211 9/2005 Federal Reserve Board, Financial Crimes Enforcement Network, Office of 

Foreign Assets Control, New York State Banking Department, and Illinois Department of 

Financial and Professional Regulation press release and Order of assessment of a civil money 

penalty, 

http://www. federalreserve.gov/boarddocs/press/enforcementl2005/20051219/121905attachment2 

.pdf. Five years later, in May 2010, the Justice Department imposed a $500 million file on ABN 

Amra for removing information from ,vire transfers involving prohibited countries, See 

511 0/2010 U.S. Department of Justice press release, http://www.justice.gov/opa/pr/2010/MayIl0-

crm-548.html ("According to court documents, from approximately 1995 and continuing 

through December 2005, certain offices, branches, affiliates and subsidiaries of ABN AMRO 

removed or altered names and references to sanctioned countries from payment messages. ABN 

AMRO implemented procedures and a special manual queue to flag payments involving 

sanctioned countries so that ABN AMRO could amend any problematic text and it added 

instructions to payment manuals on how to process transactions with these countries in order to 

circumvent the laws of the United States. Despite the institution of improved controls by ABN 

and its subsidiaries and affiliates after 2005, a limited number of additional transactions 

involving sanctioned countries occurred from 2006 through 2007."). 

914 116/2006 email from HBEU Michele Cros to HBUS Bob Shetty and other HSBC, HBUS, 

HBEU, and HBME colleagues, "OFAC - Compliance with Sanctions GCL," lISBC OCC 

7688873. 

915 1/6/2006 email from HBUS Richard Boyle to HBEU Michele Cros and HBUS Bob Shetty, 

"OFAC - Compliance with Sanctions GCL," HSBC OCC 7688871-873. The email explained 

that ABN AMRO used their "USD Ilostro [account] with ABN AMRO New York to process 

USD payments originated through 'special procedures' ," and that cover payments were used "as 

a method of masking Iranian and Libyan tinancial institutions as the originators ofUSD wire 

transfers." It also discussed the recent regulatory actions as establishing "a precedent that the U 

S entity of a global group will be held responsible for the transactions in USD that may take 

place any where in the Group," and mentioned other banks where regulatory action had been 

taken, including one that led to a cease and desist order prohibiting cover payments. 
366 


76061.732

192 

The new GCL 060011 required all HSBC Group affiliates to use 

fully transparent "serial" payments when sending U.S. dollar 

transactions through I-lBUS or any other U.S. correspondent, with full 

disclosure of all originators and beneficiaries. 916 Essentially, it required 

all HSBC affiliates to use the same procedure already established at 

HBUS. The GCL made an exception, however, for Iranian U-turns. 

Instead of requiring full disclosure in the transaction documents sent to a 

U.S. bank, the GCL allowed U-turns to "continue to be made as cover 

payments." HSBC affiliates were required, however, to obtain the 

underlying payment details to ensure the transaction was permissible 

under OF AC regulations.9J7 In addition, the GCL required all U-turn 

transactions to continue to be directed through HBME, which had 

established a dedicated team in Dubai for processing Iranian 

transactions. Because the GCL created an exception for Iranian U-turns, 

it did not stop the use of undisclosed transactions being sent by HBME 

and HBEU to HBUS.918 

The policy's effective date was April 30, 2006, and directed HBUS 

to require all third-party banks for which it provided U.S. dollar 

correspondent banking services to utilize the same fully transparent 

payment procedures by December 31, 2006.919 The GCL also stated that 

dispensations from the deadlines could be obtained only from HSBC 

Group Compliance, with the concurrence ofHBUS Compliance. 

Soon after the GCL was announced, several HSBC affiliates 

requested and received dispensation from the April 2006 deadline, the 

most notable of which ended up giving HBEU more than a year to come 

into compliance with the new GCL.920 HBEU obtained an initial 

916 See "GCL 060011 - US Dollar Payments (06/Apr/2006)." HSBC OCC 3407587. 

917 The GCL stated that "serial payments cannot qualify as U-turn payments," but OFAC 

confirmed to the Subcommittee that U-turn payments CQuld, in fact, be processed as serial 

fayments. Subcommittee briefing by OFAC (5/8/2012). 

IS From April through June 2006, about 90% of the Iranian payments sent by HBME to U.S. 

dollar accounts at HBUS and elsewhere did not disclose their connection to Iran. In July 2006, 

an internal HSBC policy was issued that required HBME to send Iranian payments received from 

Group affiliates to HBUS on a serial basis. After July 2006, nearly 100% of the Iranian 

payments scnt by HBME to the U.S. disclosed their connection to Iran. This internal policy did 

not apply to HBEU until late in 2007. From April 2006 through December 2007, about 50% of 

the 700 Iranian payments sent by HBEU to U.S. dollar accounts at HBUS and elsewhere did not 

disclose their connection to Iran, Deloitte Review of OFAC transactions, "March 29, 2012," 

HSBC OCC 8966113-150, at 143. 

919 4/612006 GCL 060011, "US Dollar Payments," HSBC OCC 3407587. 

920 See 4/2512006 - 515/2006 email exchanges anlong HSBC David Bagley, Group offices, and 

HBEU Rod Moxley, "Serial Payments - USD - GCL," HSBC OCC 8877231-239. The emails 

indicate HSBC Asia Pacific requested dispensation for 19 specific countries until August 31, 

2006, to allow time to change its payment systems. HBEU requested a dispensation until the end 

of October 2006 for MPS, citing a reconfiguration of the new GPP system that was expected by 

December 31, 2006. Michael Grainger in GTB PCM, in conjunction with Operations and IT, 

requested a dispensation for HBEU sites through HUB until the end 01'2006 to allow system 

changes to be implemented and piloted. David Bagley forwarded this email correspondence to 

John Allison with a request for consideration. He also noted that the serial methodology would 
367 


76061.733

193 

dispensation until October 31, 2006. On November 21, 2006, HBEU 

MPD head Malcolm Eastwood requested a second extension until after 

installation ofa new GPS system scheduled for July 1,2007. In July, 

due to "the huge volume ofHBEU traffic and the potential resolution of 

the problem by an impending global system change," HBEU received a 

third extension until November 2007.921 Since HBEU was one ofthe 

top processors of payments for HSBC affiliates, its year and a half 

dispensation delayed full implementation of the new GCL until 

November 2007.922 

The month after the new GCL was issued, HBUS Compliance 

official Anne Liddy sent an email to HSBC Group AML head Susan 

Wright indicating she had heard that David Bagley had "issued a 

dispensation" in relation to the new GCL. Ms. Liddy said that while she 

recalled discussions about how HSBC Group was "having a difficult 

time getting our Group offices to switch (mainly due to systems issues)," 

and the need to provide more time for clients to convert, she did not 

recall any dispensations being issued. She asked Ms. Wright for more 

information. Ms. Wright responded: "There have been a limited 

number of dispensations granted re HSBC's own customers - John is the 

keeper of the dispensations and so will provide you with more detail.,,923 

Based on Ms. Liddy's email, it appears that Group Compliance may 

have granted dispensations, which then allowed cover payments to 

continue, without obtaining HBUS Compliance's agreement, as the GCL 

required. 

JPMC Pulls Out. In May 2006, about six months after HBME 

opened an account with JPMorgan Chase to process Iranian U-turns, 

JPMorgan Chase decided to stop processing them. On May 25, 2006, a 

JPMC representative informed HBME official Gary Boon that they 

would continue to process HBME's dollar payment transactions, with 

the exception of Iranian transactions that reference details in the 

payment narrative.924 On May 26, 2006, Mr. Bagley wrote to HSBC 

Group CEO Stephen Green that "JMPC have indicated that they are not 

willing to process these payments, I assume for reputational rather than 

regulatory reasons (given that they are within the U-turn exemption)." 

put HBEU at a competitive disadvantage with regard to fees charged and the volume of customer 

complaints. Id. 

921 7/4/2007 email from HBEU Rod Moxley to HBEU Tony Werhy and Andy Newman. 

"[redacted] HSBC arrangements for payment of the consideration." HSBC acc 8876901. 

922 A Deloitte review later determined that HBEU continued to send U-turns without any 

reference to Iran through the end of 2007. reflective of the dispensation granted to HBEU until 

November 2007. Deloitte Review ofaFAC transactions. "March 29. 2012." HSBC acc 

8966113, at 8966143. See also 1112112006 memorandum from HBEU Malcolm Eastwood to 

HSBC David Bagley and others. "GCL 06001 1 Dispensation," HSBC acc 8876896-899. 

923 See 7116/2007 -712512007 email exchanges among HBUS Anne Liddy. HSBC Susan Wright, 

and HSBC John Allison, "Conversion of Clients to Serial Payment Method," HSBC OCC 

8875256. 

02' 5/25/2006 email from JPMC Ali Moosa to HBME Gary Boon and others, "US Dollar 

Transactional Activities via DDA at JPM," HSBC acc 3243782-787, at 786. 
368 


76061.734

194 

He continued that HBME would have to "pass these payments through 

HBUS." He noted that they had previously received concurrence from 

HBUS to process the transactions, confirmed by HBUS CEO Martin 

Glynn.925 That same day Mr. Bagley alerted HBUS AML head Teresa 

Pesce that "HBME have no choice but to now pass" U-turn exempt 

payments through HBUS.926 

Iranian Transactions Shift to HBUS. HBUS was already 

processing Iranian U-turn transactions for HBEU, but HBME's decision 

to route its Iranian U-turns through HBUS as well represented an 

increase in the volume of transactions that l-IBUS would have to identifY 

and review. 

On May 26, 2006, the same day he learned HBME would begin 

routing U-turns through its U.S. dollar account at HBUS, HBUS AML 

officer Alan Ketley emailed HBME's Alan Kerr to clarifY how HBUS 

would process the new volume ofpayments.927 On May 30, 2006, Mr. 

Ketley wrote to HBME Gary Boon, copying HBUS AML head Teresa 

Pesce: "['m unclear why you would be seeking to have HBUS handle 

this activity at no notice and am uncomfortable making arrangements for 

such sensitive activity in this fashion." He requested examples of 

payment orders for routing through HBUS and asked for confirmation 

that HBME would not begin routing U-turns through HBUS until they 

had the "appropriate controls in place." He was also concerned from a 

resource perspective, and stated that HBME intended to pass as many Uturns in a day as HBUS would normally handle in a busy month.928 That 

same day, in response to his email to Mr. Boon, Ms. Pesce wrote: "Alan 

- we have no choice. JPMC won't take them.,,929 

HBUS' effort to ensure it had adequate staffing to review OFACrelated alerts from the HBME U-turns was made more difficult by 

varying information from HBME on the number of transactions to 

expect. On June 22, 2006, HBUS Compliance officials Anne Liddy and 

Alan Ketley reacted to an email exchange involving HBME's Gary 

Boon discussing U-turn payment volumes being processed through 

HBUS as between 10 and 25 per day. Ms. Liddy wrote: 

915 512612006 email from HSBC David Bagley to HSBC Stephen Green, "US Dollar 

Transactional Activities via DDA at lPM," HSBC acc 3243782-787, at 784. 

926512612006 email from HSBC David Bagley to HBUS Teresa Pesce and others, HSBC acc 3243782-783. 

927 512612006 email from HBUS Alan Ketley to HBME Alan Kerr and HBME Gary Boon, "UTurns," aCC-PSI-OOI79654 

928 513012006 email from HBUS Alan Ketley to HBME Gary Boon and HBME Alan Kerr, "UTurns," aCC-PSI-00179654. 

929 513012006 email from HBUS Teresa Pesce to HBUS Alan Ketley, "U-Turns;' HSBC acc 3243965. 
369 


76061.735

195 

"[BJefore it was about 40. Yesterday 10. Now 25ish. BTW I am 

going to set up a m[eeJt[inJg with Terry and Denise (as our 

financier) to discuss resourcing for OFAC. It is out ofhand.'.93Q 

In July 2006, HBME made a policy decision to go beyond the 

requirements ofthe Group-wide 2006 GCL and require all of its Iranian 

transactions to provide fully transparent payment information to its U.S. 

correspondents.93 ! 

In addition to the HBME transactions moving to HBUS, one other 

notable transaction involving Iran in 2006, pertained to 32,000 ounces of 

gold bullion valued at $20 million. In May 2006, the HBUS London 

branch cleared the sale ofthe gold bullion between two foreign banks 

for the ultimate benefit of Bank Markazi, Iran's Central Bank. HSBC 

indicated that it had been aware that Bank Markazi was the beneficiary, 

but had viewed the transaction as a permissible U-tum. 932 OFAC later 

told HBUS that it considered the transaction to be a "non-egregious" 

violation oflaw, and provided HBUS with an opportunity to explain 

why it should not be penalized for it; HBUS is still awaiting a final 

determination as to whether it will be penalized.933 

(i) Getting Out 

In October 2006, HSBC Group reversed course and decided to stop 

handling Iranian U-turns. In 2007, it went further and exited all business 

with Iran, subject to winding down its existing obligations. 

Increasing Risks. In October 2006, Mr. Bagley provided a 

warning to his superiors that HSBC might want to reconsider processing 

U-turns. In an email onOctober9.2006.Mr. Bagley informed Stephen 

Green, who had become HSBC Group Chairman, Michael Geoghegan, 

who had become HSBC Group CEO, and David Hodgkinson, who used 

to head HBME but had become HSBC Group COO, that the risks 

associated with U-turns had increased due to "actions taken by the US 

government in withdrawing the U-Turn exemption from Bank 

Saderat.,,934 The prior month, in September 2006, HBUS had stopped an 

undisclosed transaction that involved Bank Saderat in Iran, which was 

added to the OF AC SDN list that same month.935 

9306/2212006 email from HBUS Anne Liddy to HBUS Alan Ketley. "You Tum Payments," 

HSBC OCC 3250730-732. 

9Jl Subcommittee briefing by Cahill Gordon & Reindel LLP (6/20/2012) 

9321/8/2010 Compliance Certificate from HSBC Christopher O'Donnell to HSBC David Bagley, 

OCC-PSI-00783419. 

933 See draft HSBC response to pre-penalty notice, OCC-PSI-00299323. 

934 10/9/2006 email from HSBC David Bagley to HSBC Stephen Green, HSBC Michael 

Geoghegan, and HBME David Hodgkinson, "Iran - U-Turn Payments." HSBC OCC 8874731-

732. 

935 See 9/1112006 email from HBUS Anne Liddy to HBUS Teresa Pesce, "HBME Wire payment 

USD 586.00 (Iran-Bank Saderat) - Reject & Report to OFAC," HSBC OCC 4844209 and 
370 


76061.736

196 

Mr. Bagley wrote: 

"During my recent visit to the US to attend a Wolfsberg meeting I 

was discretely advised of the following by a reliable source: 

[U.S. Treasury] Under Secretary [Stuart] Levey ... and the more 

hawkish elements within the Bush administration were in favour of 

withdrawing the U-Turn exemption from all Iranian banks. This 

on the basis that, whilst having direct evidence against Bank 

Saderat particularly in relation to the alleged funding ofHezbollah, 

they suspected all major Iranian State owned banks of involvement 

in terrorist funding and WMD [weapons of mass destruction] 

procurement. ... 

Certain US Government bodies have however made it known to a 

number of US banks that, as WMD related transactions are 

impossible to detect they would run an unacceptable reputational 

and regulatory risk were they to continue to process U-Turn 

transactions. The essence of the statement appears to be that as 

WMD related transactions would be heavily disguised (where even 

as a trade transaction documents would in effect be falsified) there 

is no safe way for a US bank to be involved in even a U-turn 

exempt transaction however stringent the scrutiny or monitoring. 

The clear implication made was that being found to be involved in 

a WMD related transaction, even if wholly innocently, would 

result in significant and severe action being taken against such a 

bank. 

There were very strong indications that a number of US banks 

were therefore considering withdrawing from all U-turn related 

activity. Ifthis happens those continuing in this market are likely 

to have an increased concentration. 

Although I am satisfied that we have put appropriate controls in 

place to manage the U-Turn transactions, I am concerned that there 

are now increased risks in continuing to be involved in U-Turn 

USD payments which would justifY our reconsidering our 

approach. I do recognize that the significance that tightening our 

policy to withdraw from U-Turn permitted transactions would have 

in terms of our Middle Eastern and Iranian business.,,936 

12/14/2006 email from Elizabeth Protomastro to John Allison and others. "OFAC - Wire 

payments blocked from HSBC offshore entities - USD 32.000 (re SDGT) and USD 

2.538.939.33 (re Sudan)," HSBC OCC 3407608·609. 

9)6 10/9/2006 email from HSBC David Bagley to HSBC Stephen Green, HSBC Michael 

Geoghegan, and HBME David Hodgkinson. "Iran - U-Turn Payments," HSBC OCC 8874731-

732, at 732. 
371 


76061.737

197 

GeL 060041 Ending U-turns. Shortly after Mr. Bagley's email, 

HSBC decided to stop processing U-turns entirely. On October 25, 

2006, HSBC Group Compliance issued Group Circular Letter 060041 

which directed all Group offices to immediately stop processing U-turn 

payments.937 An exception was made for permissible U-turn payments 

in connection with legally binding contractual commitments. HSBC 

decided to stop utilizing the U-turn exception two years before OF AC 

actually revoked the exception in November 2008. 

Despite this decision, HSBC maintained a number of existing 

Iranian relationships.938 On March 13, 2007, as a result of a "letter 

recently filed with the SEC "relating to the extent of our exposure to 

business in the so-called named countries (Sudan, Syria, and Iran),,,939 

HSBC Group Compliance head David Bagley updated HSBC Group 

CEO Michael Geoghegan on HSBC's relationships with Iranian banks. 

He wrote: 

"The existing levels of business, much of which is historic and 

subject to ongoing commitments, has been reviewed by CMP 

[Compliance] as against the requirements of Group policy, 

particularly where transactions are denominated in USD. Some of 

this activity related to pre-existing committed obligations which 

are binding on an ongoing basis. Group policy recognizes that we 

will have to allow such arrangements to run off. Relevant business 

colleagues are however aware of the Group's stance in terms of 

having no appetite for new or extended business activity involving 

Iranian counterparties. Where transactions appear to potentially 

conflict with Group policy those transactions are referred to GHQ 

CMP for determination and sign_off.,,94o 

The subject ofIran arose again a few months later, in June 2007, 

when Mr. Bagley informed HSBC Group CEO Michael Geoghegan that 

he had a private meeting with U.S. Treasury Under Secretary for 

Counter Terrorist Financing and Sanctions, Stuart Levey, during a recent 

Wolfsberg Group conference. Mr. Bagley indicated that Mr. Levey had 

questioned him about a HSBC client who, according to Mr. Levey, "had 

clearly been identified as having acted as a conduit for Iranian fundin~ 

of' an entity whose name was redacted from the document by HSBC. 41 

Mr. Bagley wrote: "Levey essentially threatened that ifHSBC did not 

937 1012512006 GCL 060041, "US aFAC Sanctions against Iran ~ U-Turn Exemption," HSBC 

acc 3407606. 

938 See 21612006 Project and Export Finance presentation, "Iranian portfolio," HSBC acc 

8876050-057. This presentation indicated that Project and Export Finance had not taken on any 

new Iranian business since 2005, 

939 311312007 email from HSBC David Bagley to HSBC Michael Geoghegan and others, "Iran," 

HSBC acc 8878037-038. 

"Old. 

941 See 61812007 email exchanges among HSBC David Bagley, HSBC Michael Geoghegan and 

others, "Iran," HSBC acc 8878214-216, at 215. 
372 


76061.738

198 

withdraw from relationships with [redacted] we may well make 

ourselves a target for action in the US." Mr. Geoghegan responded: 

"This is not clear to me because some time ago I said to close this 

relationship other than for previously contractually committed export 

finance commitments.,,942 Mr. Bagley replied that the bank had only 

"limited relationships with [redacted] and in fact overall with Iranian 

banks." 

Mr. Bagley also wrote that he had discussed the matter with David 

Hodgkinson, and they agreed that HSBC "should immediately withdraw 

from [redacted] and also withdraw from all Iranian bank relationships in 

a coordinated manner." He noted that the bank would have to honor 

"legally binding commitments" such as Project and Export Finance 

facilities.943 These communications indicate that HSBC officials had 

previously known about problems with one particular Iranian client but 

that it did not end the relationship until after a warning from the U.S. 

Government. 

GeL 070049 on Exiting Iran. On September 24,2007, HSBC 

Group Compliance issued another Group Circular Letter, this one 

announcing the bank's decision to exit Iran. GCL 070049 directed all 

account relationships with Iranian banks to be "closed as soon as 

possible" with sufficient notice as required by local law and to "allow an 

orderly run down of activity" and the "run-off of any outstanding 

exposures." The GCL allowed ongoing payments involving 

existing facilities and transactions "where there are legally binding 

commitments," such as Project and Export Finance facilities, to continue 

to be made as serial payments.944 The deadline for closure of all Iranian 

accounts was November 30, 2007. 

2008 and 2009 Iranian Transactions. After the GCLs terminating 

most business with Iran, internal bank documents show that hundreds of 

Iranian transactions per month continued to surface at HBUS during 

2008 and 2009. These transactions were not, however, the type of 

undisclosed U-turn transactions that HSBC affiliates had been routinely 

sending through HBUS accounts prior to HSBC's decision to exit Iran, 

but represented other types of transactions. 

In 2008 and 2009, for example, HBUS' London Banknotes office 

conducted a series of apparently prohibited transactions benefitting the 

Iranian Embassy in London. From July 22, 2008 to February 12,2009, 

in more than 30 transactions, HBUS sold over €455,000 to HBEU 

which, in tum, sold them to the Embassy oflran in the United 

942 Id. at 215. 

943 Id. at 214. 

944 9/24/2007 GCL 070049, "Sanctions Against Iran," OCC-PSI-00141530-531 and HSBC acc 

8876013-015. 
373 


76061.739

199 

Kingdom. 945 According to HBUS, "the funds were used to meet salary 

obligations" of the Iranian Embassy.946 In addition, from December 5, 

2008 to February 5, 2009, HBEU purchased over $2,500 from the 

Embassy ofIran and resold the U.S. dollars to HBUS.947 In 2009, after 

HBUS discovered that the London Banknotes office was engaging in 

currency transactions with the Iranian Embass~, it reported the 

transactions to OFAC and ended the activity.9 8 

Other transactions involving Iran processed through HBUS' 

correspondent accounts from 2008 to 2009, included a March 2009 wire 

transfer for $300,000, which was mistakenly processed because a HBUS 

compliance officer did not realize a transaction reference to "Persia" 

implied a connection to Iran; and two wire transfers totaling over 

$55,000 which involved a vessel owned by "NITC" which, until it was 

updated, HBUS' OFAC filter did not recognize as the National Iranian 

Tanker Company.949 

(j) Looking Back 

According to an ongoing outside audit requested by HSBC, from 

2001 to 2007, HBEU and HBME sent through their U.S. dollar accounts 

at HBUS and elsewhere nearly 25,000 OFAC sensitive transactions 

involving Iran totaling $19.4 billion.950 While some of those 

transactions were fully disclosed, most were not. According to the 

review conducted by Deloitte, from April 2002 to December 2007, more 

than 85% of those payments were undisclosed.951 

Despite HBUS pleas for transparency and a 2004 internal 

agreement to use fully transparent procedures, HSBC affiliates HBEU 

and HBME often took action, including by deleting references to Iran or 

using cover payments, to prevent the Iranian transactions sent through 

their U.S. dollar correspondent accounts at HBUS from being caught in 

945 3/20/2009 letter from HBUS Elizabeth Protomastro to OFAC, HSBC OCC 0630892. See 

also 1125/2012 OCC Supervisory Letter HSBC-2012-03, "OFAC Compliance Program," OCCPSI-01768561, at Attachment (describing the transactions as involving over $606,000 in U,S, 

dollars), [Sealed Exhibit.) 946 Id, 

947 ld, 

948 See 3/24/2009 "Compliance Report for 1 Q09-HUSI Businesses," sent by HBUS Lesley 

Midzain, to HNAH Janet Burak, HSBC David Bagley, and HBUS Paul Lawrence, HSBC OCC 

3406981-3406996 at 982; 1125/2012 OCC Supervisory Letter HSBC-2012-03, "OFAC 

Compliance Program," OCC-PSI-01768561-566, at Attachment. [Sealed Exhibit.), 

949 See 1125/2012 OCC Supervisory Letter HSBC-20 12-03, "OFAC Compliance Program," 

OCC-PSI-01768561-566, at Attachment. [Sealed Exhibit.] 

950 See Deloitte Review of OF AC transactions, "Results of the Transactions Review - UK 

Gateway, March 29, 2012," HSBC·PSI-PROD-0197919, at 930, 

951 Subcommittee briefing by Cahill Gordon & Reindel LLP (6/20/2012); Delaine presentation, 

"March 29, 2012;' at HSBC OCC 8966113, These payments were sent to the U,S, bank as 

cover payments, serial payments, or payments that were cancelled and then Te-submitted by 

either an HSI3C affiliate or the client without disclosing the connection to Iran in the payment 

message, Id, at 8966118 and 8966143, 
374 


76061.740

200 

the OFAC filter. Despite the fact that they viewed most ofthe 

transactions as permissible under U.S. law, concealing their Iranian 

origins helped avoid delays caused when HBUS' OFAC filter stopped 

the transactions for individualized review. HBME, in particular, 

requested that HBUS allow the use of cover payments to conceal Iranian 

transactions and circumvent the OF AC filter. When HBUS insisted on 

fully transparent transactions, the HSBC affiliates sent undisclosed 

transactions through their HBUS accounts anyway. HSBC Group 

leadership, including the heads of Compliance and AML, were aware in 

varying degrees of what the affiliates were doing, but for years, took no 

steps to insure HBUS was fully informed about the risks it was incurring 

or to stop the conduct that even some within the bank viewed as 

deceptive. The HSBC Group Compliance head took no decisive action 

even after noting that the practices "may constitute a breach" of U.S. 

sanctions. At HBUS, senior executives in the Compliance and payments 

areas knew about the actions being taken by HSBC affiliates to send 

concealed Iranian transactions through their U.S. dollar correspondent 

accounts, but were unable or unwilling to obtain information on the full 

scope of the problem, bring the issue to a head, and demand its 

resolution at the highest levels ofthe bank to ensure all U-turns were 

reviewed for compliance with the law. 

(2) Transactions Involving Other Countries 

Iranian transactions were not the only potentially prohibited 

transactions sent through HBUS. Transactions involving Burma, Cuba, 

North Korea, and Sudan, as well as persons named on the SDN list, were 

also sent through HBUS accounts, although to a much lesser extent than 

those related to Iran. HSBC affiliates were one major source ofthe 

transactions, due to poor compliance with HSBC Group policy barring 

U.S. dollar transactions with prohibited countries or persons, and 

requiring transparent transactions, but the majority ofthese transactions 

appear to have been sent through HBUS by unrelated financial 

institutions. The transactions sent by HSBC affiliates also do not appear 

to be the product of the same kind of systematic effort to avoid the 

OFAC filter as was the case with the Iranian U-turns. Some of the 

transactions sent through HBUS had references to a prohibited person or 

country deleted or used cover payments, and passed undetected through 

thc OFAC filter. Others openly referenced a prohibited country or 

person, but escaped detection by HBUS' OFAC filter or HSBC's WOLF 

filter due to poor programming. Still others were caught by a filter, but 

then released by HBUS personnel, apparently through human error. An 

ongoing review by an outside auditor, examining HBUS transactions 

over a seven-year period from 2001 to 2007, has so far identified about 
375 


76061.741

201 

2,500 potentially prohibited transactions involving countries other than 

Iran, involving assets totaling about $322 million.952 

(a) 2005 and 2006 GeLs 

The documents examined by the Subcommittee show that HBUS' 

OF AC filter blocked a transaction involving a prohibited country other 

than Iran as early as 2002.953 Internal bank documents indicate, 

however, that transactions involving prohibited persons or countries 

other than Iran did not receive the same level of attention as the Iranian 

transactions, until issuance of the July 28,2005 Group Circular Letter 

050047 which barred HSBC affiliates from executing U.S. dollar 

transactions involving any person or country prohibited by OFAC.954 

Shortly after the GCL was issued, the HSBC Group head of Global 

Institutional Banking, Mark Smith, issued a managerial letter, in August 

2005, providing guidance on implementing the new policy.955 His letter 

summarized the Group's relationships with Burma, Cuba, Iran, North 

Korea, Sudan, and Zimbabwe. He explained that most ofHSBC 

Group's business with Sudan and Cuba was conducted in U.S. dollars 

and "discussions already initiated with the affected banks will dictate the 

extent of our ongoing relationship." The guidance also clarified that the 

revised policy applied only to U.S. dollar transactions.956 

In addition, the managerial letter identified correspondent 

relationships affected by the new policy.957 It provided the number of 

open correspondent accounts with financial institutions in Cuba, Burma, 

Iran, North Korea, and Sudan. It also explained: 

"The revised policy does not represent an automatic exit strategy 

with regards to affected clients. Non-USD business (and for Iran, 

U-turn exempt transactions) may continue to be undertaken. 

However, for a number of reasons ego operational simplicity, 

where the remaining non-USD business is uneconomic or where 

952 Deloitte presentation, "Results of the Transactions Review - UK Gateway, March 29, 2012," 

HSBC·PS]-PROD-0197919-989, at 930. Since the Deloitle review has yet to examine an 

additional set of U.S. dollar transactions and does not include any transactions during the period 

2008 to 201 0, its figures represent a conservative analysis of the potentially prohibited 

transactions transmitted through BBUS. 

953 On May 21, 2002, a $3 million payment from HBEU was blocked by HBUS' OFAC filter 

due to a reference in the payment details to Cuba. See 4/2412006 email from HBUS Charles 

Delbusto to HBUS Michael Gallagher, "ING Writeup," HSBC OCC 1933599-601. See also 

11114/2002 memorandum from HBEU Malcolm Eastwood to HBUS Denise Reilly and HBEU 

Geoff Armstrong, "Compliance - OF AC Issues in General and Specific to Iran," HSBC OCC 

7688824. 

9547/2812005 GeL 050047, "Compliance with Sanctions," HSBC OCC 3407560-561. 

955 8/25/2005 managerial letter from HSBC Mark Smith to HBllS Aimec Sentmat, HBME Alan 

Kerr, and others, "GCL050047 - Compliance with OFAC sanctions," HSBC OCC 3407565-569. 

956 Id at 566. 

957 Id. 
376 


76061.742

202 

the client concludes they will have to conduct their business with 

an alternative provider, the ultimate outcome may be the closure of 

certain relationships. Verbal discussions with affected clients 

would be preferable. Any written correspondent seeking to clarifY 

the Group's revised policy should be cleared with local 

Compliance.,,95B 

The letter noted that "any dispensation from the terms of the GCL 

require[d] Group Compliance concurrence.,,959 

In September 2005, senior HBEU payments official Rod Moxley 

completed an analysis of U.K. transactions over a 10-day period that 

were st<;gped by HSBC's WOLF filter and involved Burma, Cuba, or 

Sudan.9 He forwarded the results to senior HSBC Group Compliance 

officials John Root and John Allison, noting that there were "a 

considerable number ofUSD denominated transactions" for Sudan, and 

"also to a lesser extent" Cuba and Burma. He also noted that prior to the 

effective date of the new GCL, these payments would have been stopped 

by the WOLF filter but then allowed to proceed, "providing they did not 

infringe on UN/EU sanctions or terrorist parameters," since HBEU was 

"not affected directly by OFAC sanctions," but the new GCL would 

require these payments to be blocked due to OF AC prohibitions. 

Mr. Moxley also wrote: 

"Since the issuance of the GCL, it has been made clear that US 

interests are of paramount importance and we should do nothing, 

when processing payment transactions, which would leave HBUS 

in a vulnerable position. The issues surrounding Iran have 

overshadowed other OFAC payments recently, however, I can 

advise that we have not so far physically returned any USD 

payments involving Sudan, Cuba or Burma. I feel we now need to 

look far more closely at these payments to ensure compliance with 

the GCL.,,96! 

Mr. Moxley asked about two alternative responses to transactions 

stopped by the WOLF filter and barred by the new GCL. One was to 

continue processing the transactions but ensure that the payment was 

routed in such a way "that they are not frozen in the US." He explained: 

"This will involve intelligent usage of the routing system but may 

perpetuate similar scenarios to those encountered with Iran (customer 

instructions saying Do not mention Sudan or routing which does not 

958 Id. at 568. 

959Id. 

960 See 9/23/2005 email from HBEU Rod Moxley to HSBC John Allison and HSBC John Root, 

"OFAC sanctions," HSBC OCC 8877213-214. 961 Id. 
377 


76061.743

203 

make it apparent that these are Sudanese payments)." This alternative 

seems to suggest that HSBC would engage in Iran-style transactions in 

which transaction details are stripped out to avoid triggering the OF AC 

or WOLF filters. His second alternative was to "strictly" apply the GCL 

"and return the payments unprocessed." He wrote that his "instinct" was 

to "return all such USD payments ... so that our US colleagues' position 

is not compromised," but wanted confirmation from HSBC Group 

Compliance before taking that action.962 The documents reviewed by 

the Subcommittee do not indicate what response he received. When 

asked about his email.Mr. Moxley told the Subcommittee that he could 

not recall how his inquiry was resolved. 963 

About a year later, on April 6, 2006, HSBC Group issued another 

Group Circular Letter, GCL 060011, which required all HSBC affiliates, 

when sending U.S. dollar transactions through a correspondent account 

at HBUS or another U.S. financial institution to use so-called "serial 

payments" specifying the transaction's chain of originators and 

beneficiaries.964 This policy change was intended to stop HSBC 

affiliates from using cover payments, which provide less information for 

banks when processing payments and which can mask potentially 

prohibited transactions sent through HBUS or other U.S. banks. Its 

effective date for HSBC affiliates was April 30, 2006; HBUS was 

required to impose the policy on all third-party banks for which it 

provided U.S. dollar correspondent banking services by December 31, 

2006.965 At the same time, HSBC Group Compliance granted a yearlong extension to HBEU, giving it until November 2007, before it was 

required to use serial payment instructions.966 

Internal bank documents indicate that OF AC sensitive transactions 

involving countries other than Iran took place both before and after the 

2005 and 2006 GCLs. 

(b) Transactions Involving Cuba 

Internal bank documents indicate that, from at least 2002 through 

2007, HBUS processed potentially prohibited U.S. dollar transactions 

involving Cuba. HSBC affiliates in Latin America, in particular, had 

many Cuban clients and sought to execute transactions on their behalf in 

90' Id. at 214. 

963 Subcommittee Interview of Rod Moxley (6/7/2012). 

964 4/6/2006 GCL 060011, "US Dollar Payments," HSBC OCC 3407587. 

965Id. 

966 See 4/25/2006 - 5/512006 email exchanges among HSBC David Bagley, Group offices, and 

HBEU Rod Moxley, "Serial Payments - USD - GCL," HSBC OCC 8877231-239. 

Subcommittee briefing by OFAC (5/8/2012). 
378 


76061.744

204 

U.S. dollars, despite the longstanding, comprehensive U.S. sanctions 

program and the OF AC filter blocking such transactions.967 

In August 2005, a month after HSBC Group issued its new GCL 

policy barring HSBC affiliates from engaging in U.S. dollar transactions 

in violation of OF AC prohibitions, HBUS circulated an email 

identifying correspondent relationships that would be affected.968 The 

email stated: "An overriding observation is that the revised policy will 

most significantly impact the Cuban and Sudan correspondent bank 

relationships." It also observed: "For Sudan and Cuba, most of our 

business is conducted in USD and the discussions already initiated with 

the affected banks will dictate the extent of our ongoing 

relationships.,,969 

In September 2005, HSBC Group Compliance head David Bagley 

told HSBC Group CEO Stephen Green that they had closed "a number 

of USD correspondent relationships with Cuban ... banks.,,970 On 

October 3, 2005, Mr. Bagley sent an email to Matthew King, then head 

ofHSBC Group Audit, that Mr. Green was "particularly concerned" 

about ensuring the 2005 GCL was "properly and fully implemented 

across the Group.,,971 Mr. Bagley asked Mr. King to use HSBC's 

internal audits to help gauge compliance with the new GCL. Mr. King 

relayed the request to various HSBC auditors and, in response, learned 

from HSBC Mexico (HBMX) Compliance that the OF AC list had not 

been fully integrated into HBMX's monitoring system and would not be 

for another six months, until April 2006.972 HBMX reported that, 

pending the systems integration, it had set up "manual controls" in 

several divisions to implement the new GCL, but "no automated means 

exists to ensure that these controls are properly being carried out.,,97J 

HBMX explained further that its "greatest exposure" was "the volume of 

business historically carried out by HBMX customers with Cuba in US 

dollars.,,974 

Mr. King responded that the HBMX transactions raised two sets of 

concerns, one with respect to the U.S. dollar transactions involving Cuba 

being run through HBMX's correspondent account at HBUS, and the 

967 See OFAC "Sanctions Programs and Country Infonnation," Cuba sanctions (last updated 

5/11/2012), http://www. treasury.gov/resource-centerlsanctionslPrograms/pages/cuba.aspx. 

968 See 8/25/2005 email from HBUS Alan Ketley to multiple HSBC colleagues, "GCL050047-

Compliance with aF AC Sanctions," HSBC acc 3407565-569. 

96° ld. at 3407568. 

970911912005 email from HSBC David Bagley to HSBC Stephen Green and HSBC Richard 

Bennett, "GCL050047 "Compliance With Sanctions," HSBC acc 8874360-362. 

971 10/3/2005 email from HSBC David Bagley to HSBC Matthew King, "GCL 050047-

Compliance with Sanctions," HSBC acc 8874359-360. 

912 ]0114/2005 email from HBMX Graham Thomson to HSBC Matthew King, "GCL 050047-

Compliance with Sanctions," HSBC acc 8874358-359. 

913 Id. 

974 Id. 
379 


76061.745

205 

second with respect to non-U.S. dollar transactions being "transmitted 

through the HBUS TP gateway," referring to a U.S.-based server that 

handled transfers from Mexico and South America.975 Since the United 

States prohibited transactions involving Cuba, both types of transactions 

raised questions about whether they ran afoul of the OFAC list and the 

2005 GCL. Mr. King responded: 

"I note HBMX continues to process USD payments involving 

Cuba. It is very important that is stopped immediately as the 

regulators are getting very tough and the cost to the Group could 

be considerable if a breach occurs, both in terms of the fine and the 

rectification work which is likely to be a pre-requisite to any 

settlement. 

With regard to non-USD payments as described above, GHQ CMP 

[Group Headquarters Compliance] are urging HBUS to screen out 

these transactions to avoid any risk, and HBMX would have to put 

measures in place to p[re]-empt customer dismay.,,976 

HSBC affiliates from outside of Latin America also occasionally 

sent potentially prohibited transactions involving Cuba through their 

HBUS accounts. For example, in December 2006, a payment for 

$15,350 that had been sent by an HSBC affiliate in the Asia-Pacific 

region was blocked by HBUS, because the transaction documents 

referred to "Air Tickets Moscow Havana Moscow 3Pax.,,977 

In 2007, an internal HSBC document entitled, "Information 

Requested in Connection With: (North Korea, Cuba, and Myanmar)," 

revealed that, as of May 2007, HSBC affiliates in Mexico and Latin 

America were still providing U.S. dollar accounts to Cuban clients, in 

apparent violation of HSBC Group GCL policy and OF AC 

regulations.978 The document indicated that HBMX had 23 Cuban 

customers with U.S. dollar accounts containing assets in excess of 

$348,000, and 61 Cuban customers holding both U.S. dollar and 

Mexican peso accounts with assets totaling more than $966,000.979 In 

addition, the report disclosed that HSBC affiliates in Colombia, Costa 

Rica, El Salvador, Honduras, and Panama were also providing U.S. 

dollar accounts to Cuban nationals or the Cuban Embassy. The 

document also indicated that arrangements had been made to "cancel all 

975 10/17/2005 email from HSBC Matthew King to HBMX Graham Thomson, HSBC David 

Bagley, and others, "GCL 050047 "Compliance With Sanctions," HSBC OCC 8874357-358. 976 Id. 

977 12117/2006 email from HBAP Donna Chan to HBUS Alan Ketley and others,'TT 

NSC770937 Dated 13Oec06 For USDl5,350.21," HSBC OCC 3287261-262. 

978 5/18/2007 HSBC document, "Information Reguested in Connection With: (North Korea, 

Cuba, and Myanmar)," HSBC OCC 8876088-095, at 8876093-095. 

979 Id. In addition. 1.284 Cuban clients had nearly 2250 HBMX accounts holding solely 

Mexican pesos, with assets exceeding a total 0[$8.9 million. Id. at 8876093. 
380 


76061.746

206 

business relationships with" Cuban clients, in relation to U.S. dollar 

accounts or commercial relationships for the entire region.980 These 

steps were being taken almost two years after the July 2005 GCL had 

prohibited HSBC affiliates from executing U.S. dollar transactions 

involving OF AC sensitive persons. 

(c) Transactions Involving Sudan 

A second set ofOFAC sensitive transactions involved Sudan, a 

country which is also subject to a comprehensive sanction program in 

the United States.98I Internal bank documents indicate that, from at least 

2005 to 2008, HBUS processed a considerable volume of U.S. dollar 

transactions involving Sudan that, once the new GCL took effect, should 

have decreased. The reasons they continued include a wide range of 

factors, from inadequate bank staffing reviewing OF AC transactions, to 

deceptive wire transfer documentation, to ongoing actions by HSBC 

affiliates to send these potentially prohibited transactions through 

HBUS. 

In August 2005, a month after HSBC Group issued the GCL policy 

barring HSBC affiliates from engaging in U.S. dollar transactions in 

violation ofOFAC prohibitions, HSBC Group head of Global 

Institutional Banking, Mark Smith, circulated a managerial letter 

identifying correspondent relationships that would be affected. 982 The 

letter stated: "An overriding observation is that the revised policy will 

most significantly impact the Cuban and Sudan correspondent bank 

relationships." It also observed: "For Sudan and Cuba, most of our 

business is conducted in USD and the discussions already initiated with 

the affected banks will dictate the extent of our ongoing 

relationships.,,983 In September 2005, a senior HBEU payments official 

Rod Moxley completed an analysis of U.K. transactions over a 10-day 

period that were stopped by the WOLF filter and noted "a considerable 

number ofUSD denominated transactions" for Sudan.984 

A year after the GCL took effect, however, one affiliate attempted 

to clear a Sudan-related transaction through HBUS in violation of 

company policy. On December 6, 2006, HBUS blocked a $2.5 million 

payment originating from an HSBC branch in Johannesburg because the 

980 5118/2007 HSI3C report. "Infonnation Requested in Connection With: (North Korea, Cuba, 

and Myanmar)," HSBC OCC 8876088·095 at 8876093-095. 

981 See OF AC "Sanctions Programs and Country Infonnation," Sudan sanctions (last updated 

2/112012), http://www.treasury. gov/resource-centerlsanctions/Programs/pages/sudan.aspx. 

982 8/2512005 managerial letter from HSI3C Mark Smith to HBUS Aimee Sentmat, HBME Alan 

Kerr, and others, "GCL050047 - Compliance with OFAC sanctions," HSBC OCC 3407565-569; 

8/2512005 email from HBUS Alan Ketley to multiple HSBC colleagues, "GCL050047-

Compliance with OFAC Sanctions," HSBC OCC 3407565-569. 

98' Id. at 568 . 

• " See 9/23/2005 email from HBEU Rod Moxley to HSI3C John Allison and HSBC John Root, 

"OFAC sanctions," HSBC OCC 8877213-214. 
381 


76061.747

207 

payment details referenced the "Sudanese Petroleum Corporation.,,985 

Although the payment had also been stopped by the WOLF filter in 

HSBC Johannesburg, an employee there had approved its release and 

sent the transaction through their correspondent account at HBUS. An 

internal email from HSBC Johannesburg explained that the release of 

the funds was: 

"a genuine error in an attempt to push the day[']s work through 

before the cut-offtime. I believe the loss of three staff in the 

department leaving only two permanent staff remaining is causing 

the[m] to work towards clearing their queues rather than slow 

down to read the warnings such as these. ... Having said that I 

also feel it is a matter of training where seeing the word 'Sudan' 

alone should have been warning enough.,,986 

The email also noted that the transaction had been sent by Commercial 

Bank of Ethiopia, which was "aware that this payment may not go 

through as they have attempted to make this payment via their other 

correspondent banks and failed. ,,987 

In July 2007, HBUS discovered that another client, Arab 

Investment Company, had been sending "multiple Sudan-related 

payments" through its U.S. dollar account at HBUS, that other banks 

later blocked for specifying a Sudanese originator or beneficiary, 

"suggesting that HBUS has been processing cover payments for this 

client. ,,988 An email identified seven wire transfers over a one-year 

period, collectively involving more than $1.1 million, in which the 

documentation provided to HBUS made no reference to Sudan, 

preventing the transfers from being stopped by HBUS' OFAC filter.989 

The email noted that two of the wire transfers later blocked by other 

banks had resulted in letters from OF AC seeking an explanation for 

HBUS' allowing the transfers to take place, and suggested closing the 

client account to prevent more such incidents.99o On another occasion, 

HBUS identified five wire transfer payments between January and 

November 2007, totaling more than $94,000, that turned out to be 

intended for a Sudanese company, but had been processed as straight 

985 See 1211412006 email from HBUS Elizabeth Protomastro to HBUS John Allison and others, 

"OFAC - Wire payments blocked from HSBC olIshore entities - USD 32,000 (re SDGT) and 

USD 2,538,939.33 (re Sudan)," HSBC OCC 3407608-609. 

986 1211512006 email from IISBC Gimhani Talwatte to HSBC Krishna Patel, "PCM Operational 

error. Funds frozen in USA - payment on behalf of Commercial Bank of Ethiopia," OCC-PSI00610597, at 8. 

987Id. 

988 71812007 email from HBEU Joe Brownlee to HBEU Giovanni Fenocchi, forwarded by HBEU 

Peter May to HBUS Anne Liddy and HBUS Alan Ketley, "Arab Investment Company 

Reportable Event #3948 Notification Entity," OCC-PSI-00620281, at 2. 989 Id . 

9OoId. 
382 


76061.748

208 

through payments at HBUS, because "there was no beneficiary address 

and no mention of 'Sudan' .,,991 

In still other cases, wire transfers clearly referencing Sudan were 

stopped by HBUS' OFAC filter for further review, but then allowed by 

HBUS staff to proceed. An HBUS internal report on OFAC compliance 

noted, for example, two blocked wire transfers involving Sudan, one for 

over $44,000 and the other for over $29,000, blocked on November 5 

and December 7,2007, respectively, by HBUS' OFAC filter, but 

subsequently "released due to human error.,,992 

In August 2008, HBUS noted that it was then holding over $3.2 

million in Sudan-related payments sent to the bank from other HSBC 

affiliates. 993 The bulk of the funds came from blocking a $2.5 million 

payment from HSBC Johannesburg destined for the Sudanese Petroleum 

Corporation, but three other Sudan-related payments from HSBC 

affiliates were also identified, a $300,000 payment sent by HSBC Hong 

Kong; a payment for more than $367,000 payment from HSBC Dubai, 

and a payment for more than $58,000 from British Arab Commercial 

Bank Ltd. The email listing these blocked funds noted that a court order 

was seeking transfer ofthe funds to a Federal court in the United States 

in connection with a lawsuit seeking compensation for the families of 17 

U.S. sailors killed in a 2000 terrorist attack on the USS Cole in 

Yemen.994 

In August 2010, in connection with an effort to exit correspondent 

relationships with 121 international banks that HB US determined it 

could no longer support, HBUS CEO Irene Dorner sent an email noting 

references to 16 banks in Sudan. Ms. Dorner wrote: 

"In Phase 2 there will be Trade names the exit for which may be 

more complicated but to give you a flavo[u]r of the problem we 

seem to have 16 correspondent banks in Sudan which cannot be 

right.,,995 

(d) Transactions Involving Burma 

Another set ofOFAC sensitive transactions involved Burma, also 

referred to as Myanmar, a country which, like Cuba and Sudan, was 

991 "OFAC Compliance Team Monthly Update Date - January 200S;' OCC-PSJ-0063I 007. 

992 4/21200S HBUS memorandum, "Management Report for I Q200S for OF AC Compliance." 

OCC-PSJ-00633713. 

993 S/8/200S email from HBUS Anne Liddy to HSBC Susan Wright and others, "USS Cole 

Case," OCC-PSI-00304783, at 2-3. 994Id. 

995 8120/2010 email from HBUS Irene Dorner to HSBC Andrew Long and others. "Project Topaz 

US Urgent Requirements," HSBC OCC 8876105-106. 
383 


76061.749

209 

subject to a comprehensive sanctions program in the United States.996 

This program, first imposed in 1997, remains in effect today, although 

certain aspects of the program were suspended in May 2012.997 Internal 

bank documents indicate RBUS processed potentially prohibited 

transactions involving Burma from at least 2005 to 2010. 

One of the earliest references to transactions with Burma in the 

documents reviewed by the Subcommittee is a January 2005 email 

involving HBUS' Global Banknotes business, which involves the buying 

and selling oflarge quantities of physical U.S. dollars to non-U.S. 

banks.998 The email, written by RSBC Group Compliance head David 

Bagley, described a transaction in which RBUS purchased $2.9 million 

in U.S. dollars from a client, determined that the dollars had come from 

a certain party whose name was redacted by RBUS, and noted: 

"Myanmar is currently subject to OF AC regulations prohibiting any 

transactions by US persons relating to Myanmar counterparties." Mr. 

Bagley wrote: 

"There appears little doubt that the transaction is a breach of the 

relevant OFAC sanction on the part ofRBUS, that it will need to 

be reported to OF AC and as a consequence there is a significant 

risk of financial penalty. It does not appear that there is a systemic 

issue, rather we are dealing with an individual incident, although 

given the potential seriousness of the breach external lawyers have 

been instructed to assist with the process of resolving matters with 

OFAC.,,999 

In July 2005, RSBC Group issued its new GCL policy barring all 

RSBC affiliates from engaging in U.S. dollar transactions in violation of 

OF AC prohibitions. A few days later, on August 25, 2005, RSBC 

Group head of Global Institutional Banking, Mark Smith, circulated a 

managerial letter, referenced previously, identifYing correspondent 

relationships that would be affected.lOoo The letter noted that the "Group 

has 2 account relationships with Myanmar entities," and stated that the 

996 See OFAC "Sanctions Programs and Country Information~" Burma sanctions (last updated 

411 7/20 12). http://www.treasury .gov Iresource·centerlsanctions/Programs/pages/burma.aspx. 

997Id. The U.S. Government suspended certain aspects of the Burma sanctions on May 17, 

2012. See "U.S. Eases Myanmar Financial Sanctions;' Wall Street Journal, Jay Solomon 

(5/1712012), 

http://online.wsj.comiarticie/SB10001424052702303879604577410634291016706.htm1nnhe 

U.S. Treasury Department is maintaining and updating its list of sanctioned Myanmar military 

companies, business tycoons and generals who allegedly engaged in human-rights violations and 

corruption. "). 

99' See 1/2112005 email from HSBC David Bagley to HSBC Stephen Green and Richard 

Bennett, "Compliance Exception," HSBC OCC 8873671. 999 Id. 

1000 8125/2005 managerial letter from HSBC Mark Smith to HBUS Aimee Sentmat, HBME Alan 

Kerr, and others, "GCL050047 - Compliance with OFAC sanctions," HSBC OCC 3407565-569; 

8/25/2005 email from HBUS Alan Ketley to mUltiple HSBC colleagues, "GCL050047-

Compliance with OFAC Sanctions," HSBC OCC 3407565-569. 
384 


76061.750

210 

"GCL applies in full," implying both relationships would have to be 

terminated. In September 2005, a senior RBEU payments official, Rod 

Moxley, who analyzed U.K. transactions stopped by the WOLF filter 

over a 10-day period noted that a number of the U.S. dollar transactions 

involved Burma. lool 

After the GCL's 2005 effective date, Burma-related transactions 

appear to have been reduced, but continued to occur. One example is a 

$15,000 payment that originated in Burma on January 18, 2008, was 

processed as a straight-through payment at RBUS, and blocked by the 

OF AC filter at another bank involved with the transaction. 1002 An 

HBUS email explained that the payment had not been blocked at RBUS, 

because its OF AC filter didn't recognize "Yangon," the former capital of 

Burma, also called "Rangoon," as a Burma-related term. According to 

the email, it was the second payment involving "Yangon" that was 

missed by the HBUS filter. RBUS Compliance head Carolyn Wind 

requested that the filter be fixed immediately: "We are running too 

much risk that these misses will cause OFAC to start questioning the 

effectiveness of our controls."IOO] 

Four months later, RBUS blocked an April 2008 wire transfer for 

$12,060 headed for the account of an SDN-listed entity at Myanmar 

Foreign Trade Bank. An internal bank document noted that the payment 

had been blocked by HBUS due to "references to Yangon and Myanmar, 

rather than blocking it due to the sanctioned entity[']s involvement." 

The document noted that the bank eode "for the sanctioned entity was 

not included in the payments filter, as per agreed upon procedure with 

the UK WOLF team," and a systems fix was implemented in October 

2008.1004 

In May 20 I 0, two additional Burma-related U.S. dollar 

transactions were proeessed by HBUS, due to limitations in the WOLF 

filter. In one instance, a payment was not blocked, because "the filter 

did not list 'Burmese' as an a.k.a. [also known as] for Burma." In the 

other instance, the "filter did not identify 'Mynmar' as a possible 

referenee to Myanmar.,,100S 

1001 See 9/23/2005 email from HBEU Rod Moxley to HSBC John Allison and HSBC John Root, 

"OFAC sanctions," HSBC OCC 8877213-214. 

1002 See 1125/2008 email exchanges among HBUS Carolyn Wind, HBUS Mike Ebbs, and others, 

"Myanmar-related payment - Missed by filter ('Yangon')," HSBC OCC 0616168-178, at 169, 

1003 Id. at 168, 

1004 Undated Global Transaction Banking report, "All Open Reportable Events," OCC-PSI00823408, at 4. 

1005 111/2010 - 513112010 Compliance Certificate from HSBC David Bagley to HNAH Brendan 

McDonagh and HNAH Niall Booker, OCC-PSI-01754176, at 4. 
385 


76061.751

211 

(e) Transactions Involving North Korea 

Still another set of OF AC sensitive transactions involved North 

Korea which, unlike Burma, Cuba and Sudan, is not subject to a 

comprehensive U.S. sanctions program, but has particular persons and 

entities included in the OF AC SDN liSt. 1006 

In August 2005, a month after HSBC Group issued the GCL policy 

barring HSBC affiliates from engaging in U.S. dollar transactions in 

violation of OF AC prohibitions, HSBC Group head of Global 

Institutional Banking, Mark Smith, circulated a managerial letter 

identifYing correspondent relationship that would be affected. 1007 The 

letter stated: "The Group has 3 account relationships with North Korean 

entities. These are all inhibited. We have been seeking to close the 

accounts, and will continue to do so, for some time but have not been 

able to elicit a response from the banks concerned.,,1008 

Nearly two years later, in 2007, an internal HSBC document 

entitled, "Information Requested in Connection With: (North Korea, 

Cuba, and Myanmar)," revealed that, as of May 2007, HSBC affiliates in 

Mexico and Latin America were providing U.S. dollar accounts to North 

Korean clients. 1009 The document indicated that HSBC Mexico 

(HBMX) had nine North Korean customers with nine U.S. dollar 

accounts holding assets exceeding $46,000, and seven North Korean 

customers with both U.S. dollar and Mexican peso accounts whose 

assets totaled more than $2.3 million.101O The document indicated that 

arrangements had been made to "cancel all business relationships with" 

North Korea, in relation to U.S. dollar accounts or commercial 

relationships for the entire region. 

In addition, HBUS did not close a U.S. dollar account with the 

Foreign Trade Bank of the Democratic People's Republic of Korea until 

1006 See OFAC "Sanctions Programs and Country Infonnation," North Korea sanctions (1ast 

updated 6/20/2011), http://www.treasury.govlresourcecenterisanctions/Programs!pages/nkorca,aspx. 

1007 8/2512005 managerial letter from HSBC Mark Smith to HBUS Aimee Sentmat, HBME Alan 

Kerr, and others, "GCL050047 - Compliance with OFAC sanctions," HSBC OCC 3407565-569; 

8/25/2005 email from HBUS Alan Ketley to multiple HSBC coUeagues, "GCL050047-

Compliance with OFAC Sanctions," HSBC OCC 3407565-569. 

1008 812512005 managerial letter from HSEC Mark Smith to HBUS Aimee Sentmat, HBME Alan 

Kerr, and others, "GCL050047 - Compliance with OFAC sanctions," HSBC OCC 3407565-569, 

at 567. 

1009 5118/2007 HSEC document, "Information Requested in Connection With: (North Korea, 

Cuba, and Myanmar)," HSEC OCC 8876088-095, at 093-095. 

1010 ld. In addition, 92 North Korean clients had 137 HEMX accounts holding solely Mexiean 

pesos, with assets exceeding a total of $697,000. ld. at 093. 
386 


76061.752

212 

April 28, 2010, although a review of the account indicated that no U.S. 

dollar activity had taken place in it since 2007. 1011 

(f) Other Prohibited Transactions 

In addition to transactions involving jurisdictions subject to U.S. 

sanctions programs, some transactions sent to HBUS involved 

prohibited individuals or entities named on the OF AC SDN list. While 

many of these transactions were not sent by HSBC affiliates, some were. 

HBUS did not allow such transactions to proceed, showing the 

effectiveness of the OFAC filter when all appropriate transactions are 

run through it. 

On November 9,2006, for example, "at the direction ofOFAC," 

HBUS blocked for further review a $32,000 payment that had been 

originated by HBME, because the underlying payment details indicated 

the funds were to be credited to Al Aqsa Islamic Bank. lOl2 This bank 

had been designated as a "specially designated global terrorist" by 

OF AC in December 200 I, because it was a "direct arm of Hamas, 

established and used to do Hamas business.,,1013 On November 20,2006, 

HBME asked RBUS to cancel the payment, because "it was sent in 

error." On December 7, 2006, however, OFAC instructed HBUS to 

continue to block the funds. HBUS AML Compliance head Teresa 

Pesce wrote: "How is it that these payments continue to be processed by 

our affiliates in light of the GCLS?,,1014 

A report prepared by Deloitte at HBUS' request, examining the 

period 2001 to 2007, also disclosed that one U.S. dollar correspondent 

account located in the United Kingdom had been opened for a bank 

located in Syria, while two U.S. dollar correspondent accounts in the 

United Kingdom had been established for the "Taliban.,,1015 When 

asked about the correspondent account for a bank established for the 

Taliban, HSBC legal counsel told the Subcommittee that RBEU had 

maintained an account for Afghan National Credit and Finance Limited, 

the London subsidiary of an Afghan bank that, from October 22, 1999 to 

1011 See 2007 Deloitte OFAC review, "Results of the Transactions Review-UK Gateway, March 

29,2012," HSBC-PSI-PROD·0197919-989, at 988; Subcommittee briefing provided by Deloitte 

rep,resentatives (5/5/2012). 

102 12114/2006 email from HBUS Elizabeth Protomastro to HBUS John Allison and others, 

"OFAC - Wire payments blocked from HSBC offshore entities - USD 32,000 (re SDGT) and 

USD 2,538,939.33 (re Sudan)," HSBC OCC 3407608·609. 

1013 119/2007 email from HBUS Elizabeth Protomastro to HSBC John Allison, HBUS Teresa 

Pesce, Anne Liddy, and others, "OFAC - Wire payments blocked from HSBC offshore entitiesUSD 32,000 (re SDGT) and USD 2,538,939.33 (re Sudan)," OCC-PSI·Q0610498, at 2. 

1014 See 12/15/2006 email from HBUS Teresa Pesce to HBUS Elizabeth Protomastro and others, 

"OFAC Wire payments blocked from HSBC offshore entities - USD 32,000 (re SDGT) and 

USD 2,538,939.33 (re Sudan)," HSBC OCC 3407608. 

lOIS 10118-10119/2011 'Transaction Review Progress and Results Rcporting," prepared by 

Dcloitte LLP, HSBC-PSI·PROD·0096628-672, at 649. 
387 


76061.753

213 

February 2, 2002, was designated under OFAC's Taliban sanctions. 1016 

An HBUS representative told the Subcommittee that HBUS was unable 

to go back far enough in its records to uncover whether or not the 

Afghan account at HBEU sent transactions through HBUS during that 

time. IOI ? The fact that HBEU had this account after the 9111 terrorist 

attack on the United States again demonstrates how HSBC affiliates 

took on high risk accounts that exposed the U.S. financial system to 

money laundering and terrorist financing risks. These U.S. dollar 

accounts may also have contravened the 2005 GCL and OFAC 

regulations by enabling banks in Syria and Afghanistan when it was 

controlled by the Taliban to engage in U.S. dollar transactions through 

HBUS. 

Another account in volving an individual on the OF AC list was 

housed at HSBC Cayman Islands. On February 21, 2008, a Syrian 

businessman by the name of Rami Makhloufwas placed on the SDN list 

by OFAC. loI8 One week later, HSBC Cayman Compliance personnel 

contacted HBUS to report that HSBC Cayman Islands currently held a 

trust relationship with Mr. Makhlouf and to inquire as to "what actions if 

any HSBC Group has taken in relation to the above mentioned 

individual.,,1019 An HBUS Compliance officer asked the Cayman 

Compliance officer for more information about the Makhlouf accounts, 

and the head ofHSBC Cayman Compliance responded: "The Trust is 

administered by HSBC Geneva. We raised concerns with this client in 

August 2007 however we were assured by David Ford that the 

relationship ~ad be~n reviewed. at a ?ro~gJeve~ and a decision had been 

taken to contmue with the relatIOnship." • Ultimately, HBUS 

determined that it did not have any connection to Mr. Makhlouf and did 

not need to report any information to OF AC. 

(3) HBUS' OFAC Compliance Program 

Internal bank documentation related to HBUS' OFAC compliance 

efforts regarding OFAC sensitive transactions portrays a variety of 

specific problems over the period reviewed by the Subcommittee. One 

problem was that some HSBC affiliates continued to offer U.S. dollar 

1016 Subcommittee briefing by HSBC legal counsel (7/9/2012). See also "UK Observer Reports 

Taliban Banks Still Operating in London." London The Observer, Sunday edition of The 

Guardian (1011/2007); "Schwerer Schlag": Ein kleines Geldhaus in London diente offenbar als 

Hausbank der Taliban," [Serious Blow: A small Financial Institution in London apparently 

served as Taliban's main bank"], Der Spiegel. Christoph Von Pauly (10/8/2001). 

1017 Id. 

10\8 See 2/21/2008 U.S. Department of Treasury Press Release No. HP-834, "Rami Makhluf 

Designated For Benefiting from Syrian Corruption," http://www.treasury.gov/press-center/pressreleases/Pageslhp834.aspx ("The U.S. Department of the Treasury today designated Rami 

Makhluf, a powerful Syrian husinessman and regime insider whom improperly benefits from and 

aids the public corruption of Syrian regime officials."). 

1019 2/28/2008 email exchange among HBUS Andy 1m and HSBC Cayman Islands Patricia 

Dacosta and Michelle Williams. HSBC aCc 8878838-840. 1020 1d. 
388 


76061.754

214 

accounts to prohibited persons despite HSBC Group policy and OFAC 

regulations, and continued to send transactions involving those accounts 

through their U.S. dollar accounts at HBUS. A second problem was the 

ongoing practice by some HSBC affiliates and others to use methods of 

proccssing transactions which did not disclose the participation of a 

prohibited person or country when sending a transaction through an 

account at HBUS. Even some within HSBC worried that such methods 

would look deceptive to its U.S. regulators. In other cases, prohibited 

transactions were not detected by HSBC's WOLF filter or HBUS' 

OF AC filter due to programming deficiencies that did not identify 

certain terms or names as suspicious. In still other cases, transactions 

that had been properly blocked by the WOLF or OF AC filter were 

released by HSBC or HBUS employees in error, due to rushed 

procedures, inadequate training, or outright mistakes. Beginning in 

2008, spurred in part by an upcoming OCC examination of its OF AC 

compliance program, HBUS took a closer look at its program as a 

whole. 

On September 28, 2008, HBUS received a cautionary letter from 

OFAC regarding "12 payments processed from September 4, 2003 

through February I, 2008 which represent possible violations against 

U.S. economic sanctions.,,1021 That same month, HBUS learned that the 

OCC planned to review its OF AC operations as part of a November 

2008 examination ofHBUS' Payments and Cash Management (PCM) 

division. l022 In response, HBUS undertook a detailed analysis of not 

only the 12 transactions highlighted by OFAC, but also other prohibited 

transactions that had been processed through the bank since issuance of 

the 2005 GCL policy. 

On October 3,2008, a member ofHBUS' OFAC Compliance team 

Elizabeth Protomastro forwarded the OF AC letter to HBUS Compliance 

head Leslie Midzain. 1023 Ms. Midzain, in tum, forwarded it to HSBC 

Group Compliance head David Bagley and HNAH's regional 

Compliance head Janet Burak. 1024 Ms. Midzain wrote that she was 

giving them an "immediate heads up" because ofthe "additional 

[OFAC] failures since February 2008," the upcoming OCC examination 

in November, and the "continued sensitivity" surrounding OF AC 

compliance. She stated that the matter would "receive high priority."J025 

1021 9/29/2009 OFAC Cautionary Letter, HSBC·PSJ-PROD-0096 1 80-181. 

1022 See 10/3/2008 email from HBUS Lesley Midzain to HBUS Janet Burak, HSBC David 

Bagley, and HBUS Anne Liddy, "OFAC 'Cautionary Letter' received today," HSBC OCC 

3406951-952. 

1023 Emails between lmUS Elizabeth Protomastro, HBUS Lesley Midzain, and others on 

October 3, 2008, "OFAC 'Cautionary Letter' received today," HSI3C OCC 3406952-953. 

1024 10/3/2008 email from HBUS Lesley Midzain to HBUS Janet Burak, HSBC David Bagley, 

and HBUS Anne Liddy, "OFAC 'Cautionary Letter' received today," HSBC OCC 3406951-952. I025Id. 
389 


76061.755

215 

On November 6, 2008, Ms. Midzain provided Mr. Bagley and 

Ms. Burak with detailed charts on the 12 prohibited transactions as well 

as a larger number of prohibited transactions that had been mistakenly 

processed by the bank. lo26 To provide context to the figures, she noted 

that RBUS processed approximately 600,000 wire transfers per week, of 

which about 5%, or'30,000 transactions, generated 'fossible [OFAC] 

matches which require review prior to releasing."lo2 She wrote that, 

over a five-year period from 2003 to 2008, RBUS had "rejected and 

reported 1,212 transactions valued at $100 million" to OFAC. lo28 She 

explained that, in addition, RBUS had self-reported 79 missed 

transactions to OF AC that should have been blocked, but weren't. Of 

those, she wrote that RBUS had identified "approx[imately] 57" that 

were issued subsequent to the 2005 GCL that were "contrary to sanction 

requirements and for which RSBC was the originating bank."lo29 She 

noted that some of the issues had arisen after HB US replaced its OF AC 

filter in July 2007, and may have been due to gaps in the filter that were 

closed "as the system [was] refined."lo30 

Ms. Midzain reported that the 79 missed transactions primarily 

involved Iran and Sudan. 1031 Other transactions involved Cuba, Iraq, 

Syria, Zimbabwe, and persons on the SON list. Ms. Midzain explained 

that of the 57 missed transactions that occurred since issuance of the 

July 2005 GCL policy barring HSBC affiliates from processing U.S. 

dollar transactions for OF AC sensitive persons, 2 I or about one-third 

had nevertheless originated with an HSBC affiliate. 1032 Of those 21, her 

analysis noted that about five did not contain a reference to a prohibited 

person. Her analysis suggests that an RSBC affiliate may have been 

using a cover gayment which would mask the nature of the transaction 

from RBUS. l 33 Ms. Midzain wrote: "Regarding Group members, since 

Group policy was issued JUL05, we have nonetheless received a fairly 

notable number of payments that suggest HSBC banks have not been 

consistently applying the policy."lo34 She also noted that the analysis 

had not examined the population of payments that HBUS stopped over 

the years to see how many of them also came from HSBC affiliates. Her 

figures also did not reflect the larger universe of potentially prohibited 

transactions that were processed by the bank without either HBUS or 

OFAC detecting them. 

1026 111612008 email exchanges among HBUS Leslie Midzain, HSBC David Bagley. HBUS 

Janet Burak. and others, "OFAC analysis," HSBC OCC 0616010-026. 

1027 ld . at 012. 

I028 ld. 

1019 Id. at 016. 

1030 Id. at 014. 

10JI Id. at 016-017. 

1032 Id. at 017. 

1033 1d. at 016. 

IOJ4 rd. 
390 


76061.756

216 

David Bagley, HSBC Group Compliance head, thanked Ms. 

Midzain for her analysis. He also wrote: 

"As you know, we have just completed and are currently collating 

the results of a Groupwide Compliance review of compliance with 

our USD/OF AC policy. 

Whilst some of these apparent breaches of Group policy may be 

rather historic nevertheless I am determined that we should enforce 

our policy on a consistent and Groupwide basis. 

Given this, what I would like to do is at Group level track back 

relevant and apparently offending payments and establish root 

causes so as to satisfY ourselves that there can be no, or at the very 

least, far less repetition. It is of course unrealistic to expect that no 

payments will pass through to HBUS, and at least our move to 

transparency in form of serial payments should allow these to be 

caught nevertheless I would prefer that payments were rejected at 

point of entry." I 035 

The OCC examination took place near the end of 2008. It tested 

the bank's OFAC systems to determine ifOFAC screening was being 

properly applied to new accounts, wire transfers, and other 

transactions. 1036 An internal OCC memorandum stated that, as of June 

30,2008, "HBUS reported 370 items on the OFAC blocked report, 

valuing approximately $20 million." It reported that, from September 

2003 to September 2008, HUBS had "rejected and reported to OF AC 

over 1,200 transactions valuing $100 million.,,'OJ7 The memorandum 

also stated that HB US was then processing about 600,000 wire transfers 

per week, of which 6%, or about 30,000, were manually reviewed each 

week by four-person OF AC Compliance teams in Delaware and New 

York. The OCC wrote that, of the wire transfers that underwent manual 

review, 20 to 30 per day were "escalated" and required a "disposition 

decision from compliance management.,,1038 The OCC memorandum 

reported: 

"Although, according to management, within the past five years 

(9/03-9/08) there harvel been only 80 missed payments, the bank's 

Compliance teams are under rigorous pressure to process alerts and 

determin[e] a disposition in a timely maner. ... [T]his strain can 

and will inhibit their mental capacity leaving gaps for errors even 

1035 ]]/]112008 email from HSBC David Bagley to HBUS Leslie Midzain and HSBC Susan 

Wright, "OFAC," HSBC OCC 0616010·011. 

1036 7/2812008 OCC memorandum, "OFAC Examination - Payment and Cash Management 

(PCM)," OCC·PSI·01274962. [Sealed Exhibit.] 

1037 rd. at 3. 

1038 Id. at 4.5. 
391 


76061.757

217 

though permanent current staff members are well trained and 

qualified to complete the OF AC responsibilities." 

On January 20, 2009, the OCC sent RBUS a Supervisory Letter 

with generally positive examination findings regarding its OF AC 

compliance efforts. 1039 The Supervisory Letter stated: 

". OFAC Compliance is High and Increasing. The quality of 

risk management systems is satisfactory . 

• Compliance with legal and regulatory requirements is 

satisfactory and no violations of law or regulation were cited at this 

examination . 

• One recommendation is made related to staffing.,,1040 

The Supervisory Letter stated that the OFAC risk was high and 

increasing due to "almost a zero tolerance for error" under OF AC 

regulations and increasing growth in HBUS' PCM and retail banking 

businesses. The staffing recommendation, which did not require 

corrective action, stated: "Management should consider a review of 

current staffing requirements to ensure that there is an adequate number 

of permanent qualified staff to prolong the timely operations associated 

with OF AC related matters and to ensure adherence with regulatory 

requirements ... as your business growS."I041 Despite the OCC's 

generally positive examination, internal bank documents indicate that 

HBUS itself had a much more negative view of its OFAC compliance 

program. In June 2009, RBUS initiated an "OFAC Program Review 

Project."I042 Four months later, in October 2009, Debra Bonosconi, the 

HBUS Director for Specialized Compliance overseeing the Embassy 

Banking business, sent an email to Anthony Gibbs, the COO ofRSBC 

North America Legal and Compliance, commenting on a number of 

compliance issues, including OF AC compliance. 1043 Ms. Bonosconi, 

who had begun working at RBUS in March 2008, wrote that she had 

only recently become aware of the negative findings of the OFAC 

Program Review Project. She explained: 

"This project has been underway since June and the findings that 

have surfaced are no different than those already identified 

previously. So, we have a project that has taken far longer than it 

should have and findings that do not vary significantly from 

previous reviews. 

1039 See OCC Supervisory Letter HSIlC·2008-41, "Office of Foreign Asset Control 

Examination," OCC-PSJ-00000434-436. [Sealed Exhibit.] 

1040 rd. at 1. 

1041 rd. at 3. 

1042 See 10/23/2009 email from HIlUS Debra Ilonosconi to HIlUS Anthony Gibbs, "comments," 

HSBC OCC 3405534-537. 1043 Id. 
392 


76061.758

218 

The bottom line is, our OF AC process is in disarray and in great 

risk of being noncompliant. We have multiple systems, 

inconsistent practices, limited communication between the various 

functions, and no oversight function."lo44 

This candid description of the bank's OFAC compliance program, as 

having "inconsistent practices," "limited communication," and "no 

oversight function," stands in marked contrast to the OCC findings less 

than a year earlier. 

Another sign ofthe stresses in the OF AC compliance program 

surfaced in December 2009, when the four-person OF AC Compliance 

team in New York faced an accumulated backlog of greater than 700 

OFAC alerts that had yet to be reviewed. 1045 The OF AC Compliance 

team requested five or six people from the Payments and Cash 

Management (PCM) department for ten days to help clear the 

backlog. 1046 PCM responded that it had no resources to loan, and 

suggested asking Compliance personnel in Delaware for help. The 

OF AC Compliance team in New York responded that the Delaware 

Compliance staff was already "fully deployed" dealing with general 

alerts from the CAMP monitoring system: 

"We have considered all options at this point[;] the Compliance 

team in DE is already fully deployed dealing with wire camp alerts 

and bank examiner requests for the current exam. There is no 

bandwidth there at all[;] they are behind on the current alert 

clearing process which we are also dealing with.,,1047 

In late 2011, the OCC conducted a second examination ofHBUS' 

OFAC compliance program and, on January 25, 2012, issued a 

Supervisory Letter with a more negative assessment. 1048 The 

Supervisory Letter stated that the OCC was "concerned about the 

number and severity of the deficiencies in the enterprise-wide OFAC 

compliance program" at HBUS and at two other HSBC affiliates in the 

United States, HSBC Nevada, N.A. and HSBC Trust Company 

(Delaware), N.A. It stated that the OCC had reviewed reports prepared 

by BBUS' own auditors and by an outside consultant that "identified 

significant deficiencies in the program." It noted that bank management 

had taken "significant steps" to address deficiencies, but concluded the 

1044 Id. at 537. 

1045 12111/2009 email exchange among HBUS Camillus Hughes and HBUS Michael Gallagher, 

Charles DelBusto, Sandra Peterson, Thomas Halpin, Chris Davies, and Lesley Mid7zin, "OFAC 

Payments," HSBC OCC 7688668-670, at 670. 1046 1d. 

1047 ld. at 668. 

1048 See 1/2512012 OCC Supervisory Letter HSBC-2012-03, "OFAC Compliance Program," 

OCC·PSI·01768561·566. [Sealed Exhibit.] 
393 


76061.759

219 

"three banks lack a robust OFAC risk assessment that ensures the OF AC 

risks have been adequately identified so they can be managed 

appropriately." The Supervisory Letter contained two Matters Requiring 

Attention (MRAs) by the bank: (1) development of a "comprehensive 

OF AC risk assessment;" and (2) an independent review of certain real 

estate loans through a California branch between 2009 and 2011, 

involving Iran, that raised OF AC concerns. 1049 The Supervisory Letter 

also included a three-page attachment identifYing OF AC violations cited 

in seven OFAC cautionary letters since June 2009. The OCC required 

RBUS to modifY the AML action plan it was developing in response to a 

September 20 I 0 Supervisory Letter necessitating broad improvements in 

its AML Brogram to include the MRAs on its OF AC compliance 

program. 050 

Since the OCC examination, OF AC has issued one more 

cautionary letter to RBUS. Altogether, six ofthe pending OFAC letters 

warned that the violations might result in a civil monetary penalty, but 

no penalty has been imposed as of June 2012. 

(4) Server Issues 

One additional issue involving OFAC-sensitive transactions 

involves payment messages associated with non-U.S. dollar transactions 

that were sent through servers physically located in the United States, 

but which were not processed by RBUS and were not screened by an 

OF AC filter. The key issue is whether the electronic presence of those 

payment messages in the United States, utilizing U.S. facilities on their 

way elsewhere, required application of the OF AC filter. 105 I Despite 

concern expressed by RBUS, the bank decided not to tum on the RBUS 

OF AC filter to screen these payment messages. 

WHIRL Server. In the documents reviewed by the 

Subcommittee, server issues appear to have first arisen in 2003, when 

the HSBC Group Executive Committee discussed establishing a new 

server in the United Kingdom to process credit card transactions, instead 

of continuing to route those transactions through a server in the United 

States, for the express purpose of "avoid[ingJ contravening the OFAC 

restrictions.,,1052 In January 2004, the HSBC Group Board of Directors 

approved installing a separate, so-called "WHfRL system" in the United 

Kingdom at an estimated cost of $20 million. 105} When asked about the 

1049 Id. at 2. 

1050 Id. at 3. 

1051 When asked, OFAC declined to provide a definitive answer to the Subcommittee in the 

abstract, indicating that its analysis would have to examine specific facts. Subcommittee 

briefing by OFAC (51812012). 

1052 See lf3012004 Board of Directors minutes for HSllC Holdings pIc, HSBC-PS!-PROD0198571-572. The HSBC Group Executive Committee consisted of senior executives in HSBC. 

10.11 See lfJO/2004 Board of Directors minutes for HSBC Holdings pIc, HSBC-PSI-PROD0198571-572. 
394 


76061.760

220 

WHIRL server, Mr. Bagley told the Subcommittee that the bank had 

moved the payment processing outside of the United States to protect 

HBUS, that he viewed it as a broad reading of OF AC rules at the time, 

and that he saw it as a conservative decision. 1054 

By 2005, the WHIRL server was active. In November 2005, Mr. 

Bagley asked Mr. Root to follow up on certain HBMX compliance 

issues identified by Mexican regulators, including the processing of 

credit card transactions. Mr. Bagley wrote that even through the credit 

card transactions "are, or will be processed on the UK Whirl server the 

routing of the relevant messages may pass through the U.S. first.,,1055 

He also wrote: "If this is the case then we may still have an issue 

dependent on how much intervention is theoretically possible on the part 

of the US leg." The following day, the head ofHBMX Compliance 

Ramon Garcia informed Mr. Root and Mr. Bagley that WHIRL 

transaction messages were still being routed through a U.S. server "for a 

fraction of a second for later transfer to the UK," which could be long 

enough for a "log file" to exist in the United States identifying the 

transactions. 

HSBC Affiliates in the Americas. Six months later, in April 

2006, Mr. Bagley proposed that "countries in the Americas outside USA 

disconnect their payment routing link to the USA TP Gateway and 

reconnect to the UK TP." He indicated doing so would provide two 

main benefits: "firstly the ability to make payments in currencies other 

than USD to countries/names/entities sanctioned by USA OFAC (as 

permitted by GCL 050047), and secondly to take data records outside 

USA.,,1056 His email raised the issue of whether electronic payment 

messages routed through a U.S. server could be subject to HBUS' 

OFAC filter and the obligation to block all potentially prohibited 

transactions. 

In November 2006, at a meeting of the HBUS Compliance Risk 

Management Committee, then HBUS Compliance head Teresa Pesce 

advised: "Plans are underway to implement OF AC screening for 

messages sent by the Americas through the global messaging gateway in 

the US in 2007.,,1057 Her decision to inform the committee of that 

development indicates that payment messages already being routed 

through the U.S. server were not being scanned against the OFAC filter. 

If the OFAC filter was not being used, all of the payment messages 

being sent through the United States by HSBC affiliates in Latin 

\054 Subcommittee interview of David Bagley (511012012). 

\055 See 11115-2212005 email exchanges among HSBC David Bagley, HSBC John Root, and 

HBMX Ramon Garcia, "HBMX - Compliance Issues," HSBC DCC 8873261-266. 

\0564/1012006 email from BSBC David Bagley to BBBR Luis Eduardo, HBMX David Leighton, 

and others, "TP Gateways," HSBC DCC 7687437-438. 

\057 1111312006 Compliance Risk Management Committee minutes for BBUS, BSBC DCC 

3407449-451. 
395 


76061.761

221 

America were not being screened for terrorists, drug traffickers, or other 

wrongdoers. 

Four months later, in March 2007, Mr. Bagley contacted 

Alexander Flockhart, then HSBC Latin America CEO, about Latin 

America payment messages being routed through the U.S. server, in 

light of the increased focus on OFAC compliance "on the part of both 

OF AC" and "our banking regulators.",058 Mr. Bagley noted that HBUS 

was required to screen all transactions for compliance with OF AC 

requirements, including all non-U.S. dollar transactions, which "would 

clearly be disadvantageous from Latin America's perspective," since the 

logistics of screening all those transactions "would be commercially and 

operationally challenging" for Latin American affiliates. Mr. Bagley 

informed Mr. Flockhart that they were developing a stand-alone WHIRL 

server in the United Kingdom that Latin America could use and which 

would avoid OF AC screening. He commented that if Mr. Flockhart 

"want[ed) to earry out as many transactions permitted by Group policy 

as possible," he should relocate Latin America's payment processing "to 

a different Group Messaging Gateway" than the one in the United 

States. 

Mr. Bagley also noted that HSBC Group had already "informally 

explored" the possible relocation of Latin America payment processing 

to the U.K. server, but realized that gateway was already experiencing 

capacity issues. Mr. Bagley commented further that the existing 

situation in which "the filtering" was not turned on was making HSBC's 

U.S. colleagues "extremely uncomfortable": 

"Whilst we have lived with the current position for some time, it is 

fair to say that now that our US colleagues are on notice they feel 

extremely uncomfortable in allowing the position to continue 

indefinitely. In essence, we will either have to have a pass and 

timeline for a relocation of the payment messages or will need to 

tum the filtering on.,,1059 

Mr. Bagley does not make it clear how his U.S. colleagues were 

put "on notice," and when asked, he told the Subcommittee that he did 

not recall who he talked with at HBUS about the issue, but he did 

indicate clearly that the OF AC filter was not turned on for the U.S. 

server being used to forward £ayment messaging traffic from HSBC 

affiliates in Latin America. 10 0 Five months earlier, HBUS Compliance 

head Teresa Pesce told the HBUS Compliance Risk Management 

Committee that payment messages sent by the Americas through the 

1058 311 312007 email from HSBC David Bagley to HBMX Sandy Flockhart, "Group Messaging," 

HSBC acc 8874354-355. 

1059 Id. at 355. 

1060 Subcommittee interview of David Bagley (511012012). 
396 


76061.762

222 

U.S. gateway would be scanned for OFAC beginning in 2007; Mr. 

Bagley's email indicatesthat.as of March 2007, the OF AC filter had 

still not been turned on, and his U.S. colleagues were "extremely 

uncomfortable in allowing the position to continue indefinitely." 

The following day Mr. Flockhart asked for a contact to discuss rerouting Latin American payment messaging traffic through the U.K. 

server. A few days after that, Mr. Bagley provided the contact 

information and also notified Mr. Flockhart that HSBC Brazil was 

considering "giving up certain payments activity given the challenges of 

passing that activity through the US.,,1061 Mr. Bagley wrote that the 

HSBC Group had asked HSBC Brazil to postpone that decision until it 

was determined whether payment messaging could be "migrated 

elsewhere." Mr. Bagley also wrote: "There may also need to be a 

conversation at some stage with Paul Lawrence [then HBUS CEO] ifit 

is necessary to persuade HBUS to continue with payment messaging 

pending any migration."J062 In this email, the head ofHSBC Group 

Compliance seems to be advocating sending non-U.S. dollar payments 

through the U.S. gateway without monitoring the transactions for OF AC 

compliance, pending migration ofthe Latin American traffic to another 

server. When Paul Thurston, former head ofHBMX, was asked about 

Mr. Bagley's comments, he expressed surprise that the HSBC Group 

Compliance head took that position. 1063 In June 2007, Mr. Flockhart 

approved switching Latin America's non-U.S. based SWIFT traffic to 

the U.K. gateway citing it as the most cost effective solution. 1064 

Around the same time, HSBC Brazil (HBBR) also sought to move 

its transactions from the U.S. to the U.K. server to avoid the OFAC 

filter. In December 2006, HBBR contacted Malcolm Eastwood at 

HBEU, asking for assistance in obtaining a second SWIFT address to be 

used for HBBR payments going to Iran, Cuba, and other sanctioned 

countries. HBBR explained that these transactions - about 50 per year -

were compliant with Group policy, but ran the risk of being blocked by 

the U.S. server they currently utilized, which was why it wanted to 

switch the transactions to the U.K. server and execute them in Euros. 

HBBR wrote: "To enable it, we have been informed that we have to 

create a second SWIFT address (BIC) to be used exclusively for this 

1061 3/22/2007 email from HSBC David Bagley to HBMX Sandy Flockhart, "Group Messaging," 

HSBC OCC 8875066-067. 1062 Id. 

1063 Subcommittee interview of Paul Thurston (511/2012). Mr. Bagley said that the reason he 

suggested to Mr. Flockhart that the messages be moved to the U.K. gateway was because he had 

received a legaJ opinion, which he considered "extreme," that non-U.S, dollar messages going 

through a U.S. messaging center could be impacted by OFAC. He was, thus, acting in a 

conservative manner to avoid violating OFAC requirements. Subcommittee interview of David 

Bafley (5110/2012). 

106 6/1/2007 email from HBMX Sandy Flockhart to HBMX Neelesh Heredia and others, "Group 

Messaging Gateway for LAM - Clear Choice Report," HSBC OCC 8874349-350. 
397 


76061.763

223 

purpose, which should also not be published by SWIFT in their 

books.,,1065 

In response, Mr. Eastwood reached out to HSBC Group 

Compliance and HBEU operational staff to discuss practical issues with 

Brazil's routing "US sanctioned items" via the U.K. server. He wrote: 

"I have concerns that we might be breaching at least the spirit of the US 

Serial Routing GCL ifnot the letter Ofit.,,1066 HSBC Group Money 

Laundering Control Officer John Allison responded that, by using the 

U.S. server, Brazil was subject to an "all currency prohibition for all 

OFAC entries," but HSBC Group policy allowed Brazil to make 

payments in non-U.S. dollar currencies to entities on the OFAC list, so 

long as they were not linked to terrorism or weapons of mass 

destruction. At the same time, he expressed concern about the 

perception of HSBC's obtaining an additional SWIFT address dedicated 

to payments intended for OF AC sanctioned countries. 

Mr. Eastwood forwarded this email correspondence to HBEU 

colleagues with the comment: "Just fYi. This all makes me very 

nervous!" HBEU's Rod Moxley responded that trying to identifY and 

process transactions "which have so many conditions attached to them" 

was a predicament for them. He wrote: "Slightly irritating too that 

GHQ CMP [Group Headquarters Compliance] seem to have bent over 

backwards to accommodate a system which looks very dodgy to me. 

How about no you can't do this?"lo67 On January 2,2007, Mr. Moxley 

sarcastically described setting up a second SWIFT address an 

"interesting concept," forwarded the idea to a colleague, and wrote: 

"let's set up a completely different Swift address to help avoid any 

problems with Cuba and Iran. Wish I'd thought ofit."lo68 

On January 26, 2007, Mr. Eastwood responded to Brazil's 

request. 1069 He indicated in a memorandum that, after conferring with 

HSBC Group Compliance and operational personnel, they were not 

favorable to segregating certain transactions through separate SWIFT 

addresses, even though the transactions were permissible under Group 

policy, due to the possible perception of "taking action to avoid certain 

transactions being examined by the US authorities." Instead, Mr. 

Eastwood noted that HBBR could re-route all of its SWIFT traffic via 

1065 12/18/2006 email Irom HBBR Morgana Casagrande to HBEU Malcolm Eastwood and 

others, "Transactions with Iran/Cuba, etc.," HSBC OCC 8876927-928. 

106612/2112006 email from HBEU Malcolm Eastwood to Bill Rice and others, "Fw: Transactions 

with Iran/Cuba, etc.," HSBC OCC 8876927. 

1067 See 12/28/2006 - 11412007 email exchanges among HBEU Malcolm Eastwood, HSBC John 

Allison, HBEU Rod Moxley, and others, "Transactions with Iran/Cuba, etc.," HSBC OCC 

8876925·927. 

1068 112/2007 email from HBEU Rod Moxley to HBEU Andy Newman, "Transactions with 

IranlCuba, etc.," HSBC OCC 8876921. 

1069 1126/2007 memorandum from HBEU Malcolm Eastwood to HBBR Lucas Fragoso and 

others, "Trade Transaction with Iran/Cuba etc.," HSBC OCC 8876930·931. 
398 


76061.764

224 

the U.K. server, listing several logistical issues that would have to be 

resolved if Brazil wanted to move forward. 

These documents raise the question of whether non-U.S. dollar 

payment messages referencing transactions routed through a U.S. server 

by HSBC affiliates were required to be screened by an OF AC filter, or 

whether they could move across U.S. boundaries and use U.S. facilities 

without triggering any OF AC prohibitions. On the one hand, HSBC 

Group Compliance urged Latin America to switch their messaging 

traffic from a U.S. to a U.K. server to avoid the delays that come with 

OF AC screening, while on the other hand indicating that for at least a 

five-month period from November 2006 to March 2007, the OFAC filter 

had not been turned on to screen the Latin American payment messages 

going through the U.S. server even though HBUS apparently had 

expressed concerns about not screening the messages for prohibited 

activity. HSBC Group knowingly put its U.S. affiliate at regulatory and 

reputational risk by moving payment messages through a U.S. server 

without scanning them against the OF AC filter. 

Turning OffOFAC Verification. A very different server issue 

arose in July 2007, when HBUS introduced a new product called 

Fircosoft to help monitor OF AC sensitive transactions. The product 

caused a huge increase in the number of OF AC alerts, creating a backlog 

that began to overwhelm HBUS OFAC compliance personnel. 

According to a fourth quarter 2007 Compliance Report by HBUS, the 

introduction of the new product caused "serious performance issues" 

that would "not support HBUS volumes.,,1070 On July 17,2007, "a risk 

based decision was made to eliminate the verification step of all OF AC 

filter alerts on a temporary basis to accelerate the process of clearing the 

OFAC queue.,,1071 The more limited review process for OF AC sensitive 

transactions remained in effect for about three weeks, from July 17 to 

August 6. On August I, 2007, HBUS Chief Operating Officer David 

Dew wrote: "I think that we simply must now agree on a definitive 

timetable for reintroduction of full OFAC controls."lon When asked 

about this matter, Mr. Dew told the Subcommittee that he thought the 

limitation on the "verification step" in the OF AC filter was only stopped 

for about a day.1073 Anne Liddy told Subcommittee that she recalled that 

the verification step was turned off for about a month, but didn't view it 

as a risk to the bank.1074 

\070 4Q07 Compliance Report from HBUS Carolyn Wind to HNAH Janet Burak and others, 

HSBC-PSI-PRGD-0000508-016, at 509. 

1071 Global Payments System (GPS) Implementation Issues, 6 Aug 07 HUSI Audit Committee 

U~date, HSBC GCC 1105891. 

102 8/0l/2007 email from HBUS David Dew to Bandula Wijesinghe and others, GCC-PSI00188404. 

1073 Subcommittee interview of David Dew (3/05/2012). 

1074 Subcommittee interview of Anne Liddy (2/22/2012). 
399 


76061.765

225 

In 2009, the same verification step in the OF AC filter was again 

turned off by HBUS for a few weeks. In November 2009, due to an 

industry-wide switch to S WIFT202 cover payments, OF AC alerts 

increased dramatically at HBUS. HBUS was so concerned about the 

large number of false OFAC hits being generated that it stopped the 

verification step, as was done in 2007. Turning off the verification step 

concerned one HBUS employee enough that the employee quietly 

reported the action to the Federal Reserve. The Federal Reserve 

examiner who spoke with the employee wrote in an email to colleagues 

the following: 

"On Monday Lesley Midzain, former head ofBSAJAML turned 

off the second level filter on Chips activity without consulting 

anyone and with no supporting documentation. The rational given 

for turning the second level filter off was to reduce the daily 

backlog in lieu of additional resources. The individual who spoke 

to me knew this was not appropriate action and decided to call the 

[regulatorj.,,1075 

HSBC's legal counsel told the Subcommittee that the verification 

step was turned off for 13 days, from November 25, 2009 to December 

7,2009. 1076 The issue raised by both incidents in 2007 and 2009, is 

whether HBUS' decision to tum off part of the OFAC filtering system 

reduced its effectiveness in screening for prohibited transactions and 

increased U.S. vulnerabilities to money laundering and terrorist 

financing. 

C. Analysis 

OFAC enforces U.S. programs aimed at exposing and disabling the 

financial dealings and resources of some of the most dangerous persons 

and jurisdictions threatening the world today, including terrorists, 

persons involved with weapons of mass destruction, drug traffickers, and 

rogue jurisdictions. The OF AC filter is the central mechanism used to 

identify, stop, and block suspect transactions speeding through financial 

systems. Global financial institutions have a special responsibility to 

respect OFAC prohibitions and comply with OFAC restrictions. 

Actions taken to circumvent the OFAC filter or endanger the 

effectiveness of a critical safeguard may facilitate transactions 

undertaken by some ofthe worst wrongdoers among us. 

The evidence reviewed by the Subcommittee indicates that, from 

2001 to 2007, HSBC affiliates, with the knowledge and tacit approval of 

HSBC Group executives, engaged in alarming conduct sending 

undisclosed Iranian U-turn transactions through their HBUS 

1075 1211612009 internal Federal Reserve memorandum, BOG-A-207130. [Sealed Exhibit.] 

1076 Subcommittee briefing by HSBC legal counsel (6/27/2012). 
400 


76061.766

226 

correspondent accounts, without information that would otherwise have 

triggered OF AC reviews. When asked, HBUS insisted on HSBC 

affiliates using transparent payment instructions so that all U-turn 

transactions would be stopped by the OF AC filter and reviewed, but 

when faced with evidence that some HSBC affiliates were acting to 

circumvent the OF AC filter, HBUS failed to take decisive action to stop 

the conduct some in its own organization viewed as deceptive. In 

addition, from at least 2009 to early 2012, the bank's OF AC compliance 

program suffered from multiple deficiencies. Still another issue is that 

some HSBC affiliates sent non-U.S. dollar messaging traffic through 

U.S. servers in which the OFAC screening was not turned on or was 

restricted. 

The aim in many of the instances in which HSBC affiliates acted to 

circumvent the OFAC filter may have been to avoid the time-consuming 

individualized reviews that followed, rather than execute prohibited 

transactions. But expediency in the face of the threats posed by the 

targets ofOFAC prohibitions does notjustity potentially violating or 

undermining OFAC requirements. HEUS likewise failed to obtain 

information about the full scope of undisclosed OFAC sensitive 

transactions going through its correspondent accounts, bring to a head 

the issue ofHSBC affiliates circumventing OFAC safeguards, and 

ensure all transactions were reviewed for OF AC compliance. 
401 


76061.767

227 

V. AL RAJHI BANK: DISREGARDING LINKS TO 

TERRORIST FINANCING 

For decades, HSBC has been one ofthe most active global banks 

in Saudi Arabia, despite AML and terrorist financing risks involved with 

doing business in that country. Among other activities, for more than 25 

years, HSBC has provided a wide range of banking services to Al Rajhi 

Bank, Saudi Arabia's largest private bank. 1077 Those services included 

providing large amounts of physical U.S. dollars to the bank as part of 

HSBC's U.S. banknotes business. After the 9111 terrorist attack on the 

United States in 200 I, evidence began to emerge that Al Rajhi Bank and 

some of its owners had links to organizations associated with financing 

terrorism, including that one of the bank's founders was an early 

financial benefactor of al Qaeda. In January 2005, despite the fact that 

AI Rajhi Bank had not been indicted, designated a terrorist financier, or 

sanctioned by any country, HSBC Group Compliance recommended 

internally that, due to terrorist financing concerns, HSBC affiliates 

should sever ties with the bank. 

In response, some HSBC affiliates disregarded the 

recommendation and continued to do business with the bank, while 

others terminated their relationships but protested HSBC's decision and 

urged HSBC to reverse it. The protests continued despite a U.S. 

indictment the next month, in February 2005, of two individuals 

accused, among other matters, of cashing $130,000 in U.S. travelers 

cheques at AI Rajhi Bank in Saudi Arabia and smuggling the money to 

violent extremists in Chechnya. In May 2005, four months after its 

initial decision, HSBC Group Compliance reversed itself and announced 

that all HSBC affiliates could do business with AI Rajhi Bank, thus 

allowing HBUS to decide for itself whether to resume the relationship. 

For nearly two years, HSBC Banknotes repeatedly asked HBUS AML 

Compliance personnel to allow reinstatement of the AI Rajhi Bank 

relationship, despite ongoing concerns at HBUS about the bank's 

possible links to terrorist financing. 

On December 1,2006, despite concern that there is "no smoke 

without fire," HBUS AML Compliance agreed to allow I-IBUS to 

reinstate the relationship and resume supplying U.S. dollars to AI Rajhi 

Bank. Earlier, AI Rajhi Bank had threatened to pull all of its business 

from HSBC if the U.S. banknotes business were not restored, while 

HSBC personnel estimated that restoring the U.S. banknotes business 

would produce annual revenues of at least $ I 00,000. In 2007, additional 

information surfaced about AI Rajhi Bank's possible links to terrorism, 

1077 HSBC also operates an affiliate, HSBC Bank Middle East, with branches in Saudi Arabia; 

owns Saudi British Bank; and provides correspondent banking services to other Saudi financial 

institutions, 
402 


76061.768

228 

including articles on a 2003 report by the U.S. Central Intelligence 

Agency (CIA) entitled, "AI Rajhi Bank: Conduit for Extremist Finance," 

which found that "[s]enior al-Rajhi family members have long supported 

Islamic extremists and probably know that terrorists use their bank." 

Despite that and other troubling information, HBUS continued to supply 

U.S. dollars to the bank, and even expanded its business, until 2010, 

when HSBC decided, on a global basis, to exit the U.S. banknotes 

business. 

AI Rajhi Bank was not the only bank with links to terrorism 

serviced by HBUS. Two additional examples are lslami Bank 

Bangladesh Ltd. and Social Islami Bank Ltd. which is also located in 

Bangladesh. In each case, in anticipation of revenues of$75,000 to 

$100,000 per year, HBUS Banknotes personnel disregarded troubling 

evidence of possible links to terrorist financing, opened accounts for the 

banks, and provided them with U.S. dollars and access to the U.S. 

financial system. 

A. AI Rajhi Bank 

Founded in 1957, AI Rajhi Bank is one of the largest banks in 

Saudi Arabia, with over 8,400 employees and assets totaling $59 

billion. 1078 Headquartered in Riyadh, the bank has over 500 branches, 

mostly in Saudi Arabia, but also in Malaysia, Kuwait, and Jordan. 1079 

The bank was founded by four brothers, Sulaiman, Saleh, Abdullah, and 

Mohamed, of the AI Rajhi family, one of the wealthiest in Saudi Arabia. 

The bank began as a collection of banking and commercial 

ventures which, in 1978, joined together as the AI Rajhi Trading and 

Exchange Company.1080 In 1987, the company converted to ajoint stock 

company, and two years later renamed itself the Al Rajhi Banking and 

Investment Corporation. 1081 In 2006, the bank rebranded itself as AI 

Rajhi Bank. 1082 It is traded on the Saudi Arabian Stock Exchange 

(Tadawul), and about 45% of its shares are publicly owned.1083 AI Rajhi 

family members remain the bank's largest shareholders. 1084 

107'AI Rajhi Bank website. "About Us." http://www.alrajhibank.eom.salenlaboutus/pages/default.aspx. 

I07~ Id. 

1080 Id.; Al Rajhi Bank website. "Our History." http://www.alrajhibank.com.salourhistory/index.html. 

1081 AI Rajhi Bank website. "Our History," http://www.alrajhibank.com.salourhistory/index.html. 

1082 Id. The bank also has various subsidiaries. including AI Rajhi Capital. See Al Rajhi Capital 

website, http://www.alrajhi-capital.com/enlWeicome+lo+ARFS/Overview/. 

,0'3 HBUS "Know Your Customer Profile" of AI Rajhi Banking & Investment Corp. 

(10115/2010), HSBC-PSI-PROD-01023 10, (hereinafter "2010 HBUS KYC Profile on Al Rajhi 

Bank"), at 2. About 45% oflhe bank's shares arc publicly traded; the remainder is held 

~rimarily by members of the AI Rajhi family. Id. at 3. 084 2010 HBUS KYC Profile on AI Rajhi Bank, at 3. 
403 


76061.769

229 

Al Rajhi Bank offers a wide range of banking services including 

deposits, loans, investment advice, securities trading, remittances, credit 

cards, and consumer financing. lOSS All services are offered in 

conformance with Islamic requirements, including the set aside of funds 

for "zakat," which is used for charitable donations. The bank has won a 

number of awards for its operations in the Middle East. 

The bank's most senior official is Sulaiman bin Abdul Aziz Al 

Rajhi, who at various times has held the posts of Chief Executive 

Officer, Managing Director, and Chairman of the Board of Directors. 1086 

The bank's General Manager is Abdullah bin Abdul Aziz Al Rajhi. The 

board of directors consists of eleven directors, six of whom are Al Rajhi 

family members: Sulaiman bin Abdul Aziz Al Rajhi, Chairman of the 

Board; Abdullah bin Abdul Aziz Al Rajhi; Sulaiman bin Saleh Al Rajhi; 

Mohamed bin Abdullah Al Rajhi; Abdullah bin Sulaiman Al Rajhi; and 

Bader bin Mohammed Al Rajhi. 1087 

The bank is part of an extensive group of Al Rajhi business and 

nonprofit ventures, which include companies engaged in money 

exchange services, commodity trading, real estate, poultry, construction, 

and pharmaceuticals. 1088 One business which also had an HBUS 

account was the Al Rajhi Trading Establishment, a money exchange 

business owned by Abdulrahman Saleh Al Rajhi. 1089 Its I·IBUS account 

was closed in 2005, when it merged with seven other businesses to form 

a new Saudi bank. The largest nonprofit venture in the Al Rajhi group is 

the SAAR Foundation, which is named after Sulaiman bin Abdul Azis 

Al Rajhi, and supports nonprofit and business ventures around the 

world. 1090 Sulaiman Al Rajhi and his family today have an estimated net 

worth of nearly $6 billion. 1091 

The Subcommittee contacted Al Rajhi Bank regarding its 

relationship to HSBC and the matters addressed in this section, but the 

1085 See Al Rajhi Bank website, http://.www.alrajhibank.com.sa.aspx. 

1086 See Al Rajhi Bank website, "About Us," hltp:llwww.alrajhibank.com.saleniaboutus/pages/board-of-directors.aspx. See also 2010 HBUS KYC Profile on Al Rajhi Bank, at 3 

(describing Sulaiman Abdul Aziz AI Rajhi as Chainnan of the Board and Managing Director; 

Abdullah Sulaiman Al Rajhi as CEO; and Mohammed Lookman Samsudeen as General Manager 

and Chief Financial Officer). 

1087 Rajhi Bank website, "About Us," http://www.alrajhibank.com.saleniabout-us/pages/boardof-directors.aspx. 

1088 See, e.g,. Sulimin Abdul Aziz Al Rajhi Holding Company website, 

hltr:llwww.alrajhiholding.com/. 

lOS See, e.g., March 2002 email chain among HBUS personnel, "AI Rajhi Trading 

establishment," OCC-PSI-00381727, at 3; 9/8/2008 HSBC Financial Investigations Group (FIG) 

re?c0rt on Al Rajhi Bank, HSBC-PSI-PROD-OI02813. 

10 0 See "Sulaiman AI-Rajhi's life a rags to riches story," Arab News (5/29/2012), 

http://www.arabnews.com/?q=economy/sulaiman-al-raj hi%E2%80%99s-life-rags-riches-story. 

109 See Profile of SuI aim an Al Rajhi & family (March 2012), Forbes, 

http://www.forbes.com/profile/sulaiman-al-rajhi/. See also 2010 HBUS KYC Profile on AI 

Rajhi Bank at 3 (estimating family worth at $22.5 billion). 
404 


76061.770

230 

bank has not provided any information in response to the 

Subcommittee's inquiry. 

B. Saudi Arabia and Terrorist Financing 

The majority of Al Rajhi Bank's operations take place in Saudi 

Arabia, which the United States has long identified as a country of 

concern in the area of terrorist financing. JOn Following the terrorist 

attack on the United States on September 11,200 I, the U.S. Government 

began a decade-long intensive investigation into where and how 

terrorists obtain funding, repeatedly returning to Saudi Arabia, its banks, 

and its nationals as a suspected source. 

In 2004, the 9/11 Commission charged with investigating the 

terrorist attack issued a report which found that Osama Bin Laden and al 

Qaeda had relied on a "financial support network that came to be known 

as the 'Golden Chain,' put to~ether mainly by financiers in Saudi Arabia 

and the Persian Gulf states." 1 93 The Commission's report explained: 

"AI Qaeda appears to have relied on a core group of financial 

facilitators who raised money from a variety of donors and other 

fund-raisers, primarily in the Gulf countries and particularly in 

Saudi Arabia. Some individual donors surely knew, and others did 

not, the ultimate destination oftheir donations."lo94 

The Commission report stated: "Saudi Arabia's society was a place 

where al Qaeda raised money directly from individuals and through 

charities. It was the society that produced 15 of the 19 hijackers."lo95 

The report also stated that it "found no evidence that the Saudi 

government as an institution or senior Saudi officials individually 

funded [AI Qaeda],,,I096 and that after terrorist attacks began occurring in 

Saudi Arabia, a "Saudi crackdown ... ha[ d] apparently reduced the funds 

available to al Qaeda perhaps drastically - but it is too soon to know if 

this reduction willlast."lo97 

After several major terrorist attacks within its borders in 2003 and 

2004, Saudi Arabia took a number of steps to combat terrorist financing. 

One report to Congress by the Congressional Research Service 

summarized those actions as follows: 

1092 See, e.g., International Narcotics Control Strategy Reports prepared by the U.S. Department 

of State, 2003·2012 (identifying Saudi Arabia as a country "of concern" with respect to money 

laundering and terrorist financing). 

109J The 9/11 Commission Report: Final Report of the National Commission on Terrorist Attacks 

UDon the United States, (7/22/2004), at 55. 

1094 Id. at 170. 

1095 Id. at 370. 

1096 Id. at 171. 

1097 Id. at 383. 
405 


76061.771

231 

"Since mid-2003, the Saudi government has: set up ajoint task 

force with the United States to investigate terrorist financing in 

Saudi Arabia; shuttered charitable organizations suspected of 

terrorist ties; passed anti-money laundering legislation; banned 

cash collections at mosques; centralized control over some 

charities; closed unlicensed money exchan§es; and scrutinized 

clerics involved in charitable collections.,,1 98 

Saudi Arabia also reported seizing illicit cash [Tom terrorist 

organizations, shutting suspect bank accounts, designating several 

individuals as terrorist financiers, and killing two of them. 1099 In 

addition, Saudi Arabia established a Permanent Committee on 

Combating the Financing of Terrorism and a Financial Investigation 

Unit which began operations in September 2005. 1100 

Despite those advances, U.S. Government testimony and reports 

indicate that Saudi Arabia continued to be a focus of concern with 

respect to terrorist financing. In 2005, for example, U.S. Treasury 

Under Secretary for Terrorism and Financial Intelligence Stuart Levey 

testified before Congress: "[W]ealthy donors in Saudi Arabia are still 

funding violent extremists around the world, from Europe to North 

Africa, from Iraq to Southeast Asia."llol He also testified that Saudi 

individuals may be "a significant source" of financing for the Iraq 

insurgency. I 102 

In 2007, in its annual International Narcotics Control Strategy 

Report, the U.S. Department of State wrote: "Saudi donors and 

unregulated charities have been a major source of financing to extremist 

and terrorist groups over the past 25 years."IIOJ A 2007 report to 

Congress by the Congressional Research Service stated: "U.S. officials 

remain concerned that Saudis continue to fund Al Qaeda and other 

terrorist organizations.,,1104 That same year, Congress enacted 

legislation which found that "Saudi Arabia has an uneven record in the 

fight against terrorism, especially with respect to terrorist financing," 

1098 "Saudi Arabia: Terrorist Financing Issues," Congressional Research Service Report for 

Congress, RL32499 (9/14/2007), http;llwww.fas.org/sgp/crs/terrorIRL32499.pdf(hereinaftcr 

"2007 CRS Report on Saudi Arabia Terrorist Financing Issues"), in the summary. See also 2007 

International Narcotics Control Strategy Report, U.S. Department of State, at 355-357. 

1099 2007 CRS Report on Saudi Arabia Terrorist Financing Issues, at 25. 

1100 Id. at 24. 

1101 Stuart Levey testimony before the House Financial Services Subcommittee on Oversight and 

Investigations and House International Relations Subcommittee on International Terrorism and 

Nooproliferation (5/4/2005). 

I !02 Stuart Levey testimony before the Senate Committee on Banking, Housing, and Urban 

Affairs (711312005) ("Wealthy Saudi fioanciers aod charities have funded terrorist organizations 

and causes that support terrorism and the ideology that fucls the terrorists~ agenda. Even today, 

we believe that Saudi donors may still be a significant source of terrorist financing, including for 

the insurgency in Iraq."). 

IIOJ 2007 Iotemational Narcotics Control Strategy Report. U.S. Department of State, at 355. 

1104 2007 CRS Report on Saudi Arabia Terrorist Financing Issues, in the summary. 
406 


76061.772

232 

and required the U.S. Government to develop a long-term strategy for 

working with Saudi Arabia to combat terrorist financing. I lOS On the 

sixth anniversary of the 9/lJ attack, Treasury Under Secretary Levey 

said in a televised interview on terrorist financing: "[I]fI could 

somehow snap my fingers and cut off the funding from one country, it 

would be Saudi Arabia."] 106 

In 2008, the U.S. State Department issued the long-term strategy 

required by the 2007 law. I 107 The strategy identified goals and 

"performance targets" to track progress in strengthening collaboration 

with Saudi Arabia to clamp down on terrorist financing. In April 2008, 

when questioned during a Senate hearing, Treasury Under Secretary 

Levey testified that, while Saudi Arabia had taken strong action against 

terrorists operating within its borders and was cooperating with the 

United States on an operational level, it was not working as hard to 

prevent funds from flowing to terrorists outside of its borders: "Saudi 

Arabia today remains the location from which more money is going to 

terror groups and the Taliban - Sunni terror groups and the Taliban -

than from any other place in the world."] 108 

In 2009, a report prepared for Congress by the U.S. Government 

Accountability Office (GAO) reviewed both the State Department's 

long-term strategy and Saudi anti-terrorism efforts since 2005. GAO 

concluded: "U.S. and Saudi officials report progress on countering 

terrorism and its financing within Saudi Arabia, but noted challenges, 

particularly in preventing alleged funding for terrorism and violent 

extremism outside of Saudi Arabia."llo9 GAO wrote: 

"U.S. officials remain concerned about the ability of Saudi 

individuals and multilateral charitable organizations, as well as 

other individuals visiting Saudi Arabia, to support terrorism and 

violent extremism outside of Saudi Arabia. U.S. officials also 

noted that limited Saudi enforcement capacity and terrorist 

financiers' use of cash couriers pose challenges to Saudi efforts to 

prevent financial support to extremists.,,1l10 

1105 See Section 2043(c). Implementing Recommendations of the 9/11 Commission Act, P.L. 

110-53 (8/3/2007). 

1106 "U.S.: Saudis Still Filling Al Qaeda's Coffers," Brian Ross, ABC News (911 II 2007). 

1107 "U.S. Strategy Toward Saudi Arabia, Report Pursuant to Section 2043(c) of the 

Implementing Recommendations of the 9/11 Commission Act/' U,S. Department of State 

(1/30/2008). 

! 108 Stuart Levey testimony before Senate Committee on Finance, "'Anti-Terrorism Financing: 

Progress Made and Challenges Ahead," (411 12008). 

1 109 "Combating Terrorism: U.S. Agencies Report Progress Countering Terrorism and Its 

Financing in Saudi Arabia, but Continued Focus on Counter Terrorism Financing Efforts 

Needed." U.S. Government Accountability Office, GAO-09-883 (Sept. 2009), 

http://www.gao.gov/new.items/d09883.pdf, at l. 

1110 ld. at 29. 
407 


76061.773

233 

GAO also noted that certain performance targets set by the State 

Department had been dropped in 2009, such as the establishment of a 

Saudi Commission on Charities to oversee actions taken by Saudi 

charities abroad as well as certain regulations of cash couriers. I I I I GAO 

recommended that the United States reinstate the dropped performance 

targets to prevent the flow of funds from Saudi Arabia "through 

mechanisms such as cash couriers, to terrorists and extremists outside 

Saudi Arabia."III2 

Recently, Saudi Arabia won praise for its role in foiling a terrorist 

plan to smuggle a bomb onto an airline flight to the United States.IIl3 

The State Department's most recent annual International Narcotics 

Control Strategy Report contains no information about Saudi Arabia's 

anti-money laundering or terrorist financing efforts. I 114 

C. Alleged AI Rajhi Links to Terrorism 

In the ten years after the 9/11 attack in 2001, U.S. Government 

reports, criminal and civil legal proceedings, and media reports have 

alleged links between Al Rajhi family members and the Al Rajhi Bank 

to terrorist financing. The alleged links include that some Al Rajhi 

family members were major donors to al Qaeda or Islamic charities 

suspected of funding terrorism, established their own nonprofit 

organizations in the United States that sent funds to terrorist 

organizations, or used Al Rajhi Bank itself to facilitate financial 

transactions for individuals or nonprofit organizations associated with 

terrorism. 

Many ofthe suspicions regarding Al Rajhi Bank stem from 2002, 

when the name of its most senior official, Sulaiman bin Abdul Azis Al 

Rajhi, appeared on an internal al Qaeda list of financial benefactors, and 

when a network of Al Rajhi-related nonprofit and business ventures 

located in Virginia was subjected to search by U.S. law enforcement 

seeking to disrupt terrorist financing activities in the United States. 

Al Qaeda List of Financial Benefactors. The al Qaeda list of 

financial benefactors came to light in March 2002, after a search of the 

Bosnian offices of the Benevolence International Foundation, a Saudi 

based nonprofit organization which was also designated a terrorist 

organization by the Treasury Department, led to seizure of a CD-ROM 

11I11d. at 15,33. 

11I'ld. at 3. 

1!!3 See, e.g., "International sting operation brought down underwear bomb plot," Los Angeles 

Times, Brian Bennett and Ken Dilanian (5/8/2012), 

http://iatimesblogs.latimes.comlworld_ now/20 12/05/underwear-bomb-plot.htmL 

III 2012 International Narcotics Control Strategy Report, Volume II Country Database, U.S. 

Department of State, at 287-289. 
408 


76061.774

234 

and computer hard drive with numerous al Qaeda documents. I I IS One 

computer file contained scanned images of several hundred documents 

chronicling the formation of al Qaeda. 1116 One of the scanned 

documents contained a handwritten list of20 individuals identified as 

key financial contributors to al Qaeda. 1117 Osama bin Laden apparently 

referred to that group of individuals as the "Golden Chain."lll In a 

report prepared for Congress, the Congressional Research Service 

explained: 

"According to the Commission's report, Saudi individuals and 

other financiers associated with the Golden Chain enabled bin 

Laden and AI Qaeda to replace lost financial assets and establish a 

base in Afghanistan following their abrupt departure from Sudan in 

1996.,,1119 

One of the 20 handwritten names in the Golden Chain document 

identifying al Qaeda's early key financial benefactors is Sulaiman bin 

Abdul Aziz AI Rajhi, one of AI Rajhi Bank's key founders and most 

senior officials. I 120 

The Golden Chain document has been discussed in the 9111 

Commission's report, in Federal court filings, and civil lawsuits. I 121 

Media reports as early as 2004 noted that the al Qaeda list included the 

1111 See United States v. Enaam Amaout, Case No. 02-CR-S92 (USDC NDIL), "Government's 

Evidentiary Proffer Supporting the Admissibility of Coconspirator Statements," (11612003), 

http://fll.findlaw.com/news.findlaw.com/wsj/docslbif/usamaout 1 0603prof.pdf (hereinafter 

"Amaout Evidentiary Proffer"), at 29. See also 2007 CRS Report on Saudi Arabia Terrorist 

Financing Issues, at 3; "Terrorism, 2002-2005," FBI report, at 12, http://www.fbi.gov/statsservices/publications/terrorism-2002-2005/terror02_05.pdf ("On August IS, 2003, Enaam 

Arnaout, the director of Benevolence International Foundation, was sentenced to 11 years in 

federal prison after pleading guilty on February 10,2003, to terrorism-related racketeering 

conspiracy charges. Amaout had been indicted on October 9, 2002, for conspiracy to 

fraudulently obtain charitable donations in order to provide financial assistance to al-Qa'ida and 

other organizations engaged in violence and terrorism. "). 

1116 Amaout Evidentiary Proffer, at 29. 

IIlJ Id. at 30. 

1118 Id. at 30. See also 2007 CRS Report on Saudi Arabia Terrorist Financing Issues," at footnote 

6. But see "Tangled Paths: A Sprawling Probe Of Terror Funding Centers in Virginia," Wall 

Street Journal, Glenn Simpson (6/21/2004)("Soon thereafter, a senior al Qaeda leader held by the 

Justice Department in New York confinncd the document's authenticity in an interview with the 

FBI, referring to it as the Golden Chain, U.S. government court filings say."). 

11i9 2007 CRS Report on Saudi Arabia Terrorist Financing Issues," at 3. 

1120 A copy of the Golden Chain document was provided as Exhibit 5 to the Amaout Evidentiary 

Proffer. Copies have also appeared on the Internet with English translations. See, e.g.,"The 

Golden Chain," Wikipedia, http://en.wikipedia.org/wiki/The Golden Chain. 

1121 See The 9111 Commission Report: Final Report of the N;;tional C-ommission on Terrorist 

Attacks upon the United States, (7/2212004), at 55. See also, e.g., Amaout Evidentiary Proffer at 

29-30; The Underwriting Members of Lloyd's Syndicate 3500 v. Saudi Arabia, Case 3:II-cv00202-KRG (US DC WDPA), Civil Complaint (9/SI11), 

http://www.investigativeprojecLorg/documents/case_docsIl6S0.pdf.at 20. 
409 


76061.775

235 

AI Rajhi name. I 122 HSBC was clearly on notice about both the al Qaeda 

list and its inclusion of Sulaiman bin Abdul Aziz Al Raj hi. 1 123 

2002 Search Warrant. Also in March 2002, as part of Operation 

Green Quest, a U.S. Treasury effort to disrupt terrorist financing 

activities in the United States, 1124 U.S. law enforcement agents 

conducted a search of 14 interlocking business and nonprofit entities in 

Virginia associated with the SAAR Foundation, an Al Rajhi-related 

entity, and the Al Rajhi family. I 125 Over 150 law enforcement officers 

participated in the search, generating widespread media coverage. 1126 A 

law enforcement affidavit supporting the search warrant detailed 

numerous connections between the targeted entities and Al Rajhi family 

members and related ventures. 1127 The affidavit stated that over 100 

active and defunct nonprofit and business ventures in Virginia were part 

of what it described as the "Safa Group," I 128 which the United States had 

reasonable cause to believe was "engaged in the money laundering 

tactic of 'layering' to hide from law enforcement authorities the trail of 

its support for terrorists.,,1129 

The SAAR Foundation is a Saudi-based nonprofit organization, 

founded by Sulaiman bin Abdul Aziz Al Rajhi in the 1970s, named after 

him, and used by him to support a variety of nonprofit endeavors, 

academic efforts, and businesses around the world. In 1983, the SAAR 

Foundation formed a Virginia corporation, SAAR Foundation, Inc., and 

operated it in the United States as a tax-exempt nonprofit organization 

under Section 501(c)(3) of the U.S. tax code. 1130 In 1996, another 

nonprofit organization was incorporated in Virginia called Safa Trust 

Inc. 113 I These and other nonprofit and business ventures associated with 

1m See, e.g., "Tangled Paths: A Sprawling Probe Of Terror Funding Centers in Virginia," Wall 

Street Journal, Glenn Simpson (6121/2004). 

1123 See, e.g., 7126/2007 email from OCC Joseph Boss to HBUS Alan Ketley, "Saudi's," HSBC 

OCC 2830874-879 

(transmitting 2007 Wall Street Journal article to HBUS and requesting its response); 

2/312010 email [rom HBUS Jon K. Jones to HBUS Ali S. Kazmy, "Islami Bank 

Bangladesh Ltd. - Poss SCC," OCC-PSI-00453499 ("AI-Raj hi Bank got [its] start as a 

money chaining network and (Chairman Suleiman al-Rajhi appeared on the 'Golden 

Chain' of wealthy investors who supported Osama bin Laden.)"). 

! !24 Sec "Operation Grecn Quest Overview," U.S. Customs and Border Protection press release 

(2/2612002), 

http://www.cbp.gov/xp/cgov/newsroom/newsJeleases/archivesIlegacy12002122002/02262002.x 

mL 

IllS See "Affidavit in Support of Application for Search Warrant," In Re Searches Involving 555 

Grove Street. Herndon, Virginia and Related Locations, (USDC EDV A), submitted by David 

Kane, Senior Special Agent. U.S. Customs Service (hereinafter "Kane affidavit"), at ~~ J-4 

(describing investigation). 

1126 See, e.g., "Raids Seek Evidence of Money Laundering," New York Times, Judith Miller 

(312112002). 

1127 See Kane affidavit throughout, but in particular ~~ 178-180. 

1m Kane affidavit at ~ 1 (page 6). 

Ill9 Kane affidavit at ~ 5. 

IUO Kane affidavit at ~ 132. 

lUI Kane affidavit at ~~ 135-136. 
410 


76061.776

236 

the Al Rajhi family shared personnel and office space, primarily in 

Herndon, Virginia. In 2000, SAAR Foundation Inc. was dissolved, I 132 

but the Safa Trust continued to operate. 

An affidavit filed by the United States in support of the search 

warrant alleged that the Safa Group appeared to be involved with 

providing material support to terrorism. Among other matters, it alleged 

that members of the Safa Group had transferred "large amounts of funds 

... directly to terrorist-front organizations since the early 1990's," 

including a front group for the Palestinian Islamic lihad-Shikaki Faction, 

a designated terrorist organization. I 133 It also detailed a $325,000 

donation by the Safa Trust to a front group for Hamas, another 

designated terrorist organization. I 134 In addition, the affidavit expressed 

suspicion about a transfer of over $26 million from members of the Safa 

Group to two offshore entities in the Isle of Man. 1135 The affidavit 

further alleged that "one source offunds flowing through the Safa Group 

[was] from the wealthy AI-Raj hi family in Saudi Arabia.,,1136 

The search produced about 200 boxes of information which was 

then analyzed and used in other investigations and prosecutions, 

although neither the SAAR Foundation or Safa Trust has been charged 

with any wrongdoing. I 137 In 2003, Abdurahman Alamoudi, who had 

worked for SAAR Foundation Inc. from 1985 to 1990, as executive 

assistant to its president, 1138 pled guilty to plotting with Libya to 

assassinate the Saudi crown prince and was sentenced to 23 years in 

jail. 1139 He had also openly supported Hamas and Hezbollah, two 

terrorist organizations designated by the United States. I 140 According to 

an affidavit supporting the criminal complaint against him, Mr. 

Alamoudi admitted receiving $340,000 in sequentially numbered $100 

bills from Libya while in London,1141 and planned "to deposit the money 

in banks located in Saudi Arabia, from where he would feed it back in 

smaller sums into accounts in the United States.,,1142 According to the 

affidavit, he also admitted involvement in similar cash transactions 

involving sums in the range of$IO,OOO to $20,000. 1143 

1m Kane affidavit at ~ 132. See also "Raids Seek Evidence of Money Laundering," New York 

Times, Judith Miller (3/21/2002)(stating that, "although officially dissolved," the SAAR 

Foundation had recently occupied the Virginia offices subject to search). 

113] Kane affidavit at ~ 3. 

1134 Kane affidavit at ~~ IO(g), 161. Executive Order 12947 (1995). 

1135 Kane affidavit at ~ ~ 103-104. 

1136 Kane affidavit at ~ III (emphasis in original omitted). 

Ill? See In re Grand Jury Subpoena (T-II21, 597 F.3d 189 (4th Cir. 2/24/2010), at 191-192. 

1138 Sec United States v. Alamoudi, (USDC EDV A)(9/30/2003), "Affidavit in Support of 

Criminal Complaint," submitted by Brett Gentrup, Special Agent with U.S. Immigration and 

Customs Enforcement, (hereinafter "Gentrup affidavit"), ~ 29. 

! 139 See "Abdurahman Alamoudi Sentenced to Jail in Terrorism Financing Case," press release 

rrepared by U.S. Department of Justice (10/15/2004). 

140 See Gentrup affidavit at ~ 35. 

1141 Gentrup affidavit at ~~ 39, 43 

1142 Gentrup affidavit at ~ 44. 

1143 Gentrup affidavit at ~ 45. 
411 


76061.777

237 

The documents seized in the 2002 search were returned after about 

18 months, but in 2006, were sought again through subpoenas issued by 

a Federal grand jury in Virginia. 1 144 The AI-Raj hi related business and 

nonprofit ventures initially refused to re-supply the documents, then 

turned them over after a court imposed civil contempt fines totaling 

$57,000. 1145 The Al Rajhi group then engaged in a four-year, 

unsuccessful court battle to nullifY the fines. 1 146 In addition, in 2004, Al 

Rajhi Bank filed a defamation lawsuit against the Wall Street Journal for 

a 2002 article describing how Saudi Arabia was monitoring certain 

accounts due to terrorism concerns. 1 147 In 2004, the lawsuit settled; the 

Wall Street Journal did not pay any damages. It also published a letter 

from the bank's chief executive, 1 148 and its own statement that the 

newspaper "did not intend to imply an allegation that [AI Rajhi Bank] 

supported terrorist activity, or had engaged in the financing of 

terrorism.,,1149 

2003 CIA Report. While the widely publicized 2002 search 

fueled suspicions about Al Rajhi Bank's association with terrorist 

financing, a 2003 CIA report, discussed in a news article in 2007, 

provided another basis for concerns about the bank. 

In 2003, the U.S. Central Intelligence Agency (CIA) issued a 

classified re~ort entitled, "AI Rajhi Bank: Conduit for Extremist 

Finance.,,115 According to Wall Street Journal reporter, Glenn Simpson, 

this CIA report concluded: "Senior Al Rajhi family members have long 

supported Islamic extremists and probably know that terrorists use their 

bank.',1151 A later civil lawsuit, filed in 2011, provided a longer 

quotation from the same CIA report as follows: 

"Islamic extremists have used AI-Rajhi Banking & Investment 

Corporation (ARABIC) since at least the mid-1990s as a conduit 

for terrorist transactions, probably because they find the bank's 

vast network and adherence to Islamic principles both convenient 

and ideologically sound. Senior aI-Raj hi family members have 

long supported Islamic extremists and probably know that 

terrorists use their bank. Reporting indicates that senior al-Rajhi 

"'4 See In re Grand Jury Subpoena (T ·112), 597 F.3d 189 (4th Cir. 2/24/20 I 0). 1145 I

d, 

1146 Id. See also "A Court Sheds New Light on Terror Probe," The New York Sun, Joseph 

Goldstein (3/24/2008). 

1147 The article was "Saudis Monitor Key Bank Accounts For Terror Funding at U.S. Request," 

Wall Street Journal, James Dorsey (2/6/2002), 

httr://online. wsj.com/article/SB 1 09813587680048521.html. 

114 "AI Rajhi Bank's Statement on Journal's Article," Wall Street Journal, Abdullah Sulaiman 

AI Rajhi (l 0/1912004), http://online.wsj.com/article/SB I 09813521 879 I 48492.html. 

1149 HSBC Financial Intelligence Group Report of Findings on Al Rajhi Bank, HSBC acc 7519413 (12113/2004). 

1150 "US Tracks Saudi Bank Favored by Extremists," Wall Street Journal, Glenn Simpson 

(7/26/2007), http://online.wsj,eom/artiele/SBI1853003825047640S.html. IIsI I

d. 
412 


76061.778

238 

family members control the bank's most important decisions and 

that ARABIC's princip[al] managers answer directly to Suleiman. 

The al-Rajhis know they are under scrutiny and have moved to 

conceal their activities from financial regulatory authorities.,,1152 

According to the same Wall Street Journal article by Glenn 

Simpson, the 2003 CIA report alleged that, in 2000, Al Rajhi Bank 

couriers "delivered money to the Indonesian insurgent group Kompak to 

fund weapons purchases and bomb-making activities.,,1153 The report 

also allegedly claimed that in 2002, one year after the 9111 attacks, the 

bank's managing director ordered the Al Rajhi Bank's board "to explore 

financial instruments that would allow the bank's charitable 

contributions to avoid official Saudi scrutiny.,,1154 The 2003 CIA report 

allegedly stated further that extremists "ordered operatives in 

Afghanistan, Indonesia, Pakistan, Saudi Arabia, Turkey, and Yemen" to 

use Al Rajhi Bank. I 155 

2005 Al Haramain Prosecution. A third source of suspicion 

regarding Al Rajhi Bank's possible links to terrorism arose from a 2005 

Federal indictment of al-Haramain Islamic Foundation Inc. and two of 

its senior officials. AI-Haramain Islamic Foundation is a Saudi-based 

nonprofit organization that, in 2005, operated in more than 50 countries 

around the world. 1156 Beginning in 2002, the United States desi~nated 

multiple branches of the Foundation as terrorist organizations. II 7 After 

freezing the assets of two such branches for "diverting charitable funds 

to terrorism," a U.S. Treasury Department press release stated: "The 

branch offices of al Haramain in Somalia and Bosnia are clearly linked 

to terrorist financing.,,1158 In 2004, a Treasury Department statement 

called al-Haramain Foundation "one of the principal Islamic NGOs 

[Non-Governmental Organizations] providing support for the Al Qaida 

network and promoting militant Islamic doctrine worldwide." 1 159 That 

same year, the United States added the U.S. branch of the organization 

1152 The Underwriting Members of Lloyd's Syndicate 3500 v. Saudi Arabia, Case 3:11·cv· 

00202·KRG (USDC WDPA), Civil Complaint (9/8/2011), 

http://www. investigati veproject.org/documents/case _ docs/1680. pdf (hereinafter "Lloyd's 

lawsuit"), at ~ 370. 

1153 "US Tracks Saudi Bank Favored by Extremists," Wall Street Journal, Glenn Simpson 

(7/6/2007), http://online.wsj.com/article/SBl18530038250476405.htm!. 1154 Id. 

1155 Id. 

1156 United States v. al·Haramain Islamic Foundation Inc., Case No. 6:05·CR·60008·HO (USDC 

Oregon) Indictment (2117/2005), at ~ B. 

1157 See "Blocking Property and Prohibiting Transactions With Persons Who Commit, Threaten 

To Commit, or Support Terrorism," 66 FR 49079 (9/2312001). 

! !58 3/1112002 "Designations of Somalia and Bosnia-Herzegovina Branches of AI-Haramain 

Islamic Foundation," U.S. Treasury Department, 

httr:llwww.fas.org/irp/news/2002103/dot031102fact.html. 

!15 "Treasury Announces Joint Action with Saudi Arabia Against Four Branches ofal-Haramain 

In The Fight Against Terrorist Financing," U.S. Treasury Department press release No. JS·II08 

(1122/2004), http://www.treasury.gov/press/releases/js1108.htm. 
413 


76061.779

239 

to the SON list for acting as an "underwrit[erJ of terror." I 160 The Saudi 

government issued a similar 2004 designation and ordered the alHaramain Islamic Foundation to be dissolved. 1l61 In 2008, however, 

Treasury noted that, despite the Saudi government's action, the 

organization's leadership appeared to have reconstituted itself under a 

new name and continued to operate. I 162 

In the United States, representatives of the al-Haramain Islamic 

Foundation formed, in 1999, an Oregon corporation named al-Haramain 

Islamic Foundation, Inc. which set up offices in Ashland, Oregon. I 163 

The corporation was operated as a nonprofit organization under Section 

501(c)(3) of the U.S. tax code. ll64 In 2004, the Office of Foreign Assets 

Control (OFAC) at the Treasury Department deemed al-Haramain 

Islamic Foundation Inc. in Oregon a "Specially Designated Global 

Terrorist Entity.,,1165 In 2005, the United States indicted the Foundation 

and two of its senior officials, Pirouz Sedaghaty and Soliman AI-Buthe, 

who was later designated by the United States as a terrorist financier. I 166 

Since both men were out of the country when the indictment was filed, 

the case was dormant for two years.

1167 In 2007, Mr. Sedaghaty returned 

to the United States and was arrested at an airport. I 168 In 2010, he stood 

trial, was convicted of two felonies, and sentenced to nearly three years 

in prison. I 169 In the incident that led to his conviction, he and Mr. AIButhe used funds from an Egyptian donor to purchase $130,000 in U.S. 

travelers cheques from a bank in Oregon; Mr. AI-Buthe then traveled to 

Saudi Arabia and, in 2000, cashed the travelers cheques at AI Rajhi 

1160 See Executive Order No. 13,224 (2004); "U.S.-Based Branch of Al Haramain Foundation 

Linked to Terror," U.S. Treasury Department press release (1119/2004). 

1161 See, e.g., 2007 CRS Report on Saudi Arabia Terrorist Financing Issues, at 19. 

1162 See "Combating Terrorism: U.S. Agencies Report Progress Countering Terrorism and Its 

Financing in Saudi Arabia, but Continued Focus on Counter Terrorism Financing Efforts 

Needed." U.S. Government Accountability Office, GAO-09-883 (Scpt. 2009). 

http://www.gao.gov/new.items/d09883.pdf.at 35. 

116 See United States v. al-Haramain Islamic Foundation Inc., Case No. 6:05-cr-60008-HO 

(USDC Oregon) Indictment (2/17/2005), at ~ B. 1164 Id. 

1165 See Executive Order No. 13224 (2004); "U.S.-Based Branch of Al Haramain Foundation 

Linked to Terror," U.S. Treasury Department press release (111912004); Al Haramain Islamic 

Foundation Inc. v. U.S. Dep't of Treasury, 660 F.3d 1019, 1023 (9th Cir. 2011). 

1166 See United States v. al-Haramain Islamic foundation Inc., Case No. 6:05-CR-60008-HO 

(USDC Oregon) Indictment (2117/2005). The case was featured in the U.S. State Department's 

annual report on money laundering issues. See 2005 International Narcotics Control Strategy 

Report, Volume II, "Money Laundering and Financial Crimes," U.S. State Department, at 16. 

See also "U.S.-Based Branch of Al Haramain Foundation Linked to Terror," U.S. Treasury 

Department press release No. JS-1895 (9/912004); "Tax Case Ends Against Charity," Les Zaitz, 

The Oregonian (8/512005). 

1167 Because neither individual was in the United States, the prosecution tater dropped the 

Foundation from the case, to prevent the case from proceeding in a piecemeal fashion. See M 

Ra;hi Banking & Investment Corp. v. Holder, Case No. I: 1 0-MC-00055-ESH, Memorandum of 

Points and Authorities In Support of Petitioner's Motion to Quash USA Patriot Act Subpoena 

(Ill 9/2010), at 5. 1168 Id. 

II" "Former U.S. Head of AI-Hararnain Islamic Foundation Sentenced to 33 Months in Federal 

Prison," U.S. Attorney's Office for the District o[Oregon press release (9/2711 I), at 1. 
414 


76061.780

240 

Bank; the money was then smuggled to violent extremists in 

Chechnya. 1170 

AI Rajhi Bank's role in the events that formed the basis for the 

prosecution attracted media attention in 2005, when the indictment was 

filed; in 2007, when Mr. Sedaghaty was arrested; and in 2010, when the 

trial took place. Over the years, it became public that Mr. AI-Buthe, a 

designated terrorist financier, had been a client of AI Rajhi Bank in 

Saudi Arabia in 2000,1171 as had the al-Haramain Islamic Foundation, 

later designated a terrorist organization. 1172 In 2007, a Wall Street 

Journal article reported that AI Rajhi Bank had maintained at least 24 

accounts for the al-Haramain Islamic Foundation and handled unusual 

transactions for it. I 173 In January 20 I 0, after the United States served an 

administrative subpoena on AI Rajhi Bank to obtain authenticated bank 

documents for use in the al-Haramain Foundation criminal trial, the bank 

refused to Rroduce them and filed a motion in court to quash the 

subpoena, 174 leading to media reports that it was refusing to cooperate 

with a terrorist financing prosecution. I 175 

Links to Suspect Banks. In addition to the Golden Chain 

document, the U.S. search of AI-Raj hi related businesses and nonprofits 

in the United States, and the al Haramain Foundation prosecution, still 

another source of concern about Al Rajhi Bank involves its alleged links 

to other banks suspected of financing terrorism. 

In 2011, a civil lawsuit filed by an insurance syndicate against 

Saudi Arabia and others seeking to recover insurance payments made 

after the 9111 terrorist attack discussed two of those suspect banks, Bank 

I17°Id. 

1171 See, e.g., Al Rajhi Banking & Investment Com. v. Holder, Case No. 1:10-MC-00055-ESH, 

Memorandum of Points and Authorities In Support of Petitioner's Motion to Quash USA Patriot 

Act Subpoena (filed 1-19-10), at 6. 

1172 See, e.g., "U.S. Tracks Saudi Bank Favored by Extremists," Wall Street Journal, Glenn 

Simpson (7/26/2007), http://online.wsj.comiarticle/SBI18530038250476405.html. See also 

7/2612007 email from OCC Joseph Boss to HBUS Alan Ketley, "Saudi's," HSBC OCC 3391185 

(transmitting the article to HBUS); email from HBUS Ketley to HBUS colleagues, Saudi's;' 

HSBC OCC 3391262 (sharing the article within HBUS). 

1173 "US Tracks Saudi Bank Favored by Extremists," Wall Street Journal, Glenn Simpson 

(7/26/2007), http://online.wsj.com/article/SB 1185300382504 76405.html. 

1174 See Al Rajhi Banking & Investment Corp. v. Holder, Case No. 1:10-MC-00055-ESH, 

Memorandum of Points and Authorities In Support of Petitioner's Motion to Quash USA Patriot 

Act Subpoena (111912010). This case was later closed as "moot." See Order Dismissing Action 

As Moot (31212010) ("It is hereby ordered that this action is dismissed as moot in light of the 

ruling issued on February 26, 2010. by Judge Michael R. Hogan of the U.S. District Court for the 

District of Oregon in United States v. Sedaghaty ... granting the government's motion to compel 

petitioner AI~Rajhi Banking and Investment Corp.'s compliance with an administrative 

subpoena.") (emphasis in original omitted). 

1175 See, e.g., "Saudi Bank Refuses to Cooperate in U.S. Investigation into Terrorist Financiers," 

For The Record - The IPT Blog (112612010). http://www.investigativeproject.orgI1753/saudibank-refuses-to-cooperate-in-us. 
415 


76061.781

241 

al Taqwa and Akida Bank Private Ltd. 1176 Both banks have been 

deemed by the United States as Specially Designated Global Terrorist 

Entities. l177 Regarding Bank al Taqwa, the lawsuit noted that two 

individuals who were former executives at Bank al Taqwa, Ibrahim 

Hassabella and Samir Salah, were also associated with the SAAR 

Foundation. 1178 Mr. Hassabella was a former secretary of al Taqwa 

Bank and a shareholder of SAAR Foundation Inc. Mr. Saleh was a 

former director and treasurer of the Bahamas branch of al Taqwa Bank, 

and president ofthe Piedmont Trading Corporation which was part of 

the SAAR network. The U.S. Treasury Department has stated: "The AI 

Taqwa group has long acted as financial advisers to al Qaeda, with 

offices in Switzerland, Lichenstein, Italy and the Caribbean." 1179 

Regarding Akida Bank, the lawsuit complaint alleged that Sulaiman bin 

Abdul Aziz Al Rajhi was "on the board of directors of Akida Bank in 

the Bahamas" and that "Akida Bank was run by YoussefNada, a noted 

terrorist financier." I 180 

As explained below, Al Rajhi Bank was also associated with 

Islami Bank Bangladesh Ltd., which was located in a country at high 

risk for money laundering, provided an account to a Bangladeshi 

accused of involvement with a terrorist bombing, and had been fined 

three times for violating AML requirements in connection with 

providing bank services to "militants.,,1181 HSBC's own research 

indicated that the Al Rajhi group held about one-third of the bank's 

shares. In addition, Al Rajhi Bank provided a correspondent account to 

Social Islami Bank, a Bangladesh-based bank whose largest single 

shareholder for many years was the International Islamic Relief 

Organization, which was designated by the United States in 2006, as a 

terrorist organization. I 182 A second shareholder was the precursor to the 

Benevolence Islamic Foundation, also later designated by the United 

States as a terrorist organization. 

1176 See Lloyd's lawsuit at ,,459-460. This lawsuit was withdrawn II days after being filed, 

with no prejUdice against its re-filing in the future. See Lloyd's lawsuit, Notice of Voluntary 

Dismissal, Docket document 5, 9119/2011. 

!In See "The United States Designates Twenty-Five New Financiers of Terror," U.S. Treasury 

Department press release (8/29/2002), http://www.treasury.gov/press-center/pressreleases/Pageslp03380.aspx. See also E.O. 13224, "Blocking Property and Prohibiting 

Transactions With Persons Who Commit, Threaten To Commit, or Support Terrorism," 66 FR 

49079 (9/23/2001); Kane affidavit at , 112. 

1178 Lloyd's lawsuit at 1[459. 

1179 Statement by Treasury Secretary Paul O'Neill (1117/2001). 

1180 Lloyd's lawsuit at 1[459. Youssef Nuda was designated as a terrorist financier by the United 

States in November 2001. See "Recent OFAC Actions," U.S. Department of the Treasury, 

(1117/200 I), http://www.treasury.gov/resource-center/sanctions/OFACEnforcement/Pages/200 III 07.aspx. 

11'/ See Subsection 1(1), below. 

II" See Subsection 1(2), below. See also "Islamic Charity Charged with Terrorist Financing," 

U.S. Justice Department, (l/l6/2008), 

http://www.justice.gov/usao/mow/news2008Iiara.ind2.htm. 
416 


76061.782

242 

Suspect Bank Clients. A final source of concern about AI Rajhi 

Bank involves accounts it provided to specific clients linked to 

terrorism. The accounts provided to the al-Haramain Islamic 

Foundation and Soliman AI-Buthe, both designated by the United States 

as linked to terrorism, have already been discussed. Another example is 

the International Islamic Relief Organization (IIRO) which, as 

mentioned earlier, is a Saudi-based nonprofit organization which was 

added to the SDN list by the United States for "facilitating fundraising 

for AI Qaida and affiliated terrorist groups".1l8) In 2003, HSBC's 

internal Financial Intelligence Group (FIG) raised questions about the 

IIRO; in 2006 a FIG report noted that the IIRO had been linked to AI 

Qaeda and other terrorist groups, plots to assassinate President Bill 

Clinton and the Pope, attacks on the Brooklyn Bridge and Lincoln 

Tunnel, and the 1993 attack on the World Trade Center. I 184 According 

to a CRS report, press reports indicated that, until at least December 

2004, the IIRO had arranged for donors to send donations directly to 

accounts it held at AI Rajhi Bank, advertizing the accounts in various 

publications. I I 85 In addition, the Lloyd's lawsuit alleged that AI Rajhi 

Bank made or arranged for large donations to the IIRO.II86 Sulaiman 

bin Abdul Aziz AI Rajhi, the most senior official at Al Rajhi Bank, is 

also alleged to have been an officer ofIIRO. II87 

1183 See 8/3/2006 press relcase, "Treasury Designates Director, Branches of Charity Bankrolling 

AI Qaida Network," U,S, Treasury Department, reprinted in 8/3/2006 email from HBUS Sharyn 

Malone to HBUS Stephanie Napier and others, "Social Investment Bank, Bangladesh," HSBC 

OCC 3259936, See also 8/312006 "Treasury Takes Additional Measures to Combat Iranian 

WMD Proliferation Iranian Nuclear & Missile Firms Targeted," Treasury press release, 

http://www,treasury .gov Ipress-center/press-relcases/Pages/hp4 5 ,aspx, 

118 8/4/2006 FIG Report on Findings (Update) for Social Investment Bank Limited, OCC-PSI00823818 at 12.; 11/2003 FIG Report on Findings for Social Investment Bank, Ltd" OCC-PSI00823818, at 18, See also In Re September 11th Litigation, C,A, 04-7280 (S,D,N.Y, 2010), at ~ 

371. 

1185 See, e,g" 2007 CRS Report on Saudi Arabia Terrorist Financing Issues, at 9, footnote 35 

(citing International Islamic News Agency (Jeddah), "lIRO Distributes Aid to Falluja War 

Victims," (l 2/2 1I2004 ). 

http://www.saudiembassy.netl2003NewslNews/RelDetail.asp?cIndex~737), See also Lloyd's 

lawsuit at ~~ 445, 447 (alleging !IRO advertised sending donations to its accounts at AI Rajhi 

Bank, Accounts No, 77700-77709, in its own publications, and AI Rajhi Bank advertised sending 

donations to lIRO accounts at the bank in the Al Igatha 10urnal in several countries). 

1186 Lloyd's lawsuit at ~ 446-448 (alleging "AI Rajhi Bank collected charitable donations on 

behalf of Sanabel aI Kheer ('Seeds o[Charity'), the linanciallinvestment arm of the IlRO, 

depositing the donations into Sanabel's Al Rajhi Bank account no. 77707, '" Under the guise of 

IlRO funds labeled and designated for purposes such as 'war and disaster' (Account number for 

Immigrants, Refugees, and Victims of Disasters: 77702) or 'sponsor a child' (lIRO Account 

Number of Deprived Children: 77704), charitable organizations such as the IIRO use banks like 

Al Rajhi Bank to gather donations that fund terrorism and terrorist activities, Al Rajhi Bank 

also handled lIRO "charitable" contributions intended to benelit suicide bombers by directing AI 

Igatha 10urnal advertisements, ' in Somalia, Sri Lanka, India, and the Philippines under IlRO 

Account number 77709 "" On February 17, 1994, Al Rajhi Bank made a $533,333 donation to 

the Saudi High Commission ('SHC') in response to a call for donations for Bosnia and Somalia, 

In August 1995, AI Rajhi Bank contributed $400,000 to the SHC which was collecting donations 

for Bosnia during a 12-hour telethon, The donation was identilied by the Arabic newspaper 

Asharq al Awsat. "). 

1187 See, e,g" Lloyd's lawsuit at ~ 9, 
417 


76061.783

243 

Al Rajhi Bank gained notoriety as well for providing banking 

services to several of the hijackers in the 9/11 terrorist attack, including 

Abdulaziz al Omari who was aboard American Airlines Flight 11. A 

civil lawsuit described the bank's involvement with him as follows: 

"[M]oney was funneled to the Hamburg, Germany al Qaeda cell 

through the Al Rajhi Bank to businessmen Mahmoud Darkazanli 

and Abdul Fattah Zammar, who in tum provided the al Qaeda cell 

of September 11 th hijackers with financial and logistical support. 

Through Al Rajhi Bank, September 11 th hijacker Abdulaziz al 

Omari received funds into his Al Rajhi Bank Account Number .... 

AlOmari frequently utilized a credit card drawn on Al Rajhi Bank 

in the planning ofthe attacks. On September 7, 2001, four days 

before the 9111 attacks, al Omari received a wire transfer from Al 

Rajhi Bank, Buraidah Branch, Jeddah, Saudi Arabia .... ,,1188 

Takcn together, the information - the Al Qaeda Golden Chain 

document, the 2002 search of Al Rajhi-related entities in Virginia, the 

2003 CIA report, the 2005 al Haramain Foundation indictment and trial, 

the 2007 media reports, the 2010 refusal to provide bank documents in a 

terrorist-financing trial, and the multiple links to suspect banks and 

accountholders - present an unusual array of troubling allegations about 

a particular financial institution. When asked about these matters, AI 

Rajhi Bank has repeatedly condemned terrorism and denied any role in 

financing extremists.1189 In addition, despite all the allegations, neither 

the bank nor its owners have ever been charged in any country with 

financing terrorism or providing material support to terrorists. 

HSBC was fully aware of the suspicions that AI Rajhi Bank and its 

owners were associated with terrorist financing, describing many of the 

alleged links in the AI Rajhi Bank client profile. I 190 On one occasion in 

2008, the head ofHSBC Global Banknotes Department told a colleague: 

"In case you don't know, no other banknotes counterparty has received 

so much attention in the last 8 years than Alrajhi.,,1191 Despite, in the 

words of the KYC client profile, a "multitude" of allegations, HSBC 

chose to provide Al R~ihi bank with banking services on a global basis. 

1188 Lloyd's lawsuit at 11 449. 

1189 See, e.g., "AI R'\ihi Bank's Statement on Journal's Article," Wall Street Journal, Abdullah 

Sulaiman Al Rajhi (10/19/2004), http://online.wsLcomiarticle/SBl09813521879148492.hlml; 

"AI Rajhi Bank responds to Wall Street Journal report," distributed by PR Newswire, 

(l0/2412003), 

http://www.thefreelibrary.com/AI+Rajhi+ Bank+responds+to+ Wall+Street+ Journal+report.-

aOI09218136. 

1190 See, e.g., 2010 HBUS KYC Profile of Al Rajhi Bank, at 6, II. 

1191 5/2008 email from Christopher Lok to Gary C H Yeung, , "KYC Approval needed for: AL 

RAJHI BANKING & INVESTMENT CORP," OCC-PSJ-00155690. 
418 


76061.784

244 

D. HSBC Relationship with Al Rajhi Bank 

In the United States, Al Rajhi Bank first became a client of 

Republic Bank of New York during the 1970s; after Republic Bank of 

New York was purchased by HSBC, Al Rajhi Bank became a client of 

HSBC Bank United States (HBUS).ll92 HSBC also had longstanding 

relationships with Al Rajhi Bank and other Al Rajhi-related businesses 

in other parts of the world, including the Middle East, Europe, and the 

Far East, which HSBC had developed separately from the relationship it 

assumed from Republic Bank of New York in the United States. I 193 

HSBC provided Al Rajhi Bank with a wide range of banking services, 

including wire transfers, foreign exchange, trade financing, and asset 

management services. I 194 In addition, in 1998, HSBC Group established 

"HSBC Amanah," a "global Islamic financial services division" 

designed to "serve the particular needs of Muslim communities" in 

compliance with Islamic law, and provided those banking services to Al 

R~jhi Bank and other Al Rajhi-related businesses. I 195 

In the United States, a key service was supplying Al Rajhi Bank 

with large amounts of physical U.S. dollars, through the HBUS U.S. 

Banknotes Department. The physical delivery of U.S. dollars to Al 

Rajhi Bank was carried out primarily through the London branch of 

HBUS, often referred to internally as "London Banknotes." I-IBUS 

records indicate that the London Banknotes office had been supplying 

U.S. dollars to Al Rajhi Bank for "25+ years.,,1196 In addition to the 

London branch, HBUS headquarters in New York opened a banknotes 

account for Al Rajhi Bank in January 2001. 1197 The U.S. dollars were 

physically delivered to Al Rajhi Bank in Saudi Arabia. 1 198 

In January 2005, a little more than three years after the 9/11 

terrorist attack on the United States, HBUS decided to end its 

relationship with Al Rajhi Bank due to terrorist financing concerns, as 

explained further below. I 199 Nearly two years later, in December 2006, 

the relationship was reactivated and continued for another four years, 

1192 See 2010 HBUS KYC Profile of AI Rajhi Bank, at 4. 1193 Id. 

1194 See, e.g., 2010 KYC Profile of Al Rajhi Bank at 8; 5/23/2005 document prepared by CIBMInstitutional Banking on AI Rajhi Banking and Investment Corporation, at HSBC OCC 0659988-

997, at 8. 

1195 See HSBC website, "About HSBC Amanah," http://www.hsbcamanah.comlamanahlaboutamanah. 

1196 2010 HBUS KYC Profile of AI Rajhi Bank, at 3, 5. The London Banknotes office supplied 

U,S, dollars to both AI Rajhi Bank and, until its account closed in 2005, AI Rajhi Trading 

Establishment. Another HBUS branch office in Hong Kong also did banknotes business with AI 

Rajhi Bank beginning in 2009, See HBUS "Know Your Customer Profile - Banknote 

Information," for the Hong Kong office regarding AI Rajhi Bank (10/29/2010), HSBC-PSIPROD-O I 02782-784. at I. 

1197 2010 IlBUS KYC Profile of AI Rajhi Bank, at 2, 3, 

119& Id, at 2, 

1199 I

d, 
419 


76061.785

245 

until 20 I 0, when it was ended once more due to a group-wide decision 

by HSBC to exit the U.S. banknotes business. HBUS closed its 

banknotes account with AI Rajhi Bank in October 20 I 0. 1200 

From 2000 to 20 I 0, HSBC assigned a series of Global 

Relationship Managers to the Al Rajhi Bank account. They include 

Shariq Siddiqi 1201 and Shamzani Bin Md Hussain. I202 In 2005, the 

Relationship Manager for KYC approval purposes was Beth Fisher. 

From 2005 to 2010, the head ofthe HSBC Global Banknotes business 

was Christopher Lok, who was based in New York; the regional 

Banknotes head for the Americas was Gyanen Kumar, who was based in 

New York; and the regional Banknotes head in charge of the London 

Banknotes office was Stephen AIIen. 1203 

HSBC classified Al Rajhi Bank as a "Special Category of Client" 

(SCC), its highest risk designation. 1204 This designation was due in part 

to the bank's location in Saudi Arabia, which HSBC classified as a high 

risk country. In addition, HSBC noted that the bank was owned in part 

by a Politically Exposed Person (PEP), Abdullah Abdul AI Rajhi, who 

was a major shareholder, a member ofthe bank's board of directors, and 

a member of the Northern Borders Provincial Council in Saudi 

Arabia. 1205 Al Rajhi Bank was one of only a handful of bank clients that 

HSBC had classified as SCC clients. 1206 

E. AI Rajhi Trading Establishment 

In addition to Al Rajhi Bank, HSBC provided accounts to Al Rajhi 

Trading Establishment, a money exchange business based in Saudi 

Arabia and owned by Rajhi family members. This account closed in 

2005, when the business, along with seven others, merged into a new 

bank, Al Bilad Bank in Saudi Arabia. 

According to HSBC internal documents, Al Rajhi Trading 

Establishment opened two accounts in 1994, with Republic Bank of 

New York before its purchase by HSBC. 1207 One account processed 

payments, such as from travelers cheques or money orders, while the 

other handled foreign currency exchange. According to HSBC 

1200Id 1 15 

1201 51i3;2005 document prepared by CIBM-Institutional Banking on AI Rajhi Banking and 

Investment Corporation, HSBC OCC 0659988-997, at 7. 

1202 2010 HBUS KYC Profile of AI Rajhi Bank, at 4. 

12113 11/2006 HEUS "Banknotes Trading A Global Reach Organizational Chart As of November 

2006," OCC-PSI-0000050, at 5. 

1204 2010 I·IBUS KYC Profile of AI Rajhi Bank, at 1. 

1205 ld. at 1,3. 

1206 Id. at 3. 1207 March 2002 email chain among HBUS personnel, "AI Rajhi Trading 

establishment," OCC-PSI-00381727, at 3. 

1207 March 2002 email chain among HBUS personnel, "AI Rajhi Trading establishment," OCCPSI-00381727, at 3. 
420 


76061.786

246 

documents, Republic Bank of New York had a policy of not dealing 

with money exchange businesses, but had made an exception for AI 

Rajhi Trading Establishment due to a "long relationship with the bank, 

their knowledge of the stiff penalties (death) for drug trafficking and 

money laundering within the country and the general good reputation of 

exchange houses in Saudi Arabia.,,1208 After HSBC purchased Republic 

Bank of New York, the Al Rajhi Trading Establishment accounts were 

handled by the HSBC International Private Banking Department. 1209 

In 2002, after the 9/11 attack on the United States, the International 

Private Banking Department asked to transfer the two accounts to 

HSBC's Institutional Banking Department in Delaware which had 

superior ability to monitor account activity.'210 In connection with the 

transfer, HBUS banker Joseph Harpster wrote: 

"The most recent concern arose when three wire transfers for small 

amounts ($50k, $3k and $1.5k) were transferred through the 

account for names that closely resembled names, not exact 

matches, of the terrorists involved in the 9/11 World Trade Center 

attack .... The profile of the main account reflects a doubling of 

wire transfer volume since 9/01, a large number of travelers checks 

but with relatively low value and some check/cash deposits. 

According to the account officer, traffic increased because they 

have chosen to send us more business due to their relationship with 

Saudi British Bankl211 and the added strength ofHBC versus 

Republic. ... Maintaining our business with this name is strongly 

supported by David Hodghinson of [Saudi British Bank] and 

Andre Dixon, Deputy Chairman of [HSBC Bank Middle East]. 

Niall Booker and Alba Khoury [ofHBUS] also support.,,1212 

Douglas Stolberg head of Commercial and Institutional Banking 

(CIS) at HBUS forwarded the email to Alexander Flockhart, then a 

senior executive in Retail and Commercial Banking at HBUS, noting: 

"As we discussed previously, Compliance has raised some concerns 

regarding the ongoing maintenance of operating/clearing accounts for Al 

Rajhi group." He forwarded recommendations on how to handle the 

account: "Retain [International Private Banking] as the relationship 

manager domicile for continuity purposes, and as we understand there is 

interest in further developing private banking business with family 

1208 rd. 1209 rd. 1210 rd. 

1211 HSBC owned Saudi British Bank. See "Doing Business in Saudi Arabia," an IISBC 

publication, 

http://www.hsbc.comll/contentJassets/business_ bankingll1 00511_ hsbc _ doinL business_in _saud 

i-?,df. 

I 12 March 2002 email chain among IIBUS personnel, "AI Rajhi Trading establishment," GCCPSr-00381727, at 3, 
421 


76061.787

247 

members. . .. Domicile the actual accounts with Delaware where 

HBUS's most robust account screening capabilities reside." His email 

also stated: 

"[T]his has become a fairly high profile situation. Compliance's 

concerns relate to the possibility that Al Rajhi's account may have 

been used by terrorists. If true, this could potentially open HBUS 

up to public scrutiny and lor regulatory criticism. SABB [Saudi 

British Bank] are understandably keen to maintain the 

relationships. As this matter concerns primarily reputational and 

compliance risks, we felt it appropriate for SMC [Senior 

Management Committee] members to be briefed ... so that they 

may opine on the acceptabili~ of the plan. Please advise how you 

would prefer us to proceed."L13 

Mr. Harpster reported a week later that Mr. Flockhart had decided to 

transfer the accounts to HBUS in the Delaware office. 

Three years later, in 2005, eight Saudi money exchangers, 

including Al Rajhi Trading Establishment, were merged into a new Al 

Bilad Bank in Saudi Arabia. 1214 The HSBC accounts for Al Rahji 

Trading Establishment closed in November 2005. 1215 

F. 2005: Decision to Sever Ties with Al Rajhi Bank 

In 2005, despite its longstanding relationship with Al Rajhi Bank, 

HSBC Group Compliance decided that its U.S.-based businesses should 

sever ties with Al Rajhi Bank due to terrorist financing concerns. 1216 To 

carry out this decision, on January 28, 2005, Teresa Pesce, head of 

HBUS AML Compliance, sent an email to HBUS personnel entitled, 

"AI Rahji Trading/AI Rahji Banking": 

"As some of you may know, the above named clients have been 

under evaluation by US and Group Compliance based, among 

other things, on relationships maintained with entities/countries on 

the OFAC list. Additionally, US law enforcement has placed these 

entities under scrutiny. After much consideration, Group 

Compliance has recommended that thc US businesses sever ties 

with these clients based on the current regulatory environmcnt and 

1213 Id. at 2-3. 

1214 See April 2005 HBUS Financial Intelligence Group (FIG) Report of Findings (Update) on Al 

Rajhi Trading Establishment, HSBC acc 2725168-169. Another Al Rajhi-related business, the 

Al Rajhi Commercial Foreign Exchange, was also one of the eight businesses that merged into 

Al BHad Bank. See 7/13/2005 HBUS Financial Intelligence Group (FIG) Report of Findings 

(Update) on Al Rajhi Commercial Foreign Exchange, HSBC acc 2725167-168. 

III 4/12/12 HSBC legal counsel response to Subcommittee inquiry. 

1116 2010 HBUS KYC Profile of Al Rajhi Bank, at 2 ("relationship exited and deactivated on 2 

February 2005 due to TF issues"). 
422 


76061.788

248 

the interest of US law enforcement. Accordingly, I will not 

approve customer profiles for or transactions with these entities. 

Please make appropriate arrangements. I am available to answer 

any questions you might have.,,1217 

At the time the email was issued, Al Rajhi Bank had not been 

indicted, designated as a terrorist financier, or sanctioned by any 

country, including the United States. HSBC Group Compliance based 

its decision on concerns that the bank had relationships "with 

entities/countries on the OFAC list," the bank was of "interest" to U.S. 

law enforcement which had placed it "under scrutiny," and severing the 

relationship was called for in light of the "current regulatory 

environment.,,1218 

The 2005 decision was made several years after the 9/11 terrorist 

attack, as U.S. law enforcement and bank regulators directed increasing 

scrutiny to terrorist financing issues. As discussed earlier, in 2004, the 

9/11 Commission issued its report which included information on the 

role of Saudi Arabia in financing terrorism, described the "Golden 

Chain" ofal Qaeda's financial benefactors, and noted that one of the 

hijackers had an account at AI Rajhi Bank. Congress held hearings on 

that report. The media also disclosed in 2004, that AI Rajhi Bank's most 

senior official was on the Golden Chain list. 1219 In addition, 2004 saw 

the United States designate as terrorist organizations several Saudi-based 

nonprofit organizations that were also clients of Al Rajhi Bank, 

including the International Islamic Relief Organization and the al 

Haramain Foundation, adding them to the OF AC list of entities with 

which U.S. persons were prohibited from doing business. 122o U.S. 

prosecutors also intensified their investigation of al Haramain 

Foundation Inc., whose 2005 indictment would disclose that its senior 

officials had cashed $130,000 in U.S. travelers checks at Al Rajhi Bank 

in Saudi Arabia and used the money to support violent extremists in 

Chechnya. 1221 

On the regulatory front, in July 2004, this Subcommittee held 

hearings on how U.S. banks and U.S. bank regulators had failed to fully 

1217 I128/200s email from HBUS Teresa Pesce to numerous HSBC colleagues. "AI RaUh]1 

TradinglAI RaUh]l Banking," HSBC OCC 1884218. 

1218 When asked about this decision, David Bagley, the head ofHSBC Group 

Compliance, told the Subcommittee that there was no single incident that led to the 

decision. Subcommittee interview of David Bagley (5/10/2012). 

1219 See, e.g., "Tangled Paths: A Sprawling Probe Of Terror Funding Centers in Virginia," Wall 

Street lournal, Glenn Simpson (6/2112004). 

1220 "Blocking Property and Prohibiting Transactions With Persons Who Commit, Threaten To 

Commit, or Support Terrorism," 66 FR 49079 (9/23/2001) (see Annex). 

1221 The U.S. Treasury Department was later quoted as saying Al Rajhi Bank maintained at least 

24 accounts and handled unusual transactions for the al Haramain Foundation. "US Tracks 

Saudi Bank Favored by Extremists," Wall Street Journal, Glenn Simpson (7/26/2007), 

http://online.wsj.com/article/SB 11853003 82504 7640s.htmL 
423 


76061.789

249 

implement the tougher AML requirements enacted into law as part of the 

USA Patriot Act of2001, 1222 highlighting Riggs Bank as an example. 1223 

Among other measures, the Patriot Act required U.S. financial 

institutions to establish AML programs, conduct special due diligence 

on correspondent accounts 0Eened for foreign banks, and verifY the 

identity of accountholders. 12 4 The law also deemed money laundering 

through foreign banks and the laundering of terrorism proceeds as 

criminal offenses in the United States. 122S These new provisions had 

given rise to new bank regulations, new examination requirements, and a 

new emphasis on the importance of AML controls. 

HBUS' primary U.S. regulator, the OCC, scheduled an AML 

examination of the HBUS banknotes business to take place in 2005. 1226 

In December 2004, in anticipation of that examination, the HBUS 

Global Banknotes Department had completed a review of its Know Your 

Customer (KYC) client profiles. 1227 In October 2004, the HSBC Global 

Relationship Manager for AI Rajhi Bank, Shariq Siddi1i, visited the 

bank and reviewed its KYCIAML procedures in detail. 228 Mr. Siddiqi 

praised the procedures and noted: "The management appeared fully 

cognizant of the reputational risks associated with terrorism financing, 

and confirmed Al Rajhi Bank's strong commitment to combat it.,,1229 

Despite that endorsement ofthe bank's AML policies and 

procedures, HBUS AML Compliance did not approve the AI Rajhi Bank 

KYC profile, an action it took with respect to only a few clients out of 

more than 930 active client profiles reviewed. 1230 The failure to approve 

the client profile meant that bank personnel were unable to do business 

with the client. HBUS AML Compliance Officer Alan Ketley circulated 

1222 See Title III of the Uniting and Strengthening America by Providing Appropriate Tools 

Required to Intercept and Obstruct Terrorism (USA Patriot Act) Act 0[2001. P.L. 107-56 

(101261200 I). 

1223 "Money Laundering and Foreign Corruption: Enforcement and Effectiveness ofthe Patriot 

Act, Case Study Involving Riggs Bank," S.Hrg. 108-633 (July 15 2004). 

1224 See USA Patriot Act, §§ 312, 326, 352. 

1225 See USA Patriot Act, §§ 318,376,377. 

1226 See 31812005 email from Daniel Jack, HBUS, to Denise Reilly and Alan Ketley in HBUS, 

"Re: KYC Deactivation Report for Banknotes in Feb-05," OCC-PSI-00169771 ("There has been 

a surge in KYC updates in the past few months due to clean-uplprep for OCC."); 612012005 OCC 

Supervisory Letter on Global Banknote AML examination, OCC-PSI-00I07505-51 0 (containing 

six Matters Requiring Attention by the bank related to AML deficiencies) [sealed exhibit]. 

1227 See 11412005 email from Daniel Jack, HBUS Legal Compliance, to HBUS KYC Account 

Managers. HBUS KYC Banknote Traders, and others, "KYC Status of Profiles for Banknotes by 

Office: December 2004," IISBC OCC 2405588-589. 1228 512312005 document prepared by CIBM-Institutional Banking on Al Rajhi Banking and 

Investment Corporation, HSBC OCC 0659988-997, at 3. 

1129 Id. at HSBC OCC 0659991. 

1230 11412005 email from Daniel Jack, HBUS Legal Compliance, to HBUS KYC Account 

Managers, HBUS KYC Banknote Traders, and others, "KYC Status of Profiles for Banknotes by 

Office: December 2004," at IISBC OCC 2405588-589. See also 31712005 email from Daniel 

Jack to Alan Ketley and others, "Re: KYC Deactivation Report for Banknotes in Feb-05," OCCPSI-00l69771 (noting that Al Rajhi Bank was one of only two client profiles "deactivated for 

AMLIKYCIComplianee Reasons"). 
424 


76061.790

250 

instructions on how to handle clients, including AI Rajhi Bank and Al 

Rajhi Trading Establishment, whose profiles had been "denied" by 

HBUS Compliance. He explained that such clients must be given "10 

days notice of trading termination unless a dispensation is obtained from 

the AML Director and an updated profile is approved by the AML 

Director within that 10 day period. For current customers that 10 day 

clock will commence on December 7 (so December 17 will be the final 

day we will transact with them unless a dispensation is obtained.),,1231 

On January 4, 2005, HBUS AML Compliance head Ms. Pesce sent 

an email to Daniel Jack, an HBUS AML Compliance Officer who often 

dealt with the London Banknotes office, instructing him to: "[p]lease 

communicate that Group Compliance will be recommending terminating 

the Al Rahji relationship.,,1232 Mr. Jack inquired as to when that 

recommendation would be made. She responded: 

"I expect to see an email from Susan Wright today. She tells me 

that HBME [HSBC Bank Middle East] does not agree with 

Compliance and will not be terminating the relationship from the 

Middle East, but she/David B[agley] recommend that in light of 

US scrutiny, climate, and interest by law enforcement, we in the 

US sever the relationship from here.,,1233 

Susan Wright was then the Chief Money Laundering Control Officer for 

the entire HSBC Group. She reported to David Bagley, head of the 

HSBC Group's overall Compliance Department. The documents do not 

explain why HSBC Middle East disagreed with the decision or why it 

was allowed to continue its relationship with Al Rajhi Bank, when 

HSBC's Group Compliance had decided to sever the relationship 

between the bank and other HSBC affiliates due to terrorist financing 

concerns. 

The decision to sever ties with Al Rajhi Bank was announced 

internally within HSBC on January 28, 2005. The decision clearly 

affected some HSBC affiliates, such as HBUS and its London Banknotes 

office which discontinued transactions with Al Rajhi Bank, but not 

others, such as HSBC Bank Middle East which continued doing business 

with Al Rajhi Bank and other Al Rajhi entities. 1234 The Subcommittee 

1231 12/6/004 email from HBUS Alan Ketley to HSBC Christopher Lok, HBUS Stephen Allen, 

and others, "KYC Profiles Impact of CO Denial," HSBC OCC 3185023-025. 1232 11412005 email from Teresa Pesce to Daniel Jack. "KYC Status of Profiles for Banlmates by 

Office: December 2004," HSBC OCC 2405588. Illl Id. 

1214 See, e.g., I1412005 email from Teresa Pesce to Daniel Jack, "KYC Status of Profiles for 

Banknotes by Office: December 2004," HSBC OCC 2405588. See also, e.g., 1111712006 email 

from Salman Hussain to David IIling, Gordon Brown, Stephen Allen, and others, "AI Rajhi Bank 

KYC & AML Policy," HSBC OCC 3280496-497; I III 712006 email from HBUS Stephen Allen 

to HBUS Beth Fisher and Alan Ketley, "AI Rajhi Banking," HSBC OCC 3280505 (both emails 
425 


76061.791

251 

asked but has received no explanation as to why the decision bound 

HSBC affiliates in the United States and Europe, but appeared to not 

apply to the Middle East. 

Soon after the decision was announced in January 2005, HSBC 

Group Compliance began to narrow its scope. On February 22, 2005, 

Paul PI esser, head of the HBUS Global Foreign Exchange Department, 

sent an email to a colleague asking whether, despite the HSBC Group 

Compliance decision, his office could continue to engarce in foreign 

exchange trades with AI Rajhi Trading Establishment.! 35 He was told 

by a trader from the Banknotes department: "For us is business as 

usual.,,!236 Mr. Plesser double-checked with HBUS AML Compliance 

officer Alan Ketley, asking in an email: "so I guess we are ok to 

continue trading?,,12J7 On March 16, 2005, Mr. Ketley affirmed that the 

trades could continue, forwarding an email from Ms. Pesce, head of 

HBUS AML Compliance, stating that the earlier HSBC Group decision 

no longer applied to AI Rajhi Trading: 

"Group has clarified the AI Ra[jh]i guidance issued last month. 

They have evaluated AI Ra[jh]i Banking and AI Ra[jh]i Trading 

and now believe that the two are separated enough that 

relationships may be maintained with the latter but not with the 

former. To be clear, recommendation is to sever with Banking 

only at this time."1238 

Mr. Ketley commented: "Looks like you're fine to continue dealing 

with AI Rajhi. You'd better be making lots ofmoney!,,1239 

In May 2005, four months after announcing the decision to sever 

ties with AI Rajhi Bank, HSBC Group Compliance backed down still 

further. It announced that HSBC affiliates could re-establish business 

ties with AI Rajhi Bank, though subtly suggested that HBUS might not. 

David Bagley, head ofHSBC Group Compliance, announced the 

decision in a May 23 email sent to HSBC personnel: 

"Having now received the updated KYC from Shariq Siddiqi and 

reviewed the previous information received from Group Securities 

indicating that. in late 2006. HSBC business with Al Rajhi Bank was "substantial," including 

through the "HSBC Amanah business"). 1235 2/22/2005 email from Paul Plesser to Georges Atallah, "AI Ra[jh]i Trading/AI RaOh]i 

Banking," HSBC GCC 3111888. 

1236 2/22/2005 email from Georges Atallah to Paul Plesser and others, "AI Ra[jh]i Trading/AI 

Raph]i Banking," HSBC GCC 3111888. 

123 2/22/2005 email from Paul Plesser to Alan Ketley. "AI Ra[jh]i TradinglAI RaOh]i Banking," 

HSBC GCC 3111888. 

12383/16/2005 email from Alan Ketley to Paul Plesser, "Fw: Al Ra[jh]I Guidance Clarified," 

HSBC GCC 3114022. 1239 Id. 
426 


76061.792

252 

I am pleased to confirm that we have revised our recommendation 

in relation to the above. 

Accordingly we have lifted our recommendation against the 

commence or expansion of relationships with the above with 

immediate effect.!240 We will communicate this decision to HBEU 

[HSBC Europe] where I believe there are a number of pending 

applications. 

Whilst we will advise HBUS CMP [Compliance] of the revised 

view within GHQ CMP [Group Headquarters Compliance] 

nevertheless I believe it will remain appropriate for HBUS CMP in 

conjunction with HBUS senior management to reach their own 

determination with regard to the expansion of business with AI 

Rajhi within the US. Although the revised view from GHQ CMP 

ought to be a material matter causing them to reconsider their 

position nonetheless, and particularly in the current US 

environment, I do not believe it is appropriate for us to seek to 

influence their determination one way or the other.,,!24! 

The effect of this decision was to allow HSBC affiliates to do business 

with AI Rajhi Bank if they chose, which meant HBUS Compliance had 

to determine for itself whether or not to re-establish ties with AI 

Rajhi.!242 

G. 2006: HBUS Banknotes Account Reinstated 

Although HBUS Compliance in the United States held out almost 

two years, after a concerted campaign by HBUS Banknotes personnel, it 

ended up following the lead ofHSBC Group Compliance and restoring 

the AI Rajhi Bank account at HBUS in late 2006. One precipitating 

event appears to have occurred in November 2006, when AI Rajhi Bank 

threatened to pull all business from HSBC, unless the U.S. banknotes 

services were restored. Within a month, the account was reestablished. 

The two HBUS bankers who spearheaded the effort to restore the 

AI Rajhi account were Christopher Lok, head of the HSBC Global 

Banknotes Department, working from New York, and Stephen Allen, 

1240 The new decision lifted the ban on relationships with both Al Rajhi Bank and Al Rajhi 

Commercial Foreign Exchange. aoother money exchange business owned by Abdullah Abdul Al 

Rajhi. The decision on Al Rahhi Commercial Foreign Exchange was in addition to the earlier 

decision allowing relationships with Al Rajhi Trading Establishment. 

1241 5/23/2005 email from HSBC David Bagley to HSBC colleagues, "AI Rajhi Bank," accPSI-00144350, at 2. 

1242 At almost the same time, HSBC CIMB-Institutional Banking, which is part of HSBC 

Amanah, approved additional banking services for Al Rahji Bank, including trade, treasury, 

SWIFT wire transfers, foreign exchange, and asset management services. See 5/23/2005 

document prepared by CIBM-Institutional Banking on Al Rajhi Banking and Investment 

Corporation, HSBC acc 0659988-997, at 8. 
427 


76061.793

253 

head of the RBUS Banknotes branch in London. For more than 20 

years, the London office had supplied physical U.S. dollars to Al Rajhi 

Bank in Saudi Arabia, until forced to stop by the January 2005 decision. 

When HSBC Group Compliance reversed the decision on Al Rajhi 

Bank for RSBC affiliates on May 23, 2005, RSBC Banknotes personnel 

expressed a desire to reopen their accounts with AI Rajhi Bank as well, 

while signaling a willingness to wait until the conclusion of an 

upcoming Global Banknotes examination by the OCC. 1243 On May 23, 

2005, Mr. Allen, head of the London Banknotes office, forwarded the 

HSBC Group Compliance email regarding Al Rajhi Bank to Mr. Lok, 

head of the Global Banknotes Degartment, stating: "We'll have to see if 

this will make any difference!,,12 4 Mr. Lok, in tum, sent an email to 

Ms. Pesce, head ofHBUS AML Compliance, stating: "After the OCC 

close out and that chapter hopefully finished, could we re-visit AI Rajhi 

again. London compliance has taken a more lenient view.,,1245 

The on-site work for the OCC AML examination concluded about 

a month later, 1246 and the I-IBUS London branch shortly thereafter began 

to discuss plans to speak with RBUS AML Compliance to allow it to 

resume ties with Al Rajhi Bank. In a July 2005 meeting to discuss KYC 

issues, members of the RBUS London Banknotes office discussed both 

the results of the OCC examination and next steps to discuss the future 

ofRSBC's relationship with Al Rajhi Bank: 

"OJ [Daniel Jack]: We gave the OCC \08 client files. The 

primary focus of their finding[s] boiled down to 18 files 

concentrating on the money service business[es] and high risk 

clients. We obtained a satisfactory rating from the OCC although 

their examiners identified 5 issues considered 'Matters Requiring 

Attention' with urgency. 1247 ... 

Saudi: We lost Al Rajhi this year - we discussed this in various 

compliance meetings already. SA [Stephen Allen] - a resumption 

decision was put off because of the OCC audit. CL [Christopher 

Lok] to speak to SA after the OCC. Allen to speak to Terry 

[Pesce] before his holidays. Al Rajhi threatened to pull any new 

1243 See 5/15/2006 OCC letter to HBUS ("On June 12.2006 we will begin a 3-week Examination 

of Global Banknotes, London. We hope to complete on site work on or before June 30, 2006."). 

1244 512312005 email from HBUS Stephen Allen to HSBC Christopher Lok, "AI Rajhi," OCCPSI-OOI44350, at 1-2. 

1245 512312005 email from HSI3C Christopher Lok to HBUS Teresa Pesce, "AI Rajhi," OCC-PSI00144350, at 1. 

1246 6/2012005 OCC Supervisory Letter, Global Banlmote examination ofHSBC, USA, OCCPSI-OOI07505. [Sealed Exhibit.] 

1247 The MRAs cited by the OCC required the London I3anknotes Office to conduct a client file 

review to improve client infonnation and analysis; review client risk ratings; add expected client 

account activity to the client files; revise written procedures to include the need to obtain 

expected client activity; and improve AML training in these areas. Id. 
428 


76061.794

254 

business with HSBC, unless we give them a satisfactory reason 

why we won't trade banknotes with them.,,1248 

Al Rajhi Bank communicated the threat to "pull any new business with 

HSBC" unless given a "satisfactory explanation" why HSBC had 

stopped supplying it with U.S. dollars via its relationship managers. 1249 

That threat was not mentioned again in the documents provided to the 

Subcommittee. 

The next month, in August 2005, Mr. Allen sent Sally Lomas, 

KYC manager for the London Banknotes office, a copy ofthe Lok email 

asking HBUS AML Compliance to re-visit the Al Rajhi issue, together 

with the HSBC Group Compliance email allowing re-establishment of 

the relationship for the rest of HSBC. Ms. Lomas forwarded the emails 

to Lynda Cassell, then a senior Compliance official at HBUS. Ms. 

Lomas wrote: 

"Please find attached an email sent by David Bagley, indicating 

that there is no longer a recommendation against expanding 

relationships with Al Rajhi Bank. I have asked Fig [ESBC 

Financial Intelligence Group] to check, when they do their 

additional work, whether the same part of the Al Rajhi fa[m]ily is 

in[vol]ved in both Banks.,,125o 

On the same day, Ms. Pesce, head ofHBUS AML Compliance, 

responded to the Lomas email, warning that re-opening the Al Rajhi 

Bank account should not be viewed as an easy decision: 

"This is not so simple. David [Bagley] does not object insofar as 

HBEU [ESBC Europe] is concerned, but has left it to us to assess 

the US risk. We've gotten push back from the OCC on Al Rahji 

Trading, which is less controversial than the bank. We can revisit 

this, but I am not inclined to push ahead precipitously, especially 

in light ofthe regulatory scrutiny.,,1251 

In January 2006, the Banknotes Department tried again. Minutes 

of a London Banknotes meeting to discuss KYC issues recorded the 

following discussion: 

"Banknotes-London would like to resume business with Al Rajhi, 

although we have ceased trading (due to rumours in terrorist 

financing, the U.S. Government has now dropped those charges 

... )[.] [T]he rest of the HSBC group still deal with them. LC 

124' 7/12/2005 "HBUS London Banknotes Minutes ofKYC Review Meeting," OCC-PSI00835857, at 1,4 (emphasis in original). 

1249 Subcommittee interview of Christopher Lok (3/29/2012) and Alan Ketley (2/16/2012). 

12SO 81l 012005 email from Sally Lomas to Lynda Cassell with copies to Teresa Pesce. Alan 

Ketley, Stephen Allen, and others, "AI Rajhi," OCC-PSI-00343527. 

1251 8/1012005 email from Teresa Pesce to Sally Lomas and others, "AI Rajhi," OCC-PSI00343527. 
429 


76061.795

255 

[Lynda Cassell] advised a conference call with Terry [Pesce] is 

needed but before this takes place LC would like to see a memo 

from SA [Stephen Allen] about the history ofthis matter, 

subsequently Lynda will take this memo to Terry to arrange the 

conference ca11.,,1252 

The minutes reflect that a rumor was circulating among several HSBC 

officials that the U.S. government had "dropped" charges of terrorist 

financing against the bank, which was not the case since no formal 

charges had ever been filed. The minutes also indicate that all HSBC 

affiliates were then allowed to do business with Al R~jhi Bank other 

than HBUS, a fact used at one point to try to convince HBUS 

Compliance to allow the account. 

In February 2006, Mr. Allen met with Llnda Cassell, a senior 

AML policy advisor, about Al Rajhi Bank. 125 That same month, 

Gordon Brown, who had taken over London Banknotes KYC issues 

from Susan Lomas, provided Ms. Cassell with a copy of Al Rajhi 

Bank's AML policies and procedures. 1254 Ms. Cassell responded with 

an email toMr.Brown.Mr. Allen, and others explaining: 

"Gordon, in accordance to our previous conversation, the AML 

compliance decision to do business with Al Rajhi lies with Terry 

Pesce and as suggested, Stephen [Allen] should speak to Terry 

regarding his desire to enter into a Banknotes relationship .... In 

regards to Al Rajhi's AML Policy and Procedures, I find them 

comprehensive.... Their hi?h risk client base generally mirrors 

our high risk type clients.,,12 5 

In March 2006, Mr. Allen and Mr. Brown exchanged emails with 

Mr. Ketley, a senior HBUS AML Compliance officer who worked for 

Ms. Pesce. 1256 Mr. Allen wrote: 

"[A]ccording to Al Rajhi, their senior management had been 

advised by the US State Department that they were no longer 

considered to be under suspicion and I was wondering whether 

HBUS Compliance or Security may have a contact at State ... that 

could be explored to verifY this statement?,,1257 

1252 112612006 "HBUS London Banknotes Minutes ofKYC Review Meeting." aCC-PSI00835851, at 3. 

1253 See 3/21/2006 email from HSBC Stephen Allen to IlBUS Alan Ketley and Gordon Brown, 

"AL RaUh]I," HSBC acc 0695040. 

1254 2/6/2006 email from HSBC Gordon Brown to HBUS Lynda Cassell, "AML Procedures: Al 

Rajhi Banking & Investment Corp., Saudi Arabia," HSBC acc 3250665-667, at 667. 

125 2/8/2006 email from HBUS Lynda Cassell to HSBC Gordon Brown and others, "AML 

Procedures: AIRajhi Banking & Investment Corp., Saudi Arabia," HSBC acc 3250665-667, at 

666. 

1256 3/20/2006 email exchange between HBUS Alan Ketley and HSBC Stephen Allen and 

Gordon Brown, "AL Raijh]!''' HSBC acc 0695040. 

1257 Id. It is unclear what his email referred to when it said that the State Department told the 

bank that it was no longer "under suspicion." 
430 


76061.796

256 

Mr. Ketley agreed to try to verify the information, and Mr. Allen 

responded: 

"Thanks Alan, anything that you can do is appreciated as, with the 

summer heat approaching, this client becomes very active and is 

commercially extremely important to us - if we can ever get to restart our business with them that is. You may recall me telling you 

that we dealt with AI Rajhi for 30 years prior to being obliged to 

desist!,,1258 

Also in March 2006, Beth Fisher, an HBUS employee who used to 

be the corporate relationship manager assigned to Al Rajhi Bank, 

discovered that I-IBUS had failed to cancel a $50 million line of credit 

for the bank when the relationship ended. She sent an email to Mr. 

Ketley: "I thought we exited this name!,,1259 He responded: "I gather 

tha[t] Banknotes wants to revive the relationship but has not yet done 

so." The next day, Ms. Fisher explained to a colleague: "FYI, this was 

an HBUS London Banknotes (only) relationship which was exited a year 

ago due to AML Compliance concerns .... This is NO LONGER an 

HBUS relationship. We must remove this bank from our list.,,126o 

In April 2006, Susan Wright, head of AML Compliance for the 

entire HSBC Group, weighed in, sending an email to Ms. Pesce and Mr. 

Ketley asking, "what the position is with regard to the possibility of a 

Bank Note relationship in London" with AI Rajhi?1261 Ms. Pesce 

responded: "It still makes me nervous. Alan has gone out to Steve 

Allen for more KYC/EDD [Know Your CustomerlEnhanced Due 

Diligence]." Mr. Ketley told the Subcommittee that the AI Rajhi Bank 

relationship was the only one where he was influenced by HSBC 

Group. 1262 

That same day, April 10,2006, Lynda Cassell sent an email to Mr. 

Allen at London Banknotes requesting information about whether AI 

Rajhi Bank did business in countries subject to OF AC sanctions and 

how they would use U.S. banknotes, if they were restored. 1263 He 

arranged for an inquiry to be sent to AI Rajhi Bank which then took five 

months to respond with limited information. 1264 For example, in 

1258 3/2112006 email from HSBC Stephen Allen to HBUS Alan Ketley and Gordon Brown, "AL 

Ra~jhlI," HSBC acc 0695039. 

125 312012006 email from HBUS Beth Fisher to HBUS Alan Ketley, "AI Rajhi," HSBC acc 3224893. 

1260 3/21/2006 email from HB US Beth Fisher to HBUS Dorothy Gulman, Alan Ketley and 

others, "Re: Updated TSalTCS2 spreadsheet," HSBC acc 3225386. 

1261 4118/2006 email exchange between HSBC Susan Wright and HBUS Teresa Pesce, "AI 

Raihi," HSBC acc 4827027. 

126 Subcommittee interview of Alan Ketley (2/16/2012). 

126J 4110/2006 email from IIBUS Lynda Cassell to HBUS Stephen Allen, "AI Rajhi Banking & 

Investment Corp., Saudi Arabia," HSBC acc 3250665. 

1264 911712006 email from Al Rajhi Bank Mohd Fazal Haque to HSBC Salman Hussain, "HSBC 

Bank Middle East Limited," HSBC acc 3280498-499. 
431 


76061.797

257 

response to a question asking the bank to "confirm the countries outside 

of Saudi Arabia that you do business with," AI Rajhi Bank wrote: "All 

our correspondent banks['] names are available in the Bankers 

Almanac.,,1265 When asked how the bank ensures it does not utilize 

HBUS products or services in countries that are "OF AC-sanctioned," the 

bank's entire response was: "We a~Ely strict due diligence and KYC 

procedures to high risk countries." 1 6 Both replies did not sufficiently 

answer the questions posed. 

The bank provided a slightly longer answer when asked how it 

would use U.S. banknotes: 

"All USD banknotes we purchase [are] for our own branches['] 

use .... [W]e have a big population of around 7 million foreign 

workers in the kingdom who mostly prefer USD when traveling 

back to their countries on vacation or even when remitting money 

to their families.... Also during summer time we have a high 

demand from tourist[s] traveling for their vacations.,,1267 

This response suggested that, if resupplied with U.S. dollars, the bank 

would provide those dollars to a wide group of persons in Saudi Arabia, 

many of whom would be expected to transport the dollars across 

international borders into other countries. 

In June 2006, HSBC Bank Middle East added its voice to that at 

the Banknotes group in pushing for the account to be reopened. Salman 

Hussain, then Payments and Cash Management (PCM) Regional Sales 

Manager for HSBC Bank Middle East, sent an email to Mr. Ketley at 

HBUS AML Compliance highlighting the potential revenue if Al Rajhi 

Bank were to be reinstated as a banknotes customer: 

"I am sending you this email seeking your assistance to address 

any issues pertaining to AI Rajhi Bank in order to obtain 

compliance approval. ... As I understand from talking to all 

parties that we had an excellent relationship with AI Rajhi Bank 

until year 2004, banknote[s] (David IIIing) stopped doing business 

while being the largest revenue generator in the Middle East. 

Amanah Finance in London (Emran Ali Reza) still traders] with AI 

Rajhi Bank .... From my side, I would like to use the Islamic 

Overnight Investment [product] ... as an intro to this bank. The 

amount of potential business/revenue is quite substantial .... ,,1268 

1265 rd. at HSBC OCC 3280498. 

1266 rd. 

1267 Id. at HSBC acc 3280499. 1268 6122/2006 email from HBME Salman Hussain to HBUS Alan Ketley with copies to others in 

HSBC. "AI Rajhi Banking & Investment Corp. (AI Rajhi Bank), Saudi Arabia." HSBC OCC 

3250655. 
432 


76061.798

258 

Mr. Hussain sent copies of his email to six colleagues in various HSBC 

departments. 

Mr. Ketley responded to Mr. Hussain on the same day as follows: 

"This must be the week for Al Rajhi as yours is the second e-mail 

about the bank that I have received. 

HBUS exited the relationship in 2004 primarily for Compliance 

reasons. Earlier this year, Banknotes London expressed their 

desire to re-establish the relationship and there has been a fair 

amount of discussion about whether or how to do this .... 

[ejertain questions ... need to be addressed before any 

Compliance decision can be made about resuming the relationship. 

For your information, Banknotes London has been fully embroiled 

in (preparing for and now in the midst of) an OCC exam so are 

unlikely to have been able to pursue these questions. 

The concerns about this name in the US have been rather long 

standing and we will need to get extremely comfortable with Al 

Rajhi before we would be willing to re-establish a relationship.,,!269 

In June 2006, the OCC completed the on-site work for its AML 

examination of the London Banknotes Office and, in September, sent a 

Supervisory Letter to HBUS summarizing the results and directing the 

London office to imforove its Know Your Customer information and 

client risk ratings.!2 0 

Also in June 2006, Emma Lawson, who worked for Susan Wright, 

head of AML Compliance for the HSBC Group, sent an email to Mr. 

Ketley and Ms. Pesce inquiring about progress on the AI Rajhi Bank 

account.!271 Mr. Ketley responded that they had yet to receive answers 

to certain AML questions, in part because London Banknotes personnel 

"have been fully engaged on an OCC exam for the past few months. 

The exam will end on June 30 so I expect they will revisit the subject 

then." ! 272 

In July 2006, the London Banknotes office held a meeting to 

discuss its business activities and prospects, and again brought up Al 

Rajhi Bank. A summary of the meeting stated: 

1269 6/22/2006 email from HBUS Alan Ketley to HBME Salman Hussain and others in HSBC, 

"AI Rajhi Banking & Investment Corp., Saudi Arabia," HSBC acc 3250655. 

1270 See 9/26/2006 acc Supervisory Letter HSBC-2006-29, "London Global Banknote 

BSAIAML Examination," aCC-PSI-00l0755-760. [Sealed Exhibit.1 

1271 612012006 email from HSBC Emma Lawson to HBUS Alan Ketley and Teresa Pesce, "AI 

Rajhi Banking & Investment Corp., Saudi Arabia," HSBC acc 3281773-774. 

127 6/20/2006 email from HBUS Alan Ketley 10 HSBC Emma Lawson and Teresa Pesce, "AI 

Rajhi Banking & Investment Corp., Saudi Arabia," HSBC acc 3281773-774. 
433 


76061.799

259 

"Saudi Arabia ... [W]e are experiencing a lot of competition from 

Commerz [Bank] who are shipping [U.S. dollars] directly from NY 

[New York] into Saudi and they are offering nearly 50% cheaper 

prices than BN [Banknotes] quote, so work has had to be done to 

offer better prices to re-gain volume in this business. We only 

have two customers here ... but we continue to press for the reinstatement of AI RaDh]i but there remain ongoing KYC 

issues.,,1273 

In the fall, at the request of Gordon Brown, KYC manager at the 

London Banknotes office, the HSBC Financial Intelligence Group (FIG) 

provided an update to an existing investigative report on AI Rajhi 

Bank.1274 The report was only three pages long and consisted primarily 

of information taken from publicly available pUblications about the 

bank's ownership and management. The report also noted that a U.S. 

judge had dismissed the bank from a lawsuit brought by victims of the 

9/11 terrorist attack, and that the World-Check database had listed the 

bank's Chairman and Managing Director Sulaiman Abdul Aziz AI Rajhi 

under its category for "terrorism.,,1275 

Following receipt of the report, the KYC customer profile was 

updated by the HBUS Banknotes Department for AI Rajhi Bank with a 

view toward reinstating the account. The profile stated in part: 

"A multitude of allegations have surrounded the AI-Rajhi family 

implicating them in a gamut of highly adverse activities ranging 

from money laundering to terrorist financing. The current facts, 

however, do not easily support these allegations. Presently, no 

U.S. or foreign government law enforcement or regulatory body 

has stated, unconditionally, that any member of AI-Raj hi or any 

company controlled by AI-Rajhi is under sanction. The U.S. 

continues to pursue relationship with Saudi Arabia and the AIRajhi family irregardless of the allegations being levied against 

charitable institutions with some presumably direct and indirect 

links to AI-Rajhi. The major 9/11 lawsuit, which included AIRahji, has been dropped against the family and family-related 

institutions. 

However, there is some reputational risk and the possibility that 

further investigations by U.S. authorities may ultimately uncover 

substantiating proof of the AI-Rajhi connection to terrorism is 

12737/24/2006 "2Q06 London Banknotes Review Meeting," HBUS London Banknotes branch, 

lISBC acc 2691117-124, at 122 (emphasis in original). 

1274 10/24/2006 email from FIG Michael Ellis to HBUS Gordon Brown and others. "Report of 

Findings - AI Rajhi Banking & Investment Corp .. , FIG," HSnC acc 7519403-406. 

1275 Id. at 405-406. 
434 


76061.800

260 

certainly a concern. Our account relationship with AI-Raj hi will 

be primarily selling USD banknotes out of London. The risk of 

future sanctions and the reputational risk based on the 

aforementioned allegations should be measured against the current 

risks involved in our relationship when ultimately deciding our 

course of action. Therefore, London Banknotes feels that the bank 

poses minimal reputational risk to US.,,1276 

This justification for renewing the account relationship had two key 

features. First, it asserted that, despite many allegations, no government 

had stated "unconditionally" that Al Rajhi Bank or its owners were 

under sanction for financing terrorism. Second, it focused on "current 

risks" and asserted that, measured against those, Al Rajhi Bank posed 

only "minimal" reputational risk to HSBC. 

On November 14,2006, Christopher Lok, head of Global 

Banknotes, submitted the new profile for approval to Beth Fisher, the 

HBUS corporate relationship manager formerly assigned to Al Rajhi 

Bank.1277 Ms. Fisher responded to Mr. Lok, with a copy to Mr. Ketley 

and Mr. Jack in HBUS AML Compliance, "I thought this was an HSBC 

exit name.,,1278 Mr. Ketley replied to her, "It was exited once (20047)-

Banknotes London is looking to reopen the relationship." He also 

stated: "The profile had better be bullet proof.,,1279 

Three days later, Mr. Allen sent Ms. Fisher and Mr. Ketley an 

email urging them to expedite their review of the client profile, which he 

hoped would reestablish the account, citing a threat by Al Rajhi Bank to 

pull all business from HSBC unless the U.S. banknotes services were 

restored: 

"Salman Hussain, the PCM [Payments and Cash Management] 

Regional Sales Manager at HBME [HSBC Bank Middle East] in 

Bahrain, who has recently visited the subject, has called to say that 

Al Rajhi has now run out of patience waiting for us to re-start our 

banknote trading relationship and unless we can complete the kyc 

formalities and advise them accordingly by the end of November, 

they will terminate all product relationships with the HSBC Group 

- which I believe to be substantial. 

1276 2010 BSBC KYC Profile of AI Rajhi Bank, at 11-12. BSBC KYC profiles are evolving 

documents that retain past infonnation stretching back multiple years. 

1277 11114/2006 email from BSBC Christopher Lok to BBUS Beth Fisher, "KYC Approval 

needed for: AI Rajhi Banking & Investment Corp," BSBC OCC 3279589-590. 

1278 11/14/2006 email from BBUS Beth Fisher to HSBC Christopher Lok and BBUS Alan 

Ketley, "KYC Approval needed for: Al Rajhi Banking & Investment Corp," BSBC OCC 

3279589. 

1279 11114/2006 email from BBUS Alan Ketley to BBUS Beth Fisher, "KYC Approval needed 

for: Al Rajhi Banking & Investment Corp," BSBC OCC 3279589. 
435 


76061.801

261 

Their main point of contention is that they feel that they were 

exonerated by all US legal processes from TF [Terrorist Financing] 

suspicion some time ago and yet we have still not been able to restart trading with them. Gordon [Brown] finished our latest 

attempt at the profit on Tuesday and you will find the kyc profile 

to be currently in the 'IB Pending' in box. Could I please ask you 

both to expedite your reviews so that we can attempt to prevent the 

loss of an important client to the Group?,,1280 

Later in the day, Mr. Allen forwarded to Ms. Fisher and Mr. Ketley 

an email that had been sent by Mr. Hussain after he met with the bank in 

Riyadh, Saudi Arabia. 1281 Mr. Hussain had sent the email to Mr. Allen 

and other colleagues, informing them that Cassim Docrat, an Al Rajhi 

Bank representative, had told him that ifthe U.S. banknotes business 

wasn't reestablished by the end of November, Al Rajhi Bank would 

"cancel any business dealings with HSBC.,,1282 His email also stated 

that the bank had indicated it had been able to procure a large line of 

credit from one ofHSBC's competitors, JPMorganChase. Mr. Hussain 

wrote: 

"I can't stress on the fact that we do want to do business with this 

institution from PCM [Payments and Cash Management] side. We 

do stand a good chance to win a US$ clearing account thru offering 

Islamic Overnight Investment Product and the US $ checking 

clearing thru Check 21.,,1283 

Mr. Allen also sent a copy ofMr. Hussain's email to Mr. Lok, 

commenting: "As ever, we are taking an inordinate amount oftime to 

make our minds up. I discussed this client with Terry [Pesce], Linda 

[Cassell] and Alan [Ketley] when I visited in February, we eventually 

received and have now answered a rate of supplementary questions from 

Linda and now that she has left, no doubt there will be more questions 

from Alan!,,1284 Mr. Lok responded: 

"I would tell Salman that he should relay the 'concern' Alrajhi has 

expressed to the higher ups. To cancel the Amanah business is 

much bigger than not dealing with banknotes. Hopefully 

1280 11 /1712006 email from HBUS Stephen Allen to HBUS Beth Fisher and Alan Ketley, "AI 

Rajhi Banking," HSBC OCC 3280504-505. 

128 1111712006 email from Salman Hussain to David Hling, Gordon Brown, Stephen Allen and 

others, "AI Rajhi Bank KYC & AML Policy," HSBC OCC 3280496-497. Mr. Salman was 

meeting with the bank, because HSBC Bank Middle East had never ceased doing business with 

it. 

1282 11/17/2006 email from Salman Hussain to David Hling, Gordon Brown, Stephen Allen and 

others, "AI Rajhi Bank KYC & AML Policy," HSBC OCC 3280496-497. 

1283 Id. 

1284 1l/17/2006 exchange between HBUS Stephen Allen to HSBC Christopher Lok, "Alrajhi," 

OCC-PSI-00150798. 
436 


76061.802

262 

somebody in London will listen and given NYK [New York] 

Compliance a gentle pUSh.,,1285 

That afternoon, Ms. Fisher sent an email to Mr. Allen declining to 

approve the new Al Rajhi Bank client profile: 

"I am not trying to be difficult, but I do not personally feel 

comfortable [being the] IB [institutional banker] approving this 

name. I do not know this bank. Additionally, several years ago, 

when HBUS had relationships with 2 different Al Rajhi names, 

management would ask me questions about the customer every 

time the name appeared in the US newspapers. I do not know this 

bank personally and therefore not qualified to render an opinion. 

... Therefore, please ask another officer to IB approve. I am IBDenied the KYC, so that ml name can be removed as RM 

[relationship manager].,,128 

Mr. Allen responded: "I quite understand your position and I will try 

another tack.,,1287 

After receiving her refusal to approve the Al Rajhi Bank profile, 

Mr. Allen forwarded it to Mr. Lok and asked: "[W]ho do you suggest 

can/will sign this profile? You will see that it is pressing - perhaps 

David [Wilens] could IS and you could IB approve if Susan [Wright] 

and I sign it again?,,1288 Mr. Lok responded: "At the end of the day, its 

compliance who's the key. I'll speak to Ketley & ask him to re-evaluate 

this name.,,1289 Mr. Lok also sent an email to Mr. Allen informing him: 

"Just spoke to Alan [Ketley]. He's going to read the whole file ... and 

he's aware of the 'threat' you passed along. His view is Alrajhi may not 

really walk away if we can't revert by November end, which I agree. 

W[e] should have an answer in the next few weeks.,,1290 

Over the next few days, Mr. Ketley reviewed Al Rajhi Bank's 

AML policies and procedures. He also asked Mr. Hussain: "What 

revenue projections do you have associated with the US$ clearing and 

Check 21 'cash letter'" services that could be provided by HBUS to Al 

1285 Id. 

1286 11117/2006 email from HBUS Beth Fisher to HBUS Stephen Allen, Alan Ketley, 

Christopher Heusler, "AI Rajhi Banking," lISBC acc 3280504. 

12871111712006 email from HBUS Stephen Allen to HBUS Beth Fisher, Alan Ketley, 

Christopher Heusler, "AI Rajhi Banking," HSBC acc 3280504. 

1288 1111712006 email from HBUS Stephen Allen to HSBC Christopher Lok and David Wilens, 

"AI Rajhi Banking," aCC-PSI-00150795, In a Subcommittee interview, Mr. Lok explained that 

he retained the authority to act as the institutional banker for a client and so could approve a 

client profile. Subcommittee interview of Christopher Lok (3/29/2012). David Wilens was the 

chief operating officer of the London Banknotes office and later became chief operating officer 

for the entire HBUS Banknotes Department. See Nov. 2006 HBUS organizational chart, acc- PSI-00000501. at 505. 

1289 11/17/2006 email from HSBC Christopher Lok to HBUS Stephen Allen and HSBC David 

Wilens, "AI Rajhi Banking," aCC-PSI-00150795. 

1290 11117/2006 email from HSBC Christopher Lok to HBUS Stephen Allen, "Alrajhi," acc- PSI-OO I 50796. 
437 


76061.803

263 

Rajhi Bank?1291 Mr. Hussain responded: "Estimated revenue will be a 

minimum of$100k per annum." 

Emma Lawson, in AML Compliance at HSBC Group 

Headquarters, also sent an email to Mr. Ketley asking, "Has progress 

been made.,,1292 Mr. Ketley responded: 

"Your timing is uncanny and I suspect not entirely unrelated to 

correspondence last week from Banknotes and PCM. I have 

reviewed the new documentation provided by the client and 

discussed it with Terry [Pesce]- she has indicated a desire to 

discuss with David. Will keep you posted.,,1293 

A later email indicated that Ms. Pesce also raised the matter with "the 

Bank's executive management.,,1294 

On December I, 2006, Mr. Ketley sent an email to Mr. Allen and 

Salman Hussain, with copies to Ms. Pesce and Mr. Lok, indicating he 

would approve re-opening the banknotes account with Al Rajhi Bank: 

"[T]he purpose of this note is to confirm to you the willingness of 

HBUS to recommence a relationship with Al Rajhi Bank. ... 

[I] am satisfied that we can do business with this entity as long as 

our due diligence is thoroughly documented and close transaction 

monitoring takes place by Compliance along with a high degree of 

transaction awareness being maintained by the business. Over a 

period of years there has been much negative pUblicity associated 

with the principals of this entity - while none of these allegations 

has been proven or substantiated, the notion of 'no smoke without 

fire' is one we must bear in mind and any business unit dealing 

with this entity must acknowledge the associated risks. ... [T]o 

paraphrase an expression from English Banking, if it is in my hand 

and in order I will approve it.,,1295 

1291 11120/2006 email from HBUS Alan Ketley to HSBC Salman Hussain, with copies to 

Stephcn Allen, Gordon Brown, and others, "Re: Fw: Al Rajhi Bank KYC & AML Policy," 

HSBC OCC 3280945. 

1292 6/2012006 email exchange between HSBC Emma Lawson and HBUS Alan Ketley, "Fw: AI 

Rajhi Banking & Investment Corp., Saudi Arabia," HSBC OCC 3281773-774. 

129 Id. Teresa Pesce. then HBUS AML hcad, told the Subcommittee that she didn't recall any 

specific pressure exerted by HSBC Group with regard to the Al Rajhi Bank relationship, but she 

knew that HSBC Group was interested in maintaining it. Subcommittee interview of Teresa 

Pesce (3/30112). 

1294 6/3/2008 email from HBUS Denise Reilly to HBUS Alan Williamson, Daniel Jack, Anne 

Liddy and others, "Banknotes with AI Ra[jh]! Banking in S.A.," HSBC OCC 1638575. Ms. 

Pesce told the Subcommittee that the United States initially raised the idea of exiting the AI 

Rajhi relationship. She said she may have raised it with Susan Wright, David Bagley, and "the 

board." Subcommittee interview of Teresa Pesce (3/3012012). 

1295 121112006 email from HBUS Alan Ketley to HBUS Stephen Allen, HSBC Salman Hussain, 

and others, "AI Rajhi Bank," OCC-PSI-00IS0892. Ms. Pesce told the Subcommittee that a court 

dismissal of claims against the bank was the single most important reason that she decided to reopen the relationship. Both Mr. Ketley and Ms. Pesce stated that they did due diligence on AI 

Rajhi Bank, and both thought that the risk could be managed and that they made sure the 
438 


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264 

Mr. Ketley also placed several conditions on the approval of the client 

profile, noting that his approval extended only to banknotes transactions 

and not to cash letter transactions. He also stated that the bank could 

engage in wire transfers, but "1 cannot support paper activity with the 

degree of close monitoring that would be appropriate.,,1296 

Mr. Ketley noted that Christopher Lok, head of Global Banknotes, 

would act as the "relationship owner" ofthe account in place of Beth 

Fisher, and would "approve the profile ifhe is satisfied with it."1297 

Mr. Ketley announced the decision to reopen the AI Rajhi Bank 

account despite, in the words of the 2006 client profile, a "multitude of 

allegations ... implementing [AI-Rajhi] in a gamut of highly adverse 

activities ranging from money laundering to terrorist financing." The 

decision was also made despite the refusal of the prior Al Rajhi Bank 

relationship manager, Beth Fisher, to approve the profile, and 

immediately after HSBC learned that the outside KYC database it relied 

on for due diligence, World Check, had identified Al Rajhi Bank's most 

senior official as linked to terrorism. The decision also came one year 

after a 2005 U.S. indictment provided a concrete example of AI Rajhi 

Bank's alleged link to terrorism, disclosing how senior officials from alHaramain Foundation Inc. had cashed $130,000 in U.S. travelers 

cheques at Al Rajhi Bank in Saudi Arabia and then smuggled the money 

to violent extremists in Chechnya. 1298 

The 2006 client profile focused on the fact that no country had 

indicted, issued a terrorist-related designation, or sanctioned AI Rajhi 

Bank or its owners, even though that was also true in 2005, when the 

original decision to close the account was made. The internal HSBC 

emails indicate that two other major factors in the decision to restore the 

account were the threat made by Al Rajhi Bank to withdraw its business, 

and the promise of new revenue exceeding $100,000 per year. 

H. 2007 to 2010: Additional Troubling Information 

The HBUS Banknotes account for Al Rajhi Bank was formally 

reestablished on December 4, 2006. 1299 Once the account was 

reinstated, HBUS London Banknotes began supplying an estimated 

regulators were aware of the relationship. Subcommittee interviews of Teresa Pesce (3/30/2012) 

and Alan Ketley (2/26/2012). 

1296 1211/2006 email from HBUS Alan Ketley to HBUS Stephen Allen, HSBC Salman Hussain, 

and others, "AI Rajhi Bank," OCC-PSI-00IS0892. Ms. Pesce confirmed to the Subcommittee 

that the HBUS relationship with Al Rajhi Bank was limited to a banlmotes relationship. 

Subcommittee interview of Teresa Pesce (3/30/12). 

1297 12/112006 email from HBUS Alan Ketley to HBUS Stephen Allen, HSBC Salman Hussain, 

and others, "AI Rajhi Bank," OCC-PSI-00IS0892. 

1298 "Former U.S. Head of AI-Haramain Islamic Foundation Sentenced to 33 Months in Federal 

Prison," U.S. Attorney's Office for the District of Oregon press release (9127/11), at l. 

1299 See 2010 HSBC KYC Profile of Al Rajhi Bank, at 13. 
439 


76061.805

265 

average of $25 million in physical U.S. dollars per month to Al Rajhi 

Bank in Saudi Arabia.I3Oo HBUS informed the Subcommittee that over 

the next four years Al Rajhi Bank purchased nearly $1 billion in U.S. 

dollars from HBUS, while selling back less than $10 million. The 

annual totals are as follows. 

U.S. Dollars Sold U.S. Dollars Purchased 

to Al Rajhi Bank from Al Rajhi Bank 

2006 $0 $0 

2007 $ 123 million $ 8 million 

2008 $ 202 million $0 

2009 $ 369 million $0 

2010 $ 283 million iQ 

Grand total: $ 977 million $ 8 million lJOI 

During that time period, troubling information about Saudi Arabia 

in general and Al Rajhi Bank in particular continued to circulate, but 

neither HSBC nor HBUS engaged in another round of internal 

deliberations over whether to maintain the account. Instead, HBUS's 

Hong Kong branch opened a new line ofbanknotes trading with AI 

Rajhi Bank. 

In July 2007, the Wall Street Journal published two lengthy articles 

by reporter Glenn Simpson examining Al Rahji Bank's links to 

terrorism.I302 The first article disclosed the existence of the 2003 CIA 

report, "AI Rajhi Bank: Conduit for Extremist Finance," and quoted its 

statement that "[s]enior al-Rajhi family members have long supported 

Islamic extremists and probably know that terrorists use their bank." 

The article repeated the information that the name of the bank's most 

senior official, Sulaiman bin Abdul Aziz Al Rajhi, had appeared on al 

Qaeda's list of 20 early financial benefactors. I 303 After the first article 

was published, HBUS' primary U.S. regulator, the OCC, asked HBUS to 

respond to its allegations. 1304 

Also in 2007, reports by the U.S. Department of State I 305 and the 

Congressional Research Service 1306 stated that Saudi Arabia continued to 

1300 See 7/26/2007 email from HBUS Daniel Jack to HBUS Alan Ketley. "BN·LN with AI Rajhi 

Bank in Saudi Arabia:' HSBC OCC 1413726. 

1301 Subcommittee briefing by HSBC legal counsel (7/9/2012). 

1302 "U.S. Tracks Saudi Bank Favored by Extremists," Wall Street Journal, Glenn Simpson 

(7/26/2007); "Reported U.S. Concerns over Saudi Bank leave Compliance Officers Reading Tea 

Leaves," Wall Street Journal, Glenn Simpson (712712007). 

130) "U.S. Tracks Saudi Bank Favored by Extremists," Wall Street Journal, Glenn Simpson 

(7/26/2007). 

1304 7126/2007 email from OCC Joseph Boss to HBUS Alan Ketley, "Saudi's," HSBC OCC 

3391185. 

1305 See 2007 International Narcotics Control Strategy Report, U.S. State Department, at 355. 
440 


76061.806

266 

be a source of financing for Al Qaeda and other terrorist organizations, 

and expressed particular concern about the use of cash couriers to 

deliver funds outside ofthe country. In September, on the sixth 

anniversary of the 9/11 attack, Treasury Under Secretary Levey said in a 

televised interview on terrorist financing: "[I]fI could somehow snap 

my fingers and cut offthe funding from one country, it would be Saudi 

Arabia.,,1307 In August 2007, Congress enacted legislation expressing 

concern about Saudi Arabia's uneven role in terrorist financing. 1308 

In April 2008, Treasury Under Secretary Levey testified that, while 

Saudi Arabia had taken strong action against terrorists operating within 

its borders and was cooperating with the United States on an operational 

level, it was not working as hard to prevent funds from flowing to 

terrorists outside ofits borders: "Saudi Arabia today remains the 

location from which more money is going to terror groups and the 

Taliban Sunni terror groups and the Taliban than from any other 

place in the world."I309 

The 2009 GAO report prepared for Congress stated: "U.S. 

officials remain concerned about the ability of Saudi individuals and 

multilateral charitable organizations, as well as other individuals visiting 

Saudi Arabia, to support terrorism and violent extremism outside of 

Saudi Arabia." 131 0 Also in 2009, HBUS received an inquiry from the 

IRS Criminal Investigation Division asking for contact information for 

the U.S. agent that receives service of process in the United States on 

behalf of Al Rajhi Bank. 13 !! In response, HBUS AML compliance 

officer Daniel Jack reviewed the bank's account activity for the prior 12 

months. He wrote: 

"This bank (an SCC) had a long-standing relationship (25+ years) 

with Banknotes-London until we closed the account in Feb-OS due 

to TF [Terrorist Financing] & reputational risk. With approval 

from AML CA. Ketley), London re-opened the BN [Banknotes] 

account in Dec-06 with SCC classification due to PEP. This client 

still has relationships with HSBC in the UK, UAE, France, Hong 

1306 See 2007 CRS Report on Saudi Arabia Terrorist Financing Issues, in the summary. 

1307 "U.S.: Saudis Still Filling Al Qaeda's Coffers," ABC News, Brian Ross (9/11/2007). 

1308 See Section 2043(c), Implementing Recommendations of the 9111 Commission Act, P.L. 

110-53 (8/3/2007). 

1309 Stuart Levey testimony before Senate Committee on Finance, "Anti-Terrorism Financing: 

Progress Madc and Challenges Ahead," (411/2008). 

1310 "Combating Terrorism: U.S. Agencies Report Progress Countering Terrorism and Its 

Financing in Saudi Arabia, but Continued Focus on Counter Terrorism Financing Efforts 

Needed." U.S. Government Accountability Office, GAO-09-883 (Sept. 2009), 

http://www.gao.gov/new.items/d09883.pdf.at 29. 

131 See 511212009 HBUS email exchange, "AI-Raj hi Banking and Investtnent Corporation, 

Saudi Arabia," OCC-PSI-00823520, with attachments. 
441 


76061.807

267 

Kong and Italy .... Following is a listing of all traders' 

explanations provided for alerts over the past 7+ years.,,1312 

His analysis disclosed that, over the prior 12 months, HBUS had 

provided Al Rajhi Bank with over $200 million in U.S. dollars.1313 

In 2010, the al Haramain Foundation trial got underway related to 

the cashing of $130,000 in travelers cheques at Al Rajhi Bank in Saudi 

Arabia to help violent extremists in Chechnya. Prior to the trial, the 

United States served a subpoena on Al Rajhi Bank to obtain 

authenticated bank documents for use in the trial, but the bank refused to 

produce the documents and moved to quash the subpoena,1314 leading to 

"negative news articles," in the words of the 2010 KYC client profile 

prepared by HBUS for Al Rajhi Bank.1315 The trial court denied the 

bank's motion, 1316 and the case was later closed as "moot." 13 17 

One other 2010 development was action taken by an Al Rajhi 

related money exchange, Tahweel Al Rajhi, to join with the largest bank 

in Pakistan, Habib Bank Ltd., to initiate a new funds transfer product 

called "HBL Fast Cash." The new product was designed to allow the 

instant transfer of funds from Riyadh, Saudi Arabia, to any Habib branch 

in Pakistan, whether or not the sender or recipient ofthe funds had an 

account at either financial institution. According to one media report, 

Hazem Elhagrasey, the head of Tahweel Al Rajhi, said: "The new 

service will assure that the beneficiaries will receive payments in cash 

within minutes in Pakistan.,,131B Tariq Matin Khan, Habib Bank's 

general manager for financial institutions and international banking, 

said: "The remitters can benefit from the huge HBL network to send 

money to any nook or comer ofPakistan.,,1319 The Subcommittee 

intended to ask Al Rajhi Bank about AML safeguards to prevent misuse 

of this new transfer mechanism, but the bank declined to provide any 

information in response to the Subcommittee's inquiry. It is unclear 

whether Tahweel Al Rajhi has an account at Al Rajhi Bank. 

1312 Id. 

I3JJ Id. 

1314 See Al Rajhi Banking & Investment Corp. v. Holder. Case No.1 :1O-MC-00055-ESH (USDC 

OR 1119/10). 

1315 2010 HBUS KYC Profile of Al Rajhi Bank, at 6. See also 12/6/2011 HSBC AMLID Case 

#1434 for Al Rajhi Bank, HSBC·PS]-PROD-OI02340-342. 

1316 United States v. Sedaghaty. (USDC D OR), 2010 U.S.Dist.LEXIS 144171, Order 

(1112/2010). 

1311 Sec Al Rajhi Banking & Investment Corp. v. Holder, Case No. I :10-MC-00055-ESH, Order 

Dismissing Action As Moot (3/2/2010). 

1318 "Terror-linked Saudi bank launches major remittance program to Pakistan," Khaleej Times 

in Saudi Arabia (4/10/20 I 0), 

http://www.khaleejtimes.comibiziinside.asp?xfile=/dataibusiness/20 I 0/ Aprilibusiness_ 

AorilI83.xml§ion=business&col=. 

1319]d. 
442 


76061.808

268 

Meanwhile, from 2007 to 2010, HBUS continued to supply, 

through its London branch, hundreds of millions of U.S. dollars to Al 

Rajhi Bank in Saudi Arabia. In addition, at AI Rajhi Bank's request, 

I-IBUS expanded the relationship in January 2009, by authorizing its 

Hong Kong branch to supply AI Rajhi Bank with non-U.S. currencies, 

including the Thai bat, Indian rupee, and Hong Kong dollar. mo At the 

time, Gloria Strazza, a senior official in HBUS's Financial Intelligence 

Group, observed: "There was (and may be in the future) a fair amount of 

press and government attention focused on this entity. I am not sure we 

would want to engage in even this limited activity for this entity but I 

forward some of the intelligence from our files on this bank.,,1321 Mr. 

Lok responded: "This is an on-going debate that will never go away. 

My stance remains the same, i.e. until it[']s proved we cannot simply 

rely on the Wall Street Journal['s] reports and unconfirmed allegations 

and 'punish' the client.,,1322 In a later email.Mr. Lok commented: 

"LON [London Banknotes office] already has a relationship with 

Alrajhi. Adding HKG [Hong Kong Banknotes office] won't change 

Alrajhi's profile.,,1323 AML compliance officer Daniel Jack offered this 

comment to his fellow compliance officer, Alan Williamson, regarding 

the account: "I believe the business owns the customer and the risk. ... I 

don't think you should CO [Compliance Office] deny - or even hesitate 

now - on this for HK [Hong Kong], despite the negative info on TF 

[Terrorist Financing] & Rep[putational] risk, which is not new (e.g. WSJ 

in Jul-07, EDD in Dec-07). I understand why Denise/Anne/Gloria are 

not comfortable, but I respectfully do not think it is their decision to 

terminate the relationship (again).,,1324 HBUS decided to open the Hong 

1320 See 2010 HBUS Hong Kong office KYC Customer Profile for Al Rajhi Bank, HSBC-PSIPROD·OI02304-306 (showing Hong Kong account for Al Rajhi Bank began trading 1129/2009). 

See also 4/3/2008 email from HBME Salman Hussain to HBMD David Illing and HBEU John 

Scott, "AI Rajhi Bank, Saudi Arabia," OCC·PSI·OOI56271 (showing Al Rajhi Bank requested 

the Hong Kong account); 5/5/2008 exchange of emails among HBUS Christopher Lok, Gary 

Yeung, Stephen Allen, and others, "KYC Approval needed for: Al Rajhi Banking & Investment 

Corp," OCC·PSI·00155719; 6/212008 email from HBUS Daniel Jack to HBUS Anne Liddy, 

Gloria Strazza, Alan Williamson, and others, "Banknotes with Al RaUh]I Banking in S.A.," 

OCC-PSI-003434SI. 

1321 6/3/2008 exchange of emails among HBUS Gloria Strazza, Danicl Jack, Christophcr Lok, 

Stephen Allen, and others, "Banknotes with Al RaDh]i Banking in SA," HSBC OCC 0752005· 

006. AML compliance officer Daniel Jack forwarded her email to Mr. Lok, Mr. Allen, and 

others, noting "there is still some concern in AMLlICRO regarding TF [Terrorist Financing] & 

reputational risk in dealing with [AI Rajhi]," and asked for an email to "address the negative 

info, risk analysis and appropriateness ofmitigants, and your support for maintaining the HBUS 

relationship." Id. 

1322 Id. 

1323711812008 email from HBUS Christopher Lok to HBUS Alan Williamson and others, 

"Banknotes with Al RaUh]I Banking in SA," HSBC OCC 0760928. 

1324 6/3/2008 email from HBUS Daniel Jack to HBUS Alan Williamson, "Banknotes with AI 

RaUh]I Banking in SA," HSBC OCC 1638463. See also 5/3012008 emails exchanged among 

HBUS Daniel Jack, Alan Williamson, and Betty NG, "KYC BankNote Profile is IE Approved 

for: AI Rajhi Banking & Investment," OCC·PSI·00239206; HSBC OCC 1638463. 
443 


76061.809

269 

Kong account,1325 providing AI Rajhi Bank on average another $4.6 

million per month in non-U.S. currencies. 1326 

HBUS Banknotes finally ceased doing business with Al Rajhi 

Bank when, in September 2010, HSBC made a global decision to exit 

the U.S. banknotes business, one week after the acc sent a lengthy 

Supervisory Letter to the bank criticizing its AML program, including 

with respect to its handling ofbanknotes. 1327 

I. Servicing Other Banks with Suspected Links to 

Terrorism 

Al Rajhi Bank was not the only bank with suspected links to 

terrorist financing serviced by HSBC. Two others were Islami Bank 

Bangladesh Ltd. and Social Islami Bank Ltd. Both banks cooperated 

with the Subcommittee's inquiries. 

(1) Islami Bank Bangladesh Ltd. 

Islami Bank Bangladesh Ltd. opened its doors in 1983, designed its 

operations to be in conformance with Islamic requirements, and has 

grown to become one of the largest private banks in Bangladesh, which 

is one ofthe most densely populated countries in the world. 1328 It 

provides a wide variety of individual and commercial banking 

services.1329 Several of the bank's most senior officials were politically 

important figures within the country or in Saudi Arabia, leading to their 

designations as Politically Exposed Persons in the World Check 

database.IJ3O According to Islami Bank Bangladesh, it has an extensive 

network of more than 600 correspondent accounts. 1J31 

1325 In July 2008, Mr. Williamson approved the new account and wrote to Mr. Lok, "You're in 

business now." 7/1812008 email exchange between Alan Williamson. Christopher Lok, and 

others, "Banknotes with AI RaUh]1 Banking in SA," HSBC OCC 0761014. 

1326 See HBUS Hong Kong office KYC Customer Profile for AI Rajhi Bank, HSBC-PSI-PROD0102304-306, at2. 

1327 See 9/20/2010 "HSBC to Exit Asian Banknotes Business," HSBC Holdings pIc 

Announcement. http://www.hsbc.comlllPA esf-ca-appcontent/content/asscts/investor _relations!sc;) 201 O/sea _100920_ wholesale _ banknotcs_ en. pdf, 

See also 2010 HBUS KYC Profile on AI Rajhi Bank, at 1 (showing account deactivated on 

10114/2010); 2010 I-IBUS Hong Kong office KYC Profile on AI Rajhi Bank, HSBC-PSI-PROD0102304-306, at 1 (showing Hong Kong account deactivated on 10/2912010). In addition. in 

October 201 0, both the OCC and Federal Reserve issued Cease and Desist Orders to HBUS and 

its ,Farent holding company, HNAH, to require them to revamp their AML programs. 

132 See Islami Bank Bangladesh Ltd. website, "About IBBL," 

http://wv.w.islarnibankbd.com/abtIBBLIabtIBBLAtaGlance.php; 411 912005 HSBC FIG report on 

Islami Bank Ltd.-Bangladesh, HSBC OCC 3241695; 7/4/2012 email from Islami Bank 

Bangladesh Ltd. to Subcommittee, PSI-IBBL-OI-OOOI. 

1)29 See Islami Bank Bangladesh Ltd. website, "Products & Services," 

httr:llwww.islarnibankbd.comlprodServices/prodServices.php 

133 Sec 4/1912005 HSBC FIG report on Islami Bank Ltd.-Bangladesh, at HSBC OCC 3241696; 

5/11/2006 FIG report on Islami Bank Bangladesh, HSBC OCC 3241693. 

1331 7/412012 email from lsi ami Bank Bangladesh Ltd. to Subcommittee, PSI-IBBL-OI-OOOI. 
444 


76061.810

270 

Islami Bank Bangladesh applied to open accounts with HSBC in 

2000, and currently has correspondent accounts with HSBC in 24 

locations around the world. 133 According to the bank, it opened a U.S. 

dollar account with HBUS in 2000, and U.S. dollar clearing accounts 

with HSBC India and HSBC Pakistan in 2006. In 2007, the HBUS 

branch in Singapore also sought approval to open an account for the 

bank to supply it with physical U.S. dollars, cash U.S. dollar monetary 

instruments such as travelers cheques and money orders, process U.S. 

dollar wire transfers, and provide other services. 1333 

Opening 2007 HBUS Account. Documents show that proposals 

to open the 2007 HBUS account for Islami Bank immediately raised 

AML concerns within I-IBUS AML Compliance, not only because the 

bank was located in a country ranked by HSBC as at "high risk" of 

money laundering1334 and ranked by Transrsarency International as one 

ofthe most corrupt country in the world,13 5 but also because members 

of the AI Rajhi group held a 37% direct ownership interest in the bank. 

In the fall of2007, Kwok Ying Fung at the HBUS office in 

Singapore asked Beth Fisher at HBUS AML Compliance to approve 

Islami Bank's KYC profile, but she declined without explaining why.1336 

On October 24,2007, after receiving her response, he asked HBUS 

AML Comfliance to suggest someone else to approve opening the 

account.13J Angela Cassell-Bush suggested that he "reach out to Chris 

Lok to see ifhe is wiIling to be the RM [Relationship Manager] 

Approver.,,1338 Ms. Fisher warned her colleagues that, given the 

connection between the Bangladeshi bank and Al Rajhi Bank, "[t]his is 

not just an RM issue. This is a KYC due diligence issue.,,1339 

On November 6,2007, Mr. Fung asked Mr. Lok, head ofHSBC 

Global Banknotes and located in HBUS offices in New York, ifhe 

would consider serving as the "RM [Relationship Manager] approver" of 

the Islami Bank KYC profile, so that the bank could become a "shared 

1332 See BBUS Know Your Customer Profile ofIslami Bank Bangladesh Ltd. (3/9/2012), BSBCPSI-PROD-0117222-237 (hereinatler "2012 BBUS KYC Profile of Islami Bank"), at 2; 7/4/2012 

email fromIslamiDankBangladeshLtd.toSubcommittee.PSI-IBBL-OI-OOOI. 

1333 See 2012 BBUS KYC Profile of Islami Dank at 2. 

133' rd. at 1. 

1335 See 2007 "Corruption Perceptions Index," Transparency International, 

http://archive. transparency.org/policLresearchisurveys _indices/cpi/2007 (ranking Bengladesh as 

162 out of 180 countries in terms of perceived levels of corruption). 

1116 See 10/24/2007 email from BBUS Kwok Ying Fung to BDUS Jarrett Payne and Angela 

Cassell-Bush, "KYC BankNotes Profile is IB Denied for: Islami Bank Bangladesh Limited," 

BSBC OCC 0739990-991. 1337 Id. 

1J18 111612007 email from Angela Cassell-Bush to Kwok Ying Fung with copies to Beth Fisher 

and others, "KYC BankNotes Profile is IB Denied for: Islami Dank Bangladesh Limited," BSDC 

OCC 0739990. 

1339 111712007 email from BBUS Beth Fisher to BBUS Angela Cassell-Bush and others, "KYC 

DankNotes Profile is IB Denied for: Islami Bank Bangladesh Limited," HSBC OCC 0739989. 
445 


76061.811

271 

client" ofHBUS Banknotes and HBUS Payments and Cash 

Management (PCM).1340 On November 8, 2007, Mr. Lok responded that 

his interest in considering a new account depended upon whether there 

was enough potential revenue to make the effort of vetting Al Rajhi 

worth it: 

"First, I'm happy to be the RM [Relationship Manager] ifthis is 

an account worth chasing. How much money can you expect to 

make from this name? If this can be answered positively then I 

will ask PCM to check out the ... alrajhi connection. ... The name 

Alrajh has been a name heatedly debated for many years. We 

terminated our trading relationship following 911 and only a year 

ago after London Compliance came back telling NYK the group is 

happy to let us resurrect the relationship that we went back. ... 

Not saying just because of this connection we won't do business. 

It[']s just that ifthe revenue is there then we're prepared for a good 

fight. ,,1341 

Mr. Lok's email suggests that he expected from the outset that HBUS 

AML Compliance would resist opening an account for Islami Bank and 

it would take a "fight" to open the account. 

Later the same day, Benjamin Saram ofHBUS Singapore emailed 

Mr. Lok and others with information about the likely revenues if an 

account were opened for Islami Bank. He wrote that, because 

approximately 60,000 Bangladeshis traveled to Saudi Arabia each year 

on religious pilgrimages and would require about $1,000 to $3,000 each, 

"we're therefore looking at about USD 60 mio [million] of currency 

needs on an annual basis.,,1342 He noted that, in 2006, HBUS Banknotes 

had netted about $47,000 in profits in Bangladesh, and expected a 53% 

increase in 2007, to about $75,000, explaining, "[w]e are a monopoly 

here, and margins are decent.,,1343 Mr. Saram estimated that, ifan 

account were opened for Islami Bank, the "net profit would be 

approximately USD 75,0001 year." 

Mr. Lok responded: "One, the money is there and we should go 

for this account. Two, I will jump in and wear the GRM [Global 

Relationship Mana~er] hat. ... I believe we should be able to get the 

K[YC] sign off.,,13 4 He also asked I-IBUS AML Compliance to look 

into the possible connection between Islami Bank and Al Rajhi Bank. 

1340 11 /612007 email from HBUS Kwok Ying Fung to HBUS Christopher Lok, "Islami Bank 

Bangladesh Limited," HSBC DCC 0739989. 

1341 11/8/2007 email from HBUS Christopher Lok to HBUS Kwok Ying Fung and others, 

"Islami Bank Bangladesh Limited," HSBC DCC 0739988-989. 

1342 111812007 email from HBUS Benjamin Saram to HBUS Christopher Lok, K wok Ying Fung, 

and others, "lslami Bank Bangladesh Limited," HSBC DCC 0739987-988. 1343Id. 

1344 111812007 email from HBUS Christopher Lok to HBUS Benjamin Saram, Kwok Ying Fung, 

and others, "lsi ami Bank Bangladesh Limited," HSBC DCC 0739987. 
446 


76061.812

272 

The next day, November 9,2007, HBUS AML compliance officer 

Angela Cassell-Bush confirmed a direct link between the two banks: 

"[P]lease note that there is a connection between ISLAMI BANK 

BANGLADESH LIMITED-Bangladesh and AI-Rajhi Bank .... 

Based on the information we have on file, the Al - Rajhi family has 

been associated with Islami Bank Bangladesh Limited, since its 

inception. They have at least 37% direct ownership ... through 

their ownership within the following companies: Arabsas Travel 

& Tourist Agency, 9.999%; Janab Yousif Abdullah Abdul Aziz 

AI-Rajhi, 9.936%; AI-Raj hi Company for Industry & Trade, 

9.94%; Abdullah Abdul Aziz AI-Rajhi, 7.58%. This same family 

has major controlling interest within AI-Rajhi bank."J345 

Troubling Information. HBUS' Singapore branch actually 

opened the account for Islami Bank in December 2007. 1346 Mr. Lok and 

others approved the account, despite ongoing questions about its primary 

shareholder, Al Rajhi Bank, whose past links to terrorist financing had 

received additional attention in the media during the summer of2007. 

HBUS also approved the account despite troubling information about 

Islami Bank itself. 

The troubling information about Islami Bank was contained in an 

internal report that had been prepared less than a year earlier by HSBC's 

Financial Intelligence Group (FIG). J347 The May 2006 FIG report 

disclosed that, in March 2006, "Abdur Rahman, chief ofthe Jamaatul 

Mujahideen of Bangladesh (JMB), and his second-in-command, Bangia 

Bhai, were arrested for being responsible for the terrorist bomb blasts of 

August 17, 2005 in Bangladesh.,,1348 The FIG report noted that Mr. 

Rahman had been found to have an account at Islami Bank.1349 

134; 11/9/2007 email from HBUS Angela Cassell-Bush to HBUS Christopher Lok and 

others, "Islami Bank Bangladesh Limited-Bangladesh," OCC-PSI-00IS4139, at 1. Mr. 

Lok asked Ms. Cassell-Bush to doublecheck one ofthe shareholders, Abdullah Abdul 

Aziz AI-Raj hi, who was listed as holding 7.58% of the shares, suggesting that the wrong 

company may have been identilied as the shareholder. A later email suggested that the 

shareholding company was not a member of the Al Rajhi group. See November and 

December 2007 exchange of emails among HBUS Christopher Lok, Angela CassellBush, Muhammad Shohiduzzaman, and others, "lsi ami Bank Bangladesh LimitedBangladesh," HSBC OCC 0741466-469. Later KYC profiles for the bank indicate, 

however, that the shares were, in fact, held through a company that was part of the AI 

Rajhi group. See, e.g., 2012 HBUS KYC Profile ofIslami Bank, at 7. Islami Bank 

Bangladesh Ltd. has conlirmed to the Subcommittee that Abdullah Abdul Aziz Al Rajhi 

has been both a shareholder and director of the bank. 7/4/2012 email from Islami Bank 

Bangladesh Ltd. to Subconunittee, PSI-IBBL-OI-OOOI. 

1346 See 2012 HBUS KYC Profile ofisiami Bank, at IS. 

1347 See S/J 1/2006 FIG report on Islami Bank Bangladesh, HSBC OCC 3241692-694. 

1348 Id. at 693. 

1349 Id. Islami Bank Bangladesh Ltd. told the Subcommittee, however, that it has never 

had an account for Abdur Rahman. 7/412012 email from Islami Bank Bangladesh Ltd. to 

Subcommittee, PSI-IBBL-OJ-OOOI. 
447 


76061.813

273 

The FIG report also disclosed that an investigation by the Central 

Bank of Bangladesh found that two branches of Islami Bank had been 

engaged in "suspicious transactions" and urged the bank to take action 

against 20 bank employees, including for failing to report the suspicious 

transactions. 1350 According to the FIG report, in response, Islami Bank 

reportedly suspended five officers and warned 15 others. 135 ! The FIG 

report stated that Bangladeshi news articles had observed it was the third 

time Islami Bank had been fined by the Central Bank "for covering up 

militants' transactions." 1352 

Islami Bank's KYC profile repeated this information and indicated 

that the HSBC Global Relationship Manager had visited the bank to ask 

about the matter, and was told that the incident did not involve terrorist 

financing.!353 The Global Relationship Manager advised against taking 

any further action, attributing the AML failures to the bank's 

unsophisticated technology platform. 1354 Neither the KYC profile nor 

the FIG report indicate whether any steps were taken to verifY the bank's 

explanation of the incident with the Central Bank. The KYC profile 

noted that, in 2006, FIG recommended classifYing Islami Bank as a 

"Special Category Client," or SCC, HSBC's designation for its highest 

risk clients, but that recommendation was rejected, which meant HSBC 

did not subject the bank to any enhanced monitoring. 1355 

2009 Information on IIRO Accounts. The HBUS account was 

opened near the end of2007. About 18 months later, in May 2009, a 

FIG due diligence report prepared for another Bangladeshi bank with 

which HBUS did business, Social Islami Bank, discussed below, 

disclosed new information relevant to Islami Bank. This information 

related to the International Islamic Relief Organization (IIRO), a Saudi 

nonprofit organization which, in 2006, had two of its branches and a 

high ranking IIRO official designated by the United States as terrorist 

financiers and added to the list of entities with which U.S. persons are 

prohibited from doing business.1356 

1350 5111/2006 FIG report on Islami Bank Bangladesh, at HSBC acc 3241693. 

1351 lslarni Bank Bangladesh told the Subcommittee that it suspended and later fired the 

bank officials involved. 7/4/2012 email from Islami Bank Bangladesh Ltd. to 

Subcommittee, PSI-lBBL-Ol-OOOl. 

1352 5/1 112006 FIG report on Islami Bank Bangladesh, at HSBC acc 3241693. 

1353 2012 HBUS KYC Profile ofIslami Bank, at 3. 

1354 Id. (The Global Relationship Manager wrote: "[ejonsidering that Islami Bank is involved in 

mass banking with a pretty large branch network without a sophisticated or integrated IT 

platform, there will always be a chance that isolated incidents like this might be found. As such, 

we will closely monitor the future events and keep you infonned as soon as any issue of concern 

is detected. "). 

1355Id. 

1356 See 8/3/2006 "Treasury Designates Director, Branches of Charity Bankrolling Al Qaida 

Network," U.S. Treasury Department press release, reprinted in 8/2/2006 email from HBUS 

Sharyn Malone to HBUS Stephanie Napier and others, "Social Investment Bank, Bangladesh," 

HSBC acc 3259936. 
448 


76061.814

274 

The 2009 FIG report stated that the lIRO had accounts at both 

Social Islami Bank and Islami Bank. 1357 It quoted a 2008 local press 

article saying that, in response to the action taken bl the United States in 

2006, Islami Bank had frozen its lIRO accounts. 135 The FIG report did 

not indicate when the accounts were first opened, what actions had been 

taken beyond freezing them, or how much money was involved. In 

20 I 0, an HBUS KYC profile for Social Islami Bank referenced a letter 

from the Bangladeshi Central Bank, dated June 30, 20 I 0, indicating that 

lIRO had accounts at three Bangladeshi banks, including Islami Bank, 

which needed to be closed. 1359 

Islami Bank Bangladesh confirmed to the Subcommittee that lIRO 

had two accounts at the bank which opened in 1993 and 1994, when 

lIRO was a nongovernmental organization in good standing. 1360 It stated 

that after the lIRO was added to a United Nations sanctions list in 2006, 

it froze the accounts and reported them to the Bangladeshi Central Bank. 

In 2010, according to the bank, it received an "instruction from the 

Central Bank at the direction of [the] Ministry of Finance" to unfreeze 

the accounts and "transfer the accounts" to a government owned bank, 

BASIC Bank, which it did.136J 

Despite the 2008 published article, the information in the two 

internal HBUS documents related to Social Islami Bank, and Islami 

Bank Bangladesh's willingness to discuss the accounts, no information 

about the lIRO accounts appeared in the HBUS KYC profile for Islami 

Bank. While the lIRO accounts at Social Islami Bank were the focus of 

extensive discussions in emails and other documents by HBUS AML 

Compliance personnel and HBUS bankers working in Bangladesh, no 

similar discussions appear in any of the HBUS documents related to 

Islami Bank. 

In September 2009, the Islami Bank KYC profile indicates that an 

unnamed HSBC emRloyee requested a new enhanced due diligence 

report on the bank. J 62 HBUS Compliance denied the request, indicating 

an update "is NOT needed at this time.,,1363 

2010 see Designation. In February 2010, HBUS AML 

Compliance personnel reviewed the Islami Bank account and 

1357 See 5/5/2009 FIG Report of Findings on Social Investment Bank Limited, OCC-PSI00823818, at 7 (quoting 10/8/2008 article from Bangladeshnews.com). 1358 Id. 

1359 2012 HBUS KYC Profile of Social lsi ami Bank, at 4 ("The 3 bank accounts ofIIRO namely 

i) Social Islami Bank Ltd. ii) Islami Bank Bangladesh Ltd. iii) AI-Falah Islami Bank Ltd. must 

be disposed off [sic I and transferred"). 

1360 7/412012 email from Islami Bank Bangladesh Ltd. to Subcommittee, PSI-IBBL-OI0001-003, at 003. 

1361 Id. 1362 2012 HBUS KYC Profile ofIslami Bank, at 2. 1363 Id. 
449 


76061.815

275 

recommended that the bank be designated an SCC client. 1364 One key 

reason given for the proposed SCC designation was Islami Bank's links 

to the Al Rajhi group, noting that the Vice Chairman of the bank and 

10% owner was Yousif Abdullah Al Rajhi, that Al Rajhi interests held 

about a third ofthe bank's shares, and Al Rajhi itself had links to 

terrorist financing. 1365 Another reason given was the information 

provided in the 2006 FIG report, that the Bangladeshi Central Bank had 

issued a "notice of cause" to Islami Bank "to explain accounts owned by 

suspected Islamic Militants," and reportedly fined the bank for the third 

time "for covering up militants['] transactions.,,1366 No mention was 

made of the lIRO accounts. Contrary to the outcome in 2006, in 2010, 

HSBC designated Islami Bank as an SCC client. 1367 

Later in 2010, an OCC AML examiner reviewing emails related to 

Islami Bank characterized the information provided about the bank as 

depicting "extreme circumstances," and recommended that the account 

be reviewed as part of a larger AML "look back" effort at HSBC. 1368 In 

2011, HSBC engaged in an extensive discussion with Islami Bank 

regarding its AML policies and procedures, also noting in its KYC 

profile that the bank acted as a "pa~out agent" for 53 money exchange 

businesses across the Middle East. 369 

Today, although HSBC exited the U.S. banknotes business in 2010, 

Islami Bank Bangladesh remains a customer of two dozen HSBC 

affiliates, including HBUS PCM, which continues to provide Islami 

Bank with access to U.S. dollars, U.S. wire transfers, and U.S. payment 

systems. 1370 

(2) Social Islami Bank Ltd. 

A third bank serviced by HSBC despite suspected links to terrorist 

financing is Sociallslami Bank Ltd. 

Social Islami Bank Ltd. was founded in 1995, changed its name 

from Social Investment Bank Ltd. in 2009, and is located in 

Bangladesh.1J71 It operates 76 branches throughout the country and 

provides a variety of individual and commercial banking services, 

including deposits, loans, investment advice, commercial financing, 

foreign exchange, and wire transfers. It operates in conformance with 

1364 See 2/312010 email exchange between HBUS JonK. Jones. Ali Kazmy and others, "Islami 

Bank Bangladesh Ltd·- Poss SCC;' OCC-PSI-00453499. 1365 Id. 

1366 Id. 

1367 Id. See also 2012 HBUS KYC Profile ofIslami Bank, at 3. 

1368 10/27/2010 email from OCC AML Examiner Joseph Boss to OCC coUeagues, OCC-PSI00919631. 

1)69 2012 HBUS KYC Profile ofIslami Bank, at 3-4. 

1370 2012 HBUS KYC Profile ofIslami Bank, at 2, 7. 

1371 See Social Islami Bank website, http://www.siblbd.comihtmllhomepages.php; HBUS "Know 

Your Customer Profile" of Social Islami Bank Ltd. (21712012), HSBC-PSI-PROD-Ol 02782-789 

(hereinafter "2012 HBUS KYC Profile of Social Islami Bank"), at 2. 
450 


76061.816

276 

Islamic requirements and is publicly traded on Bangladeshi stock 

exchanges. Its headquarters are in Dhaka, the capital of Bangladesh, one 

of the world's largest cities with a population of 16 million. 

Until May 2012, HSBC was one of the bank's major 

correspondents, providing it with services in multiple countries. 1372 

HSBC also has an affiliate located in Dhaka. That affiliate, HSBC Bank 

Asia Pacific (HBAP) Dhaka, introduced Social Islami Bank to 

HBUS. 1373 In 2003, HBUS Payments and Cash Management (PCM) 

sought to open an account for Social Islami Bank, providing it with U.S. 

dollar wire transfer and clearing services. 1374 

Opening ofHBUS Account. When HBUS first sought to open 

the account in 2003, it asked for an enhanced due diligence report on the 

bank from the HSBC Financial Intelligence Group (FIG). In addition to 

noting that Bangladesh was a high risk country due to its reputation for 

corruption, the resulting FIG report contained adverse information about 

some of the bank's owners and officials. 1375 Most serious were 

allegations that two shareholders, the International Islamic Relief 

Organization (IIRO) and the Islamic Charitable Society Lajnat ai-Birr AI 

Islam (Lajnat ai-Birr), had links to terrorism. lIRO then held 8.62% of 

the total outstanding shares, and was the bank's largest single 

shareholder, while Lajnat ai-Birr held 1.54%. 

The 2003 FIG report stated the following with regard to the two 

shareholders: 

"IIRO is a Saudi-Arabian charity ... , The IIRO was named in the 

2002 lawsuit brought forward on behalf of family members of 

victims of the September II, 2001 terrorist attacks. The lIRO was 

accused of having 'played key roles in laundering of funds to 

terrorist[s] for the 1998 African embassy bombings' and having 

been involved in the 'financing and aiding and abetting of terrorists 

in the 1993 World Trade Center bombing.' The IIRO has also 

reportedly funded al-Qaeda directly as well as several of its 

satellite groups. Osama bin Laden's brother-in-law, Mohammed 

Jamal Khalifa, headed the Philippine branch of the lIRO in the 

1990's. The Philippine government has charged that the group 

contributed to terrorist causes there. 1376 .•• 

1372 See Social Islami Bank website, "List ofCorrespondents/Agency Arrangements Overseas." 

http://www.siblbd.comldownload/CorrespondentsAgencyArrangementsOverseas.pdf. 

1J7 2012 HBUS KYC Prome of Social Islami Bank, at 7. 

1374 Id. at 2, 14. 

1375 See 11/2003 Report on Findings for Social Investment Bank, Ltd., HSBC Financial 

Intelligence Group, OCC-PSI-00823818, at 18 (hereinafter "2003 FIG Report on Social Islami 

Bank"). 

1376 Id. at 1-2. 
451 


76061.817

277 

Lajnat ai-Birr Al Islamiah was established in 1987. It has been 

stated that Lajnat ai-Birr Al Islamiah was the original name of the 

Benevolence International [F]oundation, and that it originally had 

offices in Saudi Arabia and Pakistan. According [to] the U.S. 

government, among the purposes ofLajnat was to 'raise funds in 

Saudi Arabia to provide support to the Mujahadeen then fighting in 

Afghanistan,' as well as to provide 'cover for fighters to travel in 

and out of Pakistan and obtain immigration status.' Benevolence 

International has been tied to terrorism and its director, Enaam 

Arnaout, was indicted in 2002 with conspiring to defraud his 

group's donors by secretly ~roviding financial and logistical help 

to al-Qaeda for a decade.") 77 

The FIG report also contained negative information about the 

bank's founder: 

"Dr. M.A. Mannan was the chairman and founder of Social 

Investment Bank Ltd. He was fired in 2000 after fault was found 

with his banking procedure. It was alleged that he created an 

obstacle to the team of Bangladesh Bank [Bangladesh's Central 

Bank] during their visit to Social Investment Bank Ltd. 

Additionally, he was accused of interfering with bank 

administrative work and with harassing a bank employee.,,1378 

The FIG report concluded: 

"In conclusion, it is of significant concern that the leading 

shareholder of Social Investment Bank Ltd. (at 8.62%), 

International Islamic Relief Organization, has been accused in both 

the Philippines and in America offunding terrorist groups. The 

group is currently under investigation by the F.B.I. Another of the 

bank's shareholders, Lajnat ai-Birr Al Islam (at 1.54%) has also 

been connected to terrorist groups. Additionally, the bank's 

founder and chairman was let go on allegations of interference and 

harassment. ... Finally, it is important to note that Social 

Investment Bank Ltd. is located in Bangladesh, which was ranked 

as the world's most corrupt nation by Transparency 

International." 1379 

The FIG report offered this cautious analysis about whether to open an 

account: 

"Although the allegations presented in this report, primarily 

against the International Islamic Relief Organization (IIRO) and 

JJ77 Id. at 2. 

JJ78 Id. at 3. 

J379 Id. at 4. 
452 


76061.818

278 

the Lajnat aI-Birr AI Islamiah, are highly adverse, no U.S. or 

foreign government law enforcement or regulatory body has stated 

unconditionally, that these organizations are under sanction. The 

reputational risk is significant, however, and the possibility that 

further investigations by U.S. authorities may ultimately uncover 

substantiating proof of a connection to terrorism. The risk of 

future sanctions and the reputational risk based on allegations 

noted in this report should be measured against the current risks 

involved in our relationship when ultimately deciding a course of 

action.,,1380 

While the 2003 FIG report provided significant adverse 

information about Social Islami Bank and noted that Lajnat aI-Birr was 

the original name of the Benevolence International Foundation which 

"had been tied to terrorism," it failed to state that, in 2002, the United 

States had designated the Benevolence International Foundation as a 

"financier of terrorism" with whom U.S. persons are prohibited from 

doing business.1381 This additional terrorism-related designation meant 

that when HBUS was considering whether to open an account for Social 

Islami Bank in 2003, Social Islami Bank was partially owned by two 

organizations associated with terrorist financing. 1382 

Despite its failure to provide that additional information, the 2003 

FIG report provided significant negative information about Social Islami 

Bank and squarely raised the question of whether HBUS should be 

doing business with it, given the "highly adverse" allegations. 

Nevertheless, on October 14, 2003, HBUS AML Compliance approved 

Social Islami Bank as an HBUS PCM client. 1383 In addition, despite the 

bank's location in a high risk country, the terrorist links uncovered in 

connection with two of its shareholders and a director, HBUS opened 

the account without designating the bank as an SCC client warranting 

additional monitoring and due diligence reviews. HBUS immediately 

began providing the bank with services that included clearing U.S. dollar 

1380 Id. at 1. 

1381 "Treasury Designates Benevolence International Foundation and Related Entities as 

Financiers of Terrorism," U.S. Treasury Department press release No. PO-3632 (11119/2002), 

v,rww,treasury.gov!press-center/press-releases/Pages/po3632.aspx. See also Executive Order 

13224, "Blocking Property and Prohibiting Transactions with Persons who Commit, Threaten (0 

Commit, or support Terrorism" (9/23/2001). 

1382 The 2003 FIG Report also failed to mention that Sociallslami Bank had opened an account 

for Al Rajhi Commercial Foreign Exchange. That money exchange business was part of the Al 

Rajhi Group, whose U.S. business and charitable ventures were the subject of a 2002 law 

enforcement search to disrupt terrorist financing. The FIG may have been unaware of the 

account at that time, although a 2005 FIG report on Al Rajhi Commercial Foreign Exchange 

disclosed it. See 7/13/2005 HBUS Financial Intelligence Group (FIG) Report of Findings 

(Update) on Al Rajhi Commercial Foreign Exchange, HSBC acc 2725167-168. In 2005, Al 

Rajhi Commercial Foreign Exchange and seven other businesses merged into Al Bilad Bank. ld. 

According to bank counsel, (he Al Rajhi Commercial Foreign Exchange account closed in July 

2002. Subcommittee briefing by HSBC legal counsel (6/27/2012). 

1383 2012 HBUS KYC Profile of Social lsI ami Bank, at 14. 
453 


76061.819

279 

monetary instruments and U.S. wire transfers. Those services produced 

revenues from Social Islami Bank totaling about $100,000 per year. 1384 

2005 Review. Two years after the account was opened, as part of 

a broader HSBC effort to update its KYC client profiles in 2005, Social 

Islami Bank was the subject of a second enhanced due diligence 

review. 1385 The resulting 2005 FIG report again identified IIRO, the 

bank's largest shareholder, as linked to terrorism, noting that it was 

"alleged to have provided funding to terrorist groups such as Al Qaeda 

in the past," and is "alleged to have acted as a cover for Al-Qaeda 

operations in the Philippines.,,1386 The FIG report stated: "Based on the 

frequency with which the group is connected to terrorist financing in the 

press, it is likely that their activities will always be under scrutiny, and 

future government sanctions against the group are highly probable.,,1387 

The report also noted that Social Islami Bank did "not appear to have 

correspondent relationships with many of the other major global banking 

corporations.,,]388 The FIG report "strongly recommend[edJ" that the 

account not be approved "until the matter is discussed with Senior 

Compliance Management.,,!389 

Despite the concerns raised in the FIG report, HBUS retained 

Social Islami Bank as a client. At the same time, to address concerns 

about the account, HBUS AML Compliance required the HSBC CEO 

for Bangladesh to provide annual approval of the account for it to stay 

open.

1390 Despite this requirement, the Subcommittee uncovered only 

one instance in which approval was granted, and when asked, HSBC 

was unable to provide any additional documentation. 1391 

2006 Terrorist Designation. Eighteen months later, on August 3, 

2006, the United States designated two branches ofIIRO and a high 

ranking IIRO official as terrorist financiers and prohibited U.S. persons 

13841d. at 8. 

1185 See 3/8/2005 email from HBUS Nanayo Ryan to I·lBUS FIG Michael Ellis, "Social 

Investment Bank Ltd Bangladesh," HSBC·PSI·PROD·OI02769·770. 

1186 3/10/2005 "Report of Findings - Social Investment Bank Ltd. - FIG (UPDATE)," HBUS 

Financial Intelligence Group, OCC·PSI·00823818 (hereinafter "2005 FIG Report on Social 

Islami Bank"), at 15. 1387 Id, 

1388Id. 

JJ89 Id. 

1390 HBUS AML head Terri Pesce told the Subcommittee it was "unusual" to obtain CEO 

approval of an account. Subcommittee interview ofT eresa Pesce (3/30/2012). See, e.g., 2012 

1-lBUS KYC Profile oflslami Bank, at 14·15; 2/9/2010 email from HBUS Jon K. Jones to HBAP 

Sadique Reza and others. "Compliance Conditions: Social Islami Bank Ltd," HSBC·PSI·PROD· 

0102645. 

JJ9i This approval was provided in April 2005 by Steve Banner, HSBC Bangladesh CEO. He 

wrote with regard to Social Investment Bank: "I have been in Bagladesh for only 2 months and 

have not yet met any of the executives from SlBL. Based on my discussion with Shohid, 

however, I can see no reason why we should not continue the relationship as at present." 

4/16/2005 email from HSBC Steve Banner, HSBC PSI PROD 0102765. See also Subcommittee 

brieling by HSBC legal counsel (4/1212012). 
454 


76061.820

280 

from transacting business with them. lJ92 Treasury Under Secretary for 

Terrorism and Financial Intelligence Stuart Levey said: "We have long 

been concerned about these TIRO offices; we are now taking public 

action to sever this link in the al Qaida network's funding chain.,,1393 

In response, on the same day, HBUS AML Compliance placed a 

block on the Social Islami Bank account, so that no funds could be 

withdrawn. The email imposing the block noted that the Social Islami 

Bank brought in HBUS revenues totaling $44,000 per year. 1394 

The next day, August 4,2006, the HSBC Financial Intelligence 

Group (FIG) issued an updated due diligence report on Social Islami 

Bank, containing significant adverse information about IIRO.1395 

Among other information, the FIG report noted that the World Check 

database relied on by HSBC for KYC information classified TIRO as 

associated with terrorism, linked it to providing assistance to al Qaeda 

and other terrorist organizations, and described it as "allegedly linked" 

to the 1993 World Trade Center bombing, "plots to assassinate Bill 

Clinton and the Pope," and "the ~lanned destruction of the Lincoln 

Tunnel and Brooklyn Bridge.,,13 6 

Two days after that, on August 6, 2006, an HSBC institutional 

banker from HBAP Dhaka, Muhammad Shohiduzzaman, met with 

Social Islami Bank to discuss IIRO.1397 He wrote to the HSBC CEO in 

charge ofthe operations in Bangladesh, Steven Banner, that Social 

Islami Bank had told him that lIRO "never took part in any activities" at 

the bank, "did not even take possession ofthe shares," and had never 

been a board member. 1398 Mr. Shohiduzzaman advised: "we are of the 

opinion that since IIRO is not involved in the operation ofSIBL [Social 

Islami Bank Ltd.], there [are] no issues of concern locally. But since the 

matter has been raised by the US treasury, HBUS should take 

appropriate measure after careful examination of all the present and 

potential aspects.,,1399 Mr. Banner wrote to Hersel Mehani, the HSBC 

sales person assigned to the account: "Based on the feedback from 

1392 See 8/312006 press release. "Treasury Designates Director, Branches of Charity Bankrolling 

Al Qaida Network," U.S. Treasury Department, reprinted in 8/3/2006 email from HBUS Sharyn 

Malone to IIBUS Stephanie Napier and others, "Social Investment Bank. Bangladesh." HSBC 

OCC 3259936. 

1393 813/2006 press release. "Treasury Designates Director, Branches of Charity Bankrolling AI 

Qaida Network," U.S. Treasury Department, reprinted at HSBC OCC 3259936. 

1394 8/312006 email from HBUS Sharyn Malone to HBUS colleagues, HSBC-PSI-PROD0102776 ("IIRO holds a 8.62% stake in Social Investment Bank (SIB). Bangladesh who is a US 

PCM client ofHBUS since Oct. 2003. Their value to US PCM is $44K annualized."). 

JJ9S See 8/412006 FIG Report of Findings (Update) on Social Investment Bank Limited, OCCPSI-00823818, at 12. 

1396 1d. at 3. 

1391 8/6/2006 email from HBAP Muhammad Shohiduzzarnan to HBAP Steve Banner, "Social 

Invst Bank Bangladesh," HSBC OCC 3260411-412. 

1398ld. 

1399 Id. 
455 


76061.821

281 

SIBL, IIRO's role remains that ofa minority shareholder that does not 

seek to engage in the management of the bank. We have no reason to 

disbelieve SIBL's statements. There are therefore no grounds for me to 

recommend an account closure or account freeze.,,1400 

Mr. Banner continued: 

"I appreciate, however, that HBUS may feel compelled to act 

firmly in the light ofOFAC's position. This is obviously a 

decision that rests with HBUS and I can confirm that we will not 

object to such action. That said, we would much prefer it if SIBL 

is allowed to withdraw the balances held with HBUS before you 

freeze or close the account. From our perspective there appears to 

be no justification for depriving SIBL of their funds and to do so 

would open HSBC to unwanted reputational damage I regulatory 

scrutiny locally.,,1401 

In essence, Mr. Banner asked for the account to be kept open but if it 

were frozen, to allow Social Islami Bank to pull its money first so that 

none of its funds would be affected. 

Later that same day, August 6, 2006, HBUS AML Compliance 

officer Alan Ketley forwarded the email exchange to his AML 

Compliance colleagues, George Tsugranes and Andrew Rizkalla, and 

asked for their thoughts. 1402 Both advised closing the account. Mr. 

Tsugranes wrote: 

"Although the Philippine and Indonesia branch offices were cited, 

the Treasury action also cited Abd AI Hamid Sulaiman AI-Mujil 

who is a high ranking lIRO official. So although only the 2 

branches were cited, having a top official in the organization 

mentioned should be cause for concern involving the IIRO. As 

this organization has a 9.0% stake and does not involve itself on 

the day to day operations or mgmt - who is to say that ther won't 

sooner or later or start moving funds through this acct.,,140 

Mr. Rizkalla wrote: 

"I remain firm to my first opinion, the account should be closed in 

an orderly fashion. We still don't know if there is a nominee 

shareholder interest to IIRO, the U.S. Govt has designated IIRO 

1400 8/6/2006 email from HBAP Steve Banner to HBAP Muhammad Shohiduzzaman, "Social 

Invst Bank Bangladesh," HSBC OCC 326041l. 

1401 Id. See also 8/612006 email from HBAP Hersel Mehani to RBUS Alan Ketley, RSBC OCC 

3260410. 

1402 81712006 email exchange among RBUS Alan Ketley, George Tsugranes, and Andrew 

Rizkalla, "Social Invest Bank Bangladesh," RSBC OCC 3260409-410. 1403 1d. 
456 


76061.822

282 

for supporting terrorism, so even the small shareholder ownership 

entitles them to profits and dividends from Soc Invst Bank to 

reinvest where?? .... Hersel says monitor the accounts for 6 

months, will he be doing the monitoring??,,1404 

Despite their advice to close the account, Mr. Ketley lifted the 

block on the account four days after it was imposed and approved 

keeping the account open: 

"After reviewing the information provided by HSBC Dhaka my 

provisional decision is that this relationship be allowed to continue. 

It will need to be designated as an SCC Category 4 (reputational 

risk) with immediate effect and will be subject to closer monitoring 

as a result.... I am not willing to commit to the 6 months 

suggested by Hersel and we will review activity and determine 

what further action may be required as events warrant. ... IIRO's 

shareholding is a minority holding and information received 

indicates that they exert neither management control nor have 

board representation. While this entity clearly represents a 

heightened reputational risk to the bank, I believe that with the 

knowledge we have today and the controls that are being 

implemented we have mitigated that risk adequately.,,1405 

A few days later, FIG forwarded its report on Social Islami Bank 

to the head ofHBUS AML Compliance, Teresa Pesce. She wrote to Mr. 

Ketley: "This makes me very uncomfortable. Can we talk to the 

business about this?,,1406 Despite the discomfort she expressed and the 

advice of two AML compliance officers, the account was kept open. 

Mr. Ketley reported to the Subcommittee that he understood that IIRO 

was a passive shareholder, that Social Islami was attempting to expel 

them, and that he talked about the account with Terri Pesce and Denise 

Reilly and believed they supported his decision to maintain the 

account. 1407 Ms. Pesce told the Subcommittee that she did not recall 

much about the relationship, but the bank should have reached out to 

OFAC with regard to it. 140 HBUS OF AC Compliance officer Elizabeth 

Protomasto told the Subcommittee that she contacted OFAC about this 

relationship after the SDN designation, and was told that the bank could 

continue to do business with Social Islami Bank, because only two 

branches ofthe IIRO had been designated by OFAC as SDNs, not all 

J404 Id. 

1405 81712006 email from HBUS Alan Ketley to Hersel Mehani and others, "Social Investment 

Bank." HSBC acc 3260426. 

1406 8/1112006 email from HBUS Teresa Pesce to Alan Ketley and Andrew Rizkalla, "Re: 

Report of Findings - Social Investment Bank Limited - Bangladesh - FIG," HSBC acc 3261519. 

1401 Subcommittee interview of Alan Ketley (2/1612012). 

1408 Subcommittee interview of Teresa Pesce (3/30/2012). 
457 


76061.823

283 

branches and not the branch in Bangladesh.1409 Social Islami Bank was 

also designated an SCC client. 1410 

IIRO Remained a Shareholder for Six Years. In September 

2006, Mr. Ketley asked Mr. Mehani to obtain additional information 

from the Social Islami Bank about its relationship with IIRO.1411 In 

response to a question asking whether IIRO was "a customer of the 

bank," Mr. Mehani wrote that the bank had told him: "IIRO has no 

relationship with the subject bank and doles] not maintain or operate any 

account with the bank.,,1412 In 2009, however, an internal FIG due 

diligence report quoted a 2008 local press article stating that the IIRO 

did have an account at Social Islami Bank, as well as over 50,000 bank 

shares which FIG estimated might then be worth $733,000. 1413 In 2010, 

the HBUS KYC profile referenced a Bangladeshi Central Bank letter 

dated June 30, 20 I 0, stating that IIRO had accounts at three Ban§ladeshi 

banks, including Social Islami Bank, that needed to be closed. 141 Social 

Islami Bank told the Subcommittee that IIRO did have a "foreign 

currency account" with the bank that was opened in 1995, but has a 

current balance of zero. 1415 

In 2006, Mr. Mehani indicated that the bank planned to "oust" 

IIRO as a shareholder at its next board of directors meeting and sell 

IIRO's bank shares. 1416 Mr. Mehani wrote: "IIRO never responded to 

their request to provide a full address rather than a PO box and they will 

use this to oust them by November [2006] which is allowed according to 

their Articles of Association which I have a copy given by them to 

me.,,1417 Despite that communication, a 2006 Social Islami Bank board 

resolution authorizing sale ofthe shares,1418 and HBUS' repeated 

1409 Subcommittee interview of Elizabeth Protomastro (6/912012). 

1410 See 2012 HBUS KYC Profile of Social Islami Bank, at 14 (applying SCC designation as of 

8/7/2006). 

1411 September 2006 emails between HBUS Alan Ketley, Hersel Mehani and others, "Social 

Invest Bank Bangladesh, HSBC OCC 3260409-418. 

1412 9127/2006 email from HBUS Hersel Mehani to HBUS Alan Ketley and others, "Compliance 

issues from Trip Dhaka," HSBC-PSI-PROD-OI02755-756 (answer to Question 5). 

1413 5/5/2009 Financial Intelligence Unit Report of Findings on Social Investment Bank Limited, 

OCC-PSI-00823818, at 7 (quoting 10/812008 article from Bangladeshnews.com). The FIG 

report also stated: "You may therefore wish to obtain information from your customer to 

ascertain the status of the accounts held by the IIRO in the Social Investment nank Ltd. You 

may also wish to consider the risks, including reputational risk involved in maintaining this 

account relationship." Id. at 7-8 (emphasis omitted). 

1414 2012 HBUS KYC Profile of Social Islami Bank, at 4 ("The 3 bank accounts oflIRO namely 

i) Social Islami Bank Ltd. ii) Islami Bank Bangladesh Ltd. iii) Al-Falah Islami Bank Ltd. must 

be disposed off [sic] and transferred"). 

1415 7/11/2012 Social lsI ami Bank response to Subcommittee questions, at 4, PSI-SIBL-OI-OOOI. 

1416 9/27/2006 email from HBUS Hersel Mehani to HBUS Alan Ketley and others, "Compliance 

issues from Trip Dhaka," HSBC-PSI-PROD-OI02755-756. 

1417 Id. See also 2012 HBUS KYC Profile of Social Islami Bank, at 5 ("Compliance advised ... 

that lIRO has no involvement in the running of the bank, is not a client ofthe bank and will 

likely be ousted as a shareholder [which] give considerable grounds for comfort"). 

1418 See 12114/2006 letter from Social Islami Bank quoting board resolution, HSBC OCC 

3342182. 
458 


76061.824

284 

inquiries into their status over multiple years, 1419 lIRQ has remained a 

shareholder of Social Islami Bank, although its ownership interest has 

graduallr dropped from 8.62% in 2006, to 3.85% in 2009, to 1.69% by 

2010. 142 lIRQ currently holds a 1.61 % interest in the bank, six years 

after Social Islami Bank promised to ensure the shares would be sold. 1421 

In 2009, Social Islami Bank sent a letter to HBUS indicating that it 

was planning to seek permission from the country's High Court to sell 

the shares still held by lIRQ. 1422 In 20 I 0, Social Islami Bank informed 

HBUS that the Bangladesh government had reached an agreement with 

lIRQ that, after certain safeguards were put in place, would allow lIRQ 

to begin operating in the country again.1423 Qne ofthe conditions was 

that the lIRQ would have to "dispose" of its Social Islami Bank 

account,1424 although that account remains open today with a zero 

balance. 1425 Social Islami Bank informed the Subcommittee that, due to 

the government's actions, "the bank is under definite obligation in 

paying dividend/issuing bonus shares/right shares to lIRQ as per the 

instructions of the Central Bank and Ministry of Finance which were not 

paid/issued in their favor till 3110512010.,,1426 

A Second Terrorist Financier Shareholder. Also in 2009, a due 

diligence report issued by the HBUS Financial Intelligence Group 

identified a second, longterm Social Islami Bank shareholder that raised 

concerns. It disclosed that Islamic Charitable Society Lajnat aI-Birr Al 

1419 See, e.g., January 2007 email exchange among HBUS Muhammad Shohiduzzaman, Hersel 

Mehani, Alan Ketley, and others, "Social Investment Bank·· IIRO," OCC·PSI·00808829; 

9123/2008 email exchange among HBUS Alan Williamson, Daniel Jack, Hersel Mahani, and 

others, "Social Investment Bank," OCC·PSI·00246337; 9/23/2008 email exchange among 

HBUS Alan Williamson, Daniel Jack, Gloria Strazza, Monique Codjoe, and others, "POSITIVE 

OFAC MATCH - IIRO -KYC NOTES DATABASE," OCC-PSI-00246334; 9/24/2008 call 

report from a meeting at Social Islami Bank, HSBC-PSI-PROD-O 1 02615; 3/812009 letter from 

Social Islami Bank to HSBC Dhaka, "Information regarding Bank's ownership for KYC 

purposes," HSBC-PSI-PROD-OI02743, at 1; 2/912010 email from HBUS Jon K. Jones to HBAP 

Sadique Reza and others, "Compliance Comlitions: Social Islami Bank Ltd," HSBC-PSI-PROD0102737. 

1420 See 2012 HBUS KYC Profile of Social Islami Bank at 3-4; 3/8/2009 letter from Social 

Islami Bank to HSBC Dhaka, "Information regarding Bank's ownership for KYC purposes," 

HSBC-PSI-PROD-OI02743, at l. 

142! 7/11/2012 Social Islami Bank response to Subcommittee questions, at 3, PSI-SIBL-OI-OOI; 

See also 2012 HBUS KYC Profile of Social Islami Bank, at 3,16. 

1422 3/8/2009 letter from Social Islami Bank to HSBC Dhaka, "Information regarding Bank's 

ownership for KYC purposes," HSBC-PSI-PROD-OI02621-625, at l. Around the same time in 

2009, HSBC's Commercial and Institutional Banking in the Asia Pacific region further expanded 

HSBC's relationship with Social Islami Bank by providing it with new commercial banking 

services. The approval form mistakenly characterized Social Islami Bank as "medium risk," 

erroneously said it was not an SCC designated client, and stated that none of the bank's disclosed 

shareholders increased the client's risk profile, despite a specific reference to IIRO. 3110/2009 

CIBM-Institutional Banking KYC Profile for Social Islami Bank Limited, HSBC-PSI-PROD0102646. 

1423 2012 HBUS KYC Profile of Social Islami Bank, at 4. 

1424 Id. 

1425 7111/2012 Social Islami Bank response to Subcommittee questions, at 2, PSI-SlBL-OI-OOl. 

1426 Id. at 3. 
459 


76061.825

285 

Islam still held a 1.54% ownership interest in the bank. 1427 The 2009 

FIG report explained that World Check, the database relied on by HSBC 

for KYC purposes, had classified the charity "as a terrorist organization 

with reported tiers] to Hamas. In September 2008, the Israeli 

government reportedly declared it an illegal entity.,,1428 Despite this new 

information in the 2009 FIG report, the HBUS KYC profile on Social 

Islami Bank does not acknowledge it, stating instead in a note: 

"Updated EDD [Enhanced Due Diligence] ROF [Report on Findings] 

received May 5, 2009. Report provided no new, or, up to date 

information.,,1429 Social Islami Bank has informed the Subcommittee 

that Lajnat aI-Birr remains a 0.22% share owner, but does not have any 

account at the bank 1430 

Sobhan Misconduct. The ongoing ownership of the bank's shares 

by IIRO and Lajnat aI-Birr was not the only troubling development. 

Social Islami Bank's initial Chairman of the Board, Ahmed Akbar 

Sobhan, also known as Shah Alam, was a well-known businessman who 

held, with his son, a 3.35% ownership interest in the bank since its 

inception. 1431 Beginning in 2006, however, Mr. Sobhan and his son 

became the subjects of several criminal investigations involving bribery, 

corruption, fraud, and tax evasion. 1432 In 2007, Mr. Sobhan and his son 

reportedly fled to the United Kingdom, after which Mr. Sobhan was the 

subject of corruption charges brought in his absence by the Bangladeshi 

Anti-Corruption Commission which sentenced him to eight years in 

prison. 1433 This troubling information was detailed in the 2009 FIG 

report that, inexplicably, was later described in the Social Islami KYC 

profile as containing no new information. 1434 

In May 2012, HSBC terminated its relationship with Social Islami 

Bank1435 David Bagley, head ofHSBC Group Compliance, told the 

Subcommittee, when asked, that the closure decision had been a "no 

1427 51512009 FIG report, HSBC PSI PROD 0102696, at 3, 5. 

1428 Id. at 5 (emphasis in original is omitted). 

1429 2012 HBUS KYC Profile of Social Islami Bank, at 4. 

1430 711112012 Social Islami Bank response to Subcommittee questions, PSI-SIBL-OI-OOOl-004, 

at 002. 

1431 See "Social Investment Bank Ltd. Director's Business Information," Social Islami Bank, 

undated, HSBC-PSI-PROD-Ol02626; 2003 Bankers Almanac at 3891 (listing Mr. Sobhan with a 

2.12% interest and Mr. Sobhan and his son, Sadat Sobhan, sharing a 1.23% interest). 

1432 See 51512009 Financial Intelligence Unit Report of Findings on Social Investment Bank 

Limited, HSBC OCC 3261530, at 6-7. See also "Court orders (0 arrest Bashundhara chairman," 

The Daily Star (4126/2012), http://www.thedailystar.netlnewDesign/newsdetails.php?nid=231738; "Shah Alam lands in jail," The Daily Star (312112011), 

httrl/www.thedailystar.net/newDesigninews-details.php?nid=178563. 

143 See 5/512009 Financial Intelligence Unit Report of Findings on Social Investment Bank 

Limited, HSBC OCC 3261530, at 6-7. 

1434 5/512009 Financial Intelligence Unit Report of Findings on Social Investment Bank Limited, 

HSBC OCC 3261530, at 2, 6-7; 2012 HBUS KYC Profile of Social Islami Bank, at 4. 

1435 711112012 Social Islarni Bank response to Subcommittee questions, PSI-SIBL-O 1-0001-004, 

at 002. 
460 


76061.826

286 

brainer.,,1436 He did not explain what factors led to the termination 

decision. Social Islami Bank currently has no open account with any 

HSBC affiliate. 1437 

J. Analysis 

HSBC is a global bank with a strong presence in many countries 

confronting terrorist threats. If safeguards are lacking, HBUS offers a 

gateway for terrorists to gain access to U.S. dollars and the U.S. 

financial system. HSBC has a legal obligation to take reasonable steps 

to ensure it is not dealing with banks that may have links to or facilitate 

terrorist financing. 

Banks rarely carry explicit links to terrorist financing, but in the 

three banks reviewed here, an array of factors raised troubling questions. 

In the case of AI Rajhi Bank, the factors included the naming of a key 

bank official in a list of al Qaeda financial benefactors, a U.S. law 

enforcement search of AI Rajhi nonprofit and business ventures in the 

United States to disrupt terrorist financing, a CIA report targeting the 

bank for being a "conduit" for extremist finance, the bank's refusal to 

produce authenticating bank documents for use in the criminal trial of a 

client who cashed travelers cheques at the bank for use by terrorists, and 

multiple accounts held by suspect clients. In the case ofIslami Bank, 

the factors included substantial ownership of the bank by al Rajhi 

interests, Central Bank fines for failing to report suspicious transactions 

by militants, and an account provided to a terrorist organization. In the 

case of Social Islami Bank, the factors included ownership stakes held 

by two terrorist organizations whose shares were exposed but never sold 

as promised, and a bank chairman found to be involved with criminal 

wrongdoing. 

In each case, HBUS and HSBC personnel were aware of the 

information, but approved or maintained the accounts anyway. When an 

AML Compliance officer like Beth Fisher declined to approve an 

account, HSBC personnel found someone else to take her place. In 

several cases, Christopher Lok, head of U.S. Banknotes, took on the role 

of relationship manager fighting for account approval. His test for 

taking on that role depended in part upon how much revenue an account 

would produce. AI Rajhi Bank's threat to terminate business with 

HSBC affiliates also appears to have galvanized HBUS' renewal ofthe 

account. 

Another striking feature ofthese accounts is the fact that a decision 

by one HSBC affiliate to terminate a relationship with a bank due to 

terrorist financing concerns did not always lead other HSBC affiliates to 

1436 Subcommittee interview of David Bagley (5/10/2012). 

1437 7111/2012 Sociallslami Bank response to Subcommittee questions, PSI-SIBL-OI-OOOI-004, 

at 002. 
461 


76061.827

287 

follow suit. In the case of AI Rajhi Bank, for example, HBUS 

terminated the relationship, but HSBC affiliates in the Middle East 

continued to do business with the bank. One HBUS executive later 

argued that, since HSBC was already exposed to the reputational risk 

posed by Al Rajhi Bank through the accounts at other HSBC affiliates, 

its reputational risk would not increase if one more account were 

opened. In May 2012, HSBC changed its policy to apply decisions to 

terminate a client relationship to apply globally to all its affiliates. 
462 


76061.828

288 

VI. HOKURIKU BANK: CLEARING BULK 

TRAVELERS CHEQUES 

With few questions asked and despite ongoing evidence of 

suspicious activity, HBUS cleared tens of millions of dollars per year in 

bulk travelers cheques for Hokuriku Bank of Japan. According to 

Hokuriku Bank, from 2005 to October 2008, 1-!BUS cleared travelers 

cheques totaling between $70 million and $90 million per year for the 

bank, producing a grand total in less than four years of more than $290 

million. HBUS estimated that, at one point in 2008, it was clearing 

travelers cheques for the bank at an average of $500,000 to $600,000 per 

day. The Hokuriku deposits consisted of U.S. dollar travelers cheques 

that were in denominations of$500 or $1,000, came in batches of 

sequentially numbered cheques, and were signed and counter-signed by 

the same person using an illegible signature. They were made payable 

to one ono different companies or individuals, all of whom claimed to 

be in the used car business. The cheque beneficiaries were clients of 

Hokuriku Bank, but the cheques were purchased from the same Russian 

bank for deposit into their accounts in Japan. When HBUS finally asked 

Hokuriku Bank about those clients and the business purpose behind 

Russians cashing massive numbers of U.S. dollar travelers cheques on a 

daily basis for deposit in Japan, Hokuriku Bank claimed to have little or 

no KYC information or understanding of its clients' banking 

transactions. 

The documents produced to the Subcommittee disclosed that some 

HBUS AML Compliance personnel raised concerns about the Hokuriku 

travelers cheques in 2005, but failed to investigate the transactions. The 

Hokuriku travelers checks came to HBUS' attention again in 2007, 

during the course of an OCC AML examination which found "serious 

concerns related to weak policies, procedures, s?,stems and controls" 

with how it processed monetary instruments,143 but HBUS again failed 

to investigate the transactions. In 2008, during a followup OCC AML 

examination, the OCC singled out the Hokuriku travelers cheques as 

suspicious and required HBUS to obtain additional information about 

them. 

The OCC and HBUS quickly uncovered troubling information 

about the travelers cheques, including that they had originated in Russia, 

a country at high risk of money laundering, involved millions of U.S. 

dollars, and had no clear business purpose. When HBUS sought more 

information about the cheques, Hokuriku Bank at first delayed 

responding, then provided minimal information, and finally declined to 

investigate further, claiming to be constrained by bank secrecy laws 

14383/31/2007 OCC Report of Examination for HSBC bank, OCC-PSI-00304077. [Sealed 

Exhibit.] 
463 


76061.829

289 

from disclosing client-specific information. In 2008, at the urging of the 

acc, HBUS stopped accepting travelers cheques from the bank and told 

the acc that it planned to close the Hokuriku account within 30 days. 

HBUS later decided to continue to do business with Hokuriku Bank in 

other areas despite its poor AML efforts. In 2010, during the course of 

another AML examination, the acc uncovered the ongoing relationship 

with Hokuriku Bank. In May 2012, HBUS closed the Hokuriku Bank 

account, although Hokuriku Bank continues to do business with other 

HSBC affiliates. 

A. Hokuriku Bank 

Hokuriku Bank Ltd. is a Japanese regional bank with over 2,800 

employees and 185 branches. 1439 It also has representative offices in 

New York, London, Singapore, and China. 1440 Hokuriku Bank traces its 

origins back to 1877; in 1961, it began trading on the Tokyo Stock 

Exchange. 1441 In 2003, the Hokugin Financial Group was formed in 

Japan, and Hokuriku Bank became a wholly-owned subsidiary of the 

Group. In 2004, the Group merged with another financial institution and 

changed its name to Hokuhoku Financial Group, Inc. which continues to 

operate as the bank's holding company today. 1 42 Hokuhoku Financial 

Group is headed by Shigeo Takagi, who has been the President of both 

the Group and Hokuriku Bank since 2003. 1443 

According to a 20 I 0 HBUS Know Your Customer (KYC) Profile, 

Hokuriku Bank is a longstanding customer ofHBUS, which has 

provided it with correspondent banking services in Hon~ Kong, Korea, 

and the United Kingdom, as well as the United States. 14 4 In addition to 

HBUS, Hokuriku Bank has correspondent relationships with several 

other HSBC affiliates as well, including Hong Kon? and Shanghai 

Banking Corporation, Ltd. and HSBC Middle East. 445 By 200 I, 

Hokuriku Bank had become a client of HB US' Payments and Cash 

1439 See HBUS "Know Your Customer Profile" for Hokuriku Bank (hereinafter "HBUS KYC 

Profile")(last updated on 913/2010), prepared by HBUS Global Payments and Cash Management 

division, HSBC-PSI-PROD-OI 02415-425, at 417; "Hokuhoku Financial Group Inc. Annual 

Report 2011," (year ended March 31, 2011)(hereinafter "Hokuhoku 2011 Annual Report"), at 

59, http://www.hokuhoku-fg.co.jp/english/financialldocslfg_ar2011.pdf. 

1440 Hokuhoku 2011 Annual Report, at 1,59. 

IMI See Hokuhoku 2011 Annual Report at 59; HilUS KYC Profile at HSBC-PSI-PROD0102416. 

1442Id. 

1443 HBUS KYC Profile at HSBC-PSI-PROD-OI02420; Hokuhoku 2011 Annual Repert, at 61. 

1444 HBUS KYC Profile at HSBC-PSI-PROD-OI02417-418. HBUS told the OCC that it first 

opened an account for Hokuriku Bank in 1978, through its U.S. predecessor, Marine Midland 

Bank, which HSBC purchased during the 1980s. 5/1512012 email from OCC to the 

Subcommittee, "HSBC - Hokuriku Questions," PSI-OCC-38-0001-002. 

1445 See 612612012 letter from Hokuriku Bank's legal counsel to the Subcommittee, PSIHokurikuBank-Ol-0001-016, at 001. 
464 


76061.830

290 

Management (PCM) division which used its Erocessing centers in New 

York to handle most Hokuriku transactions. 1 46 

HBUS provided Hokuriku Bank with two accounts, numbered 

50385 and 34738. Account No. 50385 was closed on Feb. 6,2009, and 

its balance transferred to Account No. 34738, which remained open until 

May 2012. 1447 HBUS provided Hokuriku Bank with access to U.S. 

dollars, primarily by clearing millions of dollars in U.S. dollar travelers 

checks each year. According to Hokuriku Bank, HBUS cleared travelers 

cheques totaling about $77 million in 2005, $72 million in 2006, $90 

million in 2007, and $52 million in 2008, until HBUS stopped providing 

clearing services for the bank's bulk travelers cheques. 144 Those figures 

show that, in less than four years, HBUS cleared travelers cheques for 

Hokuriku Bank totaling over $290 million. HBUS also processed wire 

transfers from Hokuriku Bank and provided other banking services. In 

2007, the Hokuriku account produced revenues for HBUS totaling about 

$47,000. 1449 

According to the HBUS KYC Profile, the initial HBUS Account 

Manager for Hokuriku Bank was Nanayo Ryan, and the Relationship 

Manager for KYC approval purposes was Beth Fisher. 1450 In 2008, the 

HBUS Account Manager switched to Kgomotso Hargraves, while the 

Relationship Manager for KYC approval purposes switched to Wayne 

W. Ferguson, then Anthony Julian, then Wen Lu WU. 1451 The Global 

Relationship Manager since 2008 has been Machiko Yamashita. 1452 

B. Travelers Cheques 

Travelers cheques are typically sent by one financial institution to 

another via a "pouch." A pouch is an envelope or package, and pouch 

activity refers to the sending or receipt and processing of an item that is 

sent to a bank from another country by common carrier, courier, or 

referral agent. Pouches typically contain currency or a monetary 

instrument, such as a travelers cheque, cashiers cheque, or money order, 

which is intended to be used to make a deposit or loan payment, or to 

engage in another transaction. Pouches can be sent by an unrelated 

financial institution, a bank affiliate, or by an entity or individual. 

1446 HBUS KYC Profile at HSBC-PSI-PROD-0102415-425, at 423. 

1447 ld. at 420. HBUS closed the second account on May 21, 2012. 6/2612012 letter from 

Hokuriku Bank's legal counsel to the Subcommittee, PSI-HokurikuBank-O 1-000 1-0 16, at 001. 

1448 See 6126/2012 letter from Hokuriku Bank's legal counsel to the Subcommittee, chart 

entitled, "Volume of U.S. Dollar Travelers Checks to HBUS for Clearance by year," PSIHokurikuBank-01-0001-016. Hokuriku Bank cleared another $52 million in 2008, until HBUS 

stofped clearing the cheques in October 2008. 

144 HBUS KYC Profile at HSBC-PSI-PROD-0102415-425, at 420. 

1450 Id. at 424. 

1451 ld at418 424-425 

1452 915/2008 ~mail fro~ Hideki Matsumoto to Michio Yarnashita and others, "Hokuriku Bank," 

OCC-PSI-00S08695, at 5. 
465 


76061.831

291 

In addition to physical delivery of monetary instruments, many 

banks, including HBUS, provide a service called "Remote Deposit 

Capture" (RDC). RDC enables customers who sign up for the service to 

send electronic images of physical monetary instruments that they wish 

to present for deposit, including travelers cheques. Processing these 

electronically sent deposits are sometimes referred to as part ofthe 

receiving bank's pouch activity. 

At large banks, pouched monetary instruments are typically sent to 

a specialized facility for processing. These facilities typically process a 

high volume of monetary instruments on a daily basis. When a bank 

processes a pouched travelers cheque, it typically credits the amount of 

the cheque to the correspondent account ofthe client financial institution 

that sent the cheque. Pouch activity is often referred to as "cash letter" 

activity, since it consists primarily of cashing a monetary instrument by 

crediting an account with the amount specified on the instrument. 

Providing cash in exchange for a monetary instrument is also referred to 

as "clearing" the instrument. 

HBUS has two processing centers in the United States, one in 

Brooklyn and one in Buffalo, New York, both of which process a high 

volume of monetary instruments on a daily basis. RDC services are 

provided solely at the Buffalo center. 1453 Both centers segregate 

travelers cheques from other types of deposits and process them 

separately, crediting the U.S. dollars to the relevant client accounts. 1454 

A processing clerk typically skims each deposit to identifY any 

sequentially numbered travelers cheques. If the sequentially numbered 

cheques total more than a designated amount, the clerk is required to 

refer the deposit to HBUS AML Compliance for approval prior to 

processing. 1455 If the sequentially numbered travelers cheques exceed 

another specified threshold, the processing clerk must attach a Traveler's 

Cheque/Money Order High Value Deposit Information (TCIMO HVDI) 

form to the deposit prior to processing. 1456 If the form is not attached, 

the deposit must be submitted to AML Compliance for approval prior to 

processing. 1457 This procedure is intended to ensure that HBUS AML 

Compliance is kept apprised of large deposits of sequentially numbered 

travelers cheques, since such cheques are often associated with money 

laundering or other misconduct. 

1453 10/4/2010 draft acc Supervisory Letter to HBUS, aCC-PSI-00863984-992, at 2. [Sealed 

Exhibit.) 

1454 6/26/2008 Memorandum to the acc Examiner-In-Charge Anthony DiLorenzo from acc Examiner Elsa de la Garza, "Pouch Transactions - Hokuriku Bank and SK Trading Company 

Ltd," aCC-PSI-00885828, at I. [Sealed Exhibit.) 1455Id. 

1456 Id. 

1457 rd. 
466 


76061.832

292 

U.S. banking regulators have long warned financial institutions 

about the money laundering risks associated with travelers cheques 

which can be purchased with cash by a non-customer of the bank and 

used to move substantial funds across international borders in ways that 

are difficult to trace. 1458 Travelers cheques have been used by 

terrorists,1459 drug traffickers, 1460 and other criminals. 1461 

C. 2005 Concerns about Hokuriku Travelers Cheques 

The documents produced to the Subcommittee show that HBUS 

AML Compliance personnel were aware of, and expressed concerns 

about, the large number of travelers cheques being cashed for Hokuriku 

Bank from at least as early as March 2005, but did little about them for 

years. 

On March 15,2005, HBUS AML compliance officer George 

Tsugranes sent an email to the HBUS account manager for Hokuriku 

Bank, Nanayo Ryan, in which he noted that, in less than 60 days from 

January to March 2005, Hokuriku Bank had deposited travelers cheques 

totaling over $2 million. 1462 The email provided a chart listing 41 

separate deposits over a 51-day period, showing that the deposited 

1458 See, e.g., Federal Financial Institutions Examination Council (FFIEC) Bank Secrecy 

Actl Anti-Money Laundering (BSA! AML) Examination Manual, "Core Overview: Purchase and 

Sale of Monetary Instruments," (6/23/2005) at 59; FFIEC BSA!AML Examination Manual, 

"Purchase and Sale of Monetary Instruments-Overview," (8/24/2007), at 212 ("The purchase or 

exchange of monetary instruments at the placement and layering stages of money laundering can 

conceal the source of illicit proceeds. As a result, banks have been major targets in laundering 

ofserations because they provide and process monetary instruments through deposits."). 

I "See, e.g., United States v. al-Haramain Islamic Foundation Inc., Case No. 6:05-cr-60008-HO 

(USDC Oregon) Indictment (2117/2005); "Former U.S. Head of AI-Haramain Islamic 

Foundation Sentenced to 33 Months in Federal Prison," U.S. Attorney's Office for the District of 

Oregon press release (9/27/11), at I (describing how the convicted defendant cashed $130,000 in 

U.S. dollar travelers cheques at a bank in Saudi Arabia and then provided the funds to support 

violent extremists in Chechnya). 

1460 See, e.g., United States v. Wachovia Bank N.A., Case No. 10-20165-CR-Lenard (USDC 

SDFL), Factual Statement, Exhibit A to Deferred Prosecution Agreement (3116/2010), at ~ 35 

(describing how Wachovia Bank processed $20 million in suspicious travelers cheques, some 

portion of which was suspected to include illegal drug proceeds); "How a Big U.S. Bank 

Laundered Billions from Mexico's Murderous Drug Gangs," The Guardian, (4/2/2011), 

http://www.guardian.co.uklworld/2011/apr/03/us-bank-mexico-drug-gangs. See also Albajon v. 

Gugliotta, 72 F. Supp. 2d 1362, 1365 (S.D. Fla. 1999) (admitting travelers cheques as evidence 

of drug trafficking proceeds); United States v. $41,305.00 in Currency & Travelers Checks, 802 

F.2d 1339, 1343 (11th Cir. 1986) (finding travelers cheques could bc seized as drug trafficking 

r.roceeds). 

461 See, e.g. Folk v. State, 192 So. 2d 44, 46 (Fla. Dis!. C!. App. 1966) (upholding conviction for 

signing a false name on travelers cheques and cashing them); United States v. Sebaggala, 256 

F.3d 59, 63 (1st Cir. 2001) (upholding conviction for using undeclared travelers cheques to 

attempt to move money fraudulently through U.S. customs). 

1462 3/15/2005 email from HBUS George Tsugranes to HBUS Nanayo Ryan, "Hokuriku Bank 

CIL Activity," HSBC OCC 3113976-977. The chart is unlikely to contain a comprehensive list 

of all of the travelers cheques presented by Hokuriku Bank over the Course of those two months 

since, during 2005 alone, Hokuriku Bank cleared $77 million in travelers cheques through 

HBUS. See 6126/2012 letter from Hokuriku Bank's legal counsel to the Subcommittee, chart 

entitled, "Volume of U.S. Dollar Travelers Checks to HBUS for Clearance by year," PSIHokurikuBank-OI-OOOI. 
467 


76061.833

293 

amounts ranged from $20,000 to $100,000 at a time; often consisted of 

multiple $1,000 travelers cheques; and referenced about ten different 

clients, including corporations and individuals. 1463 All of the deposits 

were to Hokuriku Bank's Account No. 50385. Mr. Tsugranes asked Mr. 

Ryan: 

"to reach out to the bank and ask that adequate KYC is on file for 

each name listed on the spreadsheet, whether the customer activity 

is consistent with the KYC, and also who is their customer base 

(local clients, people buying cars for export, etc.) and why US 

dollar travelers checks would be used for payment.,,1464 

This email shows that, in early 2005, Hokuriku's pattern of making large 

deposits with multiple travelers cheques triggered a review by HBUS 

AML Compliance personnel concerned about who was behind the 

deposits. Despite the request for more information in the March 2005 

email, the Subcommittee received no additional documentation or 

information indicating that HBUS AML Compliance personnel actually 

sought or obtained additional KYC information from Hokuriku Bank in 

early 2005, regarding the travelers cheques it was cashing. 

Eight months later, in November 2005, several emails indicate that 

HBUS AML Compliance personnel took a broader look at the cash 

letter/pouch activity at its Brooklyn center, apparently in an effort to 

detect unlicensed money service business activity. 1465 This inquiry was 

not specific to Hokuriku Bank. On Nov. 23,2005, HBUS AML senior 

compliance officer Alan Ketley sent an email to AML compliance 

officer Mark Balawender stating that, while HEUS had "strong 

monitoring procedures in place for PCM clients," he wasn't sure about 

what was "in place for other clients" at the Brooklyn center. He 

attached to the email a 2 I-page chart listing the "cash letter volume" for 

35 bank clients over a one-year period from April 2004 to March 

2005. 1466 The data disclosed, among other information, that over the 

course of the year, Hokuriku Bank had cashed an increasingly larger 

volume of monetary instruments each month into its Account No. 

50385, building from 36 items totaling about $209,000 in April 2004, to 

109 items totaling over $4.3 million in March 2005. Altogether for the 

year, Hokuriku Bank is recorded as having deposited at HEUS 562 

"envelopes" with over 24,000 items totaling $11.2 million. 1467 

1463 311512005 email from HBUS George Tsugranes to HBUS Nanayo Ryan, "Hokuriku Bank 

C/L Activity," HSBC OCC 3113976-977. 1464 Id. 

1465 See email exchange among HBUS AML Compliance personnel, from 11123/2005 _ 

1112912005. HSBC OCC 3180772-797, at 773 ("I do not believe there are any formal or 

documented checks in place that would identify potential unlicensed money service business 

activity"). 

1466 Id. at 776-797. 

1467 Id. at 776. 
468 


76061.834

294 

On November 25, 2005, Mr. Balawender sent an email to Mr. 

Ketley with his findings. 1468 He described the Brooklyn center as 

engaged in "heads down volume process[s]ing." He stated, "Given the 

volume/deadline driven/processing nature of the departments above, I 

am not sure what we can do. ... I would anticipate a rather strong pushback from Ops and the branches, if AML Compliance were to suggest 

additional processes.,,1469 

No further information or inquiries related to Hokuriku Bank 

appear in the 2005 timeframe among the documents provided to the 

Subcommittee in response to a broad request for all documents related to 

Hokuriku Bank and pouch activity. When asked for more information 

about the March and November 2005 reviews, Mr. Ketley indicated that 

he could not recall either Hokuriku Bank or what happened in either 

review. 1470 

In sum, despite a specific March 2005 AML inquiry into $2 

million in travelers cheques cleared for Hokuriku Bank, and a broader 

November 2005 inquiry that included evidence of an escalating pattern 

of Hokuriku deposits, HBUS AML Compliance apparently took no 

further action to investigate Hokuriku's cash letter activities in 2005. 

The 2005 and 2006 OCC annual examination ofHBUS also made no 

mention of AML issues related to its pouch activities or clearance of 

travelers cheques. 1471 

D. 2007 oee Pouch Examination 

Two years after the internal HBUS inquiries, in early 2007, the 

OCC commenced an AML examination ofHBUS' pouch activities. 1472 

In response, HBUS AML compliance officer George Tsugranes 

produced a chart listing clients with a high volume of cash letter activity 

during the last two months of 2006. 1473 Hokuriku Bank was repeatedly 

listed, appearing in the chart more times than any other bank. Over a 

62-day period, the chart identified 100 Hokuriku deposits. The deposit 

amounts ranged from $20,000 to $193,000 at a time, often consisted of 

multiple $1,000 travelers cheques, and referenced about a dozen clients, 

both corporate and individual. 1474 Many of the client namcs on the 2006 

1468 Id. at 773. 1469 1d. 

1470 Subcommittee interview of Alan Ketley (2/16/2012). 

1471 See acc Reports of Examination of HBUS, for the examination cycle ending March 31, 

2005 and March 31, 2006. [Sealed Exhibit.] 

1472 See 5/8/2007 acc Memorandum, "BSAlAML Examination - HSBC, USA, NA - Pouch 

Activities," aCC-PSI-01298647 [Sealed Exhibit.]; 3/2/2007 email from HBUS George 

Tsugranes to HBUS Alan Ketley, HSBC acc 3352026. 

1473 See chart, prepared by HBUS AML Compliance, HSBC acc 3352034-037. 

1474 Hokuriku Bank told the Subcommittee that, since the mid 1980s, it has limited its clients to 

deposits of no more than $1,000 in travelers cheques per person per day, unless the cheques were 

issued by Hokuriku Bank or the depositor was a "regular customer" and the bank "deemed that 
469 


76061.835

295 

list had also appeared on the March 2005 list compiled by Mr. 

Tsugranes. The total amount deposited over the two-month period was 

about $5.6 million. 

Mr. Tsugranes sent the chart to his supervisor, Mr. Ketley, and 

wrote that "all acc[ oun ]ts are being checked to ensure activity is 

reflected on KYC." Of the documents produced to the Subcommittee, 

none indicate, however, what information was "checked" with respect to 

Hokuriku Bank or what Mr. Tsugrantes learned. 

Six weeks later, on April 24, 2007, Mr. Ketley asked HBUS AML 

compliance officers Mr. Tsugranes and Robert Guthmuller, to travel to 

the HBUS Brooklyn center "to gain a thorough understanding of what is 

processed ... [and] what items are reviewed.,,1475 Three days later, on 

April 27, 2007, Mr. Guthmuller sent an email to Mr. Ketley providing 

him with "the Readers Digest version" of their findings after "a high 

level review of cash letter processing" at the Brooklyn center. 1476 

Mr. Guthmuller's email stated that the Brooklyn center "treat[ed] 

all clients the same," regardless of whether cash letter items involved 

"high risk clients." He wrote: "We should be drilling down on our high 

risk customers" and, for example, "identifY those clients that in the past 

have sent a large number of sequentially numbered travelers checks ... 

and monitor accordingly.,,1471 Mr. Guthmuller also wrote that the center 

staff had "divided loyalty," explaining: 

"Their main job is processing checks - 5 :OOPM deadline. But they 

are also asked to be the 'front line' for monitoring, referring items 

to Delaware for further investigation. One job focuses on pushing 

items through, another is to go slower, review items, ask 

themselves questions - is it suspicious? - contact Delaware - wait 

for a response - hopefully before 5:00PM. 

[O]ne solution is to have a full time compliance person review 

items FULLY, that means internet searches, OF AC, wor[l]dcheck 

etc. Additionally the compliance person could drill down on the 

high risk accounts.,,1478 

the funds will be collected from the customer should it tum out that the travelers' chef c]k was 

not duly issued:' 6/2612012 letter from Hokuriku Bank's legal counsel to the Subcommittee, 

PSI-HokurikuBank-Ol-000l-016, at 004. 

1475 412312007 email from HBUS Alan Ketley to HBUS George Tsugranes, Robert Guthmuller, 

Mark Balawender, and others, "Vist to Brooklyn Ops," OCC-PSI-00312153, at 5-6, 1476 4/2712007 email from HBUS Robert Guthmuller to HBUS Alan Ketley, "Visit to Brooklyn 

OpsLink," OCC-PSI-00312153, at 4. 

"'7 Id, at 5. 

1478 Id. at 5 (emphasis in original), 
470 


76061.836

296 

Mr. Guthmuller also stated that HBUS "[ m Just improve trend 

analysis. Nothing done in Brooklyn." He wrote: 

"We have reportedly had all travelers checks $20k and over ... on 

Excel for 4 years but haven't used/sorted items for trend analysis. 

Let's start looking at it. WHAT ABOUT SEQUEN[T]IALL Y 

NUMBERED TRAVELERS CHECKS AGGREGATING SAY 

$15K per day, same payee ... 7,,1479 

This email indicated that HBUS had compiled an extensive database of 

travelers cheque information, but was not using it to identifY suspicious 

travelers cheque activity or high risk clients. 

Mr. Guthmuller also wrote that the HBUS AML office in 

Delaware "must improve" its enhanced due diligence (EDD) efforts, 

including by using "more internet searches, calls on high risk clients 

asking questions, use of certifications, etc.,,1480 His email indicated that 

HBUS' AML staff did not engage in sufficient due diligence activity to 

identifY high risk clients depositing bulk travelers cheques. 

Mr. Ketley forwarded the email to Anne Liddy, a senior HBUS 

Compliance official, with the comment, "Food for thought.,,1481 He 

wrote: "We will look to have a meeting with Bob [Guthmuller] next 

week to discuss further." 

Ten days later, on May 7, 2007, Mr. Tsugranes sent an email to 

Mr. Ketley and others stating he had "discussed the issues with the 

Delaware AML team and asked for some input on ways to improve our 

cash letter monitoring.,,1482 He stated: "Below are some 

recommendations which will allow for both operational benefits and a 

more risk based monitoring approach." 

His email advised reducing the monitoring of checks from 

Fortune 100 names, and revising the dollar limit to $100,000 to trigger 

review of an account of a Special Category Client (SCC). While 

reducing review of Fortune 100 names could be seen as an effort to 

target AML review efforts to higher risk transactions, imposing a 

$100,000 dollar limit on SCC clients, the bank's highest risk clients, set 

a high bar to trigger a review. With respect to Hokuriku Bank and 

another bank in Korea, Mr. Tsugranes advised that AML personnel track 

the banks' total daily deposits, "eliminate the check by check 

comparison," and "only investigate if an apparent MIF [Monetary 

Instrument Form] was not included." He wrote: "To summarize we 

1479 Id. at S (emphasis in original). 

ImId.atS. 

1481 Id. at 4. 

1482 Id. at 2-3. 
471 


76061.837

297 

would be focusing more on SCC clients, cutting back on some Group 

reviews in non HRCs [non High Risk Clients] and also tracking" a 

specific bank of concern. 

While the Tsugranes email advocated a stronger focus on SCC 

clients, it did not address Mr. Guthmuller's suggestion to identify other 

high risk clients by analyzing the bank's travelers cheque data. His 

email did not, for example, include the Guthmuller suggestion to 

strengthen trend analysis ofthe cash letter activity at the Brooklyn center 

by utilizing the four years of travelers cheque data already included in 

Excel spreadsheets. The Tsugranes email also failed to include the 

suggestion, urged in capital letters in the Guthmuller email.toidentify 

and investigate clients making deposits of sequentially numbered 

travelers checks above a specified threshold. Instead, the Tsugranes 

email recommended reducing the monitoring directed toward Hokuriku 

Bank by eliminating the "check by check comparison" that had been 

routine practice. In the end, despite another chart disclosing multimillion-dollar Hokuriku deposits of$I,OOO travelers checks, the final 

result of HBUS' review was to advocate devoting less rather than more 

attention to the bank. 

The two OCC examiners who conducted the 2007 examination 

told the Subcommittee that they were very concerned about the lack of 

AML controls over HBUS pouch activity and had recommended that the 

OCC impose a Cease and Desist Order requiring HBUS to revamp 

them. 148 They later concluded, however, that they were unable to meet 

the OCC standards required for issuing the order. Instead, the OCC 

examiners designated the lack of AML controls over pouch processing 

as a Matter Requiring Attention (MRA) which was included in the 

annual OCC Report of Examination provided to the HBUS Board of 

Directors on July 24, 2007. 1484 The MRA did not, however, explicitly 

identify the Hokuriku travelers cheques as a problem. 

The OCC uses its annual Reports on Examinations to ensure bank 

boards are kept apprised of serious bank deficiencies requiring action by 

1483 See 7/312007 acc memorandum, "BSAI AML Examination - HSBC, USA, NA - Pouch 

Activities," aCC-PSI-00S7773 [Sealed Exhibit.]; Subcommittee interviews of Joseph Boss 

(l/30/2012) and Elsa de la Garza (1/912012). 

1484 7/24/2007 acc Report of Examination ofHBUS, for the examination cycle ending March 

31,2007, aCC-PSI-00304077, at 1. [Sealed Exhibit.] The MRA read in full as follows: 

"The bank provides pouch services in a number of business unites. An examination of 

HSBC pouch services resulted in serious concerns related to weak policies, procedures, 

systems and controls. The policies and controls in this area are inferior to BSAlAML 

controls in other areas of the bank, and remedial action is warranted. The absence of 

cornprhesnive policies, procedures and adequate systems and controls could potentially 

subject the bank to undue reputation risk and/or lead to BSAIAML violations. Pouch 

serives facilitate easy movement of funds, and are favored by persons who transfer illgal 

and terrorist funds. Consequently, the Board should ensure that management implements 

appropriate policies, procedures, systems and controls for this activity. The Board should 

communicate the corrective measures to the DCC, and confinn subsequent resolution." 
472 


76061.838

298 

management. The 2007 Report of Examination notified the HBUS 

Board about the acc's "serious concerns related to weak policies, 

procedures, systems and controls" related to its pouch activities, and 

urged immediate improvements. 1485 In September 2007, the acc also 

issued a Supervisory Letter to HBUS which again urged that "policies, 

procedures, systems, and controls for pouch need strengthening and 

augmenting.,,1486 

E. 2008 DCC Inquiry into Hokuriku Travelers Cheques 

Nine months later, in June 2008, the acc commenced a followup 

AML examination ofHBUS pouch activity, looking at pouch services in 

additional business units. 1487 During the course of that examination, 

acc examiners identified the Hokuriku travelers cheque deposits as an 

activity warranting greater scrutiny. 1488 

In June 2008, two acc AML bank examiners visited the HBUS 

Brooklyn and Buffalo processing centers to examine their pouch 

activity.1489 ane ofthe examiners told the Subcommittee that when they 

visited the Brooklyn center, they found "stacks and stacks of travelers 

cheques, some signed and countersigned by the same entity.,,1490 In a 

memorandum the examiner wrote that, at the Brooklyn center, she 

reviewed a Hokuriku cash letter deposit in the amount of$110,000, and 

found it consisted of220 sequentially numbered travelers cheques, each 

for $500. 1491 She wrote that all of the cheques were signed and 

countersigned by the same individual, whose name was illegible, and all 

were made payable to SK Trading Company Ltd. The TC/Ma HVDI 

form attached to the deposit described SK Trading as a "used car dealer" 

and stated that the travelers cheque funds were to be used for a "business 

purpose.,,1492 The other examiner reviewed another Hokuriku deposit 

for $240,000 and found a similar situation involving sequentially 

numbered $1,000 travelers cheques that had been signed and 

countersigned by the same person as the other deposit and made payable 

to SK Trading. The acc examiners then contacted the I-lBUS cash 

letter department manager who explained that the Brooklyn center 

received three to five Hokuriku deposits daily oftravelers cheques 

which totaled between $500,000 and $600,000 each day.1493 He 

14" Id. 

1486 911312007 OCC Supervisory Letter, "Pouch Services and Middle Market at HBUS," OCCPSI-00000391-394. [Sealed Exhibit.] 

1487 See 6/26/2008 OCC memorandum, "Pouch Transactions - Hokuriku Bank and SK Trading 

Company Ltd," OCC-PSI-00885822-826. [Sealed Exhibit.] 

1488 Id. 

1489 Id. 

1490 Subcommittee interview ofOCC AML Examiner Elsa de la Garza, (1/9/2012). 

1491 6/26/2008 OCC memorandum, "Pouch Transactions - Hokuriku Bank and SK Trading 

Company Ltd," at OCC-PSI-00885822, at 1. [Sealed Exhibit.] 

1492 Id. 

1493 Id. at 2. 
473 


76061.839

299 

indicated that travelers cheques were the "only types of instruments 

received through pouch for Hokuriku Bank.,,1494 

The OCC examiners researched SK Trading and found that, 

according to its website, the company appeared to be headquartered in 

Seoul, Korea, with offices in Japan and the United States, and had been 

in business since 1984.1495 They also found that the company had been 

identified by other financial institutions as involved with suspicious 

activity. These other financial institutions had identified suspicious wire 

transfers, sometimes involving millions of dollars, which were 

originated by individuals with Russian surnames who sent the funds 

from accounts at Russian banks or which were originated by 

corporations that sent the funds from banks in the British Virgin 

Islands. 1496 The ultimate beneficiary of the funds in each case was SK 

Trading using accounts at various banks in Japan. The OCC examiners 

noted that, in November 2006, one of the financial institutions had 

contacted Hokuriku Bank directly and asked it about the business 

purpose behind the transactions, but was told that Hokuriku Bank "could 

not answer this as their customer (S.K. Trading Company Limited) 

refused to provide information.,,1497 

The OCC examiners concluded that SK Trading was "conducting 

high dollar volumes of activity utilizing wire transfers and pouch 

services," that SK Trading was involved with "numerous entities," and 

that the transactions involved "numerous individuals from Russia," and 

warranted additional investigation.1498 The travelers cheques' 

connections to Russia raised a particular red flag, since the United States 

has long viewed Russia as a country of "primary" money laundering 

concern, its highest risk category.1499 At the time, a 2008 report by the 

U.S. State Department, then the latest in a long line of annual U.S. State 

Department reports summarizing money laundering concerns on a 

country-by-country basis, described Russia as follows: 

"94 Id. 

1495 Id. 

" 96 ld. 

"Criminal elements from Russia and neighboring countries 

continue to use Russia's financial system to launder money .... 

Experts believe that most of the illicit funds flowing through 

Russia derive from domestic criminal activity, including evasion of 

tax and customs duties and smuggling operations. Despite making 

progress in combating financial crime, Russia remains vulnerable 

to such activity because of its vast natural resource wealth, the 

pervasiveness of organized crime, and, reportedly, a high level of 

1497 Id. at 3. (emphasis omitted). 

1498 Id. at 4. 

1499 See, e.g., "International Narcotics Control Strategy Report, Volume II, Money Laundering 

and Financial Crimes." U,S. State Department (March 2008), at 62. 
474 


76061.840

300 

corruption. Other vulnerabilities include porous borders, Russia's 

role as a geographic gateway to Europe and Asia, a weak banking 

system with low public confidence in it, and under funding of 

regulatory and law enforcement agencies. Russia's financial 

intelligence unit (FIU) estimates that Russian citizens may have 

laundered as much as U.S. $11 billion in 2007.,,1500 

When the Subcommittee asked the OCC about its 2008 inquiry 

into the Hokuriku travelers cheques, Ms. de la Garza stated that, despite 

the earlier AML examination in 2007, HBUS seemed to have no AML 

policies or procedures in place regarding pouch activity.1501 She 

characterized the failure to monitor the travelers cheques being cashed 

as "not normal," and stated that they immediately brought the matter to 

the attention ofHBUS AML Compliance. Ms. de la Garza indicated 

that, at first, HB US Compliance personnel asserted that the travelers 

check transactions were legitimate, and that the high cost of cars in 

Russia accounted for the daily deposits of $500,000 or more by SK 

Trading. After doing additional research and finding additional accounts 

with high volumes of traveler cheque deposits, often sequentially 

numbered and signed and countersigned by the same person, she said 

that HBUS AML Compliance became more concemed. 1502 

On Sept. 2, 2008, the OCC examiners met with HBUS senior 

compliance officials Anne Liddy and Mary Ann Caskin. I 503 According 

to an OCC memorandum summarizing the meeting, Ms. Liddy disclosed 

that HBUS had reviewed: 

"all transactions over the past 2 months and identified a total of 20 

entities (including SK Trading) which were using Cash Letter 

services to clear Travelers Cheques. All 20 entites are used car 

dealerships .... Four additional companies with significant dollar 

amounts have been identified. (Maric Trading - $3.5 Million; 

Jamsou Traders - $1 Million; I K Auto - $929 Thousand and Dean 

Corp - $587 Thousand - totals for two months) .... The Business 

Unit has gone back to the Relationship Manager and Hokuriku 

Bank to obtain additional information on Maric Trading and 

Jamsou Traders. They will also be inquiring on the other 

companies identified. ... The bank will be exiting the Hokuriku 

relationship within the next 30 days.,,1504 

1500 Id. at 390. See also "International Narcotics Control Strategy Report, Volume II, Money 

Laundering and Financial Crimes," U.S. State Department (March 2012), at 156 (identifying 

r,enerally the same AML vulnerabilities in Russia today). 

501 Subcommittee interview ofOCC AML Examiner Elsa de la Garza (1/912012). 

1502Id. 

1503 91312008 OCC memorandum. "SK Trading Co Update." OCC-PSI-00885817. [Sealed 

Exhibit.] 

l504 Id. 
475 


76061.841

301 

The OCC informed the Subcommittee that the two OCC examiners who 

attended the meeting understood RBUS to mean that it would close the 

Rokuriku account, cease all business with the bank, and report any 

suspicious activity to U.S. law enforcement. lsos 

F. Absence of Hokuriku Bank KYC Information 

In July 2008, in response to the OCC, RBUS AML Compliance 

initiated a more in-depth review of the Rokuriku travelers cheques. A 

search ofRBUS processing records determined that, over a 12-month 

period from 2007 to 2008, RBUS had received an average of7,800 

travelers checks per month from the bank with an average monthly value 

of about $7.4 million. 1506 RBUS determined that "[a]1I deposits are 

Travellers Checks, no Money Orders found."lso7 An RBUS AML 

Compliance officer also noted: "They seem to sell traveler's checks 

which are used to purchase cars in Japan. The purchasers of the cars 

often provide Russian passports as ID.,,1508 

To find out more, on July 15, 2008, RBUS AML compliance 

officer Stephanie Napier sent an email to Yumi Seto at RSBC Tokyo, 

PCM Client Service, informing her that RBUS had undertaken a review 

ofRokuriku Bank Account No. 34738 and asking her to obtain specified 

KYC information related to certain deposits into that account.ISO The 

Subcommittee was unable to determine why the email asked only about 

Rokuriku Account No. 34738 and not also Account No. 50385, where 

the travelers cheques were typically deposited.1 51O Nor was the 

Subcommittee able to determine why the email requested information 

about only four entities associated with the travelers cheque deposits: 

De Araujo Roseli Aparecida (an individual), Aksys Corp., R S Corp., 

and Sanhu COrp.ISII 

Ms. Napier made repeated re~uests for the information over the 

next two months without success. 15 2 Rer RSBC contact in Tokyo, Ms. 

Seto, repeatedly responded to her em ails that Rokuriku Bank had 

1505 5115/2012 email from OCC to the Subcommittee, "HSBC - Hokuriku Questions," PSI-OCC38-0001-002. 

1506711612008 email from HBUS Jonathan Dean to HBUS Mary Arm Caskin and others, 

"Hokuriku Bank," OCC-PSI-00407498, at I. 15071d. 

!508 1d. 

1S09 Email exchange among HBUS personnel, from July to Sept. 2008, "Hokuriku Bank LtdCompliance Inquiry," OCC-PSI-00409214-216, at 8-9. 

15IOSee chart accompanying 3/1512005 email from HBUS George Tsugranes to HBUS Nanayo 

Ryan, "Hokuriku Bank C/L Activity," HSBC OCC 3113976-977; chart accompanying email 

exchange among HBUS AML Compliance personnel, from 11123/2005 - 11129/2005, HSBC 

OCC 3180776-797; chart prepared by HBUS AML Compliance in 2007 regarding transactions 

in 2006, HSBC OCC 3352034-037. 

1S11 Email exchange among HBUS persoll,e1, from July to Sept. 2008, "Hokuriku Bank LtdCompliance Inquiry," OCC-PS]-00409214 and attachment OCC-PSI-00409215-216, at 9. 

1512ld. at 4-8. 
476 


76061.842

302 

indicated it was preparing a "report."ISI3 In September 2008, Ms. Seto 

was replaced by Ako Kobayashi who, after several attempts, obtained a 

single, handwritten page from the bank with the requested 

information. lsl4 Because the information was provided in Japanese, she 

translated it and, on September 9, 2008, sent both the original and her 

typed translation to Ms. Napier's supervisor in HBUS AML Compliance 

Judy Stoldt.1S1S 

The information provided by Hokuriku Bank was minimal. In the 

case of the one individual who had been identified, Hokuriku Bank 

reported that he was a "Business man," gave his address, and stated that 

he worked with a company called "Sugimoto," and had a "Satisfactory" 

relationship with the "Originator." In the case of the three corporations, 

Hokuriku Bank stated that each was involved in "Sales of Used Cars," 

which HBUS already knew, and provided the company's address, the 

date of establishment, and whether it was a private corporation or 

publicly traded. Hokuriku Bank also provided the name of one 

beneficial owner of one company, but wasn't sure of the spelling of his 

name. No reasons were given for its clients using sequentially 

numbered travelers cheques, having the same person sign and 

countersign them, or generating the high daily volume of cheques. Ms. 

Stoldt forwarded the information to HBUS senior Compliance official, 

Anne Liddy, characterizing it as "very limited information that took us 

over a month to get."ISI6 

G. 2008 Decision to Stop Cashing Hokuriku Travelers 

Cheques 

On September 4, 2008, even before the KYC information from 

Hokuriku Bank was formally translated, HBUS PCM Compliance 

officer Alan Williamson sent an email to multiple HBUS personnel 

informing them that HBUS would no longer accept bulk travelers 

cheques from Hokuriku Bank for processing. He explained: 

"Compliance meets monthly with senior management in the 

Payments and Cash Management AML Management Review 

Committee. Recently we discussed the fact that Hokuriku has 

been sending a large number of sequential traveller's checks from 

a number of similar businesses through cash letter here in the US. 

This use of cash letter is inappropriate and the Committee has 

concluded that PCM should no longer allow Hokuriku to send 

151l Id. at 5-7. 

1514 Id. at OCC-PSI-00409215. 

1515 Id. at OCC-PSI-00409216. 

1516 Email exchange among HBUS personnel, from July to Sept. 2008, "Hokuriku Bank LtdCompliance Inquiry," OCC-PSI-00409214, at l. The time period was actually closer to two 

months. 
477 


76061.843

303 

traveler's checks through cash letter. Hokuriku should therefore 

cease the activity and make alternative arrangements, such as to 

make the deposits by wire, by September 30.,,1517 

The task of informing Hokuriku Bank was given to Machiko 

Yamashita, an HSBC employee in Tokyo who was then the designated 

Global Relationship Manager for Hokuriku Bank. 1518 On September II, 

2008, he and a colleague met with Hokuriku officials who provided 

additional information about the travelers cheque deposits and asked 

HBUS to continue clearing them. According to Mr. Yamashita, 

Hokuriku Bank explained: 

"-Most oftheir customers related to this issue are used-car dealers 

for Russian buyers who are cash account holders ofHokuriku 

Bank through appropriate AML process. 

-The dealers are doing cash on delivery type of deals with buyers 

in this market therefore cash or TCs [travelers cheques] are 

normally used to accommodate those deals. As such Hokuriku 

Bank considers it is difficult for its customers to shift their 

payment method to wire transfers or commercial check[s] from 

TCs .... 

-Since relevant customers are limited [to] around 20 - 25 names 

and they are all cash account holders of Hokuriku Bank, Hokuriku 

Bank is well prepared to cooperate with HBUS by providing 

necessary information.,,1519 

The email also stated: "HBUS is currently the sole Cash Letter provider 

for Hokuriku Bank.,,1520 

The next day, Anthony Julian responded that HBUS senior 

management had already reviewed the matter extensively "and 

determined that we can not continue to support this business. Th[i]s is 

not an issue for negotiation with Hokuriku.,,1521 Mr. Yamashita replied, 

in that event, Hokuriku Bank had requested additional time to consider 

whether to end the business or find a replacement service provider. He 

wrote: "We suggest that we should withdraw very carefully given the 

fact that Japanese regional banks' world is very small. Ifwe will push 

Hokuriku drastically, HSBC may likely have bad reputation on our PCM 

business in this marketplace.,,1522 

1S17 9/4/2008 email from HBUS Alan Williamson 10 HBUS Anthony Julian and others, 

"Hokuriku Bank," OCC-PSI-00808896, at 5. 

1518 Emails among HBUS and HSBC personnel from Sept. 10 Nov. 2008, "Hokuriku Bank," 

OCC-PSI-00808695, a15. 

1519 Id. a14. 

1520 Id. 

1S21 Id. aI2-3. See also email exchange among HBUS and HSBC personnel from 9/4 10 

91ll/2008, OCC-PSI-00196439, all. 

1522 Email exchange among HBUS and HSBC personnel from Sept. 10 Nov. 2008, "Hokuriku 

Bank," OCC-PSI-00808695, al 2. 
478 


76061.844

304 

A month later, on October 17,2008, Mr. Julian sent an email to 

Albert Halley, head of the cash letter department at the Brooklyn 

processing center, advising him that Hokuriku Bank had been informed 

verbally and by letter that HBUS would "no longer accept bulk deposits" 

of travelers cheques "in excess of$5,000.,,1523 Mr. Julian advised Mr. 

Halley that, after October 31, 2008, any bulk travelers cheques received 

from the bank should be "returned to Hokuriku" via overnight mail. Mr. 

Halley responded that he had been told to return "any deposits" from 

Hokuriku Bank after October 31 - not just deposits in the form of 

travelers cheques - and asked Jonathan Dean in Compliance to 

"confirm/clarify this new request.,,1524 After consulting with his 

supervisors, Mr. Dean clarified that no travelers cheques could be 

accepted from Hokuriku Bank, but that other commercial items could 

still be processed. 1525 Mr. Dean wrote that he expected the remaining 

volume to be "extremely low" and asked Mr. Halley to report on the 

types of checks received from Hokuriku Bank after October 31. This 

decision to continue the correspondent relationship varied from the 

September memorandum which stated that senior HBUS AML 

Compliance official Anne Liddy told the OCC examiners that HBUS 

would be "exiting the Hokuriku relationship within the next 30 

d ,,1526 ays. 

H. Hokuriku Bank's Continued Lack of Cooperation 

Even after informing Hokuriku Bank that it would no longer 

process any travelers cheques, HBUS AML Compliance continued to 

seek KYC information from the bank in connection with the originators 

ofthe travelers cheques, in order to complete an analysis ofthe 

transactions and determine whether they involved suspicious activity 

and had to be reported to law enforcement. 

In late November or early December 2008, HBUS Compliance 

provided an update to the OCC about its efforts. According to an OCC 

memorandum summarizing the updated information, after receiving an 

inquiry from HBUS, the company issuing the travelers cheques 

dispatched investigators to the Russian bank where the travelers checks 

were being purchased. 1 527 The oee report stated: 

1523 1011712008 email from HBUS Anthony Julian to HBUS Albert Halley and others. "Hokuriku 

Bank;' OCC-PSI-00808896. at 4-5. 

15241012012008 email from HBUS Albert Halley to HBUS Anthony Julian. Jonathan Dean, and 

others, "Hokuriku Bank," OCC-PSI-00808896, at 4. 

1525 Email exchange among HBUS personnel, from 10120-1013112008, "Hokuriku Bank," OCCPSI-00808896, at 1-3. 

1526 See 9/312008 OCC memorandum, "SK Trading Co Update,"OCC-PSI-008858 17. [Sealed 

Exhibit.] 

1517 121112008 OCC memorandum, "SK Trading," OCC-PSI-00888526. [Sealed Exhibit.] 
479 


76061.845

305 

"The result was that five individuals were identified who were 

purchasing the travelers checks with cash at the bank. The five 

individuals were then providing the checks to Mr. Alexander 

Tokarenko who is the owner ofSK Trading. Mr. Tokarenko then 

stamped the checks payable to SK Trading." 

All five individuals were Russians living in Russia. The memorandum 

stated that HSBC was attempting to determine ifMr. Tokarenko owned, 

not only SK Trading, but also the 29 other entities that had been 

identified as clearing bulk travelers cheques with HBUS. The OCC 

memorandum reported that "the total dollar amount of bulk travelers' 

checks processed by HSBC for the 30 entities during the period of 

November 2007 to October 2008 was over $61 million.,,1528 

In late November 2008, HBUS AML Compliance personnel 

drafted a new information request and asked Stephanie Brown to 

forward it to Hokuriku Bank. It asked whether five named Russians 

(identified in the earlier investigation) were or had been account 

signatories or "connected in any way" with the accounts opened by 30 

specified corporations and individuals involved with the bulk travelers 

cheques.I529 Ms. Brown forwarded the request to Ako Kobayashi at 

HSBC in Tokyo who, in turn, sent it to Hokuriku Bank.I530 

On December 3, 2008, Ms. Kobayashi sent an email to Ms. Brown 

indicating that Hokuriku Bank had raised the following questions: 

"What is the background for your queries? Does it relate to your 

compliance reason or does it relate to criminal act and the police 

asks such information? Where did you get those Russian names? 

Since no cheques has been presented to you since Nov08, why 

such information is required now?" 1531 

HBUS explained that the information was needed to complete an 

internal investigation, and was not being requested in connection with a 

criminal prosecution.I 532 Hokuriku Bank responded that it did not retain 

signatory cards or ownership information for the 30 accounts and had to 

identify and contact each of its branches where the 30 accounts were 

opened, which would take time. IS3 ] 

1528 Id. 

1529 Email exchange among HBUS personnel. from Nov. to Dec. 2008. "Hokuriku Bank," OCCPSI-00811358, at 10-13. SK Trading Company was one ofthe 30. 

1530 Id. at 9-10. 

1531 Id. at 9. 

1532 Id. at 8. 

1533 Id. at 6. 
480 


76061.846

306 

On December 15,2008, Ms. Kobayashi sent an email to multiple 

HBUS AML personnel forwarding additional auestions from Hokuriku 

Bank about the new request for information. ls3 She also wrote: 

"Please be advised that apparently they are not very happy with 

your request as they have other matters to attend toward the end of 

the year. . .. Hokuriku Bank is not saying that they will not assist 

you to provide the required information however they are upset 

with the nature of the request without being given sufficient 

background. Given the nature of the queries, please understand it 

is time consuming and consider to allow them more time. They 

might not be able to supply the information by the end of the 

year.',1535 

Two days later, Denis O'Brien, head ofHBUS Global Transaction 

Banking Compliance, sent an email answering the questions posed by 

Hokuriku Bank.1536 Later that same day, the HSBC Money Laundering 

Control Officer in Japan, Shinji Kawamura, sent an email to Mr. 

O'Brien indicating that Hokuriku Bank would not provide the requested 

information. He wrote: 

"They have been good enough to provide information so far but as 

you may understand from bank secrecy viewpoint, they should not 

or cannot disclose customer information. So they will no longer 

provide information. If you need my suggestion to clear those 

backlogs, I will tell you that you should file suspicious transaction 

report to your authority.,,1537 

Notwithstanding that communication, two days later, on December 19, 

2008, Ms. Kobayashi sent Mr. O'Brien an email stating that Hokuriku 

Bank "has provided the information at their risk and confirmed that the 

purchasers of the travelers checks ... are not signers or are NOT 

connected in any way to the previously requested named relationships at 

Hokuriku Bank. This should be the last favour and we cannot expect 

further or next assistance from them." 1538 

Mr. O'Brien responded: "We are appreciative of your assistance 

and thank you for your diligence in this regard. We have closed our 

investigation as it related to this issue.,,1539 

The Subcommittee contacted Hokuriku Bank to learn more about 

the travelers cheques. The bank provided this additional information: 

J534 Id. at 4-5. 

J535 Id. at 5. 

1536 Id. at 3-4. 

J537 1d. at 2. 

J538 Id. at I. 

J539 Id. at I. 
481 


76061.847

307 

"Due to the geographic proximity of Russia across the Sea of 

Japan, many Japanese dealers of pre-owned automobiles are 

located along the coast, including the Hokuriku region. (Hokuriku 

means 'North Land' in Japanese.) Hokuriku Bank is 

headquartered in this area and has several branches in the 

surrounding areas. Some of such dealers have accounts at 

Hokuriku Bank. 

In a typical transaction, a customer of Hokuriku Bank (that is to 

sayan account holder) sells a used car (or cars) to a Russian buyer 

who is a passenger or crew member of a ship at a nearby port. The 

buyer pays with travelers' checks. The seller/account holder 

brings the travelers' cheques to its bank (Hokuriku) and deposits 

them into its account. Hokuriku Bank accepts the travelers' 

checks, credits the customer's account, and sends the checks to 

clearing banks.,,!540 

This description, which seems to describe a thriving used car business in 

northern Japan, does not explain why a single individual in Russia was 

using five individuals to purchase millions of dollars of sequentially 

numbered U.S. dollar travelers cheques from the same bank in Russia 

per month, and then signing and countersigning all of them. Nor does it 

explain why the parties were using U.S. dollars to purchase used cars 

located in Japan or why the Hokuriku branches had so little information 

about the 30 clients carrying in U.S. dollar travelers cheques totaling 

about $500,000 to $600,000 each day. 

In February 2009, HBUS closed one of the accounts held by 

Hokuriku Bank, Account No. 50385, and transferred its balance to 

Account No. 34738. HBUS has not explained why it closed one account 

but not the other, or why Account No. 34738 was kept open when it was 

the subject of the extended HBUS inquiries to Hokuriku Bank in 2008. 

Because the one account remained open, the correspondent relationship 

between HBUS and Hokuriku Bank continued.!54! The OCC examiners 

told the Subcommittee that they had thought all of the Hokuriku 

accounts had been closed in 2008, and were unaware of the ongoing 

relationship for some time.!542 

1540 6/26/2012 letter from Hokuriku Bank's legal counsel to the Subcommittee, at 4, PSIHokurikuBank-OI-OOOI. 

1541 HBUS KYC Profile of Hokuriku Bank, at HSBC-PSI-PROD-OI02415, 420. 

1542 Subcommittee interviews of Joseph Boss (1/30/2012) and Elsa de la Garza (11912012); 

511512012 email from OCC to the Subcommittee, "HSBC - Hokuriku Questions," PSI-OCC-38-

0001-002. 
482 


76061.848

308 

I. 2010 oee Discovery of Hokuriku Account Activity 

Two years later, in the summer of201O, two OCC AML examiners 

conducted a review ofRDC services at the HBUS Buffalo processing 

center, including RDC processing of monetary instruments presented for 

deposit through electronic images. 1543 During that review, one ofthe 

examiners was surprised to discover that the Hokuriku account was not 

only still open, but that HBUS was processing monetary instruments for 

Hokuriku Bank through RDC. 1544 In an email to the OCC Examiner-inCharge summarizing the RDC concerns that were communicated to 

HBUS after the examination field work, the examiner included: 

"Concern related to pouch activity being conducted by HSBC for 

Hokuriku.,,1545 He informed the Subcommittee that the volume of 

activity was "significant, but not as extensive as in 2008.,,1546 

In October 2010, a draft OCC Supervisory Letter detailing AML 

deficiencies in HBUS' RDC operations specifically identified concerns 

related to Hokuriku Bank. After describing the problems uncovered in 

2008, involving the bulk processing of Hokuriku travelers cheques, the 

letter stated: 

"[I]n late 2008, early 2009, bank management informed the OCC 

that it would terminate the account relationship with Hokuriku. 

During the OCC's RDC review, it was again found that pouch 

activity was being conducted by HSBC for Hokuriku. Upon 

further review, it was determined that at the time that the Bank was 

to have initially severed its relationship with Hokuriku, there 

existed two separate accounts for Hokuriku. At that time, 

management decided to close the account in which the 

aforementioned deposits [of travelers cheques] were being 

processed and continue to maintain the other account. It was 

through the second account that the pouch activity continued.,,1547 

The draft OCC letter also recited a long list of AML concerns involving 

the bank's pouch activity. The final version of this Supervisory Letter 

included most ofthe information in the draft, but dropped the paragraph 

that singled out Hokuriku Bank.1548 OCC personnel asked about the 

letter were unable to remember why the reference to Hokuriku Bank had 

154J See 10/4/2010 draft Supervisory Letter from acc to HBUS, aCC-PSI-00863984-992, 

1544 See 9/3/2010 email from acc Joseph Boss to acc Sally Belshaw and others, OCC-PSI00887684-685. HBUS KYC Profile at HSBC-PSI-PRaD-0l02421; 5/1512012 email from acc 

to the Subcommittee, "HSBC - Hokuriku Questions," PSI-OCC-38-0001-002. 

1545 9/3/2010 email from acc Joseph Boss to OCC Sally Belshaw and others, OCC-PSI00887684-685. 

1546 5115/2012 email from acc to the Subcommittee, "HSBC - Hokuriku Questions," PSI-OCC38-0001-002. 

1547 10/412010 draft Supervisory Letter !fom OCC to HBUS, at OCC-PSI-00863990. 

1548 1012112010 Supervisory Letter HSBC-2010-24 from OCC to HBUS, OCC-PSI-00880181-

18S. 
483 


76061.849

309 

been dropped. 1549 HBUS' legal counsel told the Subcommittee that 

HBUS stopped processing travelers cheques through the Hokuriku 

account in 2008.1550 Hokuriku Bank similarly informed the 

Subcommittee that HBUS stopped processing its travelers cheques in 

October 2008. 1551 

The HBUS KYC Profile of Hokuriku Bank, updated in 2010, 

referenced ongoing AML concerns related to the bank, perhaps due to 

the OCC's renewed interest in the relationship. Among other matters, 

the KYC Profile indicated that, as of September 20 I 0, despite a 

relationship of many years, HBUS did not have a cORY on file of 

Hokuriku's KYC or AML policies and procedures. I 52 The profile also 

indicated that HBUS had sent an AML questionnaire to the bank, but 

Hokuriku Bank had not yet returned it. I-JBUS also noted in the 2010 

profile that Hokuriku Bank did not have an independent AML 

compliance function within the bank, raising further questions about 

Hokuriku's AML efforts. 1553 

In May 2012, HBUS closed thc Hokuriku Bank account. 1554 While 

that action endcd the direct rclationship, Hokuriku Bank still has 

correspondent relationships with other HSBC affiliates which, in tum, 

have correspondent accounts at HBUS. Accordingly, it is still possible 

for Hokuriku Bank to obtain U.S. dollar services through the U.S. dollar 

correspondent accounts of the HSBC affiliates, although Hokuriku Bank 

told the Subcommittee it is not doing so. 

J. Analysis 

As a major global bank, HBUS serves as a gateway for foreign 

banks to obtain U.S. dollars, including through the clearing of U.S. 

dollar travelers cheques. HBUS AML Compliance personnel knew that 

travelers cheques were vulnerable to money laundering abuses, and that 

large numbers of sequentially numbered travelers cheques were a red 

flag. In 2003, it set up a data system that captured travelers cheque 

information, but in five years, appeared not to use it to identify 

suspicious activity or high risk clients. In 2007, the OCC found that 

HBUS essentially had no effective AML controls over the process used 

to cash travelers cheques and required the bank to strengthen its policies 

and procedures. 

1549 Subcommittee interview of Teresa Tabor (5117/2012). 

1550 Subcommittee briefing by HSBC legal counsel (519/2012). 

1551 6/26/2012 letter from Hokuriku Bank's legal counsel to lbe Subcommittee, PSIHokurikuBank-01-0001-016, at 001. 

1552 HBUS KYC Profile at HSBC-PSI-PROD-OI02421. 15531d. 

1554 6/26/2012 letter from Hokuriku Bank's legal counsel to the Subcommittee, at I, PSIHokurikuBank -01-000 I. 
484 


76061.850

310 

The Hokuriku Bank example illustrates the problem. For years, 

Hokuriku Bank routinely presented a large volume of travelers cheques 

to HBUS for processing. Most involved sequentially numbered cheques 

signed and countersigned illegibly by the same person. For years, 

HBUS cleared the cheques with few questions asked. The cheque 

volume, which involved $500,000 to $600,000 in travelers cheques per 

day and $70 to $90 million per year, produced a four-year total of more 

than $290 million. When directed by acc to look into the transactions, 

HBUS quickly discovered that most of the cheques were being 

purchased for cash by Russians at a Russian bank and sent to Hokuriku 

Bank accounts in Japan. HSBC discovered that Hokuriku Bank had 

virtually no information about a network of 30, possibly related, 

accountholders who were physically turning in large stacks of 

sequentially numbered U.S. dollar travelers cheques to the bank every 

day. When asked about the accounts by HBUS, Hokuriku Bank resisted 

finding out and claimed bank secrecy requirements prevented it from 

disclosing client-specific information. HBUS also learned it was the 

only bank cashing the Hokuriku travelers cheques. Later, in 2010, 

HBUS discovered that Hokuriku Bank had no separate AML compliance 

function and was left waiting to receive a copy of its written AML 

policies and procedures. After the Subcommittee inquired about the 

account, HBUS closed it, although other HSBC affiliates are continuing 

to service the bank. 

HBUS enabled a number of Russians engaged in suspicious 

activity to use a relatively small Japanese bank with weak AML controls 

to gain access to over $290 million in U.S. dollars in less than four 

years. HBUS continued to clear the travelers cheques even after it 

learned ofthe transactions' suspicious nature. In so doing, HBUS 

facilitated the suspicious transactions and failed to live up to its AML 

obligations, all in return for about $47,000 in annual revenues. 
485 


76061.851

311 

VII. HBUS PRIVATE BANK AMERICAS: OFFERING 

BEARER SHARE ACCOUNTS 

Over the course of a decade, HBUS allowed over 2,000 customers 

to open accounts in the name of bearer share corporations, a type of 

corporation that allows secrecy by assigning ownership to whomever has 

physical possession of the shares. At its peak, the Miami office had over 

1,670 bearer share accounts; the New York office had over 850; and the 

Los Angeles office had over 30. The Miami bearer share accounts alone 

held assets totaling an estimated $2.6 billion, generating annual bank 

revenues of$26 million. Multiple internal audits and regulatory 

examinations criticized the accounts as high risk and advocated that 

HBUS either take physical custody ofthe shares or require the 

corporations to register the shares in the names of the shareholders. 

In 2007, HBUS Compliance circulated a draft to standardize 

bearer share AML safeguards across the bank, including by designating 

all ofthe bearer share accounts as high risk clients requiring enhanced 

due diligence and monitoring. Internal documents show Miami and 

New York bank personnel successfully weakened the standards by 

enabling the majority of accounts not to be treated as high risk and 

requiring updated ownership infOimation only once every three years. 

Later, HBUS learned that the British Virgin Islands (BVI), which 

formed most of the bearer share corporations with HBUS accounts, was 

requiring the registration of all outstanding BVI bearer shares by the end 

of2009. In response, HBUS initiated an effort to require its BVI 

accountholders to register their shares by the legal deadline. In 20 I 0, 

HBUS also contacted its other bearer share accountholders, requiring 

them either to register their shares or place their shares in the custody of 

HBUS or a third party. HBUS ended up obtaining registered shares or 

share custody for 1,155 accounts, closed over 530 accounts, and by 

2012, had substantially reduced the number of bearer share accounts it 

maintained to 26. 

Two examples of the accounts illustrate the risks they pose. In the 

first, two Miami Beach hotel developers, Mauricio Cohen Assor and 

Leon Cohen Levy, a father and son, used bearer share accounts they 

opened for Blue Ocean Finance Ltd. and White bury Shipping TimeSharing Ltd. to help hide $150 million in assets and $49 million in 

income. In 2010, both were convicted of criminal tax fraud and filing 

false tax returns, sentenced to ten years in prison, and ordered to pay 

back taxes, interest, and penalties of more than $17 million. A second 

example involves two Panamanian bearer share corporations, Urigeler 

International S.A. - Holding Company and Birmingham Merchant S.A. -

Holding Company, beneficially owned by a wealthy and politically 

powerful family in Peru. The family sought a waiver from HBUS' AML 

requirements to avoid registering their shares or placing them in bank 

custody. When asked whether the waiver was granted when the account 
486 


76061.852

312 

was opened in 2007, RBUS legal counsel told the Subcommittee that 

"we don't know." The account was closed in 2011. These accounts 

demonstrate the risks associated with bearer share accounts, whose 

owners seek to hide their identities. Today, RBUS has 26 bearer share 

accounts left, most of which are frozen, but also maintains a policy 

allowing the bank to open more bearer share accounts in the future. 

A. High Risk Corporate Accounts 

Bearer share accounts have long been viewed as being at high risk 

for money laundering, due to the ability of bearer shares to hide 

ownership ofa corporation. A 2005 U.S. Money Laundering 

Assessment defined bearer shares as follows: 

"Bearer shares are negotiable instruments that accord ownership of 

a company to the person who possesses the share certificate. Such 

share certificates do not contain the name ofthe shareholder and 

are not registered, with the possible exception of their serial 

numbers. Accordingly, these shares provide for a high level of 

anonymity and are easily negotiable.,,1555 

Because of the ease of transfer and secrecy attached to bearer share 

corporations as well as their attractiveness to money launderers and 

terrorist financiers, their propensity for misuse have made them lose 

favor with governments and AML organizations. 

Financial Action Task Force. The Financial Action Task Force 

(FATF) is the leading international AML body.1556 In its 2006 report, 

"The Misuse of Corporate Vehicles, Including Trust and Company 

Service Providers," F ATF highlighted the AML problems associated 

with bearer share corporations. F ATF explained that anonymity is a 

critical factor in facilitating the misuse of corporate vehicles, and bearer 

shares present a "special challenge to determining beneficial ownership 

of a corporate vehicle" because these shares "can be easily transferred 

without leaving a paper trail.,,1557 The FATF report noted that, while 

bearer shares can be used for legitimate purposes, they were also used 

for "money laundering, self-dealing, and/or insider trading.,,1558 

1555 12/2005 "U.S. Money Laundering Threat Assessment," issued by the Money Laundering 

Threat Assessment Working Group, which included the U.S. Departments of Treasury, Justice. 

and Homeland Security, Federal Reserve, and Postal Service, 

http://www.justice.gov/dealpubs/pressreIlOl1106.pdf.at 47. 

155 See FATF website, www.fatf-gafi.org. 1557 10113/2006 "The Misuse of Corporate Vehicles, Including Trust and Company Service 

Providers," at 10, FATF Publication, http://www.fatf-gafi.org/medialfatf/documents/reports/ 

Misuse%20of%20Corporate%20 Vehicles%20including%20Trusts%20and%20Company% 

20Services%20Providers.pdf 

1558 Id. at 16. 
487 


76061.853

313 

Organisation for Economic Co-operation and Development. 

The Organisation for Economic Co-operation and Development (OECD) 

is a 50-year-old membership organization of 34 countries including the 

United States, which tackles issues of common interest to promote 

economic development. 1559 In a 2001 report, "Behind the Corporate 

Veil," the OECD identified bearer shares as one of the primary means 

used to achieve anonymity for the beneficial owners of corporations. 

The OECD report noted that bearer shares' high level of anonymity and 

ease of transfer "make them attractive for nefarious purposes, such as 

money laundering, tax evasion, and other illicit conduct, especially when 

they are issued by private limited companies.,,1560 The OECD noted that 

bearer shares were especially vulnerable to misuse, because of the lack 

of information available to authorities in the event of an 

investigation. 1561 

U.S. Government. The United States has also criticized bearer 

share corporations. In 2005, for example, multiple U.S. agencies 

worked together to produce a U.S. Money Laundering Threat 

Assessment to identifY key money laundering methods. 1562 The 

Assessment identified the use of shell corporations as a key AML 

problem and singled out bearer shares as one of the means, along with 

nominee shareholders and directors, "to mask ownership in a corporate 

entity.,,1563 It warned that bearer shares "provide money launderers with 

the tools to hide their identity from financial institutions and law 

enforcement.,,1564 In addition, Federal financial regulators warn about 

the risks associated with bearer shares, because they allow "ownership 

of the corporation to be conveyed by simply transferring physical 

possession of the shares.,,1565 The Federal regulators' joint AML 

examination manual states that due to the risk, "in most cases banks 

should choose to maintain (or have an independent third party maintain) 

bearer shares for customers.,,1566 

World Bank. A 2011 report issued by the World Bank on 

corporate transparency issues is a recent example of an international 

1559 See OECD website, www.oecd.org. 

1560 "Behind the Corporate Veil: Using Corporate Entities fOT Illicit Purposes," OEeD 

P

ublication. at 30, http://www.oecd.org/dataoecd/O/3/43703185.pdf. 561 Id. 

1562 See 12/2005 "U.S. Money Laundering Threat Assessment," issued by the Money Laundering 

Threat Assessment Working Group, which included the U.S. Departments of Treasury, Justice, 

and Homeland Security, Federal Reserve, and Postal Service, 

httr:llwww.justice.gov/dealpubs/pressrelI011106.pdf. 

156 Id. at 47. 

1564 Id. at 48. 

1565 4/29/2010 "BSA/AML Examination Manual," Federal Financial Institutions Examination 

Council, "Bearer Shares," at 282, 

httf'llwww.ffiec.gov/bsa_arnl_infobase/documents/BSA_AML_Man_2OIO.pdf. 

156 Id. The AML examination manual also stated: "In rare cases involving lower~risk, wellknown, long-time customers, banks may find that periodically fe-certifying beneficial ownership 

is effective." Id. 
488 


76061.854

314 

body condemning use of bearer share corporations. It indicates that, in 

recent years, bearer share corporations have "generally been frozen out 

ofthe financial sector," asserts that "[n]o bank with any sort of due 

diligence standards is willing to conduct business with a company that 

has free-floating bearer shares," but also states that such corporations 

remain an AML threat: 

"Concerns have been raised in AML forums that companies that 

issue bearer shares are used extensively for illegal activities, such 

as tax evasion and money laundering.... In most jurisdictions, 

bearer-share statutes have generally been undergoing a process of 

reform and elimination .... 

Financial compliance officers and company service providers 

report that bearer shares have generally been frozen out of the 

financial sector even if they are still permitted by the laws of a 

particular jurisdiction. No bank with any sort of due diligence 

standards is willing to conduct business with a company that has 

free-floating bearer shares. Companies that are not required under 

their own laws to have bearer shares immobilized will typically 

have to place the share in the trust of an agent of the bank, as a 

condition of being accepted as a customer. ... 

Given the legislative reforms of the past decade and the fact that 

bearer shares or share warrants featured in roughly 1 percent ofthe 

grand corruption cases we reviewed, one might be inclined to 

consider bearer securities to be a problem ofthe past. Investigators 

interviewed for this study from Latin America and the Caribbean 

disagree, however. They maintain that bearer-share companies are 

still a problem for money laundering investigations, that their 

anonymity prevents detection and impedes prosecution, and that 

corrupt individuals still can gain access to financial systems and 

undertake anonymous transactions involving considerable sums. 

In practice, there is scant business rationale for the continued use 

of bearer securities. The claims that bearer securities are necessary 

to facilitate transfer of ownership and enhance liquidity no longer 

hold for the vast majority of countries. An electronic system of 

registered shares is clearly a more efficient platform for 

transferring equity interests. In this case, the risks outweigh the 

benefits." 1567 

1567 "Puppet Masters: How the Corrupt Use Legal Structures to Hide Stolen Assets and What to 

Do About It," World Bank (2011), at 41, 43-44. 
489 


76061.855

315 

B. Bearer Share Activity at HBUS 

Despite the widespread, longstanding international condemnation 

of bearer share corporations, until last year, RBUS maintained hundreds, 

sometimes thousands, of bearer share accounts in the United States. At 

its peak, RBUS had over 2,000 bearer share accounts, including 1,667 

accounts at the International Private Bank in Miami,ls68 851 at the 

International Private Bank in New York; 1569 and 33 at the International 

Private Bank in Los Angeles. 1570 The Miami bearer share accounts 

alone have held assets totaling an estimated $2.6 billion and produced 

revenues to the bank of $26 million per year. IS71 

These accounts were overseen by two different Federal banking 

regulators. The OCC oversaw the accounts in New York and Los 

Angeles, which were held in the RBUS International Private Banking 

division. The bearer share accounts in Miami, however, were lodged 

with a different RBUS subsidiary, which was often called an 

International Private Bank, but was actually formed under the Edge Act, 

a Federal law which allows corporations to be chartered by the Federal 

Reserve, engage solely in international banking, and serve only non-U.S. 

citizens with U.S. banking needs. l572 Edge Act corporations are 

regulated by the Federal Reserve. 1573 The Miami bearer share accounts 

were accordingly overseen by the Federal Reserve Bank of Atlanta 

which conducted an annual examination of its operations. 1574 

RBUS' bearer share accounts repeatedly raised AML concerns 

largely because the accounts suffered from missing or inadequate KYC 

information. A 2004 internal audit ofRBUS' Private Bank International 

in Miami by RSBC Group auditors found, for example, that sixty bearer 

share accounts lacked "Certificates of Beneficial Owner" forms, 

1568 See 1012007 "HSBC Group Financial Services and European Audit Report on HSBC Private 

Bank International, Miami and HBUS Domestic Private Banking-Florida Region," OCC-PSI00223637 (citing 1,667 accounts in October 2007); 1211112007 email from HBUS JeffClous to 

HBUS Paul O'Sullivan and others, "Bearer Share Corporation Policy," OCC-PSI-00226652 

(citing 1,679 accounts in December 2007); but see OCC-PSI-00217164 (estimating 600 accounts 

in July 2007). 

1569 See 10/2007 "HSBC Group Financial Services and European Audit Report on HSBC Private 

Bank International, Miami and HBUS Domestic Private Banking-Florida Region," OCC-PSI00223637 (citing 851 accounts in November 2005); see 8/2712007 email from Alan Williamson 

to Terry Westren, OCC-PSI-00318438, with accompanying 2007 List of New York Bearer Share 

Accounts, OCC-PSI-00318439 (citing 636 accounts in August 2007). 

1570 1111112005 memorandum from OCC C. Seiler, "Bearer Share Activity," at 2, OCC-PSI01437596 (citing 33 accounts in November 2005). 

1571 12/1112007 email from HBUS JeffClous to HBUS Paul O'Sullivan, "Bearer Share 

Corporation Policy," OCC-PSI-00226652. 

1572 See 6/12/2008 letter from FRB of Atlanta Robert Schenck to HSBC Private Bank 

International Board of Directors, OCC-PSI-00I07444-449; Section 25A oflbe Federal Reserve 

Act, P.L. 102-242, codified at 12 U.S.c. §§61l-631. 

1573 Section 25A oflbe Federal Reserve Act, P.L. 102-242, codified at 12 U.S.c. §§611-631. 

1574 The Miami Edge Act corporation has undergone annual Federal Reserve audits since at least 

2006. 
490 


76061.856

316 

meaning the bank had no information on who owned the accounts. The 

audit also repeated a recommendation carried forward from a 2002 

Group Audit that management should obtain the missing beneficial 

ownership information "at the earliest opportunity,,,1575 suggesting the 

ownership information had been missing for at least two years. In 

February 2005, an RBUS Monthly Private Banking Compliance Report 

to RSBC Group noted that ten bearer share accounts had been frozen 

due to missing "Beneficial Ownership Letters," and Relationship 

Managers for the accounts had been notified they had 30 days to obtain 

the needed documents or the accounts would be c1osed.1 576 

OCC Concern. In 2005, the OCC identified the RBUS bearer 

share accounts as an AML concern and, in 2006, directed RBUS to 

assess their AML risk and take physical control of the bearer shares. 

In November 2005, the OCC conducted an AML examination of 

RBUS' International Private Banking division and looked at the bearer 

share accounts in its New York and Los Angeles offices. In November 

2005, an OCC AML examiner wrote an internal memorandum 

summarizing RBUS' "Bearer Share Activity" and recommending that 

RSBC adopt a policy to "ensure that either the bank or an acceptable 

third party controls the bearer shares.,,1577 The memorandum stated that 

the RBUS New York office then had 851 bearer share accounts and the 

California office had 33. 1578 The memorandum explicitly noted the 

AML risks attached to the bearer share accounts and the need to obtain 

satisfactory evidence of the accounts' beneficial owners. It noted that 

bearer share certificates allowed corporate ownership to be transferred 

without the bank's knowledge, and OCC policy was to require banks to 

maintain control of all bearer shares. 1579 The memorandum also 

discussed new legislation in the British Virgin Islands that "provides a 

legal framework for immobilizing bearer shares.,,158o 

As a result of the AML examination, on January 31, 2006, the 

OCC issued a Supervisory Letter to HBUS which included a Matter 

15752/2004 Group Financial Services Audit Report on High Level Controls Review ofHSBC 

Private Dank International, at 5, OCC-PSI-00210878. 

1576 3/7/2005 report from HSBC Carolyn Wind and HSBC Teresa Pesce to HSBC Curt 

Cunningham and HSBC Anthony Gibbs, "Monthly Private Banking Compliance Report for 

February 2005." HSBC acc 7695260-266. 

1577 11111/2005 acc memorandum, "Bearer Share Activity." aCC-PSI-0l437596. According 

to the memorandum, the policy at the time was that the International Private Bank required the 

following for each bearer share account: an explanation for opening the account, CEO approval, 

and completion of a beneficial ownership letter, to be certified every 3 years, identifying the 

beneficial owners of the bearer share company. 

l5"ld. 

1519 Id. 

1580 Id. (explaining that, under the BVI legislation, international corporations fonned after 

January 1,2005 would have to have their shares held by either an "authorized" or "recognized" 

custodian. Companies fonned prior to January 1,2005, would have a transition period in which 

to either have the shares registered or have them held by a custodian). 
491 


76061.857

317 

Requiring Attention (MRA) ofthe HBUS Board of Directors directing 

HBUS to strengthen AML controls over its bearer share accounts.IS81 

The Supervisory Letter stated: 

"Management should evaluate the risks associated with bearer 

share accounts. BSA! AML policy and procedures need to be 

revised to ensure that either the bank or an acceptable third party 

controls the bearer shares. The bank must monitor legal 

requirements in countries that allow for the organization of 

International Business Companies (IBCs) and Private Investment 

Companies (PIC). Policies and procedures need to define 

'acceptable third parties' and any applicable due diligence, and 

specifY documentation required by the bank to ensure that the 

shares have been properly received by the third party 

custodian." IS82 

The Supervisory Letter also stated that HBUS management had "agreed 

to implement revised policies and procedures for bearer shares in 

accordance with our recommendation by March 31, 2006.,,1583 When 

asked about this Supervisory Letter, the OCC Examiner-in-Charge at 

HBUS, Anthony DiLorenzo, did not remember the bearer share issue, 

but said that, aside from HSBC, he had not seen bearer share accounts at 

other large banks that he oversaw. IS84 

On March 3, 2006, 1-IBUS responded to the Supervisory Letter 

with a proposal that did not completely follow the OCC instruction on 

bearer shares. Instead of requiring that all bearer share certificates be 

placed in custody for all of its bearer share accounts, HBUS indicated 

that it would require custodization only for what it deemed to be high 

risk bearer share accounts. For lower risk bearer share accounts, HBUS 

would not take possession ofthe shares, but would allow accountholders 

to submit to the bank a "beneficial ownership letter" every two years 

stating who had possession of the corporate shares. HBUS committed to 

having a plan in place to implement this approach by March 31, 

2006.T585 

At the same time the oee was reviewing the New York and Los 

Angeles bearer share accounts, the Federal Reserve was performing a 

"risk-focused examination" of the Edge Act subsidiary holding the 

Miami accounts, HSBC Private Banking Interational. In January 2006, 

the Federal Reserve issued a Report of Examination (ROE) deeming the 

1581 1/3112006 OCC Supervisory Letter, "International Private Banking BSAIAML 

Examination," OCC-PSI-00000317. [Sealed Exhibit.] 

1582 Id. at 3. 

1583Id. 

1584 Subcommittee interview of Anthony DiLorenzo (3/2212012). 

1585 3/3/2006 letter HSBC Teresa Pesce to OCC Anthony DiLorenzo, "International Private 

Banking BSAlAML Examination," at 2, OCC-PSI-01358804-809. 
492 


76061.858

318 

overall risk management framework for the Miami operation as 

satisfactory, while identifying as its "primary risk" the "reputational risk, 

arising from its international private banking and wealth management 

activities that are directed towards a high net-worth Latin American 

client base.,,1586 The ROE also deemed the Miami office's AML 

program as adequate, while noting numerous issues involving offshore 

accounts, unavailable offshore documentation, offshore shell companies 

"serving as operating accounts," and the addition of international private 

banking accounts moved from New York which added "in excess of$l 

billion" to the assets under management in Miami, but made no mention 

of bearer share accounts. 1587 

In February 2006, as the OCC deadline approached for 

implementing stronger AML controls over HBUS' bearer share 

accounts, the head ofHBUS' International Private Bank (IPB) 

Operations in Miami, Jeff Clous, asked a Miami law firm prepared an 

analysis for the bank on the Federal Reserve's policy regarding bearer 

share accounts. According to Mr. Clous, the law firm reported that the 

Federal Reserve expected banks to conduct a risk assessment and assign 

risk classifications to each account for risk -based monitoring. 

According to Mr. Clous, the law firm also informed him that the Federal 

Reserve provided banks with the option of either obtaining custody of 

the bearer shares or recertifying beneficial ownership ofthe shares on a 

periodic basis, based upon the account's risk classification.1588 

Mr. Clous emailed his report ofthe law firm's analysis to senior 

personnel in the New York International Private Bank (IPB), the CEO of 

Private Bank America, Philip Musacchio, the Chief AML Officer of 

Private Bank, Susan Hoggarth, and the Head of Private Bank Operations 

Terry Westren. Mr. Musacchio responded that New York would prefer 

to adopt this "much better and reasonable approach.,,1589 Ms. Hoggarth 

replied: 

"That may work for Miami, but it won't work for the OCC in NY 

and California. The OCC has specifically advised us that the 

Beneficial Ownership letters are not sufficient. We have been 

advised that the shares need to be held either by ourselves or an 

accepted third party.,,1590 

1586 1119/2006 letter from FRB Atlanta to HSBC Private Bank International Board of Directors, 

OCC-PSI-00309434. [Sealed Exhibit.] 

1587 Id. at 2, 4-6. 

1588 2/912006 email exchanges among HBUS Susan Hogart, HBUS Philip Musacchio, HBUS Jeff 

Clous, HBUS Teresa Pesce, and HBUS Terry Westren, "Bearer Shares - More Info," HSBC 

OCC 4816460-462. 1589 Id. 

1590 rd. 
493 


76061.859

319 

Mr. Musacchio responded that he had assumed that Ms. Hoggarth would 

explain the Federal Reserve's position to persuade the OCC to agree to 

the same approach. 1591 Ms. Hoggarth replied that the OCC examiners 

had already advised the bank that beneficial ownership letters were not 

adequate, and she did not think the OCC would accept the Federal 

Reserve's approach.1592 

When the OCe's bearer share deadline arrived at the end of March 

2006, however, little had changed in either the New York or Miami IPB 

offices. Both continued their policy of obtaining periodic beneficial 

ownership letters from most accounts, and arranging for shares to be 

taken into custody only for a small percentage of accounts deemed to be 

higher risk. 

The documents reviewed by the Subcommittee also contain no 

indication that the OCC followed up with HBUS on the bearer share 

MRA in the 2006 OCC Supervisory Letter. When asked why, the OCC 

AML Examiner told the Subcommittee that he had been informed by 

HBUS that it had closed all of its bearer share accounts in 2006, and 

didn't learn unti12010, that the bearer share accounts had, in fact, 

remained open.

1593 

Proposed Job Aid on Bearer Shares. From at least 2002 to 2007, 

HBUS did not have a standard policy establishing how its various 

branches should handle bearer share issues and what AML safeguards 

should be used. 1594 In early 2007, HBUS undertook an effort to develop 

a standard bearer share policy that would apply to all HBUS offices. It 

was an effort that would take the rest of the year. 

An HBUS AML Compliance officer located in New York, Ali 

Kazmy, was tasked with developing the policy. In February 2007, he 

emailed his supervisor, Mary Caskin, that he hoped to finalize a draft 

that week. 1595 Internal documents indicate that, a few months later, the 

draft was circulated to other HBUS Compliance personnel for comment. 

At least one colleague sought to strengthen it. On April 17,2007, 

HBUS AML Compliance officer Robert Guthmuller sent an email to 

colleagues stating that the policy should not make it optional for bearer 

shares to be classified as high risk. Mr. Guthmuller contended that 

approach did not mirror other banks' policies: "For at least the last 10 

1591 Id. 

"92 Id. 

"93 See 5/10/2010 email exchanges among acc Joseph Boss, Lee Straus, James Vivenzio, 

Monica Freas, Sally Belshaw, and others, "Bearer Share Accounts" aCC·PSI·00886601 

(discussed further supra). 

1594 See 212612007 email exchanges among HBUS Ali Kazmy and HBUS Mary Caskin and 

others, "APC Interim Procedures," aCC·PSI·0030770l ("At present, we do not have a standard 

bearer share policy. I am actually working on it and expect it to be finalized this week, however 

it will require senior management approval. "). ]595 Id. 
494 


76061.860

320 

years, all private banks I know classify ALL bearer share PICs as high 

risk.,,1596 

In June 2007, Mr. Kazmy sent a draft "Job Aid" on bearer shares 

to the IPB offices with bearer share accounts. 1597 HBUS Job Aids were 

documents designed to provide more specific instructions to bank 

personnel in implementing higher level policies and procedures. 1598 Mr. 

Kazmy immediately met strong resistance to strengthening the AML 

controls on bearer share accounts. 

Teresa Garcia, who was a senior Compliance officer at the New 

York IPB, criticized the draft on several grounds: for requiring all 

bearer share accounts to be classified as SCC accounts subject to 

enhanced due diligence and monitoring; requiring all shares to be held in 

the custody of the bank; and requiring beneficial ownership to be 

disclosed every two years. 1599 Ms. Garcia wrote that, although the Job 

Aid was similar to an existing policy at the New York IPB, the New 

York IPB did not classify bearer share accounts as SCCs unless the 

nature ofthe beneficial owner warranted it, and bearer certificates could 

be held with a third party custodian instead ofthe bank. Ms. Garcia 

added that the Job Aid should only require beneficial ownership 

disclosure forms to be renewed every three years. Later that day, Ms. 

Garcia sent another email to Mr. Kazmy and others stating: "IPB-NY 

has about 500 non-high risk bearer share accounts. There is no way we 

are making all these accounts SCCS.,,1600 These emails, in which Ms. 

Garcia opposed the proposed AML controls, show that she saw her role 

in this instance as acting on behalf of the business unit rather than acting 

on behalf of RBUS Compliance. 

The Miami office was also critical of the proposed Job Aid. Clara 

Hurtado, Director of AML Compliance for Miami, wrote: 

"Miami also has a large number of bearer share accounts. I too 

disagree with making these SCCs. We are also getting an updated 

BOL [Beneficial Ownership Letter] every 3 years, not 2 years. 

Before anything goes out to the units, we need to be careful that we 

do not change the agreed upon policies/procedures which have 

been put in place based on local regulator requirements.,,160J 

1596 4117/2007 email from HBUS Robert Guthmutler to HBUS Nerissa Hall and Alan 

Williamson. OCC-PSI-0021 1658. 1597 6/18/2007 email from HBUS Ali Kazmy to HBUS Anne Liddy, "Job Aid ~ Bearer Share," 

OCC-PSI-00617514. 

1598 Subcommittee interview of Ali Kazmy (2/29/2012). 

1599 6/18/2007 email from RBUS Ali Kazmy to HBUS Anne Liddy, "Job Aid ~ Bearer Share," 

OCC-PSJ-00617514. 

1600Id. 

1601Id. 
495 


76061.861

321 

On July 25, 2007, Ms. Hurtado sent Mr. Kazmy another email stating 

that Miami had approximately 600 bearer share accounts and they 

"could not possibly categorize them all as high risk.,,1602 She proposed 

instead that Miami use the bearer shares as one indicator of a high risk 

account, but that a second indicator would also have to be present before 

the account would be classified as high risk and subjected to enhanced 

due diligence and monitoring. She wrote: "We feel this is a good way 

to capture truly high risk bearer share accounts." Ms. Hurtado also 

asserted that there was "no way to custodize in Miami and remotely was 

too difficult.,,1603 She proposed instead that Miami maintain its current 

practice ofrequiring a Beneficial Ownership Letter for new accounts 

with updates every three years. She noted that the Miami policy had just 

been approved by HBUS Compliance head Teresa Pesce and 

Compliance Officer of California Programs, Susan Hoggarth, both of 

whom had agreed that Miami would not have to custodize the shares. 1604 

These emails show that Ms. Hurtado, like Ms. Garcia, saw her role in 

this instance as defending the position of the international private bank 

rather than the position ofHBUS Compliance. 

Four days later, on July 29,2007, Ms. Hurtado sent Mr. Kazmy 

another email suggesting that the AML Director rather than the CEO 

should be able to approve the opening of bearer share accounts. She 

also wrote that the Miami subsidiary "will not be lowering the 

monitoring thresholds on over 600 bearer share accounts," and that 

Miami's use of Beneficial Ownership Letters had been approved by 

HBUS Corporate Compliance and the office "cannot go back and repaper.,,1605 The next day, Ms. Hurtado forwarded Mr. Kazmy a copy of 

the Miami bearer share procedures, explaining that ifhe wanted to 

change them, he would need to "reach out to the business first," and 

gave him contact information for JeffClous, head ofHBUS IPB 

Operations in Florida. 1606 

On August 6, 2007, Mr. Kazmy forwarded Ms. Hurtado's emails to 

two more senior HBUS AML Compliance officials, Alan Williamson 

and Anne Liddy. Though Mr. Williamson had agreed that IPB Miami 

should be included in the new policy, he said after reading Ms. 

Hurtado's emails, "unfortunately I now question my prior inclination to 

make them be consistent.,,1607 Mr. Williamson suggested that the new 

guidance be prospective from the date of issuance so that the bank 

1602 7/25 /2007 email from HBUS Clara Hurtado to HBUS Ali Kazmy and others, "Bearer Share 

Meeting," OCC-PSI-00217164. 1603 I

d. 

]604 Id. 

1605 Id. 

1606 8/6/2007 email exchange among HBUS Ali Kazmy, HBUS Alan Williamson, HBUS Clara 

Hurtado, and others, "miami bearer share procedures," OCC·PSI·00217163. 

1607 8/9/2007 email exchanges among HBUS Ali Kazmy, HBUS Alan Williamson, and HBUS 

Anne Liddy, "On Boarding Bearer Share Corporation Policy Guidance," OCC-PSI-00316956. 
496 


76061.862

322 

would not have to do a retrospective review of bearer share accounts, 

stating that "may be a good idea but we should avoid locking ourselves 

in." Mr. Williamson also recommended adding an "exception process" 

in the policy, because there is "always a special case somewhere.,,1608 

Mr. Kazmy replied that the bank may have to do a retrospective review 

over a reasonable time period, but agreed to include the following line in 

the policy: "Exceptions to this Policy must be sought from the AML 

Director or designee in writing giving full details of the matter 

warranting such exception. The written approval must be maintained in 

customer file and reported to Oversight & Control Group upon 

receipt.,,1609 In August 2007, the New York IPB policy for bearer shares 

was slightly strengthened. It required all new clients wishing to open a 

bearer share account to obtain approval from the New York IPB CEO 

and AML Local Compliance Officer, and further required them to 

register or custodize their shares. 1610 This policy essentially treated all 

new bearer share accounts as high risk, though no mention was made of 

enhanced due diligence or monitoring obligations. Existing bearer share 

accounts were kept divided into high and low risk accounts. High risk 

bearer share accounts were required to register or custodize their shares. 

Low risk bearer share accounts were allowed to provide a Beneficial 

Ownersh~ Letter every three years, and their shares were not taken into 

custody. I II At this time, HBUS New York held over 630 bearer share 

accounts. 1612 

American Express Prosecution. On August 6, 2007, the U.S. 

Justice Department, working with the Federal Reserve and FinCEN, 

filed a Deferred Prosecution Agreement against American Express Bank 

International for criminal violations of Federal AML laws. 1613 In August 

2007, HBUS Compliance circulated information about the 

prosecution,1614 not because HBUS had participated in any of the matters 

involving American Express,1615 but to alert employees to the 

prosecution, ascertain if any ofthe American Express clients were also 

clients ofHBUS, and point out that the Deferred Prosecution Agreement 

had targeted the bank in rart for lack of sufficient AML controls over 

bearer share accounts. 161 

1608 8/6/2007 email exchanges among HBUS Ali Kazmy, HBUS Alan Williamson, and HilUS 

Anne Liddy, "On Boarding Bearer Share Corporation Policy Guidance," OCC-PSI-0021714S 1609 Id. 

1610 S127/2007 email exchanges among HBUS Alan Williamson, HBUS Terry Westren, and 

others, "OCC-PSI-003IS43S 1611 Id. 

1612 2007 List of New York Bearer Share Accounts, OCC-PSI-003IS439. 

1613 United States v. American Express Bank International, Case No. 07-20602-CRZLOCH/SNOW (USDC SD Flor.), Deferred Prosecution Agreement (SI7I2007). 

1614 S/9/2007 email exchanges among HBUS Ali Kazmy, HBUS Alan Williamson, and HBUS 

Anne Liddy, "On Boarding Bearer Share Corporation Policy Guidance," OCC-PSI-00316956. 

1615 SI7I2007 email exchanges among OCC HBUS Daniel Jack, HBUS Alan Williamson, and 

others, "AML Enforcement Actions vs AmEx (Banknotes & Metals)" OCC-PSI-00217241. 

1616 SI7I2007 email exchanges among HBUS Daniel Jack, HBUS Michael Baez, HSBC/IBEU 

Gordon Brown, HBMD Sally Lomas. HBUS Michael Karam, and others, "AML Enforcement 
497 


76061.863

323 

In response, on August 16,2007, JeffClous, head ofHBUS IPB 

Operations in Florida, expressed concern to Alan Williamson ofHBUS 

Compliance about HBUS' relative dearth of AML compliance resources 

compared to American Express, which had twelve fuII time compliance 

staff. He wrote: "I believe we have resource constraints that impact our 

AML program that need to be addressed.,,1617 

The next day, on August 17, 2007, HBUS Compliance head 

Carolyn Wind and Alan Williamson met with Federal Reserve officials. 

During this meeting, described by HBUS as "friendly," the Federal 

Reserve referenced the American Express case, suggested HBUS might 

have similar issues, and suggested the HBUS Miami management and 

compliance teams take another look at risky products, such as bearer 

share companies. 161B In a summary of the meeting, Ms. Wind noted that 

one Federal Reserve employee commented with respect to HBUS: "if 

you take the facts from the American Express case and lay them over 

our last report ofHSBC, they are alI there.,,1619 Earlier in the year, on 

January 24, 2007, the Federal Reserve had issued a Report of 

Examination for the Miami IPB which included a requirement that 

management "enhance the current controls over bearer share accounts to 

ensure that they are sufficiently risk-based and capable of detecting 

changes in ownership of these entities on an ongoing basis.,,162o 

That same month, HBUS Compliance began conducting a "gap 

analysis" comparison of the American Express case versus its own AML 

program. On October 11,2007, the analysis was issued and identified 

bearer shares as a particular concern at both American Express and 

HBUS. 1621 It also announced the decision by HBUS to stop opening 

new bearer share accounts as of September 1,2007, and to consider also 

eliminating all of its existing bearer share accounts: 

Action against AmEx businesses," OCC-PSI-00153253. On August 9, 2007, Ali Kazmy wrote, 

"'At this juncture, your cognizance is drawn to the recently issued enforcement action against 

American Express entities, who were penalized up to $55 million for BSAJAML violations 

including those associated with PICSlbearer share accounts." 810912007 email from Ali Kazmy 

to Alan Williamson, OCC-PSl-00316956. 

1617 812012007 email exchanges among HBUS Alan Williamson, HBUS Camillus Hughes, and 

others, "AEBI Deferred Prosecution Agreement," OCC-PSI-00218380. 

1618 8/23/2007 email exchanges among HBUS Marlon Young, HBUS Carolyn Wind, HBUS 

Louis Marino, HBUS JeffClous, and others, "File Note on Meeting with Federal Reserve Bank 

of Atlanta," OCC-PSI-0069846I. 1619 I

d. 

1620 1/2412004 Board of Governors of the Federal Reserve System "Report of Examination of 

Edge Corporation," OCC-PSI-0038811 O. 1124/2004 Board of Governors of the Federal Reserve 

Sl,stem "Report of Examination of Edge Corporation," OCC-PSI-00l07432. 

I 21 10/1112007 "High Level Comparison of Key Anti-Money Laundering Program Deficiencies 

Identified at American Express Bank international," prepared by Alan Williamson and Stefan 

Hardy,OCC-PSI-00221959. 
498 


76061.864

324 

"AEBI [American Express Bank International] failed to exercise 

sufficient control over accounts held in the names of offshore 

bearer share corporations, and until 2004 had no policy or 

procedure requiring beneficial owners of such accounts to certifY 

in writing their continued ownership of the bearer shares. 

Bearer share accounts are known and HSBC requires written 

confirmation every three years. A decision has been taken by the 

business not to accept new bearer share accounts beginning 

9/1/07. Management is considering a program to eliminate all 

bearer share customers. ,,1622 

Although HBUS announced a ban on opening new bearer share accounts 

as of September 1, 2007, it issued a new bank-wide bearer share policy 

three months later allowing new accounts. 

Final Bearer Shares Policy. On December 10,2007, HBUS 

Compliance officer Paul O'Sullivan circulated a final draft ofthe 

proposed new Bearer Share Policy. He explained that the policy was 

more flexible than first proposed, and "we will be able to maintain 

Bearer Share Company accounts once the requirements of the policy are 

met.,,1623 The draft policy applied to both new and existing bearer share 

accounts. It required all bearer share accounts to either register their 

shares or keep the shares in custody with the bank or an approved third 

party. In addition, Beneficial Ownership Letters would have to be filed 

every three years. The draft policy also permitted new accounts to be 

opened if they were approved by the Business Unit head, AML Local 

Compliance Officer, and AML Director, or a designee. The approvals 

would have to be documented and retained in the customer file. 1624 

On December 11, 2007, HBUS Compliance officer Terry Westren 

responded as follows: 

"If! read this correctly, it is saying that one year from the issuance 

ofthis policy, we have to have all outstanding bearer shares 

(currently with clients), either registered or in the hands of an 

approved Custodian. Is this correct? I recall when the OCC was 

here, they asked for this. AML Compliance was able to negotiate 

for this requirement to be applicable only to High Risk accounts. 

We then complied with this. It looks like this is now expanded to 

all outstanding bearer shares? Of course, with the new BVI rules 

1612 Id. (Emphasis in original.) 

1623 1211012007 email exchanges among HBUS Paul O'Sullivan, HBUS Terry Westren, HBUS 

Mason Salit. HBUS Tereso Suarez-Obregon, and others. "Bearer Share Corporation Policy," 

OCC-PSI-00226S2S. 

1624 812912007 Bearer Share Corporation Account "Policy Guidance," OCC-PSI-00226S26. 
499 


76061.865

325 

coming into play in 2009, they will have to do this anyway, but I 

think it should be noted this could be a considerable exercise.,,1625 

Contrary to the statement in this email, however, the 2006 OCC 

Supervisory Letter had already called for the bank to place all bearer 

shares in the custody of either the bank or an acceptable third party, with 

no exceptions made for lower risk accounts. 1626 While RBUS had 

responded to the Supervisory Letter that it planned to limit that 

requirement to higher risk accounts, there is no documentation showing 

the OCC accepted that position. When asked about this email, the OCC 

told the Subcommittee it had been under the impression that RBUS had 

closed all of its bearer share accounts. 1627 

That same day, December 11,2007, JeffClous, IPB Operations 

head in Florida, repeated the concerns he had voiced to Alan Williamson 

in September. Mr. Clous asserted that the draft policy would have an 

adverse effect on IPB business. Re noted that, although IPB Miami was 

no longer opening new bearer share accounts, it still maintained 1,679 

accounts with $2.6 billion, which generated $26 million in revenue 

annually. Mr. Clous also asserted that the draft policy went too far 

beyond what regulators required. Re noted that the proposed policy 

required the bank to both register and custodize bearer share accounts, 

while the Federal AML examination manual offered a choice between 

those options. In addition, he noted that the draft policy would require 

existing bearer share accounts to register or custodize their shares by the 

end of2008, even though the new BVI bearer share regulations would 

not reauire the registration ofBVI bearer shares until the end of 

2009.1 28 

On December 14, 2007, the RBUS Board of Directors approved its 

first RBUS-wide Bearer Share Policy.1629 The bearer share policy 

applied to all new and existing bearer share accounts and required the 

client to register the shares or agree to hold the shares in custody with 

RSBC or a third party custodian and provide a periodic beneficial 

ownership certificate. 1630 AML Director Leslie Midzain gave both IPB 

New York and Miami IPB a full year, until 2009, to comply with the 

1625 1211112007 email exchanges among HBUS Terry Westren, HBUS Paul O'Sullivan, and 

others, "Bearer Share Corporation Policy," OCC-PSI-00327917. 

1626 See 1/31/2006 OCC Supervisory Letter, "International Private Banking BSAIAML 

Examination," OCC-PSI-00000317. [Sealed Exhibit.] 

1627 Subcommittee interview of Joseph Boss (1/30/2012) and James Vivenzio (3/15/2012). See 

also 5110/2010 email exchanges among OCC Joseph Boss, Lee Straus, James Vivenzio, Monica 

Freas, Sally Belshaw, and others, "Bearer Share Accounts" OCC-PSI-00886601. 

1628 12111/2007 email from HBUS Jeff Clous to HBUS Paul O'Sullivan and others, "Bearer 

Share Corporation Policy," OCC-PSI-00226652. 

1629 August 29, 2007 Bearer Share Corporation Account Policy Guidance, OCC-PSI-00226526. 

1630 Id. For more information, see 12/1412007 HSBC Group Private Banking North America 

Compliance Report, OCC-PSI-00328384. 
500 


76061.866

326 

policy due to the BVI registration project which had a 2009 deadline. 1631 

For the next year, New York IPB and Miami IPB continued to follow 

their own policies and procedures with regard to bearer share accounts. 

Federal Reserve Concern. In 2008, an HSBC Group Audit ofthe 

New York IPB disclosed that it had 610 bearer share accounts, 31 of 

which had overdue Beneficial Ownership Letters, including 21 which 

were overdue by more than a year.

1632 In Miami, an earlier HSBC 

Group Audit disclosed that, as of October 2007, the Miami IPB had 

1,667 bearer share accounts, 1,109 or two-thirds of which had Beneficial 

Ownership Letters that were more than three years old and so were 

overdue to get new letters. 1633 Both audits indicated that HBUS was at 

risk of not knowing, in many cases, who owned the corporations behind 

the bearer share accounts. 

On January 31, 2008, HBUS AML Compliance officer Paul 

O'Sullivan emailed Clara Hurtado, Compliance officer for the Miami 

IPB, regarding a "De-Risking Strategy for Miami.,,1634 He also 

discussed with HBUS Compliance head Carolyn Wind and senior AML 

Compliance officer Alan Williamson the Federal Reserve's concerns 

regarding the high-risk nature of the Miami IPB' s client_base. 1635 Mr. 

O'Sullivan asked Ms. Hurtado to identifY the high risk bearer share 

accounts for which there was no "glue to cement the relationship" and 

consider terminating them. 1636 

Six months later, on June 12,2008, the Federal Reserve issued its 

annual Report of Examination (ROE) for the Miami IPB. The ROE 

again identified bearer share accounts as a problem, this time expanding 

the recommended action to be taken and noting, in particular, that 

ownership of a bearer share account should be ascertained more 

frequently than every three years: 

1631 See 4/18/2008 HBUS KYC Committee Meeting minutes, OCC-PSI-00241 046. See also 

7/312008 memorandum from HBUS Ali Kazmy to HBUS Leslie Midzain, OCC-PSI-00292367 

("Since BVI authorities have granted till December 2009 for all bearer shares to be registered, all 

BV! bearer share corporations within PB Americas will follow this time frame."). Subcommittee 

briefing by HSBC legal counsel (7/9/2012). 1632 10/2008 Group Financial Services Audit October 2008, OCC-PSI-00248215. 

1633 See 1012007 "HSBC Group Financial Services and European Audit Report on HSBC Private 

Bank International, Miami and HBUS Domestic Private Banking-Florida Region," OCC-PSI00223637; see also 12111/2007 HSBC Private Bank International FSA Audit Issues Status 

ReF°rt,OCC-PSI-00226813. 

163 1/31/2008 email from HBUS Paul O'Sullivan to HBUS Alan Williamson and HBUS 

Carolyn Wind, "De-Risking," OCC-PSI-00331923. 

1635 Wben asked about the 1, I 67 bearer share accounts, Ms. Wind told Subcommittee that she 

knew there were bearer share accounts, but did not know there were that many. She said she had 

talked about getting rid of bearer share accounts and wanted tighter controls. She also said 

longstanding bank clients with bearer share accounts were not uncommon in private banking. 

Subcommittee interview of Carolyn Wind (3/7/2012). 1636Id. 
501 


76061.867

327 

"Assess the risks associated with bearer share accounts and 

establish risk mitigation control measures that are appropriate for 

the associated level of risk. These control measures may include 

maintaining control over bearer share accounts; entrusting bearer 

share accounts with a reliable second party; or requiring periodic 

certification of ownership. At a minimum, management should 

conduct a review of the bearer share recertification policy and 

ensure that accounts that pose higher risks are recertified more 

frequently than every three years.,,1637 

On June 25, 2008, Peter Georgeou, deputy head of Group Audit 

Private Bank, emailed the head of HSBC Group audits, Matthew King, 

addressing the latest Federal Reserve examination report. While the 

Federal Reserve had listed 13 required actions, Mr. Georgeou alerted 

Mr. King to those he considered "more material." On his list was: 

"Improved controls and risk mitigation are required in respect of bearer 

share accounts and accounts held in the name ofPICs. In addition, 

policies and procedures should be enhanced for identification and the 

review of higher risk accounts.,,1638 

On July 3, 2008, HBUS Compliance officer Ali Kazmy sent a 

memorandum to HBUS Compliance and AML head Lesley Midzain 

summarizing changes that had been made to the IPB' s AML Procedures 

for 2007 and 2008. He noted that BVI bearer shares would have to be 

registered by December 2009, in accordance with the time frame set 

forth by BVI authorities. He wrote that high risk bearer share accounts 

would also require annual recertification of beneficial owner 

information, while lower risk bearer share accounts would need to 

recertify beneficial ownership every three years. In addition, he wrote 

that bearer share clients would be required to attest that they will notify 

the bank if a change in ownership occurs and provide a new Beneficial 

Ownership Letter. l639 The next day, July 4, 2008, JeffClous, head of 

IPB Operations in Florida, repeated the concerns he had voiced twice 

before, to Alan Williamson and Paul O'Sullivan. l64o 

On November 12, 2008, the New York International Private Bank 

sought dispensation to open 80 new bearer share accounts for existing 

clients.IMl New York IPB employee Todd Maddison asked senior 

1637 6/12/2008 Federal Reserve Audit, all 0-11. 

1638 7/212008 email exehanges among HBUS Janet Burak, HBUS Bob Martin, and others, 

"Federal Reserve Bank of Atlanta Review ofHSBC Private Bank Miami," HBUS OCC-PSJ00725897, 

1639 7/3/2008 memorandum from HBUS Ali Kazmy to HBUS Lesley Midzain, "Modifications to 

the Approved Private Bank Americas AML Procedures," OCC-PSI-00292367. 

1640 10/2912008 email exchanges among HBUS Alan Willianlson, HBUS Lesley Midzain, and 

others, "Enquiry - co-branding," OCC-PSI-00219656. 

1641 11114/2008 email exchanges among HBUS Todd Maddison, HBUS Alan Williamson, and 

others, "Bearer share question," OCC-PSI-00248782. HBUS legal counsel told the 
502 


76061.868

32S 

HBUS Compliance officer Alan Williamson whether Compliance would 

provide the needed dispensation. I642 Mr. Maddison said that he thought 

that an email written by Teresa Garcia, which outlined exceptions to the 

bearer share policy for the Private Bank, implied that the accounts could 

be opened under these exceptions: 

"Since BVI authorities have granted till December 2009 for all 

bearer shares to be registered, all BVI bearer share corporations 

within PB Americas will follow this time frame; High risk bearer 

share accounts will provide an annual recertification of the 

beneficial owners through a properly executed BOL; Standard risk 

bearer share accounts will provide beneficial ownership 

recertification every three years through a properly executed 

Beneficial Ownership Letter (BOL); and Clients must attest that 

they will notifY the bank of change in ownership, as and when it 

takes place. A new BOL will be required from the new beneficial 

owner." 1643 

Some ofthe SO new bearer share brokerage accounts were opened 

and some ofthem, as well as some other New York IPB bearer share 

accounts, were later moved to the Miami IPB. 1644 On March IS, 2009, 

the OCC issued a Supervisory Letter addressing AML concerns related 

to the HBUS Private Banking operations. The letter indicated that one 

of the OCe's primary examination objectives was to "[e]valuate 

effectiveness of enhancements to policies and procedures for PUPID 

activities, bearer share accounts and monitoring processes.,,1645 Despite 

this objective, the letter did not address bearer share issues in its 

conclusions or recommendations. 1646 The OCe's silence on the issue 

stands in sharp contrast to the Federal Reserve which was not only 

aware ofthe bearer share accounts, but tracking actions taken in Miami 

with respect to them. 

On May 19,2009, the Federal Reserve issued its annual Report of 

Examination for the Miami IPB, which again mentioned bearer shares as 

a concern. It stated in part: 

"[T]he risks posed by the international private banking activities 

remain significant, given the high transactional nature of the client 

Subcommittee that 80 of its clients with bearer shares needed to open brokerage accounts due to 

a regulatory change. Subcommittee briefing by HBUS legal counsel (7/9/2012). 

1642 1111412008 email exchanges among HBUS Todd Maddison, HBUS Alan Williamson, and 

others, "Bearer share question," aCC-PSI-00248782. HBUS legal counsel told the 

Subcommittee it did not know whether or not a dispensation was granted for these accounts. 

Subcommittee briefing by HBUS legal counsel (7/912012). 1643 Id. 

1644 Subcommittee briefing by HSBC legal counsel (7/9/2012). 

1645 31l8/2009 supervisory letter from acc to HBUS Leslie Midzain, "Private Banking 

BSNAML Examination," aCC-PSI-00000445-447, at 445. 

1646 See 51l0/2010 email from acc Joseph Boss to acc Lee Straus, James Vivenzio, Monica 

Freas, Sally Belshaw, and others, "Bearer Share Accounts," aCC-PSI-00886601. 
503 


76061.869

329 

base, a higher risk target market (Latin America), and the 

existence of offshore shell companies (including offshore 

operating companies), including bearer share structures.,,1647 

The examination report continued that the risk was increasing due to the 

bank's transfer of some accounts from the New York International 

Private Bank to the Miami Edge Corporation. The report also noted that 

BBUS had taken steps to address the risk. It noted that senior 

compliance personnel had sought to "de-risk" the Miami IPB's private 

banking activities, primarily by: 

"continued review of offshore operating shell companies, seeking 

to exit those relationships where the profitability ofthe 

relationships does not justify the additional compliance costs 

associated with the account. This strategy, coupled with increased 

approval requirements for new operating company accounts, and a 

decision to no longer open new bearer share accounts, shows 

tangible steps taken towards reducing reputational risk at 

Corporation." 1648 

This was the third Report of Examination over a two year period to have 

directed BBUS to strengthen its AML controls over its bearer share 

accounts. 

2009 Bearer Share Project. In February 2009, BBUS began the 

"Bearer Share ProJect" with the goal of winding down BBUS' bearer 

share accounts. 164 Because the British Virgin Islands (BVI) had passed 

legislation that would require bearer share certificates to be registered or 

custodized by the end ofthe year, BSBC viewed this development as an 

indication that other laws would soon be passed and decided that it 

would begin registering or custodizing its bearer shares beginning with 

the accounts opened by BVI bearer share corporations. 1650 By 2009, 

BBUS' international private banks operated under a new organizational 

structure called Private Bank Americas (PBA), and the bearer shares 

were treated as a group. PBA determined that it had a total of 1,833 

unregistered bearer share accounts, including 1,257 BVI bearer shares 

and 576 non-BVI bearer shares. It determined that 306 were in the New 

York Private Bank and 1,527 were in the Miami Private Bank. 1651 The 

Project began with BBUS' sending a letter to all of its BVI bearer share 

1647 5/19/2009 Federal Reserve Report of Examination of Edge Act Corporation, BOG-A300035. [Sealed Exhibit.] 

1648 Id. at 21. 

1649 Subcommittee briefing by HSBC legal counsel on bearer share issues (4/20/2012 and 

719/2012). 

1650 Id. 

16Slld. 
504 


76061.870

330 

clients in May 2009. 1652 The letter explained that as of December 31, 

2009, RBUS would "no longer maintain accounts for companies that 

issue bearer shares." It indicated that clients would need to register their 

bearer shares or close their accounts. 1653 

In 2010, the OCC, which had been silent on bearer share issues at 

HBUS for four years, renewed its focus on the accounts. On May 10, 

2010, one of the OCC AML examiners sent an email to EIC Sally 

Belshaw, OCC attorneys in Washington and others stating that RBUS 

Compliance head Terry Pesce had told him that all but one bearer share 

account had been closed in 2006. 1654 One of the OCC attorneys in 

Washington wrote in an email that he recalled that the examiner "had 

been told" that there were no bearer share accounts. 1655 The AML 

examiner indicated that he had just learned that RSBC still had 79 bearer 

share accounts held in Panama, Uruguay, Bahamas, Cayman, Belize, 

and Netherlands. 1656 In June 2010, another OCC examiner at RBUS 

obtained a list from RBUS of 117 bearer share accounts. 1657 On 

September 8, 2010, the same examiner forwarded a portion of a May 

20 I 0 New York IPB report stating it had 610 bearer share accounts, 31 

of which had overdue beneficial ownership declarations. 1658 The report 

also indicated that, for some accounts, the bank had no beneficial 

ownership declaration on file and no information about the location of 

some of the shares. Later that same day, the examiner sent another 

email with a copy of an audit ofthe Miami IPS indicating it had 925 

bearer share accounts, in addition to the 610 accounts in New York. 1659 

The examiner agreed to forward the Miami audit report to the Federal 

Reserve. 1660 These internal communications indicate that a primary 

reason for OCC inaction on bearer share issues was a misimpression that 

the accounts had been closed four years earlier. 1661 It also indicates a 

1652 Letter from HBUS to British Virgin Islands bearer share clients, "For Companies 

Incorporated in the British Virgin Islands," HSBC-PSI-PROD-0197129-133; Subcommittee 

briefing by HSBC legal counsel (7/9/2012). 

1653 Letter from HBUS to British Virgin Islands bearer share clients, "For Companies 

Incorporated in the British Virgin Islands," HSBC-PSI-PROD-0197129-133, at 129. 

l654 See 5/10/2010 email from OCC Joseph Boss to OCC Lee Straus, James Vivenzio, Monica 

Freas, Sally Belshaw, and others, "Bearer Share Accounts," OCC-PSI-0088660L 1655 9/8/2010 email exchanges among OCC James Vivenzio and OCC Teresa Tabor, "Bearer 

Share Accounts," OCC-PSI-00894871. 

1656 See 511012010 email from OCC Joseph Boss to OCC Lee Straus, James Vivenzio, Monica 

Freas, Sally Belshaw, and others, "Bearer Share Accounts," OCC-PSI-0088660L 

l657 611512010 email from OCC Teresa Tabor to OCC Joseph Boss, [no subject], OCC-PSI00929779 and attachment OCC-PSI-00929780 

1658 9/8/2010 email exchanges among OCC James Vivenzio and OCC Teresa Tabor. "Bearer 

Share Accounts," OCC-PSI-0089487L 

l659 6/15/2010 email from OCC Teresa Tabor to OCC Joe Boss forwarded to OCC Elsa De La 

Garza, [no subject], OCC-PSI-00929779 and attachment OCC-PSI-00929780. 

1660 9/8/2010 email exchanges among oee Teresa Tabor and oec Joseph Boss, "IPB Miami 

(Edge)," OCC-PSI-00921759-760, at 759. 

1661 See also 5112/2011 conclusion memorandum from OCC Teresa Tabor to OCC Kerry Morse, 

"Latin American International Center (LAIC) Miami - BSNAML Examination," OCC-PSI01768568 (finding that LAIC had two bearer share accounts which "only came to the attention of 

the LAIC Compliance Staff based on Examiner inquiries at the commencement of the 
505 


76061.871

331 

lack of coordination with the Federal Reserve which had been 

monitoring the bearer share issue in Miami for several years. 

By the time the OCC became aware of the large number of bearer 

share accounts still open at HBUS, the Bearer Share Project was well 

underway in its efforts to reduce the account volume. Having already 

sent a 2009 letter to accountholders with BVI bearer share corporations 

about the need to register their shares or close their accounts, HBUS 

followed in November 2010, by sending a similar letter to all 

accountholders with non-BVl bearer share corporations. 

By June 2011, of the 1257 BVI bearer share accounts, 900 had 

registered their shares (so that the accounts no longer qualified as bearer 

share accounts) and 350 accounts had c1osed.1662 Of the 576 non-BVI 

bearer share accounts, 255 had registered their shares, and 182 accounts 

were c1osed. 166J In November 2011, Private Bank Americas froze the 

remaining 139 non-BVl bearer share accounts, and began working to 

contact the accountholders and close the accounts. 1664 

As ofJuly 9, 2012, HSBC legal counsel told the Subcommittee 

that HBUS Private Bank America still had 26 bearer share accounts. 1665 

HSBC legal counsel also told the Subcommittee that "all but a handful" 

of those accounts were frozen, because the accountholders had not 

registered their shares or closed their accounts. 1666 According to HSBC 

legal counsel, the handful of bearer share accounts that were not frozen 

were beneficially owned by a single client, and the shares were being 

kept in the custody ofa law firm in New York. HSBC legal counsel 

indicated that, although HBUS' latest bearer share policy continued to 

allow new bearer share accounts to be opened under limited 

circumstances, no new bearer share account had, in fact, been opened 

since that policy took effect. 1667 Internal HBUS documents indicate that 

as a result of the Bearer Share Project, on at least two occasions, the 

bank identified suspicious activity related to the accounts. 1668 

examination"; and that LAIC had not fully followed HilUS bearer share policy for these two 

accounts because Beneficial Ownership Letters were not obtained every three years and the 

shares were being held by third-party custodians but it was lmclear if the custodians had been 

argroved by LAIC and what approval process was utilized). 

I Subcommittee briefing by HSBC legal counsel on bearer share issues (4/2012012). 

1663 Id. 

1664 ld. 

1665 The Subcommittee was told that 12 accounts are located in Miami and 14 are located in New 

York. Subcommittee briefing by HSBC legal counsel on bearer share issues (7/912012). 

16"ld. 

1667 Briefing by HSBC legal counsel to the Subcommittee on bearer share issues (4/20/2012). 

1668 See 516/2010 AML Oversight Committee Meeting minutes for HBUS. OCC-PSI-00860859-

860, at 859. 
506 


76061.872

332 

C. Two Examples of Bearer Share Accounts 

Two examples of bearer share accounts illustrate the AML risks 

they pose. They involve bearer share accounts opened by Mauricio 

Cohen Assor and Leon Cohen Levy, which demonstrate how bearer 

share accounts can be used to conceal assets and evade taxes; and a 

wealthy Peruvian family, which demonstrates how banks can be 

pressured to waive AML safeguards when opening bearer share 

accounts. 

Cohen Bearer Share Accounts. Mauricio Cohen Assor and Leon 

Cohen Levy, father and son, were hotel developers in Miami Beach. 1669 

On April 14, 20 I 0, both were indicted in Florida on charges of 

conspiring to commit tax fraud and filing false tax returns. 1670 The 

Justice Department charged that the Cohens had used bearer share 

corporations and shell companies to help conceal $150 million in assets 

and $49 million in income from the IRS. Both resided in Miami Beach, 

Florida. 

The indictment explained that "bearer share corporations are often 

set up in tax havens to hide the true ownership of assets, because 

ownership records are not maintained and nominee officers and directors 

are often used to appear to control the affairs ofthe corporation.,,1671 

The indictment named two bearer share corporations used by the 

Cohens to open bank accounts, Blue Ocean Finance Ltd., a Panamanian 

bearer share corporation,1672 and Whitebury Shipping Time Sharing Ltd., 

a BVI bearer share company.167J The Cohens used those bank accounts 

to conceal their ownership ofthe assets deposited into them. The 

indictment also disclosed that, around May 2007, an unnamed 

international bank asked one ofthe Cohens to register the shares of 

Whitebury Shipping and, when the request was refused, the bank closed 

the account. 

Internal bank documents disclose that RBUS was the unnamed 

bank that maintained a bearer share account for Whitebury Shipping. 

April 2007 transcripts of several telephone conversations between 

Mauricio Cohen and an HBUS banker describe the account, RBUS' 

request that he register the bearer shares, and his refusal to do so. 

1669 1017/2010 "Miami Beach Hotel Developers Convicted of Tax Fraud," Department of Justice 

~ress release, http://www.justice.gov/usao/f1s/PressReleases/101007-01.htm!. 

670 See generally United States of America v. Mauricio Cohen Assor and Leon Cohen Levy. 

Case No. 10-60159-CR-ZLOCH(s) (USDC SD Flor.), Superseding Indictment (8/3/2010) 

(hereinafter "Cohen Indictment"). Sec also "2 Charged in Tax Evasion Scheme Involving 

HSBC," New York Times, http://dealbook.nytimes.com/20 1 0104/16/2-charged-in-tax-evasionscheme-involving-hsbcl. 

1611 Cohen Indictment at 3. 

1672 Id. at 7. 

167l ld. at 8. 
507 


76061.873

333 

According to one of the telephone transcripts, on April 23, 2007, HBUS 

executive Claude Mandel, the Relationship Manager who handled the 

bank's relationship with Mauricio Cohen, apparently agreed to remove 

Mr. Cohen's name from the Whitebury account. 1674 The next day, Mr. 

Cohen talked to Mr. Mandel about replacing White bury with another 

bearer share account. Mr. Mandel offered to convert Whitebury from a 

BVI to a Bahamian bearer share corporation, but said that the bank no 

longer opened bearer share accounts. Mr. Cohen protested and told Mr. 

Mandel that the bank would lose clients and that other banks take bearer 

share accounts. 1675 The telephone transcripts indicate that, on April 25, 

2007, Mr. Mandel and Mr. Cohen again discussed Mr. Cohen's bearer 

share accounts. Despite Mr. Mandel's insisting that his bearer shares 

would need to be registered, Mr. Cohen convinced Mr. Mandel to check 

ifhe could convert White bury into a Panamanian bearer share 

corporation. Mr. Cohen indicated again that he did not want to put 

names on the shares; when Mr. Mandel said that the shares would need 

to state the names, Mr. Cohen said: "But, I can't put that, otherwise I 

have to declare them in the United States? I can't do that, I don't want 

to declare ... otherwise, I have to close the accounts with you and go to 

Geneva." 1676 

Minutes from a May 6, 2010 AML Oversight Committee Meeting 

at HBUS noted that the HBUS Private Bank was providing information 

on closed bearer share accounts opened by an "ex-client" as part of the 

investigation of Mauricio Cohen, a former HSBC client. 1677 

In October 2010, the Cohens were convicted after ajury trial, 

sentenced to ten years in prison, and ordered to pay back taxes, interest, 

and penalties totaling over $17 million. This example demonstrates the 

risk of bearer share accounts being used to conceal ownership of assets 

and commit criminal tax evasion. 

Peruvian Family Bearer Share Accounts. In 2007, a senior 

Compliance official with the HSBC Private Bank in New York, Teresa 

Garcia, sought a waiver to open a relationsh~ for a Peruvian 

businessman for two bearer share accounts. 1 8 According to Ms. 

Garcia, his business group was one of the richest and most powerful in 

Peru. 1679 

1674 Transcript of 4/23/2007 telephone conversation between HBUS Claude Mandel and 

Mauricio Cohen, HSBC-PSI-PROD-003089J-894. 

1675 Transcript of 4/24/2007 telephone conversation between HBUS Claude Mandel and 

Mauricio Cohen, HSBC-PSI-PROD-0030873-877. 

.676 Transcript of 412512007 telephone conversation between HBUS Claude Mandel and 

Mauricio Cohen, HSBC-PSI-PROD-0024791-793. 

toJ) 516/2010 HBUS AML Oversight Committee Meeting Minutes, OCC-PSI-00860859, at 859. 

1678 6/20/2007 email exchange among HBUS Teresa Garcia and HB US Alan Williamson, 

"Waiver Request," OCC-PSI-00214516, at 3. 

1679Id. at 3. 
508 


76061.874

334 

The bearer share corporations, Urigeler International S.A.-

Holding Company and Birmingham Merchant S.A. - Holding Company, 

were formed in Panama. 1680 According to an email exchange among 

HBUS Compliance personnel, in 2007, opening a new bearer share 

account required: (1) approval by the New York International Private 

Bank CEO and AML Local Compliance Officer; and (2) registration or 

custodization of the bearer shares. 1681 

Ms. Garcia wrote that she was requesting the waiver because the 

businessman had indicated that he did not want to forfeit confidentiality 

by registering or custodizing the bearer shares. 1682 She explained: "they 

wish to maintain confidentiality, and they have never been asked by our 

competitors with whom they bank to do this.,,1683 Manuel Diaz, 

President and Managing Director ofHSBC Private Bank International in 

Miami, indicated that he supported a waiver, because he was very 

familiar with the family and interested in establishing a relationship with 

them. 1684 Marlon Young, CEO of Private Banking Americas, also 

approved the waiver request. 1685 

Ms. Garcia then escalated the request to senior HBUS Compliance 

official Alan Williamson to determine who had authority to grant the 

waiver on behalf of AML Compliance. Mr. Williamson explained that, 

while he had no objection to granting the waiver, the bearer shares 

policy was an HSBC Group mandate and anls exception would have to 

be approved by HSBC Group Compliance. 1 86 David Ford, HSBC 

Global Money Laundering Control Officer, confirmed that HSBC Group 

approval was required for an exception to Group policy. Mr. Ford also 

wrote that he was "[ s ]uprised can open bearer share account for offshore 

client with no bo [beneficial ownership] declaration in US," and 

suggested checking with HBUS Compliance head Carolyn Wind about 

the OCC and Federal Reserve "view of such a structure.,,1687 Mr. 

Williamson asked HSBC Group AML head Susan Wright about the 

1680 6/20/2007 email exchange among HBUS Teresa Garcia and HBUS Alan Williamson, 

"Waiver Request ... OCC·PSI-002l45l6, at 2. 

1681 Id. at I. 

1682 7/5/2007 email exchange among HBUS Teresa Garcia and HBUS Alan Williamson, Susan 

Hoggarth, and others, "[redacted] Family," OCC·PSI-002IS211, at 6. 

1683 6/21/2007 email exchange among HBUS Alan WiUiamson and HBUS Marlon Young, 

Manuel Diaz, Teresa Garcia, and others, "Waiver Request," OCC-PSI·00214618, at 3·4. 

1684 6/20/2007 email exchange among HBUS Teresa Garcia and HBUS Alan Williamson, 

"Waiver Request," OCC-PSI-00214516, at 3. 

1685 6/25/2007 email from HBUS Marlon Young to HBUS Jaime Carvallo and others, "[redacted] 

Family," OCC·PSI·00214806. 1686 6/21/2007 email exchange among HBUS Alan Williamson and HBUS Marlon Young, 

Manuel Diaz, Teresa Garcia, and others, "Waiver Request," OCC-PSI-002l46l8, at 3. 

1687 Id. at I. 
509 


76061.875

335 

request, and reported that she was reluctant to grant the exception but 

would consider it. 1688 

There was a strong push for this relationship by the business side. 

Manual Diaz, head of the Miami Private Bank International, wrote: "I 

FULLY SUPPORT THIS WAIVER.,,1689 Jaime Carvallo, a Miami 

bank executive, sent an email to the head of Private Banking Americas, 

Marlon Young, enlisting his support to obtain a waiver. Mr. Carvallo 

wrote: 

"Teresa Garcia must have given you heads up on the [redacted] 

family and the issue regarding their holding companies having 

bearer shares and the fact that they will not sign the BOL 

[Beneficial Ownership Letter]. 

1 will see one of the family members tomorrow morning and this 

still seems to have no resolution. This is too important a family in 

Peru for us not to want to do business with, and one that has taken 

a lot of my time and effort to convince to start a relationship with 

us .... I would appreciate your involvement at this point, as this has 

become extremely sensitive.,,1690 

Mr. Young signaled his support for the waiver the same day,1691 

and later wrote to senior HBUS Compliance officer Alan Williamson: 

"This is an important relationship for IPB [International Private Bank] 

and a family that has a clean record. It would be a shame if we are not 

able to obtain an exception." 1 692 Mr. Cavallo also wrote directly to Mr. 

Williamson that the family was "too important a family in Peru for us 

not to want to do business with.,,1693 Mr. Carvallo estimated the 

family's liquid net worth, 1694 and explained that HSBC was currently 

competing with another bank to help the family reorganize their 

businesses and facilitate the succession of their financial assets and 

operating companies, which could be very profitable. 1695 

16" 612612007 email exchange among HBUS Alan Williamson and HBUS Jaime CaryalIo, 

Marlon Young, Manuel Diaz, Teresa Garcia, and others, "[redacted] Family," OCC-PSI00214880, at 1. 

1689 612012007 email exchange among HBUS Alan Williamson and HBUS Manuel Diaz, Teresa 

Garcia, and others, "Waiver Request," OCC-PSI-00214534, at 1. 

1690 612512007 email from HilUS Jaime CaryalIo to HBUS Marlon Young and others, "[redacted] 

Family," OCC-PSI-00214806. 1691 612512007 email from HBUS Marlon Young to HBUS Jaime CarvalIo and others, "[redacted] 

Family," OCC-PSI-00214806. 

1692 612612007 email from HBUS Marlon Young to HBUS Alan Williamson and others, 

"Jredacted] Family," OCC-PSI-00214891, at 1-2. 

1 93 71512007 email exchange among HBUS Teresa Garcia and HilUS Alan Williamson, Susan 

Hoggarth, and others, "[redacted] Family," OCC-PSI-00215211, at 6. 

16'14 6/26/2007 email exchange among HilUS Alan Williamson and HilUS Jaime CarvalIo, 

Marlon Young, Manuel Diaz, Teresa Garcia, and others, "[redacted] Family," OCC-PSI00214880, at l. 

1695 71512007 email exchange among HBUS Teresa Garcia and HBUS Alan Williamson, Susan 

Hoggarth, and others, "[redacted] Family," OCC-PSI-002152 I I, at 5. 
510 


76061.876

336 

Mr. Williamson responded: "I thought so. I would do it without 

going to Geneva but audit wrote up DPB [Domestic Private Banking] on 

a similar situation.,,1696 Later, he wrote: "we will do our best.,,1697 Still 

later: "Doing what I can.,,1698 David Ford pointed out that the HSBC 

Group policy was flexible, because the client could either declare 

beneficial ownership, have HSBC hold the shares, or have an acceptable 

third party hold the shares. 1699 On July 5, 2007, Mr. Williamson wrote 

that the "RM [Relationshi~ Manger] and the Group Head are not seeing 

eye to eye on this one.,,170 

In 2007, HBUS opened a bearer share account in the name of 

Urigeler. 1701 When asked whether a waiver had been granted from the 

requirements that the bank hold the shares in custody and obtain an 

Beneficial Ownership Letter from the owner, HSBC legal counsel told 

the Subcommittee: "We don't knoW.,,1702 HSBC legal counsel told the 

Subcommittee that the accounts was opened in New York, transferred to 

Miami in 2009, and closed in 2011. 170 

This account demonstrates the difficulty of adhering to a strong 

bearer share policy when a wealthy and powerful family asks to open a 

bearer share account and obtain a waiver from requirements to either 

register the shares with their names or submit the shares to the custody 

of the bank. HBUS' bearer share policy continues to permit the bank to 

open bearer share accounts. 

D. Analysis 

For decades, bank regulators and AML experts have cautioned 

against opening accounts for bearer share corporations due to the ease 

with which these corporations hide ownership and the frequency with 

which they have been used to commit money laundering, financial 

crime, tax evasion, and other wrongdoing. From at least 2000 to 2011, 

HBUS maintained a sizeable number of bearer share accounts, despite 

1696 6120/2007 email exchange among HBUS Alan Williamson and HBUS Manuel Diaz, Teresa 

Garcia, and others, "Waiver Request," OCC-PSI~00214534, at L 

1697 6/2112007 email exchange among I-IBUS Alan Williamson and HBUS Marlon Young, 

Manuel Diaz, Teresa Garcia, and others, "Waiver Request," OCC-PSI-00214618, at I. 

1698 6/26/2007 email from HBUS Alan Williamson to HBUS Marlon Young and others, 

"[redacted] Family," OCC-PSI-00214891, at 1. See also 7/512007 email exchange among HBUS 

Teresa Garcia and HBUS Alan Williamson, Susan Hoggarth, and others, "[redacted] Family," 

OCC-PSI-00215211; 6/26/2007 email exchange among HBUS Alan Williamson and HBUS 

Marlon Young, Manuel Diaz, Teresa Garcia, and others, "[redacted] Family," OCC-PSI00214891. 

1699 7/512007 email exchange among HBUS Teresa Garcia and HBUS Alan Williamson, Susan 

Hoggarth, and others, "[redacted] Family," OCC-PSI-00215211, at 2. 

1700 Id.at I. 

1701 Subcommittee briefing by HSBC legal counsel (7/9/2012). 

1702 Id. 

1703 Id. 
511 


76061.877

337 

repeated regulatory questions and expressions ofconcem. HBUS 

bankers, and at times their compliance officers, pushed to open and 

maintain bearer share accounts. Two bearer share accounts illustrate the 

risks inherent in such accounts and the pressures to circumvent AML 

controls. While HBUS finally registered or closed most ofthe accounts 

by 2011, its policy continues to allow bearer share accounts to be opened 

under some circumstances. 
512 


76061.878

338 

VIII. OCC: EXERCISING INEFFECTIVE AML OVERSIGHT 

The mission of the Office of the Comptroller ofthe Currency 

(OCC) is to charter, regulate, and supervise all U.S. banks that hold a 

national charter. 1704 To carry out that mission, in the words of the OCC, 

it conducts "regular examinations to ensure that institutions under our 

supervision operate safely and soundly and in compliance with laws and 

regulations," including AML laws. 1705 However, the HSBC case 

history, like the Riggs Bank case history examined by this 

Subcommittee eight years ago, 1706 provides evidence that the current 

OCC examination system has tolerated severe AML deficiencies for 

years and given banks great leeway to address targeted AML problems 

without ensuring the effectiveness oftheir AML program as a whole. 

As a result, the current OCC examination process has allowed AML 

issues to accumulate into a massive problem before an OCC 

enforcement action is taken. 

At HSBC, during the five-year period fi'om 2005 to 2010, OCC 

AML examiners conducted nearly four dozen AML examinations, 

identified at least 83 AML Matters Requiring Attention, and 

recommended two cease and desist orders to strengthen HBUS' AML 

program. Despite the many AML problems identified by its examiners, 

OCC supervisors took no formal or informal enforcement action during 

nearly that entire period, allowing the bank's AML problems to fester. 

In 2009, after learning that two law enforcement agencies were 

investigating possible money laundering through HBUS accounts, the 

OCC legal and enforcement divisions directed OCC AML examiners to 

hastily intensifY and expand an ongoing AML examination to consider 

HBUS' AML program as a whole. In September 2010, the expanded 

OCC examination culminated in a blistering Supervisory Letter 

identifYing numerous, serious AML problems at the bank. Many of 

these AML problems had been identified in prior examinations, but were 

tied to specific HBUS business units rather than applied bankwide, and 

were not resolved by bank commitments to remedy the identified 

problems. 

The September 13, 20 I 0 Supervisory Letter criticizing HBUS' 

AML deficiencies ran 31 pages long.'707 It cited the bank for five 

violations of Federal AML law. Its list of AML problems included a 

backlog of over 17,000 unreviewed alerts regarding possible suspicious 

1704 See "FAQs - HSBC Money Laundering Enforcement Action," attached to 10/612010 email 

from acc James Vivenzio to acc colleagues. "HSBC FAQs," aCC-PSI-00898845, at 5. 1705 Id. 

1706 See "Money Laundering and Foreign Corruption: Enforcement and Effectiveness of the 

Patriot Act," U.S. Senate Permanent Subcommittee on Investigations, S.Hrg. 108-633 (July 15, 

2004). 

1707 911312010 acc Supervisory Letter HSBC-2010-22, "Bank Secrecy Act/Anti-Money 

Laundering ('BSAlAML') Examination - Program Violation (12 U.S.C. § 1818(5); 12 C.F.R. § 

21.21)," aCC-PSI-00864335, at 342. [Sealed Exhibit.] 
513 


76061.879

339 

activity, and a failure to timely file hundreds of Suspicious Activity 

Reports (SARs) based upon those alerts. The Supervisory Letter also 

criticized HBUS for failing to conduct any due diligence or to assess the 

AML risks posed by HSBe affiliates that opened U.S. dollar 

correspondent accounts at HBUS, even though many of those affiliates 

operated in high risk jurisdictions, had high risk clients, or offered high 

risk products. Another problem was a three-year failure by HBUS, from 

mid-2006 to mid-2009, to conduct any AML monitoring of billions of 

dollars in bulk cash transactions, including $IS billion from 2007 to 

2008 alone, with those same HSBe affiliates, despite the risks 

associated with large cash transactions. 

In addition, the Supervisory Letter criticized HBUS' failure to 

conduct any AML monitoring of $60 trillion annually in wire transfer 

activity by customers domiciled in countries rated by HBUS as lower 

risk, unless a customer was individually rated as high risk, while also 

criticizing the bank's country risk assessment process. The oee 

attributed the bank's monitoring failure in part to HBUS' goal of 

minimizing AML staffing requirements. To place the magnitUde ofthe 

AML vulnerability created by HBUS in context, the oee noted that, 

from 200S to 2009, HBUS' wire activity had grown from 20.4 million to 

30.2 million wire transactions per year, with annual dollar volumes 

climbing from $62.4 trillion to $94.S trillion, an increase ofSO%. The 

oee also noted that HBUS had become the third largest user ofthe 

CHIPS wire transfer system which provides 9S% of U.S. dollar crossborder and nearly half of all domestic wire transactions totaling $1.5 

trillion daily.l708 

The letter didn't stop there. It also offered a slew of criticisms of 

the techniques used by HBUS to identifY suspicious activity, describing 

them as "ineffective," "inadequate," and overly reliant on a "highly 

discretionary manual monitoring approach," all of which decreased the 

number of AML alerts. Additional problems included inappropriate 

procedures to close alerts; an "inadequate focus on country risk instead 

of customer risk"; the failure to assign high risk ratings to high risk 

clients, including Politically Exposed Persons; inadequate and 

unqualified AML staffing; inadequate AML resources; and high 

turnover in AML leadership. Despite its own failures to take proactive 

steps to oversee the bank, the oee letter noted that the bank had not 

been proactive enough in identifYing and remediating its own AML 

problems: 

"Through year-end 2009, the oee has issued 83 BSAIAML 

Matters Requiring Attention ('MRAs'). The bank has a history of 

not identifYing BSAIAML problems proactively. Instead, the bank 

has taken a reactive posture, choosing to focus its attention on 

correcting specific deficiencies identified by regulators without 

170' Id. at 342-343. 
514 


76061.880

340 

taking comprehensive action to identifY and correct deficiencies in 

the bank's overall BSAIAML program.,,1709 

A month later, on October 4,2010, the OCC issued a Cease and Desist 

Order requiring HBUS to revamp its AML program. 1710 In response, 

HBUS committed to making major changes. 

At the time the OCC issued the October Cease and Desist Order, it 

had been conducting regular AML oversight ofHBUS for six years, 

raising the issue of how such deep-seated AML deficiencies could have 

gone on at the bank without the regulator's taking action. Part of the 

answer is that HBUS, like other international banks, presented the OCC 

with a number of AML challenges. It functioned as the U.S. nexus for 

one of the largest banks in the world. The HSBC network was not based 

in the United States, and its central focus was not on U.S. customers or 

U.S. businesses, but on other areas of the globe. HSBC affiliates 

operated in a number of jurisdictions which faced huge AML risks from 

terrorist financing, drug trafficking, tax evasion, and other law 

enforcement problems. The HSBC Group was also one of the largest 

participants in international wire transfer systems and a leader among 

global banks in moving large amounts of physical currency around the 

world, with all the attendant AML risks inherent in large cash 

transactions. HSBC also handled numerous high risk clients and high 

risk products. In addition, as OCC examinations disclosed over the 

years, it was a financial institution with inadequate AML resources; 

inadequate AML systems and controls; and inadequate AML leadership. 

HBUS itself was a large, complex, and growing financial 

institution with numerous business lines, products, and services, as well 

as millions of customers. It also had correspondent accounts for more 

than 80 HSBC affiliates as well as financial institutions around the 

world. From the time the OCC became HBUS' primary regulator in 

2004, it oversaw HBUS' AML program and conducted regular 

examinations throughout the bank. Year after year, those AML 

examinations exposed AML deficiencies. Each time problems were 

identified, HBUS promised to correct them and sometimes did. But 

those corrective actions were narrowly targeted and, instead of 

improving, the bank's overall AML program deteriorated, resulting in 

the dramatic failures described in the September 2010 Supervisory 

Letter. 

1709 Id. 

1710 See In re HSBC Bank USA. N.A., Case No. AA-EC-IO-98, Department of the Treasury 

Comptroller ofthe Currency, Consent Order (10/4/2012), OCC-PSI-00904698. On the same 

day, the Federal Reserve issued a Cease and Desist Order against HBUS' holding company, 

HSBC North America Holdings, Inc. (HNAH) to require it to strengthen its AML program. See 

In Re HSBC North America Holdings. Inc., Case No. 10-202-B-HC, before the Board of 

Governors ofthe Federal Reserve System, Cease and Desist Order Issued Upon Consent 

Pursuant to the Federal Deposit Insurance Act as Amended (10/4/2012). 
515 


76061.881

341 

The focus of this section is to chronicle the OCC's AML oversight 

efforts at HBUS and draw from that case history potential lessons 

regarding OCC examinations of AML controls at a large global bank; 

how AML problems can accumulate over years despite the OCe's 

presence; and what can be done to strengthen the OCe's AML 

oversight. Problems include the OCC's decision to treat AML 

deficiencies as a consumer compliance problem rather than a 

management problem with safety and soundness implications; its 

practice off ore going the citation oflegal violations for the failure to 

comply with mandated components of a AML program; its use of 

narrowly focused AML examinations without also examining a bank's 

overall AML program; its failure to make timely use of informal and 

formal enforcement actions to compel AML improvements; and its use 

of Supervisory Letters that sometimes muted examination criticisms or 

weakened recommendations for reforms. Actions to remedy these 

problems would strengthen the OCC's AML oversight and help protect 

the U.S. banking system from being misused for terrorist financing, 

money laundering or other misconduct. 

A. Background 

(1) Key Anti-Money Laundering Laws 

Federal law defines money laundering as "the movement of illicit 

cash or cash equivalent proceeds into, out of, or through the United 

States [or] .. , United States financial institutions.,,1711 Federal antimoney laundering laws also apply to terrorist financing, including any 

legally obtained funds if intended for use in planning, committing, or 

concealing a terrorist act. 1712 These laws arose as a result oflaw 

enforcement investigations demonstrating that terrorists, drug 

traffickers, tax evaders, and other criminals were using financial 

transactions to execute their crimes, including by transferring funds 

across international lines, recharacterizing illicit proceeds as legitimate 

funds, hiding assets, and using financial and corporate secrecy laws and 

practices to block inquiries into their activities. U.S. AML laws are 

designed to prevent these wrongdoers from misusing the U.S. financial 

system to commit their crimes. 

Three key laws layout the basic AML obligations of U.S. financial 

institutions, the Money Laundering Control Act of 1986, the Bank 

Secrecy Act of 1970, and the USA Patriot Act of2002, which amended 

both prior laws. 1713 

1711 31 U.S.C. § 5340(2). 

1712 See, e.g., 18 U.S.c. § 981(a)(I)(G) (civil forfeiture laws applicable to latmdered proceeds 

also apply to terrorist assets). 

1713 For a more detailed discussion of U.S. AML laws, see "Anti-Money Laundering: Issues 

Concerning Depository Institution Regulator Oversight," testimony of the General Accounting 
516 


76061.882

342 

The Money Laundering Control Act, enacted partly in response to 

hearings held by this Subcommittee in 1985, was the first law in the 

world to make money laundering a crime. It prohibits any person from 

knowingly engaging in a financial transaction which involves the 

proceeds of a "specified unlawful activity.,,1714 The law provides a long 

list of specified unlawful activities, including, for example, terrorism, 

drug trafficking, fraud, and foreign corruption. The Bank Secrecy Act 

(BSA), as amended by the Patriot Act, imposes AML obligations on a 

designated list of financial institutions operating in the United States to 

ensure they do not facilitate money laundering or become conduits for 

terrorist financing. 

AML Requirements. The Bank Secrecy Act mandates that 

covered financial institutions establish an effective AML program that 

meets four minimum requirements: 

1) It has a system of internal controls to ensure ongoing 

compliance. 

2) It designates an individual responsible for managing AML 

compliance. 

3) It provides AML training for appropriate personnel. 

4) It requires independent testing of AML compliance. 1715 

These four components are sometimes referred to as the "pillars" 

of an effective AML program. The first requirement for a system of 

AML "internal controls" involves development of risk-based policies 

and procedures to detect and prevent money laundering.17l6 At a large 

bank, these safeguards would include Know Your Customer (KYC) 

policies and procedures, including developing a customer identification 

program, conducting due diligence reviews, and assessing customer risk; 

a monitoring system to analyze account and wire transfer activity to 

detect suspicious activity; and a system for reporting suspicious activity 

to law enforcement. To ensure AML controls are implemented 

effectively, banks are also required to provide appropriate resources, 

infrastructure, and staff. 

The second requirement is to designate a qualified individual for 

coordinating and monitoring the bank's day-to-day AML 

compliance. 1717 The AML compliance officer must be knowledgeable 

about the law and have the time, expertise, authority, and resources 

needed to ensure bank compliance with AML requirements. The AML 

compliance officer should also have the authority to make regular 

reports to the bank's board of directors or a board designated committee. 

Office. Report No. GAO-04-833T. (6/3/2004), before the U.S. Senate Committee on Banking. 

Housing, and Urban Affairs, at 4-6. http;//www.gao.gov/new-itemsJd04833t.pdf 

1714 18 U.S.C. §§ 1956-57. 

1715 See31 U.S.C. § 5318(h)(l) and 12 C.F.R. Section 21.21(b)(1). All Federal bank regulators 

have adopted the same requirements within their own regulations. 

1716 31 U.S.C. § 5318(h)(1)(A) and 12 C.F.R. Section 21.21 (c)(1). 

1717 3 J U.S.C. § 5318(h)(1)(B) and 12 C.F.R. Section 21.21(c)(3). 
517 


76061.883

343 

The third requirement is for the bank to provide adequate training 

to all personnel with AML responsibilities. 171 AML training should be 

ongoing to ensure bank personnel are kept up-to-date with the law. The 

fourth requirement is for the bank to conduct independent testing of its 

AML program and controls to ensure compliance with the law and to 

identify and correct any AML deficiencies. 17J9 This function is typically 

performed by a bank's internal audit group or by an outside auditor with 

AML expertise. 

Other AML Requirements. In addition to requiring covered 

financial institutions to establish effective AML programs, Federal AML 

laws include a number of other statutory requirements, including 

requiring banks that keep records outside ofthe United States to produce 

them within a specified period oftime; 1720 to obtain identifyin~ 

information for persons seeking to open or maintain accounts, 721 and 

requiring appropriate due diligence when opening and administering 

accounts for foreign financial institutions or senior foreign political 

figures. 1722 The Bank Secrecy Act also authorizes and the U.S. 

Department of Treasury has issued regulations requiring covered 

financial institutions and other businesses to file reports on large 

currency transactions and suspicious activities to guard against money 

laundering. 1723 

(2) AML Oversight In General 

The Secretary of the Treasury is the primag Federal regulator 

charged with enforcing key Federal AML laws. J 24 To help carry out 

those responsibilities, in 2003, the Secretary established the Executive 

Office for Terrorist Financing and Financial Crimes, headed by a Deputy 

Assistant Secretary. This office oversees the operation of the Financial 

Crimes Enforcement Network (FinCEN), a Treasury bureau which, 

among other duties, develops AML regulations and guidance, analyzes 

currency transaction reports and suspicious activity reports filed by 

financial institutions, and interacts with local, state, Federal, and 

international law enforcement as well as other financial intelligence 

units around the world. Treasury also oversees the Office of Foreign 

Assets Control (OFAC) which is primarily responsible for enforcing 

U.S. sanctions laws to detect and block financial transactions and assets 

171' 31 U.S.C. § 53 18(h)(J)(C) and 12 C.F.R. Section 21.21 (c)(4). 

1719 31 U.S.c. § 5318(h)(I)(C) and 12 C.F.R. Section21.21(c)(2). 

1720 31 U.S.C. § 5318(k)(2). 1721 31 U.S.C. § 5318(1). 1722 31 U.S.C. § 53!8(i). 

1723 See, e.g., 31 U.S.C. §§ 5313 and 5318(g); 31 C.F.R. §§ 103.11 and 103.21 et seq. 

1724 See, e.g. 31 U.S.C. §§ 5311 et seq. (Treasury Secretary charged with carrying out key antimoney laundering laws) and § 5341 (Treasury Secretary given lead role in development of 

national anti-money laundering strategy). 
518 


76061.884

344 

belonging to identified terrorists, persons associated with weapons of 

mass destruction, drug traffickers, and rogue jurisdictions. 

Although FinCEN is the administrator of Federal AML regulations 

in the United States, it does not examine banks. That task is assigned to 

Federal bank regulators which are charged with monitoring bank 

compliance with AML laws through their examination procedures. Any 

AML violations they discover are reported to FinCEN which can, among 

other actions, impose civil monetary penalties on financial institutions 

for the violations.1725 

Significant responsibility for AML oversight, thus, rests with 

Federal bank regulators. The decisions they make with respect to AML 

policies and procedures, AML examinations, and safety and soundness 

ratings consequences for AML deficiencies will in large measure 

determine the importance that both regulators and financial institutions 

place on achieving effective AML controls. 

Oversight of Financial Institutions. At the end of 20 I 0, the 

United States had over 7,600 federally insured commercial banks and 

savings institutions.1726 In addition, the United States had over 7,300 

federally insured credit unions. 1727 On the federal level, these financial 

institutions are overseen by four agencies: the Federal Reserve which 

supervises state-chartered banks that are part ofthe Federal Reserve 

System and certain financial holding companies; the Federal Deposit 

Insurance Corporation (FDIC) which supervises state-chartered banks 

that were not part of the Federal Reserve System; 1728 the Office of the 

Comptroller of the Currency (OCC) which supervises banks and savings 

associations with national charters, and certain U.S. affiliates of foreignowned banks;1729 and the National Credit Union Administration 

(NCUA) which supervises Federal and state-chartered credit unions. In 

addition, state banking authorities supervise and examine state-chartered 

institutions. 

1725 See FinCEN Enforcement Actions, http://www.fincen.goY/news_room/eai(''Underthe Bank 

Secrecy Act (BSA), 31 U.S.C. 5311 et seq., and its implementing regulations at 31 C.F.R. 

Chapter X (formerly 31 C.F.R. Part 103), FinCEN may bring an enforcement action for 

violations of the reporting, recordkeeping, or other requirements of the BSA, FinCEN's Office 

of Enforcement evaluates enforcement matters that may result in a variety of remedies, including 

the assessment of civil money penalties."), 

1126 See the Federal Deposit Insurance Corporation's (FDIC) Statistics at a Glance, (Fourth 

Quarter 2010). This includes 6,529 commercial banks and 1,128 savings institutions. 

?,t;r:llwww.fdic.gov/banklstatistical/stats/2010declindustry.html 

• See the NatIOnal CredIt Umon AdmmIslratlOn's (NCUA) 2010 Annual Report, "Insurance 

Fund Ten·Year Trends" chart, page 133. This figure includes 4,589 Federal and 2,750 state· 

chartered credit unions. http://www.ncua.gov/LegallDocumentslReports/AR2010.pdf 

1728 The FDIC also acts as a backup regulator for all financial institutions with Federal deposit 

insurance. 

1129 Until recently, the Office of Thrift Supervision (OTS) supervised Federal savings 

associations and institutions, but it was abolished by the Dodd Frank Wall Street Reform and 

Consumer Protection Act. All OTS duties were officially transferred to the OCC on July 21, 

2011. 
519 


76061.885

345 

The primary responsibility of the Federal bank regulators is to 

ensure the "safety and soundness" ofthe financial institutions they 

supervise. One key mechanism they use to carry out that responsibility 

is to conduct safety and soundness examinations on a periodic basis and 

provide the results in an annual Report of Examination (ROE) to the 

Board of Directors of each financial institution. Safety and soundness 

examinations are conducted to assess the risk that an insured bank poses 

to the Federal Deposit Insurance Fund. All FDIC-insured institutions 

contribute to this insurance fund through assessments which are 

typically collected on a quarterly basis. The assessment amounts are 

based, in part, on a bank's safety and soundness ratings. 

The largest U.S. financial institutions are supervised under a 

"continuous examination" program. Under this program, examiners are 

always on-site at the institution, as opposed to periodically arriving onsite, conducting an examination, and then departing for the next bank 

after finalizing the ROE. Examinations at smaller community banks are 

typically conducted on a 12- or IS-month exam cycle. Examiners are 

typically on-site at smaller community banks for only a few weeks. 

Interagency AML Examination Manual. In June 2005, the 

Federal Financial Institutions Examination Council (FFIEC) issued a 

joint AML Examination Manual. 1730 This manual was developed by the 

Federal bank regulators, in collaboration with FinCEN, OFAC, and state 

banking agencies. It was developed to provide current and consistent 

AML examination procedures and guidance to examiners across the 

Federal banking agencies and the financial institutions they oversee. 

The manual has been updated three times to incorporate regulatory 

changes and reflect feedback from the banking industry and examination 

staff. The most recent version of the manual was released in April 

2010. 1731 

Safety and Soundness Examinations. Federal bank regulators 

conduct several different examinations at the financial institutions they 

supervise. The most important is the safety and soundness examination. 

Federal bank regulators conduct safety and soundness examinations to 

assess the risks that a bank poses to the Federal Deposit Insurance Fund 

(DIF) and to maintain public confidence in the integrity ofthe banking 

1730 The FFlEC is a formal interagency body empowered to prescribe uniform principles, 

standards, and report forms for the Federal examination of financial institutions by the Federal 

Reserve, FDIC, OCC, NCUA, and the Consumer Financial Protection Bureau (CFPB), and to 

make recommendations to promote unifonnity in the supervision of financial institutions. See 

FFIEC website, http://www.ffiee.gov/.In 2006, the State Liaison Committee (SLC) was added 

to the Council as a voting member. The SLC includes representatives from the Conference of 

State Bank Supervisors, the American Council of State Savings Supervisors, and the National 

Association of State Credit Union Supervisors. The CFPB became an FFIEC member in 2011. 

The Office of Thrift Supervision was also an FFlEC member, until the agency was abolished in 

2011. 

1731 See 412912010 "BSAIAML Examination Manual," Federal Financial Institutions 

Examination Council, 

http://www.ffiee.govlbsa_aml_infobase/documentsIBSA_AML_Man_20 1 O.pdf. 
520 


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346 

system. These examinations help prevent identified problems from 

deteriorating to the point of bank failures, the costs of which are often 

borne by the DIF. The DIF is funded by assessments that the FDIC 

charges banks. These assessments are derived from the level of insured 

deposits that a bank holds and the inherent risks that the bank poses to 

the DIF, which are calculated in part from a bank's safety and soundness 

component ratings and composite rating. 

Safety and soundness examinations are designed to determine the 

financial condition of an institution, assess the effectiveness of its risk 

management practices, and aid in the development of effective and 

timely corrective actions. The examinations evaluate the bank's 

adherence to a variety oflaws and regulations, identifY and assess key 

risks, and identifY and assess any problems. 

CAMELS Ratings. Safety and soundness examinations are 

organized around a rating system called CAMELS, an acronym for the 

six components that are evaluated. The CAMELS rating system 

evaluates a financial institution's: (C) capital adequacy, (A) asset 

quality, (M) management effectiveness, (E) earnings, (L) liquidity, and 

(S) sensitivity to market risk. Each component of the CAMELS rating is 

based upon a qualitative analysis of various factors comprising it. 

CAMELS ratings use a scale of 1 to 5, with "1" being the best rating and 

"5" the worst. 

The CAMELS component ratings also serves as the basis for a 

bank's "Composite Uniform Financial Institution Rating," often referred 

to as the "composite rating" or the overall "bank rating." The 

composite rating also uses a scale of I to 5, and generally bears a close 

relationship to the component CAMELS ratings, although it is not 

simply an average of them. For composite ratings, 1 is the highest rating 

and signifies a safe and sound institution with no cause for supervisory 

concern, 3 signifies an institution with supervisory concerns in one or 

more areas, and 5 is the lowest rating, which signifies an unsafe and 

unsound bank with severe supervisory concerns. 

When the FDIC assesses bank insurance fees for a particular 

institution, it takes into consideration both the CAMELS component 

ratings and the composite rating. Lower ratings, signifYing a higher risk 

institution and a greater threat to the Defiosit Insurance Fund, can lead to 

a higher deposit insurance assessment, I 32 which in turn can affect net 

income. 

Specialty Examinations and Ratings. In addition to safety and 

soundness examinations, Federal bank regulators also conduct various 

specialty or secondary examinations targeting particular aspects ofthe 

1732 See page 3 - sample deposit insurance assessment invoice. 

http://www.fdic.gov/depositiinsurance/assessments/EV2Sample.pdf. 
521 


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347 

institutions they supervise. These specialty examinations, which are 

separate and distinct from safety and soundness examinations, are 

important in their own right, and focus on such areas as information 

technology (IT), trust operations, compliance with the Community 

Reinvestment Act (CRA), and compliance with consumer protection 

laws. 1733 

Each of these specialty examinations has its own unique rating 

system based upon an interagency agreement on what elements should 

be considered and how the rating should be calculated. For example, IT 

examinations produce ratings under a "Uniform Rating System for 

Information Technology"; trust examinations produce ratings under a 

"Composite Uniform Interagency Trust Rating" system; CRA 

examinations produce ratings under a "Community Reinvestment Act 

Rating" system; and consumer compliance examinations produce ratings 

under a "Uniform Interagency Consumer Compliance Rating" 

system. 1734 

These ratings are typically presented in the annual Report of 

Examination provided to a financial institution by its primary regulator. 

They are typically included in a section which lists all of the ratings 

assigned to the bank during the year. The specialty examination ratings 

are calculated and presented separately from the CAMELS component 

ratings which give rise to the bank's overall Composite Uniform 

Financial Institution Rating. In OCC Reports of Examination, for 

example, the ratings are usually presented in the following format: 

1733 According to the DCC, typical issues addressed by these specialty examinations are as 

follows: 

• Information Technology (IT) Examinations - evaluate IT-related risks including 

operations, infonnation security programs, and IT governance processes within supervised 

financial institutions and technology service providers. 

• Trust! Asset Management Examinations - determine if an institution's policies or 

administration of trust accounts has resulted in a contingent liability or estimated loss that 

could damage the institution's capitaL 

• Consumer Compliance Examinations - assess a financial institution's compliance with 

federal consumer protection laws and regulations. 

• Community Reinvestment Act (CRA) Examinations - ensure compliance with the CRA, to 

include meeting the credit needs of the community that the financial institution serves, 

including residents of low- and moderate-income neighborhoods. 

See DCC website, "Examinations: Overview," 

http://www.occ.gov/topics/examinations/examinations-overview/index~examinations~ 

overview.html 

11J4 712612006 DCC Report of Examination ofHBUS for the examination cycle ending March 

31,2006, DCC-PSI·00422079, at 4. [Sealed Exhibit.] 
522 


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348 

Ratings 

Composite Uniform Financial Institution Rating 

Component Ratings: 

Capital 

Asset Quality 

Management 

Earnings 

Liquidity Asset/Liability Management 

Sensitivity to Market Risk 

Uniform Rating System for Information Technology 

Composite Uniform Interagency Trust Rating 

Uniform Interagency Consumer Compliance Rating 

Community Reinvestment Act Rating. 1735 

While specialty examination ratings do not automatically or 

routinely affect either the CAMELS component or composite ratings, if 

a specialty examination identifies significant problems that are extensive 

enough to potentially affect the financial condition of the bank, 

including through the imposition of large civil money penalties, 

reimbursable violations, or reputational risk, it may contribute to a 

downgrade of one or more of the CAMELS component ratings which, in 

turn, may affect the composite rating. 1736 Downgrades to safety and 

soundness ratings due to problems identified through specialty 

examinations are not common, however, and are reserved for extreme 

cases. 

AML Examinations. An examination focusing on AML 

compliance is considered a specialty examination. Each ofthe Federal 

banking agencies has examiners specially trained to conduct AML 

examinations. AML examinations do not, however, produce a separate 

specialty rating, since no interagency agreement has produced an AML 

rating system. Instead, at Federal banking agencies other than the OCC, 

AML examination findings are generally addressed as one of the safety 

and soundness considerations in the Report of Examination (ROE) and 

included in the development of the bank's safety and soundness ratings. 

Typically, AML examination results impact the CAMELS management 

component rating, which may be downgraded if management fails to 

maintain an adequate AML program. 

1735 Id. 

1736 See, e.g., Federal Financial Institutions Examination Council~ "Unifonn Financial 

Institutions Ratings System," 61 FR 245, at 67021 (12/19/1996), 

http://www.gpo.gov/fdsys/pkg/FR-1996-12-19/pdf/96-32174.pdf 

("Generally, the impact of specialty area examination findings are reflected in the composite and 

Management component ratings."). 
523 


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349 

The CAMELS management component rating is designed to 

reflect the ability of bank management to adequately identifY, measure, 

monitor, and control problems and manage riskS. I

?3? Although AML 

compliance is just one factor in rating the management component, a 

bank's failure to maintain an adequate AML program can expose a bank 

to significant reputational risk, remedial costs, and civil money 

penalties. When such factors are present, Federal bank regulators 

normally take them into account when assigning the management 

component rating. If the management component is downgraded, it may 

also in certain circumstances lower the bank's overall composite rating, 

with potentially severe impacts on the financial institution's reputation, 

risk profile, and insurance assessment fees. 

In contrast to this approach, which is used by the Federal Reserve, 

FDIC, and NCUA, the acc does not treat AML examinations as a 

safety and soundness matter and does not routinely take AML 

deficiencies into account when assigning a bank's CAMELS 

management rating. Instead, the acc treats AML examinations as a 

matter of consumer compliance and includes consideration of AML 

deficiencies when determining an institution's consumer compliance 

rating. The acC's approach is explained more fully below. 

Violations of Law. In their supervisory programs, Federal bank 

regulators assign a high priority to the detection and prompt correction 

of violations of law. Such violations may involve statutory or regulatory 

requirements. Regulators typically list all significant violations oflaw 

(as opposed to isolated or technical violations) in the annual Report of 

Examination provided to a bank's board of directors. The board of 

directors, in turn, is charged with initiating prompt and appropriate 

corrective action. 

Listing one or more statutory or regulatory violations in a Report 

of Examination is not uncommon. They may result from bank 

management's unfamiliarity with the governing law, misinterpretation of 

the requirements, negligence, or willful noncompliance. The more 

egregious the nature of the violation, the more severe the repercussions 

may be. Willful noncompliance with statutory or regulatory 

requirements, for example, may result in civil money penalties against 

the bank or individual bank managers as well as removal actions against 

bank personnel, officers, or directors. Violations are also viewed as 

significant adverse reflections on bank management capabilities and 

may lead to a downgrade ofthe CAMELS management component 

rating. The underlying causes ofthe violation playa significant role in 

that assessment. 

1737 See, e.g., Federal Financial Institutions Examination Council, "Unifonn Financial 

Institutions Ratings System," 61 FR 245, at 67021 (12119/1996), 

http://www.gpo.gov/fdsys/pkg/FR-1996-] 2-19/pdf/96-32174.pdf. 
524 


76061.890

350 

Enforcement Actions. If a bank regulator becomes concerned 

about the condition of a financial institution, it has a wide range of 

informal and formal enforcement actions that could be used to require 

corrective action. Informal actions are viewed as voluntary actions and 

include requesting that the financial institution issue a safety and 

soundness plan, board resolution, or commitment letter pledging to take 

specific correction actions by a certain date. Another informal action is 

a memorandum of understanding, which is a signed agreement by both 

the regulator and the board of directors addressing various actions that 

the financial institution will take to correct its problem areas. Informal 

actions are nonpublic and are not enforceable in court. On the other 

hand, formal enforcement actions are legal proceedings which can 

include issuing a consent order or a cease and desist order requiring the 

financial institution to stop an unsafe or unsound practice or to take 

affirmative action to correct identified problems; imposing a civil money 

penalty; suspending or removing personnel from the financial 

institution; suspending or banning personnel from the banking industry; 

revoking the bank charter; or referring misconduct for criminal 

prosecution. Formal actions are disclosed to the public and are 

enforceable in court. Failure to comply with an order can subject the 

bank to civil money penalties. 

With respect to AML enforcement, in July 2007, the Federal bank 

regulators issued joint interagency guidance entitled, "Interagency 

Statement on Enforcement of Bank Secrecy Act! Anti-Money 

Laundering Requirements.,,1738 This guidance sought to promote 

consistent implementation of Section 8(s) of the Federal Deposit 

Insurance Act and Section 206(q) of the Federal Credit Union Act, both 

of which require Federal bank regulators to conduct AML examinations 

and identifY AML problems in Reports of Examination. Both sections 

also require Federal bank regulators to issue a cease and desist order in 

the event that a bank fails to provide or maintain an adequate AML 

program. The guidance affirms the Federal bank regulators authority 

and responsibility for enforcing AML requirements and use of cease and 

desist order to correct identified problems. 

(3) OCC AML Oversight in General 

Because it oversees the largest and most complex banks operating 

in the United States, some of which operate affiliates in high risk 

jurisdictions, maintain accounts for high risk clients, or offer high risk 

products vulnerable to money laundering and terrorist financing, the 

OCC plays a crucial role in ensuring bank compliance with U.S. AML 

laws. 

1738 See 7119/2007 "Interagency Statement on Enforcement of Bank Secrecy Act/Anti-Money 

Laundering Requirements." reprinted in 8124/2007 FFIEC BSAJAML Examination Manual, at 

R-I to R-7, http://www.ffiec.govlbsa_amljnfobase/documents/BSA_AML_ Man_ 2007.pdf. 
525 


76061.891

351 

OCC Organization. The OCC oversees about 2,000 nationallychartered banks and savings associations and about 50 U.S. affiliates of 

foreign-owned banks. 1739 In 2011, the OCC's budget, which is paid for 

by assessments on the financial institutions it regulates, totaled about 

$875 million.I74o As of2011, about 3,700 OCC employees were 

stationed in 66 offices nationwide, organized into four districts known as 

the Northeastern, Central, Southern, and Western districts, with agency 

headquarters in Washington, D.C. I74I 

Several groups within the OCC contribute to AML oversight. 

Examiners with special expertise conduct the actual AML examinations, 

evaluate bank AML programs, and identifY AML deficiencies. They 

provide their findings to the Examiner-In-Charge at a particular financial 

institution. At large banks, if AML deficiencies are identified, the 

Examiner-In-Charge works with the OCC Department of Large Bank 

Supervision to evaluate the AML examination findings and direct efforts 

to ensure bank compliance with the law. Bank supervision personnel 

also work with counsel in the Enforcement and Compliance Department 

and the Legal Department to determine whether AML enforcement 

actions are needed and, if so, what actions to take. 

During most of the years reviewed by the Subcommittee, the OCC 

was headed by John C. Dugan who served as the Comptroller of the 

Currency until his five-year term expired in 2010. In August 2010, he 

was succeeded by John Walsh who served as Acting Comptroller until 

April 2012, when Thomas Curry was confirmed by the Senate to serve 

as the new Comptroller of the Currency. The second in command 

during most of the years reviewed was First Senior Deputy Comptroller 

and Chief Counsel Julie Williams. The head of the Department of Large 

Bank Supervision, which oversees the largest nationally-chartered U.S. 

banks and U.S. branches of foreign banks was Michael L. Brosnan. One 

of his chief deputies was Grace Dailey who helped oversee RBUS, until 

the end of 201 0, when she left that post for another, and was replaced by 

Sally Belshaw. Two other key OCC officials in AML enforcement were 

Daniel Stipano, Deputy Chief Counsel, and James Vivenzio, senior legal 

counsel for AML matters. In addition, the Director ofthe Enforcement 

and Compliance Department was Richard Stearns. 

OCC Examinations Generally. Much of the OCC workforce is 

devoted to conducting or supporting safety and soundness examinations 

1730 See 20 II aee Annual Report, at I, chart entitled "National Banking System at-a-Glance," 

http://www.occ.gov/pu blications!publications-by-type/annual-reportsl20 II AnnuaIReport.pdf; 

aee website, "About the aee," http://www.occ.gov/about/who-we-are/comptroller-of-thecurrencyibio-thomas-curry.html. 

1740 2011 aee Annual Report, at I, chart entitled "aee at-a-Glance," 

htlr:llwww.occ.gov/publications/publications-by-type/annual-reports/201IAnnuaIReport.pdf. 

174 2011 aee Annual Report, at I, chart entitled "aee at-a-Glance," 

http://www.occ.gov/publications/publications-by-type/annual-reports/201lAnnualReport.pdf 

.ld.; aee website, "About The aee," http://www.occ.gov/aboutlwho-we-are/district-and-fieldoffices/index~organization.html. 
526 


76061.892

352 

of the banks regulated by the acc. In general, for a large bank, the 

relevant acc district office assigns an Examiner-in-Charge (ErC) and a 

team of examiners to work on-site at the bank, on a ful\time basis under 

a continuous examination program. 

Under the acC's continuous examination program, the EIC is 

assigned to a particular institution for five years. At the five-year mark, 

the EIC is then assigned to another bank. The EIC is assisted by a team 

of examiners that are also assigned to the bank on a full-time basis, but 

do not have similar five-year term limitations. Members of the 

examination team may rotate to other banks at various intervals as 

needed. Regardless, examiners work at the bank year-round and should 

have a firm and immediate grasp on any issues and problems affecting 

the bank. 

Supervisory Strategy. The EIC is responsible for developing an 

annual supervisory strategy. The supervisory strategy is a prospective 

work plan for examining the bank, based on perceived risks. The 

strategy addresses supervisory areas of interest, including what targeted 

examinations will be conducted throughout the coming year. Targeted 

examinations address what are called "specialty areas," such as 

Information Technology, Consumer Compliance, Community 

Reinvestment Act, and Trust areas. The EIC develops the supervisory 

strategy, including strategies with respect to the specialty areas with 

input from examiners, called "team leads," who have lead responsibility 

for conducting the examinations in those areas. At the acc, AML 

compliance is not considered a separate specialty area, but is included 

within Consumer Compliance specialty examinations. The EIC 

ultimately presents the annual supervisory plan for approval to the 

deputy comptroller for Large Bank Supervision at acc headquarters in 

Washington. 

Targeted Examinations. Based on the supervisory strategy, a 

series of specialized or "targeted examinations" is conducted throughout 

the year. acc "Request Letters" are sent to a bank approximately 30 

days before the start of each targeted examination. Request Letters give 

the bank advance notice of the examination and include a list of 

requested items that the bank should assemble for the examiners to 

review at the start of the examination. 

The examiners then conduct an examination of a specific area of 

the bank and write a "Conclusion Memorandum" summarizing their 

findings for the EIe. The examiners may also contribute to any related 

Supervisory Letter that the EIC sends to bank management and any 

relevant portion ofthe annual Report of Examination provided to the 

bank's board of directors. 
527 


76061.893

353 

Supervisory Letters are used by the OCC officially to infonn a 

bank ofthe findings of a specialty examination and issues that warrant 

management's attention. For large banks under continuous examination, 

the OCC typically uses Supervisory Letters to provide detailed 

infonnation to bank management about each specialty examination 

completed throughout the year. In addition to describing the 

examination findings, the Supervisory Letter can cite an apparent 

violation oflaw or a "Matter Requiring Attention" CMRA), meaning it 

requires the attention of the bank's senior management. Both violations 

and MRAs require prompt corrective action by the bank. 1742 A 

Supervisory Letter may also include one or more "recommendations" to 

enhance bank perfonnance or compliance in a particular area. Under 

OCC regulation and practice, "recommendations" do not require 

corrective action by bank management.174J OCC personnel told the 

Subcommittee that the Supervisory Letters written by EICs should 

accurately reflect the findings and criticisms in the conclusion 

memoranda written by the examiners.1744 

Before issuing a Supervisory Letter, the EIC is required to forward 

a draft of the letter to the OCC's Senior Deputy Comptroller in 

Washington for review. If the Supervisory Letter cites an AML 

violation or MRA requiring corrective action, it is referred to the Large 

Bank Review Committee CLBRC), which is comprised of three senior 

staff with AML expertise. 1745 The LBRC members are the senior legal 

counsel with AML expertise from the Legal Department, the Director 

for Bank Secrecy Act and Money Laundering Compliance, and the 

Director for Enforcement and Compliance. The LBRC was established 

in response to problems associated with the Riggs Bank AML 

examinations nearly ten years ago and is intended to ensure that OCC 

AML experts review field examiners' work and promote consistency in 

AML enforcement across large national banks. Until recently, it was 

optional for the LBRC to have the examiner's Conclusion Memorandum 

upon which the draft Supervisory Letter is based, but the LBRC has 

recently befun to require both before it will undertake a review of the 

draft letter. 746 

Report of Examination (ROE). On an annual basis, for each 

large bank, the OCC issues a Report of Examination (ROE), 

summarizing the condition of the bank. The ROE normally includes all 

of the bank's ratings arising from examinations of the bank's safety and 

soundness and specialty areas, as well as all cited violations of law and 

1742 Subcommittee interviews of Joseph Boss (1/30/2012) and James Vivenzio (3/15/2012). Mr. 

Vivenzio told the Subcommittee, "An exam cited with an MRA is a failure" on the part of the 

bank. 

1743Id. 

1744 Subcommittee interview of Joseph Boss (1130/2012) and Elsa de la Garza (1/9/2012). 

1745 Subcommittee interview of James Vivenzio (311512012). 

l7"rd. 
528 


76061.894

354 

significant MRAs. Depending on the circumstances, the issues noted in 

Supervisory Letters provided to bank management throughout the year 

mayor may not be referenced in the ROE. The ETC sends the ROE with 

a cover letter to the bank's board of directors so that it has a written 

record ofthe regulator's concerns. In addition, on an annual basis, the 

EIC attends a board meeting and presents the consolidated examination 

findings contained in the ROE to ensure the Board is fully informed 

about the bank's ratings, financial condition, and any deficiencies. 

AML Examinations. Like other Federal bank regulators, the 

OCC treats AML examinations as a specialty or targeted examination, 

and employs examiners with specialized AML expertise to conduct 

them. Upon completing an AML examination, the examiner is required 

to submit a Conclusion Memorandum to the Examiner-In-Charge ofthe 

bank describing the examination findings, any apparent violations of 

law, and possible recommendations, MRAs, or enforcement actions. 

The Examiner-In-Charge then sends a Supervisory Letter to the bank 

summarizing the AML examination findings and presenting any 

violations, MRAs, or recommendations. 

At the end ofthe year, when the OCC readies the annual Report of 

Examination (ROE) for the bank and summarizes examination findings 

made during the year, the OCC does not treat AML deficiencies as a 

safety and soundness matter. It does not discuss AML problems in the 

ROE's analysis of safety and soundness issues, nor does the OCC 

routinely take AML deficiencies into account when assigning the bank a 

CAMELS component rating for management or its overall composite 

rating. 

Instead, unique in the Federal Government, the OCC subsumes 

AML issues within its consideration of consumer compliance issues. 1747 

The ROE discusses AML compliance in a section entitled, "Consumer 

Compliance" and combines that discussion with consideration of the 

bank's compliance with consumer protection and civil rights laws. In 

addition, the OCC takes AML deficiencies into consideration when 

assigning a bank's consumer compliance rating, even though the 

Uniform Interagency Consumer Compliance Rating System does not 

include AML considerations when specifYing how to calculate that 

rating. 

Consumer compliance examinations normally cover a bank's 

compliance with consumer protection laws, such as laws requiring 

accurate disclosures of fees and interest rates, understandable mortgage 

1747 See 912007 "Comptroller's Handbook - Bank Supervision Process," Appendix D, at 89, 

http://www.occ.gov/publications/publications-by-type/comptrollershandbook! ydflbanksupervisionprocess. pdf, ("However, the OCC does incorporate into the 

consumer compliance rating examination findings pertaining to compliance with the Bank 

Secrecy Act (BSA). anti-money laundering (AML), and Office of Foreign Asset Control 

(OFAC)."). See also 2006-2010 OCC Reports of Examination for HBUS. [Sealed Exhibits.] 
529 


76061.895

355 

and credit card disclosures, and avoidance of unfair or deceptive 

practices. They also examine a bank's compliance with civil rights laws, 

such as prohibitions against discrimination against persons on the basis 

of race, religion, national origin, or other prohibited categories. 1748 The 

examinations test, for example, the adequacy ofa bank's operating 

systems to track compliance with consumer protection laws, the 

documentation it uses for consumer products, and the content of files 

related to such products as mortgages, consumer loans, and credit cards. 

Those considerations are key to ensuring bank compliance with 

consumer protection and civil rights laws, but do not include and have 

no relevance to compliance with AML requirements to guard against 

money laundering and terrorist financing. 

Like CAMELS ratings, consumer compliance ratin¥:s use a scale of 

1 to 5, with" 1" being the best rating and "5" the worst. 17 9 The 

consumer compliance rating is calculated and presented separately in the 

OCc's ROE, and typically has no impact on a bank's component 

CAMELS ratings or its overall composite rating and, thus, no impact on 

an evaluation of the bank's safety or soundness. 175o A bank's consumer 

compliance rating typically comes into play if a bank wants to open a 

new branch or expand into a new area of consumer lending; the OCC 

generally will not approve such an application, unless the bank has a 

consumer compliance rating of 1 or 2, showing that it is treating its 

customers fairly.1751 Those considerations are not relevant, however, to 

AML compliance issues. Additionally, there is no logical reason why 

poor AML compliance should lower a bank's consumer compliance 

rating when the two have virtually nothing in common. 

An internal OCC review raised these same concerns. In 2005, 

following the Subcommittee's report on the OCc's inadequate AML 

oversight of Riggs Bank, the OCc's Quality Management Division 

issued an internal report evaluating the OCc's AML supervision 

1748 The OCC has identified a long list ofrelevant laws, including the Truth in Lending Act, Fair 

Credit Billing Act, Consumer Leasing Act of 1976, Fair Credit Reporting Act, Equal Credit 

Opportunity Act, Fair Debt Collection Practices Act, and Electronic Fund Transfers Act. See 

"Comptroller's HandbookError! Main Document Only. ~ Consumer Compliance 

Examination," Appendix A, "Uniform Interagency Consumer Compliance Rating System," 

http://www.occ.gov/publications/publications-by-type/comptrollershandbook(Jlaginatedi overviewl default.htm ?slart.t=overOOO 13 .htm. 

!749 See "Comptroller's Handbook- Consumer Compliance Examination," Appendix A, 

"Unifonn Interagency Consumer Compliance Rating System," 

http://www.occ.gov/publications/publications-by-type/comptrollershandbook! yaginated/overview/default. htm?startat=overOOO 13 .htm. 

1750 ace officials told the Subcommittee that, in some circumstances, the consumer compliance 

rating could be taken into account when evaluating a bank's CAMELS management rating, 

although that was not typical. Subcommittee interview of James Vivenzio (31l5/2012) and 

Joseph Boss (1/3012012). 

1751 See, e.g., 12 C.P.R. Section 5.13(a)(2); branch application for national banks, at 7, 

http://www.occ.gov/static/licensing/form-branch-relo-app-v2.pdf; Branches and Relocations, 

Comptrollers Licensing Manual, at 4, http://www.occ.gov/publications/publications-bytype/licensing-manuals/branches.pdf. 
530 


76061.896

356 

program.

1752 That report found that the interagency consumer 

compliance rating system was not designed to and did not address AML 

issues. It noted that the rating was "geared to more traditional consumer 

protection regulations, such as Regulation Z and Regulation B, but is 

silent relative to BSA/AML compliance issues.,,1753 The report also 

noted: "Since the consumer compliance rating system was developed as 

a FFIEC initiative, OCC cannot modifY the ratings outside ofFFIEC." 

The report recommended that the OCC work with the FFIEC to try to 

change the ratings system to incorporate AML issues, but seven years 

later, the ratings system still excludes consideration of AML issues, 

perhaps because no agency other than the OCC attempts to combine 

consumer compliance and AML concerns into a single rating. 

AML Violations. In addition to subsuming AML concerns within 

its consumer compliance rating system, the OCC also has a unique 

approach to citing AML violations in its Supervisory Letters and 

Reports on Examination (ROE). 

Like other Federal bank regulators, the OCC often includes a list of 

apparent violations oflaw in its annual Reports of Examination. Those 

violations span a wide range of banking laws and regulations, including, 

for example, consumer compliance concerns.1754 In the AML area, 

however, the Subcommittee has learned that the OCC has adopted a 

practice of limiting the types of AML violations it will cite either in a 

ROE or Supervisory Letter. 

Currently, all Federal bank regulators, including the OCC, will cite 

an apparent violation oflaw in a Supervisory Letter or ROE if the 

regulator determines that a financial institution's entire AML program 

has failed. For the OCC, that citation would be an apparent violation of 

31 U.S.C. § 53l8(h)(I) and the OCC implementing regulation, 12 C.F.R. 

Section 21.21 (b)( 1). On the other hand, if the OCC were to determine 

that a bank failed to comply with one ofthe four mandated components 

of an effective AML program - described earlier as internal controls, an 

AML compliance officer, AML training, and independent testing - the 

Subcommittee has been told that, contrary to all other Federal bank 

regulators, the OCC generally will not cite a violation of one of the 

individualized program components, even though each component has 

its own statutory basis. For example, if a bank failed to provide 

adequate AML internal controls, Federal bank regulators other than the 

1752 5/1812005 "Bank Secrecy Act/Anti-Money Laundering Supervision," prepared by OCC 

Quality Management Division, HSBC OCC 2495056. 

http://www.aba.com/Solutions/Compliance/Documents/ 

cd8a83ee7a934b4ab75e7Ia4fae6813aBSAAMLOCCQMD.pdf. 

1753 Id. at 7. 1754 7/26/2006 OCC Report of Examination for HBUS, OCC-PSI-00422079, at 2-3 (citing 

violations of the Equal Opportunity Act and Consumer Protections for Depository Institution 

Sales ofInsurance regarding disclosures). [Sealed Exhibit.] 
531 


76061.897

357 

OCC would cite the bank for violating 31 U.S.C. § 53 I 8(h)(I)(A). In 

contrast, the OCC routinely forgoes the citation of violations of the 

individual AML program components, instead typically designating 

such a deficiency as a Matter Requiring Attention (MRA) by the 

bank. 1755 

To examine the difference in the approach of the OCC versus other 

Federal banking agencies, the Subcommittee reviewed five years of 

reports compiled by the U.S. Treasury's Financial Crimes Enforcement 

Network (FinCEN) which, among other matters, track the AML 

statutory violations cited by the agencies. 1156 Over the five year period 

from 2007 to 20 I 1, the FinCEN reports show that the OCC conducted 

about 6,600 examinations and cited pillar violations only 16 times. In 

comparison, the Federal Reserve conducted about 4,800 examinations 

and cited pillar violations 159 times. The FDIC conducted about 12,800 

examinations and cited pillar violations 714 times. The OCC approach 

is out of alignment with that of its peers. 

Treating the failure of an AML pillar component as an MRA rather 

than an AML violation sends a more muted message about the 

importance ofthe AML deficiency and the need to correct it in a prompt 

manner. A matter requiring "attention" simply does not have the same 

urgency as a statutory "violation." In addition, citing a violation oflaw 

when one critical component ofa bank's AML program is inadequate 

sends a strong message to management that its AML program is 

deficient, does not meet minimum statutory requirements, and requires 

remediation to ensure compliance with all four statutory requirements. 

AML Enforcement Actions at Large Banks. When the OCC 

identifies AML deficiencies at a bank, it can use infonnal or formal 

enforcement actions to compel the bank to correct the deficiencies and 

strengthen its AML controls. 

Informal actions include nonpublic commitment letters, board 

resolutions, or memoranda of understanding in which the bank makes 

written commitments, with fixed deadlines, to take specific actions. To 

take an informal action against a large bank, an Examiner-in-Charge 

must obtain the approval of the Large Bank Supervision Department in 

1755 One OCC senior legal counsel specializing in AML matters told the Subcommittee that the 

oce "will not cite pillar violations" and instead lists them as MRAs which are not enforceable 

in court. He said that the ace uses the same approach when repOliing AML examination 

lindings to FinCEN, describing the OCC's repOlting as "cleaner" and not "cluttered with 

component violations" like the other agencies. Subcommittee interview of James Vivenzio 

(31l5/2012). 

1756 See "'Federal Banking Agency Bank Secrecy Act Compliance Examination: Consolidated 

Quarterly Report," (2001-2011), prepared by FinCEN, using data supplied by the OCC, Federal 

Reserve, FDIC, NCVA and the Office of Thrift Supervision, PSI-FinCEN-04-0063-296 [Scaled 

ExhibiL]; 7/2012 chart, "Bank Secrecy Act Pillar Violations 2007-2011," prepared by the 

Pennancnt Subcommittee on 1nvestigations. 
532 


76061.898

358 

Washington. While these agreements are not enforceable in court, they 

can provide quick and effective tools to produce reforms. The OCC, 

however, disfavors the use of informal actions in AML cases, and has 

taken only eight informal enforcement actions against large banks for 

AML deficiencies since 2005. 1757 

To take a formal enforcement action against a large bank, such as a 

Cease and Desist Order, the Examiner-in-Charge must submit a 

recommendation to the OCC's Washington Supervision Review 

Committee (WSRC).1758 The WSRC is comprised of senior managers in 

the agency and acts as an advising body to the Senior Deputy 

Comptroller. It was established to promote consistency in the agency's 

application offormal enforcement actions. To present a 

recommendation, the Large Bank Supervision Department and the Legal 

Department prepare pertinent examination information and a 

memorandum for the WSRC. Counsel from the Enforcement and 

Compliance Division also participates. The WSRC ultimately 

determines whether a program violation can be supported and cited, 

which would also require the OCC to issue a Cease and Desist Order. 

According to the OCC, from 2005 to 2011, the OCC issued 43 

Cease and Desist Orders against both large and smaller sized banks with 

AML deficiencies, compared to 2 by the Federal Reserve and 52 by the 

FDIC, and assessed $124 million AML-related civil money penalties, 

accountin9 for 62% of the total penalty assessments by Federal banking 

agencies. 1 59 At the same time, the statistics also indicate that the OCC 

is not resolving AML problems at an early stage but, as with HBUS, 

may be allowing AML problems to accumulate until they necessitate 

severe enforcement action. 

The interagency guidance on AML enforcement provides all 

Federal banking agencies with guidelines on the use of formal 

enforcement actions to ensure bank compliance with AML laws, but 

does not offer any guidance on the use of informal actions. Among 

other provisions, the guidance states that if a Supervisory Letter contains 

an identical AML violation or MRA that was not corrected since the 

prior examination, typically referred to as a "repeat" violation or MRA, 

the agenc6' must issue a formal enforcement action to require corrective 

action. 176 Under a 2004 Memorandum of Understanding between 

FinCEN and Federal bank regulators, FinCEN must be notified of, 

1757 Subcommittee briefing by acc legal counsel (711312012). 

1758 See, e,g., "Process for Taking Administrative Enforcement Actions Against Banks Based on 

BSA Violations." OCC 2005-45, Attachment, Appendix A to OCC 2004-50, OCC-PSI00176030. 

1159 Subcommittee briefing by OCC legal counsel (711412012). 

1760 See 711912007 "Interagency Statement on Enforcement of Bank Secrecy Act! Anti-Money 

Laundering Requirements," in the Federal Financial Institutions Examination Council's Bank 

Secrecy Act/Anti-Money Laundering Examination Manual, Appendix R, at R-4 ("Failure to 

correct a previously reported problem with the BSA Compliance Program"). 
533 


76061.899

359 

among other things, all AML-related formal and informal enforcement 

actions taken with respect to a particular bank. 1761 

B. OCC Oversight of HBUS 

RBUS is located within the OCC's Northeastern District which is 

currently headed by Deputy Comptroller Toney Bland. The OCC 

Examiner-in-Charge of HBUS was Anthony DiLorenzo from 2004 until 

2008, when his term expired, and he was replaced by Sally Belshaw. 

Ms. Belshaw served as the HBUS Examiner-in-Charge until December 

2010, when she was promoted to Deputy Comptroller for Large Bank 

Supervision. 1762 The current OCC Examiner-In-Charge at RBUS is Kris 

Mcintire. 

(1) Chronology of OCC AML Oversight of HBUS 

The OCC has been the primary regulator ofHBUS since July 

2004, when it inherited oversight of a bank already subject to a formal 

enforcement action to strengthen its AML program. HBUS has been 

criticized at times for poor AML controls for over the past decade, but 

until 2010, the OCC failed to take any enforcement action to compel the 

bank to implement an effective AML program. 

Inheriting an AML Problem. Over the past 30 years, HBUS, 

through its predecessor banks, has changed its bank charter three times, 

switching between OCC and Federal Reserve oversight in 1980, 1993, 

and 2004. 1763 The first switch took place in 1980, when HSBC acquired 

51 % control over Marine Midland Bank in New York. Marine Midland 

Bank was then a state-chartered bank, a member ofthe Federal Reserve 

System, and subject to oversight by both the New York State Banking 

Department and the Federal Reserve. In connection with the 1980 

acquisition, however, it converted its charter to a national bank subject 

to oversight by the OCC. By 1987, HSBC had assumed 100% control of 

the bank. In 1990, the OCC downgraded the bank's CAMELS 

composite rating, which remained unchanged through 1993. 1764 On 

December 31, 1993, Marine Midland switched back to a state-chartered 

bank in New York subject to Federal Reserve supervision. After its first 

examination, the Federal Reserve upgraded its rating. 1765 

1761 See Memorandum of Understanding between FinCEN and bank regulators, 

http://www.ffiec.govlbsa _ami jnfo base/documents/FinCEN _ DOCs/Memo _Understand _ Sept04. 

pdf. 

762 See 12/131201 0 "OCC Announces Changes to the Its Large Bank Supervision Leadership 

Team;' OCC press release NR 2010-140, http://www.occ.gov/news-issuances/news. 

releases/201 0/or-occ-20 1 0-140.html. 

1763 See the Federal Reserve's National Infonnation Center, 

http://www.ffiec. gov/nicpubweb/nicweb/lnstitutionHistory.aspx?par ID _ RS SD~413 208&par DT_ 

END~99991231. 

1764 See 1/19/1990 and 5/31/1993 OCC targeted examinations. [Sealed Exhibits.] 

1765 See 3/3111994 Federal Reserve Bank of New York examination conducted jointly with the 

New York State Banking Department. [Sealed Exhibit.] 
534 


76061.900

360 

Six years later, in 1999, Marine Midland Bank acquired two more 

banks and renamed itselfRSBC Bank USA, N.A. (RBUS). In 2003, 

RBUS was cited by both the Federal Reserve and New York State 

Banking Department for maintaining an inadequate AML program. 1766 

Regulators cited fundamental, wide-ranging problems, including 

ineffective monitoring of wire transfers and monetary instruments, 

ineffective recordkeeping and reporting of currency transactions, 

inadequate customer due diligence and enhanced due diligence, and a 

failure to report suspicious activities. The Federal Reserve noted that 

AML deficiencies identified in prior examinations had not been 

corrected, that bank management was reactive rather than a proactive 

with respect to its AML program, and that the compliance function had a 

lack of influence as evidenced by ongoing, uncorrected problems. 1767 

On April 30, 2003, both regulators entered into a formal agreement with 

the bank requiring it to "upgrade and improve" its AML internal 

controls. 1768 The agreement required: 

"0 Development of a compliance program, 

o An effective system and methodology related to monitoring 

efforts, 

o A system for evaluating suspicious transactions, 

o A customer due diligence program, and 

o The development and implementation of appropriate risk 

assessments." 1769 

On March 22, 2004, while this formal enforcement action was still 

unfolding, RBUS announced its intention to once more seek a national 

bank charter from the OCe. On July 1, 2004, after acquiring Republic 

Bank Delaware, RBUS changed its charter a third time and again 

became a national bank subject to oversight by the OCe. As a condition 

to approval of its new national charter, RBUS agreed to comply with the 

provisions of the 2003 agreement requiring AML improvements. 

RBUS, thus, began its tenure with the OCC operating under an 

agreement requiring it to address a host of AML deficiencies. 

Terminating the AML Agreement Despite 30 MRAs. The OCC 

produced its first Report of Examination (ROE) for RBUS less than a 

year later. 1770 The ROE covered examinations conducted through March 

31, 2005. It noted as the first Matter Requiring Attention of the bank its 

obligation to implement the AML requirements in the 2003 agreement 

and concluded that the bank had made significant progress. The ROE 

stated that RBUS had already "developed a written Anti-Money 

1766 See 12/3112002 Federal Reserve Bank of New York examination conducted jointly with the 

New York State Banking Department. [Sealed Exhibit.] 

1767 Id. 

1768 OCC Report of Examination of HBUS, for the examination cycle ending March 31, 2005, 

OCC-PSI-00I07637, at 10-11 (describing the formal agreement). [Sealed Exhibit.] 

1769 Id. at 10. 

177{) Id. 
535 


76061.901

361 

Laundering (AML) program, including a system of internal controls" 

and established an "AML Oversight and Control Group ... responsible 

for maintaining enterprise wide AML policies and procedures, 

identifYing red flags and establishing transaction monitoring criteria." It 

stated that the bank had "[i]mplemented controls [that] provide for 

effective monitoring of various transactions throughout all departments 

of the bank ... for both non-customers and customers ... designed to 

identifY unusual and/or suspicious activities." It stated that HBUS had 

"enhanced monitoring abilities through the Customer Activity 

Monitoring Program (CAMP) system." The ROE also stated that HBUS 

had established a "written Customer Due Diligence program" which 

included procedures to "ensure the identification and timely, accurate, 

and complete reporting of all known or suspected violations of law 

against or involving the bank, to law enforcement and supervisory 

authorities." It said that HBUS had also "created risk rating criteria to 

identifY categories of customers whose transactions and banking 

activities pose heightened risk of money laundering and other illegal 

activities." It noted that the bank operated an Investigative Control and 

Reporting Office and a Financial Intelligence Group to conduct 

enhanced due diligence. 

The ROE concluded: "OCC examiners reviewed compliance with 

the agreement, and found the bank to be in technical compliance with 

the requirements." It said that termination of the formal agreement 

would be considered following targeted AML examinations of certain 

high risk areas in the bank. 177 I Given the breadth and depth of the AML 

problems depicted in the 2003 agreement signed less than a year earlier 

and the relatively short time that the bank had to correct its AML 

deficiencies, the ROE's positive statements were surprising. 

Over the next year, until early 2006, OCC AML examiners 

completed seven AML examinations at HBUS. The examinations 

reviewed multiple HBUS departments with higher risk activities, 

including Embassy Banking, Global Banknotes, Foreign Correspondent 

Banking, wire transfers, and International Private Banking. Each of the 

examinations identified significant AML deficiencies. The problems 

included noncompliance with the bank's AML policies (4 of7 exams), 

weak monitoring procedures (5 of7), weak customer due diligence 

procedures (5 of7), inadequate written policies requiring revision (6 of 

7), and untrained staff (5 of7). For example, the examination of the 

Global Banknotes department found that customer information was 

missing from a number of files and that a number of banknotes clients 

were not being monitored at all. l772 The examination of the bank's wire 

transfer operations found that monitoring was being conducted on a 

1711 Id. at 11. 

1772 6120/2005 ace Supervisory Letter to HBUS on Global Banknote Examination, aee-PSI00107505. [Sealed Exhibit.] 
536 


76061.902

362 

manual rather than automated basis, and identified one trust account that 

"had a significant amount of wire transfer activity in a short period of 

time and involved wire transfers to entities and/or individuals from high 

risk geographies," had undergone no monitoring, and whose 

accountholder had not received an enhanced due diligence review. l773 

The examination ofthe Embassy Banking department found over a 

dozen incidents of suspicious activity involving one embassy account 

over eight months, yet the bank had failed to close the account, despite 

an HBUS policy requiring closure in that circumstance. 1774 The 

International Private Bank examination found 540 high risk accounts 

that needed annual reviews that had yet to be completed; account 

reviews whose conclusions were not consistently supported; and high 

risk bearer share accounts whose shares were not under bank control and 

posed a risk that the bank was unaware of the true account owners. 1775 

When viewed together, the examinations identified systemic AML 

problems, a situation consistent with the extensive AML enforcement 

action instituted by the Federal Reserve and New York Banking 

Department. Many ofthe problems cited in the OCC examinations, 

including weaknesses in customer due diligence and monitoring, were 

prominent features of the 2003 agreement. In response to the AML 

examination findings, the OCC Examiner-in-Charge sent Supervisory 

Letters which, together, identified 30 Matters Re~uiring Attention 

(MRAs) requiring corrective action by HBUS. 177 Despite issuing over 

30 MRAs in just over 12 months, on February 6, 2006, the OCC 

1773 lI23/2006 acc Supervisory Letter to HBUS on Wire Transfer Examination. aCC-PSI00107522. [Sealed Exhibit.] 

1774 11/23/2005 acc Conclusion memorandum "BSAI AML Examination - HSBC USA 

International Private Bank," aCC-PSl·01258252; 1130/2006 acc Supervisory Letter to HBUS 

on Embassy Banking Examination, aCC·PSl·00107529, [Sealed Exhibits,] 

1775 1/31/2006 acc Supervisory Letter, "International Private Banking BSAI AML 

Examination," aCC·PSI·00I07537·542, [Sealed Exhibit.] 

1776 The 30 MRAs required corrective action to address weak AML monitoring procedures, weak 

AML due diligence, inadequate AML training, and inadequate AML policies, Monitoring 

problems were noted, for example, in all four Supervisory Letters issued in January 2006, See 

1117/2006 acc Supervisory Letter to HBUS on Foreign Correspondent Banking, aCC·PSI00000295·301, at 299·300 (Monitoring is weak and is not detecting patterns of activity "below 

system parameters" and monitoring wire transfers is a "manual process and therefore subject to 

inefficiencies and potential errors"); 1/23/2006 ace Supervisory Letter to HBUS on Wire 

Transfers, aCC·PSI-001 07522·528, at 526 ("[T]he effectiveness of automated monitoring 

through CAMP is diminished in the absence of effective investigations of alerts that the system 

generates,"); 1/3012006 acc Supervisory Letter to IlEUS on Embassy Banking, aCC·PSI· 

00107529·536, at 534 ("Embassy Banking Compliance management must ensure that high·risk 

and Special Category of Client (SCC) accounts are monitored and reviewed on a consistent and 

frequent basis,"); 1/3112006 acc Supervisory Letter, "International Private Banking BSNAML 

Examination," aCC·PSI·00I07537·542, at 540-541 ("Management must establish standards for 

CAMP alert reviews that require well·documented reasons for conclusions"" [EJxisting policies 

and procedures governing PUPID do not provide for adequate identification, monitoring and 

controlling of the risk inherent in such activity .. " [T]here are no procedures in place to ensure 

activity logs are kept current on a scheduled basis, To effectively manage, monitor and report the 

potential risks associated with PUPID activity, logs must be revised to distinguish funds transfers 

payable to the account holder initiating the transfer, from those payable to a third·party nonaccount holder. "), 
537 


76061.903

363 

determined that the condition of the AML agreement had been met and 

terminated the agreement. 1777 

AML Deficiencies Continue. On July 26, 2006, the OCC 

provided I-IBUS with another annual Report of Examination covering 

the period up to March 31, 2006. 1778 In the section entitled, "Matters 

Requiring Attention," the ROE included AML matters as an MRA, but 

provided this mixed message about the state ofHBUS' AML program: 

"During the year, we identified a number of areas lacking 

consistent, vigilant adherence to BSAIAML policies, and provided 

management with supervisory letters addressing specific areas in 

need of strengthening. Bank policies are acceptable. Management 

responded positively and initiated steps to correct weaknesses and 

improve conformance with bank policy. We will validate 

corrective action in the next examination cycle.,,1779 

Later in the report, in the section discussing the bank's "Consumer 

Compliance Rating," the ROE stated that HBUS had "a satisfactory 

BSA compliance program," that its controls were generally effective, 

and "no violations oflaw were noted." It also stated: "However, each 

examination resulted in MRAs, typically non-adherence to internal 

policies and procedures.... This recurring pattern is listed as a Matter 

Requiring Attention in this Report of Examination.,,178o The ROE also 

criticized an internal group dedicated to testing AML compliance, the 

Compliance Review Unit, which, according to the ROE, was 

understaffed, performed weak analysis, and needed to be revamped. 

HBUS' typical response to these examinations was to develop 

AML policies and procedures in response to the specific AML problems 

identified by the OCe. Those policies and plans often were narrowly 

targeted, and later examinations found that bank personnel sometimes 

failed to implement or comply with them. 

A year later, on July 24, 2007, the OCC's annual Report of 

Examination contained a more negative assessment. 1781 This report 

covered examinations conducted through March 31,2007. The letter 

transmitting the ROE stated: 

"A number of business areas continue to lack vigilant adherence to 

BSAIAML policies. Supervisory letters issued during the year 

highlighted a number of thematic deficiencies in the execution of 

1777 7/2612006 OCC Report of Examination ofHBUS. for the examination cycle ending March 

31.2006, OCC-PSI-00422079, at 5. [Sealed Exhibit.] 

177' 7/2612006 OCC Report of Examination ofHBUS, for the examination cycle ending March 

31,2006, OCC-PSI-00422079. [Sealed Exhibit.] 

1779 rd. at 2. 

1730 Id. at 12. 

17&! 7/2412007 OCC Report of Examination ofHBUS, for the examination cycle ending March 

31, 2007, OCC-PSI-00304077. [Sealed Exhibit.] 
538 


76061.904

364 

BSAI AML policies and procedures at the business level. 

Management continues to respond positively to correct weaknesses 

noted, and to improve conformance with bank policy. However, it 

remains critical that sound policies adopted by the Board and 

management are executed consistently in the business lines.,,!782 

In the report itself, the section entitled, "Matters Requiring Attention," 

included this MRA: 

"During the past year, examiners identified a number of common 

themes in that businesses lacked consistent, vigilant adherence to 

BSAIAML policies. Bank policies are acceptable; however, the 

execution of these policies in the various business lines requires 

strengthening. Management continues to respond positivel~ and 

initiated steps to improve conformance with bank policy."! 83 

The MRA, which called for "strengthening" the "execution" of AML 

policies in "the various business lines," provided a general instruction to 

pay more attention to AML compliance. 

A second MRA was more specific and issued a warning about the 

need to strengthen AML controls on HBUS pouch services, meaning 

bank services to clear monetary instruments from abroad, including bank 

checks, money orders, and travelers cheques.!784 The MRA stated that 

pouch services "facilitate easy movement of funds, and are favored by 

persons who transfer illegal and terrorist funds." It noted that pouch 

services were being provided by multiple HBUS business lines. The 

ROE described the pouch examination as having "resulted in serious 

concerns related to weak policies, procedures, systems and controls ... 

inferior to BSAIAML controls in other areas of the bank." The ROE 

also stated that "remedial attention is warranted," and warned that 

ongoing inadequate AML controls over pouch activities "could 

potentially subject the bank to undue reputation risk and/or lead to 

BSAlAML violations.,,1785 

By the end of 2007, the OCC completed 21 AML examinations, 

many of which identified serious AML problems. 1786 Many of these 

examinations identified the same serious problems noted in earlier 

examinations, some of which cut across business lines. The 

examinations include AML issues in the London Banknotes office, 

Corporate and Institutional Banking, Retail Banking, Pouch Services, 

and Investment Banking. The examination that identified the most 

serious AML deficiencies, and which was included as an MRA in the 

1782 Id. at 2. 

1783 Id.at I. 

178' Id. 

1785 Id. See also the discussion orthe bank's Consumer Compliance Rating, at 12. 

1786 Eight of the 21 examinations were limited to following up on corrective actions promised 

earlier, all of which were found to have been carried out. 
539 


76061.905

365 

annual ROE, related to pouch services which seemed to be operating 

without any AML controls. The pouch examination cited insufficient 

AML policies and procedures, a lack of monitoring for suspicious 

activities, inadequate AML controls and training, and inade9uate 

independent testing of pouch services for AML compliance. 787 

Examples of potentially suspicious activity included sequentially 

numbered travelers cheques endorsed by the same exchange house and 

processed through several cash letters; a transaction that included a 

starter check for $105,000; and $130,000 in sequentially numbered 

travelers cheques presented in bearer form with the payee line left 

blank. 1788 oee examiners initially recommended that a formal 

enforcement action be taken to effect corrective action in the pouch area, 

but no formal or informal action was taken. 1789 

The 21 examination reports and the Supervisory Letters that 

followed identified numerous AML deficiencies, including 

noncompliance with bank policy, poor monitoring, weak to nonexistent 

due diligence reviews, inadequate policies requiring revision, and 

untrained staff. Altogether, from February 2006 to December 2007, the 

Supervisory Letters identified another 34 AML MRAs, but no violations 

were identified or enforcement actions taken. 

AML Deficiencies Displaced by Financial Crisis. On July 15, 

2008, the oee issued its annual Report of Examination for HBUS, 

summarizing examination activity conducted through March 31, 

2008. 1790 Despite referencing a troubling AML examination involving 

the bank's Embassy Banking department, described below, for the first 

time since 2004, the ROE did not contain any MRA related to AML 

concerns. This development may have been due, in part, to the 

1787 2/23/2007 OCC "Conclusion memorandum for HSBC Middle Market BSN AML 

Examination." OCC-PSI-01263216; 4/10/2007 OCC Conclusion memorandum "BSA/AML 

Examination - HSBC. USA, NA - Pouch Activities", OCC-PSI-00899202 (reviewing pouch 

activities at the International Private Bank, Domestic Private bank, retail banking, and Payments 

and Cash Management business units). [Sealed Exhibits.] 

17B8 ld. at 208. 

1789 Subcommittee interview of Joseph Boss (1/3012012), Elsa de la Garza (1/912012), and 

Anthony DiLorenzo (312212012). Upon receipt of the recommendation, the Examiner-in-Charge 

asked the AML examiners to prepare an analysis of whether the proposed enforcement action, a 

Cease and Desist Order, met OCC enforcement standards. The AML examiners concluded that, 

despite the serious AML deficiencies, the problems in the pouch area did not rise to the level of a 

violation oflaw and would be applied to a bank with a high composite rating for safety and 

soundness, and so did not meet OCC standards for issuing a Cease and Desist Order. See 

611412007 OCC memorandum. OCC-PSI-01298625; 7/312007 OCC memorandum OCC-PSI00877731. [Sealed Exhibits.] One examiner told the Subcommittee that although the pouch 

activity did not meet OCC enforcement standards, he felt a Cease and Desist Order was 

nevertheless warranted at the time. Subcommittee interview of Joseph Boss (1/3012012). The 

deputy head of Large Bank Supervision told the Subcommittee that she did not recall being 

infonned about the enforcement recommendation or seeing the Conclusion Memorandum that 

laid out the problems in the pouch area at I1BUS. Subcommittee interview of Grace Dailey 

(6/15/2012). 

1790 0711512008 OCC Report of Examination ofHBUS, for the examination cycle ending March 

31,2008. HSBC OCC 3601119. [Sealed Exhibit.] 
540 


76061.906

366 

deepening financial crisis then sweeping the U.S. financial system, 

raising questions about virtually every major financial institution. 

HBUS' AML issues may have been displaced by OCC efforts to analyze 

the bank's safety and soundness, including each of its CAMELS 

components. Nevertheless, the ROE did reference ongoing AML 

concerns at the bank. 

The OCC letter transmitting the ROE included this paragraph 

about AML issues: 

"Although BSAJAML internal systems and controls are generally 

effective, the examination of the Government and Institutional 

Banking (GIB) operations disclosed a number of significant ... 

compliance concerns. Management developed a plan to address 

the issues, and we are presentl~ validating that the actions taken 

are addressing our concerns.'" 91 

Although the ROE contained no MRA related to AML concerns, in 

the section discussing HBUS' composite rating, the ROE again 

referenced the examination that uncovered serious AML deficiencies in 

the GIB department: 

"Our examination of BSAIAML practices in the Government and 

Institutional Banking (GIB) department during the first quarter of 

2008 resulted in a number of concerns including: inconsistent 

adherence to internal policies and procedures, inadequate systems, 

the need to strengthen controls, and inconsistent monitoring 

processes. Management is aware of the deficiencies and developed 

a plan to address the issues. We are in process of validating that 

the corrective action plan addresses our concerns 

satisfactorily.,,'792 

Although these AML deficiencies were discussed in the composite 

rating section, there is no indication they affected the rating which 

remained unchanged from the prior year. 

AML issues were discussed a third time in the section of the ROE 

analyzing HBUS' Consumer Compliance Rating. For the first time, this 

section included a lengthy discussion of the high AML risks incurred by 

HBUS' banking operations. The ROE stated: 

"BSAIAML examinations were conducted in Middle Market, 

Government and Institutional Banking, Corporate Trust, 

Investment Banking, Customer Activity Monitoring Program, and 

London Banknotes follow-up. . .. 

1791 Id. at 2. 

1792 Id. at 3. 
541 


76061.907

367 

HBUS is the largest Embassy banking services provider. The bank 

is also active in the precious metals, jewelry, garment, and Middle 

Eastern carpets industries. HBUS has numerous accounts to 

Politically Exposed Persons and Money Service Businesses. The 

bank ranks in the top three banks in CHIPS and SWIFT wire 

transfer volume, and is a leader in global foreign correspondent 

relationships. As the U.S. dollar clearing bank for the Global 

HSBC network, HBUS maintains numerous relationships with 

institutions worldwide. ... The bank does business with numerous 

customers in both High Intensity Drug Trafficking Area and High 

Intensity Money Laundering and Related Financial Crime Area 

locations. HBUS provides pouch services through several business 

units. Historically, pouch services are vulnerable to money 

laundering risk." 1793 

Despite this recitation of the AML risks facing HBUS, the ROE stated 

that the bank's AML controls were "generally effective, with no 

violations noted." It also stated that "certain areas within GIB required 

strengthening." 1794 

Embassy Banking Examination. The ROE's multiple references 

to GIB, the Government and Institutional Banking department that 

housed the bank's Embassy Banking services, were included, because in 

January 2008, former GIB employees alerted the OCC to a host of 

problems in the Embassy Banking unit. HBUS had dramatically 

increased its Embassy Banking business, after the closure of Riggs Bank 

and the decision by Wachovia Bank to exit the business.1795 By January 

2006, the bank had over 2,500 embassy accounts with $485 million of 

deposits under management,1796 and the business continued to grow. 

The former employees described numerous problems, including 

apparent employee misconduct, inappropriate business transactions, 

noncompliance with bank policy, inadequate account monitoring, and 

erroneous and misleading regulatory and internal reports. 

Over the next few months in 2008, an OCC examination confirmed 

the allegations. 1797 The examination found, for example, that GIB had 

allowed two high risk embassy accounts involving Libya and Saudi 

Arabia to operate outside of restrictions specified in Memoranda of 

1193 Id. at 13-14. 1794 Id. at 13. 

1795 See 1130/2006 OCC Supervisory Letter regarding HBUS Embassy Banking, OCC-PSI00107529-736, at 529-530; "HSBC to Open D.C. Branch, Pursue Embassy Clients," Washington 

Post, Terence O'Hara (l 0/5/2004)( quoting Riggs spokesperson: "As a service to our remaining 

embassy clients, Riggs is working closely with HSBC to ensure a smooth transition."), 

httr:l/www.washingtonpost.comlac2/wp-dyn/A7285-20040ct4 ?Ianguage=printer. 

179 1130/2006 OCC Memorandum,"4Q05 Embassy Banking Examination," OCC-PSI00107529; 113012006 OCC Supervisory Letter to HBUS, OCC-PSI-00I07529. [Sealed Exhibit.] 

1797 10/8/2008 OCC Memorandum, "Royal Embassy of Saudi Arabia (RESA) March 2008 

Examination Conclusions," OCC-PS!-01434609; 4/3/2008 OCC Memorandum "Libyan 

Relationship Review," OCC-PSI-01434593; 5/20/2008 OCC Memorandum, "Government and 

Institutional Banking," OCC-PSI-00899215. 
542 


76061.908

368 

Understanding (MOU) established for each Embassy relationship. The 

examination found unacceptable levels of risk, inadequate account 

monitoring, and suspect transactions. One example involved a $20 

million wire transfer that was variously explained as needed to pay the 

expenses of Libyan prisoners in the United States and elsewhere, or for 

"legal expenses and consultation that will lead to the establishment of a 

bilateral agreement with the US for cooperation on judicial affairs that 

related to future prisoner transfers." 1798 The examination reported that 

when HBUS Compliance asked an Embassy Relationship Manager for 

information about one of the high risk accounts, it received insufficient 

explanations and, in some cases, the Relationship Manager took up to 

four months to obtain client responses. 

In addition, the examination found that Embassy Banking had been 

opening new accounts without notifying HBUS AML Compliance, 

which was against bank policy and led to unmonitored account activity. 

The OCC determined that two of five accounts opened for one high risk 

embassy relationship had not been disclosed to AML Compliance. It 

found that over 45 letters of credit for other Embassy Banking clients, 

ranging in amounts from a few thousand dollars to $3 million, were also 

undisclosed. Another problem was that Embassy Banking was 

executing transactions for persons who were not clients - so-called 

PUPID transactions that were Payable Upon Proper Identificationwithout logging in some ofthe transactions and without screening the 

transaction beneficiaries against OFAC's SDN list, in contravention of 

U.S. law. Still another problem was that Embassy Banking personnel 

had identified multiple instances of suspicious activity involving some 

accounts, but had not closed the accounts, despite an HBUS policy 

requiring closure under those circumstances. The OCC also identified a 

backlog of over 3,000 unreviewed alerts, some dating back to 2007, 

relating to potentially suspicious transactions in Embassy accounts. 

The OCC examiner concluded that orB's "AML program is not 

effective in identifying and mitigating risk, especially considering the 

nature of its clientele and the types of products and services it 

provides.,,1799 The examiner recommended issuance of a Cease and 

Desist Order requiring immediate corrective action and prohibiting new 

Embassy Banking accounts until AML controls were in place. The OCC 

decided, however, not to issue a Cease and Desist Order or take any 

other informal or formal enforcement action with respect to the Embassy 

Banking accounts. 1800 In May 2008, HBUS submitted an action plan to 

1798 4/3/2008 OCC Memorandum "Libyan Relationship Review," OCC-PSI-01434593, at 5. 

1799 5/20/2008 OCC Memorandum, "Government and Institutional Banking," OCC-PSI00899225. 

1800 The AML examiner told the Subcommittee he was not given any reason for OCC's inaction 

in this matter, but was simply told there would be no enforcement action. He said it was his 

understanding that the Examiner-in-Charge had discussed the matter with the deputy head of 

Large Bank Supervision in Washington before telling him: "Grace said there would be no 

C&D." Subcommittee interview of Joseph Boss (1/30/2012). The Examiner-in-Charge told the 
543 


76061.909

369 

the OCC and began addressing the AML deficiencies at GIB. A later 

examination was conducted to determine whether the GIB commitments 

were carried out and found that they were. In July 2008, the Report of 

Examination sent to HBUS acknowledged the AML deficiencies 

uncovered in Embassy Banking, but did not treat them as a Matter 

Requiring Attention by the I-IBUS board. 

AML Deficiencies Continue Amid Law Enforcement Inquiries. 

On July 6, 2009, the OCC sent HBUS the annual Report of Examination 

covering the period up to March 31, 2009. 1801 Like the prior year's 

ROE, it contained no Matter Requiring Attention related to AML issues. 

The letter transmitting the ROE noted, however, that AML concerns 

were ongoing nonetheless: 

"Compliance with BSAIAML remains a high priority and a key 

reputation risk. As part ofthe 'compliance transformation project,' 

this area is also undergoing significant change. The company has 

high-risk clients and businesses and the current leadership needs to 

be strengthened. Plans are underway to address this concern.,,1802 

This letter was the first to be signed by Sally Belshaw, who had replaced 

Anthony DiLorenzo as the OCC Examiner-in-Charge at I-IBUS, upon 

conclusion ofMr. DiLorenzo's five-year term. It was the fifth in a row 

to identifY AML compliance as a high priority issue. 

For the first time, the ROE contained a "Risk Assessment 

Summary" table which included a reference to AML issues. The table 

indicated that AML risk was "High," AML risk management was 

"Satisfacto~," and the aggregate AML risk at HBUS was "High" and 

"Stable.,,180 

Later in the report, in the section discussing the bank's "Consumer 

Compliance Rating," the ROE stated that HBUS' compliance risk was 

"high due to the bank's lines of business which offer several products 

historically associated with money laundering." It repeated much of the 

language from the last ROE describing the bank's high risk businesses 

and customers. It also indicated that HBUS needed to strengthen its 

AML leadership: 

"Although the BSAIAML program is effective overall, we recently 

highlighted the need to strengthen leadership in the area. When the 

Subcommittee that he did not recall talking to a superior about the matter, but thought he 

''probably did because it was a significant issue." Subcommittee interview of Anthony 

DiLorenzo (3/22112). The deputy head of Large Bank Supervision did not recall having a 

discussion about a Cease and Desist Order involving Embassy Banking at HBUS. Subcommittee 

interview of Grace Dailey (6115112). 

1801 6/0712009 OCC Report of Examination of HBUS, for the examination cycle ending March 

31,2009,OCC-PSI-00270034. [Sealed Exhibit.] 

1802 Id. at 2. 

1803Id. 
544 


76061.910

370 

BSA Director resigned in 2007 the role of the HBUS Compliance 

Director was expanded to include oversight of the BSAIAML 

program. The current Compliance Director has been in place since 

second quarter 2008. In addition to BSA responsibility in the U.S., 

the Compliance Director also has responsibility for Canada, 

Mexico and the Securities businesses. We believe that a complex, 

high-risk institution like HBUS needs a BSAlAML Officer who is 

highly qualified and experienced and have recommended that such 

a person be dedicated to the function. A search is underway.,,1804 

The discussion of AML leadership was prompted by the 2007 

departure ofHBUS' AML head Teresa Pesce after four years on the job, 

followed by the departure of the head ofI-IBUS Compliance, Carolyn 

Wind after seven years on the job. After Ms. Pesce left, Ms. Wind had 

served as both Compliance and AML head. Leslie Midzain was then 

hired to serve in both roles as well, serving as the bank's AML head 

even though her background was in Canada and she had no U.S. AML 

experience. In 20 I 0, the OCC would ask for her replacement due to her 

lack of AML expertise and would also criticize the weak AML 

leadership shown by the regional Compliance head, Janet Burak. In 

addition to AML leadership problems, the ROE noted that HBUS 

Compliance was undergoing a reorganization, and that the Compliance 

Review Unit, originally dedicated to AML independent testing, was also 

being reorganized and its mission expanded to other compliance issues. 

During 2008, the OCC completed six more examinations, one of 

which focused on reviewing corrective actions to prior problems. Of the 

remaining five, one involved additional work on the AML deficiencies 

at OIB's Embassy Banking unit.1805 Another focused on AML issues 

affecting the Payments and Cash Management (PCM) department which 

helped provide a variety of cash services to clients, including 

correspondent accounts. 1806 The PCM examination found fundamental 

flaws in its AML controls, including inadequate monitoring, poor review 

of account alerts, and suspicious transactions involving money service 

businesses. The PCM examination found, for example, that PCM 

"systems and controls are less than satisfactory and do not provide an 

appropriate level of monitoring for suspicious and unusual activity for 

all of the activities in the business unit." One example involved an 

account alert which found that a U.S. money service business was 

sending wire transfers through its l-IBUS correspondent account to an 

Ethiopian bank for credit to an account it held at that bank, in effect 

sending money to itself. The alert was reviewed, PCM personnel 

1804 Id. at 16. 

1805 8/14/2008 acc Memorandum, "Government and Institutional Banking Update," aCC-PSI00899227; 9/4/2008 acc Supervisory Letter to HBUS on GIB examination, aCC-PSI00107607. [Sealed Exhibit.] 

1806 1217/2007 acc Memorandum, "BSNAML Examination - Payment and Cash 

Management," aCC-PSI-01263586. [Sealed Exhibit.] 
545 


76061.911

371 

determined more information was needed, but the alert was closed and 

the transactions continued. 

Similar problems had been identified in a 2006 acc examination 

of foreign correspondent banking which resulted in an MRA requiring 

PCM to conduct a review of its money service business accounts. As a 

result ofthe 2008 examination, acc examiners recommended three 

MRAs, one of which directed PCM to conduct a review of its money 

service business accounts, which appears to be a "repeat MRA" from the 

2006 examination. Several months later, the acc Examiner-in-Charge 

sent a Supervisory Letter to HBUS including the three MRAs, but did 

not characterize the request for an account review as a "repeat MRA" 

that would necessitate an enforcement action, instead referring to 

"PCM's delay in initiating a special review for Money Services 

Businesses (MSB) type of entities, as required by a previous MRA, has 

resulted in increased risk." 1807 

A third examination in 2008, focused on HBUS Compliance 

Review Unit (CRU) which was dedicated to reviewing AML compliance 

at the bank. The examination found its work satisfactory but also 

directed HSBC's internal audit unit to test the CRU's workpapers for 

reliability and directed the CRU to conduct an immediate review of the 

PCM department which had not undergone an internal AML review for 

over three years. 1808 Additional examinations focused on AML issues at 

Card Servicesl809 and Banknotes offices in Singapore and Hong 

Kong. 1810 

In 2009, the acc conducted eight more AML examinations. 

Three followed up on the problems uncovered in connection with 

HBUS' pouch activities, Embassy Banking and PCM services. 1811 

Additional examinations assessed HBUS' aFAC compliancel812 and 

AML controls involving correspondent bankingl813 and private 

banking. 1814 Those examinations identified additional AML problems. 

1807 4/2112008 OCC Supervisory Letter HSBC-2007-24, "Payment and Cash Management 

BSAlAML Examination," OCC-PSI-00I07597. [Sealed Exhibit.] 

1808 4/912008 OCC Supervisory Letter to HBUS on CRU examination, OCC-PSI-00I07594. 

[Sealed Exhibit.] 

809211112008 OCC Memorandum, "Card Services Compliance Examination," OCC-PSI00938171. 

1810 61212008 OCC Memorandum, "SingaporelHong Kong Banknotes Examination," OCC-PSI00107603. 

1811 112212009 OCC Supervisory Letter HSBC-2008-16, "Pouch Service BSAlAML 

Examination," OCC-PSI-00I07615; 612412009 OCC Supervisory Letter HSBC-2009-10, 

"Global Institutional Banking BSAlAML Examination," OCC-PSI-00I07628. [Sealed Exhibits.] 

1812 1I20/2009 OCC Supervisory Letter HSBC-2008-41, "Office of Foreign Asset Control 

Examination," OCC-PSI-00000434. [Sealed Exhibit.] 

18lJ 313/2009 OCC Supervisory Letter HSBC-2008-34,"Correspondent Banking BSAIAML 

Examination," OCC-PSI-00I07618. [Sealed Exhibit.] 

1814 3/18/2009 OCC Supervisory Letter HSBC-2008-32, "Private Banking BSAIAML 

Examination," OCC-PSI-00000445; 9119/2008 OCC Memorandum "HSBC BSAIAML Private 

Bank Exam-File Review-Draft," OCC-PSI-01274467. [Sealed Exhibits.] 
546 


76061.912

372 

For example, the private banking examination concluded: "HSBe's 

Private Bank BSAI AML does not adequately manage the risks 

associated with DPB-NY/CA [Domestic Private Bank offices in New 

York and California] and IPB-NY [International Private Bank in New 

York]."I8I5 Supervisory Letters sent to HBUS described the AML 

problems, some of which had been detected in a 2006 examination of 

private banking, but made no mention of repeat MRAs that would 

require an enforcement action. 

Altogether in 2008 and 2009, the Supervisory Letters identified 12 

more MRAs in the AML field, but no informal or formal enforcement 

actions were taken. These 12 MRAs were on top of the 71 MRAs 

identified from 2005 to 2007. 

In the spring of2009, a new development intensified ace's focus 

on AML problems at HBUS. The acc was contacted by two Federal 

law enforcement agencies regarding separate Federal investigations into 

possible money laundering through accounts at HBUS. The first 

contact, in June 2009, was from the U.S. Department of Homeland 

Security's Immigration and Customs Enforcement (ICE) unit 

investigating possible laundering of illegal drug proceeds. I8I6 The 

second contact, around August or September 2009, was from a U.S. 

Assistant Attorney General in West Virginia investigating a Medicare 

fraud. 18l7 

Senior acc officials in Washington arranged to meet with the ICE 

representatives. an September 1,2009, the meeting took place in 

Washington and was attended by the acc Deputy General Counsel 

Daniel Stipano, Deputy Controller in charge of Large Bank Supervision 

Grace Dailey, acc senior legal counsel with AML expertise James 

Vivenzio, the acc AML examiners at HBUS, and the ICE 

representatives. I818 After the meeting concluded and the ICE 

representatives left, acc personnel continued to discuss supervision of 

HBUS. According to a memorandum summarizing the meeting, the lead 

AML examiner at HBUS informed the other meeting participants that, 

during his tenure at the bank, HBUS had been the subject of 83 AMLrelated MRAs, and he had twice recommended issuance of a Cease and 

Desist arder to compel the bank to strengthen its AML controls.I8I9 

1815 Id. 

lil6 See 9/29/2009 email exchanges between acc Jim Vivenzio, acc Joseph Boss. acc Teresa 

Tabor. acc Sally Belshaw, and others, "HSBC," aCC-PSI-00928756. 

1817 Subcommittee briefing by acc (3/15/2012). 

1818 See 9/29/2009 email exchanges between acc Jim Vivenzio, acc Joseph Boss, acc Teresa 

Tabor, acc Sally Belshaw, and others, "HSBC," aCC-PSI-00928756-758. 

18199/1/2009 Memorandum to Files from acc Examiners Joseph Boss and Elsa de la Garza, 

aCC-PSI-01416833. See also Subcommittee interviews of Elsa de la Garza (1/9/2012), Joseph 

Boss (l/30/2012), and James Vivenzio (3115/2012). 
547 


76061.913

373 

According to the meeting memorandum, Mr. Stipano "stated that he was 

unaware of the recent history ofHBUS and that he wanted a thorough 

review.,,182o 

After this meeting, the oee directed its AML examiners to draw 

up an investigative plan and expand an ongoing AML review to 

encompass a comprehensive review of the entire AML program at 

HBUS. On September 3, 2009, the aee sent a letter to HBUS 

informing it that a regularly scheduled AML examination of the 

Banknotes department that started in July and for which field work was 

completed in August 2009, was being expanded. 1821 Additional staff 

was added to the AML team. 

Expanded AML Examination. For the first time since the oee 

inherited HBUS from the Federal Reserve, it directed its AML 

examiners to conduct a holistic review ofHBUS' AML program, instead 

of focusing on AML issues in particular banking services or 

departments. The AML examiners quickly found fundamental problems 

related to the specific AML deficiencies identified over the years. This 

examination would continue throughout 2010. 

In March 20 I 0, the aee issued its first AML-related Supervisory 

Letter that cited HBUS for a violation oflaw, for failing to file 

Suspicious Activity Reports (SARs) in a timely manner. 1822 The 

Supervisory Letter stated that its AML examination had found that the 

bank had a backlog of over 17,000 alerts, in four business units, 

identifYing potentially suspicious activity that had not been investigated 

to determine whether a SAR should be filed. 1823 The oee determined 

that 98% of those alerts were generated in the "High Risk Monitoring 

Group," and 14% were six months or older. 1824 The oee gave the bank 

a deadline of June 30, 2010, to clear the backlog and instructed the bank 

to develop a risk-based system for reviewing and resolving those alerts. 

In addition to the backlog of alerts, oee examiners had found 

significant backlogs in the bank's handling of AML-related subpoenas 

and Section 314(a), and 314(b) requests for information from other 

banks, though those items were not specifically discussed in the 

Supervisory Letter. 1825 

1820 9/0112009 Memorandum to Files from Examiners Joseph Boss and Elsa de la Garza. at OCC· 

PSI·01416833. [Sealed Exhibit.] 

1821 On 912112009, the OCC sent HBUS a request letter for an extensive amount ofncw 

information on 25 Latin America·based institutions. There would be eight additional requests 

for more information through early February 2010. See 2/6/2010 HBUS email from Janet Burak 

to Brendan McDonagh, OCC·PSI·00787479. 

1822 3/10/2010 OCC Supervisory Letter HSBC 2010·03, "Backlog of Monitoring Alerts and 

Enhanced Due Diligence Requcsts," OCC-PSI-00851542. [Sealed Exhibit.] 1823 Id. 

18244128/2010 Report of Examination ofHBUS, for the examination cycle ending December 31, 

2009, OCC·PSI·00899872, at 7. [Sealed Exhibit.] 

1825 See "Background Information on HSBC's Alert Backlog as of the week of February 8, 

2010," prepared by OCC, OCC-PSI-01358494. 
548 


76061.914

374 

Shortly after delivering the Supervisory Letter, the OCC 

Examiner-in-Charge for HBUS Sally Belshaw and the head of Large 

Bank Supervision Grace Dailey met with the HSBC Group CEO 

Michael Geoghegan and the HNAH and HBUS CEO Brendan 

McDonough on April 20, 20 I O. In that meeting, the OCC officials 

informed the bank officials that the agency had identified serious AML 

deficiencies throughout the bank. According to a memorandum 

prepared by Ms. Belshaw summarizing the meeting, the discussion 

included the following: 

He [Mr. Geoghegan] asked when I thought things went bad. Grace 

and I described the spotty history of the bank relative to 

BSA/ AML compliance. The bank converted to a national charter 

with a Formal Agreement (Fed) that they addressed. We also noted 

the regular and frequent citing over the years ofMRAs in almost 

every examination we conducted. In those cases, management 

reacted to our findings and took corrective action. This, however, 

culminated in a systemic concern that we ultimately characterized 

as ineffective management (BSAIAML officer last year and now 

the compliance program overall). We believe that over the years, 

the people and program did not advance to keep pace with the risk. 

Systems enhancements are only now being achieved (and moved 

up in light of our concerns). Talent left the organization and was 

not replaced by people with sufficient technical skills to lead. 

Successionlbench strength for the compliance area is now 

inadequate. MIS has not evolved to permit early identification of 

risks/concerns. The backlog issue is a symptom of these 

management weaknesses .... 

We discussed several areas in some specificity including HBUS' 

policies/practices with respect to monitoring of affiliate activity 

(should be to same, not lesser, standard than other correspondents 

as is currently the case). We highlighted findings of weakness in 

KYC in several areas: bank notes, wire activity, domestic & 

international customers. We highlighted our recent 

concerns/questions about management's ability to address the 

backlog problem (and violation) given weaknesses we are seeing 

in data integrity in reports, quality of alert dispositioning, and the 

lack of independent review/oversight of that process. Our 

supervisory letter requires that backlogs be completely corrected 

by June 30th• We emphasized that not only must the number be 

addressed, but they must be effectively dispositioned (qualified 

reviewers guided by appropriate policy/process, adequate 

documentation, appropriate/timely SARs filed), and an ongoing 

system of controls must be in place to ensure the process is 
549 


76061.915

375 

sustainable. We will be requiring qualified, independent 

verification of that as part of the process.

1826 

2010 Report on Examination. On April 28, 2010, three months 

earlier than normal, the OCC delivered its annual Report of Examination 

(ROE) to HBUS, covering the period up to December 31,2009. 1827 Like 

the Supervisory Letter, this ROE cited HBUS for violating the Bank 

Secrecy Act due to its failure to file timely SARs, the only violation 

listed. 1828 The letter transmitting the ROE stated: 

"Perhaps most disconcerting, we have identified significant 

weaknesses in compliance, particularly in Bank Secrecy ActlAntiMoney Laundering (BSA/AML), that are likely to have costly 

financial and reputation implications. Management is responding 

to the concerns we are raising, but was not effective in preventing 

these weaknesses from becoming serious problems .... An 

extended examination is revealing serious breakdowns and 

violations. We will likely be requiring additional action to address 

this concern.,,1829 

In addition, for the first time, the ROE discussed HBUS' AML 

problems in the context ofHBUS' CAMELS management rating, 

although the rating remained unchanged from the prior year. The ROE 

noted that HBUS was the subject of several ongoing investigations that 

could damage its reputation, and the OCC was "increasingly concerned 

with weaknesses in compliance (particularly BSA/AML) risk 

management," including "the quality of BSA/AML monitoring and 

compliance." The ROE stated that the ongoing AML examination "is 

revealing weaknesses that have impacted our overall assessment of the 

program and its management.,,18JO 

The ROE also discussed the AML problems in the section on 

HBUS' Consumer Compliance Rating and disclosed that it was lowering 

that rating as a result. The ROE stated: 

"[W] are lowering our assessment of the quality of compliance risk 

management from satisfactory to weak.... The high level of 

BSAI AMLIOF AC risk associated with RBUS' business activities 

is a significant factor in our assessment. ... In addition to the high 

level of risk presented by its business activities, HBUS has a high 

quantity of risk based upon significant indications that the bank is 

not in compliance with all laws and regulations. ... Based upon 

our work to date, we have identified deficiencies relating to 

1826 412012010 acc Memorandum, "Meeting w/Michael Geoghegan and Brendan McDonough," 

aCC-PSI-00905522. 

1827 4/28/2010 Report on Examination ofHBUS, for the examination cycle ending December 31, 

2009, aCC-PSI-00899872 [Sealed Exhibit.] 

1828 Id. at 7. 

1829 Id. at transmittal letter. 

1830 Id. at 3-4. 
550 


76061.916

376 

HBUS' transaction monitoring, analysis of customer due diligence 

information, adherence to the USA PATRIOT Act; and filing of 

Suspicious Activity Reports (SARs) .... We are changing our 

assessments of both HBUS' BSAIAML program and its overall 

compliance management program from satisfactory to weak. 

These changes are based upon our concerns regarding (I) the lack 

of effective compliance oversight provided by the head of 

HNAH/HBUS' compliance department, (2) the ineffective results 

to date ofHBUS' project to implement a new model for its 

compliance structure and process, and (3) the deficiencies that we 

have identified to date during our expanded examination of 

HSBC's Global Banknotes business and the concerns raised by 

multiple external parties."ls31 

The OCC lowered HBUS' Consumer Compliance Rating even though it 

did not identifY any problems related to bank compliance with consumer 

protection or civil rights laws. The OCC's actions contravened the 

interagency agreement on how to calculate this rating, which required a 

focus on consumer protection and civil rights laws, not AML 

requirements. 

Although its Consumer Compliance Rating was lowered, the 

bank's safety and soundness ratings remained unchanged. Neither the 

CAMELS management component rating nor the overall composite 

rating were lowered. These unchanged ratings meant that the bank 

would also not incur any added Federal deposit insurance fees, despite 

its elevated AML risk. 

On April 15,2010, the OCC's Washington Supervision Review 

Committee approved an Order ofInvestigation "concerning potential 

violations oflaw and unsafe and unsound conduct in connection with the 

BSA/AML policies and practices ofHSBC Bank USA, N.A."ls32 The 

issuance of the Order was based on the preliminary findings of the 

expanded AML examination, which by that point had identified 

evidence ofa backlog of alerts that had not been processed for 

suspicious activity reporting; failure to adequately monitor foreign 

affiliates; and failure to adequately monitor wire transfer transactions for 

customers in countries designated "standard" or "medium" risk by the 

bank. 

On September 13,2010, the OCC issued the 3 I-page Supervisory 

Letter described earlier, outlining a long list of significant AML 

problems at HBUS. IS33 The Supervisory Letter also cited the bank for a 

1831 Id. at 6. 

1832 041912010 OCC Memorandum, "Order of Investigation - HSBC Bank USA, N.A, New 

York, NY", OCC-PSI-00899481. 

1833911312010 OCC Supervisory Letter HSBC-201 0-22, "Bank Secrecy Act/Anti-Money 

Laundering CBSAlAML') Examination Program Violation (12 U.S.C. § 1818(s); 12 C.F.R. § 

21.21," OCC-PSI-00864335. [Sealed Exhibit.] 
551 


76061.917

377 

violation of the Bank Secrecy Act statute for failing to maintain an 

effective AML program. The letter informed HBUS that "the bank's 

compliance program and its implementation are ineffective, and 

accompanied by aggravating factors, such as highly suspicious activity 

creating a significant Eotential for unreported money laundering or 

terrorist financing.,,18 4 In addition, the letter stated: 

"Since the OCC terminated the Formal Agreement in February 

2006, the bank has had a high number ofMRAs and the OCC 

continues to identify serious deficiencies in the bank's BSA/AML 

compliance program. Over the past two years, the examination 

scopes have included many of same areas that are of concern at 

this examination. The OCC has issued twelve MRAs during this 

period, many of which address similar issues compared to its 

current concerns, including the adequacy of compliance leadership, 

alert management, and monitoring systems."1835 

In October 20 I 0, six years after becoming HBUS' primary Federal 

regulator, the OCC issued its own formal enforcement action, a Cease 

and Desist Order requiring corrective action on many of the same 

problems identified by the Federal Reserve seven years earlier in 

2003. 1836 

Federal Reserve Ratings. The OCC was not the only Federal 

banking regulator that examined HBUS. Because HBUS had federally 

insured deposits, the FDIC acted as a secondary regulator. In addition, 

the Federal Reserve was responsible for regulating HBUS' holding 

company, HSBC North America Holdings (HNAH) as well as an Edge 

Act Corporation that HBUS owned in Florida. The Subcommittee did 

not attempt to review the oversight exercised by these two other 

regulators. The Subcommittee did note, however, that as of2009, the 

Federal Reserve Bank of Chicago maintained a lower rating for 

HNAH's risk management, in part because of the AML problems at 

HBUS. 

The 2009 Federal Reserve report stated: "[T]he primary driver for 

the overall rating is the unsatisfactory BSA/AML program. BSA/AML 

risk is currently the highest inherent Legal and Compliance risk for 

HNAH.,,1837 The Federal Reserve report stated that the bank's 

compliance program had focused "inward on alignment with Group, cost 

reduction, and centralization without sufficient focus on implementing 

and maintaining good risk identification, control, measurement, and 

management processes.,,1838 It also noted that "HNAH's strategic plan 

IB34 Id. at 336. 

1835 Id. at 335. 

1836 See In re HSBC Bank USA, N.A" Case No. AA-EC-10-98, Department ofthe Treasury 

Comptroller of the Currency, Consent Order (10/4/2012), OCC-PSI-00904698. 

1837 See Federal Reserve Bank of Chicago report as of December 31,2009, BOG-SR-001368, at 

1. rSealed Exhibit.] 

183! Id. at2. 
552 


76061.918

378 

was to focus on customers and business lines with international 

connections, which present higher levels ofBSA/AML and OFAC 

risks." According to the Federal Reserve: 

"[T]he significant weaknesses and issues identified by regulators 

on the BSAI AML program underscores senior compliance 

management's inability to self-identifY compliance risks and to 

note significant control deficiencies in a timely fashion. While the 

inabilities of senior compliance management [are] a primary driver 

for the downgrade 1 839 of board and senior management oversight 

rating, the lack of a sound risk management function that 

adequately includes compliance risk is also a contributor.,,1840 

In October 2010, on the same day and in coordination with the 

OCC, the Federal Reserve issued its own formal enforcement action 

with respect to HNAH, requiring it to strengthen its "firmwide 

compliance risk management program," including with respect to AML 

compliance, and ensure that HBUS complied with the OCC order. 1841 

(2) Six Years of AML Deficiencies 

An OCC presentation providing an "AML Retrospective (2001-

2011)" includes a chart showing that, from January 2005 to March 2010, 

the OCC issued 85 AML-related Matters Requiring Attention to the 

HBUS Board of Directors, which was a third more AML-related MRAs 

than the next closest major bank. 1842 An experienced OCC AML 

examiner told the Subcommittee: "I thought I saw it all with Riggs, but 

HSBC was the worst situation I'd ever seen.,,1843 

The following chart summarizes many ofthe OCC-issued MRAs 

related to AML problems at HBUS. It shows that the examinations 

repeatedly revealed critical AML problems across HBUS business units, 

many of which offered high risk products, had high risk clients, or 

engaged in high risk activities vulnerable to money laundering and 

terrorist financing. Twenty-one ofthe examinations identified problems 

1839 This targeted examination did not result in a downgrade at the overall holding company 

level. 

1840 Id. at 5. 

1841 See In Re HSBC North America Hold1ill'~..l!!£." Case No. I 0-202-B-HC, before the Board of 

Governors of the Federal Reserve System, Cease and Desist Order Issued Upon Consent 

Pursuant to the Federal Deposit Insurance Act as Amended (l0/4/2012). 

1842 See undated presentation, "BSA Officer Roundtable: Bank Secrecy Act Policy and Legal 

Update," by John Wagner, OCC Director of BSNAML Compliance, and James Vivenzio, OCC 

Senior Attorney for BSNAML, chart entitled, "BSNAML MRA: Large Banks: Full 

Infonnation System Extract (LBIS)," OCC-PSJ-01768523. See also Subcommittee interviews of 

Elsa de la Garza, Joseph Boss, and James Vivenzio (confinning HBUS had an unusually high 

number ofMRAs compared to other banks); 9/13/2010 OCC Supervisory Letter HSBC-2010-22, 

"Bank Secrecy Act/Anti-Money Laundering ('BSNAML') Examination ~ Program Violation 

(12 U.S.c, § 1818(s); 12 C.F.R. § 21.21)," OCC-PSI-00864335 at 9 ("Since the OCC tenninated 

the Fonnal Agreement in February 2006, the bank has had a high number of MRAs"). [Sealed 

Exhibit.] 

1843 Subcommittee interview of Joseph Boss (1/30/2012). 
553 


76061.919

379 

with the bank's AML monitoring systems, including in its wire transfer, 

pouch, foreign corresponding banking, international and domestic 

private banking, retail banking, credit cards, Embassy banking, 

Banknotes, and Payment and Cash Management operations. Inadequate 

customer due diligence and client information were similarly identified 

in multiple business lines and services. Noncompliance with bank 

policy was another common problem. Inadequate staffing and AML 

training were also repeatedly identified, as were weaknesses in internal 

reviews of AML compliance. Later on, weaknesses in AML leadership 

at the bank were also identified. When AML examiners were allowed to 

undertake a broader analysis of the AML program, they identified 

additional fundamental problems involving backlogs, inappropriate 

assessment of country and client risk, favored treatment of RSBC 

affiliates, and massive gaps in monitoring. 

For more than six years, from July 2004 until April 20 I 0, despite 

compiling a litany of AML deficiencies, the OCC never cited RBUS for 

a violation of law, never took a formal or informal enforcement action, 

and turned down recommendations to issue Cease and Desist Orders 

targeting particularly egregious AML problems, even though the same 

problems surfaced again and again. The OCC's failure to compel RBUS 

to remedy the AML deficiencies repeatedly identified by its examiners 

over a six-year period indicates that systemic weaknesses in the OCC's 

AML oversight model require correction. 

76061.920

Matters Requiring Attention (MRAs) and Recommendations in DCC Supervisory Letters for HSBC Bank USA, N.A. 

Exams Oate BuslnessUne/Area£xamlned 

1- 1/26/2005 4Q04 USA Patriot Act Exam h- 6/20/200S 1005 Global Exam 

8/9/2005 Embassy Bankin 

1/17/2006 

1/23/2006 

AI.".,,, r .. __ 

8 4/12/2006 -,- lO 

January 2005 - July 2009 i,_.h ___ " __ __ · I 

Internal Contral Pl!!ar !swes 

Bank Not Fonawing Weak Monitor,ng I Weak CDO/EOD I lm;uff. Suff 

PrOl;edures tevel:! 

, 

Bacldogs 

Noted 

PoUdesNeed 

Revision 

8SAOffiter 

BSAOffI!;'!r 

Inadeq. 

9 4/27/2006 lQ06 GIS Exam x i I X! I j 

10 6/14/2006 :) Exam 4 x _ x _ J( .- .... 11 7/13/2006 x x 

12 9/26/2006 london 0 x x x x x 10119/2006 e Exam 0 x 

12/1/2006 iM"", '''m (CceditC"d,( 5 -

15 1/8/2007 ;0" Compl",,, '''m 16 3/8/2007 I Corporate and Institutional Banking Exar 4 1 I x 1 I x 

3/19/2007 

19 3/29/2007 14Q06C"..AMPRpv;pw _Q 

3/27/2007 18 

CAMP Follow-up i 0 -0' 

22 6/20/2007 lQ07 Corporate Trust Exam I 0" 

8/6/2007 2Q07 Internal Audit and CRU Follow-up- Exam 62 

8/21/2007 3007 london 6anknote Follow-up Exam 

2S 8/21/2007 3007 GIS Fo\low"':'IJP Exam 26 9/13/2007 Pouch Services and Middle Market Exam 5 

Follow-up Exam 2_ 

--

31 4/9/2008 lQ08 Audit and CRU EKam 1 I x 

33 SanknotesExam --t--" x , " 

34 7/10/2008 TaxpayerFinandalServkesComplianceExam i 0 ----r3S 9/4/2008 2Q08 and 3Q08 GIS Exam x x 36 1/20/2009 4Q08 OFAC Exam --37 1/22/2009 3Q08 Pouch Follow-v Exam ---1938 3/3/2009 4Q08 Correspondent Banking 2 79 39 3/18/2009 4Q08 Private Bankin!! Exam -1 x 81 

41 

42 

-r J 81 

6/24/2009 2009 GI6 Follow-up Exam x I 

43 7/7/2009 I CompHance Management Exam 83 

TOTALS 83 3D 10 19 13 21 11 

Prepared by the U.S. Senate Permanent Subcommittee on lnvestjg6tlons, July 2012 
555 


76061.921

381 

c. OCC Systemic Failures 

The DCC's failure for six years to take action to force correction of 

fundamental problems in HBUS' AML program allowed those problems 

to fester and worsen. Five key weaknesses in OCC oversight 

contributed to its those failures: (I) treating AML deficiencies as a 

consumer compliance issue instead of a management issue; (2) 

unnecessarily restricting citations of AML program violations; (3) 

failing to match narrowly focused AML examinations with broader 

reviews; (4) failing to make better use offormal and informal 

enforcement actions in the face of continuing AML problems; and (5) 

issuing Supervisory Letters that sometimes did not accurately convey the 

AML problems identified in examinations. AML problems that surfaced 

even after bank commitments to cure identified problems was also a 

common thread. 

(1) Treating AML Deficiencies As A Consumer 

Compliance Issue 

The DCC is the only Federal bank regulator that does not address 

AML problems within the context of a bank's safety and soundness 

considerations and ratings, instead treating them as a matter of consumer 

compliance. This approach raises at least three concerns. First, 

combining AML and consumer compliance concerns undermines and 

confuses the consumer compliance rating. AML compliance issues are 

unrelated to consumer protection and civil rights laws and should have 

no bearing or impact on a bank's consumer compliance rating. Inserting 

AML considerations into the rating process also directly contravenes the 

Uniform Interagency Consumer Compliance Rating System specifYing 

how that rating is supposed to be calculated and what it is supposed to 

signify.1844 In the case ofHBUS, the OCC ended up lowering its 

consumer compliance rating in 2010, without citing any evidence that 

the bank was failing to comply with consumer protection or civil rights 

requirements. 

Secondly, failing to maintain an effective AML program is more 

properly viewed as a management issue that should contribute to a 

bank's CAMELS management rating and, ultimately, the bank's 

composite rating. Federal banking agencies have agreed, for example, 

that a bank with a "2" CAMELS management rating means that 

"significant risks and problems are effectively identified, measured, 

1844 See "Comptroller's Handbook - Consumer Compliance Examination," Appendix A, 

"Uniform Interagency Consumer Compliance Rating System," 

http://www.occ.gov/publications/publications-by-type/comptrollershandbookl..paginatedioverview/default.htm?startat=overOOO 13.hlm. Compare with FDIC, 

http://www.fdic.gov/regulations/lawsfrules/5000-1700.hlml; Federal Reserve Bank, 

http://www.fedpartnership.govlbank-life-cycle/topic-index/bank-raling-system.cfm; Consumer 

Financial Protection Bureau, 

http://W\VW.consumerfinance.gov/guidance/supervisionlrnanuallexaminations/. 
556 


76061.922

382 

monitored, and controlled" by bank management. 1845 In contrast, a bank 

with a "3" management rating signifies "management and board 

performance that needs improvement or risk management practices that 

are less than satisfactory given the nature ofthe institution's fiduciary 

activities." A 3 rating also means that the "capabilities of management 

or the board of directors may be insufficient for the size, complexity, 

and risk profile of the institution's fiduciary activities. Problems and 

significant risks may be inadequately identified, measured, monitored, or 

controlled.,,1846 These descriptions of the significance ofthe CAMELS 

management rating are directly applicable to management efforts to 

ensure an effective AML program. 

Interagency agreement on the significance of a bank's overall 

composite rating is also compatible with this approach. Federal banking 

agencies have agreed that a composite rating of"2" means that a bank is 

"in substantial compliance with laws and regulations," that "overall risk 

management practices are satisfactory," and "there are no material 

supervisory concerns and, as a result, the supervisory response is 

informal and limited.,,1847 A "3" composite rating means banks: 

"exhibit some degree of supervisory concern in one or more of the 

component areas. These financial institutions exhibit a 

combination of weaknesses that may range from moderate to 

severe; however, the magnitude of the deficiencies generally will 

not cause a component to be rated more severely than 4. 

Management may lack the ability or willingness to effectively 

address weaknesses within appropriate time frames. Financial 

institutions in this group generally are less capable of withstanding 

business fluctuations and are more vulnerable to outside influences 

than those institutions rated a composite 1 or 2. Additionally, 

these financial institutions may be in significant noncompliance 

with laws and regulations. Risk management practices may be less 

than satisfactory relative to the institution's size, complexity, and 

risk profile. These financial institutions require more than normal 

supervision, which may include formal or informal enforcement 

actions." 1848 

These categories fit seamlessly with management issues related to AML 

concerns. 

Currently, Federal banking agencies other than the acc routinely 

consider AML deficiencies as one factor in assigning a bank's 

1845 See Unifonn Interagency Management Component Ratings: 

http://www.occ.gov/publications/publications-by-type/comptrolIershandbook! yaginatedlbanksupervisionprocessldefauIt.htm ?startat=bankOO 1 08 .htm 1846Id. 

1847 See Unifonn Financial Institutions Rating System, discussed in 9/2007 "Comptroller's 

Handbook - Bank Supervision Process," http://www.occ.govlpublicationslpublications-bytype/comptrollers-handbook! ydflbanksupervisionprocess.pdf, at 55. 

lM'ld. 
557 


76061.923

383 

management rating and may downgrade that rating if management fails 

to maintain an adequate AML program. The management component 

rating is a reflection of management's ability to adequately identify, 

measure, monitor, and control problems and significant risks. The 

failure to maintain an adequate AML program exposes a bank to 

significant reputational risks, potentially large civil money penalties, and 

criminal prosecution. When such factors are present, it makes sense for 

a bank regulator to weigh them when assigning the bank's management 

rating. If the management component is downgraded, it may also in 

certain circumstances lower the overall composite rating, with 

potentially severe impacts on the financial institution's reputation, risk 

profile, and insurance assessment fees. 

In the case ofRBUS, after documenting widespread and serious 

AML deficiencies, citing the bank for two violations of law, noting the 

potential for large civil money penalties, and criticizing both bank 

management and the board of directors for failing to provide an adequate 

AML program, the OCC downgraded the bank's consumer compliance 

rating, but not its CAMELS management rating. The bank's composite 

rating was also unaffected. The result is that RBUS executives and 

directors escaped any CAMELS consequences for their poor AML 

management. 1849 

A third, related problem is that because consumer compliance is a 

specialty examination area with its own, separate rating system, a lower 

consumer compliance rating will rarely impact a bank's composite 

rating. The OCC Reports of Examination make it clear that the 

consumer compliance rating is not a contributing factor that has a 

routine impact on a bank's composite rating. RBUS was also aware that 

its composite rating was generally insulated from the problems with its 

AML performance, as indicated in a February 2010 email from the 

HNAR compliance head Janet Burak to top HNAR and RBUS 

executives Brendan McDonagh and Irene Dorner. At a time when 

RBUS was in the midst of an intensifying AML examination which 

would ultimately lead to a Cease and Desist Order, Ms. Burak wrote: 

"I met with the OCC today .... Sally [Belshaw, the OCC 

Examiner-in-Charge] also indicated that they are considering 

downgrading their assessment of Compliance Risk Management 

... although [Sally] indicated that if they make that decision it will 

not impact the Bank's composite CAMELS rating ... and would 

not likely impact the Management rating component.,,1850 

1849 A related problem is that because the Federal Reserve downgraded HBUS' holding company 

due to the AML problems at HBUS, HNAH executives ended up incurring lower ratings for 

HBUS' AML management failures, but HBUS executives did not. 

1850 212412010 email from HNAH Janet Burak to HBUS Brendan McDonagh and Irene Domer, 

HSBC acc 3405315. 
558 


76061.924

384 

This email demonstrates that bank officials were aware of how the 

process for rating AML performance had little real impact on the safety 

and soundness ratings that carried important consequences. It suggests 

that if AML problems had CAMELS consequences on a routine basis, 

they might have greater significance for management. 

The OCC Reports of Examination on RBUS occasionally discuss 

the bank's AML problems in the part of the report analyzing its 

management rating or composite rating, perhaps because the issue is 

relevant to those discussions. But the OCC confined the impact of the 

bank's AML problems to lowering RBUS' consumer compliance rating 

and not its CAMELS management or composite ratings which remained 

unaffected. 

The OCC's peculiar treatment of AML concerns as a consumer 

compliance issue has multiple negative consequences. National banks 

that fail to maintain adequate AML programs may end up receiving 

more favorable safety and soundness ratings than they deserve, because 

the consumer compliance ratings have almost no impact on their 

management or composite ratings. They may also receive lower 

consumer compliance ratings than they deserve for the opposite reason. 

Another consequence is that the bank's deposit insurance assessments 

remain at a lower level than they should, as a result of safety and 

soundness ratings that do not fully ret1ect their AML risks. Treating 

AML concerns as a management issue would mitigate those negative 

consequences and create a stronger incentive for national banks to focus 

on their AML obligations. To strengthen its AML oversight, the OCC 

should bring its practice into alignment with all other Fedcral bank 

regulators, remove AML considerations from its consumer compliance 

ratings, and consider AML issues in the context of the CAMELS 

management component. 

(2) Restricting Citations of AML Program Violations 

A second peculiarity in OCC AML oversight is its failure to cite 

violations of law in its Supervisory Letters and annual Reports of 

Examination when a bank fails to comply with one of the four statutorily 

mandated components of an effective AML program - described earlier 

as internal controls, an AML compliance officer, AML training, and 

independent testing even though each of the four program components 

has its own statutory basis. 18s1 Instead, the OCC has adopted a practice 

of not citing violations of the individual AML program components, 

instead treating any such deficiency as a Mattcr Requiring Attention 

(MRA) by the bank. 1852 

IS" See 31 U.S.c. § 5318(h)(1)(A)-(D). 

1852 One OCC senior legal counsel specializing in AML matters told the Subcommittee that the 

OCC "will not cite pillar violations" and instead lists them as MRAs which are not enforceable 

in court. He said that the OCC uses the same approach when reporting AML examination 
559 


76061.925

385 

Although MRAs require corrective action by bank management, 

they are separate and distinct from violations oflaw. DCC guidance 

provides that MRAs should address bank practices that "deviate from 

sound fundamental principles and are likely to result in financial 

deterioration if not addressed," or that "result in substantive 

noncompliance with laws.,,1853 MRAs are intended to target weak 

policies and practices before they result in violations, and provide an 

interim step before finding a bank in violation of the law. At the same 

time, because MRAs signifY matters that require the "attention" of 

management, they do not carry the same legal weight and urgency as 

violations oflaw. While they play an important role in AML oversight 

by focusing bank officials on emerging AML problems, if they take the 

place of statutory violations, MRAs can end up misleading a bank about 

the seriousness of an AML deficiency, delay remedial action, and allow 

an AML problem to fester. Citing a bank for noncompliance with the 

law, on the other hand, carries more severe consequences if left 

unaddressed. It also sends a much stronger message to bank 

management about the need for prompt corrective action, and lends 

more weight to any subsequent formal or informal enforcement action in 

the event the problem continues. 

The DCC's practice of not citing a bank for violating the 

individual statutory requirements for an effective AML program meant 

that DCC examiners were effectively limited to using only MRAs to 

compel reform of an identified problem. In the case ofHBUS, DCC 

AML examiners repeatedly identified instances in which HBUS failed to 

comply with one or more of the four pillar requirements of an effective 

AML program. HBUS often responded by addressing some of the 

narrow problems identified, but not the broader underlying 

programmatic deficiencies, perhaps because the problems were 

identified in the more neutral language of an MRA rather than as a 

violation oflaw. 

AML Compliance Officer. In one case, in 2009, the DCC 

determined that the HBUS AML head was not qualified for the position, 

a rare personnel decision prompted by the bank's deteriorating AML 

program. Having a qualified AML compliance officer is one ofthe four 

critical requirements of an effective AML program and is mandated by 

findings to FinCEN, describing the acc's reporting as "cleaner" and not "cluttered with 

component violations" like the other agencies. Subcommittee interview of James Vivenzio 

(3/15/2012). As indicated earlier, annual reports compiled by FinCEN show that, for the five 

year period from 2007 through 2011. acc examiners cited only 16 pillar violations in more than 

6,600 AML examinations. That total represents more than 10 times fewer violations than the 

nearest Federal bank regulator, despite the acc's having conducted nearly 1,800 more AML 

examinations. See 2007-2011 Federal Banking Agency Bank Secrecy Act Compliance 

Examination, "Consolidated Quarterly Reports," PSI-FinCEN-04-0063-296. [Sealed Exhibit.] 

1853 acc's "Examiner's Guide to Problem Bank Identification, Rehabilitation, and Resolution," 

page 24. http://www.occ.gov/publications/publications-by-type/other-publicationsreports/prbbnkgd.pdf 
560 


76061.926

386 

statute and regulation. 1854 An OCC AML examiner wrote the following 

about the problem: 

"Over the past three years, RBUS has had three BSAI AML 

Officers. Ms. Lesley Midzain is the current Board designated 

BSA/AML Officer for RBUS. She has held this position since 

April 2008. She has limited BSA/AML knowledge and industry 

experience and is not considered qualified for the position of 

BSA/AML Officer. This finding is based on numerous interviews 

by both OCC RSBC resident staff and other OCC large bank staff. 

She has not enhanced her knowledge of U.S. law related to 

BSA/AML through formal training, other than internal web based 

training. It should be noted that even with limited knowledge of 

U.S. law and regulation, Ms. Midzain has assumed responsibility 

for both BSA/AML and Compliance. 

We communicated to the RBUS President and to Ms. Janet Burak, 

Chief Compliance Risk Officer that Ms. Midzain does not possess 

the technical knowledge or industry experience to continue as the 

BSAlAML Officer. Ms. Midzin's knowledge and experience with 

BSAI AML risk is not commensurate to that of other BSAI AML 

positions held at other large national banks.,,1855 

The FFIEC AML Examination Manual states that "the 

appointment of a BSA compliance officer is not sufficient to meet the 

regulatory requirement if that person does not have the expertise, 

authority, or time to satisfactorily complete the job.,,1856 The OCC 

viewed RBUS as a large complex financial institution with numerous 

high risk aspects that required a fully qualified AML expert to 

administer the bank's AML program. To express the urgent need for the 

bank to hire a qualified AML director, the OCC could have cited RBUS 

for violating the law, but chose instead to issue a Supervisory Letter 

listing the issue as an MRA. 1857 The bank responded by keeping the 

targeted official as its head of compliance, hiring a new AML director, 

and requiring that new AML director to report to the compliance head 

with no AML expertise. The new AML director left after about nine 

months. 18S8 

AML Internal Controls over Pouch Services. In another 

instance, in January 2007, an OCC examination identified serious AML 

"" See31 U.S.C. § 53 I 8(h)(l)(B) and 12 C.F.R. Section 21.21(c)(3). 

'''' 5/15/2009 OCC Memorandum. "Compliance Management Exam." OCC-PSI-01438115. 

1856 4/29/2012 FFlEC BSNAML Examination Manual, "BSNAML Compliance ProgramOverview - BSA Compliance officer." at 36, 

httrllwww.ffiec.govlbsa_amUnfobase/documents/BSA_AML_Man_20 1 O.pdf. 

185 71712009 OCC Supervisory Letter 2009-01 "Compliance Management Examination," OCCPSI-00I07631. 

"58 6/14/2006 OCC Supervisory Letter HSBC-2006-16, "Compliance Review Unit 

Examination," OCC-PSI-00000341 (deeming problems with the independent testing pillar 

component inadequate to justify citing a legal violation]). [Sealed Exhibit.] 
561 


76061.927

387 

problems with HBUS' pouch services, which appeared to be operating 

with virtually no compliance with AML standards. Pouch services 

involve clearing U.S. dollar monetary instruments such as travelers 

cheques, bank cheques, and money orders. The AML problems included 

a lack of monitoring for suspicious activity, insufficient policies and 

procedures, and a lack of AML controls. As a result, the OCC 

broadened its examination to pouch services at other HBUS business 

units, including the PCM, International Private Banking, Domestic 

Private Banking and retail banking departments. That examination 

uncovered additional significant AML deficiencies that had been 

identified in examinations of other business lines, involving pillar 

program components such as lack of AML internal controls, training, 

and independent testing, with systemic implications. 1859 The 

examination concluded with respect to HBUS pouch services: 

"The results of this examination combined with the history of past 

examinations (i.e. significant number ofMRAs) are an indication 

that program goals and objectives have not been met. The board 

needs to establish a program with defined elements for policies and 

procedures, systems and controls, training and independent audit to 

ensure unwarranted risk is being identified, monitored and 

mitigated to an acceptable level.,,186o 

The OCC examiners recommended that a formal enforcement 

action be brought against the bank to compel immediate correction of 

the problems in pouch services. However, after researching OCC 

standards for bringing enforcement actions, the examiners determined 

that, to issue a Cease and Desist Order, the agency was required, in part, 

to cite a violation of law. 1861 Although OCC written guidance states that 

1859 41l 012007 OCC Memorandum "BSAI AML Examination - HSBC, USA, NA - Pouch 

Activities." OCC-PSI-00899202 at 202 and 204 (reviewing pouch activities at the International 

Private Bank, Domestic Private bank, retail banking, and Payments and Cash Management 

business units). 

1860 ld. at 9. 1861 6/14/07 OCC Memorandum from Joseph Boss to Anthony Dilorenzo, "Pouch Exam," OCCPSI-01298625; 7/3/07 OCC memorandum from Elsa de la Garza to Anthony Dilorenzo, 

"BSNAML Examination - lISBe, USA, NA - Pouch Activities," OCC-PSJ-0087773I. Sec 

also oee Policies and Procedures Manual 5310-3 (Rev). The June 14,2007 memorandum 

described the oec's enforcement standards as follows: 

"There are two types of enforcement actions prescribed by the oce. They are 'informal actions' 

and 'formal actions.' PPM 5310-3 (Rev.) describes the criteria for considering whether or not an 

enforcement action should be taken against a financial institution. Generally~ the nature, extent, 

and severity of the bank's problems will dictate the necessity for an action. The nature, extent 

and severity of a bank's problems can range from identified weaknesses that arc considered 

narrow in scope and correctible to significant and substantial problems and weaknesses that 

jeopardize the safe and sound operation of the bank. In all instances a number of other factors 

must be taken into consideration before the imposition of an action. Some of those factors are: 

• Overall rating of the financial institution. 

Financial condition of the financial institution. 

• Past cooperativeness of management. 
562 


76061.928

388 

one criteria for a formal enforcement action is whether: "[t]he bank lacks 

a BSA compliance program that covers one or more of the required 

program elements (internal controls, training, audit, responsible 

personnel)," ace personnel told the Subcommittee that the ace had 

interpreted this language to allow a violation of law to be cited only for a 

complete program failure, and not when a sin~le pillar or even multiple 

pillars of an AML program are inadequate. 186 The examiners 

determined that they could not conclude that RBUS' entire AML 

program was ineffective at that time. Accordingly, despite the 

significant AML deficiencies found in connection with RBUS pouch 

services, the ace examiners concluded they could not cite a violation of 

law and so withdrew their request for a formal enforcement action. 

Instead the ace included a single MRA on pouch services in a Report 

of Examination sent to the bank in July 2007,1863 and five MRAs in a 

Supervisory Letter sent to the bank two months later. 1864 

The ace's decision not to cite violations oflaw or take formal or 

informal enforcement action to correct severe AML deficiencies that 

contravene key AML statutory requirements makes no sense. An 

effective AML oversight effort must be able to act in just such 

circumstances, and premise an enforcement action on any statutory 

requirement, including that financial institutions have AML internal 

controls, an AML compliance officer, AML training, and independent 

testing, without having to find that virtually all four statutory 

requirements are being violated at the same time. 

• Management's ability and willingness to correct identified problems in appropriate 

timeframes 

The examiner also identified the standards used to assess whether or not a violation may be cited: 

"'As stated earlier, in order for the DCC to take any fann of enforcement action, certain criteria 

must be considered. This also applies in considering citing a violation under 12 CPR 21.21. For 

citing a violation of 12 CPR 21.21 the following must be evident: 

The bank lacks a BSA compliance program that covers one or more of the required 

program elements (internal controls, training, audit, responsible personnel); 

Fails to implement a written BSA compliance program; 

Exhibits significant DSA compliance program deficiencies coupled with aggravating 

factors such as evidence of widespread, blatant structuring or money laundering, 

insider complicity, repeat failures to file currency transaction reports or suspicious 

activity reports, or other substantial BSA violations; or 

Fails to respond to supervisory warnings concerning significant BSA compliance 

program deficiencies." 

1862 Subcommittee interviews ofOCC James Vivenzio (3115/2012), Joseph Boss (1130/2012). 

and Elsa de la Garza (11912012). 

1863 712412007 OCC Report of Examination ofHBUS, for the examination cycle ending March 

31,2007.0CC-PSJ-003040n [Sealed Exhibit.] 

1864 911312007 OCC Supervisory Letter HSBC-2007-01, "Pouch Services and Middle Market." 

OCC-PSJ·00000391. [Sealed Exhibit.] One examiner informed the Subcommittee that, even 

though they determined the AML deficiencies in HBUS' pouch services did not meet the OCCs 

enforccmcnt guidelines, he still felt that an enforcement action should have been initiated. 

Subcommittee interview of Joseph Boss, (1112112 and 1113/2012). 
563 


76061.929

389 

Federal bank regulators other than the acc routinely cite 

violations oflaw when a bank fails to comply with one or more ofthe 

pillar components of an AML program. 186 By declining to do the same, 

the acc is diluting the importance ofthe four components; it is 

essentially sending a message that a bank can lack one or more ofthe 

components as long as its entire AML program is not compromised. In 

addition, by restricting itself to MRAs rather than citations oflegal 

violations, the acc is unnecessarily diluting its ability to send a strong 

message that a bank needs to promptly correct a program element, such 

as an inadequate AML compliance officer or a set of missing AML 

controls. By limiting its examiners to using MRAs instead of citing 

statutory violations, the acc is, in effect, allowing particular problems 

to fester, as happened in the RBUS case. In addition, by restricting 

citation of individualized program violations, the acc is impairing the 

ability of examiners to pursue formal enforcement actions, which is 

exactly what happened in the case ofthe RBUS pouch activities. 

Finally, failing to identify violations of laws and regulations may 

mislead or confuse bank management. Violations are addressed 

prominently in the Reports of Examination and Supervisory Letters. A 

bank's directors and managers should be aware of apparent violations of 

law, given their potentially punitive nature and the bank's responsibility 

to initiate appropriate corrective action. Violations that are instead 

reduced to MRAs may mislead a bank by omitting references to specific 

laws or regulations; downplay the importance of the targeted activity; 

and insulate the bank's ratings from downgrades that would spur 

corrective action. Examiners evaluate bank ratings, including the 

CAMELS management rating and its consumer compliance rating on a 

number of factors, including management's compliance with laws and 

regulations, its responsiveness to previously reported violations of law, 

MRAs, and audit findings. Removing violations from that equation 

enables a bank to obtain more favorable ratings than it may deserve. To 

strengthen its AML oversight, the acc should bring its practice into 

alignment with all other Federal bank regulators and allow examiners to 

cite violations of law when a bank fails to comply with one or more of 

the four statutorily mandated components of an AML program. 

(3) Using Narrowly Focused Exams 

A third AML oversight practice of concern involves the use of 

narrowly focused AML examinations that don't also include an 

examination of a bank's overall AML program. At RBUS, the acc 

designed an AML supervisory strategy to examine the institution over a 

three year cycle using targeted examinations. RBUS had 32 different 

business units with varying degrees of AML risk, all of which were to be 

1865 See 2007-2011 Federal Banking Agency Bank Secrecy Act Compliance Examination, 

"Consolidated Quarterly Reports," PSI-FinCEN-04-0063-296. [Sealed Exhibit.] 
564 


76061.930

390 

examined. The plan called for business units with the highest AML 

risks to be examined first. According to the examiners, the mandate was 

to examine all 32 business units over a three-year cycle, taking 8 to 10 

weeks to examine a business unit from start to finish, using Supervisory 

Letters to communicate examination results. 1866 According to the plan, 

aee examiners would not return to a previously examined area until it 

had examined all 32 business units, and the adequacy of management's 

corrective actions for any MRAs would be reviewed once the entire 

institution had been examined. 

The aee had to depart from this ~Ian given the significant AML 

risks uncovered at some business units. 867 In addition, with only two 

full-time AML examiners dedicated to RBUS, and given the complexity, 

breadth, and volume of its high risk activities, the aee had difficulty 

meeting the three-year objective but strived to achieve it. 1868 The result 

was a series of narrowly focused, targeted examinations. As each 

examination concluded, a Supervisory Letter was issued with MRAs or 

recommendations addressing the AML issues at each specific business 

unit. 

This examination approach, which failed to provide any 

mechanism for also taking a holistic view of the bank's AML program, 

raised at least three issues in the RBUS setting: it impeded 

understanding of fundamental problems with the bank's AML program 

and allowed systemic problems to fester, it required duplicative efforts, 

and it made verification of corrective action more difficult. First, the 

narrow focus of the individual examinations at RBUS made it difficult 

for aee examiners to understand the bank's AML program as a whole, 

to detect systemic problems, or make the case for correcting them. 

Instead, the aee continued to review individual business units on a 

serial basis, addressing the AML problems uncovered in each 

examination. As a result, the aee requested and RBUS provided 

narrow corrective actions, allowing more systemic problems to go 

unaddressed for years. In addition, it required aee examiners to address 

similar AML problems in multiple business units on a repetitive basis. 

HSBC Affiliate Issues Missed. The limitations of this approach 

can be seen in the way in which targeted reviews of key bank areas, such 

as correspondent banking and the Payments and eash Management 

(peM) department, missed major AML deficiencies involving RSBe 

affiliates. It was only in 20 I 0, when aee AML examiners were 

1866 Subcommittee interview of Joseph Boss (1130/2012), and Elsa de Ia Gaml (11912012). 

1867 The oee revisited, for example, the Global Banknotes unit in 2005, 2006, 2007, 2008, and 

2009 and targeted exams of Embassy Banking in 2005, 2006 (three times), 2007, 2008, and 

2009. 

1868 AML examiners told the Subcommittee that two additional full time AML examiners were 

needed to meet the three-year cycle at HBUS, but that staff dedication would have been 

disproportionate to AML examination staffing at other large national banks. While they were 

assisted at times by other examiners, the vast bulk of the AML examinations at HBUS were 

carried out by two oee AML examiners. 
565 


76061.931

391 

allowed to take a broad-based review ofHBUS' AML program, that the 

examiners focused on the fact that HSBC affiliates played a large role in 

HBUS' correspondent banking and PCM businesses, but were not 

subjected to the same AML controls as other clients. The acc 

examiners discovered, for example, that HBUS did not conduct any due 

diligence review ofHSBC affiliates or attempt to evaluate their AML 

riskS. 1869 The acc examiners also discovered that HBUS had stopped 

monitoring all banknotes business with HBSC affiliates for a three-year 

period, from mid-2006 to mid-2009, even though those transactions 

involved billions of dollars of cash and high risk countries like 

Mexico. 1870 The acc also learned that HBUS failed to conduct routine 

account monitoring for dozens of affiliates located in lower risk 

countries. Still another problem was that acc examiners determined 

that I-IBUS was using an inappropriate process to assess country risk, 

and was assigning low risk ratings to countries such as Mexico, that 

should have been designated high risk. Narrowly focused exams, 

without more, simply didn't identify affiliates as an important AML 

concern that cut across multiple business lines. 

AML Staffing Issues Fragmented. A second example involves a 

series of three AML examinations conducted by the acc in early 2009, 

disclosing insufficient staffing to conduct AML monitoring activities in 

three critical business units, aFAC compliance, Correspondent Banking 

and the Payments and Cash Management (PCM) department. acc 

examiners looked at each business unit individually and the Examinerin-Charge issued three different Supervisory Letters that questioned the 

bank's staffing levels and resource commitment in each unit for AML 

purposes.1871 By conducting three different examinations with no 

overarching analysis of AML staffing issues across the bank, the acc 

failed to identify inadequate AML staffing as a systemic issue and deal 

with it in an efficient and efTective basis. Instead, each Supervisory 

Letters focused on a single business line or functional area under review, 

with no cross references to the other areas having the same problem, at 

the same time. The recommendations contained in two ofthe 

Supervisory Letters, issued in March 2009, contained nearly identical 

1869 See 9113/20 1 0 acc Supervisory Letter HSBC-201 0-22, "Bank Secrecy Act! Anti-Money 

Laundering ('!3SNAML') Examination - Program Violation (12 U.S.C. § 1818(s); 12 C.F.R. § 

21.21)," aCC-PSI-0086433S. [Sealed Exhibit.] 

1870 In the summer of 2009, acc examiners learned for the first time that affiliates' banknotes 

activity was not monitored when examining banknotes activity involving an HSBC affiliate in 

Mexico. The key law enforcement meeting took place the next month, and the banknotes 

examination was then expanded to look at other AML issues. The banknotes monitoring 

problem was included in the Supervisory Letter issued a year later identifying a host of AML 

problems at RBUS. See &/12/2009 acc memorandum, "Banknotes Issues;' acc-psl00917&81-882. 

1871 1/2012009 acc Supervisory Letter RSBC-2008-41, "Office of Foreign Asset Control 

Examination," aCC-PSI-00000434; 3/312009 acc Supervisory Letter RSBC-2008-34, 

"Correspondent Banking BSNAML Examination," aCC-PSI-00I0761&; 311&/2009 OCC 

Supervisory Letter RSBC-2008-40 "Payment and Cash Management BSNAML Examination," 

OCC-PSI-OO I 07624. [Sealed Exhibits.] 
566 


76061.932

392 

wording, including the same misspelled word. 1872 As a result, the 

staffing issues were addressed in a fragmented manner in three different 

recommendations rather than in a single MRA focusing on the broader 

problem. 

It was not until 201 0, after the OCC directed its AML examiners in 

September 2009, to undertake a more holistic analysis ofHBUS' AML 

program that staffing was examined in a broader way. On March 3, 

20 I 0, an OCC Supervisory Letter discussing the discovery of an HBUS 

backlog of over 17,000 unreviewed alerts noted that staffing concerns 

had been raised three times in 2009, and identified it as a Matter 

Requiring Attention by the HBUS Board: 1873 

"In the past, HSBC has had other backlogs, and we have expressed 

concerns over the course of our supervision about the levels of 

staffing and the qualifications of personnel assigned to complete 

reviews .... 

In three Supervisory Letters last year, we expressed concerns about 

the levels of staffing dedicated to BSA/AMLIOFAC compliance. 

These letters include the supervisory letter issued on January 20, 

2009 at the conclusion of our OF AC examination, the supervisory 

letter issued on March 3, 2009 at the conclusion of the 

correspondent banking examination, and the supervisory letter 

issued on March 18, 2009 at the conclusion of the Payment and 

Cash Management examination.,,1874 

Even then, however, the MRA on staffing was narrowly targeted: 

"Management must ensure that a sufficient number of qualified 

professionals are engaged to address the 2,488 alerts within the High 

Risk Monitoring Unit that were generated six or more months ago." Six 

months later, when the OCC concluded its broad-based examination of 

the HB US AML program as a whole and issued a 3 I-page Supervisory 

Letter analyzing key problems, inadequate and unqualified AML 

staffing was finally presented as a systemic problem across the bank. 1875 

We Didn't Know What We Had. One ofthe OCC AML 

examiners immersed in the HBUS AML examinations for years told the 

Subcommittee that, upon learning of various law enforcement concerns 

about HBUS in September 2009, "we'd been doing all ofthese targeted 

1872 Compare 3/3/2009 OCC Supervisory Letter HSBC-2008-34, "Correspondent Banking 

BSNAML Examination," OCC-PSI-00107618, at 619, with 3/1812009 OCC Supervisory Letter 

HSBC-2008-40 "Payment and Cash Management BSN AML Examination," OCC-PSI00107624, at 625. [Sealed Exhibits.] 

1873 71712009 OCC Supervisory Letter HSBC-201 0-03,"Backlog of Monitoring Alerts and 

Enhanced Due Diligence Requests," OCC-PSI-00851542. [Sealed Exhibit.] 1814 ld. 

1S7S 9/13/2010 OCC Supervisory Letter HSBC-20 1 0-22, "Bank Secrecy Act! Anti-Money 

Laundering CBSN AML') Examination - Program Violation (12 U.S.C. § 1818(5); 12 C.F.R. § 

21.21)," OCC-PSJ-00864335, at 337-338. [Sealed Exhibit.] 
567 


76061.933

393 

examinations and we didn't know what we had.,,1876 It apparently took 

that jolt from law enforcement for OCC senior personnel to authorize the 

OCC AML examiners to develop a broad-based plan to look at the 

HBUS AML program as a whole, tie various problems together, and 

identify the most important AML deficiencies requiring correction. 

While the narrowly focused AML reviews were important to examine 

particular business units and identify specific issues within those offices, 

such examinations were incomplete and ineffective without a broadbased look at the bank's AML program as a whole to identify 

fundamental and cross-cutting issues critical to an effective AML effort. 

Still another problem created by the narrowly focused AML 

examinations was that they complicated efforts by OCC examiners to 

verify that corrective actions mandated in OCC MRAs were 

implemented before closing out an MRA. One issue was that examiners 

weren't supposed to return to re-examine the relevant business unit until 

much later, theoretically after completing a three-year rcview of all 32 

HBUS units. In reality, the examiners had to ignore that aspect of the 

examination plan to verify that corrective action was taken. But even 

then, validation ofthe effectiveness of the remedies often required 

duplicative, repetitive efforts since many of the same problems had to be 

analyzed in multiple, individual business units. In addition, while 

HBUS and the OCC examiners were focused on AML problems in 

individual business lines and services, fundamental problems began to 

build up, including backlogs ofunreviewed alerts, collections of 

unmonitored accounts, and overly favorable treatment ofHSBC 

affiliates. 

The HBUS case history provides ample evidence that a stovepipe 

AML supervisory strategy that focuses solely on serial examinations of 

individual business lines or services without also examining a bank's 

AML program as a whole creates a fragmented and inefficient view ofa 

bank's AML program, wastes resources, encourages piecemeal 

corrective actions, fails to identify fundamental problems which are 

allowed to fester, and diminishes the usefulness of AML examination 

findings and corrective actions. To strengthen its AML oversight, the 

OCC should require its AML examiners to combine narrowly focused 

AML examinations with at least an annual examination of key elements 

of the bank's AML program as a whole. 

(4) Failing to Use Enforcement Actions 

The HBUS case history, like the Riggs Bank case history before it, 

betrays an ongoing reluctance by the OCC to use either informal or 

formal enforcement actions to compel AML improvements, even when a 

bank is cited for years for significant AML problems. 

1876 Subcommittee interview of Joseph Boss (113012012). 
568 


76061.934

394 

The OCC identified serious AML deficiencies at HBUS for six 

years in a row, with the most AML-related MRAs of any bank it 

supervised, without considering or initiating a nonpublic, informal 

enforcement action. The reluctance to use informal enforcement actions 

appears to be a cultural preference rather than the result of any guidance 

or policy. As mentioned earlier, the OCC disclosed to the Subcommittee 

that it has taken only eight informal enforcement actions against large 

banks for AML deficiencies since 2005.]877 This approach is especially 

disconcerting in the HBUS case, since the bank expressed a willingness 

to work with the regulator to implement reforms. Informal remedies -

which include requesting that the financial institution issue a safety and 

soundness plan, board resolution, commitment letter, or memorandum of 

understanding pledging to take specific correction actions by a certain 

date - offer useful tools that provide an interim step before a formal 

enforcement order that is public and carries legal penalties. These tools 

can be effective, but were not even considered by the OCC in the HBUS 

AML context. 

The HBUS case history also discloses a reluctance on the part of 

the OCC to use formal enforcement actions to correct AML deficiencies. 

Two examples involve AML examiners' who twice recommended 

issuing a Cease and Desist Order against HBUS after finding severe 

AML deficiencies in the bank's pouch activities and Embassy Banking 

unit, but no enforcement action followed. In the case of the pouch 

activities, as discussed earlier, despite overwhelming evidence of 

substantial AML deficiencies, two OCC AML examiners agonized over 

whether they could make the case for an enforcement action and 

ultimately reversed their initial recommendation for a Cease and Desist 

Order. In the case of the Embassy Banking unit, as discussed earlier, 

again despite overwhelming evidence of the bank's failure to implement 

effective AML controls, an OCC examiner was told point blank by his 

superiors, with no further explanation, that no Cease and Desist Order 

would be issued. The failure ofOCC officials to seriously consider a 

formal enforcement action in either ofthese two extreme cases 

demonstrates an enforcement problem. 

The OCe's AML enforcement guidance is clear in stating: "Even 

when the facts do not support citation of a BSA compliance program 

violation, the OCC may take a formal or informal enforcement action to 

ensure action."] 878 In addition, the OCC website explains: 

"The OCC may take enforcement actions for violations oflaws, 

rules or regulations, final orders or conditions imposed in writing; 

1877 Subcommittee briefing by aee legal counsel (7113/2012). 

1878 "Process for Taking Administrative Enforcement Actions Against Banks Based on BSA 

Violations,'· aee 2005-45 Attacbanent Appendix A to aee 2004-50. aee-PSI-OOI76030. 
569 


76061.935

395 

unsafe or unsound practices; and for breach of fiduciary duty by 

institution-affiliated parties (IAP).,,1879 

These statements seem to provide the regulatory foundation and 

flexibility needed for the OCC to act quickly to address serious AML 

deficiencies, yet the HBUS case history demonstrates that the OCC 

remains hesitant to act, even in the face of severe AML problems and 

even after years of AML MRAs on record. To strengthen its AML 

oversight, the OCC should give strong direction to its examiners about 

the availability of enforcement options and create new mechanisms to 

require bank supervisory, enforcement, and legal personnel to review the 

need for formal or informal enforcement actions at banks with severe or 

longstanding AML deficiencies. 

(5) Issuing Weak Supervisory Letters 

A final issue involves the OCe's use of Supervisory Letters. The 

HBUS case history indicates these letters do not always accurately 

convey examination findings or the need for corrective action. 

Supervision Letters are the means by which an OCC Examiner-inCharge officially informs a bank of examination findings, apparent 

violations of law, and MRAs warranting management attention. 

Violations and MRAs require corrective action by bank management; 

"recommendations" do not. In theory, OCC examination findings and 

changes to resolve AML deficiencies should be conveyed accurately in 

the related OCC Supervisory Letters sent to bank management; in 

reality, the RBUS case history showed that some Supervisory Letters 

muted criticisms or weakened recommended reforms. 

peM Examination. One striking example of the discrepancies 

that arose between examination findings and Supervisory Letters 

involved the 2007 examination ofRBUS' Payment and Cash 

Management (PCM) operations. PCM specialized in global cash flow 

coordination, using such tools as wire transfers, cash letters, and 

controlled disbursement services. The volume ofPCM activity at 

HBUS, given the bank's size, global reach, and appetite for risk, was 

huge both in terms of dollars and number oftransactions. In 2009, for 

example, PCM processed 30.2 trillion wire transfers involving $94.5 

trillion. 1880 

In December 2007, the OCC completed an examination of AML 

controls in PCM operations and found that the bank was not adequately 

monitoring PCM transactions. 1881 The OCC examination noted 

1879 http://www.occ.gov/topics/laws-regulations/enforcement-actions/index~enforcementactions,html 

18809/13/2010 OCC Supervisory Letter HSBC-2010-22, "Bank Secrecy Act/Anti-Money 

Laundering CBSA/AML') Examination - Program Violation (12 U,S,C, § 1818(5); 12 C,F,R, § 

21.21)," OCC-PSI-00864335, [Sealed Exhibit.] 

1881 121712007 OCC memorandum "BSNAML Examination - Payment and Cash 

Management," OCC-PSI-01263586, 
570 


76061.936

396 

fundamental flaws in the bank's AML controls and monitoring systems 

to identify suspicious activity as well as actions to clear alerts without 

adequately reviewing the circumstances and filing required SARs. It 

also recited several examples of suspicious activity and criticized the 

bank's Compliance Review Unit which is supposed to conduct 

independent testing ofHBUS' AML controls but had not reviewed the 

PCM operations in three years. The examination findings included the 

following: 

• "Systems and Controls are less than satisfactory and do not 

provide an appropriate level of monitoring for suspicious and 

unusual activity for all of the activities in the business unit. 

• In reviewing customer activity, there were several accounts 

which warranted additional monitoring and/or in which 

monitoring practices were inadequate." 1882 

The examination also identified three MRAs that should be brought to 

the attention of HB US' board of directors. 1883 

The Supervisory Letter signed by the acc Examiner-in-Charge 

and sent to HBUS was issued four months later, on April 21, 2008, and 

conveyed a very different message about PCM operations, in Eart 

because HBUS had begun to correct the identified problems. 1 84 The 

Supervisory Letter stated that the examination ofPCM operations found 

that "the quality of risk management systems is satisfactory"; 

"compliance with legal and regulatory requirements is satisfactory"; and 

"the quality ofPCM compliance risk management is satisfactory." It 

continued: "Policies and procedures are adequate; however, control 

systems needed to detect and report suspicious activity warrant 

improvement.,,1885 These mild statements made in the spring of2008, 

are worlds apart from the blunt examination findings issued in 

December 2007. Despite its language, the Supervisory Letter did 

include the three MRAs which, together, implied a significant 

breakdown in the bank's internal controls. 

Embassy Banking Examination. A second example involved 

HBUS' Embassy Banking examination. As discussed earlier, in January 

2008, after being contacted by two former employees, acc conducted 

an examination and confirmed a wide array of troubling practices in the 

1882 ld. 

1883 The three MRAs were: "I) management needs to improve client monitoring and analysis in 

order to obtain an accurate view of potential risk. 'When an alert is generated, a more thorough 

review of available information needs to be initiated; 2) management must ensure that CRU 

[Compliance Review Unit] appropriately identifies and accurately reports on all issues, including 

MRAs. In addition, MRA follow-up by CRU needs to address all corrective action and include 

testing to determine the adequacy of actions taken; and 3) management needs to ensure that 

decisions related to not filing SARs are documented and maintain this information in a log." Id. 

1884 412112008 acc Supervisory Letter HSBC-2007-24, "Payment and Cash Management 

BSA/AML Examination," aCC-PSI-OOI07S97. [Sealed Exhibit.] 

1885 ld. at 1. 
571 


76061.937

397 

Embassy Banking unit. They included significant internal control 

problems, suspicious activity involving two high risk embassy accounts, 

noncompliance with bank policy, inadequate due diligence and 

monitoring, transactions being conducted without OFAC screening 

describing, in short, some ofthe most egre~ious AML deficiencies 

recorded in any HBUS AML examination. 886 On May 20, 2008, the 

OCC examiner completed a Conclusion Memorandum with the 

examination findings, stating that the Embassy Banking's "AML 

program is not effective in identitying and mitigating risk, especially 

considering the nature of its clientele and the types of products and 

services it provides." 1887 The memorandum recommended issuance of a 

Cease and Desist Order to ensure immediate remediation ofthe AML 

risks. The OCC examiner also discussed the recommendation for a 

formal enforcement action with the Examiner-in-Charge, but was 

informed that no Cease and Desist Order would be issued. HBUS was 

verbally informed of the examination findings and immediately began 

work to address the problems. In July, a follow-up examination looked 

at the bank's remedial efforts and found that progress had been made. 1888 

On September 4, 2008, a Supervisory Letter summarized the 

March and July examinations was sent to HBUS. 1889 The letter's mild 

tone failed to convey any ofthe egregious AML deficiencies or 

suspicious activity uncovered during the examinations, using instead 

bland language that conveyed minimal concern or urgency. The letter 

began: 

• "The quality of risk management is satisfactory, but needs 

improvements in certain areas. 

• Compliance with legal and regulatory requirements is 

satisfactory and no violations oflaw or regulation were cited at 

this examination. 

• We noted several deficiencies in the GIB BSA/AML program 

that warrant the immediate remedial attention of senior 

management." 1890 

The letter continued with a string of positive statements: "Management 

is competent and capable." "The automation of existing systems and 

controls, together with current stafflevels, will ensure a timely and 

1886 See also earlier discussion; 5/2012008 OCC Memorandum, "Government and Institutional 

Banking," OCC-PSI-00928614; 10/8/2008 OCC Memorandum "Royal Embassy of Saudi Arabia 

(RESAl March 2008 Examination Conclusions", OCC-PSI-OI434609; 4/3/2008 OCC 

Memorandum "Libyan Relationship Review," OCC-PSI-01434593. 

1887 5/20/2008 OCC Memorandum "Government and Institutional Banking", OCC-PSI00899215. 

1888 See 811412008 OCC Conclusion Memorandum, "Government and Institutional Banking 

Ufodate," OCC-PSI-00899227. 

189 914/2008 OCC Supervisory Letter HSBC-2008-07, "Government and Institutional Banking 

BSAJAML Examination," to HBUS, OCC-PSI-00I07607. [Sealed Exhibit.] 

1890 ld. at OCC-PSI-00I07607-60S. 
572 


76061.938

398 

efficient process for monitoring accounts .... " "Currently, monitoring 

remains backlogged; however, management has developed a plan to 

bring the monitoring up to date." "Current systems and controls are 

satisfactory." "Compliance Risk is stable." 

The Supervisory Letter continued: 

"Our current review has noted a marked improvement to GIB's 

BSAI AML program from the second quarter of 2008 examination. 

Management has implemented corrective action in most of the 

areas of concern. The new GIB Compliance manager has 

implemented numerous objectives to ensure that potential risk is 

readily identified and mitigated to acceptable levels. 

There are still some issues with system and controls, resources and 

alert monitoring; however, based on the current review those 

deficiencies are noted as MRAs.,,1891 

The Supervisory Letter then reduced the AML examiner's request for a 

formal enforcement action against the bank to two narrow MRAs asking 

f-IBUS to: (I) "develop plans with milestones to further define and 

automate the risk identification and monitoring functions," and, in the 

interim, "continue to enhance methods to reduce weaknesses associated 

with manual intervention" and prevent "unauthorized changes" to a 

spreadsheet with account information; and (2) cure a backlof of 1,800 

alerts, some dating back to 2007, by September 15, 2008. 189 

The September Supervisory Letter simply did not convey the 

urgency or severity ofthe examination findings from several months 

earlier regarding AML problems in the Embassy Banking department. 

In addition, while it presented two MRAs requiring corrective action, its 

mild tone and lack of detail may make bringing an enforcement action 

difficult ifthe bank fails to remedy the identified problems in a timely 

fashion. 

AML Staffing Problems. A third example of discrepancies 

between examination findings and the Supervisory Letters that follow 

involved staffing issues. 

In 2006, two OCC Supervisory Letters included MRAs that 

required RBUS to increase AML staffing in its Embassy Banking unit to 

monitor transactionsl893 and in its Compliance Review Unit to conduct 

internal reviews of the bank's AML controls. 1894 In 2007, another 

Supervisory Letter again included an MRA about increasing AML 

1891 [d. at 609. 

1892 Id. at 610. 

1893 1130/2006 OCC Supervisory Letter to HBUS, OCC-PSI-OOI 07529, at 534-35. [Sealed 

Exhibit.] 

1894 6/14/2006 OCC Supervisory Letter HSBC-2006-16, "Compliance Review Unit 

Examination," OCC-PSI-0000034I. [Sealed Exhibit.] 
573 


76061.939

399 

staffing in the Embassy Banking unit. 1895 Two years later, in 2009, OCC 

AML examiners conducted examinations ofHBUS' OFAC Compliance 

unit, Correspondent Banking, and PCM department, and identified 

staffing issues at all three. In February 2009, the OCC examiners wrote 

an internal memorandum to the file recording a disagreement with their 

supervisor concerning staffing. In the memorandum, the examiners 

identified inadequate AML staffing as "a repetitive issue that is of 

concern" that "should be elevated to an MRA instead of a 

recommendation for the Correspondent Banking (March 3, 2009 

Supervisory Letter) and Payment and Cash Management examinations 

(March 18,2009 Supervisory Letter).,,1896 The memorandum also noted 

that the two OCC examiners had discussed the issue with the OCC 

Examiner-in-Charge who disagreed with the examiners' assessment, 

because "there are no violations being cited and staffing is a 

management decision." The memorandum concludes: "Based on our 

growing concerns regarding Ms. Midzain's qualifications to hold the 

position as BSAI AML officer, her lack of concern with our 

recommendations and a slow deterioration of the bank's BSAIAML 

Program, [we] will recommend to EIC Belshaw that we complete a 

Compliance Management examination to assess BSA management as 

soon as possible." 

The Examiner-in-Charge sent out three Supervisory Letters related 

to the examinations that had been conducted. Each reduced the 

requested MRA down to a recommendation that "management should 

consider a review of current and immediate staffing." At that point, the 

OCC had identified staffing problems in five business units through six 

exams over a period of four years, but the most recent Supervisory 

Letters treated the need to increase AML staffing as a recommendation 

rather than an MRA requiring corrective action. While it is the function 

of an Examiner-in-Charge to make the ultimate decision on MRAs and 

recommendations, this example demonstrates a clear division between 

the Examiner-in-Charge and her staff and a refusal to take strong action 

by the more senior OCC official. 

In Washington, the OCC's Large Bank Review Committee, which 

reviewed about six draft Supervisory Letters per year for HBUS and 

sometimes had a copy of the underlying examinations, also noted 

occasional discrepancies between the examination findings and draft 

Supervisory Letters. In addition, some LBRC members began to notice 

after the fact that some examinations had revealed more significant 

AML problems and criticism ofHBUS operations than were conveyed 

by the approved Supervisory Letters to HBUS management. As a result, 

the LBRC now requires both the AML examiner's Conclusion 

1895 311912007 acc Supervisory Letter HSBC-2006-30, "Government and Institutional Banking 

BSNAML Examination," aCC-PSI-00I07567. at 569-570. [Sealed Exhibit.] 

1896 2/512009 acc Memorandum to files. "Staffing issue - Correspondent Banking," aCC-PSI00899201. 
574 


76061.940

400 

Memorandum and the Examiner-in-Charge's draft Supervisory Letter 

before it will begin a review of the draft letter. 1897 This change should 

help reduce the discrepancies and ensure senior OCC officials have a 

more complete view of AML problems at the banks being examined. 

D. Analysis 

AML laws are not intended to protect bank customers or the bank; 

they safeguard the U.S. financial system and the nation as a whole. As 

the regulator of nationally chartered banks, which are among the largest, 

most complex, and global of U.S. banks, the OCC plays a critical role in 

ensuring AML compliance. It is the OCC that needs to ensure the U.S. 

affiliates of global banks function as well-guarded gateways that keep 

out risk rather than invite it in. 

To fulfill its AML obligations, the OCC needs to strengthen its 

AML oversight and revamp its AML supervisory and enforcement 

approach to bring them into closer alignment with other Federal bank 

regulators. Five reforms are key. First, it should treat AML deficiencies 

as a matter of safety and soundness, not consumer protection, and ensure 

ineffective AML management is taken into consideration when 

assigning a bank's CAMELS management and composite ratings. 

Second, the OCC should allow its examiners to cite violations oflaw for 

individual pillar violations as well as program-wide violations. Third, 

the OCC should ensure that narrowly focused examinations are 

considered in tandem with examinations that take a holistic view of a 

bank's AML program. Fourth, the OCC should make more use of 

informal enforcement actions and reconsider its standards for issuing 

formal enforcement actions to compel AML reforms. Finally, the OCC 

should instruct its Examiners-In-Charge to accurately reflect AML 

examination findings, without turning them into such mild 

recommendations that they mislead bank management into thinking their 

AML programs are functioning well, when they are not. Many OCC 

examiners see the problems; it is OCC supervisors and enforcement that 

need to act to strengthen the OCC's AML oversight efforts. 

1897 Subcommittee interview of James Vivenzio (3/1 5/20 12). 

76061.001

Matters Requiring Attention (MRAs) and Recommendations in acc Supervisory letters for HSBC Bank USA, N.A. 

January 2005· July 2009 

! 

t"l;;; 

.... 3 

.... 

= ::;: 

>-3 

'II: g 

.... 

-

'" 

"., 

Prepared by U.S, Senate Subwmmi!tee on Investigations, July 20ll. 
576 


76061.002

2002 

2005 

2007 

2008 

2008 

2009 

HBMX Compliance Failures 

"There is no recognisable compliance or money 

laundering function" 

"Fabricated records of certain mandatory antimoney laundering meetings" 

"What is this, the School of Low Expectations 

Banking?" 

"There were allegations of 60% to 70% of 

laundered proceeds in Mexico [going] through 

HBMX" 

"What I find most frustrating is the way in which 

new issues constantly emerge however much time 

is spent with HBMX." 

"[I]nherent AML risk in Mexico is still very high" 

Prepared by the u.s. Senate Penn anent Subcommittee on Investigations, July 2012 

Permanent Subeommittee on Investigations 

EXHIBIT#lb 

76061.003

Disclosed v. Undisclosed Iranian U.S. Dollar Payments 

Sent by HSBC Foreign Affiliates to U.S. Banks, Including HSBC Bank 

10000 

9000 

8000 

'" 7000 " " e. 1 6000 trJ 00 

c 

;; S • 5000 

o Total Payments 

• Undisclosed P"yments 

.... Ii' ....,;j . 4000· 'II:: " 

.... 

-

o hi 3000 

2000 

1000 

0 

2003 2004 2005 

Original Source: Deloitte March 29, 2012 presentation, HSBC OCC 8966143. 

Prepared by U.S. Senate Permanent Subcommittee on Investigations, July 2012 

2006 2007 
578 


76061.004

Excerpts from emails of David Bagley 

re HBUS awareness of Iranian transactions, 2003-2004 

"I am not sure that HBUS are aware of the fact that HBEU are already 

providing clearing facilities for four Iranian banks, presumably including 

USD clearance." 

--HSBC email, 10/2112003, Exhibit 46, HSBC OCC 88733947 

"The complexity of the OFAC regulations, and the fact that HBUS were 

unaware that any arrangements existed with Iranian Banks, has made 

speedy resolution of this issue difficult." 

--HSBC email, 03/11/2004, Exhibit 52, HSBC OCC 8873986 

"I suspect that HBUS are not aware that payments may be passing 

through them. Do not believe that we can allow this situation to continue 

very much longer ... " 

--HSBC email, 04/19/2004, Exhibit 53, HSBC OCC 8873994 

Permanent Subcommittee on Investigations 

EXHIBIT#ld 

76061.005

:l' 

e 

.. 

;; 

= t"'l;;; 

a 

-l :; 

'It: g 

.... til 

-

= "' ;. 

RATINGS USED IN OCC REPORT OF EXAMINATI

Composite Uniform Financial Institution Rating 

Component Ratings: 

Capital 

Asset Quality 

Management 

Earnings 

Liquidity - Asset/Liability Management 

Sensitivity to Market Risk 

Uniform Rating System for Information Technology 

Composite Uniform Interagency Trust Rating 

Uniform Interagency Consumer Compliance Rating 

Community Reinvestment Act Rating 

Preparod by u.s. Senate Permanent Subcommittee on Investigations, July 2012 

76061.006

31 USC § 5318 (h) 

"(h) ANTI-MONEY LAUNDERING PROGRAMS.-

"( 1) IN GENERAL.-In order to guard against money laundering thr

financial institutions, each financial institution shall establish anti-mon

laundering programs, including, at a minimum- t"l ;; II "(A) the development of internal policies, procedures, and controls

::t 

g 

:tt: g 

=: [I "(B) the designation of a compliance officer; 

:t. 

., 

:t. 

'" I a; I "(C) an ongoing employee training program; and 

"(D) an independent audit function to test programs." 
581 


76061.007

Home> News:>HSBC to testify at U.S. Sen2te hearing 

HSBC to testify at U.S. Senate hearing 

'0 Jul 2012 

In this leiter to all employees, Group Chief Executive Stuart Gulliver explains why we have been asked to testify 

about past compliance failures and what we have done since to strengthen compliance and risk management. 

Dear Colleague, 

I am writing to you today as you may have seen reports that HSBC has been asked to testify before the U.S. Senate's 

Pennanent Subcommittee on Investigations (PSI) on Tuesday 17 July. 

The hearing relates to ongoing investigations by the PSI into our compliance with U.S. regulations including AntiMoney Laundering laws, the Bank Secrecy Act and the Office of Foreign Assets Control sanctions. 

While we have previously disclosed these proceedings in our Annual Report and Accounts, the PSI hearing will be 

the first time that the details of these investigations are made public. It will certainly be the first time that the majority 

of employees have heard about these issues and I realise it will be a disappointment to you and your teams. 

While we have been cooperating with the relevant U.S. authorities since 2010 to improve the way we manage risk 

and ensure compliance, the PSI hearing may attract significant attention. It is also likely that there will be further 

enforcement actions from other U.S. authorities over the coming months. 

I wanted to ensure that you and your teams had enough infonnation about these issues to be able to answer the 

questions that you may be asked by your customers, colleagues, friends and family. 

While we do not yet know the full details of the PSI investigation, the hearing on 17 July will undoubtedly reveal that 

in the past we fell well short of the standards that our regulators, customers and investors expect. 

During the hearing, we will acknowledge and apologise for our past mistakes. Between 2004 and 2010, our antimoney laundering controls should have been stronger and more effective, and we failed to spot and deal with 

unacceptable behaviour. 

It is right that we be held accountable and that we take responsibility for fixing what went wrong. As well as answering 

the subcommittee's questions, we will explain the Significant changes we have already made to strengthen our 

compliance and risk management infrastructure and culture. 

First, with a new strategy and leadership team, we have put in place a structure that makes HSBC easier to manage. 

The creation of four global businesses and ten global functions to replace a federated structure allows a coordinated 

and consistent approach to every part of our business, including compliance. 

Second, we have decided to apply high and consistent global standards wherever we work. The Group Standards 

Committee co-chaired by Group Chief Legal Officer Stuart Levey and Group Chief Risk Officer Marc Moses is 

working towards ensuring that the highest standards required in any part of the business will apply to every part of the 

business. 

Third, we are driving a change in culture so that our conduct matches our values. We have integrated our values into 

perfonnance management, judging senior leaders on what they achieve and how they achieve it, because both 

matter to our reputation and share price. 

Permanent Subcommittee on Investigations PSI-HSBC-76-0001 

EXHmIT#2a 
582 


76061.008

Alongside these changes, we will continue to invest in a best-in-class compliance function. We have increased the 

amount spent on compliance globally from US$200m in 2010 to US$400m today. Some 3,500 colleagues now worK 

in HSBC compliance worldwide, with more than 1,000 of them in the U.S. 

There is no doubt that the coming weeks and months will be challenging, as past practices and compliance failures in 

certain parts of the firm come under serious scrutiny from regulators, investors, media, customers and employees. I 

know this will be a disappointment to the vast majority of you who have worKed so hard to build and maintain our 

reputation throughout the turbulence of the past few years, and for that I apologise. I can also assure you that we will 

also keep you fully informed of these mailers via the global staff website and other internal channels. 

While we cannot undo past mistakes, we will be judged on how we respond to this issue and demonstrate that we 

have learnt from it. You have my commitment that we will face up to our past mistakes, show our stakeholders what 

we have done to address the problems, and never let up in our absolute commitment to ensuring that every part of 

the firm meets the highest global standards and lives up to our values in the future. As the illicit actors seeking to 

exploit the financial system are constantly adapting their approach, we will need to be tireless in our own efforts to 

stop them. 

We will do this not just because regulators and authorities expect it of us, but more importantly, because we expect 

and demand it of ourselves. 

This is a fundamental part of achieving our strategy and becoming the world's leading international bank and remains 

a top priority for the Board and senior management team. 

Stuart Gulliver 

Group Chief Executive 

Contact Global 

Communications 

Pierre Goad Charles Naylor Global Co-Heads of Communications 

larry Campbell Head of Publishing and Knowledge Management 

Jezz Farr Global Head of Communications, Global Banking and MarKets 

Medard Schoenmaeckers Global Head of Communications, Global Private Banking 

TIm Harrison Global Head of Communications, Commercial Banking 

Malcolm Wallis Global Head of Communications, Retail Banking and Wealth Management 

Susanna Wilson Head of Communications, Corporate Sustainability 

Phil Askham Global Head of Global Functions Communications 

Margrit Chang Regional Head of Media Relations, Asia Pacific 

Andy Berry Regional Head of Media Relations, UK and Europe 

Jo Alexander Regional Head of Employee Communications, UK and Europe; Head of Group COO Communications 

Enrique de la Madrid Regional Head of Communications, Latin America and Mexico 

Lisa Sodeika Regional Head of Communications, North America 

Tim Doyne Regional Head of Communications, Middle East and North Africa 

PSI-HSBC-76-0002 
583 


76061.009

GCL 120014 - HSBC Global Standards 

Backg~ound 

A year ago. w-e amculated .0 cJsar atfategy fo be \'he wand's leading int~rnationat bank to order t-o rTIak-e 1he firm more cohesive and 

tmtar coon~. ~ established Global f3Ustr,esses and Globa! Functions anQ9&ve them the authoclty to manage the firm on a gmbal 

ba~js .,..,th ooo$is1errt "po'lkl~s. star.oaros at'Jd processes. We "cl$O articulated a set of HSBC .... arues to guide- our behaviourOur abfJity to. aohieve our arnbffion ulfimate!y depands on our reputation, r.ot jUSi:1 fot (l(tano!aJ sltert9L~. bu\ also fer trustworthiness"and 

integrtty. To.::) often. we have fallen. "short of oW own expettatkl:ns and that must change. We naw have the :struc'fure to help us reduc:a 

camp-laxlty and run tl'-.e firm more effeetlVely 00 a global basis. bUt structure i.9 not enough, To preserve a,.,d enhance .cur reputation, we 

must also lead our industry in fonmAatmg a!ld imp1eri1etlfing: global standards. and controls to ensure that OUf conduct matches our 

values. 

What doe.s thla tl\C!!tln in prBetice7 

Am0i19S-t othe-rthlog,o;, this means we must 

• adopt and enforce th~ I'!dhC:f'(\~ to a .s.ingle sta!l~!d global~ that is detem\lned by the hiShest's-tan::!t11d we. must apply 

anywhere. Often. this wla mean adhering globallv to US regulatOry standards, but to -the extsnt another jurisdictfQrJ; requir-6':$ 

higher ~dards, tj:,en-1hat jOrlsd1c:tion'.s reqUirements must shape-our global s:tandatd 

• ma:<imise the sharing of illforrnatfon fOf risk management purposes amoogst Group CQ(npa~i&s; at¥:! smona:st GlooaJ Businesses 

Md Functions 

.. appty n 9(QtH~Hy con~tent b.W~d\ to knowin9 SM f6alning our rustomars, When we conclude that MY -Custtlrnel' or POUt.ntiat 

customer poses an vna~pb.b.16 ",pOt?;tlooal r~k. (o!' otherwise does not ~aet our standards), we 1Or..ould e~ of .avoid th~ 

,e!alio.'1Shlp g!obally 

• ensure {hal OUt" han'k1ti9 S"@N~ are no-t used to. facilitate tax evasion a:nyRhere or t.o h1de the prccecd~ m corruption 0;1" cr~e 

• ,mamtam ethic.-al sales practroes 

senit't9 and irnplemEtnting standard!; nod c:ontrol$ l!j -not $olely the job of our control functions such as R.isk, l;EgaJ, RhanCG and Intcrr.a1 

Audn. All of us ~ across 8.11 businesses. aU S!1bgtaPhj~~ and aft k!vela of \:he f~rm - tlave: a pe~oonai. respon:sbUhy to ma:!:c;& ttllS- happen. 

W:'1iie the Group is made up of many IegaJ entitist around the world. we have only one repvtatml1 a..,d we are aU guardians of l. 

St."<ln~ Committee on HSBC Globol Stan<l .. ds 

This win be-oo ongoing and continuous. ",ffort, impt!Cfb1g an of OtJf businoos.es all Qverthe wotkf. As you Bllkno,w, much ¢1th~ work,s 

already w~ undt!N{-8y. To. facilitate .c:ompteMtWJe ova~iglJ1 of thesc matters. identify additiOf'la.l weas req1..1trlng:. an:~i1tkln< lUl.ti to 

determ'ina bO$t P1'actices, t ha'Ye D~ed:i:he Groo.p. Chief Ri$kOffJt:tir Marc MO$6'$, lU"id ·Chief Legal Offic.er Stuart Levey.¥;> co>-cha"ir a 

St •• ri"~ C<>mmi!tea on HSaC Glob~1 Stand.,ds. Thl. Committe. Will operate under the .u"",.,relon of the Group Risk Manager"",,! 

Meetir,g 10 defin .. the I-lsec Clabo! SIMdard. and to orurur& that iho"" G!obalStatldards are impiOO1enlBO. 

YOUf5 faith1utly, 

Stuatl Gulliver 

Group Chi'" E:«>GUtIIre 

PSI-RSBC-75-0001 

Permanent Subcommittee on Invest! ations 

EXHIBIT#2b 
584 


76061.010

Gel 120014 • HSBC Global Standards 

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585 


76061.011

Chapter 5 Legal, Compliance and Reputation 

Home> Group Standards Manual> Chapter 5 Legal, Compliance and Reputation 

Chapter 5 Legal, Compliance and Reputation 

http://fim.ghq.hsbdFIMfl1ome.nsfIByRefIUKWE78JFKP11334701112007?Open Pr!,·tsj wi<nrlay. 1" .JI.".. 7017 

Chapter 5 Legal, Compliance and Reputation 

legal 

Page lof2 

The Global legal Function is responsible for providing and managing legal services to members of the 

, HSBC Group, thereby facilitating its business and for protecting the Group from legal risk as well as its 

, integrity and reputation. The Group General Counsel maintains a close relationship with the Chief Risk 

, Officer (CRO). 

! The Global legal Function operates through individual legal departments in more than 50 countries. 

: Regional General Counsel for North America; latin America; Europe; Middle East; Asia Pacific; the Global 

, Head of Global Banking and Markets, Legal; the Head of GBl lGA and the Chief Operating Officer, GBl 

LGA together with the Group General Counsel form the Group legal Executive Committee. The Group 

Legal Executive Committee has primary responsibility for providing leadership and guidance across the 

i function, while the responsibility for providing legal support to the business rests with the individual country i 

i departments. 

, 

; Legal risk is a combination of a variety of risks. In particular: 

Contractual Risk is the risk that the rights andlor obligations of a Group member within a contractual 

relationship are defective; 

Dispute Risk is made up of the risks that a Group member is subject to when it is involved in or managing: 

a potential dispute or actual dispute; 

legislative Risk which is the risk that a Group member fails to adhere to the laws of the jurisdictions in 

: which it operates; and 

; Non-Contractual Rights Risk which is the risk that a Group member's assets are not properly owned or 

are infringed by others or the infringement by a Group member of another party's rights. 

; 

: For additional detail on legal risk and HSBC's policies to control such risk, please refer to the Lesa' ane 

: CO'T:pilance riM. 

, Compliance 

i The structure of the Group's Compliance function is designed to fit closely with the structure ofthe 

, business and is divided according to geographic units (each country or jurisdiction is headed by an Area 

: Compliance Officer who functionally reports to the relevant Regional Compliance Officer) and Global 

Businesses (which are typically subject to oversight by a Global Business Compliance Officer). 

~ Furthermore for major Group companies, typically those with a dedicated audit committee, a Global Head 

: of Compliance will exist to co-ordinate Local Compliance Officers both within that company's domestic and, 

: overseas offices . 

. Group Compliance in Group Headquarters is the centre of the Compliance function, setting Group-wide 

policy and supporting the regional/product networks as well as advising Group executives on all regulatory 

: matters. The Head of Group Compliance reports to the Chief Risk Officer, but also has close association 

! with the Group General Counsel so a holistic view of risk across the Group's functions can be obtained. 

Given the geographical spread of the Group and the number of financial markets in which it operates, the 

breadth and depth of legislation and regulation to which the Group is subject is enonmous. The penalties 

i for contravening rules and regulations are also increasing in severity. Compliance risk is closely bound 

; with reputational risk and the perception of the Group by customers and others can be readily damaged by 

Permanent Subcommittee on Investigations 

EXHIBIT#2c http://fim,ghq.hsbcIFIMihome.m .. ___ iiiiiiiiiiii ______ • '?Open&Print... 07/15/2012 
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Chapter 5 Legal, Compliance and Reputation Page 2 of2 

a failure to comply with relevant laws. Any wilful or negligent contravention by a Group operation will be 

regarded very seriously. 

! For full details of the globally-applicable Compliance policies in place to safeguard the HSBC Group 

: against regulatory risk, refer to the Compliance section of the Legal and Compliance FIM. In some cases, I such policies will be supplemented at Global Business level by the appropriate business FIM. , 

The following Compliance Policy Statement was adopted by the Board of HSBC Holdings pic on 

12MAR93 and is required to be adopted formally by all major operating subsidiaries within the Group: 

"It is the policy of the HSBC Group (the Group) to observe high standards of integrity and fair dealing in 

the conduct of its business and to act with due skill, care and diligence. 

To those ends, Group members should: 

• comply with both the letter and spirit of all relevant laws, codes, rules, regulations and standards of 

good market practice in each jurisdiction around the world where they conduct business; and 

• ensure that any irregularities which arise are promptly resolved in a manner which minimises 

financial loss and protects the good name and reputation of the Group." 

Management at ali levels must ensure they, or their executives with delegated managerial responsibilities, 

are fully acquainted with the rules and regulations applying to the operations for which they have 

. responsibility and that arrangements for ensuring compliance with legal/regulatory requirements are an 

: integral part df the operational procedures of the business. Where managers become aware of breaches i of laws or regulations, they must advise their Local Compliance Officer. 

Published: 27/Feb12012 

lNTERNAL 

DiSCLAIMER: lnfO!;W\2tion held withm the Group Manua!s system stlould not be disseminated extemally WltrlOU! the 

docum8,t owm)r's c~;nsent and should be tr(:;aiod as Intern'll 

Res:nc~t~d cr Hlgnly HeMr,ctec information, inc~lJding pncc or commercially scnslllv0 in"ormahm. sl~oulrl not be nisp.f1yed 

\Ylthln ltle Gro,!p Manuals system unless password protecled 

(:,~ HSBC HDldlngs ~~Jc 2012 Jill Rights Res.erv(0d 

http://fim.ghq.hsbc/FIM/home.nsfi'ByReflUKWE78JFKPI1334 701112007?Open&Print... 07115/2012 
587 


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Confidential & Non-public OCC Information OCC·PSI-0089823 

c 

HSBC-OCCE 005Ei298. txt From: DAVID OEW/HBUS/HSBC 

Sent: 9/4/20084:22:57 PM To: LESLEI( MIDZAIN/HBUS/HSBC1DHSBC02 

CC: 

subject~ Re: FW~ Kyc hires 

Lesley 

I am out next week but would a couple of temps for two months do the trick? 

David 

oavid Dew SEVP. Chief Dperatin9 Officer HSBC Bank USA 

452 Fifth Avenue I 10'th Floor I New York, NY 10018 

phone. 

Fax. 

Email. 

212-525-6951 212-525-8688 davi d. de.w@.us.hsbc.com 

Lesley Midzain/HBU5/HSBC 09/04/2008 03:57 P~ 

To 

Dav; d Dew/HBU!i/HSBC@.HSBC02 c, 

Andrew P lONG/~BEU/HSBC@.H5BC. Chris P OAVIES/HBUS!HSBC@HSBC02, Michael B Ga 11 agher /HBUS/HSBC®isBC02 

sUbject 

Re: FW: Kyc hi res 

David, 

!r~h~~f, V

e 

g~~~p~~~~i ~t~Uio~! e~f~~e O~~i~l~~:l fir~~Y ori~:e~;~~e~~e _ f~~~ re, but 

~~~~~i ~~ ~;~ 1 ;~:m oi~e ~O~~~~~~t~~~~g fg~e p~~v{~i~~ ~ ~~~ cke~l !~! ~s far B~~e I am situation. whether 'those are business-related or compliance-related, and think 

~o~:~~!~g t~~ !daiir o~~~d C~~~ii ~~~~l¥n~:r!a~f~~ ~~~~~~S~~uestef !~da~~~~~~~ 

Lesley 

Lesley Midzain 

rs~ tt~hl~:. C~~~l ~i:ce officer I HSBC BANK USA~ N.A. 

New York. NY 10018 

- = Redacted by the Permanent , 

phone 21.2-525-6410 Subcommittee on Investigations! 

Fax 21j2.-512.5-.5.71691 Mobile • 

Page 1 

Permanent Subcommittee on Investigations :onfidentlal • FOIA Treatment Reque 

EXHIBIT #3 J, Inc. HSB02545486 

Confidential· FOIA Treatment Re N.A. HSBC OCC 0616352 
588 


76061.014

:onfidential & Non-public acc Information aCC-PSI-0089824 

c 

HSBC-OCCE 0056298. txt Email Lesl ey. Mi dzai n@us.hsbc.colD 

Dall; d oew/HBUS/HSBC 

09/04/2D08 12: 23 PM 

To 

Lesley Midzain/HBUS/HSBC@HSBC02 

cc 

Andrew P lDNG/IBEU/HSBC@HSBC, chris P DAVIES/HBUS/HSBC@:HSBC02, Michael 8 Ga 11 agher /HBU5/HSBC@.HSBC02 

subject 

Re: FW: Kyc hires 

Thanks lesley. 

1 do think that collectively we need to step back and consider the full financial impact of what we are proposing for our PCM bUsiness at a time when t:he business is being ask.ed to consider carefully its strategic objectives, both from a customer perspective and also from a OneHSBC perspective. 

The proposal on the ta.ble is to add a total of 8 fte to support compliance related activity. I appreciate that they are not all additional positions from 

~o~~~g~~e~~~~~~o!~~e~~~sn:~e~t~~~~s~h~~e~~ ~~!l a~~o a 1:!~~~~f!~gtk!~~i~~ ~~5ts flat to IHOB. 

Therefore. r would still like my earlier questions answered but with the anal~sis amended to account for the additlonal compliance staff in rour area 

:~i~ouf~e b~~efi~r~~o~h:d~f~i ~~i~ ~f a~~iy~u~~~e~~~r~~~l~u~;~e~h:~~~e e C~h whe re 

~h~~~i 5 Pf~;e~~0~ft~5Hi ~P~!f ih{~n~~~i n~~s t~~d f~h~ii~~t6~~~nn m~l~n~f~~h~~e have because perhaps we should be considering eliminating sOl'!le of the manual activity? . 

I think that we must also use this opportunity to accelerate the HNAH 

~:~~~~~!z~~i~g ~~!;!~f~~ii ~~a~:uW!a~ho~~a b:q¥~~~i~~ ~~ p~~ ;~~~c;!~~~~c~o i ~~~ 

~o~e~~riado U~~! i ~~:t~~hr~h~p~b~~~~! t~o;~ 1 ~ !n~~V~~~~~~ri~g t~~tf~~y ~e~~~. If economies of scale should result. 

*Q ~p~~~c~ ~t~h;h~~ r~~~~ !~v~~~n~~~t r~s~~~~e w~h~~S~o~1: al~a~~ 1 !~~t!~~! y h!~~~~ ng 

i~~it!~n~ae~d ago~l~~~pl~c~~~~oi~ ~~~i~~~nb~s~~:~~c~~~. r E~h~~~~' b! ~~a~!f~fu}or an update as to where we stand wi th thi s , 

Happy to get together if a meeting will help. 

Regards 

David 

Davi d Dew 

Page 2 

:onfldential - FOIA Treatment Requested by HSBC N. America Holdings, Inc. HSB02545487 

Confidential- FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 0616353 
589 


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L:ontidential & Non-public OCC Information 

c 

SEVP, chief Operating Officer Hsac Bank USA 

HSBC-OC<=-.E 0056298. txt 

452 Fifth Avenue! 10th Floor I New York, NY 10018 

Phone. 

Fax. 

Email. 

212-525-6951 212-525-8668 davi d. deW@l,ls.hsbc.com 

Lesley MidzainjHBUS/HSBC 09/0llZ006 03:09 PM 

To 

David new cc 

chris P DAVIESjHBUS/HSBC@HSBC02, Andrew P LONG/IBEU/HSBC@HSBC, Charles G 

~e ~:~~i~h~~/~'~~'~~~~~~~CO; ~a~e~~L~S~~ ~ 1;: a~; :~c~ 1 :ii~ f~~~~~' cont>. Mi chae 1 

Subject 

FW: Kyc hi res 

David. 

We would support the request. PCM has an operational te.anl that does client on-boarding and file review in Delaware and we unde.r5tand they have had some outstanding vacancies. The team was created in response to an DCC comment 

f~~:i~~t¥~~~~ 3¥he a~~a!0;~~e~u~ie~!f~l r!~~ ~~t~~~~d~d t~!i;n~!:{t to additional customer types in response to an audit comment and to ensure 

a~~:~n~ri~Y t~~r~~!m t~~o~~s~~e~~m~~~!~ce C~~~i ~~~1~e "!~~. ~~fd~~~' bu~td~1:~~! c ac:tual file reviews and document collection themselves. 

~~~~~r~~~vi6~ e~h~r~ ai~~~P~g1~~~ ~: ~~dP~~:~C:~n at;~~~;~ ~dt~~~~o~~n~i ~~r~o~n~ additional approved positions (per your approval from late jUN), 2 for targetted monitoring and one more senior Leo. In recent weeks, a couple of 

:V~h;Sf~~;n~g/~i~1~~f~~t~~o~~f C~~~~!~~~s was put into effect. we were advised that this applled in the PCM world, and 50 we suspended our hiring efforts; 

- two members of the compliance staff in Delcrware resigned (one to take a position with the business). 

~hi~ ~~s~~to~~o~i~~{~;dt~u~e~~~~i~~ ~r~~~!~i ~g~pff~~~~d~~s{~i~n~e C~o~d use approved + 2 recent departures) to 4. all outside of Hew York. Attached is the 

~i~;~aih~ 'hi r~~~ ~~!~z~r~ha~f~b~~i ~~s~~~~!~~ in~nd~~~~~~rl i~:i f~a ~~~i iiso need approval by paul Lawrence, but this has continued to be an area of notable 

~!~~u~~~s ~egui~t~~ki ~~t~g~i ~~o~~~a~~;~~ ~~~~~ n~~mio s~:~~ 1 i~:t!~~t f~fft~f~~~ a~~~ costweffective means of providing some needed support. MY staff has consulted with Michael in this process and understands that he is supportive. Page 3 

OCC-PSI-0089824 

:onfidenlial - FOIA Treatment Requested by HSBC N. America Holdings, Inc. HSB02545488 

:onfidential- FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 0616354 
590 


76061.016

;onfidential & Non-public DCC Information DCC-PSI-0089824 

c) 

HS8C-OCC_E 0056298. txt [attachment "PCM opens ~ summary ·Request 3SEPOS.doc" del,eted by Lesley Midzai n!HBuS!I-ISBC] 

lesl ey 

Les 1 ey M'l dzai n 

.rr~ ~t~h;~~. C~~~l~~~ce officer I HSB( BANK USA, N.A. 

New York. NY 10018 

Phone 212-525-6410 

Fax 2l2-S,s-QI ~~~l~e LeS:Y~M~ zain@.us.hsbc.com 

- =: Redatted by the Pennant'nt 

Subc=ommittee on Investigations 

-.--- Forwarded by Les1ey Midzain/HBu5/HSBC on 09/03/2008 02:41 PM -----

Dav; d Dew/HBUs!HSBC 09/03/2008 10:11 AM 

To 

Chris P OAVIES/HBUS/HSBC@HSBC02 

cc 

MACALEST~g r~~ a~. ~~~i{!:~~~~g~~~~~~. C~i~~~; 1 G B O~! ~¥!~~~~,~~~~~~:~~~g~02 ':ran les 1 ey Mi dzai n/HRus/HsBC@HsacOz 

Suhject 

Re: Kyc hires 

chris 

As we all know, PCM is a high risk business from a aSA/AML perspective and we 

~:~~i ~~m~~~~~e~h:~Je. hiVhae~f~~!~n~~~~~ !~~;d f~~~~~f~ ~~ e:~e~n ri~Y! a~~~~est. 

That said t I will need more detailed information. A proposed increase of 4 FTE 

~~o~~n~r ~h~t bu~~~~s~ri~i ~:~~s i ~fd~~~~~~ ~~i ~u!~~~~;e~n~h~o i ~r~hih~~! ume customers from a risk profile perspective? Do they fit in with oLlr overall strategy? what is the under1ying profitability of this projected growth? 

What ;s the current number of Comp'liance FTE in the business and how are they 

~~p!~ki~~ ~~aie~~C~~Y f~~i~eFh~f~~~~~~~~a!n~ ei111~~~e ~h!ngio~i\~~~~~:5~fare Excellence? What scope do we have for further cost reSuctions in other areas, eg payments operations following the centralizatiotl under Tom Kaiser? 

~! n:~~~. t~ ~~~i ~~;h~~!~~ llo~~~~~~a~~n~~~~i ~~ k~~~i~~Vi~ ~~~e~!! i~:t b~~i ~~s 

Thanks 

David 

David Dew SEVP, Chief operating Officer HSBC Bank USA 

page 4 

;onfldential- FOIA Treatment Requested by HSBC N. America Holdings, Inc. HSB02545489 

Confidential _ FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC ecc 0616355 
591 


76061.017

Confidential & Non-public OCC Information 

c 

HSBC-OC,-E 0056298. txt 452 Fifth Avenue I 10th Floor I New York., NY 10018 

Phone. 

Fax. 

Emai1. 

212-525-5951 212-525-8688 davi d. dewlPus ,hsbc. com 

Chris P DAVIES/HBUS!HSBC 09/03/2008 08:49 AM 

To 

Michael B Gal1agher/HBUS/HSBC@HSBC02" 

'cc 

Andrew P LONG/IBEU/HSBc@.HSBC, David Dew/HBUS/HSBC@HSBCOl, Charles G De 1 BustO/HBUS/HSBOOHSBCOZ I II Ian MA.CALESTER·1 <i an. maca 1 ester@,hsbc.coln> 

Subject 

Re: Kyc hi res 

r ask for davids guidance with respect to compliance resOUrce, 

~~e~~;r~shrd~s p~~~ln ~c~~~e~r~~!o~~~~ ~~s~~~~egii~~~~a~~~a~e!~t~gr~~ is 

offset by re9uct1ons ~sewhere in your business in order for a flat cost profile to be achieved. 

I know we will be discussing this point at 9 30. 

Tha.nks 

----- original Message -----

~~~~; ~~/~~i~ogB G~1~5Qh~~ EOT 

To: Chri 5 P DAVIES 

Cc:: Andrew P LONG; David DeWj Charles Delsusto subject: Kyc hires 

chris, 

~~cko~fa~~s:~~~s ~o~hvi n e~g~~i~~~c~o~~~ d:f~~~~ ~~c~~na~~~u!~:fy t!~~p~~r k~~e and related regulatory requi rements. 

:I can nat speak to what compliance is doing to add further support to their "team. however I wish to ensure that PCIII does what it needs to. To this end we have requested 4 adds to staff with irnmedi ate effect. 

The occ will 'be here in q4 and we must ensure that resources are sufficient to give. comfort to the occ that we take this seriously. 

I would appreciate guidance on how/when we can remedy the situation. 

Mbg 

Page 5 

OCC-PSI-0089824 

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Confidential- FOIA Treatment Requested by HSBC Bank, USA, N_A. HSBC OCC 0616356 
592 


76061.018

30 Day Observations and Recommendations Report from AML Director 

To: Curt Cunningham 

From: Wyn Clark 

Date: Thursday, October 15, 2009 

Profile of HSBC 

Extremely high risk business model from AML perspective: 

Risk: 

Compliance: 

Reputation: 

Regulatory: 

Financial: 

AML: 

Products/Services 

Transactions 

Client 

Geographic 

Current Observations 

High 

AML Director has the responsibility for A!v1L compliance, but very little control over its 

success 

Operate under "crisis" mode, actions are reactive rather than forward thinking 

AML Director unable to manage at high level 

Several AML DirectorslBSA Officers in a short period of time 

Systems and controls not adequate for risk profile of organization: 

OFAC misses and backlog 

Large # of MRAs 

Training 

BartOll Adams 

Threat of repeat MRA in Gill 

Where are concerns with control environment? 

Reporting lines 

Business and A!v1L Expertise 

Technology 

Head count 

Permanent Subcommittee on Investigations 

EXHIBIT #4 

Confidential Treatment Requested HSBC·PSi·PROD-4l065332 
593 


76061.019

Independence 

MIS 

Appear lo have lost urgency of AML compliance since previous enforcement action was 

lifted 

AML risk profIle ofHBIO vs. HEUS are extreme opposites 

Decentralized functions creates inefficiencies, inconsistencies and a greater potential of 

things falling through the cracks or missed all together 

Commingling of general compliance with that of AML 

Not clear on why AML Director is in COE 

Proposed Organization (CTP) 

AML Director has responsibility for AML compliance as delegated by the BoDs (HBUS, 

NA BOD and North America BOD) but very little control, ovel~ight or direct authority 

over its success. 

Proposals 

AML Compliance should have its Own channel withir HNAH compliance 

Groups supporting AML to have direct reporting into AML Director (see draft org. chart) 

To ensure that AML Compliance is maintained rhroughout the entire North America 

region it is critical that there is a leadJhead in the following key areas. These heads should 

report directly to the AML Director or advisors in the AML Director's office that oversee 

these key areas for all of HNAH: 

Policy!Dep Director 

FIU 

SurveilIancelMoniloring 

Investigations 

SAR Reporting 

Sanctions 

KYC/CDD/EDD 

Training 

Regulatory Examllnternal Audit 

MISlMetrics 

Confidential Treatment Requested HSBC·PSI·PROD.lJ065333 
594 


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Reporting-Non SAR 

Represented in AML Governance Council: 

Business Line AML OfficerslHeads 

LCOs wi AML component 

Questions 

Is there a budget for AML? 

Priorities 

1) FIU report to AML Office 

2) Report AML risks and issues to BoD 

3) Structure and staffing of AML Office 

a. Oversight, SME, Policy. 

b. Operations - FlU primarily 

4) Fix OFAC - drill down to determine ultimate root cause and fix, men fix other 

issues 

5) Norkom implemented in GIB 

6) Full scope assessment of AML risk vs. control and system environment 

7) AMUOFAC risk assessment process 

8) 

Confidential Treatment Requested HSBC.PSI·PROD-0065334 
595 


76061.021

occ-psi-00162661 From: DEBRA L BONOSCONI/HBUS/HSBC 

sent: 10/19/2009 5:21:45 PM 

To: WYNDHAM S CLARK/HBUS/HSBC@HSBC02 

subject: Re: Fw: OFAC resources 

oh, this was express time. Trust me on that. usually the response is "no." 

original Message ----- From: wyndham S Clark 

Sent: 10/19/2009 05:19 PM CDT 

To: Debra L Bonosconi 

subject: Re: Fw: OFAC resources Clearly a positive, although I understand these were requested quite a while 

ago. I hope that isn't the typical response time. 

----- original Message ----- From: Debra L Bonosconi 

sent: 10/19/2009 05:49 PM EDT 

TO: wyndham S clark 

subject: Re: FW: OFAC resources well, not really. Yes good that we got new positoons but not good in that we don't get the staffing levels we need. 

Original Message ----- From: wyndham S Clark 

Sent: 10/19/2009 04:26 PM EDT 

TO: Debra L Bonosconi 

subject: Re: Fw: OFAC resources Good. 

Wyn Clark 

Anti-Money Laundering Director HSBC - North America 

452 Fifth Avenue, 7th Floor, New York, NY 10018 

phone. 

Fax. 

Email. 

212-525-8025 

212-642-1543 

wyndham.s.clark@us.hsbc.com 

Debra L Bonosconi/HBus/HSBC 

10/19/2009 02:33 PM 

Fyi 

TO 

"wyndham S clark" <wyndham.s.clark@us.hsbc.com> cc 

subject 

Fw: OFAC resources 

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----- Origi~al Message ----- From: Lesley Midzain 

Sent: 10/19/2009 02:23 PM EDT 

Occ-Psi-00162661 

TO: Alisha Marshall; Debra L Bonosconi 

Cc: Curt Cunningham Subject: OFAC resources Janet has approved the 3 resources (2 transaction monitoring, 1 analyst). She has to take this to paul Lawrence, but we can start the search for the in 

order not to lose time. 

Lesley 

Lesley Midzain 

Executive Vice president & Chief compliance officer 

452 Fifth Ave, New York, NY - 7th Fl. 

HSBC Bank USA 

phone. 

Fax. 

Mobile. 

Email. 

212-525-6410 

212-525-5769 

Lesley.Midzain@us.hsbc.com 

page 2 

__ = Redacted by th. Permanent 

Subcommittee on Investigations 
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76061.023

From: WYNDHAM S ClARK/HBUS/HSBC 

Sent: 2/26/2010 12:02:08 PM 

Occ-psi-00165898 

To: DEBRA l BONOSCONl/HBUS/HSBC@HSBC02 

CC: ANNE llDDY/HBUS/HSBC@HSBC02;JANE E MARTlN/HBUS/HSBC@HSBC02 

Subject: Re': Fw: Received a call from Kathy G this am .... 

remember my words .... absolutely nothing migrates into the FlU or AMl Office 

without proper resourcing, and a full accounting of risk and ultimate 

consequences of doing so. (please feel free to quote me on this to anyone you please) 

we are in dire straights right now over backlogs, and decisions being made by those that don't understand the risks or consequences of their decisions!!!! 

Wyn 

Wyn Clark 

Anti-Money laundering Director HSBC - North America 

452 Fifth Avenue, 7th Floor, New York, NY 10018 

phone. 

Fax. 

Email. 

212-525-8025 

212-642-1543 

wyndham.s.clark@us.hsbc.com 

From: Debra L Bonosconi/HBUS/HSBC 

To: wyndham S clark/HBus/HSBC@HSBC02 cc: Anne Liddy/HBUS/HSBC@HSBC02, Jane E Martin/HBUS/HSBC@HSBC02 

Date: 02/26/2010 11:52 AM 

Subject: Re: FW: Received a call from Kathy G this am .... 

yes ... it is. 

Debra L Bonosconi 

HSBC North America I Sr. VP Director, Financial Intelligence Unit 

1130 Connecticut Ave NW, 12th Floor 

washington, DC 20036 

phone. 

Mobil e. Email. 

202-496-8766 

debra.l.bonosconi@us.hsbc.com 

wyndham S Clark/HBUS/HSBC 

02/26/2010 11:51 AM 

To 

Anne Liddy/HBUS/HSBC@HSBC02 cc 

e ae e y the Permanent 

Subcommittee on Investigations 

Debra L Bonosconi/HBUS/HSBC@HSBC02, Jane E Martin/HBus/HSBC@HSBC02 

subject 

Re: Fw: Received a call from Kathy G this am .... 

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76061.024

Occ-psi-00165898 

time to push back. any idea who made this decision? is this the same function 

that takes .3 of an FTE to perform? 

wyn Clark 

Anti-Money Laundering Director I HSBC North America 

452 Fifth Avenue, 7th Floor, New York, NY 10018 

Phone. 

Fax. 

Email. 

212-525-8025 

212-642-1543 

wyndham.s.clark@us.hsbc.com 

Page 2 
599 


76061.025

From: ANNE LIDDY/HBUS/HSBC 

sent: 2/27/2010 10:47:26 AM 

occ-Psi-00165932 

TO: WYNDHAM 5 CLARK/HBUS/HSBC@HSBC02;DEBRA L BONOSCONI/HBUS/HSBC@HSBC02 

subject: Re: FW: Bco Nac Angola 

I re-read this a few times and at first thou~ht it was a bit rambling/venting but that is probably what we need at this pOlnt. It is on point, just don't 

know how we are ~oing to ~et there. I would point out that we do push back on opening/maintainlng relatlonships that are strategic Group relationships and 

have been able to hold our ~round but it is extremely difficult at times - we expend a lot of energy pushlng our point and holding our ground and certainly Group member referred relationships/transactions have increased our HBUS 

risk. 

HANA is really HNAH. 

Also, think you mean to say you can't think of one exception. 

----- original Message ----- From: Wyndham 5 Clark 

Sent: 02/27/2010 08:58 AM CST 

To: Anne Liddy; Debra L 8onosconi 

subject: FW: Fw: Bco Nac Angola I'm about to send this to Curt and Lesley w/ a cc to Janet 

opinion. Is this on point and accurate, or do I sound like 

wyn Clark 

Anti-Money Laun~ering Director 

HSBC North Amerlca 

452 Fifth Avenue, 7th Floor 

New York, NY 10018 

and wanted your a rambling lunatic? 

(212) 525-8025 

wyndham.s.clark@us.hsbc.com -= RedaC!·'d b, t:,~ P,'r1ll{Jnent 

Subcotal1l :({ee on lnnstigations 

----- original Message ----- From: Wyndham S Clark 

Sent: 02/27/201008:54 AM CST 

TO: Wyndham S Clark 

subject: FW: FW: BCO Nac Angola Lesley and curt, . This rings to the heart of one of my major issues here. We don't appear to be on the same page as to who owns the risk. My view is the businesses own this 

risk and should be articulating to their leaders and compliance as to why they are comfortable with it and provide a clear justification how the risk can be 

effectively managed within the risk tolerances that have been articulated by our BOO. The same goes to group and our affiliates. It does not hold water that we have to open accounts or process transactions just because we are expected to support group mandates. Just like the businesses, my view is that HANA owns the risk. not group, and we have to start acting that way or we will continue 

to run into problems with no end in sight. If you own the risk, and receive 

compensation based upon the risk/reward concept. then you have to be prepared to make the decisions necessary to mana~e it. 

(Based upon the very upsetting "rewards process we recently went through in 

compliance, we are clearly not being compensated on a risk/reward basis in our group.) 

The email below, as well as the recent PSI report are good examples. we are spinning our wheels with this PSI report performing scrubs and filin~ reports where necessary. My view is we should instruct the businesses to reVlew this 

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76061.026

report themselves, 

and what their act 

management in the 

actions and accept what actions the r 

Occ-psi-00165932 and report back as to where they have exposure, the risk, on plan is. This should include the highest levels of 

mpacted businesses, and our orsanization, approving the 

ng the risk. Its not what actlons compliance is taking, sk owners are taking. 

its 

At this point the businesses are not accepting that they own the risk, I can think of one exception, making the difficult decisions and taking the necessary 

steps to mitigate their risk. My view is the risks are being ignored by the 

business, and they are simply waiting for compliance to tell them what the 

risks are and to convince them as to what actions need to be taken. If they don't know what the risks are, then why are they opening accounts or continuing with the relationship? They are essentially pushing the risk to compliance, this is not where it resides. 

I am happy to discuss this anytime. I'm convinced that our biggest challenges are internal (risk ownership is just one example, my list is lengthy), and 

until we realize this and get them addressed, we are not going to have an effective AML and/or compllance program. Its time to have an honest discussion 

with the most senior levels of management in this organization about the 

issues, until then we're only fixing the symptoms. . 

I have no problem with either of you sharing this email with those that you feel appropriate. I'm very transparent and candid in my approach, and feel that 

dealing with issues head on is the best approach. 

Thanks, 

Wyn 

Wyn clark 

Anti-Money Laun~ering Director 

HSBC North Amerlca 

452 Fifth Avenue, 7th Floor 

New York, NY 10018 

(212) 525-8025 

Wyndham.s.clark@us.hsbc.com 

----- original Message ----- From: chrlstopher O'donnell 

sent: 02/26/2010 08:01 PM EST 

TO: Ali Kazmy; wyndham S Clark 

Cc: Anne Liddy; Camillus Hughes; charles Del Busto; Denis O'brien; James G 

Holderman; Judy stoldt; william M Wong subject: Re: FW: BCO Nac Angola Ali/wyn: 

I appreciate the responses and the ongoing analysis, however, we need to be 

evaluating this and other Angolan clients broadly, versus the specific transaction(s) highlighted in our monitoring. AS described in the note from 

Balance sheet Management below, we have other businesses who do not have 

direct relationships with this and other Angolan accounts. They are concerned 

about their exposure to the counterparties and, as a result, are seeking our guidance. 

whereas, its important to highlight all issues and concerns associated with 

this activity to the business and seek their concurrence, we need to be 

providing the guidance that is being sought. I don't think anyone involved 

doesn't already appreciate the risk associated with this business, they are looking for our view. we need to articulate our position and get the view out 

immediately. 

please let me know as soon as this review is completed. I'm happy to 

paqe 2 
601 


76061.027

Occ-psi-00165932 participate in any discussion so we can coordinate this view across functions. 

co 

HSBC CIBM IT USA. 

original Message From: Ali S Kazmy Sent: 02/26/2010 05:51 PM EST 

To: wyndham S Clark 

Cc: Anne Liddy; Camillus Hughes; Charles DelBusto; christopher O'donnell; 

Denis o'brien; James G Holderman; Judy stoldt 

subject: Re: FW: Bco Nac Angola 

wyn, 

Thanks for your note. 

After completion of the analysis we intend to highlight all issues/concerns, as applicable, to the business for their 

confirmation that they are comfortable with the risk. 

shall keep you apprised of developments. 

Regards, 

Ali S Kazmy vice president/senior Manager - Anti-Money Laundering policy I HSBC BANK USA, 

National Association 

452 Fifth Avenue, 7th Floor, New York. NY 10018 

phone. 

Fax. 

Mobile. 

Email . 

212-525-5560 

212-525-6994 

all.s.kaZmy@us.hsbc.com 

From: wyndham S clark/HBUS/HSBC 

_ = Redacted by the Perman,ent. 

Subcommittee on InvestigatIOns 

TO: Ali S Kazmy/HBUS/HSBC@HSBC02, christopher O'donnell/HBUS/HSBC@HSBC02 

Cc: Anne Liddy/HBUS/HSBC@HSBC02, camillus P Hughes/HBus/HSBC@HSBC02, charles G 

DelBusto/HBUS/HSBC@HSBC02, Denis E o'brien/HBUS/HSBC@HSBC02, James G 

Holderman/HBUS/HSBC@HSBC02. Judy P Stoldt/HBUS/HSBC@HSBC02 

Date: 02/26/2010 05:45 PM 

subject: Re: Fw: Bco Nac Angola 

Ali. 

I would advise that we also obtain approval from the head of this business (PCM 

7) that they are comfortable with the risk. I presume the business has some sort of risk committee that would review/approve these sorts of 

accounts/clients. 

Thanks, 

wyn 

Wyn Clark 

Anti-Money Laundering Director 

page 3 
602 


76061.028

HSBC North America 

452 Fifth Avenue, 7th Floor 

New York, NY 10018 

(212) 525-8025 

Wyndham.s.clark@us.hsbc.com 

----- original Message ----- From: Ali S Kazmy 

Occ-psi-00165932 

sent: 02/26/2010 05:11 PM EST 

To: christopher o'donnell cc: Anne Liddy; camillus Hughes; charles Del Busto; Denis O'brien; James G 

Holderman; Judy stoldt; wyndham S clark 

subject: Re: Fw: BCO Nac Angola Many thanks for your note. 

Regards, 

Ali S Kazmy vice president/senior Manager - Anti-Money Laundering policy I HSBC BANK USA, 

National Association 

452 Fifth Avenue, 7th Floor, New York, NY 10018 

phone. 

Fax. 

Mobile. 

Emai 1. 

212-525-5560 

a qnq-"'I 1.5. azmy us.hsbc.com 

From: christopher o'donnell/HBUS/HSBC 

_ = Redacted by thi! I<~rm'd~('!.~ 

Subcommittee on Investigations I 

To: Wyndham S Clark/HBUS/HSBC@HSBC02, camillus P Hughes/HBUS/HSBC@HSBC02, Ali S 

Kazmy/HBUS/HSBC@HSBC02 

Cc: James G Holderman/HBUS/HSBC@HSBC02 

Date: 02/26/2010 12:56 PM 

Subject: FW: Bco Nac Angola 

All : 

From: 

Forwarded by Christopher o'donnell/HBUS/HSBC on 02/26/2010 12:35 PM 

Blair Selber/HBUS/HSBC 

page 4 
603 


76061.029

occ-psi-00165932 TO: christopher o'donnell/HBUS/HSBC@HSBC02 cc: Ronald E Hollmann/HBUS/HSBC@HSBC02 

Date: 02/25/2010 03:39 PM 

subject: FW: BCO Nac Angola 

chri 5, 

5 not Compliance 

Hi sto ri ca 11 y, these ban ks have _S.Y"'!II!I!III!I!I!I!!I."~IIII!!~!I!I~~lIIIj~.l111l11!1dll • while we have not dealt recently, what should our procedures be 

ff we are contacted? 

Obviously with the headlines around these accounts I iust want to ensure we are communicating in both directions with compliance and following protocol. 

please advise. 

Thanks and regards. 

Blair selber 

Managing Director- Balance sheet Management I HSBC Bank USA 

452 Fifth Avenue, 3rd Floor 

New York, NY 10018 

phone. 

Fax. 

Mobil e. Email. 

212 525 6622 846 366 3251 

blair.selber@us.hsbc.com 

- Redacted by the Permanent 

Subcommittee on Investigations 

Forwarded by Blair selber/HBUs/HSBC on 02/25/2010 03:27 PM -----

From: charles G DelBusto/HBUS/HSBC 

TO: Blair selber/HBUs/HSBC@HSBC02 

Cc: Ronald E Hollmann/HBUS/HSBC@HSBC 

Date: 02/25/2010 11:39 AM 

subject: Re: BCo Nac Angola 

Bla; r, 

I am not aware of any additional reRorting requirements, however I did mention 

~~!~iners) and he W{~lc~~g~if~~~ (w 0 happens to be down here with the 9 

charles del Busto 

Global Transaction Banking (T) 302 327 2100 

(F) 302 327 2128 

page 5 
604 


76061.030

occ-psi-00165932 

From: Blair selber/HBUS/HSBC 

TO: charles G DelBusto/HBUS/HSBC@HSBC02 cc: Ronald E Hollmann/HBUS/HSBC@HSBC 

Date: 02/25/2010 11:22 AM 

subject: BCO Nac Angola 

charlie, 

one more follow-up reo the acct'Junt above., ~~I!!I!!I!I!I!!I'.' •• Does peM or anyone make Legal/compliance ~t least aware of~ 

_ Since I am harpin9 on good communication bacK to us, I 

want to ensure that we are also communlcating material changes to them. I 

would think this is in addition to any "typical" _ reporting. 

Is there someone responsible for that, and was it done in this case? 

Thanks again Regards 

Blair selber 

Managing Director- Balance Sheet Management I HSBC Bank USA 

452 Fifth Avenue, 3rd Floor 

New York, NY 10018 

phone. 

Fax. 

Mobile. 

Email. 

212 525 6622 

646 366 3251 

blalr.seiber@us.hsbc.com 

page 6 

__ "" Redacted by the Permanent 

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605 


76061.031

From: David W J BAGLEY 

Marion 0 ROACH 

07/101200212:17 

Sent By: 

Date Sent: 

To John F ROOTIHGHQlHSBC@HSBC 

Copy To: Sandy Flocl<har1/HBUS/HS8C@HSBCAMERICAS, Richard E T BENNETTfHSBHIHSBC@HSBC 

Subject BITAL 

John 

I have now met with Sandy Flockhart to discuss the way forward. 

The key points are as fonows;~ 

I attach a structure chart (by hard copy), which shows the current, and rather unsatisfactory 

structures within Bila). 

Sandy acknowledges tlle importam:e of a robust compliance and money laundering function, which at 

present is virtually nOl1~exjs!ent 

Before proceeding very far with the search for expatriate resource, Sandy would Uke someone to visit 

Mexico with a .... lew to sceping current resources, the extent of 1he problem, and the major issues. 

Particularly he is looking 10 see if there is any local resource which can either be used or groomed to 

perform tile ACO/MLCO role. 

Two possible candidales are the existing in~hoLJse lawyer at HSBC, and the current ACO. Could you 

please talk to Carolyn Wnd and get her assessment at least qn the ACO if not on the in~house 

lawyer. 

There is no recodnisable compliance or money laundering func.tion in Bita! at present, and this 

therefore increases tne likeUhood tIlat tl'lere will be no obvious eXIsting resource which we can use. 

Sandy thinks it is important to look both at issues affecting Mexico City, but also doser 10 the border 

where there appears 10 be substBlltiaJ cross·border flows of monies. including USD in cash. 

sandy Is looking lOr someone to visit mid October onwards, and would like the Initial scoping of the 

extent of the task to be completed prior to closillQ in early December. 

! am happy to discuss fur1J)er when you have had a chance to consider 

Many thanks 

Regards 

Permanent Subcommittee on Investigations 

Redacted Material 

EXHIBIT #8 

Confidential - FOIA Treatment Reques HSBC acc 8877797 
606 


76061.032

David 

Encl, by hard copy 

e-Documents Note 

Ttlls Ie; ;m image of an email that has been filed to e-Oocumentlii. 

Any attachments are not accessible rrom within this image, the)l can be aecessed by navigating to the 

Docull'Ient Profile using a browser. 

Confidential· FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 8877798 
607 


76061.033

FrOiii; Oavid W J BAGLEY Sent:: TtJe Aug ~3 15:4S:1~ 2002 

To: Ce-rolyn M INilld 

Subjfct: Hl~H NOON 

!mport:!nce: Nor:re! _.' Attac.hments: irnage_Cl.glf, High Noon Aeport.pdf, ReportAnnex (.2}.pdf; 

SE51ESA545A3CE04a025eC140OS13ACS,rt1 

EXHIBIT #9 

Confidential· FOIA Treatment Request HSBC acc 8873843 
608 


76061.034

Confidential· FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC acc 8873844 
609 


76061.035

CROUP ll"'TER."'\ . .oU. AUDIT 

DUE DILIGENCE REVlEW - l"ROJEC"J mGt! NOON 

JULY 2002 

s,I.c.nON3.22 

COMPLIANCE 

A review \II as pe'J'ionneLi I'l ftile fuadilmcn\.a.I pU11'ose. ClIrt't1l1 re5p(lnsibi1iti~s and on,going 

ticih'hies "f GFB's C01'ripli-allce relaled t:iT",rt$., wilh lht: (,IveraH objecth·e being 10 ascertain 

the eXl('.nl ofOF8'S c.xisting iUid potential Cvmpliaiicc rd.alcJ. risic.~. A determination was 

made to .!ccess the eff'c:ctiveIlf5$ he-w GFB's CcmpH:mcc l'cla'led efforts arc spread 

fhroughout tbe c-ompl'-ny. i.r:d!!dinS il£rt'tailb:mking ne:\wQ:i:. Caymtm 1s.!a'llds 2~ New York 

City bl1lncnes, m:1 !lOn-banking unil.!:. In Ilddificn, OFH has I"iemel fndlltiC'S where itS 

clients c~n perfQflJI scm.::; banking trtuSllctions. 

Docurncntali;J;) r;:\;tw~ and s~ff inter .... iews ;l.'cr.:: undertaken. to a.sccr'J.lln Grn's o-vc:mll 

'{"fTcc!iY~nC5S Wil!! Compliance 0 cli"'ili~ 2.'ld i:=>suc!:. MoM (!f~ meelings. ::1M lnt:::1".ricws 

were held with Alldit I)(J"'JCial$ RodQ Mendoza Ramos. RI!:r.n!lndo VAzquez, L~is J<lYl!;'T 

Varela. Rubio and Arturo Salvador Re~s Figueroa. 

The prjoclpl~ r!H::13$ crthe tcmpliar.ce rt:view included :-

• Adminislrntive dutl-ec;. lind ~Vlews f~r opem:ng rIC't~unts. 

Know YOUTCustomer pl'3Clic:es. 

• MOTlfytaunderi:ngp!rvt=T'llion, de{~,joll. monitorinB ;m(l1"-apOrting. 

Processes t:~ablished tD ad;'ere \.\'ith ComisioIl Nacional BancariR y de V:llores 

rCNE\l") CircalsT 15Cofl, whicn by Scplcmbcr 20il'i. r-i!qoircllllli M'"-xieo banks w have 

ii"ltelT«lt col1i.rGl poliCIes an.4 procedures (0 Jnl)rut"r~ cOrli!ol and report cer!!:Iln b unkin~ 

risks. 

Polkies and procedures cor:!>"r;.lOllS to HSBC'~ Speci;;J Categories of Clients. 

Co-dC' ofCcnduct 

Conf!~ts ofInlcreSL 

P('l"Sona! Im'cstl'l'1 ('nt PoJidcs. 

InTI:S"[{If StliU.bilhy. 

During iY~i ami i99l<, an accouniC'xtC'ative was fuilud to b;3.Ve·es13bl&~d and oper.atcd 3 

TniiTiI;Y laundering ;;c1;eme GFB's CJj.£t; ii(.cumen13tiou and !'trords were reviewed. 

A rev~w w~s a!so undl!.r'lilin relDting t-o: GFB's D!:'pa.rta:nc:::nto :II; JlJndi,",o (Le:a,d 

D~p3rtmcnt). Rtltr tn the LCfPf &dion for;'l summary ofGFB's m:.>ojol' la'l','suits 2nd client 

compiainLS. 

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC acc 8873845 
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GROUI' INT£a."~A.L AUDIT 

DUE D!L1GENCE REVlEW ~ PROJECI' HIGH NOON 

JULY:!002 

GFB do(:'s not havt ~ Corr.pliam:c Department. R:uh:tt. CQmpiiancc "work is canLaincd 

l...tthm the stope of lleuvilies of the lkpar1.;ullC'nt'll d c Audi'roria. (Audit Ol;:p~"mcnt ~ 

rNA). wbich currently tm5 a sluff of h1tl. rNA is he2.dr.d h)' FlaviQ Al.lgoSlD Frnn}'Jtd 

B!lrtt:dfl:, who ,..-as nOl-inh::rVk;wcd!loS parI of tnt: due ci.itigcJ\l;;c effort Rocio Mendoza 

J4:nos, a.. INA dlj1:C[oi, vve:;S.e~s.a staff or 30 p~vpk wbose resp;:'iislbiliti~5 inc1\lde 

Cemp!i:=xc n;:l;lt~d issue$. il'.d~oing op::r~ti(;Tl5;:~ ~he Nc'.V Y crk :tg::::nc:r omd :l;s.sets :md 

lis.bHitiel booked Uthe Ca}lDan Islands llmnch. Sra. Mendoza sald thet her <!.Jt'a's 

allnual plans indudc fl t.'Ul!ct gos.! 10 revkw 400 o(Gf3's 1,3~9 domeslK: br:nlChes 

Ac,"uun1.ing Openirw P\'9feVUJe~ ilJld Poell)llssil;.h:: Ci:lie:gUIit;:!- ufClieOisThe CNS\' is~ued n regulati<rn in 1 "'?~ thM rcquir<;$ all Mc~i:co bsnk:-s. to o-bta!n 

fuoo3.Jr.t!ltill Know Your ail-of infonnation. Banks h~ until 01/01l20Dl to bring all 

zc,o~nt,~ opened pn(lf to 05/1997 imo ;lC n.;:[1:0CC "ilth tbc retul~tion INA daLm'!d lhn! 

;:ii df;lme$tic accounlS nave been orotlgfll into adhcTtIJCC: wiw 1M rcguJau(ln. 

• GFB coiiecis tilc majority of Know Your Cikm Information froln cliems. Howt\'('.r, nC'1'I' 

ccstOrtlcrs an: nut a.sktd 10 pr>;lviol:: info1Ul iltion aboul their $!Jurec! of wealili 0 r lllibal 

~~pos.;il fund!>. AIIiV. (.he GFB ~O?i notdo;:umem. any ir.fcrmatioil about I..Loe e);;p~ct~d lise 

oflhc :m:"oun\ or il;n.ticipat~ 'r:JlSJc~jor: vo.lume.-:1' fr::-(jllcm-y. 

GFB dots not u~ Wor1d~Cbcck list 01 any other th~td varty aalabaSts fur new ll.ct.'Qunt 

Sc'.ft'.fniog.. Also, new dien! !lilll\es. nre not c-hecJ:ed t!gainst the US Treasury' 

Department's OFAC SDN List. 

GF'B docs no; have aci:iem resuie(iDn policy miw-to. Special C3tegorie; ofCjitnl~. it 

nos en;lI\cd an mkmal blacklist calli;;d Boiclinaoo. Cc::iarn govcmt.\cnt offi,ials, !.""nown 

(if higrdy SlI:sp-eC1cd crimhi.:ils an:! crimirlil-i enterprises. fij"td perwns fi'uw me FATF iluil~ 

l:m:peT";l"tive c Quntri~s c:;lmprise L'1: Iht (a!though the d>:lcurnentation p;uvlded di~ no ( 

b"r l"IJ.c current f.A TF list ofnon-cocpCt9Uye cmmtrics. th~ U!.!t bci~g. ""eU OVer Of'.c year 

01;1.) GFB's cnr~ client information s:-stelTlS comllare M"R.' a,coul1ls ...... i\:h the Boletmnd.,s 

and ptevtms acli .... "Ik1l1 of moSt' aC(.QUll!S. 

GFB hIlS ~ department c:111ed BilDl:O GDbierno. This depanment h!ls as- dienL'Ss!!:i<!cl.ed 

~Ht!calilldi ... iduals~ loca~ J;191.c and f~detill govt:lml'llctH ilg.cndes;and aic majotpcli1ita\ 

pllrlies. There "'aino ir~rorm~Livt. fO'\irtd iJidi.:;iiGtlg wl'.eil'.:; tt.iS ;;Iqa'i,.o,;ofi!l rc;;;;ivtos.any 

Sp:::dll! C:nnpliancl;.' r.::;!::.led ~c\'et.1ge. HSSe wock! r:gud llle ind:ividuOlI ~'1d politic~ 

party.;:!ients of.B<mcn Gcbie:rllo .;Gh~b nsk secs.. GF8's Casa de Bc-l:;a d(!c:s llot obtain invt"slor "StJit~ility infc-fm:nioT!. Clients are 

required to srale their mmlhnuJ]'J iDYC~[OtJl1 volumes ho.sed as:t pertttnage of the in.e~rne 

lnrc.,"n~iiDT1 they provide. 

ReICin1 revtcw!; of accau.i11 oycr,ms dncumtI11z1ron 

• FRBNY review m 11.'1000 identified 1bn! 82 cith~'i48 3CCOU!lts reviewed B!.eked·" ... U· 

dOC':[JIL'\(';tllattort. 

Confidential - FOIA Tieatment Requested by HSBC Bank, USA, N.A. HSBC ecc 8873846 
611 


76061.037

CROUP JNTU, ... !'.iAL AUDIT 

DUE DILIGENCE REVIEW ~ PROJECT HIGH NOON JUI.Y 2&02 

A review in 1 QO?: (18,}" sample review ofdoeumentatioD ofOl,ccQunts boo-ired atthe 

larSo!:l's CiI)'II1;tl1 h;illoO$ bftJnch} fQund (ha. -\1% ()f the itccounis re ... i~l/>'ecl (92 ('I f2::24 

re"jew~) iltCktd fuU client inf;::orma1ion. 3"J' fifes had no elient information. 

" D .. ring IQ01, 11'J.!. rc-vk·.NI:-d. eI~tTonican)' Tn\'cmory records of13)9 ( ~{\m,;stic ;lCto.u"t 

l3les. 49,527 (67,5%) cfth~ fil.."'S cQl'l;;:<im:d ill! IJflne reqLlired dQcLI'ttl(:ntoltion. OfB hOls;:; 

100% go-ill ror 311l212001. 

D'uring lQf.l2. INA fo(Jund !he!ltlte GFB had ~pe!lt.oj 2,O{ltl USD dtnomi~atC'd acMtmts 

cUistide La Frnnza fronLCriza, llioJ.:rung Cireular 1()1~ of Banixco. Th;:: deposit cii>:nt 

infonnalion sy"tcm nclt'!: blocks attempts to 0. pen usn accounts ol.luidt: of lhen rr.n 

. encvmpllssing lllud lvctJt~d witrun20 kilometCl'S of ... 'lc US oorocr. 

GFB's main ~(';I;ollnt m(JT1't~ring ellom <lre (ondt'c~d through." SY~ll!m narn ed Monilor. 

It is a Hogan Tool Kit b~kQ $)I$lcm th~t "" ... c bllii\ and ro;:iinc~ by GF'8'~ INA and iT 

dt.p&1'lllHn15, J...h1nituT's cun-!;til. ptim:ny fl!nction is 1.0 iQcr'llify .l!."coonts who-~ 

L-ausaclions exc<:l",d the e quiu;l;::nl of USD50k in :lily single day, lJjlCru \ciemify1ng an 

.acCOUIlI that tll:ceeds the daily lhresluJld, lM sysLem sencl:§ alen ... hal reach the :Ictouni 

f',xt"('.ulive level. where aCl;ount man:J.gC'!'S z,rr {I) review the :!.leTts a~ [l.t'tify INA «[any 

akru tl('.lic.vcd to be Un£l!lli:;t! or !;uRpkiou~. lr;lR accllUYlI execLJtl'il" ~f'lieJ:. iiuII;:I C:::JS(: is 

unusual OT pt1~ibiy SUStJ'itiOIl5, an lNA employee opens an investig;nion and rcview5 the 

t!ccounL'r;:mosl fC/;'cnt. 3 moni.t./S' Or;call5actiolls. DiscussionS.3.iC held u,itb ttlt: ~ferring 

acct:lli,d ~xet\Hi ... cas: dCl:'me:d Diiccr;:sa.;r. A c:;se :Je..-mcd Wv'I"U';Y l.c·bc s.::nt I;;; ltw 

Sec~tada de fbciC:I!rl~ }' Credlto Pt1 blica para I;:; Pr:::vcnci~ ~ de Aeti1.'idad~s HicitOts. is 

[1r$t sent to Ih~ ccntral Co-mitt de Analysis de OpcTllck,ncs ,,['r; RCCllJ'SO.S !licit'J.$ 

('·CAPORr). The: CAPOP.I h3.,. the: dedsioll responsibi1iT:,Y \\'h~~T (If not 10 ~Ild 

5\lspicio\!:sacti\lhy~puns Ie the gOvelTDIH:nl. DlJrin~ NDl, 281 [lelbe: 10.6 I:U5f!s]'t:rerred 

wcre ~ni 10 tl-IC govCl'fnTI¢l1t, thc r"sh,iu=1 being ~O(l$idt'n:d 11~ not r-,.Il\-1ng suffidcn-t mcnt 

to report. 

1'.1onitu-r has c..olumns n::portmg wl4?:bcr clk'ntCill7Cilt ilCCOwnt files iir.; dDC:liwrnt~.:3 rillly, 

!t !'t"p<lrts the bfQmation b ~e:'Ccntage tern:s by busncss rli'lUiicn.i:;rn.l:lch and acccurlt 

~x.~Ctltjv'!; po~:ml<1ti(lns. At1hc act'Ounl tcvnl, Monitor slat;::s whc!hcr the fundamc·ntd 

Know York Ciien1 jnform~tio(J I.'.lements are ~I1 me, HOWI;VIlI', ;J;Ccaunt Qt1icers ent~r Ihi$: 

infonnaLion in Morntor and TlOTIIlBliy tl:ris CRt" is v!."riri~d only when INA "isit II oranr:-n • 

.. nCii sllmplc rcvkws a.r\!c .('Indllcted fur file docdm~nt..1tiDii, The s.ystem is bcir,g 

e-r.hrmted to flag cai!y ccthiti;:s "fmnl"'C thsi! USD 10k forC'crtni:n :>ccaur;!s. 

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC ecc 3373347 
612 


76061.038

Redacted Material 

GROUP II'oITERNA.L AnHT 

DUE DiUGENCF. ilEViEW - FROJECT fiiGH NOON 

JULY;t(ll)l 

The sygem"s merits 1m' lAa.{ 11 captums :!...TK1 r'.!pc-!i5 tran£3C!iom, witl:! ~l!.li!';f~ct'Jry deb.[J. 

However. liS o\,cr,JiI allpli,::atlcln is rn~hcr Jim if::d :-

• The sysitl'l!, dots nal h.llYc .any (:upncily to ~ggn::.Bille tr""~(.·lion a~livit.)' rDr any ~eriorl 

clhcr than a gi-,'c:r; day; 

It C3nnot istu~ 31t'rtso'Tl'cports.b::.scd on weekly, momh!y or3 momh·$· of~li\,jty; 

_A.c!:'QL'!lJt officers 11.l't !'t!S;xlOEiblt:: to. identify f.ltd l'tport tr3.!\~ctjon~ lb::y bdicv.e Ie be 

unu ~'llli or suspidcus. Thep.;: is nt;I lnd I:':p-(,.orl ~nl fl':vicw r;li' ihc ,r"~r USD50k 0 r:u:fjvilies: 

Monitor is l;oJ'.nt"tlC'd only with Cllmnt ;)Ccnunts on GFB's Jedgers. Client C"S<l d~ Bol'I"" 

lind othe-r non-bankWg tranSOCilorlS are: cErpum:'d by M..,D.ito[' only if 8 currcJli acCr.!lJllt is 

.. free-ted, 

Mcui~o[' d-o(!s nct ~cn.tify hig.,i t.sk elkTl{s .. s s\lch: 

Mcn:tQT(l.Q('.S not U!cntir.1lhe ~~c:mts orth; B:lI"lW Gcbi,:n"lO ~ssur.h; 

Priva!e b3f'J:ir>-! oprl'l2!ic-n.sper d:, are nQI idemified. 

ifflcquirrd. it is considcft"d a Syst.clll S1,l~h. as C,o\MP Rt'laU""'Quid h:l:ve.lo·be insraU.ec nnd 

implr.mer,lerl at GPO. 

CNBV Cirru)!I:I" 150if. 

• In Oc,olle, 2001, the- CBNVis51l;d ·Cir.cul~r 1566. The cirt.l.lb.r:reouitc.S;.111 Mtxito b;:mks to in"ipl,,:r.ent Ullern£ll cuntrol polides, ptOctdllrts ;i.!~ Pfilt;{jc'(,S by S<;ptemo-e. 

tOn, Tbe main riSks idcntif.ed lit-':: OP\:i.3Uvilal. l~=luid-i\y. credit a,"1d iilOilCy laundclirii;. 

GFB ~s dl;:vdQP~4 ebborlle ;:tolides. pro~edtJr¢s ;-;00 s}~{en:.s toO' c(lm.ply wilh t~e 

elrodi'!. AJI al'~C:!M !l.re..as. "",ill h3vt !Q con.trol, monill;\' an:j rep(lr! regularly ibei. 

assocl!lt-en risks 10- the CfTltrni CAPORI. some a.reas .,,}ill have to repon monlhly_ The 

over.,.!! eITQrt i~ 'fcryambiti.::us, an4 GFB ""iii be veri chalkn~cd to trC' a.bk to ~dhc1"C W 

its 5Vphi~ic .. t;:d plan 

• om W'OlS involved in Operation Ca:r.a Sl"'Rca, :I US'l!o\;emme~l undercover ~·ing. 

oper.itlDF.i iiOOI!Tu.ken u; cOIilb.al am!, tr ... m·ddlig and moo.:y laundilring D~rlvities m the 

US a..'1d M:;x:Cc. A former GFB ~C!:Gllct e~ec ... ~j ... e ~ .. ;).s fouad willing' 10 es-t:blisb: 

.ri~!i"'jl)\t'!;: {lCC')I!!1ts <100 !!JQved illegElIlH!IV:y Ihrn!J.gb th~[!1. D~~iI.<;: th;: fEict 'Only the 

~:'rm ;;.; 1ms ~:i;;'l;,7:' ;;;;;;;: 'E,:S';;,~ ii';;i.if:f ;; f ;;:,;;1' ;;;;i;:,,:;t,. l;:F;:;;;;';';; ;1 f ~;;~ ;::::;;':;:::;1i ;~?'ii:. ·~;,;:;l;·l;:.":'i. 

Confidential- FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 8873848 
613 


76061.039

Redacted Materia! 

GRO(lprYTERNA!... AUDIT 

DUE lliUGF.N(:r. REViEW - PROJECT HIGH NOON 

Vi U ""ali <1 

h~'e irnewn :l.OOl:t t!w- ~:l.n;r,:;t\(,j he did [lolhing.. to slop or report it to m:;rr.age::c!nt. 

~~\I,:~v~r, be · .... 'i.lS fQUrl? ootiD .rove C()ru!.>..~~T ~~'SY"d, ,any of rtKo L""!1llS<!.CL~DS, ~o 

I..JtB 'l'l'aS no1 (mmd gUlltyby vlrlat oj§*-Sti'l'~.'1ac;t1l)n5. 

INA h:!s since condcc{cc money laundering rciatc-d n::vic~ wr;I,k <If\d we ·;nc· advi.sc.ri by 

them t~kit no f\.!r:-t-::r pr;:,bkli1s tlirie bun found. 

Regulatory Jnsp~licn:s:r.od External Audi( RepO"rts 

OlDY c-ondUC1cd twa inspcelton 0.sits. durir.g 2001. 111c rcgul:llor ~i~;:d f('lUT prim:\pic 

st¥.t1tNmings wim the l<!I].el bartk's ~~ney lalJ!!dering ptngr:u.'"!, 

1, No money laundering audiis crrcviewB. were periormtd at tile tmst nrt2. 

2. Th:. nvtra.ll :ilEitu~ -of dicT.t fil.;: dOCUi"\ltnl'ltil)n was found Ii) be ~jj tllail 5-l1ti3fiiCtQfy. 

3, infDfJ';1:)tlOn II.'rt5 missing for 25.% Df tb~ over iJSD50k U'an:sac:tio[ls re .... i::weo.by ~h 

CNrWinSJ.'cc{ors 

it. Ill: admm!Str:l.t1Qn and content of Ih~ mon!!y ImlOdern\8 Irn:injn~ pmer.r.m -needr.rI 

nnproYI,':Il1cn(' 

GFB tt;:rl'l:lgec:.eDl re;=!iecf "fhll i:mpr,nre'&.!n! r.:er:.~lJre!: \\'c::1d c-e t:.l:~n to ::.l;!do::ss each i&!:'.:.e 

I'lOt~~. Hc~e.\'(:r, SOOl{, issue$ ~mam.~t!-1st.ar!cling a..'t.d nol fully !!rldT';s~d (t',g. ML ttl.!!!.!r,g 

programme on t~ Jnl~lict), 

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 8873849 
614 


76061.040

GROUP L)(TEP ... NAL A.lIlHT 

DUE DILIGENCE REVIEW - PRO-JECT HIGH NOON 

JL"LY 1011 1 

The Decembc:r 2000 Anon Audenen Managemenl Letter addres!>ed llm:e Compli:m;;:r. 

issues. 

I. Admjl1~tio!\ :md c{l!I.!rol cfcredit f3citities It.'lC comrs.tt.s with ft'lated P.i!.rtie$ ..... ~s- wes.k 

2 OFB did Jl() t fik fma..l1<-:inl reports and schcdoks with r.:gu!:<lJ.o!), 8:l,lIhoriiics i.t) a timdy 

manner. 

3. OrB fOlikd iQ naily implclncnt its risk administration prog,mm as cailed for in its p-olicie:; 

<ina lir~.:';;:\lures. 

Management replied that they h.!ld taken tt!e Sl1."pS rteoce'£S3!''j 10 c1e:1'- e:arb item, but the 

following sh~1Jld ~ noted, 

L The 2001 CrtBV mspection'rt'p0rl lisiell two large insider IbM1S, and refcrem::e"lo 

prt"ferenti;:;l tr>!<itrocnt [Of both ... :hi.::b were. fo .. nd t.:; be problem Sl<U:iI,livD5. {Rej~r Ie. lilt:-

C;:,mmcrc:1ul Cr;;dh Se::licTI 3.3 for rurthcrdcl!liil1} 

2. GFB has~~l!l ~1 f,Jlly ~utcrn3!cd the at:cf.l\mtitlg systems !hal (!'rndl.!cC' the rC'g~~l()<ry 

~P"rt.,~ an~ ~he4~Ii!s" 

3. A Dl!cemb~f 2001 KPMG levi~\I:' of GFB's risk control poii(:ies and flrocedll~s founo. 

!iia1 lh~ orgnniz:ati{lf) will>.in complianc:e wil.h ail 31 cit.mtnl.S of C'NuV Circubr 1423. 

wrJth n.qu.ires },{e;:;:kc banks tu iilonnor and I;ontrcl liq<;lidity. ~redit. m;;:rkcts and 

aptrnting risks. B;m.l:.s had tQ implement procec";lt'es b control !bese rid;:; by 01101 ,2DO!. 

4_ The: 2[)Ol Arthur Ande!'Se.n M~nageme!!t let~r did not repeal anyQf!he three issues. It 

did state, haw~'\'ef, 1hi.1 the or:@.ll,ni.z.ali~n ~~~eJ 1(1 irnplementco;rtPin meUSU1l:S t(l. cQmply 

wit:'!. Cir(lliar 1423, unlike the opinion renriered by KPMG, we ru:tve 001 n:ceived -an 

-expbn&tion as. to why KPMO wcft; appOifi!ed 0 vet anj above. the: invI.,IYfmeot (Jr 

An;jers~ils. 

Tratl<;';1Clions over me internet 

Gre cstabUsr.cd ail Inttmr;t web site iil 19%. The:: bai"J:. arid COlSa dil B')1.s; mr.re some 

1r:ms;lction'JI web s-!te p:.ges. Ccn~J:C'le:"J., s=~ll !;l'J:;mets::Ind. corpornte b:3rJdrlg custcm.etS 

can conduct s('Ime account transactiO1\! 0"e1 tht: Internet, includ!Jlg.: 

Purchases of mutli~l fl,lnds sh:ues. 

TilX a.nd 0 tb:T bill p<l,yments. including 70 (J identified servke providers and 1; mobile 

tl::lepbone wmpallK~. 

Credilc3rOp:tyrneni.S.. 

Int~r-accc\in1 transfers. (busines<» clients only). 

GFB bas nat. however. eS'.!!b1i3-~d web site pages wh~~ clients C~"l open )leW accounts. 

During Apri120(l]_ somt. MXP7.7m (USD7'lO'k) ofunaulho.rlzcd third p3l't)' WifC transrC'1'5 

wen: coxll.,lcied through the Jllternel (m.lsing a l\lSS to GFB of MXPl.)t!I {USD150kl, To 

d.s.k:, the bank has- not been abt~ to identify anysusped.s. We hav~ not .s.een conIinnsuon that 

Inc inhc:tn: ¢(jl111i'Ol .... ca!m~ss..~ h,a\,c been rectified. 

J68 

Confidential - FOIA Treatment Requested by HS8C Bank, USA, N.A. HSBC OCC 8873850 
615 


76061.041

CROUP INTERNAL AUDIT 

DlIE DILIGENCE REVIEW - PROJECT H1GH NOON 

JULY 2002 

GF9 halO II Code ofCoJ!d;:c!, but it covers very few m;:.Ue"l"5, its overnll ccr,tcn1l>d."g. span.e. 

Co-nflicts of j!!tel'e~ :!ere addres:o;ed. but no examples .!!Te given and erep!lJyees ere not 

instructed how to rt:Spond to a $ltuation pr~~eT1~il1&;] p.()1.c:"~i\ll e{lrlflteL Otocr 15suc5. SHh as 

outside e mpl(.ymelll., neeivillg. @if~ from ciicnls and service providers, 30nd gUld;:mcc on 

f<::ll'unJ,iug to au~mp1S af iiinu!;I'II;:;. Il;~C:-;"'1;l liiilc: or no altcniion. AU empkr)'t:es wett 

reqldrcd tl) attest to undc-rst..mding. the Ccd::. lind all new hires. r:1u5t also. sv attest. 

OFB does 001. hne II rol~y rdating. to crnp1or-es' jl!!rsonal i!lveS1.!nenl aeth~ues.. like 

HSBC's SUJTDClali;'l~ Roles. Ifemployees pll:rc:bnse sIQ~" afUfS tbey must bold the shares 

for three monlh~. !Ina Gn-t ..... eek for other S1ocks. Empio}'tcs althl: leV1:1 tlrdmclOJ" and 

above must provi.::!\! personal uS5t"t find liabHity ulfumall1Jll 'Jil w) Itnulla\ ba~it>. 

GFB il'Pparenliy does not empioy separation of duties. beN,.<e:e[l d ~parltr1en'15 for sensitive 

dltt\l1 rafiSal;\!on$, s\lcb as the principa.ls of Cninest Wali$. ror investment b,lIlxing ana 

m';i'g~';;Lnd iicquis.iiior,s !l.Cti .... hies. During 50rnc intcn'icw~ with 01Ilcr DD t~am tDCmbtT3$ 

some GFB c:f5c:i<:ls refened t.ct L.\(: concept of01mese \V:lUs, li'Yw'ever. it Appeared that 'ibey 

W!!!'e !!si!lg the (!:rm 10 note separ:rli.)n of duties bet~'een front and bock omc~s. 

The GFB Compliance effort is weDk, and it appe:}fS thrll the Ulrf;(;l ot.~olnh:('Ilitln dues nul have 

::: strer.gCompH:mcecuUure, 

GFB doc! not, in ~1ity. have !I Ccmplia."1cc Dcpa!!.rn~1 3.nd en c "'!l1v!d ha\'c lI) be 

es1.abli~hed a.nd impiemented, willi rossiblr $4;mt ltlc!!) slaffbeing In,'l.Sferred from IN.I\, 

tt is likelythalln the evr.nt oItbe acquisition proceeding, HSBC would need to irnportlU"l 

~x.p\;ricn(;cu Co.mpimm::c omcial c&labJish ii formal dcpanmcnt. 

.. RCVk;W~ uf account !)P-C;'li'lg procl:,nurc$ ar'lo d~nt doc:umentation arc sporadic. arid the 

Tc:views OOrn1Qny d\l not encomp:..s.s.1arg{ popul:!lions of clk-nl fil~ or octivilies, nus eITer! needs \0 be :itrengtJ:e\l~d. 

• Oicntt!"2..'1S!!ctiCln :a:l'.d .et!t'lity T:'1crr:itorJ1'.g is vcry limited. The rdi:mee ~n ottou,,11 

m~n~gl;:rs 1('1 idr.ntlty and fqJo11 unu~1I1 and snspidou'l tn;!llsactk!:lS oftb~irtHcnts is <! 

serious in1e"roai CQtltrol.s.Mrtcnming, Higoricnl analysis ofpDs$ible G\l$pieio\ls ~itll;Jti()nl> 

:uc performeci onty althe ret:ommeoolltiol'ls 01 account officers, High risk cUenlS receive 

no special mQnitoring C(iVera,lbc. Tbe ~rgani7;;1tiOll pennits ;1CCClun1.S or indi.,.iduals and 

organizations that ;)I't cn~dcrc.:;!. hish rid;: 0)' some hrJdng .Qiganiz .. tions a,'ld simply not 

permitted by o!hers.. Yet !..~cre a~ nc special effQrts to monitor acthilics 01 perfurm 

spr.cial revieWiiiofthese clients, Enhtmced traru;actitlR mOTlilMing. esp.!!dllUy Corhi£hri!k 

c1iem~ and unl!~u.aJ acthritfes, would baw 10 be inj~c:ted to the effort Qujl~ ltk~ly the 

i:l~'Tl:lIi,c:u lJ1uni!orin,~ :r;'ti.".jlie~ wOl,lid require adclitieual staff. 

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 8873851 
616 


76061.042

GROUP INTERNAL AUDn 

DUE VlLIGENCE REVIEW - PROJECT HIGH NOON JUL\'iOOi 

• lntertlOll and external audit recDmmend.ations, lUld i~ueS r.lised in resu4J.tDJ)' rep01't!o de 

nol rec(.jo,'l! proper respect and <lcUOt"l. Many replies to ex.ceplilJos mtd recommendlltim1!i: 

are merely pt"rfu(lc\ol)', and commiUed improvements llTt OftCIl slow in forthcoming. AI. 

limes management h .. :; nct n:spililded iLt iLl! 1.0 i:;suc:s iN r.zcommo.nlauons citod in 

Intermd Audit reports. Fer tx::=;np~, we idemtf.<ec 1"'.1) r:Cotds. where INA OT :'!C:011ltr 

dcpal11nCnl pt:!:"formc:d any follow up R""r'icws !o r.bc me.W:r dtcd by Ihe: FRBNY 

c:x~minr;':rs. B~lsi~ Imcs and iUpport arC:1$ '~ .. auld hBVC Ia dedicQte cffer1S to address 

and n:!.Oive audit ane re~llialori is:Slle~ [lmi Tr.t:!omm endations. 

The shm1cDDllngs with mOllit-oring I!.ccolJnlQpening. practices, client 1.ronsnc1ions, ufit.lslI31 

opiO-lCilions, .nd th~ h.ck offoUo'if up to .:x<:e.pti.:ns ilJ"j Tccommendiil~n5 cited in lIudit 

:m~ r;gubl~1'y ftjXl"rts:. YI"es.enl the p;;1=nt!OIl \0 h.av~ a t'\cUlcr emplvyec 0"1" ~1:.p ~ r cmpioyccs. bC"(;Qtne involved in another mo[]ey bUMcrirlg op~m.tjon. 

Measures 10 DmmolE' and ensure s!l!ff diS!;"ipline 2!"e not Sl!lisfs.~l(lry. GFB's Cl)de of 

-Conduct Jacks C-Ollicnt, OC13il and Sp1rit. '1 h~rc: :is n!? [K"'II('Y 1("1 prom{llC pmdcnC'c with 

I;mpl(1yc=;'s' pcr~n"i im-cstmclTt activities. A ppropriateSlatrrc13ted ptl1ides would haV(: 

w be lillplemtnled Unn\edia1ely ... S part of the O''I'crall cffort to insl<lll a dc:di .. at.cd 

COUI pUa;;.;;: and internal cGrlirul C"i,lltUIT- lhrililii;lxm\ tb~ 1:>r(;i.i .. iz4ltkm. 

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC ecc 8873852 
617 


76061.043

Confidential - FOIA Treatment Requested by KSBC Bank, USA, N.A. HSBC acc 3873853 
618 


76061.044

F~' 

~ent!lf 

[)a1eSenl: 

To: 

~Tc> 

Subject' 

Carolyn; 

O<lvk;lWJBAOl£Y 

Oi:;:l,id 'Iii' J OAGt£y 

13108i2002 '.:5:46 

Q<rol~91. M \.Vir;;j,ti6USttlSSC@-HSSCA"'1ERiCAS 

H!GH NCC'N 

Could! leave yeLl to pass this on Ie Paul," a sec;ure tashton, 

Regaids FiY,",ian:X!~ by Dallct W J BAGEYIHG-I'QlHSBC Of'\ ~ 3 AlIg 200115· .. 4 -- . 

From: Motthew J W KINGIGaM INA GHarnCHarHSBC 

S'I!I1t by: Liz A TESTER 

5l,j"bjll'ci: HIG'r-i NOON 

COp)" of report as reql..lCStad. 

----~~--------

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 8873854 
619 


76061.045

e..oocuments Nole 

Any nfaehna'lh; ar- not .c~!bla from witi1ln Hlil! IJn3.QI, liIay can be acceased by navl~"g to tm:: OoctJf'l':ent ?reflle; \l,t~ a brw;:er. 

Confidential - !'OIA Treatment Requested by HSBC Bank, USA, N.A. HSBC ecc 8873855 
620 


76061.046

From c10lm F ROOT 

Senl 31'. John F ROOT 

Date; Sent; 251111200209:37 

T.y R.i.:.!1ard E T SENNE1T1HS81 1Il1SBC@!!GaC, Matirtilw J 'v\' !\iNGIGGM INA 

GHQJHGHOlHSBC@HSac 

Copy To: Subject· 

Attact.ed please find a raport on my visit to Bifal, a report which Sandy ;::lockhart has already seen. 

nll'~rI'! i.<; VRry lif1.1A nfwh~1 W~ wOl:lc1 r.~U '" r,Qmp!j::m,"~ fI.mr.tion Af"n,l ~"'ve ll..'-ft. out pf'Hl;onl'll eV",llli;\tion .. 

because of the sensrtjllihes invoillec. I did not encounler anybod}l at Bital who J lIlought immediately 

capable of buiding a Comphanc:e department. However. I met with Ramon Garcia Gibson, Director of Ant)... 

Mor-ey launr\erlrIQ at 5anamex (Cmgroup), and I agree with MBrtllew (anc! SU5:nn Wright) that he would 

be e good candidate to head Compiiance in Mexico. 

Kind regards, 

John Root 

BRa! Vtst\ ~ 4-8NOV02 (jo 

e~Oocuments Note 

This. iG an image of an emaillhat naG been mad to e-Documents. 

Any attactrments ue not accessible fmm wiltJin this Image, they call be accessed by navigating to the 

Document Profile using a browser. 

Permanent Subcommittee on Investigations 

EXHIBIT #10 Confidential- FOIA Treatment Reql .. ---___ ;.;.;; __ ... HSBC OCC 8877800 
621 


76061.047

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC oce 8877801 
622 


76061.048

CO."rlPLlAJ'CE PilE. DlLlGL'l:CE TRIP BY JOIfl' ROOT 

BITAL (\{[}J.(O om -4-.\3.NQV1)! 

NO'1'E; 71rro in/lJfrlltliimt ill iM~' ~pl)rl >l'U~' ubll/;ntal thlLl~h IJ1l.1ml~m(·llt in(l!.I"I';"'t"~ l//:ul 

hu,r Iwl bet'n i"J"p~"I!"flJ' w:rijh-d, 

Prior t[J 19%, DO idcn!ifi(:;Jtion WiB nttded !Cl open un account. One HSBC Mell:ico llllllUlger Dpille~ 

1 ...... 1. in Mexico. II ffllse drher's ID c~n "1:11" ob!llior.d in 11\0 OOurs·'. The salTlt: mll~1"8t:T oOlcslhm 

'1vicxic:ms don.'! like to di;close fiO;ll1ci:;.! in{o:Tn:llkm" aud tnat they -'IVilr open:all a-=Cilll.nl in Ihll !lame 

oftht:mnid". 

AS mofC than one so"llor mauager opined, then: is ~ lili~k of;! "control CUhUTC" at 8ila\. 

A nUlI1l1er ofLanksalC" clmcnlly \\'ml.illg togetltl:rOIl dC1l(Jin:?d coml)elldium of banking !<lW~, ... ·!lith 

II:QuklbC'l1sdul rorlhcConlplianccC'la~L 

Arlio,,: the Blllll (hiefLe!"WJ (onnse: to part:icipale io the working group alld ob1.uu a COllY oflhc 

eO.llJlendium for the Compliance Chllrt. T~f.I~ct d8tc· fO be dl':\cnnioled 

There is I;':' b .... · rcquirlng "public 101m,sl'' lo.1j); t.~ riley lor lIgricuJ11l.1a) OT "11"o,,r l;;wmrcd~""'lul"i, or 

ri,f [)[l(".'-' r~~OQI''i- or wl)~n "'T"«S Ho",n·r.,. )~~1 m(l'llh tilt Ril"!""!) '11" Ml'>H."l) r<'(I\ll'~I"o11hl\1 Ail"l mala., 

a VSD 1.5 bilJitl-fl r.cposit ~it.1l1/'lem311\Vfi!rCmmal mlc. 

011(': ofGrupo l3iuT's chiefrcgulal(ITS, Mr Carlos Prevencio ;\1unOI..,1111 AssiS13tli Direcfor Genml a\ 

H,ldc!lu<I {tlu; Tre<M!),j, Wa!i CX\TCll1Cly crilical of umpo Bitllt PCr1I11I)S it i.> lr';~IIO (IUule at ~oUle 

length MrPruveocio';; ()Wil .;"rd~. 

""JrPr(I\'\:ocio .!id llUil controls Cl:larc;111onnatMi") '"lIo noJ cl(ist"" -an ass~ivn which Ix:: fcpeHled 11 

n,'nlbcr,,((im;:s and in Wl~lCh he illc1udcd icgalllllt:l intcrn:.1 au-da controls. Thcy "carry f\QweigftC 

mid "do nO\" pass we ItST"' nIeCe is "an UD<lC:ctplll.ble level of diem rompl\:.bt~"" (S('I! the section 

iO\rlledb.!~!)' be!ow 01\ ~C\iem Compl~lill:s')" TIle r1:"gul:.:!ers thenl.';ehe:: receive "m:my corllpb;n~", 

He ~u~llecls lila! Banco Bi\al'''ras bWdug tile cliem~ lor liQllidilY~ lsie} 3lld thaI its "record was Wl:!~ 

l!tanmberba .. nks-". 

IJm;....--o AtJ;mlico is ~ "'.;:om;l:ic~lt;j si;''l;icm''. [lim:,) r.itill.1c;ts 1101 act.:pl ';11 .. l1lkc blilm; tliS!O\llCn UI 

their prn/'l1cm~, M'· T'rnvc:ndo ennritlll<,:d, even. thcntr\h illw, rhe kg;,! r<:'~IJOn~ihi1ifY 10 (to '0 

\h Pmvcncio rescTvd some of /'lIS harshest criticism for Grupo BimJ's Legal Dcpartlnc:nL which he 

iI.\'o;trcd \Va!> "Dot~i!ry of bad faitli Irur: extreme lD\XliQCfli)''' He wesseti th.: ueoofor bctt.;:rcom;ob; 

cf::.ivi] c:il!i~S, 1\-here IIY.: g!"ccp's \a\\"ye~ wer~ ()ficlll!Ilptep~re.d ~tU! missing Ille pmper documents. He 

citen several tX~l\w\es bl.l! said tbev ";e~ '"nol iStI-!<tled cflses'" One elIse in PltT1icular bOlbe~d ""fr 

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC acc 8877802 
623 


76061.049

Provem:io (b~\ldt!l lhe well ... known[awsuit of the Ballco ,.\t!aHtico (hem \\'\105<: mitrest p<I}lnCmS 

5plrnlled OUI o[conlrui lIiltl reacll~d lhe mil!lollS). ~ CUlnm h~adllf\he Le.gal Depa.L'\Jllect toldMr 

I'roYClIClO Ihm a cashier hlldpmd money oullO a coruplalnUlg: tlienl- and lilt h.f\pl{:~ lkp3l1mem head 

Cluefore CCiI:sidereo lIle ''':~St closed", Ullfoli\ll\3tety, Blta! apparently couldll" pro:UlI:c Ilprnpcr !jrnc~ 

galllllCd receipl, and lhe diem cominucd {II complain In Illl' regulator. who blamed a "'bad teller 

'i}'!:\em" which, M\\hlk II<)I l"t'~chll\g.lhe 1c,·cl ofin~\illllinn:tl mh~ry, c~n'l ~~~ WM! \I'em oUlla whom 

lIndwhCll," 

There's II bil nl!)re. "Ellul! !)t~ds: :t p~aetjYl:: ~r.r:Hegy:' !! also Deed! ";II.'.eeping ell,.,11g,=S in 

maOOl,gcrncnC "Theil: is a 101 cfwo!}; 10 do." MTbe;-c is nil ~bilily to prevcnt probJelm: "Today 

t\lereisno bnlll!1c{'t\em'ecn ,he client anctlhe.banx " 

SCl,ior m.lllagemen's defence IS thal rclalio;u; with Ihc regu(a~C'n ba"t' be.::n soured by fI'\'O ~suC':S in 

par;ieu[ar: Bi!:;l's ca?it::ll Deeds and the Atlalltico acqui.ition. 

Arli,,,,: F<lccd Wi!11 SUC1lll tf<:lub!ect n;gn1atory n:"lolir:mshiV. il is suggcs1cd Ih~1 sCllior 11'<ul.1gC"!llen! 

lIlW II oon~r!ed elion to meet frequently whhMr ProveJlcio Ie keep him inf{tnTledofpro!,;T<:ss made 

in cOZlirnh, Iwric~Jli1rly in the Le~')' Depar1ment. Bill11's lIead OfCoIJlplilmce. ',,,her, dcsj~naled, 

slll)uJd~tiJe):l~.:wn[l;spousib!eforcO-ordinalinllS\1'h<Uleflort. Targ.el dale: cOlllinoolls 

Client Compf;tints 

'nlere is a ~enlrah;ej S')'51tll'l of eliem eomp13ints c,1l1ed Scn'it~l It t,l\1 sorT ct)rnpl.1inl~ by typo, 

region. and die!!! ~illcgOI) (A,8,C .. ). 

lI'l:ljor t:lru-::s of c::rnplalt'l!: are: A TM. !D.;llf.mctior:~, p::yrcll errors. bad s~t'\'io::. 11=1a\'; III !hc tr::dit 

proc{"$s,cjleckli<luds(inclllctingfortrrxprl\'mel1fs).andl.1[ecrc.:iilcardSr.ltemeo\<j 

The 1c~'cl of.;!;!:,,1 wl11piailllliclluslli.-<.:1 si!'.nilic~lllly 11111: ~~ri~ble pOltioll nflll?lWlgeflll\ salanes 

l1~e\,l"\o'>r .. llllv"l)r"!lh;eh!~· t.rilir::'I\ of AII~r~ die!"1 ~cr"I~.C {.'I,,,: Iht ~(lil'ln immtdiatcly ahovc nn 

"Oovemm:n: Rc-Jalioru"; 

De!..pilC' 3 higlllcvel of ccmpi;)i!1l.s.. lhere ~ t'Clau\'cly htile litigation ogtl.ins\ tlte b<\l1k. 'rIle Legal 

DC}JllfUm;U( ovcr~et., 111U:i1l~ lIlt \;ulle:e!iDIl~ Plvcc(\ures IlIlll~ ClJllrb, 

A few ~1:'Ile~ M>:' known 10 ht [llH1itn!<'Irly r!ehlOr~fricr~Il)" rhihl~hll:l, Morchn. TlI.f'NI,lllipll~. and 

DUrnI'.gc, TIlis is a problem beC.,,,lle, willie bnoking is r{'gllimed (lU ,be fedemllevel, collect!on 

procedurc$ ~re governed hy Sl<'1\Ol'llld local l1:.g1118tions, 

IPAB. !he fn~!iTl.![e lor the ProtecUon of8:!\lY-S S:lViI'{!s, :J'Jdiie:1 Fc-bl1p!1l.llllo!e::. (Fcb3pro3 is.a 

predeces;or llauk s~\'in~s pt(l!OI;tlon Ha'" ,I{\)!clJ ;JulXhilstd celi,UIl a<;~els of Me);\c.lIn banks mter lhc 

19'-)4 crhlS} and rerumed ol\es II !\ecTI-ed 10 t:o!llTavcntion ofmc baiJ-our I1'cgllll'.Tion<;, legal 

-;Jrutecdmgs WCJ"C inslitulcd ag~inSllht govcmmenllund by [hlil\' [JIII)il!J1CX (D~Hled by Ciligroup), 

U;;11comcr{o·,\ ned by BBVA) md e~ll0nc A sclll':::llCnt is CDIIi.)~.::ret! immi:l~m, 

Bit:!! "';ali fincd USD4()O.1J0!.I-!!ld,1I.t!0!J1~ico USD 301], {l00 for faihl[e to 1'~?(J\ld ~deqnalcl;.' !l!ld 0:1 

,iH~ \(1 ~O'H',omlelJ: J'CQue-S15 ror ilJrOnllfnlon on 1994 crisis ~O!;J1\lItrT1~s< One clinical!)' had been Ihe 

Confidential- FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 8877803 
624 


76061.050

There/u.\'ca./soblxn tlIX$fon!JCc!QslngofbrruldlCS 

:\-Jmll'V f ~l1Imfl'ring Cunlwl~ 

Senior milll:l.~cmcnt pcd1avs becaus~ QfJeCC-1l1 LiquiJity concerns .. can lllllnilOr cliemlill1l:,a-:liollS. 

including. cnil1 ntpOSiiS and wilhdrn.wals.lhrough :11l1T sy~lem called Cicm: Di~fla (Dai!y Closiuf,). 

C'ic;-;c Di,(I-;o ,xl11,ains pr.:\';OUS·<l:1Y inJom)mioil, ;md i; lipdmtd hi ~ [;;nch pn:h"f,S' (ir", l)011n TE'.11· 

tiAle) 

The sys1cm CRn 5!tcrnccounls and lnlTlsacliolls i:J dillC:teH~\I,'ays (by llCCOtint region, lJranch, nmoull!, 

cic.!. It eM SC~11 all aCOO\!Hl'!;. 

Senior l1\IInU~[m'Clll's pmelicc is to !\'\oni{or1r1msneTiom .~n.·lltcrtlmn \.fXP 4 million (usn ~D(I,OC)()). 

The minimtun legal reqi,llr~elln fur ll1one~'·!aunderi1lg C(!nml!s :l.re three·told: 

I) aSy!i.lcnl to Irk:ntiry 1he clicn's ofhlgh--risk traIlS~C!lOl\S 

1) quartcrl) rt:ponillg OfnlOl"llllly cash c1cposiis ofnt lensl USD 10,000 olllICcql.livaknl 

J) a tn;)llitoliug s),sttm for Jowcr--mcomc diel\1s who depo~j( at ICILII USn lO,(l(lI) m011lhly 

.;, <;~niOT HSRC II..l~'I;k("llJ1anHgerhas ~!J!IlC ~(lUhlS Ii! 10 !low·closely Ille n'l'llIlIl<ll> il1vC:;rigMC: -reponed 

tr.lI1S::lclioIlS,!l5 USBe Me>:icu reCtIVts few substantive COllll}lelUS OI qll~lio!ls 01, the inIonnalicll 

~l1blltilH::rl. 

Cicr.c Dj~:io "i'.'~ deve!c;Jed Xi olll MI lool .. dler :b:l: lor ntQlle'J-I~undtrinl:l )rnvt:llioll. nl~ lllal\1 iT 

systell\ used by Blla! 10 comply willlrhe abovemutimllm legal R'qulrenlelll'; is c:ll!ed "\.IOIl!lOr". 

Moqi10r;S a I;IUtOl:liscd SI'Slcm built wilh the Hogan Toel Kit 

Prim;jry lespol1sibilil:t rlirlllt d~lc(;li(H) .. ,r unl!~ulll1);;("';":liuII$11l1'()U3h MOllilof '~5,~ will! lI,,:: 

mnxdQlj ,I\" A.l1''l'lUfl;t d,: 5~tnI:tII')~, 11'1 Hf<;3 Il'illl!u I'!l':nr~t JowJi\. 'nl': Cap<:'ri 1,:I)HIIUiw.«: { ........ 

below) 15 li1fOmlCd, nnd U'lil aecOtnrt cxecmrllt 15 ;tSkect iO m"tstiwlte and tr:xe appropri:lle aC:1on. Thi1 

>elf·Jcf,.'1llaiionis a signi1iclIntweaJ.:.nc5sin cOlltrols 

In 2001 2tll wspiclous '.IallSaCtiOf6 ""'ere reponed to the auJl!)rilies ttllruliilg over MXP 1.75 billion 

(USD 17.5 milliou). YTD :W02. 1 1t2 :m~viti()us !fltllSiiCliolll: wcn: n:puft\:d, IUlulliug O"cr MXP ':IO() 

million (USt) '}O nu)Ji.all) 

A committee caBed [apOTi tCom;le dt AnaJy~is ric OperllCiDnC~ con Recut';osllidt;)n mOll.L!or> 

suspidou~ m.ns~ctions. Ths corurni!1c~. which is cO!l'lDO~cd of a represcnt(J1h..: Iloo.l!lll,cd by each of 

the he<lds~f Auctll. Legal. Operalion;:. rt:;ud Prevention. and Banking, mN~lS moml1J~'. Tl'IC Comminel': 

S':C('(:L'!.r;· j~::! m(!mber oflhe Sc.smentos MC~ offmfl11.'ll All!!.'!. 

{he Capon commmee nlso mOllllOrs The miplemenl<!\lon ot Ibe imefl':< COllirol reqllu'enlenti of Cr-:SV 

CIl1:11~ !~1)6. (The: (,:-IDV, COI\lISmU Nacional O,wcana y de Yalm~, IS l n:!;uJltor. TIS pnme 

r.:£pomll;i1ilics incll1G": :.11>: rcgula:iiGli {lfSCCUrllb.) -r.l~ moll!! ris\.:!; idel11ifl.:;d iil il1i5 clrcul.1f arc 

lIp~r,!)iOllA!_liqlllrli;y, credit, :mrl nxI!1C)'l~llT1lkring 

There tire :5 regiollul Cupori conunln~ whith !cpor110 Ihe ttntm\ \);:)Idllllllrtcrs Capon. l! is lhts 

("pori <II Eilal bcadqllllrtcr~ whkh dclcflJ1iuc~ which suspicion inlwuctlom will b-c rcporwu J.O the 

p::gulill:¢!l (H<lcim:b a!lQ G1IV) 

Confidential- FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 8877804 
625 


76061.051

Redacted Material 

1l1l:U. i~ 11 conlidenlial"whislkblowcr" !elc",>hOJl: number for tnll1stlal (J":illl.actioru. Tbc progr-.[mnl(. 

called CflpGmcl. has 10 dale pCnlJiltcd lOe reponing w.lhe aulhorillCs of7 suspicions lf7l;)SaenOlls 

m~amng MXP 1 millior,(USD IDG,DCO). 

An aeeour,l records ltIust bc kept a rllilmm:m of 5 years. 

i! hd"im.:d lftfil 'Ill ~l;)!Tn.'\.x~ived mOllc:y.l;,unlb·;)lg lffihlhlg, H()Wl'VC(, 11,,: \.'xue. nuiu", of!lIi-s; 

lrdiuiJl~ !J1t1St l.>;:: "erified Thl' C'NSY limed 111 :1200! il15pertirm lhal rhe 1rlmini~ru!lOIl al1l"' C(Jnr~nJ of 

!ht" lHoney.\a1Jnd~rillg trJl\llng 'PIt'~!1I.mme. needed impfo\'cmCllt, It docs not :l.P?~ tim! Ihis 

reeommend,llion IlIU ~n fully implcmcmcd 

CUn'npondenfBauldn.'" 

Eauto Glial has ac\i~e cont:-,>powiem '.mJlkiug rcl<lliunl>.lJjps\~i1h 10 blll!k'i_ ThL.."C oouks "vpc~r ItJ u-:; 

V:CIl·t:!IO'.\'n :md re''yj~:J.bI!!! i;~!illl'!intl5 

BlnlCO A!!.a.ntico does nOI have scpaT;lle correspondenl banking rclatiomllip~-cxc.ept in Miami, whae 

there is an nccouut wah Bauc-o Bilai itself. 

Banco Biw! h:is 1S5 correspalldenl 'tlallking rei:nionsl;j~ in lOTal. 1I\1lSI with wtll known ban~ ;)nd 

IXlDl! with ~'lks i:l FA 1F non-;.oopcrn1ivc COUIltrics 

Amcpg lhos;:- b<lllks ~quirillg flliihci KYC In::: 

_-fdi",,,: BiLaJ's HeM o!"Compliancc, .... llcu clcsignnle.i. wHl nl()!\ilorell;lllll!:cd KYC 011 flU 

(;;)r~SJ.X.'lItlC.HllllD,kil¥ ,dlllilm~;li).!:.. !Jut p;!rlicuiariy un tin: ~i1ovc ballks. 111 :11(; absCllce or salisfuclOry gye. tbe COOlvJiance bc .. '('1 W!!l rcc(Jmmcm"! te senlQr flW1lI.,\!C'1!lC!l1 the cXi!tug ofilic 

reianOl:511ip, Targ(ldillc: ~:t"AR03. 

An av::ragc ofUSD 200 milliell i~ wired OUI O:'l1!C counu), every Illon:h III 8,300 opcnnions. AI; 

:lv\'/"lge ::JfUSD ;~7 ::ni!!iOl.l is Ir.:m~rcrred 1(1 >''!cxi::.c in l·'},QO!J ttp:.'ntions 

Each account execulive ha::> IU si~, orr \Jll\he K YC GuculUt:lll~!ioJl, including fur the Grdlld CaYnllIil 

opcral1oll&, 

All intemariomll w~ payzntots are Sllbject to Ihe Monitor $Ystem. wbicb does ntl! ~l1lT.e:rnly blocl:::IllY 

Inlllsa,lioll, or C\ Cll u"c nny fillcr other [haD tilz USD vallles oc;cribed abovc, The s.lSpieiou; aC1ivity 

replll\iug [lfOCci1nrc I, !he ~::t,\'C;1~ el\cwik";c in Ill!' \J;mk (,,'" ~hOH ~Mom:: .. '~I.:nr"<lcr\l1f. COlllrutS"), 

.. \s incicalcd.. Bi!~! does not have as. ,1 tiller the FATF 1I01l-coopenuivc (Omlll"? li~t. Mexicanb,lllks ;1fe 

"di~uss!llg a c.owrnon pOSUJon" on Ihe issue, 

T'.oI.~re are ;;ulo;uatic cr.;anerty :e-jXlns III ,he re,f;!liZtcr (0':3'.') of all tt;l.J13;;CfioWi gRi>.t~ ,han usn {iJ,ooo. 

Amtm.' Rit:Jl', He;!d ufCompJj,mce. whO! designated. to deve!op. and Opernnons 10 implement, a 

gwop--widt: fill.;~ fill ~lUJ.lit:i",-", !I ... ~dl.t;U!J", iLld15uUl~ th~ u:.e lIll!.e F.J,:rr UUIl·.;tKJj.lC[l!t;"c ~u\llll.il~ 

li~t ,prt 1hl! 0mQp l';t':l\-.' id, rJ:)untries li,,[ ('{>mpH,..'J(~ will 1I1so:> """,,")o:>p ,11101 imp1emf}nt a pro(r.-~s 10:> 

investigate SU'ipid~lQ\ lr.lllSaclt(ll1$;u1d l11ke f(1I1e-.iial actiOIl'inthrlltl any \ippi.nf!,-c1T. Thi~ system will 

Confidential· FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC acc 8877805 
626 


76061.052

Redacted Material 

ht: de\·t:lfll..:11 /!;tlUjJ-wj(lt; Jilt IJ1l1,ccuUllf m:[lvily. UOI JUS! COIreSpOm\c:), hil!lking THrg\.'1 d~u: 

JOJ .. 'NU3. 

As. eJSCI-..herc, man)' ~om:~polldcnl bank!; dc'Illol id1!llfif) !hl!' ordering pru1y ora wire U'!l!}S~c;j{)Il. 

/1{'rwl:l'er, early l'lexl rcnr S", ifl itl Mt);.ico will ; .... 'llcl1yO Fon)) lOJ, which does require: such 

itlcJ\1ifIC>l'jQII 

Bilal h~s lOla! correspondent bimUng deposits o[t'SD 1.5 billiol\ illclurling offsJIOrt: dt:posits ofUSD 

iOO miiliuu ill Gri.lllo CI:~'IUdll ,!ltd USD 1:<; u:uHiuu ill Ne.,.' Yo!';". TIle rc,niiiuillg USD 67.,lmiili,),\ i~ 

olldq\(!si!inMC'lkC!. 

Adicm,' Briars Heo~ ofCompliilu;;c, when tlppoimed, will analyse all conesPQlldem '!:innking.deposils, 

om pal1i;:ulariy Tho~t. iu the: Oty:nan hlanru Targel (ble' 30JUNO.~ 

Bital ,gave the reqll'silc: USA PalTio! Act o;:nHkmior.. 

Haul:. policy is not to mUlSlICllltJsille~li wilh foreigll-t:xcl.imlge ;l.Juj.l~ ('\;eJllrcs c<ul.luiares'') w!licll only 

el:.ch~n3e foreign currellc), - but do not tran.fer lnon!!}·. Tllell'! ~cen':lm ~"'bill~J;." - of wludl an 

:~!tmal-cd 5,000 e~iSI j\lll~: ~ou:ar:i a,";; lig1111y rcgu!mcd. 0:1 Ill: o(lr.:; ll:::nd, Banco B;:a! docs de 

bosJlIcss with bureau); ell' cimngc (~caslls de ClI'nl>io·) 'I1..'l1kh tr:tnsrer mOlle)' and arc be!1~r ref.\lI~loo, 

In M:xl('o 'I>c banks art: obliga;cd !o process lilX pllyll1~n!s -whichllrt: Il"(ldc ~lmoSI cn!iI'~ly by check. 

TIle banle! obl.ain lllcr,l1lVC go\,cnUTJC!JI bns.iness in n;;:hang.e for \beir cO-{)jXr.tlion. (St!t:: [h~ ~c:don OIJ 

~GlJ\ocnll11CUI Busw':$;() 

nle Ill); collcction sys1CM is very inefficient ard organised rraud is \~dc1cS\JTI:,lCl. The Ullllks h:!\.'e 

sllc~ssrully lobbied It.:: !:ovemmcTll(o require Inlcmei pa)'meTt\s [mm !C~:;.1 clllilies and, lor Inrgcf 

illllUU\Jl). inuillKJlluh \wiilJ <,;wJt:d illWlllC gn::<ll~I d]ill\ ,-.00 I mi!!ilJl1. \If lll.-c::<:U1ICU iW';l!me t;'t:ilil;:l 

!hall MXP ~OO.OOO). Itt ~di!iC'Jl, eel1<-:ill Nber ta:tpayel5- ti.~., 'toosr wo:pin.·d !Q mal(~ llI{1rrrJl1y 

""ilhhoklillg j.l1.yrnenll) nlt:S't make electronic payments. rending legi:<.lllrion will funhcr expand 

electronkpaymt".llts 

Tn of(ll':r to 1l'1'1I"" ft.)il1d. !'It!tl'allic !Sl:;'!ll~ut" ~1!f!!l1r1 h~ !!l'!11mi>.t:1L \~hel!' !~r:'Jh'!!!!!1' [!:':rmiHed by 

111"1', :q;U!OIlWl" :md lhe s\:f\'icc:.s. contmcl SIgned between Bilal M<1 HaclC.Jld>I 

.4cfi(m: BJ1;l1 Le~ and Vper:moIU to review all pcrtillem leg;tl anti comr.lCrual pro\'ISIOIIS and 

de:nJop ful'lll"..-thc elec1ronic;md }mtrllet payroems sl's!~m; D;'laling ad",'lI.nme:c: ofC\'tt:,' oppOl1uruty 

pr(T\ idcd hy 11\· ..... n::gulll!ion. :IT cor,lraCT. Targel all!e: "; 1 MAR03 

Gonromcnt Bunking 

Bilat provldn blillking and payroll ser.rI(r.;S to !l,ov.eflllllelli at tbe Federal, ;latc. and loul levels. Tn 

addition to m:tking loans 10 Slate ~nd llIuni!;iplIl el1tities, Dital Pi1;ll;essesp,\)mlls fOT go\'cmnl.c:'~ 

empll)},;)cs {aI1il.:lcl1ut1:i from llldrp~}' lnstalnx-nts on tilUSumer "no mor;'g.<lg~ !oans.); 31h'allCCS fi.;nds 

~~~~~~l~:~~~~~:~::;:)~i~ c~:;~!:>~~~~~;~1!I~·~e.hldicial d~silS and 

Clt,;u,: il~ V''=IJ(lj1(h::l~n( ni;ev(ihe )/alC: jj) l!,~ h';J1t.:i!lli.~eC1M me",ns {hilt .il1\Y bu;;,;,lt"S jJiOpos"J () aile 

.. r"'l'f"Ol 1'1 ~ "lIH and rO:lli11 .. ~ (", .. ,.,,11 r .. rl)l';"n~hi.1 lltNP'~ ~ 1,1t r)fh~If,:.i!';r!l. in l,~n hp.r~~l1"" ft'#~ 

lIrld cOHlmisskrns em Ile polilil:ally 1lJip1llaUlbk {and LlJc gDYernruen.! UoC'5 not IUi\'!; the appropriate line 

Confidential· FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 8877806 
627 


76061.053

item in its b\ldgctL Often d~ bank's tG(llunwltion [\J( il sCl'viee: will be in .'iin'CI, pc.rh~'\lS 11lI1JIl',;l\ i:I 

lllI3e depOS'l! ~I ~ ravotmlble rn.le or opportuO!tics 10 nur);:el Prod{lcts tD sta'\l: employcl:li 00 a capln'e 

payroll. {Seesccrions such 1'.$ "'Laws", ~Govemmcn1 Rc!Miom", and ''Tax Payments"} 

:.'I1.CxiCllll!.\W d(1~$ I~I perlJl..i! Ihe ,l."lici!<lliQJll1ff.Juul[,lliSfers ilbroar.l <I1!huug!llhae ~ 1\0 n:)lriclioll~ 

pt!fse rmsucf1!J1l!lSfcT'S 

Adiun: B1L.'l1 LegIlllc de .... elop pr;)clicai gti'idc1i!~es on I\'hal !S '::lIld is Jll:llllllolVed in Prll·me Banking 

Tll'l.!eldllle: ~lMAR03. 

Action: MimI's Head OfCOJ11Dliallce. 1I'!lel1 desiEllated, to re\'jew aU e."tislinl! Pth·.1le Dankin!!.. .... ith 

)lMlicular allenlion 10 USD Il~counl.$ <lnd :ul1rll~nsfcl'l \0 New Yor);: and th; Ca)1~lan b.lanU;. 

ne lru~1 area hIlS experienced mally dill'icU!lics. FOml1Ll dOCUnlCRlarioll is nfien Jacldllg. Pr.opcr 

aCCOIUltW!,l for lax: paYlIlell\s i~ II pfoi)lem(e.g, for foreisnel1> who call only o","npropttl)' 00 the tdlJd 

oonkr.;andCO;lSllineSl.lJrolle:,ha Inls.[). 

T1H: art" should improV>! with the reeelll insTalhni.ou Orll~W IT syslems, 

The main hlOO1.JI'" ulIlon is the r,demcioD de Sindicatos llancarios. to wtic;) G.500 Bi!aI employees !.le!ong-~rnostlyteilers". 

LnhmlT reh\lirll1~ an: c(lIlsirlcrN\ gomt nm;.t cases SlIPlXl11 Ibis claim. Firs.!, the ractica; Bar'lon 

UlOVe!ll!:1H., which dcmons;r.tles ··sumClimes vioh:ntl)' - for debt+relicfrcrpoot fl!.r1l1ers. hns 11011JSWlHy 

targeted Bna! bnll1cJlI:'~' Second, blanchts hllvc: lJeell kepl opelJ I{)!l~t:r !lu()ugh.)UI ilk;. UIIIIIII)' \O.'1\h 

lit:!t pratt,i froill. the lim;:,:>, •. Tllird, Indni.gfil,eal c{lnvH1~ed l!u unions io a.ccept si~fjCilTll Jot; l(ls~ 

w~o Arll\ntk", bTiln:::h~" ""c:rc (l('l~('.rl_ ill fl~n hcr.au<;(: Alt,,! W~\ f'1<paor1in! <;('I [Olpiflly ,·I~l'wht'r .. 

DIU: Sl:IUUr lllilIla::er ll\Jlt'~l '·1I11..'[ orwaJx"ill (T.F ulJ5.1l1eS\·'. nus is cmiml~ bm::m,e rCF's fnnn;!I 

1Jl\'oIVmlC'llt ""1111 Latin America ceaseci over lWO years ago and. as far tiS Gror\l is aware, LLf never 

had muc..h bU~ll'te~s in Mexico anyway. 

Adiml! Bha!\: Head ofCiJmpliaTJCe. whel1 appo11l1cd. [0 hwesti~ale all ITF-originaled hlL'ii\,c;~ 

T!lrg(,lcl31C 31fl.·1AR(l:. 

Confidential- FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC ecc 8877807 
628 


76061.054

JI<FURME GEi'iERAL DE -,UDITURJA 

HB:lcJX GAQ O~002. 

COI\1PLl..\.J,CE - MO~RY L-\XNDERiNG 

AliDlTORIA I:-iTERNA DEL GRllPO 

MAYO 2004 

llditoria 

ute-rioT 

E7~~~~~~~ IA elow Standllrd I~ 

. h IA 

HBMX G.I Q 040016 Pagina 1 de 1 MAY02004 

Permanent Subcommittee on Investigations 

EXHIBIT #11 

Confidential - FOIA Treatment Reques' HSBC OCC 8874376 
629 


76061.055

• 

I. RESl'MEN EJECI'T1VO 

1.1. AnteC'tdentcs 

EI ohjcri\'o de cstc infonne es cI dctaHar las obseTVilcirmcs tlc(c:ctl1diJ~ en 11\ re"isicm de 

Lavado de Dincru rcali7.ada a H!:3MX, 

En Mexico las Instituciones de Credito cst~n obJigadas a dar cumplimicnlo i'I las 

dlsposicioncs de la Secretaria de Hacienda y CuSdifo Puhlico (SCHP) para prevenir 

dctcctar y rcponar opcracioncs con rccursos de proccdcncia iHetfa. t.'slablccidiis 

principalmcotC' en e! aniculo 115 d~ la Ley de Imtitucioncs de Cr~dilO (Lie), donde se 

deJinen 

';;. Operacinnes rc!cv:mrcs. (a que se realice en cualquier instrumcnto monerano por un 

monto iguaJ 0 <;upellor a usn 10,000 

OpeHII::.iones inuSllalcs. Trlll1stIoC'.cioncs rt:111iL"iuJas pDf personas fisicas 0 moraics, que no 

!';can t()n,gmentI."S eOrl}a aClividad 0 giro t.:tJll1I..'fdal del die-ute, por SU lllODlo, Irecuenc-ia 

lipoonatl.lrnlcza. 

Dcntm d.: III Direction Ejecmiva de' Compliance sc encucntrn la Direecion de Preveuci6n 

de l..avado de Dinero a !;argo de Carlos Rochin Aharez dc-:;dc baee I aiio.. teniendo dentro 

de sus pnncipa!6 funclOnc-s 

;,. Asesoria yapoyo al grupo para el cUlllplimiellto de las de la Dormauvidad anti-l:lvado 

de dinero 

;. Conrrui<lr cambios en prn!;ticas y produetos 3S("gurnndo los controles de prcVC1"1C!t)O de 

la .. ·ado de dinero 

;,.. (""ontfo!af e1 cumplimiento de los procedimi11l1OS y eontroles de prcvcDcibn de lavado 

de dinero. 

,. Apoya en 1'1 capacitacion en materia de lavado de dinero en d gropo 

.,. Pl"opof(::iumn' al pcrSODa! del Grupo los medios y mecanismos para cl rcportc de las 

opcraciout::S tdtvantt..'"S c inustl.ll.lcs. 

EI arC11 5C c;ncucIltra ifl!cgr<1J8 pur I i1in:ttor, 2 subdireC"jnf~S, 5 gerentcs y -" ilnltlisl~S 

1.2 Obieth-us de Auditorl9. 

EVillU<'iJ" quc los m~.:a!li5mOS l1!iliJ.adiJ!i para d motifl(lrN y det~c(·i6u ue uperdcitlnes 

n:::lcvamc':i c inusualcs scan s.uficie[li.es. paia proh:ger la bu..-na l"Cputacl011 d~ HBr..L'i:. 

Lva!Uar e-1 cuntrul intt<m,' de la Direceion de PrEvencion de Ll:ivado de Dinero verificando: 

;.. E:;tmctura, 

,.. :\n,uisis de pl'OC4:::Sm, 

y r-..fll.m:ales dt: poHtka;.: i' precedimientDS 

I-lBMX 0:\0 040026 Po gina 1 de I M.~Y02004 

Confidential- FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC acc 8874377 
630 


76061.056

• 

Evaluar que los meeal'lismos lie- rcpUrlt de operacioot,s a las 3l.1torid.allcs sean oportunos y 

sujicientes para cUUJplir con las reg\llaciol.les esmblccidas. 

rdcntiflcar producros de nesgo y vcriticar que- C's.tos selin monimrcados adc-euadamenlc. 

VeritieiU' que ~I glupo cumpb con las teye's y (,.'irculares (."stablccidas paTa la I'Jrcvcncion d.: 

lavado de dinc:ro. 

1.3 Alea[l('e de Auditoria. 

La auditoria se rCilJi;o::o il! Grupo BBt·IX 1ncluycndo HHMl y fiiinles:, y I • .'unsistio en: 

Se verifieD la cS\TUctura del area 3 tran:'S de organigrama y descripdoll de ptle<;tos 

s~ realiz.;mm. c-ntrc"ist.1S con cl personal del area idcDtificanda sus fuodoncs, mismiLs que 

fueron ;mallzadas y cvalu<iUa$. 

Se evitlilO eJ sistema MONITOR utilizado para Ie monitoreD de openH:iuncs l't:!evanlc-s 

Sc TC\'H;aron J 7 cxpcdicntcs de cas os rcportados par B~nca 

Se eVflluilron ios pn"I._~eso. .. de: 

'r Repone de uperanoncs a la~ auronu<llIc:.. 

:r Anlilisis de uperacl<')ocs inu.o;:ua1cs rqxu1.lldas POI' las s.U":41rsa!cs, 

r MUl'1iTon:o d~ operatJlmC~ 

;.- Opc1aeiones rd~"vaDtCs. 

:;... Atcnci6n de oficio:i .de fa CNBV 

Se velifico d (.:unlp!imiol[o d.: InS princip.a-Ics Jeycs y circulolrcs <lplicilblcs: 

S(; iloali.tid'Ofl h>s procesvs lie- conlIO! p.U11 pTC':t:nir Oper.lcioncs de !avado de diner!) en las 

filiales: Casa de fiolsa, Seguws y fi<.lnz<l~ 

A traves de cntrcvistas sc idcnliticaron los proce"$os en los que 5e consldero sc ticnc mayor 

riesgo dIC iuC'llrrlT eiJ. opcraciones de lando de dinero y sc L",·aluo en c1!os \0::; mec"uismQ'; 

de monitoreo, en las sigui:::nles areas ('I fihalcs: 

r FiduCIUio 

,. C.r.I1era 

r Opcrucioncs Pasivas ( RCmCS3$, Cobm inmc-diato. Ordl;"l1C!o de pago. frwcrsinnes. 

Logislic:a MCRctana y Ackrrocicnes) 

;:.> Ballea por Interne! 

';- C ompra-Vent3 

:..- Cu:!nt!l::; Gr:ln Caim:tn 

;... f'3-s.,a de flrlsa !--!Sse ";.. HSB(, Fia117..2!S 

HHMX GAr.) 010016 Pagim 3de 1 ~lAYO 2004 

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 8874378 
631 


76061.057

e 

• 

HSBCSC-6'UIOS 

HSBC Pr-nsi ones 

Aseguraciora Atlautico 

HSBC Vida 

Sc id(:rltificaron indicadorcs de los prodUC1OS C(lll riesgos de Ja\'ado de tliner-a. 

Se dia !;cgl.lImicnto alar> obscrvaciones ernitida!; parhs allloridadcs en cl ilhimo ano. 

1.4 Condus-iones 

HB~·1X has insufficient eontrols to detce! mone), laundering: transactions ju all areas or the 

Group in a timely manner. The impicmentation of the C Al\l{P system "is In process yet It 

only includes the Bank·s trdnsactiuos (hal ha .. c bC1::n l"Cgjstcrcd In the Hugen system und 

fails 10 m(mi{Qrtho~c registered in other IT systems! HHMX Subsldlanes 

Din::ceil,'m cie Preveneion de Lavado de DinerQ [Direction of MOll'=Y iaulld.::ring 

VctCTTCncc) has identified high·risk areas ofmow.:y launderiTlg: !H\!1::;:ilLliOh~, whkh an:· nl)t 

bcing monitOred. 

The cOUlmunic~tilln bt:!WL:L" LCO::; and Compliance Joe5 not Ui.!ib!c Lhe- timely di!tection of 

the neeu::; ilnJ wc~k"es$'·s of the areas and subsidiaries, 

'nlCfC ZlfC inadequate int.;:mal .;:ontrols ovcr the IT sYSLCIDS used 10 scud iuform3tlO1"I to the 

I\~gulat(}r fin :lu:-;picious or rclc\"am: trims-actions to authorities. 

In our opinion, based upon the foregoing, the Direction of Money L;:mmknng Deterrcnce is 

upl:r.,lint?; ;. ... i1..11 a BELOW STAl"~DARD level o(Control Risk.. 

Our prim:iplt- 1.:11ndusicllts fU-c as follows: 

INTERSAL CONTROL 

The principle ..... eakm::sscs identified iu tbe admini~tratilm of per..alltli.!l include the 

inadeql1:H~ !:l:gr':b'3tion of duties as the departmem~J structure is tpp heavy (I direclor, 2 

sub---din .. 'Ctors,.5 MW!1gers and:' Analysrs). 

The inlC"!""T!a! manu~l and regulatory ciITuiars arC" not updaled on a riru~ly Il(l<;:is 

There is inadequate IHlDdliag and safeguard of rclc .... ~nt 3Dd sl.lspiciou~ tranJ;!lctioll!;. "lbe 

Sub·dircclor and the persmmei reponmg 10 bim sbilre the pas~wnrd that i~ used (0 access 

the SIT! system and :;~Ild imQrmaliQn to 11l~ aUlhonti~!; TIle restricted area U$ed LO store 

records of sU$pieious mms.nc\lono;, is not alway.~ kept ;:;afe 

HBMX GAO. 040026 Plg;na 4 del MAYO 2004 

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC acc 8874379 
632 


76061.058

RELEVA~T! SliSPICIOt!S TRA~S.\~TION MONITORl"G 

HBMX monitoring lools in place do not ensure In"l 1111 relevant i suspiciow transactions 

arc reported. !)incc ooly the tr,msactiolls rcb>islt'TOO in Hogan arc rnoDltorcd, this is not the 

case for transactions entered through the Haul- 's tuher IT systems. The info!lnution rc:!aring 

to suhsidmrics is not ... ·alidated before it is scnt to rhe authorities The information that was 

incorrectly mcluded by the system lei .. 10 be manually t"iimina!cd before il is sent to til\.: 

authontlc:'>, 

Thcrr: is a high risk of exposure in tbe detection of suspicious lfil£lSactiotlS, (ur fhcy arc 

deleClcd only through banking. lmes. "J he internal controls for money laumk.'1 iug dc:rerrcnce 

do not include Group areas or subsidiaries. The ;mditotS not~ thai rvfONrTOR ::.ystem. 

which is the only suspicious trans.action indicator, 'has nO[ received m~illl~nancc for the: la.st 

:; ycars aDd the intonn~l1on contained therein has nm been \Js\:u COl :nl)Ill:~' Jaundering 

cktcrrencc 

Add["d~Value ItceommL"lldatiofJ~: 

).. Although there is ., project fO imp1cm~lIt lllc CAMP system in HB~ ... H. il is. 3!St) 

neces;;.'uy 10 de~'elop sysrems LO monitor [Ti11b<lCtiol1s in otner busil",csscS of the- H BMX 

group using llldic(liOrS <lnd Trends in high-lis").: proJucts and ar"'a,, and rnising a!c:-rts in 

order to t/lke immcdiate actions. 

1.5. Recomendac:wnes Pdndmtlts 

Reeursos Humano$ 

Vigilar que las fuU(:ioncs inhelenleii ala subdirccd6n de medici6n y control Sf:: rcalicen de 

aeuenio a 10 estab!t'cido por t"l an:1t y C4S0 de que e\ ~l'Sonal no cumpla con el perfil 

pOlJerio a disposi(:ioll dt' tccursos humanos (3.1.l.) 

Establctcr Ul)a 3decuada segregacit1il de funcjonc~,-

Manuales ., drruJal"'I."s 

Im:orpol'iif',,;11 clmafiual de pl'cvC!lcion de Ja,,~ de dinero prect'dimitnto.s para c1 rrnl:unicntn 

Je clicntes de aha ricsgo, perfiles de transacdones de dicn!es )' "i~ita:-: domidliarias, 

(3.1.2.) 

Sistem):! )lonitor. 

La lidminhtnicion del si;:;rema debe cnrrcgo.rse a l~ direccion de rTev~nci6n de ll:lvlH!o de 

dinero. 

cSlabl<X"CT \'lthtfucirmes del ~i~!ema que '.'critique la infonnacion c~pturnda t'n las hil,lcoras 

E5tabkc("T un fcgisrfa de lu.'I usuarios QW;, CDn:<-wtan !II informacion del !:.is!ema 

fstablcccr mccauism0::. que pcrmiti'lil id'.:11tiflcar tod!'ls-l~>; opcradoncs TcJcvant.C's. 

Aun cUflndo se lienc d proyec-to de impleIDcntar c1 sistema lRstiturional CAt-rIP, C's. 

HBMX ClAQ 010026 Pagina 5 de I MAYO 2004 

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 8874380 
633 


76061.059

• 

• 

oecesario e~tablec-er medidas que perminm ml}l1ito1t~lH las operaciollcs adccuadamcmc en 

10 ;.we sc Ie-Imina el prtlyccto. (3.2.1.) 

ODer.llriones. Rdf''\'antes 

Deben dc cstablcccrsc sistemas que pCT1I1i!sn reponar todas las orerae-;ones rdevant.-:s del 

l.!Cupn 

Rcalizar un anaJisis del Set de transaccitll1cS de Hog~n \" .. riticando que tndas las 

Iransaecioncs en cJecuvo cstcn 11lc1Llii±ls en cI I1.---ponr de operacioncs rclcv(lnfcs 

Es importantc que rullcs de que se repoTtcn las operntiones relevan!cs de las cmpr~sas 

filiail!'s se VL'rifillUC la informacion. (3.2.3.) 

Ont>raciones Inu,;ua.les. 

Establece.r I11S mcdidas ncccsaria~ para cvirar la utilizacion d~ 18 red del Grupo con ef 

objcto de l<lvar umcro ( GSM !i.7). estas debcran de conslderar todas las tilialcs y proccsos 

deHBMX 

Esrabli:'ccr Junto ,,· .. 111 el are.a de opera ... -iDllcs mCC3nismos que ~:mlit;m conTrolar 'J 

llloni{OTCar los U$Ulll;US y hicncs de las cajas dl! scguridad.(3.2.4.) 

Nu('vfts Oisposiciones en mated. dt Il\"adn de dinero 

Establcccr planes fannale!> y fee hils compromisos parn dar cwnpJimicnto a cada unn de la~ 

resotue-jones rneDdonadas en las Disposiciones.(3.4.l.) 

I rDf..1..X GAQ O-t0026 Pagina 6 de I \1,\YO Z004 

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC acc 8874381 
634 


76061.060

From: Marion 0 ROACH 

Sent: Frl Jan 2116:08:022005 

To: Stephen K GREEN 

Cc: Richatd E T BENNETT 

SlJbject: COMPUANCE EXCEPTION 

Imponanca: Normal 

stephen 

There are two mafters whicn I should b(iefly draw to your attention given !heir seriousness arld potential 

repereussioos. These are:~ 

We tJave received a serious disclosure via the Group Disclosure Ling. where 3 members of the 

Comp~8nce function within HBMX have alleged that senior persons wtlhln the CompHance function 

fabricated records of certain mandatory antj~money laundering meetings and provided these to the local 

regulator, CNBV. It is alleged thal when asked for copies of e\lldeoce that the meetings had occurred as 

reQuired by local regulation the relevant Compliance Officers realised !hat the meetings had not taken 

place, and fatlricated attendance sheets purporting to be signed by relevant attenoees fOr at least 4 

meetings. After discussions with sandy FlOckhart it has baen agreed !hat Graham Thomson, Head of 

Audft in HBMX will investigate the aUegaUons In association with GHQ CMP (given the need to 

demonstrate that the Disclosure Line and procedures are belngl Mowed) and a report will be provided In 

due tOUI'Se. It is too early to reach BI1Y conclusions with regard to the allegatbns or the POSSible outcome 

of the Invest1galions. HBMX are aware oftha need to protect the identity and positions of those lodging. 

the allegations. 

As you arB aware HBUS operates a Banknates busi!"le$s """>0" a V"'"IV 

branch In SGH.lt appears that in Dece 

puttnase of US Dollam in the amo 

was slightly unusual in that whilst 

had sold ~:z~Ejjii.i!l! AC regulations ;.: 

Mysmmr count8rparties. The individual relationship manager 

acted wHhout knowtedge of the branch manager. and !he nature of !he transaction, and the parties 

!nvollled was identiTied as a consequence of routine compliance monitoring in January 2005. 

There appear.; lime doubt that the transaction is a breach of Ihe relevant OFAC sanction on tM pan of 

HBUS, that it wiD need to be reported to OFAC and 8S a consequence thare Is a significant rIsk of 

financial penalty. II does not appear that there is a systemic issue. rather we are dealing with an individual 

incklent. although given the potential seriousness of the breach extemallawyen have been instructed to 

assist with the process or resolving manel'S with OFAC. 

I win of course ensure that appropnate reports are illCluded within GMB and GAC papers, atthoL!gh with 

regard to [he first of the above two incidents I think It would be appropriate to awall the outcome of the 

investigation- before Including dela~s of the ongoing investigations so far as GMB is concerned. I will 

report in full to GAC In relation 10 both incidents at Ihe February GAC meeting. 

David Bagley 

Permanent Subcommittee on Investigations 

Redacted Material 

EXHIBIT #12 

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INTENTIONALL Y 

LEFT BLANK 

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76061.062

From: Marlol'l 0 ROACH 

Sem: 11M Feb 16 11:56:55 2005 To: Stephen K GREEN 

Cc: RfI::tI3rd E T BENNETT 

Su~ci; P!SCLOSURE LINE - H8Ml< CMP 

Impor.aOCl': Noma! 

Stephen 

I refer to my note of 21JAN05 wt.ere I g~,,~ ini~iil noUficstioo oitJw serioUii aiJoageoofls receiYed via ifle 

Disclosure Line-. The dist:!osure made by three rrefl1b~ of Ihe Comp!ance l\mcticn allege that seT':!or 

p(:l/:sons within the CompiallCe- function fabricated records of ceriaill mandatory ami.money launden'lg 

meetings a:'ld prov)jed these. false records lO"!he loca! regulator eNB\.', 

It was. ::tgre8d with Sandy Fior.khRl1lhet ~p. ~lIP.gafirlM ':It)0'.11<1 I"o~ i!1'11e:~:!1~~ by ~ WI ~'J('I!1 

function. In ,.5-5.0ciatiilfl witt, GHQ CMP. 

At1enc!enca sheets ;;Ind miT'lutl"-$ were rnbrlcat-ed to df5!Jut.:lfl !;hI('! /'aC"..t that the Il"!e'etings had not taken 

place, Fais~ fftOOl'\lS ..... e(tI PIOOUCeo in tesponse to a request from CNBV (received during a I\ll.ltinv 

el'2!ninetron} ror ~ig!'>..t of the rehwant mint!ttl$ :::1d ottmd311ce ~hc:ct5. 

Two junior employees adr'nfued involvement and knowledge of th~ fa.bricatlon albeit acting: under 

inslcuctions fro~ Carlos. Roshln (CR) the formeJ Head. (If Money Laundering Deterrenc.e witl'lin H8MX. 

CR: adrro'ttsd g! .... ing Ihe re\e\I,ifit Inst-.... r.aon3 ar.d ttl bsir'lQ SOJe-tt r<$'$ponstble for flie fitbrk:a:lioo. To!;is 

credrt GR was entirely open and t;anljjlJ !!l respontling to o:J,uest!ons em:! immediate!}' lendered hiS 

rf':~ignation. This. was. Rr.r.ep~d 

Rar.l']O Garc~ (R:G}. the-Koead oftiSMX CMPwas l.ml;'lWare ofibef.abrication, buiwas bund to be 

cu!peb!e g!'.-en ~s! he had f2.:!ed ~c ensure that the ~l:Jl(,l;"1t r:=Itings had t<l.ktH1. place, parncula:1y 1m M 

had been deSIgf"ated chairman of the reiElvantcomrMMe. RG has beeJ1 !)Nen a finilil wntten wamlrlg, 900 

wi!! 001 receive any bonus or saiary increase for the year cndod '2004. 

CNev have bs.en acl\.·1g.e;j an(f 1t is not e~ta<:l tM1 any a.ctio'l~1 will t..e: taken. Ii hu tr&$n agro$iKI vat I 

she-l.id .lI;(:!\"he FS.4. in a low key manner y ... -l;~t', wlll fhen hopefl.lily dose matters. 

Tflt;t nSJ!!l to ~ely ~versee, Sl,IpeJlM;e.and in~ s:upPOr1 RG en~" Ol"'golng basiS is 1'E'OOg!'1i!!;OO and 

we wiii do III'I\a1 we C31'1 frornGHQ CMP 10 a55j$t in Ihi:;; fllQard, O,oerall RG has performeo;:l crediDly, ha~ 

WorkflC ~ ham, and would otherw~e be hard' to replace. In the cireums.!anees whnst we win need 10 

keep his ~00n uod8l' (!!MEMo at this stl:lQe I endor:s~ the dAci!>lOn to retain his ~Ice,<;. gjVFl~ that his. 

faiiure i:;, iimlted to one of falling to super'w'iss a VBI)' senior and IrusJed subordinate. 

I wil! pWiridc an sppropriste report 10 GAC at the neXl meeting. 

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 8873673 
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76061.063

From: John F ROOT 

Sent: Fri Dec 0215;53:15 2005 

To: David W J BAGLEY 

Cc: Marton 0 ROACH 

Subject: Re; OFAC 

Importance: Normal 

DaYid 

Taklng your queries In order: 

-- "'" Redacted by the Permanent 

Subcommittee· on InvestigatiDns 

Transactlons o~ovamment missions In the United States are exerrpt from the U~ Tmnsactlons Regulations (commonly referred to as the "OFAC sanctions") provided that they are related 

to the tmport or export of goods anti services whict1 "are ror the offiCial business of the mission", or for the 

"per.>OI1al use of personna I admitted to tho United scates under la special irrrnigration sectlon1" and the 

tmns8cflons are "not otherwise prohlbfted by laW-, (31 CFR 560,512) There is no definition in the statute 

as. to what constitutes '"offICial bUsiness" of a mission or ·personal use". 

Ramon told me that only two embassies - out of ell the e sles they do bUsiness with _ have USD 

accounls In the Cayman Islands. They are: He did !lOt volunteer an explanation, but 

perhaps he didn't think that one was necessalY. e see somewhat constrained so I did not press him 

further. 

~~~~;:: ~ :::i:W~h:a~~ao~saction Is for "omclal RUflnw- En Mr:=s~:mber 

misusing their diplomatic stalus for alEeged fuMing of alleged tetrOtlst actililties. In particular through 

their "islamic Interests" sectlons. Thelr defence Is that the fundlng is tor legitimate charitabfe Islamit; 

purposes 5uch BS the fund]ng of mosques. Some Westem aulhoriHes allege more sinister purposes, e.g • 

.the fundlng of terrorist Hlzboflah activities In the case o~Atthe very least. Group risks being caught 

in the mldSt of a highty visibk'l and passionate polemic, a polemic which sadly has already caused a lot of 

bloodshed and pain. . 

Kind regards, 

John Root 

David W J BAGI EYlHGHOMSBC 

David W J BAGLEYJHGHOIH5BC HGHC Sent To Jotm F R,OOTIHGHQlHSBC@HSBC 

Permanent Subcommittee on Investigations 

Redacted Material 

EXHIBIT #13 

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76061.064

by: Marion 0 ROACH 0211212005 12:22 Phone 

No. 7991 8645 

44 2079 918645 Mail Size: 3031 

John 

subp OFAC 

" Enlily HSBC Holdings pic .. HGHQ 

As YOU may recall HSMX malntilned accounts for the lillllllllllllllllllllllll!n their Cayman branch. 

It looks like I wiU be participating in a conference call1nVOlving HBMX, Jeremy Batton and myself earty 

next. I s.uspect, altflOugn do not know, that tnls conversation wUllnclude some debate as to whether these 

accounts can be maintained, with pres.umably Jeremy Barton puWng the case fOr retention based on 

relatiOnships with. Whilst I ur'ldel'sland tllfs. In advance of the cooversation I would !Ike to be anned 

with the following !nforma;tIon If at all posslble:w 

exempt underOFAC worde we 

;e.(ifOOer.m..lne whelhar Bach Individual 

Unless I am rrisslng something the maintenance ofa USD account for anil •••• raalses: challenges for us - am I missing something? 

Regards 

David Bagley 

Redacted Material 

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76061.065

• 

• 

From: Graham THOMSON 

sent: Thu Mar 22 16:13:382007 

~~~~~:dFW_' Importaoce: ormal 

Attachments; image_O.Qif: image_1.jpg; image_2.jpg; irnage_3,jpg; lmage_ 4.jpg; lrnage_S.Jpg; 

~Jpg; Image_7.jpg; irnage_S.jpg. lmage_9.jpg: image_10.jpg, image_11 lpg; Doc Link.lltm; 

~AML_Mafch2007.dOc 

Graham Thomson 

Head of Group Audit Latin America & MexIco 

Tel (52) 55 5721 6238 

-- -- Forwarded by Gra1am THOMSQNIHBMXJHSBC on 22/03f2007 10 14 a m ----

Paul A 'ffiURSTOHIHBMXlHSBC 211031'2007 

OB.OZpm 

Graham, 

As promised. 

Regards 

Paul 

To Graham THOMSON/H8MXlHSBC@HS8C 

Sobi· Fw·al .. an .. I a I a I 

--- Forwarded by Paul A THURSTON.'I-IBMXIHs,eC or; 21A13i20D7 0745 P m --.-

Leopotdo R BARROSOIHBMX1HSBC 2DJO~2007 To Paul A THURSTON/HBMXlHSBC@HSBC 

1015 p.rn Arorew PROSSERJHBMXiHSBC@HSBC. 

daVld.!eignton@hsbc.com.l'tU, Rafael,Arana Gal7a@l1sbccomrTlx, 

Ramon GARCIAIHBMX/HSBC@HSBC, Sandy 

FlockhartlHBMX/HS8C@HSBC 

Subje Re: Fw 1Il1ll1l1ll1ll1l1l1l1 

PauL 

1 am enclosing il drJft ofthc ajorcmcntioncd ~I'0rt ill a doCtUll~m m~: howe-ver, tHany of the events disclosed lor 

executive pUflXI$es have 00\ oeen quoted or included. in tlleinolalify. thus a hard CCIPY ofllle: complete version ... /lth 

all necessary Annexes will be sent 10 Jour office. carly IOlilOlTOV,' {9:00 AM). 

Permanent Subcommittee on Investigations 

EXHIBIT #14 

Redacted Material H~Re nee RR74~1!i Confidential - FOIA Treatment Reau, 
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76061.066

• 

• 

III-QuId like to have Ihe opponuniry 10 address S{)nll: Of)'C'Uf queslions, which arc paniall~ responded througbout Ih~ 

tlOCUI11C1ll. 

~ ThecustonJerwas Dof 3 referral from ol~rpart of the Group. since fhe account v.:'3S opened dUringRII. 

IIIbtfore HSBC acuully acq,lllC'd Bha!. 

nl~ Money Laundering deterrence reporting bistory is \liell dClcumented in ,he report 

Thi5 ~a5 a Corporale cOlil, .and 01~ such it should had been managcd by other bllSlncss seg.ment in our 

opinion; however, fhis Issue h:l5 been dl.~l:usscd aline MLD COllU1JiUee, nOI onl}' conceming Ihis c<lse, bUl 

ofbe~ I.hal had been broughr \0 the amnrion of ~ajd Committee, but 3 detinition Ius not becn attained. 

smce the natufe 01 Ihe CommiHee llIllils its capaci!;.' 10 e:>:erci&e a migralioH of cUMOIne~ rrom one segmenlto 

anOllJer.lhough. il h(t~ heen staled lMt our detection. and AML enforcement rule5 mlghl be biased by h'l\'ing 

entrrks recorded ilnd llJall:lged lJy ll'fOng lypes ofl)Uo;i~s$ lines 

The seanli across tbe group has been iJlltially fe'quested with the comV'U1ies. lind Uldi\'iduais, directly 

<Issocla.ed 10 the case'. As for the OIlier en!!lies that could be associated as belleflciaries, or issuing. panks of 

renunances. or other linallciallfaIl5aClio!1s an." pending response IroOl Ihc oper.lling areas in order to be 

Idcntified. since this infonnatjon IS not 3v31!:JbJe al our main op(.'ratiug platform. this should be eOl\lv1e!ed 

!om[\ITow. and Ihe report would be also updated. 

Should Y01IllCcd any cxplanation oflhe encloscd repon, plc;]sc 00 cai1ll1C 31 your carliest conVClllCllce. 

KindR~gaf(l.s 

Le{)poldo 

Paul A THURSTONIHBMXlHSBC 

Paul A THURSTONfHBMX/HSBC 20103.'2007 

11:39a.m. 

Leopolda. 

To Leopolda R BARROSOI1-f8MXlHSBC@HS8C 

Sandy Flockhart. David Leighton, Rafse!.Arana.Gllrza@hsbe.commx, 

Ramon GARCIAA1BMXJHSBC@HSBC,Andrew 

PROSSERlH8MXlHSBC@HS8C 

Subje Fw 

David has forwarded your note 10 me thIS morning. This is a very serious, and high profile, case whiCh 

has potential reputational damage to the HS8C Group, and must be given lhe highest priDrity. 

Redacted Material 

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641 


76061.067

• 

• 

By now, I would hope that you will have completed your analysis of the case and I would ask. that you let 

me have a report by the end of the day. I would like to know. inter alia. hOw this account was opened 

(was it a referral from another part of the Group or a local account opening?), the ac;tivity on the account, 

the fT'Qney laundering reporting history (induding the names of the people in PFS who clairT'l3d to have 

detailed knO\llledge of the customer and declined to make a repo(1). and the current status of contact with 

Ihe authorities on this case, As this is a corporate entIty, I am surprised that PFS management appear 10 

be managing the relationshIp, and pemaps you coutd also Clarify this 

I trust that we have already initialed a trawl across the Group for any other aecounts held bythtS 

company, the connected individuals, and associated companies and/or individualS (including those who 

have sent remittances to, or received them I'rom, this account), and! would like to know what we have 

found from this, thus far. 

I would presume that SSE would be helping in this investigation. and hence I am also copying Andrew 

Prosser. 

Please get back to me on this by the end of Ille day 

Thanks 

Paul 

--- For.varded by Paul A n-lURSTONIH8MXiHS8C or> 20103:20071102 a m --_. 

Leopolda R BARROSOrHBMXlHSBC 16-{)3..Q7 

10:50AM 

To david \EHgh'ron@hsbccomrrp( 

ramon.garcla@hsbe,com.m)( 

Subje '11.11.1111.111 0' III 

,,= "'u .. " .. ,,"~ .. ",,,,Uy '~«"~' I ~. p"'''V<'~I~d hy ML!)~! lboo MLD C"mm!!J,,,, (l~ ~b>=·~"on ... ~lId enq"~t 10 lb~ pmperl) , w th. MLD(,:(>mIlll1\~"11l,"l>!e~l: h"""~~f, rr~ "'£!I'ed IlIa. tW < ",1<.>mer "'" rill'. pr<,p"d), 

d"""""''''led, alld bown b) lh~ b~"";'Il\J.td th~1 a """""I"h<)11 "'~. eN ""c~..d. nor a.,.'" 'ernrl W !b~ arrrb"nt> .. , "'as ok!>!..,I. M " •• It tlt. 

bw.ili~~~ ~~~=~d 1h~ NIl re'p",,~;blhly ,'f~tl)' cl<n~"'~ droa. "" lb. 6l>e Inol unf"m",al,l, <'<tl'lTtd »t~ltr&y, 

Redacted Material 

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76061.068

~.um:U""n" 11la!"~ ,,~'" nOI tl,~ onl~ l:>~nJ... Ihc, w~,~ "per"","~ ,,"'lh. ';n'~ u.." b~l~o't$ "'ub H$fj,,- ~f< n"l' "') 111,,11 <r"'l~n::r" ~ rd~,.,J 

k'!II. ~m"~nl (>j lh~ S!l7Uf< 

Redacted Material 

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76061.069

Redacted Material 

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC acc 8874319 -

Redacted Material 

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76061.070

o 

o 

From: Susan A VVRJGHT 

Sent: Moo Mar 26 17:33:312007 

To: Gratlam lliOMSON 

Cc: David W J BAGLEY; Jotln F ROOT; Werren GLEAMING 

Subject: Fw: Travellers Cheques 

Importance: Normal 

~~c:~~~L~1~n6'.ihii MiMi IE iii Wi rdo~L Procedures on TraYeI~r Cheques.doc; 

Further tQ my note IDst week I have in. fact IOl:alcd the note from Ramon tEl 

~AllnclJed for yom info. 

Regards Susan Wright 

_ .. forwarded by Sus.an A WRIGHTlHGHQIHSBC on 2Ci103n1>07 17:27 _." 

Ramon GARClAlHBMXIHSBC 

HBMX 

30/11nOO4 00:52 

Mail Si7e: 3147 

To 

John F ROOTIliGHQIHSBC@HSBC 

« 

Carlos ROCHlN/H8MXJHSBC@HSBC. [};)vid W J BAGLEY/HGHQIHSBC@HS8C. Susan A 

WRIGHTIHGHQIHSBC@HSBC 

Subject 

lle: Traveller.; Cheques 

Entity 

HSBC Holdings pic .. HGHQ 

John. 

Please find anached a pR:llutinary DO'te 00 travdler cbeques. 

More information i:s being compiled and will be delivcred soon. 

By the way. you might find interesting a ~nt (:a51;!' involving trnveller 

cheques, whose report is also attucbed. 

RegaIds. 

Romoo 

Permanent Subcommittee on Investigations 

Redacted Material EXHIBIT #15 

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76061.071

JohnFROOT 

08/11/2004 02;47 p.m. 

To: Ramon GARClAJHBMXlHSBC@HSBC.CarlosROCHINfHBMXlHSBC@RSBC 

cc: David W J BAGLEYIHGHQIHSBC@HSBC. Susan A WRIGHTfHGHQIHSBC@HSBC 

Subject: Ttavellers Cheques 

Ramon and Carlos. 

I oole that in the yearthmugh 3Q04.l-la;MX has soldoverUSD 110 mlllionof 

travelleD cheques. an amoUDt Ibat eclipses that ofHBEU here in the UK. and 

that is several ordcTs of magnitude higher than any other oon--UK entity, 

including Hong Kong and 1he US. In flict. it ICpn::sems one~lhird oftlle 

Group's Iota! global traveller's cbcque business (wilh the UK representing 

anolher third). 

Could you kindly prepare a report fOr GHQ summarising the molley Jaundering 

procedures cwrently in place for such a booming blDiness. Please include in 

this report KYC c;on\.rOls. number orSAR.s. in the YTD.bre.akdown by region and 

branch. etc., etc. 

Thank you. 

John Root 

« ... » « .. » « ... » 

Confidential - FOIA Treatment Reauested bv HSBC Bank. USA. N.A. HSBC OCC 8876646 
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76061.072

• 

From: $andy Ffoc;k.hart 

Sent! Wed Apr04 15:13:372007 

To: Graham THOMSON: Mal\t1ew J W KING 

Cc; Uz ,11, TESTER; Paul A THURSTON, SelYru PINA 

Sub~C1: R.s: GROIJP AUDIT CO!-:1MITIEE i\PR01 

Importance: Normal 

Attachments: Doc link hlm 

J bdine YOIJ Il';'cd ICI show wm.;: light ;tlld shaao: it" the ;,Iep~ 1.1k~'n 10 ilr.v~O'ie 

dOCUllk'hlllrkmJIle. imprOVCIIl<:1lI ill Fidud:U1QJh" i.Jlioflfdisatio(l of 

Firuu:as,du Flann$. we know lJl;:: issue hUl m FidllCi<lr!O a~ ~\'c :anrlol1Jy ,,[ 

Ihe !bk litCf>: \\ij\;jlw:\\.N-unccn.,\il1lll)l!le fact th;\11!l credit c-:mh the 

prmcip3! lSStli:: I" the uD,:laml!:! offllknll and gru\Hll pilU\5 and tmt:U1C1D!! of 

re~OdI(C5.tll<:' her 11\1\( llllS prhcip31 ttl\!!'! ~r!i:':i~d Iv prior );c~n. :111d ,hal 

Ihe C:.1jcro frands were: or!!aniscd crill,,' ::vcm~ ,~flI1 Ih~1 PT<'Vl:f'IItN! W;ll ,'cry 

(hf!i~uh tlfl!c~~ ~1atr SpD~ up Mid po~"ib!~ there wi'l5 prc~~uIT plll 011 

\h~Il1.As 1m rcgu\~;Qr]o· tines wt ha'<o: ~10I'Pe(\ flghtlOf. the~e which may be a 

n,j~fakt' b,11 ,i nuUlOCT wel1~ where the past adm1l1lstr.3lIOll de(fdotd 1el dt.':<lf 

tlJ(~'r 1H)·':-~s 

TI1151!pe ol'anal: ,i}. slJl,luld h~ \.Jrou~ll! I<llhe Audit (mIl> ;mentt(lll 

I would appreci31e ifY{luwtlld C{lIlSHkr sudl all arm!~ sb as ff wiH hCU~nl 

memil<::r., undcrnamhHg Or~llr ~!lvimnnll!ur 

From: Gm.h:ml THO).lS0N 

Senr: O<U12:2lll,17 05;-16 PM 

i'o:h-ht1hc ... jWKJ:'.l"G 

['\:" 1.;/. A T[SI'ER: P;1111 A "jtlUl:STOI\' ::;andy fJoc\.lliln, '\t;:"5iO Pll\A 

~llb5~Cl: R<:. GROUP .l,1)nn COM~ .. nTI"E.E:. - Af'RO"1 

til n;~J.''Ollsetoy()Urt:ll101l'I';{ll11Jllenr;]1:. lbllow}.· 

The OlaIJl5Y'i.lcmi,- u..l'~_l1essi!s 1'1 HE~t_X. wl-rich 1 bdic\'c remain Olil>jciltUill~, a:"1! 

a,foUows' 

l\ YC as ld..!n!lllcd ill bmn..!h and cOli!illllOUS :ll,ldir repon5. 

Thc be!; \lr:lcl~;:;ua.'': (h'cmll~m:l:i,)n :md filing ~y~h:ms which remain from lile 

fpnmr BiI<1\ d'IY~. C\"irlC:ll(~d 1ll[l~! ~h~rp\'" '11 t!l!" kp.::! C:.J'':''\ in B;)n,i~ MiO th{' 

(lnS{an,111l~ TnLSt C,1SCS. , .. !lCi'(" we Clll,nnuc to ~ at ri~k. 

La..:k oi il complillflcC uIJnm:, o!vl(1cnced 1m the IrkEl ~eriQus \~n~') In lbe 

mnnbc~ of~t~t:' fkr..lk<.ltl')II~ <HJd iill a mor~ \n(\e:\Jlft:lld gCll~r,,! [\e~.li?~nce) in 

Permanent Subcommittee on Investi ations 

EXHIBIT #16 

Confidential - FOIA Treatment Reques HSBC OCC 8874328 
647 


76061.073

• 

• 

Ill:: Il~llltxr C-rrlllC~ I\C rcecil'{: from the regulaJors lor a'>olcbhk .::rron" 

~il~/Ollln~ 10 rq.xln nnllch O"j)cnlngs. Of s.~Jlinr !)\<i!lHgemelll ;!ppoIrt1l'11em:>. 011 

1I1COn~[H<;:!~! MI pleNh.,cd by Finance. Ihr: AUS1J1CSS ~Ild CR\.{ which 1\<" hmrlered 

u1!,"!l!lr}{~!wll 01 prot-kill>- JS. ..... dl ,IS halltVCrill~ .eff<:Cl!\·(' d.xis)l,)ll 

Re!,!<lroin(! op\T.;tm!,-losse~ and ,techl ,",lTd fnud!> lllp:Jcnc! !h~ liJ!bwinc c>.:nlllu(nts' '. 

011 J..u~.sc5" The Irend in "\)111; Cilng!l! [he a![C'nlJ~'1l ot ~1:JIIJgcm ... nr<lnd \l1'llon 

:s be.lr,~ [:i.e:! 10 m.lIibalC 105S¢~. A Wl'lhillg grOllP h j)cinl,'; cSlabh~l-.ed 10 

nnplo\! (lit': TCJl(l11t1:g (ITrl1{'!i!less and comple.tcness). Kearney oftJlC Gordo!) 

~~~~se alld ar1l11ysls ofc1.cnts. bllso!d 011 r<:cClmmenrl;Hlnns ande r::ccut!y by 

(rcd'.1 C!1ll1.~".or, mic\/': of credit cart.! fr,llji.l:; whIch W<lS the most sig.nllfc31l{ 

cOlllnhlHor 10 OJll,(,~~. was meeruty c\"ImpJclcd hy em.,) a.nd thi! bnsinc.\s i~ 

re::pci.!ldl'"li'!-.!o I~,. rcPO:1'S re';;:HI1I:'CIl(ialiutH ~f1<l :m;-j1I,lhuJ,: U1 place a series 

01 ~1~l'S 1!l Jm)Jmv~ !tIe qu:llllY 01 fl'fTtard fnud p!\'\'cntion ;iml m~J\III!'::Illi:ltl 

<;:0 ~s \0 rcc1uccr.:lt!d rr<HHI back 10 .,.ifhin!(\c(l! Uld115Irynom~. ' 

lllC !or .. gwn .... ,\;.$ di$w)stO ,~ilh Puw TIl\lTSlon. Tb::st,' LOm11ilmN will be 

H1duderl ill my fCp"rt tel the n"",j HllM'\ I\urlll conntline~ 

Gr~h::!m'! homson 

Heinl ofGrnlJp Audi1 L~1111 AmcnclI &. M~:jc" 

Tclt52}55 572! (1236 

\1;lnhew J w K1NG'GG;\1 !NA GHQ.:fjfiHQ·}{SBC 

Selll t)'~: L17 .~ TFSl ~:ll. 

{J21!)4;2no71~ ~~ 3.m. 

To 

(;r;:11;\,':) THO~lSOl'-.: HDMX, 1 fSnC,if Hsnc 

Sllbj':<.:1 

He: GHUL? AlDlT COilfWTI'EE" .;\PRlYI 

Mnr r plC:,lsc [<;I\e a reSp{<tt~r: lu Ihe at1ru:hcd 1odil)";"L~ 1 fie;:" 10 Iil1a'i~c 1l"!V 

G ..... Cpfl~>er.i firSf!hl'lg!OIll!1ITO\\. . 

Confidential. FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 8874329 
648 


76061.074

• 

:vj.t11h!.'w j W Kfl'.G,GGM j)\;A (l11Q:HGHQ:lf').R(' 

GGM l~A, GHQ;IlGHQ 

SClIlby:!i;>'AT1::Sn:R 

1'3m.'i;,?()U7 13,!4 

Phone 1\(1. ":'<)9 21 17{~ 

+*4 wJ :'In,?!),).:."!)},:,,,, 

~tHlSk..,:2";9."i 

Te 

Graham THO\ lS0;o.,l ''HBM:'\tHSBCZi·HS B(' 

Subjecl 

R.:. G?OI.,I' ·,\i lOfT (,O!'.1t,HH'EE. APRIl', Elllily 

HSBC f1oldin.g~ pic· IlG!lQ 

CoOI~)'01I summarise tilt- mainsysfcmic \\tc:itI<.oc~~c~ illHEMX whIch VNl I"4-lie\"c 

rCJ)Ul!n o.tHSti:llidUlg J :lrprl.'cialC fbese may alre-ad ... h;r, c b('ct) rclX'11Cd: blll 

P~SllJ~,l[J!:' some ttl" bN:n il(ldrcs5Cd 'V;1)CfC de · ... e "wAd mll~ riSIll"t! 

thmk! 1tleldc"cc nf OjXT"nng. 1\l:;~!;5 ;mti creOn c;)rd fr;nllis? '" 

tit Rq',.mt'>. 

:'I.1;1oh('11/ King 

« >'> 

Confidential· FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC ace 8874330 
649 


76061.075

From: Graham THOMSON 

Sent: Fri Apr 2019:43:262007 

To: Matthew J W KING 

Cc: David W J BAGLEY; Liz. A TESTER: Sandy Rockhart; PaulA THURSTON; 

Rafael.Arana.Garza@hsbc.com.mx@HSBC; Ramon.GA.RC!A@hsbc.com.rroc@HsBC; 

phlllp.GRECKI~hSbc.com.m)(@HSBC: Nick GILMOUR: Jose Manuel DomInguez 

Subject: Re; Managerial Lette1': HBMX ~ 

Importance: Normal 

Attac.hm&nt.s; Doc: Unk.htm 

Matthew 

I refer to rur attached emal~ whicb was cOnsidered at yesterday's meeting 

: ... ~) oflhe commiuee, chaired by Paul Thurston. 

o 

This mccling, the third chaired by Paw. aboU! ~that involved GAQ. i$ 

pan of the process he initialed ever a month ~ing 1he sei:o,:~ of 

the atttU and MOney from our cmlomer's pn:nUses and his requests for separate 

rC"f'iews to be completed by CMP. PFS. P)F and GAQ. Rcporu from CMP and PFS 

had been considered at a previous meeting. 

nu: meeting com.id~ lhe reoommcoclations detailed in GAQ's rcpoIL It 

received a verbal report from PIF (written interim report received 

poSNnccting) on the ftsults of its investigations to date irl10 branch sial[ 

there- were associated with the account. TIle investigations are still continuing. 

Paul's snmmary of the meeting and its action points are detailed in the 

anactted email. Other points are as follows: 

1. TIle meeting acknowledged !:he difficulry in accnrntely compledag KYC 

checks wbc:rc customl:rs deHbel1ltcty tried to conce.pl tbe rcal in1ent of their 

business activities. as SfJPCiUS 10 have b"n the case w\lb_ 

2, TIle IIICCIlng expressed reservations overthc practicality of tile new KYC 

requirements recently introduc«l by CNDV which required customers 10 project 

their ttansactionaiactivity to allow individual bcncllmarlcs to be set Out 

could be med lo compan: with actual activilY. 

3. P1F's investigations. which are contirmlng. confinncd that Alvaro Rocha 

had based his reeOlIUTlendation to the AML committee in AUG05 11.0110 repon 

. ~to 1he authorities, on incorm:t represelltations. made 10 him by starr, ~dbccDHcdto. PIF tllrthcrconfirmcdlha(SOnlc()fthcKYC'Visits 

probably did not occur, that some ofthest.affinvolved had breached code of 

cetnduct t'Cquiremeu.ts by making in some cases sizeable loans to each OlbCT 

although t~re was no indication at this time to suggest lhat any had 

benefittedd"irectly rromth~o~tion. 

4_ndicated that the branch slaIf invotved in completing 

inuccurnte 'Visit reports should be dismiS5Cd. Any rluther disciplirwy aelion 

should aw.tit the fmdings ofthc oompJctcd PIF invcs1igatioD. 

5". Ramon Gareia confU'ttJt;d that other banks •••••••• 

--= Redacted by the Permanent 

Subcommittee on Investigations 

Permanent Subcommittee on Investigations 

Redacted Material EXHIBIT #17 Confidential - FOIA Treatment Requeste, 1. __________ .. HSBC OCC 8875010 
650 


76061.076

() 

o 

A Collow up meeting will be held to monitor progress in implementing the 

action poinls. 

Wilh regnrd to your offi:t to send somcotle to review the AML alen process; 

tile folto ..... ing is planned: 

8. CEO HBMXwill review 1he need Corany additional support from GHQ with 

Group Compliance, once the immediate action steps have been comploted; and 

b, GAQ hils scheduled nn nudit for 3Q01 ofthb. department !IS part of its 2007 

annual plan. A focus or that audit win be O'n the re--eoginccrcd AML and. CCC 

prot"esses which wlll be implemented as il res.u1l of Ihc aoove meeting. We 

shall alsO' be strengthening our continuous and branch auditing focus O'n KYC 

although as you will recollect lbc$c weaknesses have been a repclitl1ie theme 

ofmyconum::1l1s. to HBMX audit committee meetings. 

Please let me knoW' {fyou require any daritication. Gn the foregoing. pending 

whith summ8J1l comments will be tabled at LAM RAC, given that (he t85e was 

distuued at y«leT'day's MAC meeting. 

R'gan!< 

Gmham Thomson Head of Group Atldit Latin America & the Caribbean 

Tcl(S2) 55 571161'36 

- Forwarded by Graham THOMSONIHBMX/HSBC on 2O/04flOO7 08:46 a.m. ---

Paul A rnUR STONIHBMXfHSBC 

19J04nOO7 09:0) a.m. 

T. 

Rafa;cl Arana Gan.alHBMXMSBC@HSBC. Jo~ Manuel DomingucVHBMXlHSBC@HSBC. 

Grnham THOMSON1HBMXlHSBC@HSBC,RamonGARCrAlHBMXMSBC@HSBC. Leopolda R 

BARROSOIHBMXJHSBC@HSBC. Nick OlLMOURlHBMXlHSBC@HSBC.Philip 

GRECKI/HBMXlHSBC@HSBC 

co 

Sandy FJocl<hartIHBMXlHSBC@HSBC 

... 

Following our meeting. yesterday. I am swnmarising tbe key action items thal 

need to be progressed: 

~ The Audit report recommendations wiU be inlplemcnted as follows: 

Redacted Material 

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 8875011 
651 


76061.077

o 

i. The representation at CCC to be reviewed and proposed meiTlberm.lp 

$Ubmitlcd to CNBV foe approval. (Garcia) 

2. Business Heads must remind their CCC representatives of the importarll:e 

oCtheir rQle and of taking an independent view. They must be prepared to 

~~:~~~ their CDUe,! !frey an: not SSlisfted wilb the ~poMes !hey 

3. The a.n.a\ysls, assessment and reporting procedures Beed. to be revamped. 

The key is to bave appropriate csc:aladon procedures to cns.un; that higber 

risk cases are brought to senior management alt.ention, and where tile CCC or 

CMP has any concerns, these ~ to be brQught to the attention oflhe 

Customer Group Heads ilrunedi.atcly. (Gazci.a) 

4. The management processes of the CCC RlIl5t be strengthened. The minures of 

meetings should identify clearly the decisions taken, and there need to the 

be iInprovtd procedurcS;lo tnSute that open items arc a\way$ followed up at 

subsequent meetings. (Garcia) 

:he::~~~I~~:~~~t =~~':~I:!: ra~~rtr.rinJ, in 

G. A review should be undenaken to ideruify aU corporale enrlties that 

remaln'.'""'ii"iimanaoiiii''''''''ii,.bY PFS. these should be traosfecred toCMB without delay •• 

7. Branch staflwho completed false KYC reports should be dismissed, once 

the onsomg PIF im'estignlion has beeD completed _ 

Please ensure thatlhese il~ms :are CoUowcd up and provide 8 formal 

wrin:en respo~ to me on the above PQinu, confirming that these 

recDlnm~.odalions have been iqlplcmenled by )8 May 2007. 

,. ~ detailed P1F review, wbjeh h<l$ been tmdcrtakeo. over the wt 2- weeks 

wiIJ be completed, and a sccond interview will be arranged with one 

executive. and a repon prePared. with l"tCommcndatioru for di5cipJinary o actiOIL_ 

~ Although the PlF review h:lS not (ow)d any evidence (lfdire;t linkage 

between the s1affinvotved and the company (subject to the i'u:I1her interview 

fo be IlI11inged), it has surfllCed evidence of breaches. OfP.:2;lict":. ~ct 

of i[llnl~$tafflolUl!l', aod documentation signed in blank. 'U prcp<Uc 

8 COO d~lac t&$lllting our policy and zero tolerance approach. Bnd PFSiCMB 

Heads should pcrwnaJly reinforce Lhis lhrough thell" managcmellliearns, 

- The improvementofKYC pnx:ed.ures., IlCcountopening and file mainrenance., 

which is cwrcntly comprised of a number of individual initiatives, needs to 

be brought into one coherent pmgramme and given appropriate emphasis. The 

incoming COO HBMX will be tasked witb reviewing these and putting an 

implementation plan in plltCc. 

- llle review of other cases which have similar patterns. and all bigh rbk 

cases, has been complded, ami a special CCC meeting wit! tie arranged wilhm 

--"" Redacted by the Permanent 

Subtommitt~1.' on Investigations 

Confidential· FOIA Treatment Requested by HSBC Bank. USA. N.A. HSBC ecc 8875012 
652 


76061.078

o 

o 

a week (0 review these cases. (GarciaIBarroso) 

.. 11'1'1: ~view of other pharmaceutical companies wbicb have had money 

laundering alerts is underway but needs to be. completed. (Gan:iaIBarro50) 

~ We continue to await the list of other names from the federal authorities 

which they will require us to check. (Banoso) 

• Conlactml,lSl be maintained with the authorities, with whom we will continue to co-operate fully, to maintain our reputation wilh them. (Garcia) 

I will arrange a rurther meeling to review progress on the above. 

P,u1 

Matthew J W KINGfGGM INA GHQIHGHQIHSBC 

Sent by: Liz A TESTER 

181041200704:-29 B.m. 

To 

Gmbnm THOMSONIHBMXlIISBC@HSBC 

cc 

David W J BAOLEY/HOHQIHSBC@HSBC, Sanely FlockhartlHBMXfHSBC@HSBC 

". Subject N,eiaJ LeU", HBMX -m ••••••••••• Ill •• 

Gnl:tam. 

Not a l1appy sloW. I note the recomrnend~tions will be. discuSSed later today 

and 00 doubt subsequently. My initial reactions are SellOut below. 

please advise what aclion is taken in respeet ot 'ho appears to 

have vouched for this customer to AUGOj:, and lhen to have. failed to fulfil 

his undenalcings to !he CCC Comminee in DEC06. ~ a l'eQSQllabl)' senlor 

executive I would have expected III more cOonunincd approach lO his 

responsibilities than appem from Ibis saga, 

1l1c inamsisleu:ics in the visit reports obviQusly raise some questions aboul 

whether st!1lTwere more closely involved with the cust<llner llBn they should 

have been. How is this being addressed? 

The fact that stettf me producing. reports that are unrellable is a serious 

issue in itself and needs to be. t.alccn into act:ount in considering the 

appropriate disciplinary a<:lion. 

Redacted Material 

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.A. 

Redacted by tbe Permanent 

Subcommittee on Investigations 

HSBC acc 8875013 
653 


76061.079

() 

<D 

The weakness in thi: proc~ses within MlD to analyse and monitor CAMP alerts, 

and tOo 3el as a ehcu and balance on management, is obviouily a geocraJ 

concern. Is it worth having someone come into loot at processes from fOP 10 

bottom (including al the ccq to el15lU'C they ;n robust? 

Finally, are !here any other customers where [here is a similar raet panem'! 

Regards, 

Matthew King 

« ... » 

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBG OGG 8875014 
654 


76061.080

TO: 

FROM: 

DATE: 

RE: 

Deni,eReilly 

Judy Stoldt 

GIuri. Strazza 

May!,2007 

" " """ 

. Office Memorandum, 

WaIlStreet JOl1~a1 Article Reganling Wachovia 

CONFIDENTIAL 

FOR INTERNAL USE BY HSBC PERSONNEL ONLY 

This memorondum srunmarizes aoarticle in the April 16, 200& edition of the Wall Street Journal0Y'SJ) tMt 

discussed an: myesti&'3l:ion into W acbovia' s casas de cambio business... 

This memorandum also discusses the. actions that REUS has taken -with ~ to the c:a.sa.s de: C?IDbio 

IDent.ioned in the article. as well as other cambias that were not mentioned in the article. 

Please note "that HBUS does not hold any account for an~' c::;;J..S3. de cambio mentioned in me WSJ article. 'The" 

only HBUS connecttou to activity involving those named casas de catnbio is activity that was-co.nd:ucted 

through our correspondent accounts, aod most nOtably furoogh our accoUIlt IDth HSBC BllIlkMerico 

(JlBMX). 

L Wall StreetJowna! Article 

S\Jmmary of Article: 

~ Federal prosecutors are" investigating \Vacbo .... ia as part of a probe of aVeged laundering of drug 

proc.eed.s by Mexic3n and Colombian mone}-·-transfer companies. W¥bovia is allegedly one of 

"""severn.llarge US bank;;" that ha .... 'C come 1.ID.d.e£ scrutiny for relationships v.ith stich companies. 

(The other '1arge US banks'"' were not na.rned. by the WSJ.) Wac:ho".~a built ties to.casas de 

cambio in OTder to tap the Hispanic market. Wa.chovia held deposits for the foreign-exchange 

houses and proVided. back-office services to thoseCPtities. Wachoviais· coopera:ting vwith 

icrvestigatDrs and, in DeCember and January, severed relationships wiili Mexican foreign-exchange 

finns . 

• Four casas de cambio were meotiooed in the' Journal article - two that are associated ~ Wachovia. . 

(Casa de Cambia Puebla and Majapara Casa de Cambia) and m'o that ,"vere mentionerl in a sidebar (Sig1re Corp. and Made. Casa d. Cambio. Sigue was fined by the Justice Department and 

Ribmjoo h!umJe,ed funds irufuectly via Union Bank of California:. The a11egationsim'Cljvmg Union 

Bank and Ribadeo resulted in an. enforcement action agoinst Union BacIc) 

Permanent Subcommittee on Investi ations 

EXHIBIT #18a 

Confidential & Non-public OC OCC-PSI-01358514 
655 


76061.081

These oambios "'" discussed below, alcmg wiIh irrvestigatioos HBUS perfurmed into these entities (both as a 

'r{:SU]t of the Journal article and prorto the article) and other =bios. 

2.. WSJ List of Casas de Cambias: 

2 

•. Cas. de Cambia Pueb!:i - Per theV"SJ, Puebla is aMerican cmun of camhi os and is <nbjecttrl. 

feJeral court actio~ in Miami, Florida in whicbfcderal agents scizcdmore than $11 million in 23 

Wachovia accourrts belonging to this entity. Prq,secutors alkge the money was ~"being laundered" . 

• Activity:· No acccunts are held by HBUS; a fonner Banknotes acccunt was cloSed in June 2007; 

funds involving tlris entity passed through correspondent acoounts held by HBUS. (Reference 

commentsbelmv). 

o On June 15,2007, HBUS arned 

(though HBMX) of a seizure warrant is<Ued by the Southern District of Florida at the request 

of the Drug Enforcemc:ll1 AdmirrisUation seeking to freeze $11 million in 23 acoounls at 

Wacbovi3- All bonknote activity at HBUS w ... terminated in June 2007 ... a result ofilie 

'lseizure ,,,'arrant'issued against Wamovl.a. In October 2007, at the suggestion of the oec to 

'perform a money senice business revle\\'. HBUS oarmuenced·a review of 'Wire activity over a 

12 month period (October 2005 to September 2007) in ilie dollar range of $5,000 to $25,000. 

(This re\lev.1 "ill be referred to as the ~'Ocrobf!T 2007 Revil?)j.'-l. 

o On November 8, 2007, a neWs amcle was published in the MIami Herald 1bat alleged tlm 

drug funds were being launoerei! tlJrough Puebla Upon receipt of the article, HBUS 

coofumed that it bad no =unt relationsbip'v,ith Puebla. 

o The ?ctober 2(107 Review revealed that wires ir:rv.oh"ing P:,;ueibla ... badi.pas!i.sed~tlJr~oughi!!iiiitsil. GOITespond..-nt accounts. On Noveruber 30, 2007. HBUS,. _ 

reporting iha:t apprcrxirnately 550 "ire transactions bad cleared through the HBMX 

correspondent ac.count where Puebla \-vas erther ~e originator or beneficiary oftb,e wire frOm 

JaII\lilI)' 1 through October 31. 2007. On November 15. 2007. HBUS added thenam<>"Casa 

de ean,bio Puebla" to its Interoal Watclt List to ensure that no=un!s could be oponed for 

tlris entity. On January 23, 2008, HBUS added the name "Casa da Cambio Puebl." to its 

:internal- ",>ire filter system. The intemal wire :fi1ter.causes all wire transactions !hat are 

attempted to be processed thrcmgh HBUS to be scanned against the names in the '-filter". The 

filter will stop any "Wire that includeS a <'fi1t:erecf' name (in 1his case ~'Casa da Cambia 

Puebla""). An BEDS wire room emp1aree would then reject the paj-meOl.. 

o HBMX, which held an accOunt for Puebla, ~'froze" its account after the November news 

amele was publishe<i HEMX provided HBUS wiIh a list of 91 parties presumed to be 

rela:t::ed. to Puebla. Eighty-one (81) parties wereHBMX customers, whose accounts were 

frozen by HBMX. A wire search was perfonned (for the pe:ri.od January 1 through October 

31,2007) on these 91 names that resul1ed in 523 potential transactions. After m'iew, 170 

vme trnnsactions totaling $7.370.508 were found to have been conducted by 6· individuals or 

entities ...nose names exactly n;~:=~~ ~ ;:'~f ~~s originated by individuals and 

entities from accounts held at Wachovia.. A search revealed that nane had accounts at 

HBUS.) 

o In February 2008, HBUS conducted a follow-up anall'~is of1he cambio, identified by HBUS 

in its Octobe.r 2007 Reviewtbat were deemed to require follow-up review_ The February 

2008 revie'''''' exan:rined ·wires processed between October 2007 and December 2001 in 

omounts ranging from $5.000 to $25,000, and it was revealed that only 3 transactions were 

processed through HBUS correspondent aw:lUnts. 

--'" Redacted by the Pennanent 

Subcomrnittt::e on Investigations 

onfidential & Non-pubHcOCC Information OCC-PSI-01358515 
656 


76061.082

Redacted By The 

Permanent Subcommittee 

on Investigations 

• Sigue Corp. - A money seT\-lce business that allegedly processed $24.7 million in suspicious money 

rerrrittances related to drug-trilfficking proceeds. It forfeited SI5 million and agreed to speud $9.1 million 

to upgrade its ""ti-money lanndering program as part of a deferred prosecution aw=nent reached with 1lle 

Ilepmtment of Justice. 

'0 Adivity: No account relationYlip is held with this entity; funds invoh-ing this entity passed 

through correspondent accoun!5 bcld at HBUS. (Reference cc!1lIllellts below.) . 

[) On January 12, 2008, HBUS note.:! a D",,~artic!e that reported Sigue Corp" a California 

money service business (MSB)~ was entering into a record $25 rQillioo settLement ~tb the . 

Justice Department for money laundering vio1ati?ns related to the manner in which it handled 

ren:rittances to Latin America. The penalty asse;sed against Sigae set a record for-a 

Settlement .ntb. the Justice Department by a money service business. The allegations focused 

an antl--money laundering deficiencies that pemUtted arguably suspicious ~sactions to 

ocx:urprimarily.bct:ween cust01Ilf!I'S' in the US in the Dorrrinican Republic and Mo.:::i.co. 

Q Based on the article, HBUS COIJductoo a review of its ar:.courrts (~·tJcb confirmed that DO 

relationslrips were held with Sigue), an independent investigation into Sigue'and a review of 

\~ tfa.n!;fer activity. 

o The indepctident investigative search 00 Sigue and its founder (G1IiUerrno de la Vma) was 

conducted. to det..."'IIIrine whether either were the subject of any other negative news or la,,,,· 

enfurcernent activity. That investigation revealed that a Sigue employee was indicted for 

assisting drug traffickers to launder dl}lg proceeds but Sigue itselfV\a.S nat indicted. Sigue 

",as mentioned in another article'.., ha\-ing allowed $295,000 to be transferred from an 

account at A,vest Bank-to an illegal alien in Me>.iro. (TIlese allegations arose out of an 

nfidential & Non-oubHe DCC Information OCC-PSI-01358516 
657 


76061.083

-=:::~-Redacte(fby th"e Pcr-manenl,-- Subcommittee on loYestigations 

, Immigration'am! CnsIoms Enfurcement artionagIDnst the ill~ alien's employer, Sigue, 

again, was not imp-licrted.) 

o '. The v.ire review re:vealed 161 transactions fur $492.5 million were sent over a 12 month 

period (January 1 thrcmgb December 31, 2007), HBUS contacted HBMX (lbe beneficiary 

bank) fur information about its cnstaI=r and these wire transactions, HBMX stated that its 

relolionship wiIll Sigue il; conductal within eertain internal parameters (such as liroitiog 

trnnsactioos'fur $2,000 USD pert transaction), 

. 0 had. betweal January I 

\\-as DOt as 

a "Written agreement with the Department of Justice to enhance its Alill... 

program and ¥.-as not (per the lnvestiga:tive search) the subject of any other money laundering 

~vestigations. 

Redacted By The 

I Permanent Subcommittee 

on Investigations 

3. Enforcement Actions Mentioned. in WSJ Article: 

• As mention~ the \VSJ article' s ride-bar discussed 3 enforCement actions against financial institutions as 

follows: 

o Union Bank of California - Alleged to have allowed a casa de cambio to raunder drug funds 

through its accounts 

o American Express Int.rnatiooalllank - allegedly failed to report $55 million laundered 

through accounts owned by drug traffickers 

o Ilank Atlantic '- Undercover agents found lb81 drug funds were laundered through one 

bRJ.IIGh. 

• HB"Q"S originally ~iev;ed these enforcement acticm.s to uncover any natiles of drug traffickers or casas de 

i:-ambio, but reviewed them again in light of lbe WSJ article. No could be associated "1th lbese 

enfbrcell1ent actions (other than 

4 

OCC-PSI-01358517 
658 


76061.084

EXCERPT FROM SIGUE CORPORATION 

DEFERRED PROSECUTION AGREEMENT 

JANUARY 24, 2008 

FACTUAL STATEMENT 

1. Sigue Corporation, organized under the laws of Delaware, and its affiliated 

operating company, Sigue, LLC, organized under the laws of Nevada, are licensed money 

service businesses headquartered in San Fernando, California (hereinafter jointly referred to as 

"Sigue"). Sigue's primary business activity is the transmission offunds from the United States 

to Mexico and Latin America. Sigue operates by and through a network of more than 7,500 

"authorized delegates" throughout the United States. Authorized delegates are typically small 

"mom and pop" type businesses that have been contracted to offer Sigue's money transmission 

services. The authorized· delegates and Sigue each eam a small fee for the transactions 

conducted through the authorized delegates. At the Federal level, Sigue is regulated by the 

Financial Crimes Enforcement Network ("FinCEN'') and the Internal Revenue Service. 

2. The U.S. Depar1rnent of Justice, Criminal Division. Asset Forfeiture and Money 

Laundering Section ("AFMLS"), the U.S. Drug Enforcement Administration ("DEA") and the 

Internal Revenue Service ("IRS"), have determined that from November 2003 through March 

2005, Sigue violated provisions of the Bank Secrecy Act which require financial institutions to 

maintain anti-money laundering compliance programs. The violations at Sigue were serious and 

systemic, and allowed tens of millions of dollars of suspicious financial transactions to he 

conducted through Sigue, including transactions involving funds represented by undercover U.S. 

law enforcement agents to be drug proceeds. 

OPERATION HIGH WIRE 

3. From November 24, 2003 through March 30, 2005, Sigue authorized delegates 

knowingly accepted and transmitted more than $500,000 of money represented by undercover 

US. law enforcement officers to be proceeds of drug trafficking. The money used in the 

undercover operations was received by and wired through fifty-nine (59) separate Sigue 

authorized delegates in twenty-two (22) states. 

4. During each operation, undercover agents posed as drug traffickers and 

approached Sigue authorized delegates in the United States and asked for assistance in sending 

money to one of seven undercover Mexican law enforcement officers located in Mexico City, 

Mexico. The undercover agents clearly stated to the authorized delegates that the currency they 

Page 1 eftS 

Permanent Subcommirtee on Investigations 

EXHmIT#18b 
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76061.085

wanted to send through the delegates was proceeds of drug trafficking and was being sent as 

payment to the "source of supply." The undercover agents infonne4 the authorized delegates 

that they did not want law enforcement to learn of the transactions, and that they preferred not to 

provide any fonn of identification or address infonnation. ,When Sigue authorized delegates 

requested some form of identification from the und=ver agents, ilie agents produced multiple 

fonns of identification cards, all in different names and bearing obviously different likenesses. 

The following is a summary of one of the operations, which closely mirrors each of the 

successful operations: 

On January 10, 2005, a DEA Special Agent, acting in an undercover capacity 

using an assumed identity, entered the targeted Sigue authorized delegate's store 

and approached a male clerk behind the counter. The Special Agent asked the 

cleIk how much money he could send to the Federal District in Mexico without 

showing identification. The clerk responded that he thought the Special Agent 

could send $700 without identification, but he was not sure. The clerk suggested 

that the Special Agent use the phone to call Sigue cotporate headquarters. The 

Special Agent told the clerk that he did not want the police or government to find 

out about the transaction Oecause he had made the money selling marijuana. The 

clerk told the Special Agent not to worry about it. The Special Agent asked if he 

could give any name when he conducted the trnnsaction. The clerk told him that 

it only mattered that the person receiving the money knew which name the 

Special Agent used when he sent the money so that the receiver could pick up the 

money. The Special Agent asked if the store would tell the government; the clerk 

again told the Special Agent not to worry about it. The Special Agent conducted 

the transaction for $900 and then asked the clerk ifhe could send $10,000 by 

dividing it into smaller amounts. The cleIk told the Special Agent that he could 

do so at that location, but that he might need to show identification at other 

locations. The Special Agent asked the clerk if he could send mUltiple transfers 

of under $1,000 in one day. The clerk suggested that if the Special Agent used 

different names, he could send all the money in one day. The Special Agent told 

the clerk that he might be bade:, and the Special Agent left the store. 

Two days later, the Special Agent returned to the store and told the same clelk 

that he wanted to send $11,000. The Special Agent asked the clerk if he should 

do it by sending various transfers of $950 using different names. The clerk 

agreed and stated that he didn't believe the other clerk in the store would mind. 

The Special Agent began conducting the transactions for $950 each. After the 

second transaction; the clerk expressed concern that if the Special Agent was 

going to keep sending money from one location to tbe same person in Mexico that 

the transactions would be questioned. The clerk said he did not want to get in 

trouble for what he thought might be money laundering. He suggested that the 

Special Agent send the money to different people using different names. 

Page 1 oflS 
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The Special Agent conducted another transaction for $950. The clerk told the 

Special Agent that so long as the Sigue corporate operator was allowing the 

Special Agent to conduct the transactions, the Special Agent could continue to 

send money. The Special Agent again expressed concern that the clerk might 

contact the police, but the clerk assured him that he would not. The Special 

Agent mentioned again that he was in the marijuana business and that he did not 

want the government to find out. The clerk agreed. The Special Agent conducted 

five more transactions, sending $950 each to different receiven; in Mexico using 

different sender names. The clerk signed off on all the transactions and faxed the 

receipts to S igue corporate headquarten;. During the last transaction, the clerk 

informed the Special Agent that it would have to be the last tranSaction because 

further transactions would cause problems. After that transaction, the Special 

Agent left the store. 

5. In total, undercover agents conducted 84 successful transactions at 59 different 

locations (24 Sigue authorized delegates properly refused to conduct such transactions). At 47 

locations, the undercover agents, with the assistance of the authorized delegates, structured the 

cash transactions by splitting large cash amounts over $10,000 into several smaller amounts to 

avoid triggering currency transaction reporting thresholds al the Sigue corporate Level. In some 

instances, the undercover agents asked Sigue operators how much money could be sent without 

providing identification and the undercover agents stated that they did not have certain 

identifying information such as an address or telephone number. Each of the undercover 

transactions were recorded and/or videotaped by surveillance. 

6. None of the authorized delegates reported the transactions to law enforcement, as 

required by the Bank Secre<:y Act. At the corporate level, Sigue identified and reported the 

structured transactions that the agents conducted, but failed to detect and report the broader 

money Laundering scheme and take action to prevent the activity from recurring. 

MONEY LAUNDERING VIOLA nONS By SJGUE AND ITs AurHORIZED DELEGATES 

7. The S9 Sigue authorized delegates who knowingly accepted and transmitted the 

money represented by the undercover law enforcement agents to be drug proceeds could be held 

individually liable for violations oftbe money laundering laws of the United Stales. Title 18, 

United Sta1es Code, Section 1956(a)(3) provides severe penalties (up to 20 years incarceration 

and a $500,000 fine, or twice the value of the property involved in the transaction, whichever is 

greater) for whoever, conducts or a1tempts to conduct a financial transaction involving property 

Page3 of 15 
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represented to be the proceeds of specified unlawful activity (which includes proceeds of drug 

trafficldng), with the intent to (i) promote the carrying on of a specified unlawful activity; (it) to 

conceal or disguise the nature, location, source, ownership, or control of property believed to be 

the proceeds of specified unlawful activity; or (iii) to avoid a transaction reporting requirement 

under State or Federa11aw. 

8. In addition to the authorized delegates, the government maintains that Sigue could 

also be held criminally liable for the illegal acts of their authorized delegates. A corporation is 

deemed to act through its officers, employees and agents, and their conduct will be imputed to 

the corporation so long as the officers, employees and agents were acting within the scope of 

their authority and their conduct is beneficia! to the corporation. A corporation can be criminally 

liable for the conduct of any employee regardless of the employee's status or position within the 

corporation; even the lowest ranking employee may bind the corporation by his acts if they are 

committed within the scope of employment. Although a corporation is a legal entity and cannot 

be incarcerated, a financial institution convicted of money laundering violations would incur 

severe financial penalties ilIld could ultimately lose its licenses to function as a financial 

institution. 

A'iTI-MONEY LAUNDERING COMPLIANCE REQUIREMENTS FOR MSBs 

9. Congress enacted the Bank Secrecy Act (''BSA''), 31 U.S.C. § 5311 et seq., and 

its implementing regulations to address an increase in criminal money laundering activities 

utilizing financial institutions. Among other provisions, the BSA requires financial institutions 

to maintain programs designed to detect and report suspicious activity that might be indicative of 

money laundering, terrorist financing and other financial crimes, and to nurlntain certain records 

and file reports reillted thereto that are especially useful in criminal, tax or regulatory 

investigations or proceedings. Fundamental laws establishing anti-money laundering obligations 

of fmancial institutions in the Urrited States include the BSAj the Money Laundering Control Act 

of 1986 (codified in relevant part at 18 U.S.C. §§ 1956 and 1957); and the USA PATRIOT Act 

of2001, which significantly amended both laws and extended an anti-moDey laundering program 

requirement beyond federally insured deposit institutions to all types of financial institutions. 

Page .. of 15 
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10. Pursuant to Title 31, United States Code, Section 5318(h)(1) and 12 C.F.R. 

§ 563.177( c), financial institutions are required to establish and maintain an anti-money 

laundering (n AML") comp Hance program that, at a minimum: (a) provides internal policies, 

procedures, and controls desigued to guard against money laundering; (b) provides for an 

individual or individuals to coordinate and monitor day-to-day compliance with the BSA and 

AML requirements; (c) provides for an ongoing employee training program; and (d) provides for 

independent testing for compliance. 

11. Pursuant to 31 C.P .R. 9 103.125(a), money service businesses (MSBs) are 

required tIT develop, implement, and maintain an -effective anti-money laundering program 

reasonably designed to prevent the business from being used to facilitate money laundering. The 

program must be commensurate with the risks posed by the locatic)n, size, nature, and volume of 

the financial services provided by the MSB. Additionally, the program must incorporate 

policies, procedures, and controls reasonably designed to assure compliance with the BSA and 

implementing regulations. With respect to MSBs that utilize foreign agents or counter parnes, 

the anti-money laundering program must include risk-based policies, procedures, and controls 

desigued to identify and minimize money launde'ring risks associated with foreign agents and 

counter parties that facilitate the flow of funds into and out of the United States. The program 

must be aimed at preventing the products and services of the business from being used to 

facilitate money laundering through these relationships and detecting tbe use Of these products 

and services for money laundering or terrorist financing by the business or its agents. 

l2. The BSA specifically requires financial institutions to file with the Department of 

Treasury and, in some cases, appropriate Federal law enforcement agencies, a Suspicious 

Activity Report ("SAR',), in accordance with the form's instructions, When lhe type of activity 

described above is detected. See, 3l U.S.c. § 5318(g), 3l C.F.R. § 103.20. According to the 

form's instructions, Sigue was required to file a SAR with FinCEN, reporting any transaction 

conducted or attempted by, at, or through the money transmitter, if it involved or aggregated at 

least $2,000 in fimds, and Sigue knew, suspected, or had reason to suspect that: 

(i) The transaction involved funds derived from illegal activities or was 

intended or conducted in order to hide or disguise funds or assets derived from 

Page 5 of 15 
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illegal activities (including, without limitation, the ownership, nature, source, 

location, or control of such funds or assets) as part of a plan to violate or evade 

any federal law or regulation or to avoid any transaction reporting requirement 

under federal law or regulation. 

(ii) The transaction was designed to evade any requirements promulgated 

under the Bank Secrecy Act. 

(iii) The transaction has no business or apparent lawful purpose, and the 

money service business knows of no reasonable explanation for the transaction 

after examining the available facts, including the background and possible 

purpose of the transaction. 

AML I BSA COMPLIANCE VIOLA nONS BY SIGUE AND ITS AUTHORIZED DELEGATES 

13. Sigue filed SAR's on the obviously structured undercover transactions, an 

indication that its AML systems are ftmctional in at least one key aspect. At the same time, it 

failed to adequately investigate the structuring activity further and consequently failed to 

identify, report and prevent the broader pattern of money laundering and to file supplemental 

SARs. Sigue took no action to block such transactions from continuing to occur (the undercover 

operation lasted more than I year). 

14. The investigation into this matter has determined that the primary cause of 

Sigue's failure to identify, report and prevent the money laundering activity is that, during the 

time period of November 2003 through March 2005, Sigue's AML program contained serious 

and systemic deficiencies in critical areas, includlng: 

(i) Inadequate supervision and control of authorized delegates; 

(ii) Failure to effectively monitor and investigate bigh-risk transactions; 

(iii) Failure to establisb an effective risk-based AML program; 

(iv) Failure to exercise sufficient enhanced due diligence fOT high-risk 

transactions and customers; 1 

I For purposes of this Agreement oru:I Factual Statement, the term "customer" includes any individual who 

conduct!! .one or more transactions through the MSB lIS a sender or beneficiary, notwithstanding the lack OraD 

ongoing relationship between the pcroon and the MSB. 

Page 6 of15 
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76061.090

(v) Failure to have an effective, on-going training program for authorized 

delegates; 

(vi) Failure to take appropriate action on customers and transactions deemed 

suspicious; and 

(vii) Failure to establish an effective independent review process to test the 

effectiveness of the AMI.. program. 

Some of the key AML and BSA deficiencies oflaw enforcement concerns were as 

follows: 

Inadequate Supervision and Control of Authorized Delegates 

15. Sigue assigns each authorized delegate a risk level, either low, mcdiwn, or high, 

depending on their operating location. High-risk areas generally corresponded with each of the 

areas designated by law enforcement as High Intensity Financial. Crimes Areas (HIFCAs). 

Based on this classification system, Sigue theoretically would subject the transactions from the 

high-risk 'authorized delegates to an enhanced level of scrutiny to detennine whether they are 

suspicious, and w~u\d file SARs as appropriate. This investigation found no evidence that Sigue 

implemented an effectiv.e risk-based supervision program for high-risk agents during the time 

period under review. 

16. Sigue conducted only limited independent testing of authorized delegates and was 

consequently unable to identify widespread and systemic deficiencies in its monitoring and 

training programs. Between February 24, 2004 and February 26, 2004, Sigue contracted with a 

private finn to conduct compliance checks, but only at nine separate Sigue authorized delegate 

locations in California. Even with these, the contract investigator identified himself to the 

authorized delegate as an investigator acting on behalf of Sigue and asked each individual 

authorized delegate the same seven questions, as follows: 

a. What information are you supposed to collect from a customer who sends 

a $4,000 wire? 

Page 7 ofl5 
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76061.091

b. What would you do if a customer comes in four times a day and sends 

$2,500 each time? 

c. What would you do if a customer comes in with someone else and you see 

them splitting up the money so that each of them sends a wlre to the same 

beneficiary? 

d. What would you do if a customer who you thought had a low income 

sends about $5,0007 

e. What do you think the risks are if you, the agent, were aware that a 

customer had money from drug sales and that the same customer was 

sending the money through you at the agent location? 

f. Do you think you have enough training in anti-money laundering? 

g. What would you do if a customer placed several wlTes on the same day 

under $3,000? 

17. Not surprisingly, the authorized delegates who were tested in this manner 

answered almost all of the questions correctl y. Consistently, during the undercover operations, 

Sigue authorized delegates demonstrated a keen knowledge, not only ofSigue's policies and 

procedures, but also the money laundering laws of both the United States and Mexico. Yet, law 

enforcement conducted an historical analysis ofthe transactions accomplished at those 

authorized delegate locations and identified widespread and pervasive violations of Sigue's 

policies and procedures, particularly structuring activities that continued fOT months, sometimes 

years. In most of those cases, Sigue filed SARs on the transactions to report the structuring 

activity, but did not subject those transactions, customers, or authorized delegates to a 

sufficiently enhanced level of review. 

18. Late in 2003, Sigue also began requiring authorized delegates to sign a document, 

dated November 19,2003, entitled "Anti-Money Laundering Program," acknowledging receipt 

of the "Anti-Money Laundering Guide for Money Transmittal Agents of Sigue Corporation." 

The letter explained that it is was the reSponsibility of the authorized delegate to appropriately 

Page 8 ofl5 
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train each ofits employees involved with the money transmittal business on Anti-Money 

Laundering laws and compliance efforts. This form was printed in both English and Spanish on 

the same document In practice, the undercover agents routinely found copies of the money 

laundering guidelines, but in an unused condition, frequently still in the original packaging and 

unopened. Although Sigue had a training program for its authorized delegates, many of the 

authorized delegates or their employees subsequently interviewed said that they hild received no 

training or materials on anti-money laundering. 

Transaction Monitoring Deficiencies 

19. At the corporate level, Sigue began implementing in 200 I and 2002 a proprietary 

automated transaction monitoring program that screened financial transactions for numerous 

categories of suspicious activities based on pre-identified "red flags." The monitoring system 

dr3ll1llticaJly improved the company's ability to identify suspicious transactions and to file SARs 

with FinCEN.2 The ultimate failure of the company was less in the design of the monitoring 

system, but more on the company's failure to adequately investigate flagged transactions further 

and its failure to take further action against the suspicious activities identified (such as notifying 

law enforcement directly or banning individuals from sending or receiving money from Sigue). 

20. The company's reporting on suspicious transactions that it failed to adequately 

investigate is evidenced by its filing of SARs on almost all of the undercover transactions to 

report the obvious structuring, while failing to identify and report the broader money laundering 

activity. To determine whether the company's failure to identify and report the undercover 

money laundering activity was an isolated example or whether it was the result of systemic 

weaknesses within the corporation, investigators analyzed more than $6.07 biUion of transactions 

to determine whether similar cash structuring was prevalent. The resu It was the identification of 

more than $47 million of structured transactions (including the undercover sting transactions) 

that Sigue identified and reported in SARs, but failed to take action to prevent from recurring. 

21. To identify the most serious structuring examples, investigators sorted the 

ltansactiOllB to select only those cases where one person sent or received more than $50,000 in a 

l In 1001, Sigue filed omy 52 SAlU, but in 2002 it filed 1,071, and in 1003 it filed 1,663. 

Page 9 of 15 
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12-month time period through more than one transaction. Sigue claims that more than 90 

percent of its transactions are from customers who send approximately $300 twice a month to 

friends and family members in Mexico ($7,200 annually). Accordingly, investigators reasoned 

that any person sending or receiving more than $50,000 during a l2-month period would fall 

outside of the Donns associated with Sigue's unique customer base and would be relatively easy 

for Sigue to detect, identify, report and prevent. 

22. The result was the identification of 238 case examples of serious structuring 

schemes, cumulatively valued at $25.4 million. The teast si.gnificant of these examples is an 

individual who transferred, in a 12-month period, $50,640 through 46 transactions, each 

transaction averaging $1,100. One ofthe most blatant examples is an individual who 

transferred, in a 12-month period, $324,091 to 15 different individuals in Mexico, through 370 

transactions, each averaging $875, using only two authorized delegate locations. Another 

individual transferred $224,232 in 80 separate transactions on a 1 O-month period, with each 

transaction just under Sigue's reporting threshold of$3,000. Within these case examples, there 

were occasional instances of structuring, which Sigue adequately reported, but Sigue failed to 

identify and report the broader money laundering schemes undertaken by these individuals. 

Failure to Establish a llisk-Based AML Program 

23. Sigue's primary business activity and operating location presents a high-risk of 

money laundering. Yet no financial institution of substantial size can possibly monitor every 

single transaction and customer, particularly, in Sigue's case, where the transactions and 

customers originate from authorized delegates who are far removed from Sigue's corporate 

operations. To remedy this, MSBs should conduct a fonnal and detailed risk assessment of each 

of its products, transactions, sen'ices, geographic locations, etc., and then concentrate their AML 

and BSA resources to specifically monitor and control those areas identified as the highest risk. 

24. Sigue conducted a limited risk assessment orits operations and products, but it 

failed to implement an effective AML program designed to subject its highest risk areas to 

enhanced monitoring, supervision and control at three critical risk areas: the authorized 

delegates, the transactions, and the customers. 

Page 10 ofl5 
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76061.094

25. At the authorized delegate level, Sigue identified SOme authorized delegates as 

"high risk," yet very little was done to subject those high-risk delegates to any more monitoring, 

supervision or training than those authorized delegates classified as "low risk." Sigue failed to 

establish expected transaction parameters and limits for each authorized delegate, and failed to 

implement a program to subject high-risk delegates to enhanced monitoring for suspicious 

activity. 

26. At the transaction level, Sigue implemented an automated monitoring system that 

was somewhat effective in identifying "red flags" of suspicious activity. This proprietary 

monitoring system Was most effective in identifying instances of currency structuring. Yet 

Sigue's process did not include sufficient substantive review of the underlying activity. Sigue 

conducted some review of transactions associated with the same sender, but no review of 

transactions for the benefit of a single beneficiary. This failure was exacerbated by Sigue's 

failure to sufficiently review transactions from related senders or beneficiaries. Consequently, 

Sigue failed to identify and prohibit the transactions, authorized delegates, and "customers" 

involved in the undercover operation, which used dozens of different people spread across 22 

different slates to send structured drug money to a group of seven individuals in Mexico City. 

Had Sigue implemented a more robust investigative procedure, Sigue could have detected the 

undercover activity and taken action to report and provent it. 

27. At the customer level, Sigue failed to establish an effective risk-based Know Your 

Customer (KYC) program. Of course, as an MSB, Sigue operates substantially diffen:ntly from 

traditional financial institutions, such as banks. Sigue does not require customers to open 

"accounts;" there is no application roquired to use Sigue services; and Sigue does not collect 

source of wealth information. vcrify employment, etc. Yet, to avoid potential violations of the 

money laundering laws of the United States, and the mis\lse of MSBs by money launderers, 

Sigue needs to implement enhanced due diligence procedures to collect appropriate information, 

at least from its highest risk customers and operating locations, so that it may reasonably 

identify, prevent, and report money laundering activities, as roquired by the BSA. 

28. The traditional Sigue customer sends less than $400 to Mexico several times a 

month. For these customers, there is very little KYC infonnation that Sigue is requirod to 

Page II ofl5 
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76061.095

collect, under the BSA or the money laundering laws. Yet Sigue, as with all financial 

institutions, is required to have a SAR program. It is virtually impossible to have an effective 

SAR program unless the institution also has a KYC program. For MSBs the extent of the KYC 

information collected should necessarily, and as a practical matter, be risk-based. Sigue should 

be expected to have very little KYC infonnation for a customer who uses its services to send 

$400 twice a month to Mexico. However, Sigue and other MSBs should have enhanced due 

diligence procedures that require them to obtam additional information on customers who do a 

higher volume of recurrent transactions in significant sums, such as a customer who sends or 

receives more than $15,000 during any 11 month period. Since these latter customers comprise a 

small percentage ofSigue's overall customer base (less than 3 percent), Sigue's KYC burden is 

not overwhelming or unreasonable for these customers. The BSA is intended in almost all 

respects to help financial institutions comply with the money laundering laws. In order to avoid 

misuse by money launderers, MSBs may need to implement enhanced AML pOlicies and 

procedures to fully comply with the money laundering laws and the BSA. 

SIGUE'S REMEDIAL ACTIONS AND COOPERATION 

29. Even before learning of this investigation. Sigue had devoted considerable 

resources to correct and improve the identified BSA and Al'\1L deficiencies, agreed to terminate 

the licenses of the culpable authorized delegates, and implemented procedures to identify, 

report, and ultimately, block a broader range of suspicious transactions and customers, including 

the types of transactions identified during the law enforcement operation. As part of that effort, 

Siguehas: 

• made significant investments in developing and implementing its current 

compliance program and internal controls; 

• retamed a knowledgeable and experienced staff, with extensive experience in the 

MSB industry, to oversee its compliance program; 

• increased the total number of compliance personnel on staff to ensure adequate 

personnel are designated for executing the tactical objectives of the compliance 

program; 

Page 12 of IS 
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76061.096

• purchased, de~eloped and implemented advanced anti-money laundering systems 

and software to detect the misuse of Signe' s financial services; 

• instituted an authorized delegate risk management department which is 

responsible for evaluating authorized delegates prior to contract approval; 

• implemented policies requiring all authorized delegates to have undergone Bank 

Secrecy Act training. and developed authorized delegate-specific Bank Secrecy 

Act/Anti-Money Laundering Compliance Programs required for each prior to 

activation; 

• deployed a significant team of compliance field personnel responsible for auditing 

authorized delegates' compliance with their Bank Secrecy Act/Anti-Money 

Laundering Compliance Programs and recommending disciplinary action, up to 

and including termination, for non-compliant authorized delegate; 

• implemented a comprehensive, enterprise-wide employee training program in 

. which all employees receive Bank Secrecy Act/Anti-Money Laundering training 

at least twice annually; 

• rctained a competent risk management consulting firm to perform an annual. 

independent review of the integrity and effectiveness ofSigue's compliance 

program and related internal controls. 

SlGUE'S CONTINUING REMEDIAL EFFORTS 

30. Sigue has cooperated and continues to cooperate with law enforcement and its 

regulators. Through organizational and program changes. Sigue has shown a commitment to 

compliance improvements and a dedication to effectively complying with its BSA and AML 

responsibilities. As part of its continuing efforts to implement an enhanced BSA and AML 

compliance program, Sigue has committed to the following remedial measures as part of the 

Deferred Prosecution Agreement: 

Page 13 of IS 
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76061.097

A. ,Integrity of Compliance Program and Board Oversight 

Sigue will continue to employ a specific individual within its high-level personnel as the 

Global Compliance Officer who is assigned overall responsibility for the BSN AML compliance 

programs. The Global Compliance Officer will be qualified in AML compliance programs, will 

be delegated day-to-day operational responsibility for compliance, and will report directly to the 

Audit and Finance Committee of Sigue's Board of Directors. The Global Compliance Officer 

will be given adequate resources, authority, and direct access to the Board of Directors, and will 

report on an annual basis to the Board of Directors regarding the integrity and effectiveness of 

the compliance program. 

B. Authorized Delegate Due Diligence 

The Authorized Delegate approval process will be assigned to a department which 

engages in risk management and is independent from the sales and marketing function. Credit 

and criminal background checks will be run on all owners of Authorized Delegate applicants 

who own or control at least ten percent (I 0%) of the Authorized Delegate. Authorized Delegates 

will also be subject to periodic credit and criminal checks, under appropriate circumstances. 

C. Monitoring 

Sigue will implement and maintain a transaction monitoring system for the purpose of 

performing risk-based trend analysis related to sender, beneficiary, originating Authorize(\. 

Delegate, and paying location transactional activity. The monitoring system will be effected in 

part through an enhanced identification re<juirement for senders whose transactions aggregate to 

$2,000 or mOTe in one day. Siguewill obtain seuder's full name and address when sending any 

transfer (if the sender does not have an address, "none" or a code will be inserted in the 

appropriate fields) and will conduct an enhanced due diligence review of senders and 

beneficiaries, and all related persons, transmitting or receiving aggregate amounts more than 

$25,000 during any 12-month period Sigue will obtain beneficiary identification information 

for beneficiaries who receive remittances through Sigue's Mexico-based Authorized Delegates in 

amounts of $950 or more in a single day and aggregate amounts greater than $2,950 over a 

rolling five (5) day period. 

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76061.098

D. Blocking 

Sigue will implement a transaction interdiction system for the purpose of enhancing the 

functionality of blocking remitters and beneficiaries of money transmittals, as appropriate, 

including the implementation of enhanced due diligence review procedures to determine whether 

senders and beneficiaries should be blocked from conducting further transactions where Sigue 

has filed two or more Suspicious Activity Reports ("SARs") on the senders and/or beneficiaries, 

or related senders and/or beneficiaries, during any twelve-month period. 

E. OFAC 

Sigue wiII implement an OF AC interdiction system that provides for real-time screening 

of remitters and beneficiaries of money transmittals. Sigue will also periodically screen 

employees and Authorized Delegates against the OFAC lists. 

F. Authorized Delegate Training and BSNAML Compliance Program 

Reviews 

Sigue will provide BSN AML training to all new Authorized Delegates before they are 

activated, and thereafter risk-based BSAlAML training. Siguewill also implement a risk-based 

Authorized Delegate compliance review program, using dedicated compliance resources. 

Page 15 of IS 
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76061.099

From: David W J BAGLEY 

Sent: \Ned Jul18 16:52:54 2007 

To~ Warren GLEAMING 

Subject: Fw: Weekly COmpliance Report 02JUL-06JUL07 

Importance: Normal 

- Forwarded by DElYid W J BAGlEY/HGHQlHSBC on 1810712oo11B;49-

Ramon GARCIAlHBMXlHSBC HBM)[ 1BI'0712Q07 To David W J BAGLEYIHGHOJI-ISBC@HSBC 

1-4:43 Mail Size: 11.818 

SUb.te Fw: Weelc:ly Corrpliance Report 02JUL-06JUL07 

" 

Entity HSBC Hollings pic - HGHQ 

David, 

I wtU discuss the sub,lect below with WaITen and John In our Conference CaD tomorrow. I would like to-Iet 

you that the procedure and functions 01 the money laundering committoe (CCC) have been improved in a 

very i"llortant way. 

The 2 cases reported at the weekly compliance feport is a clear example of the escalation process 

Implemented as one of the learning experiences aftocalland other cases. 

I understand that the appreciation from GHQ Is that the CCC has to resolve and rute about aD the c:sses 

presented to tha attention of the committae but the real siwaUon is that sometimes there are ~me-cases 

that need to be escalated 'to the BusLness Head and CEO for further discussion. 

As I 'tOld you when you where In Mexico, CCC is a very unique body CI1!!ated by Mexican regulation In 

order, among other things, to dilute responsibilityilf MLD obligations between members, glvlng a wry 

Important weight to business opinions because In theory they are the ones that reaHy know the customer. 

For that specific situation esca!atiQO i:o a key element when MLD has a different opinion that the one from 

the business about reporUng the case to authorities, 

I will explain Warren and John torrorrow the different actions plans I am reviewing with John Rendall 

Including ttle one orlglnated after your visit In order to have better procedures at the MLD function 

includin!1 the CCC. 

Regards. 

Ramon 

_ Forwarded by Ramon GARCIAlHBMXlHSBC on 16107/2001 08:09 e,m._ 

John F ROOT/HOHQlHSBC 17/071200708;16 To Ramon. GA,RC1MiBMX/HSSC@HSBC 

Permanent Subcommittee on Investigations 

Redacted Material EXHIBIT #19 

r.nnfirhllnti::ll .. I=nl4 Trp::Itment Rp-nu HSBC acc 8875925 
674 


76061.100

a.m. 

Ramon, 

SUsanA 'MIGHTIHGHOII-ISBC@HSBC.Wam»1G 

lEAMlNG/HGHQlHSBC@HSBC, Davjd W J 

BAGLEYJHGHOIHSBC@HSBC 

SObje Fw: \fVeekly Compliance Report 02JUl-OBJUl07 

et 

A. number of Items jurJl) out from your most recent weekly report (02JUL-06JUL) but everything pales In 

comparison with the hill items on page 4. It lookS ike the business is still retaining unacceptable risks arici 

the AMl committee Is going aklng after some Initial hemming and hawlng. I am quite concerned that lhe 

committee Is not functioning properly. Alarmed, even. I am close to picking up the phone to your CEO. 

~lookS 

~ like anothe~type of slbJalion - what on earth [s an "assumplion responsibility woulci It protec~k If the ct~money launciarar? Please note lhat you can 

dress up the USD10 minion to be paid by one 01_ partners to the US authorities as an "economic 

penally" if you wish but a fine is a fine is a fine, and a hefty one at that. What ls ttllS., the SChool of Low 

Expectations BankJng? ("We dldn'( go to jail 1 We merety signed a settlement with 1118 Fecis forS10 

mil6onr) I just toyed the last sentence oftrle paragraph: "This infonnation is expected to be spread by 

mass media." Isn, that just great? 

So,~ strike one .••• 110 strike two. Let's now look at sbike three. (I hope you Uke 

baseball.) 

TIle sarna person who is giving the sacrosanct "assumption responsibUlty lette .... fol (Jose 

;;M~.~nuel~Dom!ng~~~uez. DGA.CMB) Is being asked by the CEO to explain why he retained the a '{Ij ~ elatlanshlp after USD11 million was seized by the authorltles in __ account wtth 

Wachovia in Miami. 'NtJet71 The business was okay with this? 

TIle AhilL corrmittee just can't keep rubber-sta~ng unacceptabfe riskS merely because someone on the 

business side writes a nice latter. It needs to tah a nrmer stand. It needs some cojones. We have seen 

this movie before, and It ends bacity. 

Regaros, 

John Root 

- Forwarded by John F ROOTIHGHOIHSBC on 17107f2007 11:46-

Ramon GARCIAlHBMXlHSBC HBMX 141071.2007 To \tVe~n G LEAMlNGlHGI-IQlHSBC@HSBC.John F 

00:58 Mail Size: 158258 

Redacted Material 

ROOTIHGHOItiSBC@HSBC 

Laura YESlN/HeMXIHSI3C@HSBC 

SUbje Woo,!), Co ..... n.,. Report 

Entity HSBC Holdings pit: - HGHQ 

C':nnfirl .. nti,,1 • F()IA Tc .. "tm .. nt R .. nll .. "t .. rl hv H!;I=!C I=!"nk" II~A" ',LA" HSRC OCC RR75Q26 
675 


76061.101

Warren, John, 

Please find enclosed Weekly Compliance Executive Report fot the periOd from 02JUL07 to OSJULo7. 

(attachment -w\IeeJdy 26 07 sum.doc"' deleted by Ramon GARCIAlHBMXlHSBCl 

Regards, 

Ramon 

Confidential - FOIA Treatment Requested by HSBC Bank. USA. N.A. HSBG OGG 8875927 
676 


76061.102

o 

JaOm, 

On lI'IarlJdencecflhe papal1l \h31 you have prGVld8lJlOm •• I.ag~e !halma qualll}l athlnfQn'naUon 

plovliad by eMS do," no!. give. any eomfM 1haI U'lEI'r 1\8 .... rIodrQl.l..5I)' mJewud this d181!1 ~ !bey saem 

10 new ~onmsnaglng oot1he CllKfItt'i5k. bUt'MUlOutc:ll'lSJdemg Iha R1pulildol\arrlslts, 

On thI.a boub, I SlJpport In pOOdpie the recoflurum::lazlr:ift 10 ciQu die ac:aIUnt 

HO\ll'ewr, II~ .. to be nomdlhatltVfOUld beta seI18i!ivemesaag&m sand, taady IhBtwe8nl not 

prepa,edlo~wl!hIl~pal1)'lhatJ9tegutalBdbyCN8V,a81h!sCDuldbll.,~lngfortllemit 

Itboc;;otrna ~Whlc:h!satwaY"pouIbbt-. I lhlnkW'll should IjI~MWiJ"r1\1Itllccnvars..;JtJon 

'otIfthCN'8\(lnlhellrstlMtance,It!!t!Mse(h~d.l3Ilrjll18ntandtflepalt<l1talreou~S/risbfo( 

thea1,lJtId SM lh8Ic"no objection" 10 our adbn. 

John R RENDALL 

_OtlginaIMlrs.s;1gs_ 

PiJU1, 

rr...: John It II£MDALL 

S..,tl 01/2"5/'2:007 as, 11 t't{ CO'r 

r"l 'aul A fHDRsroM 

;:';'=:"r:~."n; trrr't "'r: 

!hIli! 19th., IIlICOOct t:a58 fIlXII CCC mqlllMg escafa\lOn. 

"-i) In Ihls cam I racumrnlNld lbatwo IWpponlh08 CCC cIoGUr9l"eC1J1l1mond1J'bt. 

". The pn~pelladl:lthl\'(8lslhallhltqtJaHIy ofl'B&pQro9o!I rrom ihBCMB I8iIIT'I /msf1'Dtbeerl ofltls 

standsrd Inlli loads I'M 10 belle~a Ih:8t ttley a1'1\ on lOp clthe =mpIlanoll risk:9 1:etQ. 

Unllk8'IhIlOlh"(:;Jl'lEl,thlshlaMftXlc::Bn~IatOO~. 

The only cavealltJ this f9CDmmandallon Is lhi!ll SUOQBSI Ramon tq,isa ..... iltl hili US counlarpart as I 

bell8Yelhatlt1B«1is-aretallons:l'lipthl!tl"8SIso, 

John R RENDALL OO'I~,,~yAdmln~ I ftS!lCJI:ulaISA 

PJlllsOtItI"R~J;II70I/ll:lrlf 

Cd.C~Qel;OQ"'lIi:bIo.f'" 

flG,u55ml2Sllil 

oa:nS$sn.12972 

,W,nRRf'H!'WIA!nIx;yqu!m 

,,. 

Permanent Subcommittee on Investigations 

EXHIBIT #20 

Redacted Material 

Confidential - FOIA Treatment RequE 

HSBC OCC 8875132 
677 


76061.103

o 

,........ F<II'W1Irrli!d by John R ReNOALllHBMXlHSBC en 2~071201l7 08;05 p.m._ 

ArI\cIllo'" 

~~l.IH6MXI\1SSC r" JohtI R R~DALl..n-iBllXMS6C@~OC 

John: 

" jn"m[7!1'1"!!';:'~~;;:"-=;::~~""""po<t\o- 1.~AItecI1ed1Q Ihb IHnaIl pkDsa fill!! Inll!~ acllans lJlot.l'Ialll.1ken talN,.diWI: 

• P.tlIlOl\ lor Return IJ' SelUd funds.has Ihectlmplrife da:::um,"" wINd! CDI'1talllllt1~ than 

35 paGD. If you need iI: tet \.Ill know 

{etl3Cl'lJn8fll. ~P.lIcIon de dewlllc:lQft<l1 Pandos rtlllII"dda. CoruI Clvl!.¢" deleted by Paur A 

THUASTO~BMXIHS9CJ 

{at&ad!ll'1IIf1t~PfOnce OF SEIZIJAE.pdl" det«ed by Patll,.. THURSTOHlHBMXlHSSC! 

• 2 UttklncontMtlrtg the forlelture otthe u!zed Pf'Op4I{1y BAd 2 ~ftlbtH of Aclo:.now\edge!lI1en' oC 

e.,eculiod of an ll\lJttUment iswcd •. 

[atla . IelJedbyF'lIlJlA. 

T 

~..,erI!dMamlgertoldwltlafltley vOl I\Ot takl'l any legaJ3C!fon .... a Wachav19 Bank bcfol1l 

ItIlO'Nlng I DislrlI;fCourt'" l'U9lliu!lon 

2.~~$Ugg'51edlolhll Compl~CQmlttae tok~ ar~umenb e5taMahed In Ike LiJd Vaga'l5 mati (word docwnenl). 

fadlitll19 ~re cancelled. The blJdn~ Of'BrmIoI'Ts lila!: thll'.baldr; dr;)W$ and o depo.!;ifllfram:llldlOilacheddnQillccounts;and"curTency • 

DS:5ldl!$, ! &!9IadlorheCompIlanceC:lmtnaelo!rtfomltoth'!'me:dCMfiNinCial 

aulhIJril!esli llht ,.ilualkltl ...,gardlng Itnt selDJrl 01 Noels al Wad100via Bank. 

:1. 'l$ld""sthlsr.renlail.llJwreplJla!l\Jl'lalriskOlleradondtJlIl~a!Md Oil) 

crc;etle:n!lIxllerlfl/ll;8 ililhollnantial market In Ihe ~~ 11 years, It if!: I!I regulated entiry bY' the CNEN 

", 

~edacted Material 

:::onfidential _ FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 8875133 
678 


76061.104

o 

wl'llcl'lha!!llrnetaJIlhellulhGi1l1Uteq\IIretn 

~~"~~~IJWQOO!1i1a:~::~:~=tIIJ~~~')~%::::er 

!fYOUIlQ'~/T)QrlJlnrormutloo.pIeasa ~ttl$knaw 

MwnioCrur. 

OiremorRI!I!I\Qnal 

~egl6nSUR 

, -~byAnlonfa'MCRt.JZ.1-lat,()(fliSSCI;U'I'l4mrzanll·- I..ut.VEQAItlBUXtH5BC ........ !1\.-

200711«f7 07;00 p.m. To a"IaoIo..m.CN:@It1*beCDm""", F~ 8lEDLMaNx.t{SSC' 

'-"''''''',. 

~~..::=:::~t~J:SJ3I;Mllb 

c.p.meoF'a.a.P'urL 

_~b):LW.~ac,,":Mm7fllXl7~7:'I:n'P''''-_ 

J ....... R~~l3C 

Redacted Material 

Confidential _ FOIA Treatment Reauested bv HSBC Bank. USA. N.A. 

HSBC OCC 8875134 
679 


76061.105

C) 

.J.o.nnI\RetOAlJ.. 

=""""<bI~r.~IKS9C~~ 

Cal.C .. I>IIh*-.-C55«I"' ....... rlI. 

DIl!155"nl2a119 

OO!l2.!15ll'Zl~ZZ 

..1M" BReNDA! t Ab''''' mit! mt 

2OIa1attJ11G'.5 .... m. 

"';1OlSiN.'3,Sll 

reg'llrds 

LuIsI/eGA 

OlNdore,koi:.uw.o "'~t.ft 1:1111 ! Hsac ..... .;m A'I. T ... kAhI~ SUI 10~ Ccl.l& "'g C.P. 7'%1&0 P\IrI~~ ~ 

iSH2!ZUH6QI 

(S1·n)2'2l!1-'J60$ 

,,. 

Redacted Material Confidential. FOIA Treatment Requested by HSBC Bank, USA, N.A. 

HSBC acc 8875135 
680 


76061.106

From: M~l F GEOGHEGAN· 

Sent 2311Q;'2007 13:55 GOT 

TQ:ZJCAMA 

Subject: F-Vi: CNBV Inspsctlol"i 

ZM 

HSBC Hold~s ph 

R~j5tl:"fed Of'fr...e: 6. Can~a Square. LQndQrJ E14 5Ha, Un~too KingdOm 

R~iltef;ed in E~!!Vl{j ntm1;J~f 611007 

--Original Mesf>age --

From: Michael F GEOGHEGAN 

Sent: 2311 O120Q7 08:43 GDT 

To; Paul A THURSTON 

Cc: stephen GREEN; Maffilew J ¥"" KING 

SuhiEtc::t Re: GNS'" InSpec:iil:Jn 

"""fl1.is 1..0; d~ttlfb!I"!S anct"c~~~J V,fe wli:! ne~ I;c !~ok 2t !he !n~gerref!! strL'd.m~ el'!d prectlce's. Wnula 

t~e \I~ from GNBV be shared by (lI.If lntemaIAl!ti.r! locally? 

We. sho~la wait to see whai me offlclai iettar says bllt it 'I'r'iil be hard 10 impress on management the need 

fur f:j cha~~ ofdlrection ;fyoo afe f/QtilliQwec \0 use the.:;;ontent coiyour fllee'ti~. 

I am copying tNs to the Group CtJe,irm6it and Matth;;w Kina for thatr ifJormation 

Permanent Subcomm.ittee on Investigations 

EXHIBIT #21 

HSBC ecc 3373333 
681 


76061.107

HSBC ~fiflS pIC 

Re&lisrerod OtflC£~ e Can&da Squ~re, London E14 SHO, Udtcc KnQdom 

Reglstered h Ei';~lat1d n'J:ttNS17S87 

:......- Origina! M~.sage --

From: Pa!.JI A THI)RSTON 

~t: 23!1Ql2Q07 02:18 CDT 

To: M\l:;hae! F GEOOHEc;:AN 

.Sl!b:ect; CNBV Insrec-tion 

~';1 t!y.ttre;::!!!:st, I n".c! todDY with 'the H!:9dofBl!I'.king Sup~i1.:ion, AM the SupcrviSQf fnr-HSDC, f!'itlU our 

reguillfot, the CNBV. tbl!ovlin[!; lfteir (lor, silt O:arn1llftiOIl Qf\"arious aspects. ~(~ur boJSiness, Inc!uwng (;Mds. mOTley 

lilLlIh1erifii!- af!\1 [,'iia~Ur! oper<iiiOl"lS, ,!>'Hh<l~gh the), hoi,.-;; twlddosin,g m~tt~sS · .. ':(11 tt-.e ~!;.lJ-::r:t\\'e d~PJf'"~'1l:;:tt", tll_"1' 

;l,~f:d (0 Il'ee'l ~'il!l 'll~ <,.!c'~, COr:! ~ s\ric!1J p~\'ate:m<i tt'nncten!illl oo~~, 

T~y· W7liked rrr.: tfmmgh a 'Pf"ettl\l.a!io~ Pl!tbl.rhlch firstly set oUtipecirlC '\.l{Jint~ Iha! i1Jld liIri:.eli diu-ins iht:lr 

il1~ycc*m. bur ~h;:n .no\"~d:m I:) I't!Ctc .a~.J c~mc-::-r:\S ~fthl; DEV '}:im HSBC in M':.t:C~, Th!:sc (:cr:!~ on: 

-wcala1!!Sscs In illlc.rnaJ ~\frob whIch they saw in !levcn! area; of HSBC. citing. CYid~l.tc 1)( the level Df 'CrcOn card 

fmuas, IIWlill.!["S uf ;;tJ:I!UlIl~'1 ,t:ruJp-lajmsw l!i" liarz: (f}:.:Ilc It.>e ba:Uiillg ornbuihmar;. CU!!(l.iUct co-occr!a n~l .;tln:~j" 

b-r'C!lChcs do :'101 ha,~ spproprielc" t!"!m!l!g IL¥- que.lif..OC3!!ioDS, frequency tof IT iai1uocs,;U:<! Sic;\>{ pro~$!: in \~llllg 

KYC d~11I prC.hkl,U ~[1d !Inri 1110ney {;\!.lftdetij\~ ptOCfdllres, 

-t:"'rPor.Jl:C c;;lt.Ir~. • .. ·r.r·rt ;h.~y CCtnn'J:l'I! lhal Sir~c the P'~'"Ct .. 'tSc of SiUtl, HSaC'~~ dri·.,;;;t ~'fh '\;1 ctt'dit ;.n'WI!CI!. 

aoo ~ul!chCd 00"-' PrM\iCl:o Wil!)cr.1! jl,doqImlC r:.Q"CJIrol;:.~· ar:Jml)wl~d the sc2dltlon ofnnv ~LOr C';l.l'Cmi\'cs 

lochldin~ The O'O:lM COO, aM Jicy wclcoud ihts!:, uUl tllCY an: I.:\!llCeU~ 11 ..... :WflA' 3I.':-il5 ufl1it t...wlif$$ t\i.'it 

1101 Ct"$l1i3:cd:<\ ~H i;: l,.e-m:llity. OfllPPl"Q'.r;:I'z, dc'spl1e the clmltgi~E 113\ort; Mllle tl>J.).h~:., 3~'Id some km-ef l:\'d ~,,!1' 

h:t\'e fl(ll ~11 fidl;qJl.~le1-t If,(line(::1'J Qe..1.1 Wllh the hu!iioess now "Oeing cl).1eJ1i!~er.. They implied tllO\llhey considered 

ihat we were: ~~m ruJJ!li1l1i!; piUtS oflile bilnt. itS i(they w«e S.liiJ IliiSl. d~il~ ilIe UfW (IY,!b!c:i1Ji)) a!i:l '1re,,;.r.al'~ i,i bU'IintS5))rofile, 

Confidential· FOIA Treatment Requested by HSBC Bank, USA. N.A. HSBC oce 8873339 
682 


76061.108

lllCY alto ey_~~res~edC'tlrl!"eM! .llll!!!niClrm;rm".gcmml having dUlil rt"~,:OC11s.i'billlie$ f1."t MtXI('.o ~n,i 1m T"\"eirrn, !:.131iug 

llull "thl're ~ lrIany COlJC::n13 0)\ ho ..... ll'l!inil~'{lem 'Win be able to' irnplanl:lll st('l)llg cOllirob wilnin Ull;: bllllli Hl 

M~;tiCG, ...... hile ht"p'il,g Er. fore (II) olhen:;ilim;rirs~. 

As 1I. ~nll oft!'>;: ccmccmt ~lntM cUJI. th;' eNs'; Il('I';i$ tre s~niar I, .... d conlmi!rt~ll.1'I(I wi .. ':" Ille l'\MblCllt~ 

itrt'SScd. In oreer to 00 tbal, HSBC ncC'd5 \0 :loCI tomx:tm pro.5larrum:'i Th~ :i!\:I)(II'I:'> ~hould include 1he folbwing: 

- ,t,d::opt mea.surtS to' s1Qp i'f.lIUds. reducc I;lients's CO'ftl!llainl5 ;1llC inlpf,o",e tile level ofscrv\l;c.,to reduce rc:putll.l!(1nal 

ri~k. 

- ~s:tt:N!sh ilK' lJe('fS~!)' ,H1'>:;'~S !(,' ih'V"lNt'!'IT'&t'roml..'luce amI fl"nj,1'te~JlI,oI('lgitnt nru l;n.us.eCi ~;y S}'s.lems brc:.k 

down 

• 3\'OUI sharing scni.:.r offim's rcsponsibilitic> wi\h LAT A.M 

"avoid IilkJllr, r:u:eS$ro'l: t:I~d>{ fists illlhe cl'edU c:ml portroliCl 'tlnd '5t'! :I<:;tiom: to' <I:lS~ thiS risk ill an ade.q\l.ti~ 

LliilIHlit( 

Confidential- FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 8873340 
683 


76061.109

l1~y have to~ ITl!.' 1!lat their p!"...rematk>!"! ~tk is f'Jrmy e~t$ oQ-oly, ;lOd rot tri1>>: shilrtd with I)!htl'$ in the batik.. 

probably ~c(}gnisin" (hal CN"tlV do OOt WBH1IO be seen i(l be: g~tl~.aclh'ely involved II.] issue:; lllil.i loueb upon Ul~ 

p~ .. ple in the b;;;nk, TIl<'Y witi is.1X a corut'ill m:magement kttt"r in due- CcurYt, Wl:hOlll i1\clt:diflg~l11e oflhe lOOT!: 

~ell~itivoe ~feru:, bvt f~f wl!~1t'-d 10 brins {hc$'C lCl fllYIXtt.onal B~I.'I'tion In 1e1 me lcn.ow oftt~ircODCcms, 

I Indic-J!¢d IOlharu "'t \\'c~ flW',J,re (irlhese i,,~ue5 1iI..d. were pr~:ijile!}' fudding L'<em, i ach'lsed then. "rIlle l~' 

.lppoim.:uen15.l.If'd.:'\ c,":pelienced Hc:ad of;:oru.umer risk ... -ith eqxricl1(C: in Asia, .,(ho lIlrived l!: tet:.p~ orwee.k~ I!(;.c, 

and an~ He'dd of GBl'C, Frdl.ld from. GMO w'ht- al'I'jvc:d 'j eS-terday. In.:: OCill' woe had $O\l§.in from Ken HalY!')' 10 it:YiC:W 

1:h~ tU~~ll1css Ofih¢ IT OopCT'il;i{lus and 11:<: plannc:d ir;tctT:a1 ~t (lfIT tit ~1i',m=r.:;bcr. a;od t~ tllilj"rprogm;tt:r~ of 

~~lz~r me te-'rt~lising JJY.lim!!.g:i1!g¥'l"tithv.'QUMf!;r,,~!.lS n~{'tt flJt\U1t KY(,.j{l:\<'; ({'If .11\li~'I(!MY bunfi;!ri~ f 

talked. aooullhedtl:'\gcs: we ~ mak.i[Jg ,0 split RcglQn2.1 ftom Mer-lco responsibilities in 1tttlll5: sucb uCmM..IT. 

!:tl;;!: r.n..i A.;;..1il. !m1 tN:). :ld-"isc::\ :t-..allheir !>pcdfic cm;~m ~ctt: v...-ru: .. 'iLl. PFS. ~ld r l::d:~lod l.h.3! tl:r:)' cculd :lso. 

C"I(P'!'CI cllang>:l ill this are:a in liIe: ne~r f,1t\U't\ 

I ~jd thatUlc · ..... tf(' rnlbarb."ii on cltaneill& ta:- busjy~ models or lhi: ltirtk. :md bril'!$ii',g' ill ~ili:'C.i.a1iSI cxpeni:ic.lJut 

:l'.at 'u!m~ ch~"lge \,!,,~I!!d~:;r. ~..1!or,:-e:\ c\'~r n~h!. HmYC1!(r. I "'tlic",d,l.t\el ~ht jnr'.l~iQncfDeW n';t."l.\l~'!'=nL 

combinxl wilbchallg~ we wen: p!al.111.ill~ to lm':l:'tltivc: sdtetuct.;o pllt morc emphasis Od c.ustomer wisfariol:l and 

IHl)jI~5S ijU"Jjty wViild help pu.sli lu.:: t:mk iil tbc TiC'w dirc;;li.m, I corr.cr..:.mcd tl);l1.,.'c ha-.'.:: a yvu .. g m:ff. at'Id t"hllc 

they \.!ckcd C~Fl~e. ! We! cc-!rli&JlI thaI if ~ Wl:!'e dear in ~ur l;Iusine!S. di!'ec!!oo. Ie> Ihrm., and &I'IVC \hc'm 

tl;p;lropri::uc. :ralnil,~ and mC<I$Utc.. w-t could lIiitk..: !'eat t'!l'OElr~ss, 

I {old :hcitl th~ I wcl;orn::;;j t.';Ci.rC1l'l.li:=i; 10 ~ In>:, 3n.1Il'. .. rt we '\l.'~1d re~"'nd. pos:~it"dy I::: lh: m;J.lt;i;;;~!l:'lniacr. 

"",·bl.'!~ it errtYes, .[),,d ,!lIat I would aI~o me<;t 1~1 \J/ifhfhl;!m ~ir, k) llpd,1t~ the;lt ()f'o pfOgr.:;;S wilh. t~ issu~ 001 

CO>'l'rtd in Ihe m~nag¢me!ll !eller, 

T:'le)' indi~!ed tbzl frlt~ W.$wha! thty lY3..tH;d !O' hti!:a!~i tl-..at !~ey ~Quid re~rt beck po:hiYc1y to GuiJ~ 

5abatz., the Hc,a.d.oflllc CNB\'. 

1 <Qili: tlk Op-.,on-lL-nRy '10 ;;:~tr.3!l~ them of l1ui: !!iSUCS fhAll'll<n1 taii~>l. with ~b~ ar.d :9<lbatt tw moi1t~J; atO 1');1 ttl:: PTIJ (pmiil s...~arnlg lax), wh~rc BancoU".(.r ar-d BanRToe:.. N,I,!, ho::en .;IJ1o'\l.'M '0. lilke a~11on fO ;woid paylJl£,1" sod. me,. 

acbu)w\cd,scd thar ","cwould aha b.1l'.-r to tal;-t actIQII H we were \1,) remain competitive. lUidlb::y irdicatcd thai whiJ~ 

tl~.; did.ll1 Uke if., they wm:.ld r.p[ cib;ect providc:d :hGt au:' ~ctumm -::~ u:,i;!"'~T. lil::t ""i~dng !!.\W$ ~'I.d ~guL2.!lO~.5. 

Confidential - F01A Treatment Requested by HSBC Bank, USA, N.A. HSBCOCC 8873341 
684 


76061.110

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 8873342 
685 


76061.111

From: Susan A \lYRfGHT 

Sent: Fri Hoy i6 15:59':21 £007 

To: WsITM G lEAM1NG 

Cc;: David W J eAGlEY 

SUbJect: MeXICo 

Impor"t.ance: Normal 

wa.ren. 

01"lC of my action points from tli.a COl1ftM'ence Is 101 btlOW up INIIh Ramon GPP' 25 application !n Mexico 

(Bnd elsewhere within Ramon's area ofreaponsibilily). As )'DU ri no doubt recall GPP25 is know perhaps 

Il1OI'8 fondly BaOSS the Qroup as '"Two sbikes ( NOT 2: 5U) and aui'". At Ihe 00I1f&rence RBlllOfll'lU'ltianed 

that thara are rtlII'n9I'OO5 cases. of accounts \WIth multiple BARs (16 In one easel!) irl"'e:rioo that MT!9in 

open. I would be gnllBfullfyou could toJbw up on this dt.Iring yoLB'visit Happy 10 discuss. 

Thanks 

RegEltds Busan 

Permanent Subcommittee on Investigations 

EXHIBIT #22 Confidential - FOIA Treatment Reque ... __________ 01 HSBC OCC 8875423 
686 


76061.112

From: John F ROOT 

Sent=. Thu Dec 0616:01:10 2007 

To: Wamm GLEAMING 

Subject: Fw: warren Learning H8MX DEC VISit Issues: 

1m fXI(tlIInc.e~ Norma! 

R8-5end. 

- Forwarded by John F RoorI1;GHQIH$BC on 06/1Z12oo7 16:00 .-

JOlIn F ROOT/HGHQtH.SBC HGHQ 1Bi11J2007 To Werren G lEAMINGi'HGHClHSBCCHSBC 

10:21 P'/lone No • 1992 5555 

+0044 (2U7} 19S!Z 992 5555 Mail Sin: 3356 Oav1d W J BAGLEYIHGtl0IH5BC@j:HSBC 

subje INsmm Lea!'1lhy HBMX DEC ViSit 1$Sues. 

ct 

Er1tit:y HSBC I-t:;IkMgs pI~ - HGHQ 

I am k~ping 8 running iist OrIM~ that you might want Ie M!!~e during your DeceR"ber visit lO Ha'-tX. Ir 

you or David would like to add to the list, please let me know. 

The list below Is only parUal, and I am constalltly addtng to It n1ere Is of course overlap wrth DaVid's visit 

recommelld9Uons. 

WoDe Bnnual -31-point" Central Bank (Banxk:o) inspeetlOn ofHBMi than !ast year's. VVtty have TreQ$Ufy 

oparaUons odetePkllatecf? 

R&OOUJCIng. espacia!ty Regional head w. Meldco head; CUlM; and ML.RO} 

Sinaloa massive rrcney,leundertng scheme (1" USC 100 mllkJn) 

Regional integration, e.g. HondunH, Panama reluctant to accept CMP reql,JB!l.b: frQffl Mexi:co, !1"(:Initoriflg, 

eto. . 

CIem-up of HBMX Trusts backtog 

Smooth, independent functioning of HBMX MLD committsa 

CIBM H8US Venezuelan business ttwuugh Panermt 

Banlstmo business in regulatory and \a)( havens 

Relal:ion~ with Leg.al, Audit, senior management, regulators (MeJ\ico and Cenlrat America} 

AML systems integration (l\.4exlco 8Ild Caniral AI'T'MlJ1ca) 

Reeards, 

John ~oot 

Permanent Subcommittee on Investi ations 

EXHIBIT #23 

Confidential - FOIA Treatment Reques .. ---------- HSBC OCC 8875837 
687 


76061.113

GROLl]' AUDIT MEXloo 

Al1DlT RiE,PORT SIJMM,\R"r' S(:HF.oUl.£ 

(;NQ tu::.PUltlABLt: AUDITS 

I Name of Audit HBMX - Wj~~:~~~~=~:~·DETiRP.E~fi·~.~~~J~~!#I; M=~ic() l 1 Bulii_ tor ('enIJ:il SII.JlP'ln H1gb ! .lwdit 1 HBMX ~ 

e=m_~~.:--= __~~ti. _~·~;-~f~~~;"''''J R .. ------I~~ .... ·-~ __ I • Thi:l; ~lII.dil DECU'. Hig!~~1 6do". StaGdaI'i 'j Hl$h 

.l:~~":':-W;C+";A-r=::~~::=:, ____ [ __ ~A:~ 

I Thr! ;\~ l!l1.'o .... ·cd in ill: Ilf1:Iot~~ (bQSn:c"- li~s) a~ mp..w!l\~ fc.r ~Yl1lg MLD pR'tes~~ 4c1}1I~ NIIl \' !~ b)l1.DCII~ ML D Dql~nnx-Ill {m: KYC (lC:IU)'I-' YOl ... Ct~e_r). Jilt! mtegmliDll .. ~1!'1)pel" ltlpl.ll 01" -i:lltlonlfTS' 

! 11'1foI1l'Ll1io" inthc system, validalion ofaler>l 5t-11l b~ tl~ D?LD and()tf~Ti\'t 1't"5pOns~lheTl:lo. ! ~I; k: the Jorc!!:uill&, IIl's r .. "\·i~' ... ~ olil:: .. iI:d il' Il.'vjL"l'.,' D?LO Il~CJ'uriulB, yd i1 =,,'o:.cd a number 0{ ~rt:~51 

! .~~.~_~:~.~~.:~.~~ .. ~~~~~.~~.~~.~~~"a~.!~~!.~ ~.rj romp!i~ M!b g~,,~~ law! QW reg1!l!!l'~J 

I C&nd.siobo(A,dlt 

:o.jOOl1 c\JtJlrol ... ·ed::l~se5 ide~i(jed durillt: the ;ludil ""Crt a'5 fCU!OlVs.: 

I KY.C . . ...... ,_ . I. Rcr:J.:latory bf"CaeOO! i!l KYC LJ..~ s.rb 8$. ~ l;l~ nJJumer ~r illt(lmpJe\oe" -clie;llll m~ IIrd lbe iua.&~c 

l p~-cliS orser idclrtifiC3l.iOD atxIl!lOlm:oriDg a~lt/n 1111; rlCTWmt... 

• R6Mi bw;: o.:;-:r! giVCJllln C){Wr.slOIl by !;,e ilep1brtor froll1. May li'i II) M<JY 011 1Jl CfI~ lhill n (JOt'han gf 1iR: 

clit'lt liles {l-.MV_1I as 1~ U~A protect-sbou! L~m tWIN1lrn') ,ill: ttlmphl~d. Dlle 10 oor tl)J;cems with 1M 

• rdiabili!y of lhc sY11em IlScd Ie T1lCOtlure l"li~ prueeSi i51111ciear OIl u:xtly l~tere tl.e b .. mk j~ in rebliooo (0 Ol!lllg 

i ~~ ':,1:; ~1; ~~:~'~ (ldI.'I5eliII:.e Flci'llmor we: ""ere 3Il!(i".\, t\'beTe;J~ all aud:1 $$\lple~ batl:lltl Ibis iluGlt 

~ and (ht re~ul;"lr brantb Miu (O~uc.1-ed o ... 'tr the year gh·¢ II mu,:lll~tr pr:reeIll~¢. The 1iI1I~r llumber is l!am ! 

1 ~~~~7~:~=~/;;1~~:1::~:! ~ ~~ '~'\¥ "'.46% uf (i.dC inltU<lI.t<Jn. r'It:J. ping tl-.c.joo in lIa'1lJ \(I1l;.M:ll 

I -n~ t.:BA nllrJI~t ~ludt"S th:; :limoS! 6 mlllfon other cliOl.l.i the Group has i.n Mexico wh.ich :trC subja.'1. 10 

HS8C '$ " ..... n MlD po!itre~ ... ·k!Te sampling dR' ¥-1111::;: 3 SITIlI1IIT lel\:: ~Jnlbcr 01 ..-omp-1C11: ri1~. A$. this problem 

: h:d be~ ll!eJ"Ili!ie:t ~~ i'l0011tlJ:S .~e\() the COO W\J~ :Ip?¢r:~eri 1-., (l'..~l"'..t":: :md I;;oo-rninmc <t las):; f.::= fl) mar-4lge t 

l);i;.rnllt!(f".furll~rdeWiSilPpe-.:lr1l11~1qltlT\. .... ...... . . . . I J Delaysmrepprl--ID.l!. 

, • ~Isy.>. m O!j,)ejn.i,~ U!lutlll!llf.aili:i,,~l(lll:> 10 tRe-IUoj,.'UIJrtl)r du~ 10 increasrc rlI.I~ cr CS$e:I 10 be !o::aJICtioll'i.:y ! 

I ~::=~':T::tt ,cO ",w dci'~~ncli,~ ,,," ~~, . ... . .. I 

I ;a~~;I:~!=~::~:~~~Ji:br;;:~~~=I~:~~~~;~~t~~i: ~~~q~~~~:i~i~vKreen' f ! 1:>1!'ll;'l..lio;:t-..-""d iiwi<;Ql.lI\1~lIlC).niKrin!!: SCCiPEP·~ t1t I '!L~ I ~ \\t'e abo noted the noed to ;e-llut:!s lhc tT"tTtlE :!pprbS:h 10 M!..D lI.3min!; :u :l re.~11 of rail~ ~lIr!r ' 

.j ~~:~~~.!~~I~~dlI: ~;~ :~(\~:'!~ ~:=: 9I:l:eml Dillie JT 3yslt"lS in lM \0 ellSlln: Ucllc:rwlllrili ()V~ , 

I ~:':,",~~=:~i~':;w=:!:'~~,;=';.~ ':=.h~:;:=,~: '~;,f:':~r-::;~.~~~; ~~:. ! j ~'>US$.My .It HBMX M':>TIe~ Ullii~l"I.!! Co}mmirle-t', iu lmy"leme'l! (M)111 II il'ttJ'( lU~ 11ll~1 !tM ;JllUi t¢ t!ls.uJ~ f!i;lt t 

! t~:- it'Sucs nI!!ed In tlili r;;p!lI! c::a!:! be f'Jl!r ~li!:h-~e-d. Thr! t>o.1y wi!! !l:~ lC! hi!"¥e mf!ment ~~.!!;uti! t ; proat.li .... !t)' I() dnvc ~ :some oflbo:' mcuu.""'t! needtd III comply lVith bo!b1ocd lind Group po'Iieid ilnd : i prot~I.ITt"S, ~pe~hlil~ iUlbt tmlt ~ imoh"rd. 

}-~~-;;·fMM~l1iiflt:;t-----·--------------j 

"Thefirs.t resoon!le"\(' lbtaudifi! d~!)n 17JAN{Jf, 

VI 

Permanent Subcommittee on lnvesti ations 

EXHIBIT #24 

Confidential- FOIA Treatment RJ----------· N.A. HSBC OCC 8876347 
688 


76061.114

From: Daliid W J BAGLEY 

5.,Iit: Fri Jlin 3:> 08:02:44 2Ov"'; 

To; S!.!S8.n A VI/RIGHT 

3Ubfect: Rli: US Isr;uas· Various 

Importance: Normal 

$~tlln. 

'An obvious' learning poini for HaMX is 6'1111 ii they were conlBcfed by US auihotlt.ies then lhev shouiri have 

thought to advise H8US. The-y can go r(lund ll)e web, OOijU.5! through the mddle of me WlID. 

EXHIBIT #25 Confidential. FOIA Treatment Reques .. ____ iiiiiiiiiiiiioi ____ .. HSBC ecc 8873759 
689 


76061.115

From: TERESA PESCE/HBUS/HSBC Sent: 12/15/20069:59:00 AM 

HSBC-BNI_E 0591006. txt 

To: ELIZABETH PROTOMASTRO/HBUS/HSBC@HsBC CC: ANNE lIOOV/HBUS/HSBC@HSBC;OONALO w MCPHERSON/HBUS/HSBC@HSBC;GRACE C SANTIAGO-DARVISH/HBUS/HSBC@HSBC; 

JOHN ALLISON/HGHQ/HSBC@HSBC 

subject: Re: OFAC - wire payments blocked from HSBC offshore entities - USo 32,000 Cre SDGT) and usa 2,538,939:33 Cre sudan) 

How is it that these payments continue to be processed' by our affiliates in 1 i ght of the GClS? 

Teresa A. Pesce EVP /Managi ng Di rector Anti -Money Launder; ng compli ance HSBC North Ameri ca Ho 1 di ngs 452 Fifth Avenue New York, NY 10018 

Qh - (212) 525-6099 fax- (212) 525-5769 

El i zabeth Protomastro/HBUS/HSBC 12/14/2006 06:02 PM 

To 

John AlLISON/HGHQ/HSBdlHSBC cc 

Teresa pesce/HBUS/HSBCIlHSBC, Anne L ;ddy/HBUS/HSBC(!iHSBC, Grace C santiago-oam Sh/HBUS/HSBC@HSBC, Donal d W Mcpherson/HBUS/HSBC@HSBC 

~~~~e~w;re payments blocked from HSBC offshore entities - USD 32,000 Cre SDGT) 

and usa 2,538,939.33 Cre sudan) 

This email ;s to inform you of the following two Qayments, initiated by HSBC offices, and blocked due to OFAC sanctions. The first was block.ed under terrorist sanctions. The second was blocked due t.o involvement of a sudane.se SDN. 

v':l ue date 3-NOV-2006 Debit: 000054356, HBME Rama:Tlah Br., Ramallah palestine 

~~dd~i~ty~P ~~~ga~o~~ein~~~:miL Bank S.A., Amman, Jordan ORG: HBME, Ramallah, palestinian Territory, occupied BBr: Ace/For further credit to Palestine Investlnent Bank Head office Rainallah branch account 6171 for further credit to Al. Aqsa Islamic Bank USD 32,000.00 . 

Note that A 1 Agsa Isl ami c Bank was des; gnated by OFAC on 4-0ec-2001 as a 

:~~i~~ ai~it d~' f~a~eedf~~~i 1 a~~r~fr~~;S I !~~abli;~e~e!~ds~s:d~oT~~a~~~s business .... Below-.are links to the press releases. 

http://ustreas.gov/press/releases/poB37 • htm 

http://ustreas • gov/offi ces/enforcement/ofac/actions/20011204. shtml page 1 

Permanent Subcommittee on Invest; ations 

Confidential - FOIA Treatment Request EXHIBIT #26 , Inc. HSB03793250 

Confidential _ FOIA Treatment ReQuest 1.. __________ • HSBC acc 3407608 
690 


76061.116

HSBC-BNI_E 0591006. txt 

http://ustreas.gov/press/releases/po841.htm 

The payment was held at the direction of OFAC and additional information requested. On 20-NoV-2006, HBME sent a SWIFT message to cancel the payment as it was sent in error. On 7-Dec-2006. OFAC instructed HBUS to block the funds. 

Details are below on the payment blocked under the Sudan sanctions. 

Va 1 ue date 6-oec-2006 Debit: g HSBC Bank PLC (JOH), Johannesburg branch credit: BNP pari as New York 3rd party: BNP pari bas (sui sse) SA, Geneva 

~~~: pa~ihi opf~~a~:~~o ~~~~o ~~~~r~~1~~rati on OGB: commercial Bank of Ethiopia, Ethiopia OBI: Inv/MjlO/2006.oated Nov 05/06 uso 2,538,939.33 

"sudances petroleum corporation" is listed by OFAC as an SDN under the Sudan program. 

pl ease 1 et us know; f you have any Quest; ons or need any further information. 

Thank you, 

__ =- Redacted by the Pumanent 

Subcommittee (In Investigations 

page 2 

Confidential - FOIA Treatment Requested by HSBC N. America Holdings, Inc. HSB03793251 

Confidential - FOIA Treatment ReQuested bv HSBC Bank. USA. N.A. HSRC ncr: ~4n7I:nC! 
691 


76061.117

From: Matthew J W KING 

Sent: Fri Feb 22 17:55: 16 2008 

To: "Paul A THURSTON"; Graham THOMSON 

Cc: 'Richard E T BENNETT": David W J BAGLEY 

Subject: CNBV 

Importance: Normal 

This was tile nole I was Ihinking of sanding to Mike - a bit of a brain dump and not fully up-to-dale or 

polished bull thought I would s.end it to you as is because it might help focus the call we are due 10 have 

later. 

"Mike, 

My perspecUve on tIlese issues from my discussions with Paul Thurston, Graham Thomson and Chris 

Bentley is as follows: 

The issues raiSed by CNBV appear to be pretty similar to those raiSed previously with Paul. However, 

whereas the CNBV previously seemed broadly happy with our remedial action plans, they have suddenly 

become more aggressive, Whether this is because of political pressure, the FlU suddenly raising 

slgnlficanl concems (which perllaps the CNBV thinks rellecls poorly on them), It Is diff"lCull to say. 

One theory abOut the FlU Is that are reacting to our refusal to reimburse a public utllity (which also 

. I fraud. effected through our Intemet 

CNBV has raised concerns abOut our 

security to us by the FlU. Wtlatever the tnJlh of 

this, it is also the case that Mexico is suffering a major problem with drugs dealers and the Government is 

being very robusl abOut dealing with them Hence any AML weaknesses may well be treated similarly. 

The 'eVldence' obtained Itom the FlU does not seem very eartl1-shanerlng. There Is nothing I have heard 

which could not equally be put down to carelessness or common mistake (I am not excusing this you 

understand). However, the necessary investigation work is slill underway. 

There ara araas of known weakness which management have baen addressing but whera we now need 

to revisit the current strategy: 

Moneylaundarlng. This area was rated as Below Standard on a 0407 audjj and work has been underway 

since Ihen to address tna weaknesses. The Chief Moneylaunderiing Officar is being replaced, albeit the 

FlU apparently regard him as trustworthy - management are well-aware Ihat his departure will therefore 

have to ba carefully explaiMd. Various processes ara being enhanced. David Bagley is proposing to send 

in Warren Leeming as 8 temporary measure to ensure these are now ire3ted as matters of utmost 

urgency. 

KYC - My area of biggest immediate concern - this has been a systemic issue for some time. Enhanced 

regulations were enacted a lew years ago and implemonlation of these has proved problematic for 

HBMX. One particular problem has been the requirement to undertake visit reports for every new 

customer at their homeibusiness address. Perhaps because of the extendad HBMX branch opening 

hours this has proved particularly difficull for the branches to achieve. 1\ also Inhibits centralisation of the 

account opening process which has bean one ofiM key solutions to similar problems elsewhere. We 

(audit) end the CNBV have bOth identified a very high rate of exceptions (around 50%) to the process. 

though this level is disputed by the business. A pliot scheme has been running since Q307 to use imaging 

(and hence assist centralisation). However, I now gathar Audit is continuing to identify a high level of 

exceptions for that process also (around 30%). 

Given the concerns now raised by the CNBV and FlU (which apparently includes tapes of a drug iord 

recomrnending HBMX as the place to bank) we now have to decide: 

whether the ima.ging process can be made to work to everyone' satisfaction. 

how quickly It can be rollad our across the whole network. 

Confidential Treatment Ret .. -------------. HSBC-PSI-PROD-0198508 Permanent Subcommittee on Investigations 

EXHIBIT #27 
692 


76061.118

in the meantime. whether we can continue to open accounts using the old, flawed process. 

It sounds unll~elythalw8 will be able to meet a deedllne of MAYDa to obtain s3tlsfactory KYC on the 1.8 

million customers identified as high risk. I am now not clear whelher the CNBV will accept a further delay· 

the previous indications were tI1at they were pretty relaxed. 

Documentation· This has been a problem since we brought BltaL I am aware the old storage depots 

have been replaced, but I am advised Ihe processes are sUI! a mess. Sorting this oul needs to be handled 

as a specific project. II may be worth asking Ian Macalister to run Ulis. He i~ an 1M currenUy with CMB in 

NY who previously had repoosibility for sorting out a documentation problem in the trust business in 

Mexico. 

Reporting to the FlU 4 We apparentty route responses through a law firm. It is not clear why or indeed 

whether this is sinister or just inefficient. However, it does seem that incorrect evidence has been 

provided via this law fimn. There is a very high volume of informational requests but we need to ensure 

these are handled with due care. 

Management Stretch· the CNBV has again raised the appropriateness of allocating regional 

responsibilities tD HBMX management. It may be Ihat you are already close to sorting this out. 

Cross-border cash: the trends in this activity still need 10 be clarified by HBMX but as I read the report the 

US authorities have a general concern rather than a .petitic one about us, and CM? last year Identified 

and acted on a cambio which has just been closed down by the authorities. We can therefore show some 

successes., 

'1.11~~:;i,~baclcground (though a bit long). If you wish 10 discuss please call me on my mobile !I be in France for the weekend but please feel free to phone at anytime. I have not 

the points raised have all been discussed with Paul, Graham and Chris. 

Regards, 

Mattnew King 

HSBC Holdings pic 

Registered Office: 8 Canada Square, London E14 5HQ, United Kingdom 

Registered Number 617987 

Confidential Treatment Requested HSBC-PSI-PROD-Ol98509 
693 


76061.119

~ 1I££!OJ 10 J.," R RENDALL 

Jalm. 

lam outmlhe-otftca IIJmlJrftM¥, but 1tthd:. .... ,t,auId!"B'SpOl'ld !oGroup on1hbl b)ftMfItId gJlM_ek· wouldill:lillpos.tibleforj'QUtoflrqll&e'fGJ,TdIscuS5loMWiIttRlmnalldr8Y8tld!rt!d.b~,onMl' 

.... .., 

"',' 

John A RENDAlLlHBMXIHSSC 

A)owCMeINrnhl1JNanawant IU:itlv8lyon IcpOftheCH. 

B}If1.iNIiIMsftJr~haV.baenlMd_I9~h/stgric.rmm~. ~..Jyear.SgCl, and ~nI Improvmnents!tad bean mada since tIIm. 

Ramon \Ibhd !he cuskzrllM' pllfSDft'all'lin Daeembo:or and was hHppy Ie support !he =nllnulltitn't qf lb. 

fe/ollon"lp. 

!WIlI dl!K:us:slhvspK:llIe!J raIMd .... SUlIDn'IJe,"~Wllh Rl5/1IOII.tomorrow;mel rlW8rt.. 

- ~~~::-::::S~r:iI~~JonnatPrttUUnlfmrnCNBVlQm.lntalnq~. 

AllIn a/l. I 'II'Ou/d sug;est that _ do an Industry pcky twl9W tor agreamllllt. RamCIII sholid I_ad but 

dnrw on CMB 1M CIBp,A mptlt lOQ. 

John Paul A TIiURSTON 

-Orl;;inalMessaqeheal E'a111 A TIIORSTON 

:!J_tl a2/0(/:200S 01.~H PH CST 

~j:~~7 R RENDObi 

Jell". 

Redacted Material r..nnfitiDnthll .... Fnt6 Trp:::Itmp-nt Rp,nup-

'" 

Permanent Subcommittee on Investigations 

EXHIBIT #28 

HSBC acc 8875139 
694 


76061.120

PI6Cl$!!IcanyoUlstmelr.traww/talllllllsRua!.lonl2hfll1l. 

Pl'uJ 

~Y!dWJ8AGLeV 

-OrioinatMessagaPaul, 

I ~i!IYe be!!ln roplad in on Ih •• 1taI!h1!!d ROt8 rrom 6u8iIn W~hflo Ramon wtridl ~ a riumba\' oJ 

Issuabulln pIIIrtlc:u18r\he.1IitualIon i 'Whom I am adYIad ilia eu:stan'l«ottdl!i:d:a 

CMS, /4soilltac:hedb!iIICompllnatartid.wtllcll.surnll'lBlisestl\tl.bac:kgroUndlottl8 US federal sting 

opeqfon and the US C.P'lrtm..-rt '" JUlib' .. rec:ord In". 

lamnQt$IJrewtutthElflhia~hB:lbeennrl'erredloyOtJror[:£lnsfdenidor1. Wel\'l'Wl 

pr8\lkrus1y~dll!!l_Qfd!.i"8IWs:m.ac:ret!Unt5. IL.i/Jl.:lar.lbJrtCi,t\awIr\1r.1hat1rlIlplteaflM 

S8l1ou3nnsaflh~C:lISelll!d~lssu4slq\I'QlYed, CIIoIUlapropos!ngm l'llllainthl!ilre/alkmsh#p, Th ... 

lilt • .III nlIl!IberclBBpecbiwtdc:hgl¥.11811-IDecx'lC8ml;" 

MSe. Ii/1Iln/lenIatly hlgtI rbII g!yen their vWill!'llb!fltles In relalfon to IIIOnay lauroari"9 and man 

~tIy 1aI'roI'tsi"1I8lIdng.. FOfltllilf"IIOI'fIllni:e2000d!eGrtJqphallndud:edMsa.wltl'Ilnlhe 

SCCpaBcy '" ~eq1l4Nltly should ontremanaln ruI"IICJI1ShIJl'l wIUI ...... regiAallll M58. with • 

StrangB'" <.ndIll'fllgCll/WflIINIdClXl1roIL 

1ed wII.'t opaMIng an MSB willi. a dtflc:l.nt AIIIL Pft)gTamlTlOl ....."Idl h84 TIl$I.o"'-N ... ~~ ..ru;IlI)'Ilamlt:y~andllr.cofdl'\nl!lbylhflUSIU!hortl!ll., Inpa~ 

\fl. taM demonlill'lllN 1lIa11!: hall had IlIIa CDnIftII """" ItI numo!ltOO:ll ~ntt. WhIlslIlRJ compally 

w"'nownMdlOt;:rb$lepillrJeddnllISltIe$lI~'ItdI...,llllUlYlllll::ltylake:some1fm8. snd 

1n=J1IIng!h1ll appi"OfN'taW c:ultul'll within Ifni bu3Jnea "van Iang.r, 

I '1m pat clear&$' to haw IhB 8fX;Ot.IJltl malm.lntd~1th us opera .. and If Indeed ....... w.ble to • ,<;tMtjf,!~ .IN~, Ifwtlrscalvehl\58dklnswhlchI8\1'M1It1.nemaotthe~and: 

Ih,:·, ,tar! '/fewookl ba aWe Io..:reennamasagaimlt nlttllor1s1lerror1$llbtland we 

fM)'als<. _~ < 'IlmonllorlranudlonstDtc;:amt!npaaana,allfloughdCOUFSOlhlabbyrto 

meanaloo:'. :, TlI&e:nharn:eda:Mlttot.;~w!lneectto/ntrodoc:ewlllmpres.entaslgfllftcaot 

c;o:s:.lntenn. ~illlTMtandresoute8S. It,~ ... recefvabatd!ed~onslhenweafll 

h-ay relial\! QI'I!he Msa lor scteecIlnglmoJIj(l:lrlng pllrpolll!3. 

WdhavebaenadVl$odlhaJ._8r&nlJt~bBnkltnJInMPlca.. lltspoaslblethats 

numb.tof ltIa othetbenbrnaynowbe ~ari~g.termInadng I/JeIrt.!brisldp. g/v1Ht Ill. 

ser1aUsrIlIIDI ofltlJ:s ca., .mId:'I mll'J lead to an lna"ee. in 1/tI!'Vdume of Ir.InqC1ionS seen 

thtc..tgl'll!llny rtan.:llnlng blutklw. lncreaslno Ifre risII: _lunneot, 

! I'fOIJId oIctJt.tmJ be pieasedIOOIsaaslUnhef'VtUfI}'OII butg1o;en t/I&sbo\ra alld Ihepolenllal rk\I.ta the Gtou,:I, 1101: only In MIIIIII:::o bullWo!he US, I WdiJld strongly r~ Ihlilt a~ OO;bIcn IQ 

ctD'IlInlIIJwiIh Eh!stl!fatIotIlhlp-.nouIcI 0. r&coII5ltfeted. 

Klndr:egards D!lVkI 

Redacted Material 

I":nnflrl"nti,,1 • FnlA Tr .. "tm"nt Renm,sted bv HSBC Bank. USA. N.A. HSBC acc 8875140 
695 


76061.121

SoJl4IU1/!. 

WAlGHTlHGMOItlsac 

HGHQ 

~ O!1D2J2OO810'.24 

FIIonaNo.799:25554 

t44(lJJ20~:Z5554 

l.Iafl SIze; 4773 

To Rllmot'IQARCl'A/H1'IMXMsaC@He'BC 

ee WIm'$r1Ql..EI\.YINGIRl.AlGlMellil1S~5'HS8C@J;saC, 

John fil.OOTlIiGHOMS8C@HSIlC 

""I"' Q EnVty HSec J-kddIn!jlll p!o:* HGHQ 

G\lod IOtpl~lt!yot.Iyesterrlay. ilhougl'ltK'MHJldblJworthwt1l1ercllaMng lIP 011 II JlumbarolfssuA'WfI 

d~~:* 

• EmbassyContJD/s.IWOUkillfCOl!tm8lldltlatyoullalMwflhAnMl./ddyIltIb8/ntrodlJdjOnof 

uppropriaa contr.ols for managirlg emblHlS)'froNruIallt aeeounla. Plealut make ItIlI a 9='Ierlc 9I'Iqclsy{l.e.donotmh!rlQaI\)'~embaula). YoumaylnitJalfywlshtDpkkup1hephort. 

Ie Attn but she will certainly IiIJ ablelG pmvIde you wI!h copiet 01 approfll'lilbJ pram" and 

@ """"""-_. ... If ltIe busItIUSIlWlln..'tcI maInbIin IbJ$ relaDDn81J1p U\tI", as prB\'IOuSIy lNmlloned. 

~Jlsae\fOM wiIIntI1Id to be do&eIyrnonltontdandsubjecltofrequentffViews 

{tecom1IK!fldattonahoufd~forquarteltynMh:l"'CUI1'!Int~). TIlCt adkImJ by the US regotatorshouJdbeUflldaa lrfggerevwttaPdourduedl.llgenceon\tllldlentupdlllri. In 

thII eonn~ Un! Mgh dtikproSe thatlt In pfsee tot flnlllm:fallndtultOnl $hoU1d be used. Plolase lot me krtQW It you need .. copy of 1hlI. Thl$ profile a#b for details of th. A'$ AML. 

eootrob,.due:dllJgane.and~ WI'IJlJ'egafdIfl~nlI'IglM\not~Rt<>whattype 

afttaru;:adlcn.we,"andlnwt\;ll~. Oowei$NltldMduaJtransaeIklna-whlKw\lla 

M~ Wesnouldalsamon .ban\(ersInMextco. If.hOMWt,anyoflhlfotherbanks\'lllihdM'llhtmwem.ywellsse II 

vo/UmIJottr.ansactlonsthrough\JSrlseIll1dO!lre):postII'Whf$kwillrn:::reaMwlthlll~ndffIg 

!1IQ'II:8$.lnthacM:ofrnonllomg:ete. 

• CAMPGc'iGm8nctJdocumen~-lhavelWrtyoulllese underClMll'of8~1a6ftl:llM 

• HSec8Se/YadOf~lhave!lerdyooa~l&rmteon I:hlsmll~ofthean.ubarder ramlttancebu __ withBlHIClISOtilnd3ldp.u.s. 

Pleasa let me knoW !r you need ilnylhinQ from me at 'I you hlMJ arT)' quariea. 

~agards SI$n 

Redacted Material 

Confidential - FOIA Treatment Requested by HSBC Bank. USA. N.A. HSBC acc 8875141 
696 


76061.122

Cotr".pHnet Page 1 [lf2 

complinet . .(j'l~ ~ ---.r"".,A.- ~/ G..-..J"tQ~T 

Money laundering 'sting' led to MS8's record penalty, says 

legai pact /\/1 

<. ~ :)P. I, Ja.nZ92'01)8~ 

eardOO1Ia-.bEilPed mtJney lrins:rnitlef S!au~ Ccrpc."#on ha$~:ad 10 ~ :;15m ar.d spet'ld sit7~ en 9:!"lt!-

~ laundering compliance this year tOo settle US Department of Justice charges. that It o~ted With a 

ilelfclen1 A1AL program. SiglJil's ~oes 5tem from the fild. that ~ens of II, ~nt:s were snared by a I'&deral 

SUf'g opcralKln dubbed "Opere!tiOl'l Hig" 'M~e," accorciing to the deh;lrrad pruaecutiDn IignlIlitmolilnl, o;)r CPA,. 

released 00 Monday and cbteind by Ccmp!fnClt. 

This r~rd~settlng Bank Secrecy .Act penarcy- tile largest ever surrered by s rooney se~ bl»in",~- WeI:I 

weR aamed, ac:c:;wding \(J the DPA. Slill. the agrBti'm6flt stales fh.\)l: ;he QO>I~m~."t ""'ill raomrr.a.,d the 

dlS/"llis.sal' "f the CM!1,;Ie again~ Siou~!n 12 f1l(IntM ff the fiilTl taltu the agree.::' 1l!medii!lllidion ar.d does not 

violate the t&rms of the OPA. 

"The ;,io\<!itkiroS at Si\i1.ie were :x;;iou:!I ar.d 3)'stell'llC, and slla ... ,cd tOOQ af mi!1:o.r::e. of dclbr.J oJ B!J5pidouG 

fll'lartdallranllacfions to be conduded through Sigue, ,indudil'llt! tranSo1!lctions invohri~ funds reprel<enied by 

urxJert;over us '<M' enlClra3lTleot agents to be druQ proceeda: ecc:crc:l!ng too the CPA., wh'dl Comp/fnel heralded 

Inilfle81"i&~, 

The OPA Q/~es that Sigue. an Im.ernati<:n-al money temlttance company that specielizes.ln Iransfers 10 Mexico, 

ViOlated thll!! 6<i'1nk Secrecy Att, TIDei' 3t USC Sedion !J316(h) 1 M'ItI ~22(1I.). AcnJrding to t~·CPA·3i :sI:etemenl 

of rae-h;, i:he&e BSA Yio~ oa:;illft:d ho:i .... "fj ,,",,\Ii(~'lboer ;tOO3;;;nod March ZOO5 and inVot;~d sagUoF;'! mona;' 

I1snsmltling ag~nts, most of llllliI:'.tl_11'l ftmom Md popM ~ 

"Sigue authoriz::~d delegates knowiJlgly accepted !lnd tnlrll~"'ittcd mcJre than $&10,000 of monl!l!( rwp.-.,,..e(\t.d by 

undaiCi)TEi US ~ el'i'fOt,:e",e;;! o'ff,cars 10 be pr~;' cf drug tr;fficld·,'':g. The :r=le"l'u~ In t!1e undercover 

opBralions was received by and wired Ulrous;th S9 separate Sigue aurhorized dalegaoo$ in 22 statC$:' the DPA 

""ted. 

'o-!'-"'iI mer.:ey' Hc!,.':S to ·~et.':'Ce of ~!!Pp!\,' 

Aa:ordinoy. 10 the DPA, unClefI:'.Q...-et(l~ epprol!ld1ed Sigue age.r\te.end ,,"ked for help in- :s.cf'dlng ~drug 

pr~:I',t to tneli' Msource ofsupo,:,!!(" In Mexico Cit)'. In reallty,.ltIe recJPJent5 were undero;;:rve, ~,,'e.:cicar; lor .... enforc~t.QI't1t;en:, it ~~, 

--me (US] undon::ovar agents Informed the aulhortz:ed deleg:def; th3t tho9)' d"d not wilnt law IBnI:orcerqent to learn 

of tha transc;;C"Jo,,.·;s. and that:hey pref~d ;".at to, provlda a~v forrn of identffi=aOOn o~ <!:ddrc:5-$ ir.formatlc!!:. 'M1.en Sigve--authorized de~llte$ requested soma form of kJentliciltlon from the undercover agents, the agents. 

produced multiple rorms of idt!ntlrlCa!IOn Garde, all in different nal'N!l:S and b4aring obv!QUsly different 

tllo;.eness;ea,G ~e DPA s.tates, 

SQfl1C!fJ~B&"I1\!Uiy fail 

in total. undercover federal offit;;tlrs wll.luctW 64 su~fu: trarUo.Cidioonl; through!j;:;: diifi:reflf. Sigue agents, 

while 24 ~ "'Pf('perfy refuse:(!" kl conduct tile illidt lt3n!>action$, the: OPA. sb;It~, It lidded thal at 4T 

locations, the underc:ovet ofllCefs.and l11e Sigue agents Msm.x;rured. the cash transac;ticn:s by /iPlilling large cash 

amounts ave; $10,000 Inm !!!Warnl ,>maU;tf amQ\,ln~ 19 ilvoicllr1gg$!1"!:l CLlrrency trenSoBCllon reportlng 

lhfe.$tn;.OdS. ... t th'ii Sigue corporate tevet~ 

The DPA "'150 nOl.ttd that the Sigue a91!!nt~ who conduded 'he tnma8diOfl3 may be charged wft" mona)' 

lal.\J1de:ring unr1erTille 18 uSC SectIoos.1956 and 1957,as rnaySigus.!f1t violates the terms of Ihe agrlJemenl 

It 5o"et.'id bs notad that tJ...e AnandaiC/imes Enforcement Network alsaassessed ~ $12m eM lTIQ"ey p~ 

against Sjguc. dairning that its -failure 10 implement effective intemat cootrols, tralntng or independent testing to 

(l1anage, the ri:s~ of money: 1a.U!!~,~g 'W'JeII>. 6EjrloU&, lo~g-$tandins and systemic.- FinCEN:s ~ (PDF) will be 

5atlst\ed b)I the $15m forieitut'-e paid to the DoJ. . 

TIle 1~IM'IttUe£oflne Sigue a~ents snareo b¥ the sting operatKln are nol revealed to ~ dt;;lQJlT'lI!!nl:'5, although 

SigU9''S general coul1slll, Robert Pargac., told CCfllplinet!hal :!'i!W~ have been indided for rnot'Iey klundering 

aM th", CoJ "':eta said it may il'lod o(hers. He add&(! that S)g-U-i' t.as terminated it; r~latio.ns.'li~ ..... ir.; arooM 20 of 

!he 2.g!!"ntlS 3'CCJsed of wrongdOf!'lQ, 

""'.Ne think. thai !:his is. ~ehind tm now." Parg8c said. 

http:.!j'V,'1.VW,>C'omp li"et.comi~loQal!~ncws/artic le.btmi?ref=l 0 1562 29/01i'l003 

Confidential- FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 8875020 
697 


76061.123

Complinet Page 2 of2 

Sigue may have wea.thered the :storm, but (I remains. to be ~ whether its agf.ll1~' aI!eged IT!isdeeds WlJI !e.ad to more miSef)' fur rellow MSBs. In recent vears, many MSBs haw found. themselYes unable 10 rind banks 

wllilng 10 :s.e:fve Ihem. Hie realOon is dear. MS61S au" high-lISk ~tomel1> and mlugailng Ihose ris.k'& is eos;liy. 

A Cdsl!tsuch as Ihat against SlgUe g;",85 banks. yet aoolh91 reason t~ treat MSBs as pariahs., 

Confidential· FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC acc 8875021 
698 


76061.124

_- WKted by III. ' __ 01 

S._IOII ... Oft IlWatipIIon. 

FE'c.u Michaal F' GEOGH&GAH 

Sent: 18/02/2D08 2Jlll GMT 

'1'0: Pa.ul A THURSTON 

Co: Richard 2: T BENN£.'rJ'1 Hat1:hew " W KINGI Stephen GnE!!N 

Suhjact:.! R.e: CON'f'IDENTIAL - CNBV/FIU Meetinq 

Paul 

This Is mos' disturbing""" wa will need 10 have the most thOrough 01 Inw.lIgatlon<. 

Ple ... keep "" advised 01 an davelopmonts and can Matthew and DaVId moal with "" after GMB on 

Monday 

Best wlslles 

Mike 

HSBC Holdings pic 

Registered OffIce: 8 Canada Squant, London E14 SHQ, untlecl KIngdom 

Reglstered in England number 817987 

Paul A THURSTON 

- Original M ..... geF:om.: Paul A THURSTON 

Sent:: 18/02/2008 16:49 CST 

To: Hichael F GEOCHEGl\N 

Cc; RlchD.:rd Eo '1' eDnf~1 Matthew J N KING 

SUh:teo~; COHF'IDENTIAL - CHBV/FIU Hecting 

Mike. 

I was askecllO aUend a meeting with the CNBV today •••••••••••••••• 

Permanent Subcommittee on Investigations 

Confidential - FOIA Treatment Reql EXHIBIT #29 

Confidential- FOIA Treatment Reql ... _________ ... 

gs, Inc. HSB09340564 

HSBC OCC 8966014 
699 


76061.125

- = Redacted by the Permanent 

Subcommittee on Investigations 

2EIZ) as lite be! 01,2 AnaneS Int.:'e=lTn~ =~h~~:\.O'::~~:1 ~m~U~~~ ~ FInance Mlnl.lIy. 

report them to the FSA. as our lead regulator. 

He handed me a draft copy of the report that they hatl complied which Is In two parts: 

1. A CNBV repan on ope18tional_ In HSBC In many areas. Including Frauds. Cusfl:lmer 

complain". IT faQures. Monoy Laund_g pro'''.n .... Culture. and Organisation ."".b"e thai they had 

prelllously ldenllfled (and communlcaled In 1118 pravlau. meeUng In OCtobar. which Is summarised In my note below). The report now indudes a summary of the actions taken by HSBC to address each of Ole,e, 

but they acknowledged Dlat this was nefther up 10 data nor comprehensive. and lhey asked me to review 

h and nwert 10 lhem with a correct. up to date, plctur& on aU lhe scOons taken, so tnat lI1ey Clo not 

misrapre$enI the position. 

2. A ",pen from III. FlU setting out .'a high la ... 1 ilia avldance IhaIIl1ay hawoblalnad thai has 

raised their concerns on Money Laundering acIMtiesln HSBC. and lila' prompted them 10 repert their 

concerns ra the CNBV. The major points 8re~ 

lhe high I ......... of US BanlCno' .. exported by HaBe In 2005 and 2008 (considerably higher than any 

othar bank) 

,he high 1e..,1 of falluna of HSBC 10 provtdelnfonmaUon requesled by the FlU (conslde",bIy higher 

failure nate than other bBnIoi) 

missing documentallon related 10 custome~f not onty for old accounts (which Is a common railing 

across en banks), but of accounts opened SInce 2004. when new rules were lntroduced. They 

acknowtedged the changes being put In place over recent months 10 Improve account opening 

dOCumentation In HSBC but said to me -vvt\u\ ware Ihe management of HSSC dolng rer the past 3 or 4 

yeelST 

lhe use or exlerna' legal firms to review infDrmaUon requests from the FlU, potenUany rtskJl1g breach 

of confidantiaUty on 5ensttfve Inws1igatlons * this practice Js news to me, and to the lOcal audit team, and 

will be \:nve$t1gBt&d urgently. 

Confidential. FOIA Treatment Requested by HSBC N. America Holdings, Inc. HSB09340565 

Confidential· FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 8966015 
700 


76061.126

-- "'" Redacted by the Permanent 

Subcommittet on Innstig.tions 

b) We will review .11111. poln .. _ by the CNBV and FlU. chock them ou~ and revert 10 them wllh 

8 response setting oul1ne actions that have been taken (or actbns that wiD be taken, (or the llems which 

haw onrynow been klenllfled) 50 dlat they haw a clltarer p~ture ofU,e progress lIlat has been made. 

c) The Head 01 Gtoup Compllanc. will meet with them, following up on preYlous ma.Ungs lI1at they 

have had with him. so dlat Wit can revtew Ule report and our response together, before they 6nallse any 

report 10 the FSA. 

1!I'I·~B~ag~.Ia~Y;.;nd!1~~::':in=1or E mseUng willi flU 11111 

that relatas to susptdous Internal actMty. so we can 

corrmence an InvestJgation of these, I haw asked Inlemal Audit to ass'''' In revlewtng the other Hems. 

raised (most 01 which oems out 01 previous on-sao InspacUons eartlo, last year. and ora In P"""'ss 01 

.... oIuUO.). and confitm lila actlona that have boo. laken. I am arranging for OoWl Bagley 10 vlSK next 

week. when he and I can ntvfew our actions and response, and IJ\en ne and. I wID meet jolnUy with 1,he 

CNBV and FlU 10 follow up. 

lila clo.r In lI1is that our Head 01 Compliance Is not a. highly regarded by the CNBV a. had boan lI10ught 

by fQcaland Group managaman~ and Indead appealS to have misled us about lila e",ant to which the CNBV have been Informed of. and/or are: saUsned with. our seUons. Thb will need to be addressed 

urgonUy as well durln~ Oa\lkl Bagley'll "'sh. 

I wUl provide a furlh8r update aft .. l~o """,Ung no'" wea1<, bullryou need anyl~1ng fuMe, In lila 

meanllme. plo .. alal me know. We will keep Richard Bann81land ""'!thew KIng upd.lad. and I'm sura 

t~oy will report on II1Is to 111. Group Audh ComrriU •• next weak. 

Regards 

Paul 

- Forwan:lod by Paul A THURSTONIHBMXIHSBC on 18l02l2008 03:27 p.rn. -

Paul A Tlf,URSTONIHBMXlHSBC 23110f.Z007 02;18 a.m. 

Mike, 

To _I F GEOGHEGANlHGHQ/HSSC@HSBC 

co 

Subje CNBV Inspoclion 

.1 

At Ittefr request. I met today with the Head of BankIng Supervlston. and the SupeMsot for HSBC. from 

our regulator. the CNBV. follDWlng their on sRe examination of vartous aspects 01 our bus~S8.lncludlng 

Confldentlal- FOIA TreatmBnt RBquestBd by HSBC N. America Holdings, Inc. HSB09340566 

Confldential- FOIA Treatment RBquBsted by HSBC Bank, USA, N.A. HSBC OCC 8966016 
701 


76061.127

_"'" Redacted by the Perman.tnt. 

Subc:ommittee on InvestigatIOns 

They walked me through a pl'e&enISUon pack whICh firstly set out specJftc poiJlts that had artMn ourtng 

thalr lnspeetkJn. but then rroYEtd on 10 rrora general concerns of the CNBV wHh HSBC In Mexico. 1l'Iese 

centred on: 

... weaknesses In lntemal controls whJcn they saw In several ateas or HSBC. dUng evidenCe of Ute level of 

eredD card frauds. numbers of customer cOmpIalnts 10 the bank and to the banking ombudsman. 

customer concerns U'lat sfaft' in branctles" do not have appropr1ate trBlnlng and quaDflcsUons. ,",quanc:y of 

IT fBtlul'VS. anCI stow progress In mekOng KYC data problems and anti money laundering procedures . 

.. corporate cuhute, where they commanllhal: since the purch8Ge of Sital, HSBC tin drtven growth in c:radII produc1S and launclled new producllwlthoul adequale oonltOls. 1110y aCknOwledged Ihe addltfon 01 

new senior e)(8CUtlws Including Ihe CFO and COO, and they welcomed Iflesa. bu11hey Bra concerned 

that some areas of the business have no. changed at all in mentality, or approach. d&r;.plte: tha dlanglng 

natura of the business, and lOme lower feve' atarr haw flOt been adequately trained 10 deal with the 

bu.ln ... now being und.""ken. 111.,. ImpUed lIIat they considenod "'at wo wa ... ti1 NMlng parIS of "'e 

bank as if they were slDl BltaI. dasplle the new ownership and tha changa in businea sprofile. 

They alSO mcpt8SSed concerns at senior management havtng dual responsibHhles for Mexico and the 

reaion. staling that ""ere BIll many concerns on how managernunt wID be able to Implement strong 

conlrOls Wllhln the bank In Ma)dco. while keoplng an eye on other coun1ries-, 

Thefr final sOde reads as follOws: 

"REQUIREMENTS 

M 8 resutt ofUle concerns pointed out.; the CNBVneeda the senior levetcommllrnent to solve the 

prabtems slIBSSec:I. In otder to dO lhat, HSBC needs to sat correcllve programmes. These actions shoukt 

inclUde"," follOwing: 

.. set strong Internal controls In key business ami operadonal BTaBS 

.. adopt measures 10 stop frauds, redUCe" cflents"s complaints and Improve the leve' of 5erke. to reduce 

repulatfonal rfsk 

.. ntBbDsh the nocnsary BC1fons 10 Improve IT pelformBnce and avoid tachnobgleat risks caused by 

systems bleak down 

~ managa an effecttva culture of change 

- avoid Sharing senior otftcers responsJbllldes with LATAM 

.. sat effecUve measures regarding money laundering Issues. 

.. avoid taking excessive credit rtsks In tha credH card portfolio and sel actions to assess thIs rts.k In an 

adequata mannerConfidential· FOIA Treatment Requested by HSBC N. America Holdings, Inc, HSB09340567 

Confidential· FOIA Treatment Requested by HSBC Sank, USA, N.A. HSBC DCC 8966017 
702 


76061.128

me know ot1helr concerns. 

J indicated to the," W8 were aware· oflheSalSsues and were progress Ivery IackJJng th8m. I" advised them 

011110 now appointments 01 an ~ Head of consume, rlok with expertence In Asia. wIIo .rllwd a couple of __ ago. and a new Head of card Fraud 110m GMO wilD errtved )'8&lerdey. tho halJ> wo hod 

soughl from Ken Harvey 10 ",view tho rocus",08' of 1110 IT oparaUons and tho plannad Inlamal audft of IT In Novemt>er. and the major programma 01 custome, me cenlnlllsing and Imaging wIlleh would give us 

mont ItIbust KYC data tor anti-money laundering. t talked about the changes we are makJng ta split 

Regional from Mexico r08ponsibiUtIes In areal IUch as CISM, IT, RIsk end Audl!, but lI1ey advised thaI 

their .pocIfIo conca", hore was with PFS, and I indicated tholthey could also oxpeot changes In this Broa 

In the near Mure. 

I said that we were errtJaJ1l:ed on changing the business madera ortha bank. and bringing In apactal1s1 

expertise. bullhal cuhure changs would no! happan 0_ nIght. However, I CO_lhalthe Infllslon of 

new rnartagement, c.omblned with changes we were plannIng 10 incentive schameD 10 put more emphaSis 

on customer sadsfatJon and business quanRy would help push the bank In the new dbeCUon. I GOmmenled 

that we have e young staff, and while 1hey lacked eJqJerienca. I was confident that if we went clear In our 

business direction to them. and gava them appropriate "lnlno, and measures. we could make real proQ ...... 

I ~11 them lhat 'wef:comed thefr coming to see me. and that we would respond poslltvery 10 the 

management letler, when It en1Yes. and that I woukl alSo meet up wtth them again to upclate them on 

progress with tho bsues ngt covered In lh8 management letter. 

They lndlcatsd that IhIa was what they wanted 10 hear, and thet they would report back posHivery to 

Gullermo BabBtz, 111. Head of 1he CNBV. 

I lOok the oppo<1unlly 10 remind them of the Issuoslhot I had _ad with them and _two monlhs 

ago on 1he PTV (profit shartng tax), wIlOfl! eancomer and Banamex had ceon .Uowod 10 tal<e ac\Jon \1:1 

a""ld payman~ anrIthey """'-Iodgad thai wo would alSo haw 10 ta~e aollon W we were 10 ",main compet"""'. _they IndJcalod thel while they didn't Uks It. they woukI nol object provided "'alOUr soIuIlon was within the exlsllng Jaws and regUiBUons. 

I will Iollow up on all o!thasa polnts,l>u1lhought that you shOUld be aware, 

Paul 

Confidential. FOIA Treatment Requested by HSBC N. America Holdings, Inc. HSB09340568 

Confidential· FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC ecc 8966018 
703 


76061.129

From: Paul It. THURSTON 

&lnt Fri Mllr 07 21;"'3:26 zaoe To: Oa'Jkl W J BAGLEY 

ce: John R RENDAll 

&ubj!tet: Fie: HBMX b'npOrtanu: ~I 

Attaebmem.: image-_O,g!f: MEE11NG ATTENDAHCE NOTE· HBMX~ Leopoloo· AprOe.do: 

TIl& eommanl:S mada bJ' ~o Grs ~Ila mr~iTJt>il, ar.: I woutd a~ I"..rt ha ;'!;"ss mora 1I'h-'"On o.f 

IIlIt W86kMSSEIS. and (he COOOOfllS of Ihs CNB\I, tl1an RBIlID'" hal ndieall!d. To me, the jury ls sOl out on 

Ramon, and we need-to I\a-.e a discussion bet.een the thJee -of us., pretty 5OQO., about \ha whole quesUon 

.. """- ' ofstructurilg the regional BOO MSJlCkan CMP respOllSbillies. 

1.:../ 

Paul 

David W ) BACiLEY/HCiHOIIlSBC 

D7Jtl312OOB 08:42 a.m, 

]>0" 

JO:·,,"'~RE:N~BC(1)H5SC 

SUhjIJ HBfo,IX 

" 

You fill reCaI ihat I ~.eOlltM .XlI:' !i'lt~ w!ttJ L.eopOrldQ ·p..cd.~~ez Born;lSQ, I ~ e: t'OI'Y of the 

fit! rlQt!!. thm I d!ctsted durtng my v!sll!nd Wf1k::h hBS now bMn Iypt!d up. 

Regards 

--= Redacted by the.Permanent 

Permanent Subcommittee on Investigations 

EXHlBIT#30 

Confidential - FOIA Treatment Reque ... --~~------. 

. Subcommittee on fnvestfg~tions 

HSBC acc 8874821 
704 


76061.130

00"" Bagley 

p;S, 60th IIIctioA$ follOwed up and! believe these to be eIosed. 

o 

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THIS PAGE IS 

INTENTIONALL Y 

LEFT BLANK 

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o 

MEETINGATTENDANCZ NOn::-l7"rclnu...,.,W'va 

Attendees; Lcopoldo Rodrig\ltt BQrro~o (LRB) 

DavidBligley 

He had aslred 10 move nom thcAMLjctt prillCipaily-du!!: IOf-em With regard to 

lIis own personal civil .Tid criminil:l lhiglllioo txpaNl~ the rid:. to his pbysiwl 

security. the. fact that be did oat think thrI1 dJrr.jab v,'8S suitably graded orpaid 

aDd ~~ he bad already made it ch:lttwhm. be rni,RiDlUy root. tbe job th~t 

this would be a shott-tCllJl pos1 not long tCf'ln. 

2. l.RB went 011 to expllin in some detaiJ tharbi$ pett'epUoo afexpomre 10 

criminal AOctiOOS was due to the contlDued poor connols ill lhe bank, the fact 

dlat tbm ~ailegations of 60% to iO%oflaundemd pnx:ec& in Mtll.iu;, 

W!:.It through HBMX SlId: hlXa&&':! 'he did not think that ~ mm;gem~ll-.a4 

~y t"ommltmC!J! to TWust AML c:cntJ'lJl$. He !bought it wa! Q[!ly /I mlm:t of 

eriminal sanc.tions aDd cited • tlumbc:r of aseJ, 

I:S orche bimk's invoJ..-ement in I.miti~ which 

g sanclioncd di~tly and h.im arlit membcl't or tile 

tcam. being sanctioned personally. 

1. It was clear dIIIl LRB fdtv~ ~g1,lhal reft\liDi bu~iieti bt:ads wi1f:ain HBMX l-oad abdutdy 110 tnpec! for A... iL ec:;:;C"O!s =d the: ruh to wr.lch t!:I~ 

Group INP C'XpOJCd and had no intmtiOln of sw1yiDg sr:osiblc or- appropriate 

approachcs. A~1Io he cirod a number of c::I:llmplcs where despite strong 

ra.'OJlUDeDtiatiOllJ with the eMf bUiine!:W fl£ad" bad failed or rduscd to close 

'tlCCOW\tf Of ind.ee<l OD QCtasi('JQ$ filL SARs. He dmughl dm tben: was a culrure 

that pumling pnXd aDd targets at aU eom; and ill fEt bad seen no I'CCeIlt 

implVVemc:nt in the 5tDdud OfCOlJrrotl 01' the types ofdecisioas bciag lIIKeo. 

4. Ht~criti~ of tltelevcl ofI'C!1l~.....cs!nhi9 tc:gm.andf~d!lIfhis tcmn hd 

dODe mud, to kup the blllnk;:.1 or~ble by working e:xb1l. 'baUB againsr. 

impossible: deadlines all.dhl'ftdJiD.8 signifu;ant voll.lDll;l ofatem including those 

&om CAMP. A figun: ofsOOlc 14.000 pc:rmonlh!perllllnlln' Wall dtcd. 

5. When ukM, L-RB indicated thaI he Ibought he Deeded at h.·lSt JS D~W 

beadcoont 

6. LRB WM steptk11abO'Jt t~e ability (f" likeJibcOO oftiting able. to mignre 

proccssc.s ttl GSCs lit feast willie: the bank's sylllttnS wen: SO immaTUre (haw 

could anybody check on·1in.e: and validare llUsacti.om) but thought thar Ibis 

migbtbe'amediUDllmD s:oJudcc DKE'baok symms impro'llCd 

7, 1t ""1$ clear that LRB felt C);tn::m~y :strortgfy about his ltCJ.tmcnl and was 

reseil1fuJ both witb reaan' to Ms l"£CQIt pcfamanee r:dn;. me f~t:t that he: 

thoo..l8ht that the ML depar1t!!eot wm: beina: 5OI~0!It. aud 10'10 di5tJclievina m.tt Ihe bank c:auld find DO altemaUve role. 00 baJmce, h~ver, he aocqned that 

he was a 4iffiewt individWl:I.lIad perhaps on occ:uioru heal tacl1ess aDd apia 

Redacted Material 

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tbOU2bt that be would p:efer to leave even rbOUg:bt be wat likely to'sl.lffer 

economic bardship rather that!. my ia a job wbe:re br fell persone1Jy cposed, 

S. He Vfi!5 .a.dia:t2.ot i:ha1 David L~ghtc:m. lad prom.i~ him that ifbe did tbe job 

for tJ::D DlOdW be would be iooUd after aod felt that this commitment bad ben 

mlcged UPOD, LRB was e,;tremely crititaJ ofRG wbo be deiCribed as bciDg 

ind:-d$ivc, wc:k w. dcspero...!C to main his job :md luclcing :':1)' undemaJldj"s 

of AML mauers. There WIS; B derailcd dis<usdoo Mout the opa1Irion (lflhC' 

MlD commince chlDmt by RG wb~ um ind)j;Bted that be Ibou!ht it wou1d 

be ~d by John Rco4all. Again be felt dlere bad bctn little improvement in. 

the dctisioo-mWag withia WI Canmitte.e. 

9. LRB WIS Keptical as tttwhetherlbebantwauldbc:gi~ iUI c:;\teaskln (lfrime' 

whhin wroth. Ie R-trospet:tiv.;ty rcmc:diaTe high-risk t~O'c:n:r~ mid Silid why 

sliocr.1ld the aUlhorities £i ... 'CIl a.'y filnber exteDsiOG gi\'~ ;hat the bank bad 

pm'iOU5ly f:.itcdtomcctr:--rlicroommirmc1u:s. Hewes clcLriyoflhc ri~thl1l 

the bank was hc.jlldi"'B to!, $ittWion when:: ill due. CI)W'SC i1 w(lUld be. 'tUIctiOflcd 

or pcaaliSl:d and kad $CtJl nominB in n:taIf mouths or 'WCCb which ~tcd 

to bim ~ maher'! could improYe. 

10. LRB Ulcn referred to a report he had been ill. Itoe pr0t:C5Sorwritlng which 

would ~ 0Ul tid arriculltc 111 of me nrioos areas ofweaJmcu that be Itloug)!. 

el~. This repo.i had not been fiuished by bim aDd be ",,as ,;ill deci.1wg 

whether be wou!d write it DB =d tn:f dUs w= v=ry muc.~ a m=r.=- flJ,"" L to 

'decide 1.IJIOII pcnonall)' and thai DB would ftcitt.cr encouragc.ltim to write if, 

DO!' dhlcourage bim f'rorn doing so. It was very mucll bit OWIJ per&ODaI decisioe.. 

HlIvin$ said this, DB indic.tcd to him that if the report WB.'!J pruduc;cd and sent 

lc DB be 'WOuld distb8lJ!,e bis own per50llal ooligations iII bit cum:lIl role by 

causing me report ID be ~(uny coosidettd and f~ored itMa. lily wide wort or 

other review tbuwas being undtrtakeD. DB would DOC just ignore it or bury it 

but. equally woulci tw't: m ballUlcl: views cxp~ by LRB agan..st v1CWS 

e;l;~byQ1heisemdfo."'itI 1I"1.ew. On ba15l1cc..itseemedlib:ly &;j LRB 

will !i'.1~t $UCb !l :-epart. 

II, LRB asked that bi!. team mc:mben. partieularl)' the more sttliormemben be 

Jook"ed aftet and no in anyway pa1.1i1;cdfor hi$ dcpart:urt!. Tht!.WMgc:nLJinC!y 

unsclfislL DB 8~ him th.the would do wblll he (8n in mil regard 

. l1. Ovetllil. LRB WIve tbc impresQan IS having ilem dediclUd and c:ammitted to 

hi" wor.c, h.lving n:al BlId gcru.i.ftely fcltcone...-.ned. Hi, opn-.ions: were \';;:ry 

firm, the CanvCI!lltion e:ttr=lcl)' conilal but at no ~ were thCt'c Imy 

.r;ussr:s:riOJls; ibM h~ ~II tIIlt individual~ including individuels within CMP \Jm'e 

in 1IIl)' way compromised othertbao pezhaps hy mLSOD orfncom~couOl''pt)(Il' 

lDaDa~ment. He dearly £eelJ badly treued bUllCCqJts that some oftbe 

con.s.cqucnces. bave hem brnugbt 011 by himself no1icu1 asking to be moved. 

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC acc 8874825 
708 


76061.134

From: John F ROOT 

Sent: lIVed Jul 30 21 :48:30 2008 

To: David W J BAGLEY; warren GLEAMING; Susan A VYRIGHT 

Subject: HBMX VISit Update 

Importance: Normal 

It has been an extremely productive triP. Below please find a summary of what I have distxlverei:l so far. 

USD cayman Accounts 

There are 35,000 accounts with a fI1Of1ll1ly total average of usa 400 miUion. Many of ltIeSe acco\lnlS were 

opened by Bital through its New York branch. lNIlen this branch was closed, the accounts were 

traf'lSfarred to the Cayman bram:h, which was opened in 1980. 

The reat surprise was the existsnce of an HBMX audit in January 200B on KYC fOr the USD cayman 

accounts. tt Is not clear who in AML respooded, and how. Blank lookS an around. I should know more in a 

few hours. 

The report, which is in Spanish, concluded that KYC control was "below standard". A sampling showed 

that 15% of !.he customers did not even have a file. For the files that ooukj be found, there were serious 

faDures in fOllowing Group procedures. 

CEO Luis Pens has stopped all new Cayman accounts. CNBVwere said to he a bit surprised at this, and 

not entirely happy that a source ofUSO was being. foreclosed, 

As for the existing accounts, the management plan Is- to offer to clients to transfer \hem to another Group 

entity, currently envisaged to be HBUS (although an actual Cayman entily was also briefly contemplated), 

Fixing the Cayman accounts wiJ1 be a struggle. How do you locate c6ents when there Is- no me? 

High-Risk Transactions 

Since file beginning of the year._ a sub-director in AML, has identified 1,100 high-risk accounts. 

Of lhSS6, 270 have been canceled, most with MRs. These hig~r1sk accounts include USD Cayman 

Redacted Material 

Confidential - FOIA Treatment Requ! 

~.= Redacted by thie Permanent 

Subcornmit~ee f!D Investigatt6n~ : 

Permanent Subcommittee on Investigations 

EXHIBIT #31 

HSBC acc 8873487 
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76061.135

accounts. ~ that Ilis team is under..slarfed and that there is tiltJe or no accountabitity·in high-risk 

.' ",,""gers who knowlng~ acce,t suspect clients. The ""In area of ooocem Is PFS. accord~ to even at the "highest" levels. (Yes. I asked.) A ~ter.m of Sltal. and c;1ose to retirement, 

alanned at tile gap between what we say abovt integrity and proper AML eontrors, and what is 

:actually happening out in the lleld, pal1icutarly in .states close lo tha us border. His rrisgMngs shOUld of 

course be treated confidentlaDy. I don' want my sources fired or killed. (No exaggeration here - more 

people are dyir1\;l in the drug wars in the north of the country than are bei"" killed in Afghanistan or Imq.) 

John Rendall has asked Ramon Garcia to determine whatprocNcls have a high AML risk. The COO has 

also asked Ramon to look at USD remittances to assess c!iem riSI<. (H6MX i:S the largest remitter in 

Mexico of dollars back to the stares.) Hig\l-volurre customers will be re .... lewed and risk-welghted. Ramon 

will shol1ty give John Rendalilargst dates lOr these reviaws.. 

~1!I!I! •• l!a.!I!hIs~n..:~~~:~ -:Ly~~ ~~=TSa~~h :~~ ~on"ell!!!! ~= ~:S~g~:~.tJy 8S put together a business plan Dr 14 FTE inc!udillg himself and an AOP of USD 5001(. The plan 

may not be accepted in its current form becausa of cost-cuttlng at HBMX (aU departments to cut 15% af 

headcount and budget). It rraght be a good idea for one of you, and perhaps also Matthew King. to stress 

as 50011 as possible with Luis Pena the importance of adequate AML s1aff. I have already done SD with 

John Rendall, who generally agrees with me, but wants more specifics about the plan. (One reservation is 

\hat AML seems a bit lop-heavy In management.) 

Heving already met with _ I will meet later today w!tI1lhe HR person responsible for 

Compflance. _. to l1iscuss how OUf needs can be better met. 

Redacted Material 

--. "" Redacted by .the rennanent 

Subcommittee o·nln'Vestigations 

Confidential· FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC BB734BB 
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76061.136

Much progress has been made. John Rendall and !'he team have worked very hard, with concrete f8$utts 

to show for It I attendee! a lengthy meeting of the project !ast night and came away very impressed with 

what tIley heve achieved. I wI!! forward a number of useful reports to you on the current sltuallon. Audit 

thblk that much more can and ShOuld be done, but tlle COO and his team nave ltIe proper rl:Sk~based 

approach. 

_is extremefy busy, with meetings to attend eveiy Clay and many reports 10 writ~."1 hS~e· 

aweed with him that I will liaise regular1y with _ror the reports we require so as to ease the 

burden on him.~nd I have discussed the new reporting templete and how we should proceed. 

Operating Loss in Colombia 

A recent mishap in Colombia illustrates what we are up against In lhe region. 

OUI"treasury In Colombia sold rather than bought fe-pas. and ended up with no securities witn tile Central Bank to support the sale. We expect a "penalty not a fine", which would appear to be a distinction without 

a difference. The current estimate Is usn 5SOk. The key issue, according to Graham Thomson, is that 

someone in Colombia signed off on their being FIM-compllant wilen they weren't, He Is lnYl!StigattflQ this 

point, aOO also Why he was only informed last Friday when the problem came to light 'two weeks ago. 

The same concerns lOr Colombia, e.g. FIM compliance. apply of course to Central America. Key 

managers are telling us that they are fonowlng Group procedures when, In many cases, they aren'l 

John Root 

3OJULOe 

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 8873489 
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o. 

From: John F ROOT 

sent: TUB Aug OS 08:35:12 2008 

To: DIJ'Vid W J BAGLEY 

Subjo<t Re: Fw: HBMX. CAYMAN AecOUNTS 

Importance: NCm1!iIl 

Atblc:htr'.enta; Doc Lilk_hlm 

__ = Redacted by the Permanent 

Subtommittee on Investigations 

David W J BAQLEY-:0510812OO8 OS·09-Q6......Qmham. We will OD the basis of this just work on 

the assumPtion IDa. nothing bill been door: to date 1 do find it surprisioi t 

o.vId W J BACJLEYIOIIOIHSBC 05 Aug 200B To' Gi'ahllfn THOMSONIHaMX!HSBC@IHSBC 

OB:OC Phone IXI. 7991 aM5 

44 20 7mil1 884S Malt Siz:e: 23/1&4 

GlWlom, 

Suhje ~ .... ; H~ ~ CAYMAN ACCOUJo..'TS 

ct 

Eo"" 

we wlf on the ba$f$ of this: just WOIk On VIe ~ that nottDrlg rmi' b&eft'dc'ne'to date. I 60 find'. 

t1Jrprislng that there can have been no respons.e -aM yet the audit was clOsed out II tnls a breacn Of lire 

you In audit becoming softer • 

Regards 

:"'-'Forwardad by OI!Ivid W J BAGlEY!OMOIHSeC on O5IO!v.lOOB OB:DIS -._. 

~JWK1N01OO:MINA 

~S&ntby.Ltz.A 

TESTER/MGA; INA Gi-!O'HGHQ'HSBC OS Aug 

'200fHI7!12 P~M! M. 79t12117@ 

-+4 020 1qQ 21110 Mail ~.; 204El7 

To DI!W\d W J BAGl£Y/OMOiHSBCOHSBC 

SubjIiI RI!!!Fw:HBUX-CA'1MANACCOUNTS 

ct E....,. 

Permanent Subcommittee on Investigations 

EXHffiIT#32 

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.Grnh.!!l THOMSQNIHBMlaaSI'lC 

G~m~~~HB~ 

-0410812008 23:19 .. it Siu; 1Se.1D 

To Malft9l¥ J W KINGfG,GM It-IA GI-QfHGHQIH~SBC 

AWIMD BOLANO.....r0::JH8MXIHSSC9H..'iAC, 

Ch".RB£NTL~@Ihsbe...com.mx 

Subja Re: nv. HBMX - CAn/AN ACCOJI'rrs 

" Ently HSBC Hddings pk:- HGHQ 

Matlhew 

I rei'Cr 10 our riMnt en"Iails. 

No response W.IilS receNed follOwing Ihe Mue OflhB report In APR06 BOO Its recommenliatJons were 

"cbsod tlrr' in A1S and Inch • .dod in the matrbt of branc:h ccotn:1l weatna558S, whidl aAQ routinely 

d1s~se:s with the bW;it!eS$, 

Periodically GAO reports on managemenl"S 'P'fOIjJflt5$ on these ilems aM oontinues. 10 check on 

COf'1'4)Uonc;e standards as part of ., rvguIar branch oocWts. where as you QW'8IG 110m reports 10 audi comr'ntttevs etc, IJranch standafd&. haw failed until ~ In be Improved.. ProjeCt Res1aurBClon rs now 

reCti\Ying tlat position and has. IrJCUjed ii'IEI higher rtsk CI cuslOlTl8r accounts In ItS riSk bas.ed rel11Eii1"taUon 

appro&etl. HBfN( ceo has suspended It,e plVoPGiOn of CI &cCOiJnt; ~ nsw cusbmers. 

Gillham 'fhQf1lSQI1 . 

Head of Group Audit LeUn AmeriCa '"the Carltltaean 

Tel (52) 55 Sn1 8238 

------------.----.-.. -. __ .... _---------._._- Mitthe"i' J W KJNGfGGM !NA GHQIHGHQlHSBC 

1Ibm-J W K.lNGlGGIlINA 

GHQIHOHQ'HSBC 3110712008 11:44 •• m. 

SUbP' Ra: Fill'; I-tBMX· CAYMAN Ac:COONTS 

" 

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 8874830 
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76061.139

Graham. 

Wlat Is ths position wtth the ElUdIt report? was i .sent to me unde, standing instructions? How many of 

the rBCOfJ\'1Iendations remain outs-tanding lind a~ these included ill the reported ststs? 

Regards 

Om"'''"'' Tr.:IQMSONfflBMXlHSaC 

GntNtm mONSONlHBUXJH9Bc HBMX 

MIVTI200B 11:38 Mail Size: 11813 

Emilson 

Tc Emiti;on.ALONSO@hstle.DOm..IfIlI: 

A~ GENT,tBJoI...)(IttSSCCHSSC. D6'f'Id W J BAGLEYJGMOI'HSSCCHSBC,l.Uis PENA. . 

KEGEUtBMXJHSBCGHSSC. FUw\"ICIn,GARClAOMbc.com..mr., 

MQC:hcrw J W KlNG:I'GGM iNA GHQIHGi"tl."NHSec: 

. Sub.le Re: Fw: HBMX - CAYMAN ACCOUNTS 

Ently HSBC HoIdll'lgS PIe - HGHQ 

I flm became aware 01 a Caymai, IsSue On Monday (2Bth.) ut lAM RAe wflen eMf' rePorted ihtri· Ii fine· o.f usa SD II: had bOOn Ia..-i9d 00 HBM)(; , On TLHtSday ! asked for a copy of the Inc!Qent report CMP had sent 

w GMO, A rwponsa Is pending;. I hI1w chased S!)81n ttlb nDnllng.1 shal advise lIdher once I !laYlil 

received a copy 01 the report 

Graham Thomson I-iead of Group Audit LaBn Amer.ea &. ttla C8il1bbelin 

Tel {52} 55 ~721 S2.lS 

.Emilson AJ ONSOmSMXlHsBC 

Etnflson ALONS01HBMXIHSBC 311'0712OOB 

11;06a.rn. 

To l.ui$ PENA KEGi3JH·BMXlHSBC@HSBC,Amt 

GE.~.'HBUX!HSBC@Hsec. Graham 

THCMSONklBMXlHSBC@HSSC 

Confidential· FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC acc 8874831 
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!XI l\!!1Iid W J BAGlEYlGlotOlH'SSC@!HSBC 

SI!!:Jj!! F'w:H6MX.~CAYJ.il:,.;t.;.IACCQUNTS 

d • 

G&nlem&n. 

Can you pol m& aWllra imoLlt this piirikUllif "Problem. whISh I am not awa':~: ~ EmIlBa'l 

-.':"':'" FOI'I¥;III'(led by Errilson AlONSO.'HSM)(IHSBCon 31lO712OO811:06a.m.-~ 

DavId W.J BAOlEYlQlWDII-IBBC SetIl by: 

Uarion 0 ROACHItiGHQrHSBC 31 ...... 2008 

1).l:-4B.m ~ no. 79~18645 Mail Slze; 

5742 

Rk:hard 

TD RIchard E T BEttNETTIHSBt1IHSSC@HSBC 

Michael F GEOGHEGANfl-tGHQtf1S9COHSBc. "Emison 

Al.ONSoo1eM.i<lHS8C0HS9C, MIIthM' J W KtNGiOOM INA. 

GHQIHGttQ.lHS9ceDHSBC, JohrI R 

ReNOAL1A"fBMXJHS8CCJIHSBC. luis PENA 

KEGElJH8MXfHsecgHSBC 

Sutije HBMX~CAYMAN ACCOUNTS 

at 

Enllty 

'NIt have bOOfdn discussions with HBw{ CUP w1th regard ~ certain ~tentially- S.~UI tnlnsactions: 

kIentihd 'by rouIIne transac:tIM monitoring. This initial ... port ha .. Widened Into a rroI'C- general issue as 

detailed beloW. Vfhl~t we oo..ti!1ua to fwlaoll up with HB.w{, ! ttll:'lk It = Bppropt.3!~ to ptO\-ide ~ InllJel 

n:portas~!Ows:: 

I am swaim" further details of lt1e suspicious. ac::tivitv idf,ntifted. bUt in blief it appears Blat our CAMP 

mlnitof1ng system i~fiad sigrlifiCant USC rerriltances ~g mace by a nurrber of custo(l'lQrli to a US 

cornpsny anagea 10 haw been involved in th&5UPplyof 8irl:J'l!lft to drugs cartels, Appmpriltle ",po,u. hiw6 

been fJa.O iilrod tia\r-a apP3fentiy enable::1 the autnorlUcs to icIontif)' sf,;rniflCal1t r=ated eeth.<\ty pesslng 

through. ~ bIiInb. ,,,., IEtd to B ralotew of the ws)' In which HBM)( oparates USD-denominalBd 

ac:coUlll5lhrOUQh Jte. cayrmn branch. 

HBW( holds a category B banking licence In Cayman which aIiJwB. thl!Jm lo provide banking $erke$ 

8rrywtlll:m.l' otflBl' than to Ceyrnan nltllildunts. 

The Ileence, inherited from BilEll. sllo\n HBMX to provide USD-dvnominlited IiGMces \0 pef$Oll$ 

<!omlella<! '" Moxlco. 111_ reg_ appa",..". prohllll\lllndlmua! _ns 0 .•. /1OIHlOIllOI81O} tn· 

hOld Uso..denominated depotil aceounl;S In Mexico. The brancn currenHy holds USD400m and 35.000 

accounts. T'hem Is no phySk;a1 preseoce In C8yrnan and effllCt"'atyfrOrrt.anCi back OI'IIce soN1ces are 

." 'provlded on ttre ground In Mexk::o. A..hough HBMX were recently fined USD50,GiXI, fOr N inapp(opr~t. 

~romotlon of these sel"'o'1CS3 in Mexico. I am advb;ed thsI CNJVare BVI'.ere of!le 6)ds~ or the 

I!OOOUnts and aervk:e'!i WId have raised no concems. HBMX are however sensibly revtewlng Ihe position. 

I hayaatso asked CMP torevilw~th8rthera aRt .,y stm/lIlr operations In LATAM. 

There oontinues to be a 1'1!t8! toous 011 the le'0'8l of USD-danllminsted EIc:IMty in Mexico by CNBV and 

other bod~. and the extent of HBMX's acdvtty In thi!llna. This. Bet=OUnl base has to ttien;!fore be:$el3n 

6 hign-risk from an ,i.ML ,and reputations! p!lfspaetl'V$. 

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 8874832 
715 


76061.141

Apparently an audltcamadoul in 2000·otthli·Cayinar1brailCti acltvfttaS waS rated as belawstandarifBod 

itllln1tfied slgnflk:arrt KYC weaknesses. It wBI be II"fIPOI'Iarrt: lO _lint thallhes.e accounts wil be covered 

by the ~1o!J5 aa:ount nillnedlatlon processes underway In HBM)(. and as a priority area. As • precaution 

HBMX I'rave i6sood ins1nlCtbns thBl no new acooun15 be opened pending .. review of It)ass aClMUes. 

We aN also checicin; wh.ther any 5itni~ aetilliliilS ~ It! LAT.AM. 

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC acc 8874833 
716 


76061.142

From: John F ROOT 

Sent: Fri Sep 1215;14;172006 

To: Adrian CFtISTlANI 

Cc: David W J BAGLEY; Warren GLEAMING; Susan A WRIGHT 

Subject; Fw: Cayman Accounts. 

Imporflll1Ql; Normal 

Attachmsnt&! image_O.git; Doc Unk.htm 

Adrian, 

At IJ\Iarren Leamlng's··request belew please ftnd B recent breakdown of the USC C4i1yman aocounts at 

HSMX (t.e. held by a branch of HBMX witt! a -category B" offshore cayman license but no physical 

presence or client documentatIOn In cayman). 

The tiBMX "'A.estoraUon" project chalred by John Rendall. HBMX COO, is endeayour1ng to regularise 

these accounts on a rtsk-basls. Account opening c!ocumeneticn ls ~enerelly poor or non-e]ti:stent .end 

!here I!; a lot of work to 00. Money--42:uooertng rtskls comltlquerrtly hiQh. 

John Root 

RaJ'l1Ort GARClNH8MXIHSBC@HSBCD4Sep122008 15;04 M!J.II Size: 37281 To John F ROOTJGt-AO'HSECCJ-I.se. 

Maria SALAZARfHBMXlHSBC@.I" 

Subjo Re: ClI)'TI1lln AecounlS 

ct 

Entlty 

Joho, 

Please 'find·attached information requested. Regards. Ramon 

CAYMAN ACCOUNTS 

Permanent Subcommittee on Investigations 

EXHIBIT #33 

Confidential - FOIA Treatment Requ' .... ---------·, HSBC OCC 8876784 
717 


76061.143

Customers were cla55tfied m emergency fights considering 1helr transactional behaviour as ibllow-IS; 

RED sse sl.atus, b1aclt Hsls and custorrers wii.h one Of more reports to ihe 9:LltOOfit:y ($AR:li) 

were considered. 

YEl..lOVi CustomeiS a1erwd by CAMFI' system wltnool SARs 

VVI-IliE Customers wlm no colnclClences 10 ttle two. prevtous ranges. 

John F ROOTiGMOIHSBC<alHSBC 

John F ROOTfGMOIHS~SBC 11to;l2OO8 06'51 a.m. 

sutjo cayman Meounto 

ct 

Could you please send me figures (or the Ca:yrilBn Accounts? Haw many? Iota!? sARs fited? CD? Se. 

E\<;, 

Regards .. 

John 

Confidential· FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBG aGG 8876785 
718 


76061.144

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 8876786 
719 


76061.145

Confidential· FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 8876787 
720 


76061.146

~~ tu Nov 27 0:2:38:422008 

To: Jaime J SAENZ:. Rarron GARCIA 

Cc:._._ 

-, ~d:lct'!d by the Permanent 

:;,uhrommiUee on Investigations 

Su~tJ consider re~ the product Oo!ler.; I!CCOUnts in '!hoe zona fronrem Product 63 

Cuenta Maestra en DoJares P.F 

ImPQr1ance: Normal 

JSlm9 Y Ramon. 

In the 'liWIe way we hllve :Qtready rettridOO newcahnan Is-land accounts from opening, due" the 

massive misuse of them by organised crime, I think It Is aboot Ume we seriously consJder recommending 

10 the bus.lness. that we c;::8n n01 support their man&gement of Donal'S BCCOunts 1n the zona frontera 

Product 63 CUe-n13 MaestJa en Ool'lars PSJ'!;on8S.F)s.lCas. 

V .... e he;ve !J.l..-ffa,ad three cases thIs week wt.ei6 dOr.aiS aeeountz: bGsed in U'I15 zona Iror;t¥a have bee" 

openet:l ... .'Ittl the apparent sole intention ofllsi."lg tt:em for money lsundertn.g. 

1) Accounts are opened at varKlUs branches in Cd Joorez: (or other border areas within ~krn of the USA) 

h dollars product number 63. 

2) Declarations are made by the customer in U'1eirbranoo KYC questiDns of lOW eccount movement per 

fr.o.,th (iii one ca$e the Client indicated he 'Hn goiiig to mo-..-e USC300 is motitti.l;n.rt in fact roo"al 

US01.4~!lm) 

3} caSt'! is then depoisled in branches. fa( from She bor(Iet (TOluca and Edo de MexiCO.) The. in'Cividuat 

depolSts are normallY USOSOK but It is one: wSlOmef. standing at one c.as.hiern window. depolSting ten to 

twenty bundles of USOSOK. The total is USD500K to USD933K In one customer transaction (albeit 

seperated into 20 bundies) 

Sa !Sr t'm lOrel cft'''lIs cash. has surpassed USD:!Mn in two w~" These.:!'!r2 ths aeoounts 'NS tle\'S been 

notified about, but I imagine tl"Iat tl"Iere wi" be many more In the coming weeks/months. 

l11ere are very 3IPparerot breache$ ofprocedvres In both the bnJl1(Ihes.lhat ol':'ened ttle a¢ool,lrJts. and tl'1e 

branc.t1as that are receiving the funds" (Please s.ee belOw) 

It Is my belief that the proffessional rroney lauoderes ha.\I$ got wise to our procedures, and a(B now golng 

to.,.,!t an<:! flJrr us. The-)' .... ·iU open accounts, usee them to launder is much IiOney as possible, In:a shOrt Q 

ti;r.e a;s possit:le, snd then altha;" C'.css the ac:ccunt 1harmetvus. or w~t b cur proceduras to de ft" 

Tbe normal tkre sce!e I!\ -e typic2l-case. to close an accol!1l is throe!! monttls , frofn 'When the Arst 

CAMPIROI s:lert comes in to the AML area, As )'OU know It -Is then passBd -....ia the CCC 10 UCE who. then 

haw to kw::at& the fila, and provide it to LGA for them to start their prOCtliS. LGA 5ay -they take on ii1wraga 

it is 30 days, but with ttlo re::;turation prtIjoc;t, th",ir ba~og b now !i!olmost2.SI'( ca~" 

In aoother caSIt I am wOl1d"1g on, the ciiant has aiready been notifled by LGA that the account 15 going to 

Permanent Subcommittee on Investigations 

EXHIBIT #34 

Confidential _ FOIA Treatment Reques ... ----------. HSBC OCC 8875736 
721 


76061.147

be dosed. and he Is usmg hb last tw(l week$t(llTtQW' as mU'Ch rroneyas possible. SO 1ar this is USD1Mn 

in ~ days., to add the the USD9Mn that 1'10 I'Ias $ucessfulfy Immdarad irlthe last three months. 

It is my opiniOn that we are not ·PrevenUng- anything. We are allowing the o~anised amoals to laundr:Jr 

thief rnonay. and onlY aner tnr.:e rnontbs do we \'inal manage to slOp tham (by doslng the account). By 

whfch time they hBYe proeDly opened up another oolls..,.. account In a 13k@name,andstarted the whole 

process again. 

The first essential thirtg that must'" done is a bank wide email expJilin!ng til clear al'ld Simple terms tl'\a 

east'! d'Bpoisl arrounts that are laid done In CMP PLD 050003. 

In my Investigation 'SO far, NOT ONE SINGLE PERSON has heard oft"ls drcLJat. and no (lila" follOwing 

tt. 

It is m; opinion that until PFS can property educate thelr starr In the COrTect procedures for dealings with 

these tt-pes- of eccounts.. l,'len t.l-ze account should !:Ie removed frOm our llsto1 products. 

If we were rigmn,sty stitklng to tl'1is procedures, then I em confident that we woold serlOusry restrlct1:he 

ftaw ofdollal1> Into our OI'galnsation. lam aware that this Isa theme that has been raised by Luis PeNa 

and tnc CNBV. 

For your Informatlon the part that I COflSider most ftlievan ofCMP PLD 050003 B beiow: 

Qwida ertrictamenl(l prohibUJa /0 retJ/aocion de 1m siguirmtes OfX!TOCiones: 

bllri~1I d~ Gll'O$ Bcm •• WY'ws 

C.:mlpr41 'IiP,:a ok C.UrjtlilS d£ ~'iajero Q;:I) df£t1t~#ltGfJ(tri{n 

Venia de. Cheques de Caja a tlsuarios, 

HSBC NQ e.&labJecidr) d srgllJentl! lI1etEmismo dIt i!fco.lomiF!nlD th! aprobocf6" intema pam et rrdmfte ck ofJf!r'f1dones 

(depPsJto.s Y "'tiro$} err electl\'O CO/1 dO/ares de las Ulodos URfcbs rill' AmtJricq; 

Nivd hi F/ltJ!lCJotHuM F6t!11l1.dD 

Ejer:lItiWl de Cl/rmJo (PFS) 

LMe!' de U1!!dad de NeJ:OCID (PFS) 0 E;jectaM de C!l!m.(rJ. (!!TJlcmio£!! fk ofrv:JI Segrmmros) 

lJincror (lodoJ los Segme11f03) 

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 8875737 
722 


76061.148

Nn !UI rPiJllRriro nprohacifj" 1!11 el [rtimjltt de operudnnes ftl '!fectiliO Clln ddlolTU de los EsladcM Ufltd.Js drt. Ameriea 

lJlle fT.:Qficen pt'!nanL1.'J jlrJclJl, par lfI!mIos JrlferlDre.f Q fDl Ja.()(){).oG' dOJ~, a&i cr;mo de aqllollas ql16 /lel't1tI 0 cabo 

personllll1lO,a/es, por ",on/M inferiOrYs a 1M 50,000.00 dO/aru. 

lM1. haw had ciionts dopoist USOO33K in one day ~ one blanch. ThiS depolst should haw bean 

appfO'lo'OO by the D.EJ~. blItlt has newrre6c/1ed him. NOI it a.ppaal"6 t.a .... 1J any ottlie SJl;iilJerdepolsts 

reached even me levelS of Sub-Olredor.;.1 

It needs to be ma(je clear that any brancn reclevlng more than US0100K total with 000 customer 

(regardless of how the customer wants to seperates the aepolst3) Chat has not notified. their SUbDi.actor , wi. be sUbject to Zero tolerance policy enforced by UCE and the S u.b-Olreetor, who $houl~ 

have been told. 

111(& matter is not Fmud so PIF resources need oot be used, and It is not necessary to irlYolw ANIl.: in 

every case as tlli ti'lll:1enca Is 'Wry ObvloU5. and easy to prow thl'Vl.lgl't branch cash tTIOv&lTl<ints, or 

ccl1~e !he same Zero tole!rance. should apply when the cBSh depoi.'>t indicate. Dlrectl:'l'S and D.Ejec need 

to be infon'roed. 

PFS ChannelS and Products. should be able to "police" themselves in this matter, and I repeat that If we 

stl.;k to these prQcedures the rroney launderes Will quickly beeome very tired of waiting to g91 

authOrisation, ft'Om Out senior managemenl, and will carry out their business in anottler financial instiiuion. 

I 'i'reGrty appra~lata :hat thl:; Is a complicated Issue. hL1 .. -:mOllt firm ar.d dec!sivo =ction 'we wm ne\'ef step 

curse!\"!!:S being used by 0rt:enbed crimineb. 

Thanks and regartls. 

- = Redac:ted by the Pf!rmanent 

Subcommittee on Investigation$ ! 

Confidential- FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC acc 8875738 
723 


76061.149

Ftom: Dalrid W J BAGlEY 

Sent Thu Nov 27 06.:24:531008 

To: W.UTen G l.EAMING 

Cc: Richam E T BENNETT 

Subiect: Fle; Mexico 

Importance: Nonnal 

Thsl1k you and all noted. 

What I fllld most frus1J1:itlno if;. the way in which new issul!!s ~cnstantly emerge however much lime rs 

spent wittl HBMX 

The Pr2ctice of changilY.! USD in the branches presUrNbly wkh litUe or 1'10 lD 1br non customers is In 

bre..ch of GIOUJ) policy. \lVhen looking al our USO exposure flow can thig; hew been mis5ed. 

The SAR filing Is Just daft as is allowing an account to operate pra- closing and taking too long to close. 

Are )'OU able to clnlilwnye U)e trlYulverl'lt{ll of ieyil! ;(1 It.i:S iJI"QI..'"C:Ss. Ii flUt s\Jbj6:ct IU Rlc.hilfd's 'o'IewS cail 

they gear up their effort In this erea, 

Regards 

HSac Hoklings pic 

Registered Office: 8 Canada SQuare, London E14 SHOo Unted Kingdom 

R.agl6tElred in England number 617"981 

w.""" GLEAMING 

- OrllJlnal Message-

~: Wilrnm G L&AM:INI; 

Seat.: 21'/11)200-8 01;29 GMT 

To 1 David W ,] BAGl.E't 

C:el Richard E T BENNE'l'T 

Subject: Re: }texico 

DavidIRlch8rd 

Mite GI;!(l!J~;If1 ~dJty v~itM lhB f'Irtl~idAnt nftha CNBV Gullenno Babatz with luis PeN! HBMX CEQ 

Permanent Subcommittee on Investigations 

EXHIBIT #35 

Confidential - FOIA Treatment Request HSBC ecc 8875605 
724 


76061.150

and Emil!!:on Alonso. It wa!!: antlclpal9d that during the discussion Ule: BailkB controls Ql1 A ...... would ar1se 

foHawo9 Paul Thurston's meelirlg CNBV m. March. Ran»l1 end! conlliboled to a briefing paper for luis I 

M!l<.e which Is attached, We had 2ntidpated that !he CNBV would be ocomfortab4e with the improvements 

thai hael been made wllh \he control! but 1hat they may stili be cor1CelJ'H3"d with the ac!:k:Ins of lhe Bank's 

staff kl acceptWlg depo$its without appl¥ent KYC/ due d~igence (ie h~ Ihe message penetrated dCMm 'to 

the rank and file). 

At the meeUng apparentfy Mike acknowl9dged me CNBV may be concerned around the Banks controig 

on AML. The CNBV pf13sld'6'n1, who wa~ accompani'!'r:f by Patricio Bt~afll<'\nllQ. ('I!=l.V.fV~lnn) and Pablo 

Gomez (AMl) noled that slgntfloarrt progress had been made 10 tAe Banks cootrols but they remained 

wry concern in respect of. 

1, The USD cayman EICCOunts and the s.10W' speed of remediation 

2. The sheer \Olume of US Dollan> that HBMX repetrlates f exports. 

Between .January and s-epten"b6r HBMX repatriatoo usa 3b, 3~";' of tt'.e marke' which is doLAbIe 

Bonamex USO 1.3 b which conslftUtes 17 % olthe market lind yet Banamex Is the biggest Bank in 

Me;,:;ico and HSBC is. 5th largest, The authorities ere eoncemed that wherH!!l'V8r there ls a serious MlD 

scheme HSBC seams 1.0 be imol\led, CNBValso won1ed that tho USA authorities BrB concerned .crt tho 

wry hlgtl level's, 

Appa;c:ntly Mb told Luis fflst he Is Is not holdng him ;G3ponslblc because he is new but directed him to 

sOfl 1he problem out. When luis sa.ld this could res.uJt In lost profits. of many billions Mikes clear response 

ts that nothilg Is wor1h risk 10 our reputation. 

LuiS: callell Q task fOrce meetlnil thIS afternoon trlat Ramon attanded. OUMg this 1TI9Q1Ing It became clear 

that we are vary good at tiuylligJac:qLJirtng (Joilars but we Go not seem to sell Ihem and Mooe our \'"Srj 

high repatJiatioo figures, 80% of our dollars. come: frorn money emhenge business at brenct1f'ls, there is 

no imtt on the amount of dollars tnatcostumers can conven to pesos and Ibr non customers we conven 

up to 3000 dolla~, and-do not require any KYC, 

luis has decided that dr.K;onian measures are required and ne ;5 proposing 

1. The ~u((e,)t L'~ (to O\)eI)lnQ usn Cayman accounts wll! COIlUnu ... lnd6rlf,i1e-ly (there were proposals 

to reopsn as 99111 naxl wes!:). In addition no new cash deposits will 00 ac...'"'epted to the exisUn; accounts. 

2. H5~1X \.\'HI oeese to bUy, sccept, 59!! US cash fu! all customers. 

3, aU remediation must be completed by 31 Jan'Jary (eariierthan pBnned M<"fCh) 

Business are Rlviswing how to implement eoo will meet 898m on Friday r'f'K)ming. 

In the 2 days I been here it has bEicome apparent tha1: 

1. wtlile remedi$tjl)n efforts have progressed they ha...e in some ins.tants been very s.iow. particularly 

~cund ph<ilo:58 11 cor-prate accounts. In addition there aPPe8rs to be 2 huge !lec~~jog In cJosing eccount!; 

as this Is a legal p1OceIOS manaped by 18gBI. Pending closure customer'S CM continue to operate their 

accounts which may be part of the reason& for rnul'\lpl8 SARS, Jaime's team is producing figures but t/'1ere 

are reports of BC(;Ounts thorl MLD committee Ot'd&red clOsed in March continuing to operate. 

~, now 10 resolve eAccoun'\s with multiplo SARs not being closed in breach GPP 25. it seems thi!lt SARS 

a:6 fied befo;'G we hava com",!e inkll1TIB'Hon as to \0011e:ther there :s a need to file 'them in order to 

cDrflIdy wiUllocaJ rttgulation. We are aboo revSwinQ the practie6 of Directot Generals being able to signoff accoun~ that can remain open 

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC acc 8875606 
725 


76061.151

3, We are revieNtng !he crtterla tor high (red) medium (yellow) low {white) customer risk profiles, 

Obviously til is '11m B\'tIhie over the next few dayS.. Mikes visit and LuIS proposed actions are considered 

extremely sensiti..-e 001'9 in Mexico and IOeaI management want (0 gQt ttJev ducks in a rON before advi£ing 

GMO ~11y so it will bEl m1.lCh appreciated trthe abo\IEI coUld not be treated as informalkm only ano: not 

disseminated without dGcussing further. 

Best regarm; 

IJ'Iarren 

{aftachment "CEO Restauaraci6n Scrlptdoc· delet$d by Devid W J BAGLEYI'GMOIHSBC] 

David W J BAGLEY -~26/11/2QQ8 22"52:21 ~Richard I WAs at the legal awards dinDer where I 

note you wen:: a judge During this I took a call from Warren where because of 

David W J BAGLEVIGMOMSBC Nov:ze 2008 To Rlcha~ E T BENNETTIH6BHlHSBC 

22."52 Ma-U Size: 2181 W~ G LEI\M!NG.'RUI LG":. tl.EM~8ME!HS9C 

SLlbje Mexico 

ot 

"'ty 

Richard 

I was et the !~51! awards dInner where! note you were a jud~. DllrinQ this I took a can frOm Warren 

where because of'WhBre I was I could not prolong. Core W8'5 hOwever that at MFG s meating with CNBV 

they raisedconoc:mii re the Caymanaccountt and lIIr1"QlmtofUSD gc;r.ln'l to US from HBMX. Am catching 

up with VlJarrEJn m the morning. 

HSBC Holdings pIC 

Reglstered OffICe! 8 CMada square. L.ondo:n 1:14 5HQ.. Unl1ed Kingdom 

Registered in England number 617997 

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC acc 8875607 
726 


76061.152

From: VVarrcn G lEAMlNC 

s.nl: Mon Dec 0814:01:30 2008 

To: Ramon GARCIA: John R RENDALL 

Cc: John F ROOT: Susan A WRIGIfT; Calherine BUSSERY; DaW! W J BAGlEY: Andy GENT 

Subject: Mexico Vl$il 

Importan.e: Normal 

Ramon/John. 

Ple .. e find anached Ibe drun emo~ salting out my high ",,,,,t Illoughls lollowing my recenlllisiL Could I 

please lllank you boIh for !he Uma that you look 10 spend wlih me dumg my visH during whel was a YeI'J 

busy and III_I time lor you both. It wes of consldarable value In clarifying many of Iha cum,"1 Issues 

In Meld .. and Cenlral Amerlca and IIIope tholl added value In raspect of my DISCUSS""'S wllh those on 

the ground. 

Despite 1I1e reoervallons eJq>nos.ed by Iho CNBV In respect oltha _nlily 01 US dollars repalrlated and 

progreso 01 reml!(f",lion.1 ,.as hear1ened 10 nolelhal1hey also acknowledged lhe slgnilicant progress 

that has been made in respect of Uta compliance and AML conlrDls. OVBI" lhe pas' twalY9 months and 

since fhe CHSII meclif1g wah Paul ihu,,1on In Ma,ch. Iryo" leellhalfllB\'e neglected lomenlion 

somelhlng or you haw any 1ssU8S willi my oo""luslons expressed in my draft nol8 please let me knOW. I 

iotend to send the: note to luis Pena by ~,iday. 12 December. 

Regards. 

DRAFT EMAIL TO LUIS PENA 

luis. 

As you krlOW I vlsHed HBMX be!weenTuesday 25th Now_end Fridey2B1h NOIIember.1 spent my 

time with lI1e COmpOance and AMi. team In MexIco and thougntlhall would oller the IoIIOY/ing 

lhoughtslcondusions as a resua of my discussions. 

Submission of SARs within 3G days. CurrendY Ioeal regulallon ""Iuires 1I1alll suspfclOus acUvily Is 

recognised that a SAR shoukf ba rdod within 3D days. It is BPPOru!lt lhat in many instances the business 

are nol prCNfding the Inlb,malicn required 10 \he Compllanca deperlment to delennine _Iher 8 SAR 

should be submilled or not within tho 30 day perlod. Given tho regulatory ""Iuirement and !he absence 01 

appropriatBlnformalion in erder to 00"," 10 an appropriate conclusion, SARs lire bein!l submlned when 

tho Information is subsequenlly received n Is not possible 10 IBlrucl Ill. SAR even If the Information 

reveals Ihat ~ was no! approPliate to submit \he SAR. AccoldinolY \he numbers of SARs !hat are being 

submitted may well be 100 high and ghlen !he GPP25 requires that accounls be considered lor clOsure 

after two SAR!O are submitted. we ma), weB be closing accounts where there Is no need to ~o $Ow ThIs ts both unfair on our customers and causes lncreased work. I nota fhalthe regulation 15 to be extended to 60 aays, having said lbet pressure should be boughl 10 bear on Ihe bU.' ..... ID ensure that approprlatl! 

informalion 1$ submitted 10 Compftance in time for them to come to a condusion and submit SARs. within 

30 days. 

Confidential Treatment Requ Permanent Subcommittee on Investil!.tions HSBC-PSI·PRO[)"0197874 

EXHmIT#36 
727 


76061.153

Closure 0/ accounts· backlog ana blocking. When accounts .ralo ba closed, allner es B resuK of the 

re...,dlaliorl programme or as • r •• uD of a direcliOrt by !he CCC committee. polley in HBMX requi .... lhal 

such accounls bo .onllo Legal who will in.lnrcl an anomoy. ApparenUy \!Ie law requires "'al customers 

DO appropriately ""titled. It Is apparem thallllBra Is a slgnlru:anl backlog (3,&59) of aecounta 10 be 

cJosed. Of ItUs 8111Ounl675 accounts pending elosura W8f1I ordered 10 be closed bY Iha CCC on suspicion 

that lhey are used far rroney laundering aclMly. Vou wiD nole lhal some of Ihese accounts arB very old. 

in fact ilappe""lhallhere ere 16 ElCCDUnls that were .enl far dooure in 2005,130 from 2008, In from 

2007 and 309 from 2003 IhDI remain open. I am adYised Ihal based on legal EKlvfca " Is nol possible 10 

bIoc~ the accounts llefore CIoWIB and Becomingly all of these accounta ramaln open with 

tnnsaedone being conducted on th.m wblch also Increases tho numbor of subsequem SARli being 

submilted 10 a_lies. I would ask lhal Ihe legal advice be reviewed and if approJll\8!e a col1ll1'eldal 

decision be taken b8e8usel was _ad that Scouabank dO nat use anomeys or melt Legal department 

but notify customars usinO certified maD. I have also nMewed InInSlatJons 01 the appllc:abIB IBglslaUon ""'lth appe ... 10 confirm this. High prolila accDunls Ihal Public AIIa,on; hava advised should nol be dosed 

bocause 01 repulaUonal scn.IMIIes she"1d lie reviewed al OGA 1_110 ensure appropriate rernadlation 

andlor closure. 

GPP2/i • DGA leners . this Group policy requires thalli IYlo SARs ere submitted the account should be 

considered lor dosunt. HBMX poDcy allows lhe eCCDUnlIo remain open If !hare is a OGA leller. There are 

a large number 01 DGA IeUe ... and I em nol necessallfy confident Ihat appropr1ate due diligence is done 

by !he business balore such fellers are submilled, You wiD recaQ thai hlslorlcaDy 111 .... have been two 

very signllicantcases wll,re COll'Cllianee recommended that 

the accounts ba ctosed and thai tile busiroess ~ed !eken a commercial (jeasion end insisted thallhey 

remain open. Subsequent evenls hlI"" ",,,,,aled that t_. ca ••• inlOlvad blatant and systematic MIL 

w~ich has caused the Bonk much embe"""smenL It 15 importont thot Ihe bu.lnesses ensure thai 

epPIopriate suppotlldue difl\lOtlCe ts conduded belore compIBllon of the lallers. 

CCClAML Commllhlt. The CCC curmntly meels rmnthiy and whltst k ha.improved it appears thallhere 

are ,tID many Insranees where decisions are 100 slow in being laken and Ih,; elosun> of eccounts Is deloyed slgnificanUy by bUsiness requesls for more time. The presumpUon Seems ID be In faWur 01 Ihe 

businesses views which neods 10 change til a rna'" Compliance orientaled balance.f haw asked Ramon 

who chairs ma convniUBe 10 take a much sHleler,approach going torwamlO ensure thin suspicious 

aecounts are clo5ed quickly. I ha\/ll alsO asked Ramon 10 consider whether \he frequency should be 

inCreased 10 allow mtlre Ilmely consideration Of se~ous ca.a. or autho~1y dalBgated so llri.t llecislon. can 

be laken belwean meetings. I have alsO askec:lthal the meeUng only deal with hlgh level cases end thai 

\he \lasl majority of cases currently d8aII with 81 the Committee belle.H with outside the COtrmltee end 

only come 10 Ih. Commillee where business and Compliance cannot agree. 

Issue. arising from your CNBV vlslt.l.m aware thai fallOwing your vish to the CNBV wllh EmDson 

Alonso and Idb Geogllegen thai you have decreed:-

alThal as oltha 1st Januery the Bank wit nOl eccept USO cash deposRs nor provide exchange services 

lor US dollars. Ar.a>njlnfJly no dollers wiU ba aocapled by tna brunches and lra_ cheques wUI nol be 

sold to non-CU11omefS. and wi. be sold to customers on a JimHed basls. lbere remain AML lssues in 

respect of """"liars cheques wh~ hislDrictJlly "'0 very high risk hom an AML perspecllve end 

accordingly WB would expect Ihalihe &mils are ",asonably low and lhallhere are vary '1rDng controls in 

place 10 ensure lhat brunches do nol abuse Ihc rules. 

b) Thel no new Cayman dollar accounts b. operied unlll ruu remedlatlon 01 aU Oldsting customers. 

c) That aU remtdla\iOrl tor both the cayman accounts and lIIe restoration pro)ecl be completed by 3151 

January. You are 3\'Yare that ntmediation has been SDw ror the cayman accounts and also for the eMS 

phase two accounts. We rulty support your Impelus to speed up the remediation of such accounts. We 

Confidential Treabnent Requested HSBC-PSI·PROD-0197875 
728 


76061.154

aJso note lI1at In respect of Cayman h Is proposed !het 3,000 accounts be clased and our abo"" 

comnenls In re<pecI of !he account cbsur. backlog and slMHId need to be addressod. We are also 

a\'lare lIIat .... mpIe$ .r8 10 be sal bam on a branch and IndlWlual basis for laDure to foflew procedures 

wilh respaello """"unt opening, 10 and V guldeUnes. We fully suppot1 approp~.18 action being taken 

against alllndMduais wI10 do nDC comply within. Group's poUdes. 

Tr.nsacllon limits. TIIere are a numbe, of Iransactlan limits. I suggest that Ihe fOllowing be 

reconsidered as appropriale linits and oonlrols be pulln pia",,:. 

0) Thera is no 6mil cn !he Bnnk .. Uing cosh .. ", choqueslO cuslcman; when lIlay ore paid ler !rem Ihe 

cus\ome(s account TIlls sllould be ,ubject to approprlate limits and controls. 

b) There is no limit on CUSlomers depo.blng I13vellers cheques 10 their .emunlS. 

c) TIle Bank wHiseU up 10 525,000 of travellers cheques "hen h 15 paid for ~om Ilia cuslomer'S accaunt. 

TIIis appears 100 high and as discussed above wa weuld encourage lI1al8 reasonable Omit be Imposed 

and strong controls be put in place. 

d) TIIere Is soma confusion around lhe I,mlls on wire transfOts which should be ,.viewed. 

CMP/AML Resources. Hoying spent Ume wllll JeIme Saenz. lIle new Head of AML, Ilhlnk Illal IIa haS 

good potential He has cur tuD suppon and one 01 his fllSltaSks Is 10 revI .... the reseurcas Ihal he has al 

his disposal and what activity they conduct. I know lhat John RondaU has racentty approved a new 

haadcount o/!our whlch "W be very _Icorne ond In eddlton I ha ... asked Jaime to r.mew an actllllty 

currenUy undertaken by the MIL t.am to ensuna Iilat they are not condUCIing activity Ina! should be 

conducted by file business and 10 maxlmise the use 01 resources en a ~mety basis. It appears lnat In addition 10 advising Iha high, medium and low risk pare""'t.,. lnal \he toam has also _n asked 10 

actuaRy identify customer. thol meet th ... parameterS wIIlch would appear to me to be a business 

activity. 

camp Analysis. V¥1Jite some work has bBen done 01 fBnnlng tht5' cump alerfs more work in required DO 

refining the "soh rutes" to produca focussed meaningful alens. 

effi<:lanct.s can be obtained by 0) analysis of the high and medium ~.k categories on a sllghtty more 

scphlsUcalod basis than has boen done In tlla past loy analysing the type of adjlllly on th. accounts, This 

may ha ... tha elfec! of aClual1y reducing lila numbar of high and medium rISk cases 10 be "",,edlal8d. b) 

!l1O/e foc:ussed planning InKiaUves rather Ihan dealing vnlh issua. on an ad hoc basis and. c) introduction 

0/ relliow campfong of custorrer files to ensure hlgI1 quanty KYCicustomer visits including supportive 

documentalion. Mor. delallsd rislr based flIWews by Comp&mce and Inlernal Control ollha business 

apP9sr neces.S8'Y_ 

I am aware thaI a -AML Shock Plan" is being Implemented and lIlis wfllsssislgre811y In moving the 

emphasislbolonce of approach 10 opening/managing customer accounts to group standards. 

IlDok forw"'" 10 any COI'I1m8J\ts thaI )/CU ha ... or would .. eIcoma Iu~her disCUSSion, 

Regards. 

Confidential Treatment Requested HSBC-PSI-PROD-0197876 

76061.155

HBUS Banknotes NY - USC Bought from or Sold to Customers in Mexico: 3-Month Period (Nov-06 to Feb-07) 

SBVA BANCOMER SA (7 branches) Bank Purchases 

BBVA BANCOMER SA (7 branches) Bank Sales 

HSBC MEXICO SA (16 branches) Bank Purchases 

MEXICO SA (16 branches) Bank Sales 

CASA DE CAMBIO PUEBLA (9 offices) MSB Purchases 

CASA DE CAMBIO PUEBLA (9 offices) MSB Sales 

CONSUL TORIA INTERNACIONAl (4 offices) MSB Purchases 

trl", St 

.... a 

'11= 0 

.... :. 

-.l = 

$164,025,000 $23,795,000 $80,690,000 $6,862,700 

$2,595,000 $340,000 $1,308,000 $488,000 

$341,301,000 $65,230,150 $290,120,760 $23,967,140 

$600,000 $200,000 $440,000 

$28,520,000 $13,740,000 $146,199,000 $5,347,000 

$0 $0 $0 $0 

$93,425,000 $18,119,000 $73,643,000 $4,887,000 

__ 

= Redacted by the Permanent 

Subcommittee on Investigations 

$106,000 515,200 

$13,766,570 $53,800 

$1,708,500 $510,200 

$0 $0 

$2,508,500 517,000 

$15,300 

$7,956,015 

$465,600 

$0 

$1,127,900 

$$

$

76061.156

(") 

0 

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Q. 

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BANKNOTES·NY Selected Customers' Activity Alel'tl • Trader" Explanation& for USD Purcha,ea Sa SatH from 

LCD flWil!ro¥S clImml & prior eJfpianation$ from tradBf &. ellertl along with irdo" KYC prohle9 aM ret'.:anl activity for customtI'T alld country (m GBS) II) confirm. 

leo USillslndllpsmienl s!)UrC"n (on intemel).as MOOed 10 valfdalll in/ormation provided by trader (tourism, tfImirt.e.ncos. IfClOO. economlc & pohtk:al news/'we"ts, FX I'I'ltes, GBS deal inql,l,ry screans, etc.). 

II variance (aclual"'$ e:w:pec.-ted) appears potentially suspiciotJl5, LCD sl'Jouid Bnd report activity accordingly (intemelly & eJl18ma.II)'). 

COl.lntry Cuetomer Name 

ell", 

= 

n cr '" .. 

9 3'" 

g ;:. 

C 

= .. ia a .. 

ai' g.a 

page 1 of 15 

76061.157

0 

0 

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Qo CiI .. 

::::I 

0 3 

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"0 

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BAN KNOTES-NY Selected Customers' Activity Ahtrt5 I: Traders' Explanations for USD Purchases I. Sala. treM 

lCO rwl9W9 current & prior 8J<planallons lrom trade!' & client along wiIh Inlo In KVC pmfile' and feeeolaclJylty lor cu510mer and countlY (In GBS) to conllrm. 

LCO uses Indepe.ndel1lsources (on Intl!lmet) as needed 10 validate il'!lorTl'\eltion provided by Irader (tourism.. remUaroc8s. trade, 8C1Jf'1Omic & poIl\lcll.l ne ___ events, FX rafe!l, GBS deal inQUilY screens, etc.). 

If vaJ!;ar'lce (aclu.a.1 V8 tlJ0:p8cted) appears potenUa11v suspicious. LCO shollJd lHeerdlr1nvestIgata report acUvlty ftCC01'dflgIy (intemally & I!)I,'temally). 

COuntry eustOrMl' Name 

"''' c 

g-e- a 2-

a 

:i" oS' 

= ... 

! I[ 

page20f 15 

76061.158

0 

0 

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::J Co BANKNOTE8-NY Selected Customers' ActMty Alerts & Traders' ExplanaUons for USD Purchases a S.les 'rom 2005-2009 =n CD 

0. :::> 

m Leo re-.riews & prior e>:pIanatiol'!slrom lr.\!IdBr & eIlen\ along with Info 11\ KYC and fflCIInl ac;livtly for cv510mer and coUl1IlY (In GBB) to CQOlirrro. !:!: 

::J e Leo utes Independim! sources (on fntemet) as needed 10 valldale ir1l1Jrrroalion pIOYldedtty InIdar (tourism, r!!mlltances, trade, ooonomk: & political ne ........ lWel1ls. FX nIlle, GBS (leal Inquiry scteetls, etc.). g- --i If vananC'll (actualvs expected) appear.! poWntial!y LCO sOOuId mseal'l:Mrwestlgate MId reporl activUy (InternaJly & aldemally) 

- iii //: "\. ... tom" N...,. ..... 1 Curr.ncy HBUS USDEqulv Clkml 11<> ., Country .mow Traded PUn::heHor Amount RI,k T",*,-,' EJ:ptanallons & 

::J 3 Date Solo .... -. Rating (sec) FOllolHlp Info byCo

0 MEXICO . ,... uso $1 on Hi h Fi rslSnotaclual·areversalola rcha$eof$10

::J .. MEXICO M ...... USO $1.2 F!gullt 1$ nol actual. applies to a revel'Sal of 8 purcha

-0 ;a ..s.:"f'f'q. of $1 215200.00 and variOus elF's off-sets deals. C ;tl MEXICO 7.(' USO $1,326 Not a live daat, Iran$8etion walli created 10 reverse tr

2: .. client reported it'Icofrect am(JIJnl 

Cr .c MEXICO A\l9oM USO $122.9210 High Curing summer sea$Ol\ In Mexico. exports lend to de

C demand of USC locally III higher due 10 local holiday 

0 .. AddilionaHy overall volume In Mexico Is lower than a 

0 en t""1 d&emse In lour1sm C8U$Ud by lhe finandal crisis an

() ;; slluationin thiscoun!ry. 

::r Co .8$ II strong pnt!iel"lCa in Tht! loc

C' t!) .... since HBMX stopped accapling fonrign clII.'feI1CY from 

0' '< 

> 

were ebla to caplul'9 par'! of this cvmpellSlll

3 ::c d&erease In to\81 su!pltnlfrcrn Mexico dtJa to dmp il11

(J) ramlnaMIlI. Il) m MEXICO Mar-4S USO 5 $551 Siandard RaversalOeals. g. MEXICO v Oct ... USO S 7814 Standard ThiS I, a reversal deal to correct a b deal in vl erro

0 MEXICO _1 USO 5 $7,678 Standard The sales VOllll"n$llI nol actual activity, but, ':BIhar re

::J ;Z the sy$Iem due to dlange In $hlpment dates and or d

» MEXICO CASA DE CAMBIO PUEBLA SA DE CV .. ""'. USO $18,337 SlMdan:f sec The i$ a relatively new elient and the volt./m(lleV(I\ is 

3 ollhe rnartcel. partldpanls duMg lhls lime 01100 year

CD pricing and value date 6I.n.JCtura has lrrrpru'Ied Ihe 

. 

C()mpele ag!Jfeasively. 

., MElOCO CASA DE CAMeIO PUEBLA SA DE CV M.,..' USO $24.59 Standard sec We commenced busirwns with this narM Of! Novemb

::c mon1hlyaverage Isoot Ifletrue 12 monltt eventge. O

0 and more ooIlection points is landing us mol'9 busine

c: competil!on. :;' MEXICO CASA DE CAMBIO PUEBLA SA DE CV ""' ... USO $27,7 Standa.rd sec The volume is consistent with our expectations. We h

commenced blJ9iness with Ihelr Cal"lClJn branch Ihat i

(Q ffiOrebU'slness. !!' MEXICO CASA De CAMBIO pueSLA SA DE CV Nov..o5 USO $35.092 S"""' .. sec Increase due to eddilional coIIecIloo from 3 different 

:; Iocat!ons/branches. MEXICO CASA DE CAMBIO PUEBLA SA DE CV Feb-06 USO $38,742 Standard sec ThiS volume is due to !wi) felllSor!.!!, 1Jaarly In \tie yea

r high volume repatriations from Mexico due the end of 

of M8lIk:aM from ltIe USA 2) Cdent Is slowing growin

volume as a resull of beflerC8.sh llow thanks 10 dB8U

CASA DE CAMBJO PUESLA SA DE CV Mar-06 USO ---p- fast(l' tum around of banknotltS -- --$53,90 Standard sec slowing growing lis bo5k1ess volvmtt as a reS

0 

now lhank. to I2IltIlirIg VIIth HSec I.e. faSler II..rm 9rtX.1

Client has 81so caJl'tuMd more business dull to other 

0 di$COntinuat!onolbllsiness 

() ::c MEXICO CASA De CAMBIO PUEBLA SA DE CV Apr-ot USO '54= Standard sec With HSBC. gets credit Sime day., pickup In 

-b (J) Improved their cash flow. In 11.111"1, ttley are Il8lSlng pa

m their ellenl by glvlng thejr dlents eeme day Yalue 100. 

en 0 CCP is Ilf\r1l.ctlng more businlHllllQlll the torpol'9te d

T 0 

0 0 

0 0 0 en 0 <D 

'" CI> 01 en .... 1--::::; Redacted by the Perma

N pagll30115 Subcommittee on Inves

76061.159

0 

0 

(") ::J 

0 ::!I 

::::J C. BANKNOTE5-NY Selected Cu.tomer.' Acttvlty Atm_ 6; Trader.' Explana1lona for USD Purchases 6. Sales from 2005-2009 ::n CD 

0. g Leo rev\aw!l currum & prior BJ!pI8natlons from trader & dlent akN'Ig wiIh Info in KYC profrles and recent eClMly for cua&omer and COUfllf)' (In G85) to t:Onfirm. CD 

!!!. LeO USiI'S independent sources {on InlEHllBlj IlIi needed to ve.!ldala Informat!on provided by '/lIdsr (tounsm, remitIBncM, lJllda, 80Q00m1c & politicaf tle'l'WSr'evoo1s, FX rates, GaS deal inquiry sereuns. eIC.). U 'larlallClI (aC\l,JaI 10'15 expected) appears potentlafty IIU!ipIdouS, leO 6/louId and nJpOrt e!:lll!lIy accordingly (intemally'& e)dernq!ly) 

Dl -1 _""', CUmtncy HallS USOEqul¥ Counuy Clkmt - .., 

Sl<> co Country Cu.torner Name R ..... ew T ..... Pun::h ... or Amount Risk R' .. 

::::J l!l. D_ s." ,..- Rating (Sec) 

0 3 MEXICO CASA DE CAMBIO PUEBLA SA DE CV S ..... USO P $76.5tI Standard sec r""" a who" "d mo .. opoc" •• II, ..

::::J CO country/moo USD remlttar. Th&fe 

-0 a 'WCIrlIlng In the U.S. during the $I.Immer months (lorn.f

C ;0 money-back home (mligiously) to tMIr families. Q: CO MEXICO CASA DE CAMBIO PUe9LA SA DE CV Mar-or USO $113.267 St8.ndafd sec cr .c c 0 co 

(") 

(") It '" c. sec 5· <T 0' '< sec 

3 :r sec en Dl tD g- O 

::::J ;Z MEXICO Feb-07 USO $69,797 sec 

» MEXICO J,,,",,, USO $74,429 Standard sec 3 branches. GOl (MId June 06, leon. Lsle Oaeember 0

CD Mid Oeo::ember 06). Also, CUenlls slowing shifting th

:t. buslneU to HSBC,..mich was oclQInally 1"'l!Irfld ,nth 8

n 

.. MEXICO "':c -..,..., USO $1.800 Standald sec As a resUlt 01 our new stfUClture In wI1ldl we ant send

:r C • abfrelght. allows us to cktIiYmy any day 01 the week, 

0 "'Co scheduled which was ooca 8 week {via COI.Irier!. we h

n canture llle me orilv 01 their business. c: MEXICO 9 ft Oet .. C17 uso $6,000 Standard sec The USC sates Increase 1$ a combination 01 two lacto

:;- 3 Co EICPI'9'SS has Slopped seiling TIC's to CC's In Mall:lco, 

Ul them to banks, and ce's can not purcllase TIC's !tom 

.'" ce's would their loealsens, in cash and in TIC's

:;- Q. SillJal!on; 1helr dlems are enUrely purclla81ng cash. A

demand for usn has 100000Sed. (2) OUr new Iogl$tlc

p whlch we ant lending the "'alUee """- elrlrelghl, allows 

: day 01' the we,"" 

iMEXICO- g. M .... USO $2.00:: Standal'lf sec Duo 10 the OOIldays (Holy WBfI;k in Mexico during Mar

usa Increases signlticantty. Also, ellllni has the adva

a dally basis. yanws sehe<lu1ed days (TUf:$da)'ll and 

0 whICh 11811 given them mora room to negotlata sell ItI

(") 

)l :r AproOS USO $6,000 SlandarU SCC en -U tD (f) 0 T 0 

IMEXICO 0 0 I; Due 10 the high season (SUlT\ffitlf vacalions) the cash 

0 0 lneMasos slqniffcanflv In Mexico 0 a> 0 <D 

c.n CO 

OJ .... to 

(,J pagfiA of 15 

76061.160

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CD eo 

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-'>. 

SeJeeted CU$tomers' Activity Alerts &. Traders' Explanatlcna for USD Purchase. &. Sale. from 2005-2009 

leO reviews 6. prior eJ<planalfoM from ImdQr & dtenl along with Info in KYC prulUes end rnceol actlvlry for co.momer end country (In GBS) 10 contlrm. 

LCO U581 independent sources (on internet) as needed 10 ilalldate Information provklud by trader (tounsm. remittances, 111100, 8CO:lnomic 6. poIllic81 newsllMlnD, FX rates, GBS dual Inquiry SCf9enS, vic.', 

It valiance (actual liS expected) appeal'S potentially suspicious, lCO shotJld end repcn1ltCtlvity 8.ccordinql'f (inlerM/ly 6. otllmally). 

Counb'y C;:ulltome-r Name 

MEXICO 

MEXICO MEXICO 

MEXICO 

MEX,CO Ij1 

" MEXICO ",,,I 

g.g. 

.. 

On 

3 :; 

MExic-O: '3 Co ::i:i l 

::::;. 

o 

= ... 

IMEXICO 

g.; 

g.a 

= L.:...-.: 

[ 

A1.rtl 

Review 

Dot. 

Ocl-oa 

00, ... 

F ..... 

Apr.o& 

M.ro01 I 

cu',:incy-I------HiIDs 

Traded 

Sole 

USO 

USO USO USO 

USO 

USo 

I May.c7-

Apr.08 uso 

Sep-08 uso 

lisb EqVlV-T C-OVMry Amount Rhlk 

Oft__..l AaUng 

$55:26tl StaOdard 

... Sfaiid8Aj 

$57.03 Standard 

721 Standard 

$6,342 StandaiU 

$10,22:: StandaJd 

"'.00< Standatd 

".200 Standard 

Client 

RI.t T ....... • ExpIanldlona & 

(Sec) Foftow-vp 1",0 NquHUH:S7obtJ11ned by Co

sec -iouetoihiilinailCiaTCrislS:-imifihQ vo!etifty 01 the MX

have seiling USD lhal had been aCCUltWlal$d Ihe 

belterl'8t'l. 

sec sec sec 

sec sec 

sec sec 

seasonal inCfeasedue10 hoIidaYiieriQd-:-Meiico has otdefed USO and EUR during holiday periods 10f tmy

"l"ll&iiiCre3H masons:-') B

'1. 2009, HBMX stopped receMng USD cash we 

r&Cemt higher volumes of VSD cash from our local c

2) EllectIvtI Marr;h 31, HSBC ¥WiM Mit the BlII1knotes f

CIB, and BS a direct rasullltley hevl! been eonectlng 

Irom ottler locations 10 relicNe ftw,Ir lnm",ory for this c

enentls Qiven to competiti

Ciifmt is s!owlygfOWlilg busines$vOlume as a mu

now thllnkS to dealing vrith HSBC I.e, lastllftum arou

Client has alae captured monI busIness due to omer 

diseooHnualion of bUSiness Pail 01 the volUme inCtfJ4S8 10( this name is the enifi-i

seMelng MSB's whieh has Increased the sile. 

BXCeH to HBUS during '87. fic

-OuSIO i.he appiriiiciirit the hotid,!lyS{summer v8caTion

demand of USO$ and l()t8ign CUlTl'rq' lncretllll/lS Sign

logistical process o! Ilendlng Yar\ou!i couriers to Mit_IC

basis has glvan us the opportunIty 10 oHef a more a"r

theeustomer. 

;nie-ustfsales increagelSa cOiYibinatloO:-Ot two facto

!Express has stopped seiling TIC's 10 CC', In Me:o:lco, 

them 10 bank!!, and CC', can not purct"1i1se TIC's frum 

iCC's would split their local sans, In cash and In TIC'.s, 

l

'sJtuatlon; lheirdlen1s are enlirely PllfChs!:ilnQ ce:sh'. A

demand lorUSO has increased (2) OUf n_loglsnea

iwhlch we are sending the v8!lm via eirfraight, allows idayofme_ek. 

-$7,0001 --Standartl sec to the hOiidays 'Spring SiMk', the d-iimarnH"Or

Iincmase$ signll1earolly,loaIis tund 10 do InllimatiOOall

hive ImpltNud our operatlQnalltrUctlJnlllncl hllYa btte

fha CU$tomer 8 more attradlYe schedule and Pricing. 

$3."i1aj--- Slanderd I SCC--rcustome:?S: VOlume$hi1Ve:-giadU8TIYdeereueddunng 

due 10 B flJ$lrvcture of thel! client portfoUo. 

!Mexico are Inc:reamg due to Ihe IotematJonalllnaneia

lconsequent d8'Valuation olltle Me-.:ic1In Peso. The vo

is 26% Icwef man .. me monm last year and Ih<8I/I'Cre

comparingwiU11f)e l2·Mo averaged Is e"illaln$d byrtM

mcree-se of l11e voIumM In Ml!ldcc, pllrtlcularty if we h

consideration IIlat USD2. tMM _ro purt:hlls$d on Se

page 50! 15 

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LCD reviews currant & prioc Il)!planallona from Ir.lde, & dlam along w/ttI inlQ In KYC pro!i!1II'6 and reoont activIt)' lor customer aod coonlJy (In GBS) 10 conlil'm, 

leo lIses Independenf sources (011 i"femel, as needed 10 validate In/onNtion pmvided by '/lid.,.. {lourl(Jm, remlltanceo, b'Bde, $(;onomOc & political M¥rsllNenrs, FX rates. GaS deallnqu/ry aeleuns, ole.). 

11 variance (eclual V5 appears potentia!1y susplclous, LCD should re.searct1llmflSligale and report lIc1ivity acoordiogly (irllematly & l'I)(1emall'J). 

Country CUstomer Name 

en" c sf 

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leo ferviews CU/fent & priof IIxplanatlonS from trader & cli8l'l1elong wiII1 info In KYC proflles and recent 8<:1;"'11)' and CQUntry (In GBS) tq confirm, 

lCO uses iM!lp9nden\ sources (on Intemel) 85 n6'Eldecl 10 validate ,"lormatlon pnMcled by trader (tourism, remittances, 1T$de, BCQf1(J'fIl\c & political newsievl!lOts, FX rates. G8S deaf inquil)' screens, 81<:,). 

If Ysrial'lce (81;lUilI! 'IS appears potentlaHy 5usplcioU!!, lCO shoUld IUSftarcMnvesligate end (!!port 8cWiIy accOllfmgtv (internally!. e:demally). 

AlertJ- currency 

Country Cu.tomer Name Review Traded 

Date 

PANAMA Jart-06 USO 

PANAMA Mar..06 USO 

PANAMA May-06 USO 

'PANAMA Nov.(16 USO 

'PANAMA ..... , USO 

jpANAMA Aug-(l1 USO 

PANAMA I J.rto08 USO 

iPANAMA • I lAP' .... I USO 

PANAMA 

"'= c .,.'" " = o " ; a. I -rs:eP:Qg'r- -05-0 

o ;; 

:"d' a! 

:::. '" . " 5·-

PANAMA -------,;pr..os uso 

M ..... USO 

Aug.OS uso r: Oct-05 uso AMA PANAMA 

HBUS 

PurchUlicr Amount RI.k 

.. ,. 

... - RaUng P $1.400 Cautionary 

" CeullQl\8 $2,e Cautionary 

$2,05< Cautionary 

",' Caulionary 

is,600r-cautionary 

S8.oisl Cautlona'Y 

$3.64bl Cautionary 

$;3:2551 Cautionary 

$3;4501 Cautionary 

$4;3OCii-- Cautionary 

paga1011S 

Cllant 

Rllk 

(SCC) 

Trade,..- El.pllRiltlonl .. 

FolIDW-tlp IlIfo rwqueebldfobtalned by Co

Vok.Jme within exoeeIed Iwels 

lOr! the .v.!1Ig<;lhe baok GJIPOrts rwo illTiiiSper mollt

MeV 2006 they had resIdual cash from the pfflVlous m

ACCUmUlated VQfurne:slromOCiOber, Ymic/'l wh-et8 no

to\ocal In Panama, 

IOn IhiJ 8Vlilrage-i"hetiaOk eXiXl$ two timEos jj8rmoi'-

February.2007 they had residual caSh lrom the pruviO

S shaiii'lQ: business wi"ifi-BNP 3O"/.,a

wItri-ASBC.-Thl')' have began to repalrtate \tie 100"1'. with HSeC. Volumes within eJ(peetations. 

a8 sharing business with BNP 3O%.a

10 %with HSeC by mid July 20011t\ey h",v" bllgan t

of their business with HSBC. !n addition to tnis,s is I

Season.1O!hieh _ I'ICfI11l!1ny aile Itllt repatrialion by fo

'JanualV). 

tfu)exces$oi porcilas6son-iheamoont of $665i(Io;

!l'lOtmII!1y QIl. _IIkly bIIs19), wall oof readyfo

week of Mftfdt, reportir\gtne 1st 01 Allrii. 

only a 

as a local ptOvIder lor HaUS In Panama. HBUS was 

i·Cllent'. vafl.fO& ladllle!· untillhe dayollhe 

,gave us the oppo"'imty 10 collect pntcUoally 00 a dail

vau(tlng lor HBUS. This has sHeeted tremendously o

business"';!! 1'IlchinlheplIstwculd

now can only report !he day prior 

a week. As a result we've began 

012005, the ""'_ . 

. The increaSe Is duo us makingcoil9ction 

ibraoch I.e. wo MVO added II-OOlhef location.'b!anch to 

additiOftaTCOifectiOn from a dUh;mmt i

Panamajia dollsrized ec:ooorriY::-The hlg-hervalume

conscious effOf1 by the bank to keap an optimum inve

addllionalcOSt$ollUntb, 

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BANKNOTES·NY Se-leeted Customers' Activity Alert_ &: Traders' ExpianaUona fer USD Purcheses &: Sales from 2005<-2009 

LCO revle-Ns ClJrJ/lnt & prior e!ltplilMtions from trader & cHenl along with 11110 in KYC profiles and recent actlYity for ClJslomer and coontry (In GBS) to conflrrn. 

LeO uses indttpendellf SOUI'CM (on inlemet! as needed 10 valli:fale prtJ\'ldod by tmdef{tourism. remtt\ancn, Ir.ll.de, economic & poltllcat newsfsvents, FX rates, GBS deal Inquiry screens, etc.). 

II yariancll (aemal vs mpooleo'J appeal1l polltllliaKy suspicious, LeO stlould l'9Soon:hlirwes1iga'e and repof'l activity accordingly (Internally & edemalty). 

Country Cuatomer Name 

"'''' c ...... " 

3'" 

: : 

." 

ii " ai' " a'-

iii 

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BANKNOTES-NY Selected Customers' Activity Alerts & Traders' Explanations for USO Purchases a. Sales from 

LCD ,., ... Jews current" prior mo:planalions from trader & ellarrl. along with info n KYC profiles and teeent actiYiIy for customer and countty (in GSS) to contlrm. 

lCO uses Independent SOUrr:8!1 (on intamet) 85 needOOto yalidlile informatioo pl'ovided by ll'adaf (tourism. remlnances, trade, economic .. politle&1 f'IIJWSl6'l8n\5, FX rates, GBS doal Inquily screens, atc.). 

I! variance (actual '018 expected) 2IIPpears polentiartr suspiciouS", lCO should mearehl\nvastigola and rttp01t &ctMty aceord:ingty (Inlflma\1y 5. externally), 

Country I CUlltOfYMlrName 

rANAMA r 

PANAMA 

'PANAMA----

PANAMA 

:PAAAGUAY-- " "'''' = ft C"". " = c " ·PARAGUAY·-- a. I 

:$ 

:t;:. 

eft 

.... 

PARAGuAy i = I 

;e.s. 

PARAGUAY I I 

PARAGUAY 

PARAGUAY 

PARAGUAY -----1 

Ateftl CUf'A'ney HBUS USb EqiJli, Country I Rme", Traded PUn:tw"Of Amount Risk 

Dot. (I .. Rating I Apr-oa uso P $5,030 CO\lliornllY 

M.y-Oa uso $4,64 Cautionary 

Oct-08 USO $6.71 Cautional)' 

-OCt:.09-----r --U50 1·····-., $S.'" Cautionary 

I No,,",,' I USO .. I $"54,55or CaUtionary 

I May-06 USO $76,S9(jfC&Uilonal)' 

.,..,-<>, uso $77,000j Cautionary 

-USO p------r--- -se:,lfOOT-CaUUooal}' 

J • ....., USO $3,260 (;auiionary 

Jul-07 USO $2,852 ,Cautiooary 

bec..o7 USC - I .p r «.6OQ Cautionary 

page90f 15 

cn.irl 

Rlak Tntl:!.,.' Eltphmlltlons" 

(SeC) Follow-up Info 

The volume Is not coO'eCl; we had 10 modify 8 daalln 

'operation. The acllJ8l volume of Iho:I Pun::heses: USD

ttiiiyeari"het>Ul;lne$$ activity from thew.lree to

slowly Increasing, 8$. result the surplus of USO ",illl

portfolio and as result _ NlVO begllJ'l to see tile incre

'elQ)Orls, 

Panama that have contInued 10 e,.;port me 100% 01 tI1

Ctlsh to HBUS, The Increll98 mmng mfs month is ma

prior month, in ortSello ehlp thru us, AV8111ge has be

IdllrinQ2009. 

IJ'fCNJase Is dUe to Ihe For the sector 01 petsaMl computers. and related com

exonemilld from 1111/200510 1213112005. We have clients have dackktd to eell alf the- USD excess 10 the 

Inslead of the house exchanges. 

The Increased volume Ms-ClilWtl1iYthe-!ncreBse-ofaC

obtalnth baoknolesbtlslnen lrom the corporBfe sec

ad reported 10 condu(;\ banknotes busine

amguayan CotpOrations g9fI8'flItil'lg the USOoIIaB a

cunoocv banknoles surplus. 

Starling In D&c-errlbE;r-wiTnC"illil$9dour !lighl's freque

ithrea flights per weeII.. This aHowed our clillflls 10 Imp

iHow ami be mont aggress"'e, increasing Ihe Iolal volu

business. 

The VOiUn'le is within £luring this lim

Historically, '11'19 l1aYe seen mOfll ca$h J.n ,I'M! rrn!.tI<ellm

holldoy season shopping. This com" bacll. 10 the ban

In linl;l with MOnthly T mcitiV(iiumeE"iitiiNli6ii:TfW.iys:fi

P8rl oIlhtJ cash they collected dUrltlg Oecember. Tha

compare Oec-oo Vs Oec..<JS you aee a reduction in the 

an lnCfease wttonyou compare Jan.Q7 'Is Jan.Q6. Buabout Ihe same. 

IS aome volalillty in the monthly v

igulll8aiiTrfllfi8Wi1h mcmtl'l/y traoovolulTl6s estimate

main reason lor me aurplua of usa in PIlIi!o!1lJey b du

coming from Foz. de Iguez.u, 8raz" and PuIn10 fgualU, 

10 eluded del Este for shoppIng. Startrng In mghfs:lreque

lhrett !lights p8rweek. This allowed our dienls to 

flow and be mom aggre98Iw1,if'ICfU.slng the tolar volu

business. 

76061.165

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Leo Ctll'lltl1t & prior elO;plal"l&!loos from trader &; clief'll 810119 vAlh !nfo;n KYC proli1es and recent activit)' 101 Cll9tomef and COIlntl'y (In GBS) to conliJm. 

leO I15eS independent StllJ't'Ces (00 intemdlJ as needed to vallda!e inklrrrmUOI1 providooby trader (tourism, ItlmitlHflC9!'I, tnde, ec;onomfc: &. IX'lIIleat FJ( rales, GBS d8allnquil)' etc.). 

.. vElrl.ance (aCIWI V.!i expectl!d) appears potentially LCO should and mpor1 activity accordingly (lntemally & axt8f1lBI!y) 

Country Customer Name 

PARAGUAY PARAGUAY 

PARAGUAY 

PARAGUAY 

PARAGUAY Ijl 

PARAGUAY 

... Co 

M .. 

a 

PARAGUAY 

PARAGUAY 

g;. 

o 

" 3 !l 

::!'.:lI 

PARAGUAY 

OQM m , fPARAGUAY 

PARAGUAY 

PARAGUAY 

AlertT-I-cumncv---I--- HsliS CHent 

Review Traded Purtha .. or AI __ 

Date Sale (sec) 

Nov-o$ uso $4,9001 Cautionary 

[)oc.08 uso $11.500I---cautiOfiary 

J.rH>9 USO $21.2061 CauiionB'Y 

I""'" I UsD 

JaR-05 --I Oso 

Sl.<i5Oj¢autiooary 

$6,1.5QfCaUiiOi'uuy 

52.28SI··CaUtlpn8ty 

USO f" ... s 5aM'" $2M/"CaiJI-ionsry 

USO $ij;668I Cautionary 

uso 

Au-g...Q5 uso $20,8151 CaUtionary 

Nov...Q7 USO 51'1,9851 CavllOl'l4'Y 

De,.., USO $16.9811 CIlUtlonary 

page 100115 

TntdenI' & 

Into fM1u .. !ltQloblalned by Co

uso vo!um6$lii-Paraguay are S8EI.$QflI:IlaM lhars w

Wli$ hlgh(ll than average. Additionally. as B. W

Iliquldity.thlS blink redUced tho ctunges lor attepllng 

sector and lharalore ttlit)' _1lJI &bla 10 increBsa 

101 deposIts In thalr USD accounts . 

During the last law month$, was k

jtnvenlOry of USC notes than "'i:iitiiTiii-.-way 10 lmpro

r lf nus. was p

uso deposll$ by k/WfJrlng Ihe to their client

fpreign cummcy, they lrnpleme-nt this Slmtegy as a w

liqulditvposifion. 

In Paraguay vie -are observing It shift in the banknote

_Is laking thll pillet! of the USD and ata mar1!.el I

Ivolume Is slgrritlcant Jower. The-vOlume is within the upecled range during mis l

Historically. >WI have sean mom cash in Ihe market f

ho/Idaysefjscm .shopping. Thi9 co"nm back to IflIt ba

The banknol6$ volume decreased is due to Ihe Ios$ 

Ihe COrptlrtHliI sec:ror. COrponlle clients d&eided (0 Ira

to other bam due to the uncertainty of 

-TlleOsrfSAi..Eifoifflfenoi an aciuai$&!i.l1 Was a rev

!modilyanotleratlon. The actual VolurM was usa pu

USD1,QOO,OOO.-

:Tho slightly higher surplus Is from the me!lt;8t due 10 

icommerce IIIlm travelers and buyers from the region 

Ide Elrte 10 purchaSed. e!ectmnlc goods. Tho carnival 

a time when Brazil_" laka shorf trips to eluded de E$

The volume iSln--iiiiiiWithoor fCffeotfCSSarnfelec::trsmrs 

paying dfy to increase ltle VOtlJT6S 01 depOSits 

fmporland e:oport businesses in Asuncion and C!IJdM 

he,aslgn!f.cant&egmfll1tofcfillntslrornltleJeoMsMCQ

Paraguay. [Monlhly Volumil Imtimate of purchllse! U

lhasgained markeieharedue tOag

markeling and JoM3f" pricing 10 Ia<:a! cflertm. _ _ ___

I""". to Its geographical location. !hi! bank. has fIl8l1y 

B!:InbUslMss hetor and therefore theIr votumesare s

-starting in Oitcember_lrn:rea!ied our fligiii'Sfiiiqui

ttlltle frights par '/Veek. This .allowed our clients 10 ImPflow and be mom aggress1vIl, inc:roaslog the total vol

'business. 

76061.166

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BANKNOTES-NY Selected Customers' Activity Alerts &. Traders' Explanations fDr U$D Purchases 6. 5.18$ from 

lCO revl8'W$ CUJTeI'It &. prior e-planllUons from tradtlr & elient along with ",10 in KYC profiles Jlfl'd recent activity tor C\lstomfH' and counl'Y {in OBS) 10 confirm. 

LCO uses !ndependeoi S£MJI'Ces (on inlem8'l) u needed to validate In!OfTMtlo1 provided by lnlder (tourism, tradll, economic & polltica! nlJ¥VSlevem". FX TatM. GBS deBl inquiry flC(99r'1S, etc.). 

If wriance (actval .... s eJo:peC1edj appears- potentially suspK;:iOO$, lCO should IInlMlrct\TmvmJUgate aM tepon actjy!ty accordlngty (Internally &. I'lJrtBmalfy). 

Country CUII'omer Nllme 

"':<I = g= 3 ;;r 3 .. 

:::SC> " ... 

page 11 0115 

76061.167

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Selected CUstomers' Activity Alerts & Traders' ExplanaUon, for usa Purch89" a. Salea1rom 2005-2009 

Leo rwiBw's wrrell' 5. plior e1Cplanatlofis from Iracier & client along with iolo in KYC promu and recvR! 8ctNrty for cUStom!!! and country (In GBS) 10 confirm. 

LCO uses soun:es Ion Internel) as needed to wlldals InfomvJtIro proYfded by trader (tourism, remfttaflCl)$, l1;lde, t,ICQIlOmIc & pollfical naws/events, FX raj!!$, ass daallnqulry screens, aIC.), 

U variilnc8 (actual V$ bpeCled) appears potentialfy suspicious, Leo sOOtitd mearcMnvesligate and repon activity accordingly (intemllily & elrlemelly). 

Country 

PARAGUAY 

PARAGUAY 

IPAAAGUAY 

iPARAGUAY 

PARAGUAY 

PARAGUA.Y 

PARAGUAY 

IpARAGUAY 

WARAGU"AY 

Cuatomor Name 

I 

"'''' c gg. 

on 

3 ;; 3 "" 

:';;,c 

a; g. i; 

g.-

Si 

'----' 

AiiriT--I--cumjoq.-l---HBUS COUrntry ciientRevtew Traded Purchll .. or Al,k Rlak 

Date Sale Rating (sec) 

I U$D ---I Cautionary 

Nov-oa uso $8.273r-Cill.ifiOnaty 

M.,... uso $7.0321 cautIOnary 

Jul.09 uso $1aA22l CautiOnaty 

...... uso $3.3511 CautlOnal)' 

Mar-05 usb 

Jan-07 USD 54;5601 cautiomuy 

AUll.o7 uso -$6,0001 Ctlutfonary 

Dec'" uso P+s $15,OOOj"Cavtlonary 

page 12 011!!:. 

Tradltnl' Expllnatlons' 

Follow-up infQ requested/obtained by Com

The volume 01 the 8anknoles buSiness in the Paragua

increased mainly dUe 10 the strong BnuMJan cummcy 

lhal promotlld lhe commercial activity1n Ciudad del Em

WIlS ncrt lully feflooled blJ.lore wfth ttis dient, beeaUSIl 

harvest .$tIason a larue amount of USD bankflOles we

USOv6ium85'n-Pilraguay are seasonal and ItmrLWh

:volUme was hlgherfh8l1 aVel'8gll. AddItionalty, ;growing ItwlrbusiflltSS strongly; lI1ey am 6Jqmnd\ng 

pnx!ucts, like 510)'8-, them wos e reduction on Ihll smou

needed 10 COlIer the I:oea! demand and OOIl58qllenlly th

In the ourplus 01 notll9 aXpClrled. VokJme Is 'II

"""M. 

we exiledoorrelaiklftship Wili\---'--thCl re

are ComptIting 10 capture theIr man.:111 share

volumes. 

:focused In providing their sel"o'ices to tha agrlcultural sl

ithere!ore their bank/lol8s volum!!! had a s\rong $e8son

!whlch implies_ In monthly volumes whan 

'12-MOAVemn 

land provide thelr services to a brood6f ctlslomer base

Paraguay_ are obsI!Irvlng 8 shift mthe banknota, bu

BRL is. taking the plactt of ,ha USO and al a markat la\

ivo/ume Is 

Iocreased the CotpOraiQ-tiirmIBase:" 

_11 regllrtloom the mark

Trade Volume as mate pUf'Chasl!lS USDU,OOO,OOO.OO

In line Wiifi-MoriulIYTrlide-VoIume Estima!tl$. They shi

pari of the cash they collected dllrlng DeCElmbM. thai's 

compare DI!IXl6 Va Oec-05ytKJ see a reduction In Ihe 

an increase..nen )'0\1 compare Jan-Q7 VS Jen-Oe. But 

aboVtthesame. 

branches. They have slgniflcan' fluctuation in Itte volUm

ml!fltioned In !:he KYC due 10 v8r1ations In Ih!!! le

c:ommert:!!!. Total volume IsVt'ithin ellP8C1alioos. 

Slatting In Oec-effiber WI:! illl;reased our flight's freqllenc

IhrUlIlghts pm'Wl:Iak. Thia allowed our clll!flts to imprt

,flow and be mom aggtDsaMie. IOCreasing !tJa total vdum

'buslMH. 

76061.168

0 

0 

() :> 

0 :::!I 

:::J C. BANKNOTES-NY Selected CustomEirs' Activity Alerts & Traders' Explanations for USD Purch.8n " Sates from ::!1 

C. '" :> Leo rwil;lwS wrrem & prior IllCplanallor\:;lrom trader & clierrt along wtth info irI KYC plllj(1es end Il3C81lt. acfiyjly lor customer and coumry (In QaS) 10 confirm. CD 

:::J leO usesindepel'ldent soun::es (on Intemet) liS needed 10 validate info!'\'l1alio'l provided by trader (tourism, T'Bf\litlancus, Il1Ide, ocQnomlc &. PQIII:fcal oawslllYMI3, n: reI,", GBS dMlfnqulry SCf&ef1a, ale.l. 

"" II variance (actual n BxpecllJd) IIfJPI'Iers potentially susp;ciol.l8.lCQ :mould rn&IlICMnYO!Jtigate and fllpoi1llCllvi1y Bccotdlngty (Internally" oxternally). !!t -I iii Alml Currency HBUS USOEquly Cou'lrJ 'Clllnt I/O Coun1ry CUltomer Neme RevieW' Traded PUrr:ha"f)f Amoun' Rllk Rllk TJ"ItMrw' Expl1natioM & 

:::J Date Sale ... -, Rating (SeC) Follow-up Info TeqUe.utdfobtalned by CO

0 PARAGUAY Jul.o()8 USO $9,00< Cautionary Tha volume of Iha 8ankno!8. business in the Pal'8!)t

:::J 

-0 '" 

c ;U was nollutly reflected b'U1ore with !his cfienl 

2: '" halVGs! saason a large amounl 01 USO banknol.Bs we

0' .tl C PARAGUAY J._ USO $8,50< Cautionary The USD activlty for this bank has a &eesooe! compo

0 '" loul1sm eod commerce In the tn--bon:Ier 8rea. Volume 

() m Jan-Q8vo1ume and wiltlln () It PARAGUAY Mar..(lg USO CavUooary The USD activity for this bank t\Bs a /la8$Onal compo

C. tourism and commerce in the tri-bon:fur area. Addltlon

.,. priOO& kor egritNJBlness produets, Uka soya, theT"e was 

'< amount of US r.o4es needed !ocovetlhlllocal deman

3 :z: r--- consequently 'here wes an Increase in the surplus of 

!II !!l- ID PARAGUAY I Aug-QfIi USO $2,W< Cautionary No1 a live deal, tmnsaction was crealed to reverwa tra

()' 0 PARAGUAY Aug.05 USO $19,50( CautlonBI)' been losing marilet sharedua to 

:::J Z on the pay 01 USC· they Imd II 10! 01 smell denoms th

> 

get rid of so client wef. Jon:ed to 18k!!! them. They <'lll

"'''' away from lhla &pedal COfIdiIQR and wiftlng to pay out 

3 en 

... '" No_ USO $12,37 '" PARAGUAY n Cautionary USO volumes In Plltllgl.ley ar. seasonal and that's w

3 volume was higher than aVM8gu.ln this caM the rTIO3'" almost I Ihanlasl.Yfljj,rmonthl VOlume. D> PARAGUAY F .... USO $10,673 Cautlonary was able to get beck part oj the vo

:z: ::: :;. year,lrn::f8aslng their USD e)(pons. 12.'-40 Average fo

0 wasabolJt$12MM.Ir\Paraguey,thel"Q IS an in-llowol 

c: n ..... originated in the commen::iel.,.ctMty in Ihe tll-border e5' -n flow 01 us blmlU101es caused by pElymlJnlslrom II;gllb

.. WOfk81'S and suppliers, Iasl the soy prices went e

IQ a; .m thenMore II lalge smount 01 US ncrles were by th

::-. = r&dUclngthetotalsurpluslobae)l'.!Xlrted.lhll"yearIhI8

.. n 5' .. 4Q%k1w'lIr. reducir1g the llmouot of US notes 

f' g.- demand and COflS6QIJenlty Ihera is 8n irtel1l<1se In Itle 

i! exported. PARAGUAY Jul.(l.8 USO $13.03'1 Cautitmary 

- para,:::; alll competing \0 capWre their marile! shere

monlh volumes. 

URUGUAY M.r-OS USO P,S $5.8M+$55 Medium AIIh.,. beglnning 01 Marth a financlal inslitution W3$ $

0 Central Bank originating some uncertaInty on tho 

Banks boughl USC to be able 10 respond in the case 

() J: stert 10 IiWIlhdmw deposits from (hq $I\ualion t

t;'l ho !II URIJGUAY Mey..cS USO $8,963 Medium They afe collecting all the old notes from the banking 

-U OJ seri'" 1996 (j) 0 l.IRUGUAY Juk15 USO p.s $43M + $60M Medium The purchase volume is $3.112 mio and tha s

t; 0 ThIs di!fe1ll1l(:Q is dUG to l'eVorsal d4lals p.aued after Io

0 were encountered 10 dillay shlpmems. The staady de

0 0 Uruguay dUll 101he unwinding of the deposfts thaI 0 en Ihellna/1Cial crtsl!lln 2001102.Thls Is .. gm.duat plUCW0 <D 

U1 <D 

<0 ... 

0 

N Pllge130f15 

76061.169

0 

0 

0 :::I 

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::n ." 

0- :::I 

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:::I ! 9f -I m I/O !!!. :::I 

0 3 

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-0 ;:!. 

c ;u S[ ." 

1)" .c r::: 0 ." 

0 0 a. 

17 

'< 

3 :r en Dl m g- o 

:::I :z 

» 

3 

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0 

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0 0 0 0 0 '" 0 '" <.n '" <0 .... 0 

'"" 

Se{ected CUltomers' ActlYlty Alerts &: Traders' Explanation, for USD Purchase. &: Sales from 2()()5.2009 

LCO relOililws CUlTertt & prior tu:pfl'lnaliotls trom tra;der /I, dent along IOtlh info In KYC profiles and fecenlac:1IYitv lorcuslomer IJftd CQIiII'Ilry (it! GSS) to confirm, 

LCO uses Independent sourres (on intlmet) 85 needed KI Yl!IIHdBle informarion plU't'ided by lrader (tourism, remJnance.s,. trade, t!CQnOlTIIc a. poIftical newBi'l:JVent1, FX ra',". GaS dMllnqull)' $creens. 01<::.). 

If variance (actual V& f;'xpectad) 6PPQal"!l potentially $l.!sPcious, Leo shooId IVseBICMnvastig8le and roporl activity IICCQrdingly (Internally & extamarty), 

Alertl BU Cliem 

Country Customer Name I Review Traded Purch ... or Alsl( 

URUGUAY 

URUGUAY 

URUGUAY URUGUAY 

URUGUA.Y 

URUGUAY 

'URUGUAY 

URVGUAY 

URUGUAY 

URUGUAY 

I 

"':0:> en 

3 .. 

:::'-': 

= 

Date s... (SeC) 

F ..... uso $15,0001 Medium 

M.,-OS uso $lG,OOoI Medium 

Ap"" uso $10,0001 MetJium 

"".<» lISD S3.2W--MfidiUm 

"Mar-01' USO p:;s--- $6M+ $9Ml MElditJm 

Aug-07 USO $6,665 Medkim 

J ...... USO S1.9!)U Medi1Jm 

M", ... USO $3,711 MedhHn 

USO $3,157 Medium 

.. "... USO $15,000 MlJdium 

pBge140f Hi 

Trade,,' Expl8ru1t1onll &: 

FolJow-up Info by Ca

I

'ThlS Central oiifriol"'iOmlh-.&l

eJlporting them. Thay all! plan....-.g 10 keep doing it an

cfaan the UI1JgtJ8yan mBlitl'!1 01 notes olo1er than 9I'Ina

AI full begiririingofMiiitdi-.-iinanoal irnIUtutlonwo-s

Central Blink origirlating 50ma uncertainty on me me

Banks bought USC 10 be able 10 n!spond in lhe case 

Istart _on. 10 withdraw depoSits from \he lIys.lem, a sltu81lo

In BOA-b-i,ifas we coul

with. cO_mPtl'filive !file they cfosad this deal wlth HSB

They Dpoiiijman denominaliOO-aridil$OdllOtes-tfiei 

The3rT\an denOmi

from 411';' one pluliculaf client. II .analy1:eltle attfv

Ihey have only doNI two ellPOrts lotaHing around USb

th_ shipments _1'1 in dI'If>oma 01 5C/-!I. 205 and 105

wore accumulated over a period o! 3 or 4 IT1Qnlhs and 

in the local market for rhese denoms. Thl'! prafe1T8Cl d

the $100 denom. We 50 fllr did no! eni;Oun!IU any ml

USO coumorfeils In UftI9I.'ay. 

The)' Soid an excess of&iMiidenomination 8n(fbiitfc

thaI mey W8nI not IIbla 10 rudrt:I.J!e.le'n the local mar\

'urchase<1 new USO in !COs for «tP!acinq them. 

iThoysold anexce$S at smajfd",non;iila-tlooand-baif

lhal1tley..em not able to recirculate in the local mali

,urd'lr.sBd new USD in 100s for repladl'l<! them, 

i1'hey sold an excess of $lTl8U denomination and bad 

that thev we'" not able 10 reeircutale in the local mam

iThay sold an exC8$'!! ofsmalfdenomlrliillOn-and b8dC

ttult lhey werv nol abie 10 recirculate in tM lOcal m8r\

!They $Old an eicessof"sn;aifdeiiOrrilii8iKinilrid bad 

able to recirculate in Ihe local mam

,Oufi-lolh.-ciimml financial ellsls in the markets, an-d

idevalualion of the local currency, th.,flI is an II'IcreaBi,U$O banknot&s in Uruguay as a way 10 keep Ihe valu

76061.170

0' 0 

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0 :::!! 

::::0 a. 

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CD a 

::::0 e!. 

-t 

iil I/O 

:J 

0 3 

7' co 

-0 

C ;;0 2: co 

0' .c c 0 <II 

() 0 () !O a. 5' tI' 0' '< 

3 :I: en 

m 

0 0 

:J Z 

> 3 

co 

:::!. 

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w

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SO 

() () :I: 

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a 0 a 0 a en a '" '" '" <0 a (II 

.j>. 

• j • 

Selected Customers' Activity Aiem &. Traders' Explanations for USD PUrcP1ases & Sa'" I'rom 

lCO CUrTenl & prior 8.l(p4enalioo$lfOm trader & Client akmg with Info In KYC profiles and racen! actJltirv lor CVSIOl1'ler and country (in GBS) 10 conFirm. 

Leo USBS iod''i!P8fld6/'l1 SOUfC8S (an ifltemel) liS needed to valldale I!'IfOllllllllion provfded by Il9l1Br (tourism, ""millBnc&:!ll, Imoo, economic & poliTieilI news/events. fX mles, GaS cleallnQl.ilry scr&el'l!J. e1C.) 

If variance (aelual vs c",:pected) appeal'S polentiel'Y suspicious, leO should mseart:htinvflSOgate and repof1 actl ... lty accordingly (Inl8mal!y &. externally]. 

U DEqulv Co ..... ell.fit 

CltttomtirName Am_ Ar.k RI.II 

(lnttwMlund.) Rating (Sec) 

$72, Medium r·" .... "'" ......",,,,', ""',omy," ""'''.'''''''.

Pension annolJl'lCfld by the 1)OVemmenl, there 

demand for USC banknotas from people exchanging 

USC aoo withdrawing the money from !he bank.'s 8eC

economy WIllS related Ie Argentll'lo!l. Uruguay's bankIn

(1]", hlgher reputation thEIr'! the Argentinean one, and there

C wvalthy A'genllnes hlM't thll'ir I!I8Ylngs deposited In U

<To. metrellel1l ba56 Is reacting noI:OlI'Y to the internation

" '" but al$u 10 thB added noise CntBted by tht! Argentinea

3 ;; an el/Elmple, Uruguoy sul!81ed a severa flnal'lClal cris

a 0. cansaqu81lC$ of the Argerrtit1ear'! tir'!anclal crisis in 20

uAtR.,iUAY·- : ...... USO $13,616 Medium nw,y sold an 8JtC&$S of small denomination and bad c

" ... thellhey were not able to recirculate In the local mart

Dec, Jan & Feb olIO) rhe pBlik 01 the tourism activIty In 

" , a! consequenny Ihere is a large ilmounl 01 USD t1rculaij

try to U!lB ilto cover their own

URUGUAY May-09 USO $4,11 Medium 

'" 

URUGUAY ....... USO $5,524 Medium They sotd an excess 01 small denomination and bad c

that they were nOlllbie to redlCulale In the local mark

page 15 0115 
745 


76061.171

From: 

Sent: 

To: 

Cc: 

Subject: 

Attachments: 

FYI 

From: Vivenzio, James 

Boss, Joseph 

Tuesday, June 22, 20106:36 PM 

Tabor, Teresa 

Boss, Joseph 

FW: HSBC 

HSBC Initialllt:ontact.doc 

Sent: Wednesday, July 29, 2009 5:24 PM 

To: Stipano, Dan; Belshaw, Sally; Dailey, Grace 

Ct: Boss, Joseph; De La Garza, Elsa; Wagner, John 

Subject: RE: HSBC 

Here are my notes conceming my conversations with the llla\gents. J will have set up a meeting in 

Washington with everyone on this email, the two~gents and I will also request that they put 

together some sort of a time line for us since this case goes back nearly two years. 

Regarcls/JimV. 

From: Stipano, Dan 

Sent: Wednesday, July 29, 2009 2:02 PM 

To: Stipano, Dan; Belshaw/ Sally; Dailey, Grace 

Cc: Boss, Joseph; De La Garza, Elsa; Vivenzio, James; Wagner, John 

Subject: RE: HSBC 

! spoke further wlth_ He wants to know if there is a U.S. supervisor for HSBC~Mexico. He also wants to know when 

we expect our exam to be completed. ! told him I'd get back to him on these questions - please advise. 

Separate from my conversations, Jim was contacted today by two __ gents who are also involved in the investigation. 

They provided Jim with additional information about particular accounts, etc., and requested a meeting with us. We 

should take them up on this. 

From what I can ten, this has the makings <?f potentially being a major criminal case - we need to be all over it. 

Jim, please weigh in here concerning the substance of the call you received. 

Daniel P. Stipano 

Deputy Chief Counsel 

Office of the Comptroller of the Currency 

From: Stipano, Dan 

Sent: Wednesday, July 29,2009 1:44 PM 

To: Belshaw, Sally; Dailey, Grace 

Ct: Boss, Ja;eph; De La Garza, Elsa 

Subject: RE: H5BC 

__ "" Redacted by the rennanent 

Subcommittee on InvestigathulS 

Permanent Subcommittee on Investigations 

EXHIBIT #38 

Confidential & Non·public OCC Informati ~----------... OCC·PSI·00928756 
746 


76061.172

I think the important thing is that we take a close look at the Banknote area, which it sounds like we are doing. I would be 

particularly interested in the bank's level of due diligence on its Mexican customers, and a review of transaction activity 

involv!ng those customers to ensure that the bank is satisfactorily identifying and reporting suspicious transactions, I will 

cirde back tothe~n this and let him know that we are in the process of conducting an examination of the 

Banknotes area right now. If he identifies any key areas for us to consider looking at, I'll pass them on. 

Daniel P. stipano 

Deputy Chief Counsel 

Office of the Comptroller of the Currency 

From: Belshaw, Sally 

Sent: Wednesday, July 29, 2009 1:30 PM 

To: stipano, Dan; Dailey, Grace 

Cc: Boss, Josephi De La Garza, Elsa 

Subject: FW: HSBC 

As Joe indicates, we are in process of a review of this area now. The specific MRAs from our prior review had been 

cleared. !fthere is something we should do (or not do) as a result ofthis investigation, please let us know. 

Regards, Sally 

From: Boss, Joseph 

Sent: Wednesday, July 29, 2009 1:25 PM 

To: Belshaw, Sally 

Cc: Boss, Joseph; De La Garza, Elsa 

Subject: RE: HSBC 

Sally. 

We do not have supervisory responsibility for HSBC Mexico. The last Banknote examination encompassing the 

geographic area of Mexico was our "New York" Banknote examination which was conducted in 2005 (copy of Supervisory 

Letter attached). As you can see from the letter we had a number of MRA's involving consistent oversight of the KYC 

and EDD process, instances where the customer information, required by the bank's internal policies and 

procedures, was not obtained and/or the infonnation obtained was not properly analyzed, instances in which 

profile information was either not obtained or the analysis of the information was inadequate. no monitoring had 

in fact occurred for those clients subject to conditional approval and the specific monitoring instructions of the 

BSAJ AML Director, lack of identifying PEPs and that the current category of SCC clients does not account for 

the potential for reputation risk based on other adverse risk factors to include clients from jurisdictions that 

have. or clients who have. based on current events, become subject to enhanced regulatory, legal, media or other 

public scrutiny. 

We are currently conducting a "New York" Banknote examination which includes Banknote Clientele from the Mexico. If 

there is something that we should be doing to assist in matters, we can take the opportunity to do so during this current 

examination. If we are to take on some additional work during this examination, please let Elsa de la Garza know as she 

is acting EIC as I am on annual leave starting tomorrow. 

Joe 

Confidential & Non-public DCC Infonnation 

--= Redacted by the Permanent 

Subcommittee on InveJtigations 

DCC-PSI-00928757 
747 


76061.173

From: Belshaw, Sally 

Sent: Wednesday, July 29,2009 12:33 PM 

To: Boss, Joseph 

Subject: FW: HSBC 

Joe: Let's discuss. SaUy 

From: Stipano, Dan 

Sent: Wednesday, July 29, 2009 12:32 PM 

To: Belshaw, sally; Dailey, Grace 

Cc: Wagner, John; Vivenzio, James 

Subject: HSBC 

Sally and Grace, 

This morning I spoke to an AUSA in the Eastern District of N.Y. aid that his 

office is in the ear1y stages of inves1igating possible money laundering through the repatriation of U,S. currency through 

accounts at the banknotes division of HSBCwN.Y. The scheme that~described is similar to activity that we 

have seen at Union Bank. Wachovia, and Zions. Basically, the way it works is that drug money is physically hauled 

across the border into Mexico, then brought back into the United States through wire transfers from casas de cambia Of 

small Mexican banks, or else smuggled across the border in armored cars, etc., before being deposited in U.S, 

institutions. According to..-.. most U.S. banks, recognizing the risks involved, have gotten out of this business, 

but HSBC-NY is one of the last holdouts (afthough, interestingly, he said that HSBC-Mexico will no longer accept U.S. 

currency). 

_wanted us to be aware of his investigation, but he also wanted to know: 1) whether the OCC has 

supervisory authority over HSBC-Mexico; and 2) whether we have done any recent examinations of the banknotes area at 

HSBC-NY Of so, he would like to see a copy of the ROE). Ilold him I didn't know the answers to his questions, but I 

would get back to him. Can you help? 

Thanks, 

Dan 

Daniel P. Stipano 

Deputy Chief Counsel 

Office of the Comptroller of the Currency 

Confidential & Non-public OCC Information 

- "" Redacted by tlte Permanent 

Subcommittee on i1n'e5tigations 

OCC-PSI-009287S8 

76061.174

i?j 

.... 

>-3 

\C 

. . 

Proposal to Update the Strategy to Control 

Risk arising from Grand Cayman 

Accounts 

The world's local bank 

(", 

76061.175

Background 

HBMX CEO requested to conduct an enhanced due diligence (KYC) for 

lall Grand Cayman CDAs DDAs. I The Bank has been recently fined for offering this product in Mexico, and money laundering red 

flags have been identified. 

On 28JUL, CMP gave instructions to suspend this product. 

On 31JUL08, Segment Directors were requested by CEO that an enhanced KYC will be 

completed for all Grand Cayman accounts before 01 DEC08. 

As of JUL08, in Grand Cayman CDAJDDA product there were 49,937 customers, and its portfolio 

was approximately USD 1,500 million. 

Currently, this product is expected to be re-opened, as long as necessary adjustments to systems, 

processes and documentation are made, with stricter controls, and if Group Compliance's sign-off 

is obtained. 

On 26SEP, Segment Directors reported that almost no progress has been made in enhanced KYC 

completion. In addition, a central validation of enhanced KYC quality is not in place. 

According to Remediation Project results, success rate in file completion is approximately 25%. 

This means that if this strategy is followed, it will not be possible to complete more than 25 % of 

required enhanced KYC Forms by 01DEC08. 

HSBC<tt.,. • 

ThJ, wOlin\". Iucilt hmlk e 2 

76061.176

iActions Taken Up to Date 

!The institution has taken mitigating actions for risk arising from this 

product. 

Implementing online controls to identify if customers are blacklisted people! PEPs at HSBC 

account opening. 

• Implementing a monthly control for customers who make cash transactions and USD 

transactions over USD100K. 

In order to re-open the product, it will be required to conduct an enhanced KYC of all new 

customers and cash deposits will be limited to USD 10K, for individuals, and USD 100K, for 

corporations. 

Updating Circulars and Work Instructions Manuals applicable to this product. 

• Detailed Analysis of risk profile of approx. 50,000 Grand Cayman customers as shown in 

following slide: 

• 3 

76061.177

f.

Xisting Risk Arising From Grand Cayman Accounts 

Significant Risk degrees from Grand Cayman accounts is in 3341 

customers, i.e., 6.69% of total customers. 

I Total Customer I Grand Cayman Accounts by Risk Degree 

Description 

Customers with normal transaction profile; since 

Low Risk alerts had not been generated by monitoring 

systems for them .. 

'-1fmir.lilt4i.. 

1;314 

(2.63%) 

46,594 

(93.31%) 

2,240 

5],262 

• 4 ----

. 

76061.178

Status 9 and 13 To close. these accounts,.onc:e respective segments have cOnfirmed it. 

To conduct an EnhancedKYC by 31 OCT or 

close .the account. 

• 

258 

153 

395 

195 

5 

76061.179

iProposed Strategy :k-based strategy is proposed, which needs less resources 

Total of Customers I Grand Cayman Accounts by Risk Level 

White 

Description 

4 572 customer. files are beingpreparedJobe.completed. bY.31 OCT08;through 

Remediation' Efforts 2nd phase· (including central quality control) . 

4 Incorporate 153 customers into this effort... ..' . 

4 To close immediately 258. customers with:status 9 and 13. 

4 To complete the examination offile completion status and follow a method similar. 

to that deveJopedfor red traffic light. . 

4 These files should be' completed' by 31 OCT08. 

4 Schedule the completion of these files forthe Third Phase of Remediation Project,. 

starting in NOV08. 

4 Apply monitoring to. this universe.so as to give. priority to. the files of 

those .. customerswhose risk status maY'increasefrom time htime to amber/red 

traffic light. 

4 In addition, a control will be·implemented to monitor risk associated with dramatic 

changes' in transaCtion profile. 

• 6 

76061.180

Strategic Options for Managing Grand Cayman Accounts 

Risk 

",',. Strategy,_-

If I, 

Continue with 

present .strategy to 

complete an 

enhanced KYC for all 

accounts 

Risk-Based Strategy 

proposed in this 

document 

. . Acivantages. " 

.. Remove all. existing. risk by clo'sing 

all accounts of this produ ct 

massively, effective from DECOB. 

Implement ab';tter risk control and 

Close high risk accounts 

immediately Inc.orporate this documentationjnto 

Remediation II 

4 More focused Work Load for 

branches. 

4 Dual Control for checking progress 

achieved in File Completion and 

Enhanced KYC Completion. 

". . '.'.' <, 

, . , 

File Completion Progress.will possibly be 

25%, andas a result around 37,000 " 

accounts .will be closed. 

, The funding from this product.will be: 

lost. 

, There is not a dual control for checking 

enhanced KYC and file completion: 

, It is not possible to campleteenhanced 

KYC within established timescale. 

4 If enhanced KYC complelionfor .white 

traffic light customers is a 

certai.n level will continue 

• 7 
755 


76061.181

( 

HSBC·BNt E n06571 !.ut 

From; DfNISF. A 8:lllY/HBUSjHSBC 

Sent: :'/25/2001 8:1£:28 ;l%rv1 

To: CAROlYN WIND/HBUS!HS8C@1HS~(AMERICA5;ANN[ lIDDY!HaUS!HSBC@HSHCAMf~ICAS 

CC: 

Subject; ~,AN.K MElLI 

FYI 

...................... Forwarded by Oeni,e A ,eilly/HBUS/1I5BC On OS/25(20Cl 

09~16 ;\M ... ~ .... -.---.---'-----~ .. 

Michad B Cialiagher@ REPUBL!C an 2$ May 2001 00:54 

N()f~ 

25 May 2001 00:54 

From: \iic;"a€1 B G~l!!~gher @ n(PU~U[ Tei: 212·525-568D 

Till\.::: f'(p('.J:ive VicE; P'c:sid::f1t l(ycation: 452 5th N.;e) l"Ioor 5 

I,VorkGrou?: 

To: Denise A P,i.'iIly/HBUS/H~BC@HSBCAMER!cAS 

tc DouC1a:; Stolberg,iHBUS/HSBC 

5ubj('ct' lV,rxK 1\.'IElU 

~/lj(tla~1 

...................... Forwarded by Mich •• 1 B G,II.gher/HOUS!HSBC on OS/25/2001 

12:5,~ ,"'fA -.••. _.". 

Denise A .~c:illy @ HSBC;MER1C.'J,$ 01 22 MJY 200113:45 

Note 

n \1ay 2001 :;'3:45 

From: Denh;e A Reilly@ HSOCAMER1C.o.S Tel: 

Tit!e:: Senior vice Prc::;ldcnt loc,;:,!ion: Delawi.u!'! 

WorkGroup: 

PaYIYIPl1t Services Man Size: -'3118 

To: Caro yn VI "d/HBUS!HSBC@1I5RCAMfRICA5 

Anne Uddy!f\~US;llSBC@I--'SBCAj\1ERIC;'.S 

:\1:chaE-1 B (j.)lIaghec/H8~5/HS8(~)R~pubH:: 

iljbl~rt. RA~;": MH 1: 

Page 1 

302.636 2S()O 

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Permanent Subcommittee on Investie:ations 

Confidential Treatment EXHIBIT #40 HSBC-PSI-PROD-0096138 
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\. 

HS8C·BNI_E 0065711.('t 

FYI 

_._._._-- forwarded by Der.;s. A Reil1V/HBU5(1iSBC on OS/22(2D01 

08:45 AM .•• _ .•• _ •• _ ••••.••••• _. 

Brian W RICHARD5@HSBC 

22 May 2001 05:32 

To' Denise A Rei!ly/HBUS/HSBC@H5B(,O,MERIC,ll.S 

cc: John R WllKINSCN/hBEU/H5BC@I{,BC 

Peter C 8lS.NK/HBEU!!-:S~C@HS8C 

Sub:ect: B"';K MELLI 

Denis"e 

1 refer to JOhl1 Wilkinsonts EMall of 18MAYOl. 

I met Melli y.esterday and enquired re names ohhe principal beneficiarie-.s of 

their payments - as you will see from the. attached Call Re.port, <.IS e.)(pected. 

Me Ili cOllid no': assist, 

Brian 

/\ttachment: d 20010521 BWR NH Sadeghifu Naz:er Pourjarn,doc,zip 

Page 1 

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, 

INSTITIlTlONAL BANKING 

(CJIlIDlj 

CALL OATE, 21 MAY 01 

lJA:-i"K l'iAjI'IE: fl".nk \t-:::-Ui :nr. 

ADVHESS: 4 i\1'Jorgatc 

Lcrdo-n 

EOR Ml 

PARENT: 

GROUP Rl~LATIO"'SHIP ~f,\:-"':\GER! Chis BUldH!( 

CALL HEPORT NO, 1I61S'1 

pnO'lE: n:07 60, 36)6 

FAX: U2C7 7~}6 2152 

MARKET!NG CATEGORY: ~lLr IlLACE OF CAl,}..: Resl,lUront, Yint~rs 

Place 

I'EHSO-"(S) CONT.lCTED MiD TITLE[S): 

I. Mr An.ml'td S~deghlfnr. !){n:clor Genera! 

i. MaiidNfl.7.cr. Head ofCorportl!c Lcnd:ns & Trade 1~;r1;:ncc 

3. Mr-Saeed PCllrjmu. C"sh and P<!),mcnt!' Mnnoser 

I!snc GROUP CALLING OFFICERS: 

I, Dr N Homapour, Iran RcprCSent3live 

1, Brian Richa;d::, ArC;! Mlin:lgp, Middle. East &. Afrie-a, C1B ;SL 

3. Phil Smi-:h, HSHC ;'c.rf;JOir:g 

REIATIO:-;SHlPI;\CCOUNT PLAN OBJECTIYI:,: 

I. increase Trade Busilless \· .. ilh cJed;t C0:15trr.ints 

1- De~e!op Treasury rc::eTi0:1.!-hip wi!Jdn ~redit constraints 

3. Otl3in an iOl;re05'!:r. nccQtmi ilCltYlly bu; r.(}~ S5! 

4. Obtain CLS tegis:ra:ion 

CALL OIlJllCTIVES: 

Discuss USD t!CCOUfl: 

2. DisC"U55 forf311ln!; oppoJil...:nitic5 

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NARRAT!VE: (RELATIONSHIP INFORMATION, BUSINESS DEVELOPMENT', 

COMPETITION/OTHER ISSu'ES) 

Busmess Development 

• USD account - draft proposaJ handed over for Melli pcrosaL E.xplailled the 

Customer Cham:r wouM follow after neg-ollatlon wi~h MelIl managcmenL OUM 

exptained, and stressed its use was unconditional to our offer. Was informed lnat 

total payment flow was nearer 300 pe.r do)', wilh USD 2 bio MMK. As expet.ted, 

una.ble 10 answer H8US enquiry ~ main beneficiaries· lnm imports rrQm mill"l)' 

countries a.nd countless suppliers \\'oridwide. 

• Llcyd$ ~ BWR astonished to lcarfllna( MeHi has moved most orits USD business 

from RES to LJoyds, and hlls opened a treas:wy sel1!ement ilc!:OlJnt with Standard 

Chartered. However, sHH seem ket:n to llse; HSBC. 

• CLS· oot known by 1m), Melli ptrsonneJ present. Touched lJPon the structure and 

advantagc:s of using HSBC, including the same portal intc:rface 3S OLi\M. Details 

.sought. 

Melli London seek a lldedicated" silent confirmation line. Homapour indicated his 

support - JBL wll! process with FCC. 

Other 

, HSnC Tehran is establishing lines o[credit for HKBA imd HBAU re grain 

exports 

• HSBC is progressing its: plans to open a "virtual bank" in Kish offshore centre • 

opening planned For rnod 2002. It remains n joint venture with N1C (in which 

MeUi is fI shareholde.r). 

P AREJ'iTAL SUPPOllTIPERFOllMANCE: (CAPlT AL, ASSET QUALITY, 

MANAGEMENT, EARl~INGS, UQUOIlT'r) 

• Melli Bank pic will commen-ct: busil'\eSs end JUN01 

The nc' .... UK 5ubsidiHI)' will be the \'ehicle fDr 11 planned expansion inlo Eurohmd~ 

Melli pres~ntly only has branches in Germany (2) and Purls 

• The initial capit3l will be USD 300 mio 

ACTION: 

1. Revise Tender document - JW1GPCM 

L... Estab!ish invoice- stnJcttlre w JW 

3. Prepare Customer Charter· JW 

4. Send CLS details and place on maHing list - GPCM 

5. Can we assist re ~'dcdjCaLcdlT London CCR line? ~ lW 

Confidential - FOIA Treatment Requested by HSBC N. America Holdings, Inc. 

Confidential - FDIA Treatment Requested by HSBC Bank, USA, N.A. 

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'~ 

DlSTrun1JTlON: 

D!lily circulation. J Richards, N Weir, Q Aylward, D Reilly. P Bk:nk 

I\EXT CALL OATEo2HO! CALLING OffiCER: B W Richard, 

DATE OFTHlS REPORT: 21 MAY 01 SlGNATURE: 

Cnnfidential • FOIA Treatment Requested by HSBC N. America HoldIngs, Inc. HSBU2545280 

Confidential - FOIA Treatment Requested by HSBC Bank, USA, NA HSBC acc 0616097 

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76061.186

Frorn: DEN!SE A RE1LLY/l-tElJSII-ISSC 

Sent 7}1212DD1 8:22:53 A!·.1 

To: DOUGLAS STOLBERGIHBUSiHSBC@HSBCAMERICJl.S 

CC: JOE.HARPSTER@RNB.COM;MICHAEL B GALLAGHERlHBUSlHSBC@HSBCAMERICAS 

Subject: Re: Bank Mel6 

The fonowing memo is background information on the Bank Melli business, 

prepared by John Richards, Group Representative Iran. AddloonaUy, in a 

conference caU that Joe Harpster, CompUance and I had 'Nith HBEU and Richards. 

en ElZl. it was relayed to us th3t the Group (~th the backing of Bond) WiJS 

looking t() si9"ificantJy grow our pre$enC'3 in Iran. Curr~nt Jines of credit 

were reported to be S800m, trade lines of S 1 SOm and growth 'ti8S anticipated in 

trade, cash management and intemet banking. The Bank MeIU dearing YliaS viewed 

by Richards and others as not only profitable as a $tandalone but also key to 

y,.inning additional bUSiness. 

It should ahso be noted that at the time this proposition came to Gur 

'I'lttention, HBEU had already consulted with bclh Mat!he\Y King and external 

counsel and advised a comfort level from bath quarte~ 

Given the seriousness of the business proposal. we continue due diligence on 

the transaction flow. The decision is primarily a Compllance/lega! one and we 

are worting closely with them on the operational feasibility of any proposed 

lJansar;;tion flow. 

From: John L RICHARDSIHSBLlHSBCI\PAC 

Mail Size: 4106 

To: Brian W RICHARDSiMDBKlHSBC@HSBC 

Subject: The Central Bank of Iran 

Dear Brian 

Tel: 9821 204ll4S7 

We have been approached by the Cenlral Bank of Iran to tak.e backttleir USD 

clealing business from Natwesl. In princlpall am keen to d(l this but (In the 

cl~ar proviso that it can be don2- profitabtf and on a sustainable basis. 

On6 of our key obje4;tives for the year is to develop HSBC's Asset Management 

activlties in !ran and with the Centra! Bank. now managing the oil price 

stabaiizatlon fund amounting to some USD1 Dbn there is considerable scope for 

this. Obvious;;ly many foreign banks are chas.ing the sama business and so we need 

to demonstrate sotTle competatlve or reiational advantage. The proposal from the 

Centra! Bank. was therafore not unwelcome. 

I had en ini1ia] meeting wi'!t! Mr Nowbehar Director Inti Dept of the Central 

Bank yesterday along with Nigel Weirwilo is visiting Tehran. I emphaSised that 

if we were able to do this we would need to have detailed discussions so that 

we are clear 't'Iotlat is required of us and Ytttatwe require of them. The Central 

Bank manage their transactions through Bank Melfi London and the Intention 

would be that negotiations are held with Mr Saderighmr. 

! would like to end up v:ith a writt...en agreement so that all parties are aware 

ofwflat they are coml'Tlitting to. Although negotiating with IranIans is a 

frustrating activity we are in a. strong p()Sitian. They have become disatisfi€od 

with NatVVest and with the exception of LLoyds, who will have the same issues we 

Permanent Subcommittee on Investi ations 

EXHIDIT#41 

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have there is little competition. ! also assume that Qur technology advances 

y,ill make the business more attractive than It was in the past. 

I shall be grateful for your thoughts on Iflis and YOllf advice on h{lw I should 

take this forward, Nit;1el is here until Thursday and ifposslb!e I shan be 

grateful fur your initial feedback before he lea ... es so thai I can discuss the 

matter further with him. I am sure that he will take this up with you himself 

but at the end of the day negotiations will be held in London and will be 

driven by you. 

Nasser and I wiH be in the UK on Feb 14th 15th to help host a presentation to 

a number of Iranian Bank Managing Directors in association with Robert Gray and 

the 'nvestment ban k. Subject to your vieloW we can joIn any negotiation meetings 

that are arranged over !flat time 

In summary if we can make Hlis business independantly profitable and 

SlIstainabl~ Ihe b"me1its that we can di:rive particu!arlY' from the Treasury, 

Asset Management and Investment banklng spin offs. '#ill be sub$re.noal. I vlant 

therefore to agree a: strategy of hl)w we go forward and '-MlO we invol ... ~ before we 

make any further contact so Ihal J am aware of allihe issues involved. 

I appreciate your help 'Nith tIIis 

Best regards 

John 

Douglas Stolberg 

11 Jul 2001 18:23 

To: Denise A Reilly/HBUSJHSSC@HSBCAMER1CAS 

cc: Joe.Harpst@r@mb.com 

Michael B Galiagher/HBUSIH.SBC@HSBCAMERICAS 

Subject: Re: Bank Melli 

Denise and others, 

Wth the amount of smoke coming {Iff of this gun, remind me again why we think. 

we should be supporting this bYsiness? 

Doug 

Denise A Reilly I>Tl 11 Jul2(101 17:16 

Note 

11 Jul 2001 17;16 

From: Denise A Reilly Tel: 

Title: Senior Vice President 

'V'VorkGroup: 

Payment Sel"lficee 

302.636.2500 Del 

LGcatiGn: Delaware 

Mail Size: 33351 

To: Douglas StolbergIHBUSfHSBC@HSBCAMERICAS 

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cc: Joe.Harpster@rnb.com 

Michael B GallagherIHBUS/HSBC@HSBCAMERICAS 

Subject Bank Mel!i 

This Is on issue that you should be aware of. As described in Carolyn's memo, 

we have had ongoing discussions on the topic of Iranian payments both 

internally, with HBEU and w1th HBME !RN. HBUS Compliance and HBEU have also 

consulted with external counsel, The genesis for the discussion was an RFP for 

HBEU Treasury to handle Sank Melli's USD clearing, From an operational 

perspective, we will follow Compliance's; direction 6S to iVhether v.'e should 

support this business and if ggreed, wi!! establish any required operational 

controls. 

Given the level (If attention this is now getting, it may be raised at the SMC 

and will be inclUded in the quarterly Compliance report. 

twill ket:p you apprised. 

---~--- Forwarded by Denise A ReillylHBUSlHSBC on 07{1112001 

04;37PM-----

Carolyn VVind on 11 Jul 2001 11 :13 

Note 

11 Ju120D111;13 

From: Carolyn Wmd Tel: 2125255503 

Title: Executive Vice President Location' 

WorkGroup: 

RNYC Compliance Mail Size' 29902 

To: Mal:U1ew J W KINGlHGHQfHSBC@HSBC 

cc: Paul L LeeJHBUSIHSBC@HSBCAMERJCAS 

Anne LiddyIHBUSlHSBC@HSBCAMER1CAS 

EHzabeth ProtomastroIHBUSIHSBC@HSBCAMERICAS 

Dense A ReHly/HBUSlHS6C@HSBCAMERICAS 

Subject Bank Me\Ii 

452 5H1 Aile, Floor 07 

Matthew, this e-mail is 10 sLJmmarize the issues we discussed yesterday 

regarding HBEU Bank Melli proposal. f1.s you know, HBUS was initially approached 

in January 2001 wilh ttle proposal that HBEU would use in;. USC accO\mtwfth H6US 

to clear USD payments for Bank MeUi. Subsequently. there has been extensive 

review of the matter, including inputrrom two outside US I~aj firms. The 

first issue was ¥kIether or not the underlying transactions originated by Bank 

Melti are permissible under the Iranian Transactions Regulations. The 

regula~ons prollide a general license for transactions Ihat meet the "U-Turn" 

definition and so iNe have gone back and forth as to .. ...nether the proposed 

underlying transacfions Il":eet the definition. (see below). There continu~ to 

be Sl)tne disagreement between the advice from ourty"ro ou1sKie law firms on this 

point but we could probabty resolve the difference, Of more concem is the 

second issue which is that given the way the payment orders are to be 

constructed and formatted, HBUS will not be able to confirm wIlether ar not tile 

underlYing trans1lctJoo actually meets the "U~Tum"requirement. ltis not 

apparent Ulat HBEU win be abie to confirm that each payment meets the 

requirements, In an effort to facilitate "straight~through prcces'Slng", it flOW 

appears th.,t HBEU will train Bank Melli on formatting the payments. and that we 

will be relying on Bank Melli to ensure that only qualifying payments are 

processed through HBEU's accOlint Vwi.th HBUS. (See attached letter to Sank 

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Meli!). If OFAC identifies a transaction that does nat qualify, it might view 

HSSC's actions due to th& non·disclosurtl as having involved willful disregard 

ef evasion. GIven the large doUar amounts end volume of activity proposed 

(lDO...4DO !ransactions pee dey), If OFAC took sums view, potential Dabilities 

could be substantial and would certainly impact HBUS's relaflonship with OFAC. 

So to recap: 

A) DJes this structure as proposed meet the U-turn requirement for 

processing? If Bank Melli an.::1 the second foreign bank do not app.ear on the 

tITZ02 processed by HBUS, haw do we determine that the payment is in fact a 

U·hJm? 

B) HBUS will not know the foreign banks and, therefore, will not be able to 

monitor for compliance. WI! Melli be informing HBEU of the second foreign 

bank? WID HBEU 8et up 8 function to monitor these payments for compliance 

with the u.turn provision? 

C} If HBEU wil! set up a function to monitor the payments, it is possi~ e that 

OFAC may not find it acceptable for HSUSto rely on HBEU to monitor payments 

for compliance with the U·b.Jm. 

D) If the foreign banks involved are not disclosed on the MT202 processed by 

HBUS, and neilller HBEU nor HBUS is monitoring the pa~ments for compliance • 

OFAC could rerert!) the section of Ihe regulatjon regarding "evasion~ (Section 

560.203 EvasiQns; attempts), 

1) Definition aflhe pennitted "U-Turn" transaction under the Iranian 

sanctions: 

The QPir1il)n received from outside OOl..Insel, Tom Croc~er of Alston & Bird, on 

212101 in regards to 

the proposed transactions per Peter Blenk's emal1sof1l3.1101 and 211101 is 

quoted below. 

" ... Ule scenario ouUined below does not Bppearto qualify for the 

so·called USO "U-rum" exceptlcn~., the IranianTro::nsactions Regulatioo$. 

Sflction 560.516(a)(1} of those Regulations provides e general license for 

dollar clearing functions which meet the following. criteria: the transfer must 

b, 

(1) by 8 foreign bank which is not an Iranian entity (2) from its own ac~unt 

at a 

domestic bank{J) to an account held by a domestic bank (4) for 1:1 second 

foreign 

bank which is not an Iranian entity.- Diagramming this out, the chain would 

look as 

follows: 

Foreign Bank (norrlranian) i-Domestic Bank. 1-Domestic Bank. 1 or 2-Foreign 

Bank 2 (norrlranian) 

(The point of disagreement bet-.'1een legal firms is whet1cr Foreign Bank 2 has to 

be;3 different bank from Foreign Bank. 1. Our 5urvey of olher major USD 

clearing banks indicated that Ihey follow the literal interpretaticm of the 

license, which is two different foreign billnk.s involved.) 

TRANSACTION DETAIL 

Below are summaries of HBUS' understanding ofine first proposed transaction 

flow and the latest proposal. 

Example I: U-TURN TRANSACTION 

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1 Bank MeHi sends instructions to HBEU to: 

debit B3nk MelH's account 3t HBEU 

credit HBEU nostro wfth HBUS 

2. HBEU sends instructions to HBUS to: 

debit HBEU account with HBUS 

credit any foreign bank (via a USA correspondent for the foreign bank) 

for further credit to the ultimate beneficiar; 

Note: Original HBEU sU!:lQllIstion on payment format would not mention Bank Melli 

as !tie originaling bank 

Example II: Cover Payrn~nl~ (MT202 & MT100) 

(. Bank MeUl, london sends instructions to. HBEU to: 

debit their account iMth HBEU and 

credit HBEU nastro with HBUS 

2. HBEU witl send an MT202 to HBUS to: 

debit HBEU's account ",lith HBUS 

credit any klre1gn bank (either on our books or via 8 USA c.orrespondent for 

the foreign bank) 

Note: CutTent HBEU recommendation on format would not mention Bank MeUi but 

would contain some reference Identification on the specific transaction being 

settled between Bank Melli and their customer. 

3. HBEU wi!1 also simultaneollsly send an MT100 to the foreign bank (credit 

party) referenced in the above MT202, supplying them with beneficiary 

details for applying the funds received from HBUS 

Note: The MT100 is often processed prior to the MT202 due to lime differences 

between the US and the beneficiary's countl)l. 

3) HBEU Instructions to Ba.1k Melli regarding how to format payment!;;: 

See attached email of 28JUN01 from John R. Wlkinson wtth a copy of the letter 

5entto Bank Melli with instructions on how to format the SINIFT messaget;. 

From: John R \.'\JlLKINSONlHBEUlHSSC Tel: 79044465 

44 20 7260 4466 

Mal! Size' 23330 

To: Denise A ReinyIHBUS/HSBC®HSBCAMERICAS 

cc: Joe.Harpster@rnb.com 

Mne LiddyIHBUSlHSBC@HSBCAMERICAS 

John L RICHARDS/HSBUHSBCAPAC@HSBC 

Brian W RICHARDSIMOBKlHSBC@HSBC 

quen~n R AYLWARDIMDBKJHSBC@HSBC 

Terry J 8ELLAMYIMDBKJHSBC@HSBC 

Nick J GILLGRASSIMDBKiHSBC@HSBC 

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Peter C BLENKlHBEU/HSBC@HSBC 

Subject Re: Bank Melli 

Per our conference call today, please find 8ttached the letter 30APROl ~ent by 

our Payments dept (MPO) to Bank Melli Iran LDndon. 

Once the proposition goes live we have inslTucted Bank Melli to alter the 

format of it's payments to adlieve straight through prcocessing. The field 52 

input of 'One of our clients' IS a standard phrase used by MPD in these 

situations, 

Since sending the letter we have further aSKed tt1em to only put 'One of our 

clients' in field 52, thus removing tt1e chance of them inputtlng an'lranian 

referenced' customer name, that causes faf! out of the cover payment sent to 

HBUS and a breach of OFAC regulations. 

This method was successfutty tested last month on a MT202 (banI!. to b;:mk.) and i:I. 

MT1DO (commercial) payment 

I ,.;:tn understand your concerns following the recent formatting error detailed 

in Peter Blenk's email1SJUND1 ,hcwever I must provlde some background for 

yoo 

MPO confirm that Bank Melli have nat yet gone live on the new method of 

formatting payments, as we have not yet taken on the new business. Bank Melli 

are still formatting paymems in their usual me-thod, in this insbnce MPD 

failed to spot the poor input and did not follow their normal procedure of 

altering the payment, hence it wasblocked. MPD have again confirmed the new 

formatting method 'Nil! a.chieve straightthrougl1 processing and overcome these 

difficulties. 

I hope the above detail is sufficient for your pUTpO~es and you are able to 

progress this matter fo,nard as intimated in yoor earlier appro'lsl, 

A.o'tachment: rl20010501 fm MPD to BKBC re formaffing.do".zip 

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• 

THIS PAGE IS 

INTENTIONALL Y 

LEFT BLANK 

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• 

• 

Saeed pourjam 

BllJlkMelli[TaQ 

4 Moorga.te 

London EC2 6AL 

3lh'04/01 

I rerer to our meeting last rmnrh:m..cI our telephone com'ersntion oftodoly. f am pleased to 

adv.lSe thnt foUo"ing tes-ts.in our payments en'>;roY'..ment ·we !t!e confid~l ! .. ..at we ha,'e found a 

solution to proc.euing your ~nw:nt.~ u"ith minImal rJW),lil inteI1lenlion 

The key is to ahr_YJ. populale field 52 - if you do not have an ordenng party name then quote 

"'One of oUf Clienu". nner leave blank. This rre:ans that the outgoing ~t instruction 

from HSBC wiD not qlJOtCi "Bd Melli" lIS sender - just HSBC London and wnazcver is in 

field 52. This then negaaes the need to Quote "00 NOT .\1E~lON om NAME TN NEW 

YORK.·' in field 72. 

In order to test our proposed sc.lu1ion we 'o\.Ould appreciate if ~ed Ule following templates 

wOOn submitting your ne,,1 payments to t.'le foUoQ,>ing CliStv.'iJei', or alternatively submit a 

usn 1 test p~TIl'"..nt 

MTlOZ 

2!l fOllr ReF" 

21: RelatedRItf. ... 

32: AmIJU1wCurrencyi}n!uc dote .. 

50: DO NOT QUOTE IF IRANIAN 

52: Cwtomer .""!ame OR One or 0'.1!' diems MUST BE COMPLETED 

H 16829&908 

54; 

56: 

57: B/!./'IeficiaJ'}t Banfrer (SWIFT cndes "\A,'Mre pOSSIble) 

5&; 8eneficiary (SJf7FT cod~s 'M'hue possible) 

70: Any Payments delGrlf fiN' bene:ficiaryo<. ' 

72: Please le:aye blank 

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• 

• 

MTiOO 

Pay os above 

tTl onler rur UJ to monitor! track these payments please cail Adrian Taylor prior to release on 

020 726..').l.I 80. Please IlSe S\VIFT ;;:tandards, Adrian "iU be happy to discuss with your 

oper.u:or any questions !hey ha.ve re format1i:ng. 

~ we haVl! made rhese payments we Call then gi .. ~ feedbac\:: (In My fur1her fOl'Illaning 

ISSues . 

Thank.-you in advlUIce for co.operation. 

YOUBsincercly 

John fo\\'ie 

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Fro."'iT: Susan A \<\R!GI-IT 

3!r'1l: Thu Oct 1 ~ 09:~;24 2oo"! 

To: John ALUSON 

Sut:;jeet; Re: OFA,C SANCTIONS 

ImportallC4!: Nom'!21 

Atta&hrnent~: imago_O.gll; ifJ1!1ge_1.glf; Doc. Unk.htrn 

.k)hn-FY! 

.. ~-" Forntlrdsd by SUSD!'1 A lII.'RICHTIHCHQ:'HSBC on 11 O~ »:)1 09:27 -_. 

[h-.vio W I BAGLEY et al 

To.: Oa ... 1d W J BA.GLE'iiRLlI. LCVi.MEMlBBMc/HSBC 

S!lS.;;1tl A '\-RIGH17HGHQiH$SC@HSSC 

M .. r'" P TA'l"lo;::t'SM GMt" ;'PHiHBAPI\-ISSC@HS3C 

au, Rof: YttLlr Ref: "'EM lGA 

01~35,f 

Subject: REt: OPAC SANCTIONS 

David, 

0." .. <111 Utter 

'OOct200123:02 

Tel: 7SC 5SB15 

! wi!! fCrNsrd to you seperate~1 a note I sent to Mark Taylor v.flich I hops may clarify 

thi~gs to e certa!n extent. 

The positioo i5 difficult because things have cllenged since September 11. We also 

have to bear in mind pending US legislation which will in effect Qive the US extra~ 

territorial authority over foregn bSf'!ks. particularly if we are umortU!late enough to 

pmcBSS ~ ~yrnant which 'fi.!ms o1l1 to be c:.onnect:ed to t~rrorism_ My own view therefore 

is that some of the routes tradrtionally used to avoid the impact of US OFAC sanctions 

may no longer be- acceptable. I appreciate however that the solution will involve the 

instaiiatktn of some form of automated screening system. VVe are looking into thIS now. Until thls is resoh/ed, all we CBI1 do is to8sk that payments from the affected countries 

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are vetted manually, This is oot easy and 1 agree we should talk abwl it in more detail 

on Monc!ay, 

I look fOiWard tv speaking to -you 1hen. 

Regards 

David W J BA(I! EX 

GMQ"r&ILlt'".-r 

1 a Oct :''001 13:29 

iI:]' Mai.l:hew'; WKiNGiHGHQ;rISBC@HSBC 

tt. SU3J:1;n A 'ViIRIG""r-ITiriGHQtriSOC@HS8C 

frUrk F "7;;'YLORfSM eM;;: .Ai='HfHEiA ... :H:'SSC@t-(";BC 

Fro~.. O.w.; W J BAGlf!f'iRLA. lG'" Wl2;..iiBBnAEMSaC 9714 5IJn~7 

Our nEt. 1.1I:M LGA Y;)u; Ref: 

012J5'l 

Matthew, 

In the light of tlie c!Jrrent attention ba-ing -given to t."e applications of relevant stlnctior,s I 

fe-el th;et there i9 'Some neS'.d to c!erify precis,9!y what!9 expected of operations within my 

region in fl3!Hfion to th-e application of OFAC Sanctlons when -deaHng in USD payments. 

! do this solety from the pe~pectiv" of avojljif"lg any mtsunderstanding. 

A number of the OFAC sanctions could have potEtntial effect LipOn bu~!ness in this 

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Region. L'le most obviQUS ofwnk11 are those relating to han, Libya and Sudan. A5 these 

are US Sanctions. bmdiog US peiSons they do not have the sama effect as tha UN 

Sandions against Iraq, and on the face of ~ do .ot bind .~her HBME'. activities, or 

those of our custom~rs in sny oftha abovs jurtsdictlons. 

I recognIse. however that the sanctions do affect an transactions in USD, and that 

payments passing through the US ene Cllpeble of being identified by the OFAC filters. 

Even i!those transactions involve say an HBME UAE bssed customer, if there ie a 

connection with one of the above jurisdictions it is likely that the payment will be frozen 

pgnding furtner Investigation by OFAC l!seff. 

There are of course risks fur us if StiCh a payment is frozen, particularty if the mooies 

are frm:en as between oorresponden1 banlc.s, and yet ~e ha.ve shown a c.redit to the 

customers USD account here in the Middle East. In tlla past ws havs bAen obliged to 

pursue a release of monies which have been released to a customer, but have been 

frozen through the correspondent banking system io the US. 

'v,""at I am currently unl;lear about however is the extent to wtlich we are expected to 

police and observ~ the OFAC sanctions when dealing in transactions for our customers. 

Recant notes seem to suggest that we sholl1d apply the OFAC Sanctions regardless of 

jUiisdiction. 

As 1 understand the cUiTlSl1t position we do routinsty. and across. tha Group, adopt 

differing appro.aches to payments potentially subject to OFAC sanctions, than to those 

payments that are unaffected. 

1hz Is achieved by e number of different methods. 

V\Jhat ! am unClear about is whether 1hese procedurres is viewed as berng inappropriate, 

arid thl ... 'S should be di!e.l!owed We do not structure thasa pa)'1ilents against a speciflc 

request from the customer, rather w.e l.!ndertake this strJCturing as a rcutin~. ! am 

adVl'sed that there may even be softw'are in the UK whim filters such payments for 

restructuring in the event that the original message has bgen structured il"! such a way 

thot it will b. caught by toe OFAC fi"ers. 

\;Vere we to disallow all payments which are potentialiy subject to the OFAC process) or 

TOONSrd messages if1 such a way that they would be caught, then clearty this would have 

a sionifteant affect upon our bU5iness within the Middle East. but also the Group's 

business within correspondEH'li ballking. 

Equally given the likely 'Volumes it is irlpractical to submit each payment to a process of 

referral to HBUS. 

I would be gratGful for your clarification as to whethe,- what is. currently ga~,g Oli is 

acceptable, OJ whether we shouki be adopting a -different practice. 

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I recognise that with regard to sanctions which ch5:aiJy bind HBME (e,Q .• Iraq) we have 

no choice other Ulan to ensure that sanctions are observed. that we undertake no 

transactions whidl are potentially caught by the sanctions, other than those pennitted 

on the food fer oil basis. 

I have separately resolved the issue of EU sanctions, which would theoretIcally bind 

H8ME as an EU person, where we heve conf!l"1'nation that to observe the sanctions 

within UAE would place the bank al risk of double jeopardy. 

! 2poJosise for the length of the note. but having spoken to Mark Taylor both of us are a 

littl€' unclear !!!! to how far we ar~ expected to observe 5anctions which ere non~bindif"!g 

in our jur~iction5 in the current climate. 

David 

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r' HSBC-SNI_E 0065949. txt From: ANNE llDDY!HBUS/HSBC Sent: 10/21/2002 8;30:41) AM To: CAROLYN ~ WINO!HBUS/HSBCOHSBCAMERlCAS 

CC: DENISE A REILLY/HBUS/HSBC@HSBCAMERlCAS 

Subj ect: IRAN 

Carolyn, I just spoke with Denise.. We have: tenative.ly set a date of Friday 10125 at noon to call Gary Boon on his home number re Bank: Melli. will you be avai lable? THanks. ~--------------------- Forwarded by Anne. Liddy/HBUS/HSBC on 10/21/2002 '09:34 AM --------------------------- Anne Liddy on 18 OCt 2002 09:35 Note 

18 Oct 2002 09:35 

From: Anne Liddy Tel! 212-525-5906- Title: senior vice president Location: WorkGroup: Corporate Comp1ianceMail siu: 

To: Denise A Re.il1Y/HBUS/HSB<:@HSBCAMERICAS 

ca.rolyn M Wind/HBUS!HSBCeHSBCAMERICAS 

subject: IRA.N 

452 5th Ave, F100r 07 

55201 

I don't really know what else I can tell Gary "that has not already been 

~!~C~i~:1" ~~~ ~ire!y W;U~de~~ \gde~o~o y~~\~P M~n~~~i' could you both join 

----------~~---------- F'orwarde9 by Anne Liddy/HBU5/HSBC Oh 1(]JlB/2002 (]9:34 AM 

Gary BOON. HSBC on 17 Oct 2002 08:11 Note 

17 Oct 2002 08;11 

Front: Gary aOON dI HSBC Title: Loca"tion: Tel: 

workGroup: Mail She: 1138 

To: Anne Li ddy/HBUS/HSBC@I-ISBCAIofEIUCAS 

subject: lAAN 

:6~r ti~~e s~~edn~e I u;6ep~~~~~s~C I ~S~~e;~f~r!n g~~~~~~e~a;~~ ~~e~!W ~~n~o~u~s if we can there a.re massive opportuni"ties. 

It appea.rs London and Iran are seeking a solution to this so you help is much appreci ated. 

It is the weekend Thursday and Friday here but I'D'! more than happy to talk to 

~~~e e~~hoo ~7iiihj4g16~~'?~~u ~:~~ me at h~e at: between 12 noon & lpm YOlJr 

If not can we mak.e it Monday? 

Regards 

Gary 

Mne Liddy on 09 Oct 2002 08:24 Not"e 

09 Oct 2002 08: 24 

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HSBC-SNI_E a065949. txt 

From: Anne Liddy Tel: 212-525-5906 

Title: senior .vice president Location: ,.452 st:h Ave, F1DOr 07 W-ork.G.r9up: 

corporau Compliance-Mail Size: 6657 

To: Gary BOON/MGR. POI MEM/HBME/HSBC@.HSBC 

cc: carolyn M wi ndjHBuS/HSBC@.HSBCAMERlCAS 

Denise A Reilly/H8US/HSSC@HSBCAMERICAS Nancy HedgeS/HBUS/HSBC~SBCAMERlCAS 

~~~3e~~~CT~:{H:!~'H~~~~~SBC 

Gary, r have a mtg already schedul~d for 9am NYC time today. I wi11 try "to set up a call for a.nother day/time and get back: to you. 

Gary BOO~ @ HSBC on as Oct 2002 23: 53 Note 

08 Oct 2002 23: 53 

From: Gary SOON @ HSBC Tel: Tith: Location: WorkGrouo: Mail size: 2797 

To: Anne L i ddy/HBUS/HSBC@115BCAMERICAS 

cc: carolyn M w;nd/HBUS!HSBC@HSBCAMER.lCAS Den; se A Rei 11 y /HI3"US/HSBC@HSBCAMERlCA5 Nancy Hedges/l-IBt.JS/H5BC@HSBCAM.ERICAS 

Paul PR.OCTO~/HBEU/HSBC@~SBC 

subject: Re: Bal)k Me111 

Gary BOON @.. HSBC on 08 Oct 2.002 23: 53 

Note 

08 Oct 2.00Z 23: S3 

From: Gary BOON @. HSBC Title: locat.ion: Te.l: 

workGroup: Mai 1 size: 2797 

To: Anne Liddy/H8U5/HSSCIl)HSBCAMERICAS 

cc: Caro1yn M Wind/HBUS/HS5C~HSBCAMERlCAS 

Deni se A Reilly/HBUS/HSBC@HSBCAMERlCAS Nan cy Hedge s /HIlU5/HSBC@HSBCA}.',ERICAS paul PROCTOR/HBEU/HSBC@HSBC 

subje.ct: Re! Bank Melli 

NIne, thanks for the update. 

~~11°di s~~~~~r~B~~,h~li ~~10bi~~io~i~~y~~~t:A~~o~e~¥i a~!~c~. soon, which means 

As my previQus e-mail ex~lained these payments would t:hen be sent to HBUS for 

~~~~~~~~~~) (~~d~i efs O~y tb~l~~~e~h~~ ~h~r~fi1°f~1>;°i~~; ~h~e~~~m~iV~F~~en sent 

process. Your already processing usa payments from t ..... o existing accounts held 

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in Londonl 

~: ~:~~fnrll~ g!~e~~d ~~~~ ~~lfr~~~!fe~ ~~!"~~6~ ~~~~~n~a~ID:~~O~~~~tg\!er already doing 'this). 

~:ri ;o~~~~~S~p 1:~a~a;f~~!~c~o~aild~~a~o 1~~:~~~~e~h;:r-~i~ih(in a~c 9!bo~~)r C!~IIJ~i n 1'17 If It'S 1:00 .shor-t notice please advise! me of a cOl'TVienient time/date (1 II 8 hours ahead). 

ltegClrds 

Gary 

Anne Liddy on 08 oct 2002 15:55 N01::e 

08 Oct 2002 15:55 

From; Anne Liddy Tel: 212-52.5-5906 Title: senior Vice President l.ocat:ion: 452 5th Ave, Floor 07 WorkGroup: Corporate compliance IoIail Size: <1.8218 

TO: Gary BOON/)otGR P04 MEM/HBME/Hsarn.HSBC 

cc: Carolyn H Wind/HBUS/HSaC@.HSBCAMERlCA.S Denise A ReillY/HBUS/HSsc0HsBCAMER1CAS Nancy H",dges/HBUS/HSBceHSBCAM:ERlCAS 

~~bJ e ~:~CT~:~~B ~~{~~ BC@HSBC 

~:~k 'M~l¥~d~~~~~~~l :r0n,~a~~i ~1~e~ft~:~lg~~lia~~~k~~~~~ ~~~~~~~~do~e t~~iS proposal in that all t.ransact;ions involving Bank lIIe111 must. be fully disc10sed 

f~~d~~pr~~1~td1s~go~~~e s~Ne ail:S:~!i~~ur'a!~:~!Cnl ~~~ ~~~i~~e tre~sgf transa.ctions involvin9 Bank MelH and will <I~low Tor review of 'the transaction by HBUS Payment: operations staff to ensure that the t.ra.nsaC'tion fits the. definition of a u_turn transaction allowable for processing under the u-turn exemption of the oFAC Iranian sanction. 

~!n~ ~e S~!l ~l~Y d~~~d'"!~~~~in'9 ~h~5o ~~;~e~o~:t (~~:t e~~!~i~~~ 

~~~r~e:~a~~o~!!a ~rg~~~~efn U-turn exem;~i~~a;~~~~ r!~~s ~er~e next step was that the operational process must be a9reed between HBUS PaYlllent 

~~~~~;!in~o a~~"~B~~l~tY(;~t a~~e;;~~!~ni~ant~nW~!~~s)O~~Gs ~~~\ i !~c::a~~~~ ~~¥orm OFAC a.l~d our Senior Managel'llent committee of the propos-al and the agreed upon operatunal procedures. 

--------------~---~--- Forwarded by Mne Liddy/HBVS/HSBC on 10/08/2002 03:13 PM ---------------- --~¥-------

Nancy Hedges on 08 Oct 2002 14: 45 Note 

08 Oct 2002 14:45 

From: Hancy Hedges Tel: 302-636~23n 

pa.ge 3 

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HSSC-BN~E D065949.txt Ticle: First vice President Location: oelaware, Floor 3rd floor work.Group: Funds Transfer Mail Size: 43230 

~~bj:~~~ -l ~!~t/~:¥~(HSBC@HSBCAMERICAS 

~--------------------- Forwarded by Nancy Hedges/HBUS/H5BC on 10/08/2002 02:46 PM ---~-----------------------

Denise A Reilly on 16 Jul 200Z 09:04 Note 

16 Jul 2M2 09:04 

From: Denise A Reilly Tel: 302.636.1500 Del Title: Senior vice president WorkGrou.p: locat.ion: Delaware 

payment services Mail si ze: 42022 

~e~j~~~?Y ~~ee~'~f¥S/HSBC@HSaOO1ERlCAS 

This should be the operative: document for discussion. Due t.o increas@d regulatory con'tols in t.he UK, any previous proposals by theRi are no longer operative. 

---------------------. Forwarded by Denise A. Rei11Y/HBUS/HSBC on 07/16/2002 09:04 M --------------~--------~---

Denise A Reil1y Or"! 15 APr 200Z 19;10 Note 

15 Apr 2002. 19:10 

From: Denise: A Reilly Tel: 302,636.2500 Del Tit"le: Senior vice PrEsider!'t workGroup: Location: oelaware 

Payment Services Mail si ze: 40684 

To; ,ohn R WIlKINSON!H8EV!HSaC@HSaC John FOWlE/HBEV/HSBC@HS8C 

Geoffr@y P WEASER/HBEU/HSBC(JHSSC 

Adrian TAYI.OR/HBEU/HSBC4IH58C NanCh Hedges/H8US/HSBC@;HSBCAMERICAS 

~~~~e~~: A ~:~:S~=~{~BUS/Hsac~saWlERIG\S 

In preparation fur our D'1ec'ting this week, ilttached is "the Bank. Melli 

~~h~5~~~~~~d~~ o;i ~~:t th~~ ~~~v~~~~l tvg~ie~~~:r~ e~~ ~~~~:~~en'r h~~~~l!~o ~~ ~~e basis for ou.r discussion. 

will speak. to you on wednesday. 

--~-~----~------------ Forwarded by Denise A Reil1y/HaUS/HSE'lC on 04/15/2.002 07;05 PM --------------------------- Denise A A.e'illy on 29 Aug 2001 19:23 lIate 

29 Aug ZOOl 19:23 

From: Denise A Reilly Tel; Title: senior vice Fresident WorkGroup: Payment serv1 CiS 302.636.2500 Del location; Delaware 

~ai 1 si ze: 37527 

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HSBC-8NLE 0065949. bet 

To: Alan WILKINSON/folD HTV ASP/HBAP/HSIJC@HSBC 

Quentin R AYLWARD/""DBK/HS8~HSBC 

u! Carolyn M Wlnd/HBUS/HSBc!3HSBCAMERlCAS Muthew J W KING/HGHCl/HSBC@.H5BC 

El i zabeth protomast:ro!HBUS/HSBCIMiSBCAMERlCAS 

John L RICHARDS/HSBl/HS8CAPAOllKSBC Subject: Bank Melli 

The attached document reflects the proc.edures that have been developed, with 

~~~ui~~~~~ ~h~ ~~~~:~~r~fi~e~:!f c~~~s:~ 'Il~~t sb~~i~e;~q~t~~~l!n~a~:~~~~e through qual; ty requi relllents. Assuming t~at transactions sent to HBUS lIIeet: the u-turn qualifications, all tra!1Sact10ns wi11 be processed sameda,y of receipt:. 

~~e Tg#f~:Y oct ~~:{ q~e:~s~~s s~g~~;~r~ndeori! 1 ~fb~h:e:~!~~a W~~~m;hi s o~~ector of det.e rmine thei r posltion regarding thi 5 bus11le.5s. :Ill anti ci pation of that 

~~~i~C~e ~~~~~~ ~~g ~~d 1:~:r~~, afgr:~~~t.~/~~~~/r~~~ 11~(}~~n d~~~~~n~i :nd if 

conference call to discuss. Please confirm your availabi1i~y and a number where you can be contacted. 

Attachment: Me.lli.doc.:zip 

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From: ANNE LIDDY/HBUS/HSBC Sent: 1/21/2003 1:00:08 PM 

HSBC-BNI_E 0066016 

To: "CROCKER, TOM" <TCROCKER@ALSTON".COM> CC: CAROLYN" M WIND/HBUS/HSBC@HSBCAM'ERlCAS;DENISE A REILLY /HBUS/HSBC@HSBCAMERlCAS; ELIZABETH PROTOMASTRD/HBUS/HSBC@HSBCAMERICAS subject: USO payments from Iranian Banks 

Tom, 

At carolyn Wind's request r am fotwarding the attached memo to you for your review and comments. As you may recall, it was agreed that our London/Middle East office would put together a business case regarding plans for providing USD payment services to Iranian Banks (stemming from an initial request for HSBC Bank USA to process USD payments for Bank Melli). This memo outlines that business case. After you have reviewed and provided us with your commen1:s, which may require amendments to the business case, HSBC Bank USA had intended to present the business case to our senior Management committ.ee prior to acceptance of the plan. We appreciate your attention to this matter and look forward to hearing from you on this much discussed topic. Thank you. 

Regards. 

Anne Liddy HSBC Bank USA compliance Department Forwarded by Mne Liddy/HBUS/HSBC on 01/21/2003 11:00 AM 

Denise A Reilly on 16 Jan 2003 09:19 N"ote 

16 Jan 2003 09:19 

From: Denise A Reilly Tel: 302.636.2500 Del Title: Senior Vice President WorkGroup: l.ocati on: Del aware 

payment services Mail Size: 

To: Anne L i ddY/HBUS/HSBC@HSBCAMERlCAS Caro 1 yn M Wi nd/HBUS/HSBC@HSBCAMERICAS Subject: usa payments from Iranian Banks 

243262 

I'm not sure why you were not cc'd on this, but I am fotwarding for your review. perhaps we can discuss tomorrow when I'm in NYC. 

---------------------- Forwarded by Denise A Reilly/HBUS/HSBC on 01/16/2003 

09:20 AM --------------------------- From; Nigel] WEIR@HSBC on 16 Jan 2003 03:56 

To: Denise A Reilly/HBUS/HSBC@HsBCAMERICAS Mal co 1 m G EAS1WOOO/MDBK/HSBC@HSBC 

cc: Nasser HDMAPOUR/HSBL/HSBCAPAC@HSBC Nigel J WEIR/RM IB MEM/HBME/HSBC@HSBC Gary BOON/MGR PCM MEM/HBME/HSBC@HSBC James J Y MADSEN/HBEU/HSBC@HSBC Subject: USD payments from Iranian Banks 

Deni se, 

~;~~~~~d u~~ g~~m~~~! n~~r gi~~~i ~~g~~~m bir~~f~nP~~rik~: ~~~~!nRa~Bg~~~ ~P~~~~~l to 

deal of correspondence relating to this issue over the past 2 years so we hope this document will precipitate a positive resblution. 

Permanent Subcommittee on Investigations 

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Ki nd Regards 

Nigel 

HSBC-BNCE 0066016 

Attachment: Iran business case.doe.zip 

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( 

HSBC Bank Middle East Memo 

To Date 

Denise Reilly, Senior Manager, Operations, JIBUS January 2003 

Malcolm Eastwood, Senior Manager, Operations, HBEU 

From Sender's Reference 

Rick Pudner, Head of ClB, Middle Eas4 Dubai 

CC 

Dr Nasser Homapour. Iran Representative, Tehran 

Nigel Weir, GRM. Middle East, Dubai 

Ga:ry BOOD, Global Payments & Cash Mgmt, Dubai 

James Madsen. Global Payments & Cash Mgmt, LlndoD 

Subject Receiver's Reference 

BUSINESS CASE - USD PAYMENTS FROM IRANIAN 

BANKSIENfITIES 

To Facsimile No. I From Facsimi1e No. Total No. of pages 

Executive Summary 

This paper has been produced in order for the Senior Management Committee (SMC) 

of HSBC Bank USA (HEUS) to evaluate whether or not HB US will process US 

dollar (USD) payments initiated by Iranian Banks via accounts held with HSBC Bank 

PIc (HEED), using the proc .. , provided to JIBED by HEDS dated 29 August 2001. 

This operational process may be amended at any time and HBEU wiU be required to 

adhere strictly to the DeW procedures as advised by HBUS. 

Currently, it is estimated that Iranian banks issue up to 700 usn payments a day 

using their USD service providers, mainly banks in the UK and Europe, which in turD 

use their New York USD correspondents to effect the payments. It is believed that 

some service providers amend the payments to ensure Iran is not mentioned in the 

body of the payment instruction to their USD correspondent. This process minimises 

the risk of payments being referred to OFAC, 

Institutional Banking and PCM believe there is a substantial income opportunity to 

sell a USD payments proposition to Iranian Banks in view of the impending FATF 

regulations. which are due to become effective in Q2 2003. The new regulations 

dictate that each bank. (effecting the payments on behalf of their clients) within each 

FATF member country must ensure the full name, address and account number of the 

ordering party are quoted on the payment instructions. This increases the risk of 

Iranian payments being held in the USA as they may fall foul of the OFAC 

regulations. The Iranian Baill:s have now prioritised this issue and are now actively 

seeking B solution from their banks, mcluding HSBC. 

We believe that HSBC could offer the Iranian Banks a solution that facilitates a way 

for them to effect USD payments to beneficiaries outside the USA using the 'U-Turn' 

process documented within the OFAC regulations for Iran. HBUS have already 

provided HBEU with their operational requirements to process these U-Turn 

payments and therefore SMC approval is being sought prior to HBEU seoping 

potential IT changes and the production of a service. proposition for the fumian Banks, 

Tbis business case also highlights the potential risks should approval not be given. 

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Background 

Iran Representative office was formally opened on 11th of November 1999. 

Following the establishment of the office the volume of business between Iranian 

banks I companies and Group offices has been increasing aU the time. The Group now 

has an excellent relationship with all Iranian banlcs and some very large Iranian 

corporates such as National Iranian Oil Co, National Petrochemical Co, National 

Iranian Gas Co, N ationallranian Steel Co, top Iranian insurance companies. Ministry 

of Power, Ministry of Post and Telecommunications etc, 

About 80% of Iran's foreign trade, totalling USD15 billion, is denominated in USD. 

Iran undertakes a considerable volume of trade. in markets in which HSBC is 

represented. eoabling the Group to leverage its global footprint. Our Iran 

Representative office has worked hard over the past three and a half years to build a 

positive image of Iran through road shows. visits, supporting trade missions and by 

referring good Iranian business to Group offices. This has shown HSBC to its 

customers as a bank that is able to do business in difficult markets and as a result 

added considerable value to the Group. Strategically, Iran is the country in the Wddle 

East region with the most development potential for HSBC in the long term. It has the 

world's fifth largest oil reserves, second largest gas reserves, substantial mineral 

reserves and a large well ~ducated population. 

The Iran Representative office was established to develop relationships and credibility 

for HSBC in the market. This objective has been achieved and the Group is well 

placed to develop its operation from a position of considerable goodwill. Details of 

HSBC's business with Iran and Iranian entities are shown in Appendix 1. 

Opportuuity 

The FAFT regulations are due to be implemented in Q2 2003 and will force banks, 

within the FAFT countries, to disclose all details of the order.ing and beneficiary 

parties, effectively ending the practice currently undertaken for Iranian payments. 'The 

Iranian banks have yet to bear from their existing providers, mainly Lloyds Bank and 

StandlU"d Chartered Bank, and we believe there is currently a window of opportunity. 

However. during the past twO years, HBEU and HBUS have been in discussions about 

how we can process these transactions, identifying the operational processes and 

compliance issues involved. After meetings with OFAC and external counsel, HBUS 

has produced a payments process. It will be scop<;d by HBEU, subject to SMC 

approving this paper, in order to identify their operational, compliance and IT issues 

before prOviding Sales with a service proposition. 

HEEU I HBUS have identified that by using the 'U-Ttun' payment method, Iranian 

banks can effect transactions to beneficiary accounts outside the USA. This method 

will allow HBEU to send HBUS payment instructions with [ranian entities quoted on 

the instructions and yet at the same time be compliant with FATF and OFAC 

guidelines. The proposed service proposition will provide a suitable disdaimer to 

ensure HSBC is not held liable for any payments which have not met the 'U~Turn' 

criteria and as a result been referred to OFAC. . 

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Benefits 

• Payment volumes are estimated at 700 pel" -day of which 70% will be commercial 

payments. Transaction income is estimated at USD4M, assuming that HSBC wins 

all the business at an average item price ofUSD30, We believe that charges being 

levied by other banks at the moment are far higher than this. 

• Balance income in HBElT. 

• Reputation within Iran aDd the potential to leverage additional business. 

Risks If Approval Declined 

• If HBUS declines to process these transactions, then consideration will Deed to be 

given to closing all existing hunian bank USD accounts 'With the HSDC Group. 

I Should the above occur the cwrent Group annual income of USD2M from Iranian 

Banks will be under threat. 

• The market will perceive that HSBC does not support Iranian busioess 

The adverse impact on our Representative office in Tehran. 

Summary 

It is ilIlticipated Ihat Irao will become a SOurce of increasing income for the Group 

going forward and if we are to achieve this goal we must adopt 8 positive stance when 

encountering difficulties. We tire aware of the concerns expressed by RBUS but 

strongly believe that by working together We can overcome them using means which 

are perfectly Jegitimate and io. accordance with rules laid down by the relevant 

regulatory bodIes. I hope we will be able to resolve this issue otherwise I fear we will 

destroy future value in a market which has substantial potential for tbe Group. 

It will be appreciated if you could raise this paper to your SMC at the earliest 

opportunity and advise me of the decision as soon as possible. 

Confidential- FOIA Treatment Requested by HSBC N. America Holdings, Inc. HSB03793156 

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 3407514 
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76061.209

Appendix 1 

1- Medium Tenn Project Finance Line - Various Group Offices. DSD500M. 

This line covers a number of individual ECA backed project finance loans. It is 

denominated largely in USD. The facility requires that Iranian banks effect regulae 

USD repayments. So far under this facility USD35M is utilised. HSBC now has a 

mandate from National Petrochemical Co. and Technip of France for USD155M to 

arrange fInancing for Olefine 9 project Two other projects. one for USD14SM for 

Styrene Monomer out of the UK and one [orUSD170M out of Japan will be financed 

by HSBC through structured finance outside the above line, The latter, for Mitsui with 

JBIC cover is already finalised and the other one is near completion. The provisioning 

for Iran has been reduced to 5% in December 2002. which will make it easier for 

HSBC to undertake more projects in Iran in the near future, With this in mind HSBC 

Project and Export Enance have decided to increase the above line to USDlbn. 

2~ Short Term Trade Refinancing Agreement ~ HEME Dubai USD50M. BACB 

USD25M. These lines are denominated in USD and require the USD loans to be 

booked at HBME Dubai or BACB London. 

3~ Wheat Finance lines with HSBC Australia USD50M and HSBC Canada 

USDIOOM. 

4 • UC's Issued for Iranian Companies Abroad· Various Group Offices. 

HSB C offices are developing relationships with Iranian Government and non -

Government companies. The IJC's issued are normally denominated in usn. Following NIOC' 5 acceptaoce of HSBC as one its listed banks, HSBC Bank Middle 

East now handles Iran's oil export related UC's. Turnover for this business is about 

USD400M per year. 

5 - USD Clearing Accounts. 

HSB C Bank pIc has 8. number of existing USD accounts f.of Iranian banks, which are 

used for payments clearing purposes. 

6 - Treasury and Capital Markets 

HSBC Investment bank. has transacted in excess of USDlbn of Bond business with 

Iran generating an income of over GBP700k in 2002. HBME Dubai and HSBC 

Markets operate acti ve foreign exchange and money market lines with the Central 

Bank of Iran and Iranian banks. 

7 • Potential Billiiness 

a- HSBC is actively pursuing an Asset Management mandate with the Central Bank 

which will require usn payments to be paid and received. 

b- Iran has entered the capital market for the first time in 20 years, issuing USDlbn 

worth of paper through the Central Bank. The budget for the next year is USD 2bn 

with some to be issued in Islamic form. HSBC has a very good chance of being 

nominated to lead manage part of the conventional issue and a good chance of being 

nominated for the Islamic issue. Both require usn payments to be paid and received. 

c- HSBC may form an Internet Bank in Iran, which will require an active USD 

payment capability. 

The key thing to note is that aU existing and potential business involves a regular 

and substantial flow of usn payments both in and out. 

Confidential- FOIA Treatment Requested by HSBC N. America Holdings, Inc. HSB03793157 

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76061.210

o 

From: Nigel J VVEIR 

Sent: Mon Feb 0313:44:14 :2.003 

To: David W J BAGLEY 

Cc: Rick A PUDHER; Jb BLANTHORNE; Nasser HOMAPOUR; John F ROOT 

Subject:: Memo: Re: BUSINESS CASE - US PAYMENTS FROM IRANIAN BANKSIENTITIES 

Imporblnc:e: Normal 

Attachments: irnage_O.glf 

Devij. 

As I prepared the major"ityof tha busit\ess case I think it is appropriate that Il'es-pond on beha!f of Rick.. 

FirsHy.1 woutt like to stress that under no cirCt.lmsta~ am I suggesting !hat !he HBUS Is acting or 

should ... future consloor acting Improperty. Inoooo t have specified on more lnan one occasion ihat we 

must be in full compliance with OFAC, FAlF and other regulatory bodies, 

3rd paragraph of the section heeded Oppcwtunity: 

• This method will allow HBEU to sond HBUS payment instructions with Iranian 

entitles quoted on the instructions- and yet at the same t1me be compliant with 

FA TF and OFAC guidelines1st paragraph of the section headed SulTYTl8l'j: 

"We are aware of the concerns eKpressed by HBUS but strongly believe that by 

working together we can overcome them using means which ant perfectly 

legitimate and in accordance w~h rules laid down by the ralevant regulatory 

bodies." 

In simple terms the aim of this business case was to recommend that we need to try 

and take advantage of a signifICant business opportunity whilst at the same time actively 

complying with regulations la;d down by various regulatory bodies. 

Kind Regan:ls 

) Nigel 

03Feb2003 

SeJ1t by: Manon a ROACH 

To· Rick A ptJDNERmD ern MEMlHBME/HSBC@HSBCetal 

To: RIck A PUDNERlHD CIS MEMIHBMElHSBC@HSBC 

Jb BlANTHORNElCEO SEUHBAP/HSBC@HSBC 

Permanent Subcommittee on Investi ations 

EXHIBIT #45 

Confidential - FOIA Treatment Reql .A. HSBC OCC 8876487 
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76061.211

cc: Nasser HOMAPOURltiSBUWSBCAPAC@HSE!C 

Ni}e! J VVE.!RIRM 18 MEM/HBMBHSBC@HSBC 

Jotv'! F ROOTMGHQlHSBC@HSBC 

b= 

From: David W J BAGlEY Tel: 7991 8645;44 2019 918645 

Our Ref. Your Ref: 

SubJect BUS!NESS CASe· us PAYMENTS FROM IRANLAN BANKSIENTITIES 

RIck 

I am of course aware pf the efforts being made to rind a compliant way of TlBgotLatfng the OFAC sanctions 

and provtdlng US dollar payment sen.ices to lranian banks. 

I have hOwe-..e((eceived B copy otttle business case dated January 2003 which has been referred 10 our 

coneagoos In HBUS. 

~ clearly need ttl address thi5 i$sue and attempt to lind a eompllant approach, aDd to that end I haw 

asked one of my oolleagues In GHC CMP, John Root, to assist with this process, He has arready.started 

looking at the OFAC sanctions from a Group persj:letlive. 

At this stage, however, I would. be gra\eful ifwe oouk:l exercise greater care with regard to the oonlent of 

wrltlen rmterial being forwarded to our colleagues In HBUS. 

The bu$lness case Includes B nurriler of eXpress references to practices which may constitute B breaCh 

of US sanctions, Includlnlllhe OFAC provisions, and could IKQvid.e the basis lOr action against !he HSBC 

Group for breaCh of thOse sancUons, or seeking to facilitate a preach. 

Could I suggest that future corrrnunicallons on this SUbject are perhaps elearedthrougn John Root, or 

mysetfso as to aVOid relative sensfti¥e r$ferences. 

I ha\<8 asked JOhn 10 discuss matters with HBUS and seek 10 take matters brwant 

Regards 

David 

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 8876488 
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76061.212

From: Manor! 0 ROACH 

Sint: TIJEI Or.'; 2117:10:24 2003 

To: John F ROOT 

S~t: IRAN ~ STRATECY O:SCUSSION PAPER 

lmporbnce: Normal 

Attachments: imag.B_O_Qff: lmage_f.glf, image_2.glf: image_S.gif; image_4,gif: irT151j;1e_S.gif; OtIc 

Unlt.him; iran - s.rategy DiscutoSion P.apc-r- Oct03.doc; OFAC Sanc:llons.doc 

John 

! refer 10 our o!SCUssiOll~ CCl~erning the "'an strategy, 

Aitacht.'d is bOm the: incoming, and my outgoing ~ relallllQ to ihe VilrY.JU& is':5ueos. 

I would <::uggest th:rt we do not Inke furtller- [J(;tlon urnll tl':crc t somQ c!Qftlleotlon as to the gen~ral 

direction we sre e""...,."ee!.ed to Ulke. 

"Regards 

From: PJu! l LeelH8UM!SBC 9 HSBCAMERICAS Till: 212.o25.e5JJ 

To" David W 1 BAGLEY 

SlIb.fu1:t: IRAN· USO PAYMENTS 

Permanent Subcommittee on Investigations 

Confidential- EXHIBIT #46 FOIA Treatment Reques .. ____ iiiiii _____ .. HSBC oec 8873941 
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76061.213

To: \1ich,ge! B G3:Il!'!gher 

Pe..-i l. Ut6iHI3US1HSeCQ/HSGCAMeRICAS 

SlJbjcc:t rio; lFVo.N. USD F'AYMEh,S 

MiChael, 

Tei: ,12~25-Jllec 

45;i!!il.h",,,,,rlI>?rlQ. 

My mai!'1 comment t~ D3Vid WBS, -as stElle!! i~ the text, Ihat there reJn!;lin seMus polltlca! and rejlU!31iOni!! 

risk.s within t~ USA jf!hey proceed with Illis and ttJl:!f he should ensure that Paullefl- i!S wpt in the loop at 

ail t::res b6catls$ ~ the prtcrwol'k. he has C!one boOth oolhis an'::: iOiTlEi ~snt approarn£s from Grwp 

ot!ces ~oout opporttrli!.les ;n Ubya. 

Y{llissef 

J-Ail.:bat! B Gallagh¢IQn 1:; ~20t); 10;28 

T~r; 

Confidential- FOIA Treatment Requested by HSBC Bank, USA, NA HSBC OCC 8873942 
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76061.214

To; YDU!>.~i A Nasril-lSUSfrlSBCO/HSBCAMER("..iI.,s 

Subject: lP.AN-U$D PA'r'M:NTS 

Yoossef, 

The below note 5~eslS Itlat the! yo-J have hac! ree&n! disell$!\.i'Jns on ~is t{Jpi~ Apprecisle 1'111)' 

gUidanc@yQ\!mayhe"",onhow."oowishusloproceed., 

Mir:h31!1 

_ •• __ • __ •• FIlMllrdood "" "'h~"III>1'jB Qa\llagMr.'\ofS:JSIHS$Cr>n1i'Jf1.I.{JU1;>, lw~aAp,l----·--.. -

AJaY BHANDOOL.A@H!t8C 

To' Mid·.aeJ B Galtng;her 

Gary BOOIiIMCR j:''CM MEMiHBMEfHSBC@HSeC 

NISei J YVE!RJRM lB MEMIl"EMElrSBC@i1~BC 

Su~t: iRAN-USDP;\'i'ME-NTS 

T., 

Tru~ you are well. V\'e had ~!sCusslild Iran a Wl'jle .-:lOO an::'! since tI'Ir.n there has been.G lot of wort: t.';at 

Denise Riley from your tum and GJlry Boon IrOr.'l the MiQdi9 East have done on lrun pR'fI'DI'lOts. \-Wh the 

impr.:lved situilivr; in IhB Middle Easl post 11le h-eq .... ~J. Db'Ykl HodQkln5Otl (HDME Deputy CtJalrmao) Is 

keen on elCpbr!nQ poss!ble ol.. .... iness -opportunities amI has disCtls!.ed 1!1/s paper wl!:t1 YO'JS$ef i"mr at II 

1llG8m (1f'1s~e. 

Steve Ba"nnariH6Mi; Plannin~j has sU(JQeSted a possible-way fmvard. hOWe'olef I nad wanted to dl$.cLlSS 

tt!.i;; wIth you r.fll you( inpui!;, L;)t rne·I:<lCW wrnm you are avaiiable lOr EI qt.il.'iI ·m minute (.a!L 

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC acc 8873943 
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76061.215

APly 

-- F~rwllrje·jtyAJav~HANDOCl.ADn 10114:2003---

O80ct20D3 

To: Ajay BHANDOOLAlRM PCM MEMiHBMEJHS~.C@tfSBG cI.nl 

To ."',)3)' SHANDOOlJJRtJ PCM -.t;.M!H9ME.4-!S8C@HSSC 

GtI:(y 13oo.~'AGR PCM MEPM-SM5ltSSC@HSSC 

cc o.,.id '1 "'iODGKIN,5ON!OCH MEMiHBME1HSaC@HsSC 

Jolm Bt..Aifni.OFi.NEitlD CIB MEWIHBMEi>i~ElC®kSe.c 

P<M:.. Lee.'H9L1S.lHSeC@HSBCAM;R!!::.'\S 

Cltmlyn!.ll 1iIh'IdJHBUSit ... SSC.@HSSCoU4ERfCAS 

Wemlt1 G lEmlNGlRLA LGA MEMIHBMEfHS3C@HSBC 

"""~ HO~.;.,pr.AiRlHSflUHS6CAPAC@HSt>C 

Nigel J \\'ElR'R"'l 19 ~8,.t'HBMG,'HSSC@HSeC 

~cc 

Out Ret: YC!Jf Ref; 

As discussad,l iJltach a copy nfthA draft discllSSO;J paper on Inm. 

Davl(l Hoctglt!nsoo d~CIl5SfXl til~ paper, find the oeneral IDpic 04 Iran, wi1h varIOus members Qft'lO top 

teamduainQ Ulttleoifnl uffsile in LOlldO!~ NuLalJly, htl held di:sl;;ussions "'till YOU':'isef Nasr covering, 

amongst ~t"la, thinQs, the oopic 01 USD jJUyrTeots. 

~vid ad\lised yes1erday that he Is keen Ibr HBP.E. togeth8r Wllh H8US, 10 e:xplOre in more !:IetHii the 

alremsU\ie ways in which ~'B might be abiSl(I offer USO paymemservicl!$ to Iranian barIXs. Youssef Nasr 

has sultQc~tad 1hat our Ilm1 ~int Of .contact In HBUS sll.::>uld be Peu[ Lim, 1t'.air legal advisor 

J Mtf A MM1Ail;'!pt1Qtte oonver"jatiorl. y,.jth P8ul this aft-emOC>n duling wlJbh we agreed the!. ~ ~ wt!y II:J 

tBkEf' !liIs f0f\lr8fd woUid ~ to hiao.re ihe i&iavanl peM 5pec1a.1tSts. within fl8r.11 0l1Janlliaoor\ Yffifk to(reiher on 

the prep3l'8tion of s fea&ibUify :.1:Jdj.' th:!;t exa.flBile5 !he alternative cp!ions and the rlsks azoc!l:Itad vrith 

eech. 

rcrullias ~f1'1illijndeQ thai you work closely with e»effiai legal coun<ial. in \"Jashhgk,n to k?J"SUf,. mat the 

various legsl and rompliBnce implications of eacll option are properl}' consitlered. Palll has sugogcsted 

Confidential- FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 8873944 
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76061.216

\t;at y~ mcke ro~ct with Carol)'r. \ .... ~nd. HBUS' Head ~fCompUanco, .... hc wlll;.e able 10 put you iii 

cooIact rorilh thF.!it rewfTlmCf1~Q ~;w:I0mei c"un96!. 

I \'i"Ould ~feiill'J apprecliila It if yOu COJ.l!d PU.I9!t:tt;b. Ihili with U vitIW to lla'ling a dra!'t of Ihe feaslbUity study 

t:I'o'5'!!IabJe forf-eview!:lv H9MElHeUS SGnj:}r mClI'13gs:ne:nt !)'j21 NOV"'...mbcr. 

St~ 

--fOmwardi-d!:ly :5oit'fII !1A"NFR :lI1 10I(J&I2{.o)3 •• ~ •• _ 

Tim W O'RRIFNK"~ ~! r, GHr..t!Hf3W.lII-!$8C@H.<;;&: 

,..~ 

OurRE'T: 

SL:h-jeet FOLLOW!NG N01E SelT FOR DAVID HCOGtlJNS~ 

k. dis;\ri.I~, I '\/0:.110 QrtrdUV apr.areciatec it if you GOuld pMoS the attached discussion uaper 10 [)a"ll!d 

Hudgklnron. 

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC DCC 8873945 
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76061.217

S!t~'¢ BANNER d if! 

Tef.: 79Sf1Mi45 

442::>-7Sg186&15 

To: Skn a .... "INERIMGR Pl':; MBMr-iSMENSBC@H58C 

~c: Tim IN O'SRIENiGGM -::>LG Gl-lar--jGHClHSBC@kSBC 

D~!-i HOOGKINOOWnC-L.f J,oIEJ,.Ii1·.8~EiHSBC@iiS8C 

Joon I- KOOlfI1GHClHSBC@HSBC. 

bee; 

S"bjoI .. t; iAAN - SiR;.. TEGY DiSCUSSION PAPER 

Fc!i0l!'.1t1Q the discussions 1n1!lated by ~ Bhandeob w!ttl Paul Lee whiel1l know h3pj)Qr:~d a:t Y~uz3fjof 

Nasr's SlJgQCslic'A, Peul Lee rTIBde contACt with me e~preS$jng some concern$, 

iofavinl;l CQrJsldered the s-trl:dcgy discu:-;~!on pepor. there s~e:d 10 me tc be G number of )s5!J8!; l..m!ch 

require clBlirlCliitioo, ?3rticu!efly 1n rel .. tion ~ OFAC 

i am oot sure tha! the intarl--'lte;aLion 0-1' tlie U-tUi'n ext,H'llli'iOn leiatirll(J to tho Irall S-llflc-tlcm. i;J acoorate, A 

ditailed ccnsid-a.r.lltOn (l-f lJle OPAC $!mc:tlrm in quaslkm Il18k91l f: clesr th3t the mli;fJ1Dr 3M benelici.'ll), of 

aU-tum quDlifyng payment muSt De Dem non-US aM J'lOl'..J.I'.&'l'tiaO. I attach Q SlIl'nfJ'I8f'y note prep(ned bY 

.blm Roc! (who happElr;s to be a US lawye.ry .... t;lI::i'i I h,,-pe ts of so"", B.S$ls~5f)Ce. altnough It ~~ a ClSrteral 

flo1e r.el;;;.tl1'lg 10 aU OFAC saf)(:tlOfl'S. rlO!jU'St tho~e rela-tll1,g to ltM, Too poSi\iOO is rrot helped hOwever I:Iy 

... t,;I1 appe.Ql~ io b~ CQOtfllo,lio:;tOl)' ad..-!(!C 1)(1 OFAC'~ own wt-loo.ile .... r!ere it! one eXi1l!fIj}ie BaflkMeli! Is 

de.'l.(:!'i~r:! 9.:'1 bllii"lg careh!~ of b~neflti~ from ~ U~lL!M exe:"."'.pticr., but 'n anolr.P,f exemplI': ':s e~!:Jded by 

ressofl of tile bel that It is a pO\'tlfnlTlSnt ownoo !rnoi3fl MOi;. We will seek 10 clari..y this 6Ipparent 

dis":l-tiJJ."mcy, 

Redacted Material 

Confidential· FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 8873946 
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76061.218

relation to Ir.sn. 'I'...t1i~t cor.ce1i\3 .. 02 is ;;he~;.:t.ent to whic,'l such facilities, If ttiel' remain In USD, are '¥-iabte 

once then! 15 a reQu!rerrenl to disctose details of the renilie1 of settling peymeo.'lts. \Nouk:l this not maKe 

seUlement under Ihese facilities l:lornewt:at oorrple:x. 

I am flO! SlJfE! ahal HSUS ~ftl awafll Of !tlf.l ~~ ihEd HBEU Afa already pruvilling e\eYrlnu facilities for fum 

I~nlan b-ar\~~, presu\NItltj !:ldIJdlng USD c~crom)c. So:"!!;. Mc.1tmi is named in !he QfAC s.5nclio-rn a:; c. ~vemment owned bank &ld IIlIlS on ItT!:! tdCB Qf it nol alJle 10 benslit I'mm U-turn S;J;errpfDls. ! think we should 9M3 cc.nsiClsidtloo.. to tt.e cUjJ~nt per,..; 5c;rv)r)eS am:! the liroUt,.. oHni) bl'llj(~ ~o whOm those 

servites .. re CO<t-rer.tIr pro".",;bj in !tIe cor-taxi. of considering our Olo'Elral riik appetite, 

\M:len ~ oon~iOAr.f>d lJ'le 6!i!'lk M~i CI~ring pmpo!;'1I1on my (lI'IdI1<rstmdlng W9S l~t MI would consider 

e~ner Mhar'tOOd !'i:crtlenirlg of payments mrthEI lJ..tum exemption witllin HeUS (1IrittJ pn:r5-umably tha1 ~xtr.s 

c(I!.l i.Jeing SlJpportE:'ld by HBUS) Of alwrl13lNely looking w pre.«reen payments ror U-Ium -compllHnce 

w!t11!n HBElJ, [!;; thIs l:;ontempl1!ted py the ~opc$ed ~:r.pam;!oo of 2!:1t>.'fty In re!iJt!on ltl PCM7 

1 am not $\II'e tnat tt.e C(JlTOrrt pQ'litu:al positIOn wllh m!1ard 10 t/1e uS has t11&lgf'!d U1 any !1]lPlIncaot 

manner from tOe po!il~ at 'Nhl<:"l1: we det~rrrii.e11 'tt\.1i; Project Beluga, end 1M Bank MaUl CIoa&rirlQ 

prOIJ:::::5:t1Cn \\'are ir:appropt'.ats, 

~ I woulr;! be relucterrt to un(!ertake sig1'lific:a'lt ~(lrk, p.-Ilrt\cu(8rly in relation to the int;:!Jmog of US 

.".tIOme~· iefJ3, bfri(J1~ it Wfl3 clear lila! ihrs 'fila:!;. wofthwhiie, I 'Wouid be grateful for an indi[;aoon from you 

or b"tcse copied as to whelh&r fvrtt-.er work woulc be appropriate at tflis $Iaga 

Ragar::ls 

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 8873947 
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76061.219

IRAN - STRATEGY DISCUSSION PAPER PRIVAU AND CO~fwe;!'lr1AL 

Purpose 

Thb p:.pet b~ beer. P:'ep01.~ to ~'k GUQ's 'm~dpl," ajrc;tUien.t, and unus' ''nc cbjCt1ilm", 11:\; 

!he .adoption or /l:ll1ort illl:gr...m..'c .lppro~h [.0 !hr. JlW"S'uit Qflr.nul!:tl bumcss oPpw.1lIIities, ;pit 

~ :.r. ~¢ler3li{>fl o-ftt!e C"f'QIlP'S ~tr:l~gy of"gmdw e!'!gage!!IC!"" with 1n.!I. 

BridCouniry Onrview 

1k Ir.oiao lIlill:l'kct offcr.i ~ubS·.alllUl.l u!lll1ppcd j)<11cDtial fer In,:: ASBe Group 11'.:.1 ~;:ld. IhcTt: nrc s«ic¥ 

demographk and politic:).! ch.3I~n~e!: thai ne-ed' to \1.!: ~~dl':rM. u/~II det~rmming ~tr.l.k8Y, T(li;lriet1y ~Y{!UI1:;)ri.oo: 

i()mt:oru...c;oU,,\ry.specii'kh18b!lgh!~: 

E't:oIICllfI)' 

• Wit .. ;a GOP of c. IlCbn in 2002 Ii';;;r, is !he 2nd li1I"S~s\ e~c.I\OU:y (aflcr $!>u.-:li Arabia) in (he- Mid~lc £.lil !l!lkJ 

N.r,lrt.h Afrio;a r!;&lon. The ~utiJY !;";-.-perienettl::ln ;IV"lI~e ~.8% ;;r'Cl'it.i. i:1.GDP Q"C: the PJ~ t..\jrt:c ~'CCll:;" ::m.:! GDP 

is fcr~ast to read! 11% next yllBr. This srnw\J'1 has b«l1iW'Bcl), ""vcn b)-' gc,."ommenl polic:y dl~gt!J (some ~r 

-\v'-h~dl at ... dfSl'rib(.d bel,,,,Ii'), Tbt iit"Otlg p::ff"lmiIIIJ;.,. ofDx: dl1lllo. l1);.'fic-uhuml sC(;tOI'S ba.'Vl: .,ls\) (:uHbibuir.d. 

• lrnJI's CCQftQMy 15 begyily R'litml ~ oil. 1.1\: CfWAtl)' M:! proVtil rcStlVtf (Of {:. 90bn barrell. the 3'"'lllTgcst io tbo; 

WOT]d (afur Saudi ArMl1a flllI'i Iraq), <lCCOUnlmg. fer ~.5% Df U1I: global loW. The devdtl?IDen! of iran's oii 

irld;JJ;uy b:u:, hO;l.·cver. SlJrr"rot ;OJ; II i:;J.rl5eql.lcm:e of tl.e US SOlttGLions. Inmiilll vll produClioil hr.s rernnj"cd 

relatively sfJ.bk [CIt the pa1l det'OOe, whib~ gbtd !)oil p:c-l!llcnou Ius ~OWIi J.telldy, .lllie!l small, year'(J,",·~'ear 

frowLh (c. 14% IIp sitIC'C 1993). Whilst the oil :iltetor's sbaN oj' fl'OBinn GDP hos dccliMd frolll 30-4~~ in tbc 

1970;; l('l 11"5 .. ;bQ1, 20';{. .... ~r, oil re,,'f-llue SIil! iK.wUl!i~ fuf c. ~O% of rhe COIllltr)', e>"pcl1 f-;m-.ings 3/ld ",_ywhcre 

betwe~1t 4(L.7[~·{, c,f g;>vemme~t m'C.nae, Cepel'ldi!le 01:1 !..~ pBv2i!bg of! price. 

• {filii h.ll!', IJI1 ~timalr.d .'.6,oir cubic metre~ o{IJiMlJml g:rs:,;he s!:cocd larges[ proVeJI re-sel\'es. in the world (af[~r 

Runill), ~~~oi.ll\lin3 for c. 1~A. cf',hl; glot:.lllQlal. !1'iiIl is farbclo.ind SOiil{" Q\h;::r Mi.ddl" Eg;;t i:Qunlri~s (e.;, Qalilr 

mil Oman) ITI 1M dtvtl!)ptrn'nt {If!~ npnr< o::apabililies. The lra.l1b.n .z~·err'!n'elt! 11.1; recncnified Ih~ p:11en1i31 rot 

signifi~.~nl gm~th i:'l tbi~ ~ IlI'Id nQS set:lll runbitiQU$ ~(of dQub:1I1~ pl'{ld~ion b~ 2!105. 

'" Acc.::mlln" m lhe. Ec:crllOnli::\l Intd!ig::no:e Unit, bn h:ls (m!}, ll$D'J!I;r: of extereal debt, :l re!;tive1y =al1 

prOportlOll of mmual GDf>{t. 'p,;'). ThI: <'.(IUDL!y hU, in 11:('(':1\1 yell!'!'. (!['Ij\'!ycd II p('Isilivc IJ:Ide oohuec and had. at 

Scpl.cmbct 2002, approximalely USD2Ib!l [If foreign currr:ncy reSCf\'es fUm);. !Omonlhl> import OOI>'~r). 

'" AtthooJ;;h lnn'~ ~~II(O:nic dcvcl\)~C111 r~ ~H! ~\J:tmg in t':';enl)'t'i!r:l rt could, 1lTg'J~hly,):!.e rnuc!'t Slrnn~r. The 

reccnt rcforrw; (diJolCllS!oCd briefly l;Iclow) have kad a pos,lIlvc aJTect b!.l11DeSC havc proceeded aS;l relatively slow 

p.:atc. Tbc c"U!1lJy'~ groll,'ili is ~lill si&nilitanll), bifU:!..'l-cd by !.be an,@.GiOIl uS Ctllnomtt ~lI~tiOll~ lIS wcll :l5 iIll 

ar.c:ha!t dame!l!c b:mkins s}'s~r. dCl'!'!~'la(ed b,· !Y-w':'e~:it: and b~m<:ienl gI11f-erllrl:ei.t ownd bJ:lK$. ShQ1,Ild Ib~ 

S:::rIlC11OIlS ever be blkd, ::rod \he liber4l1utloo iJtitia\I')eli se.c:deraled, the eC!;III(Iomlc b-rtJu'lh pt:'r.cr>I!;q (:1nd 

CPpoliunili':;l> f..,J' $!:,,;l.to;gi~';Jh loI·cll-pm.ititrucd banb) would be t'llllmll.lUS. 

Sodo-VelftOinpllic 

~ Iran'lt populatioi". of c. (,5)11 ii tt.-o S~Qil~ liltgest in ;hc MENA (¢8iOO {a~t E~ypt}. Oll.!l p:r ... arila: Uali~. i1J~ 

eCTIl'iry's GDP i$ll rrlmivdy Jc'.':' USD!.7!)1}. 

• Llm!..as Il, !'!tmllS ~dlKd(iall syslcUl TIlt: cour.try bill 11 c. ;5% iileraC)' r.\~ (97% il!:r:l'IJK~[ ihDX Il'Dd~r 2;9). 

• HO .... C\·CI'.like sC ... e-mlI)Ih"f~ounuit~ in lb~ !'I~gion, Inrn Ca-xs Il s:I,llilie!.r.t dtmogmphic ch:ll.!t!lge with. e. 5!},!~ ~f 

me pcpul;nioll "IlJ)der 20)'Can of age . 

.. The l!3l1i3ll governrnc:ntr,:s!»tn m:tltins:: ~r:Cf:rtei. efibrt 1c ;:~'C;;tejo':Js, wilt: :;.ume su;:ces> in ZU[)2. Th;l! ~id, 

the lo'OXmployrm:at r.IlI:; rr:maiDS high (!:~tim:lted ill !5~. In 1(03) nod wilh 700JI(J() tdm:;[n~d YOllm; Muerir.¥ (\\.1". 

\ .. b...>urm::tt'kel t~b ),cikr, then: an: im;\lilllbiC" f;()doll icniioDS (sec P"Hucw COlDIDC[llt belowl. 

PNiriNiI 

" I;an':; 1919 constiMion laid t},e; foundatiofl for il(Ilsl~mk L'-,~IX!rs:.c)', ""jib IJ supreme rclj~io.ls l.:aokt u(;i~ at ~ 

!:~\.'t1.r.y·s ~l ;,X),,~tfu! ?o!iti~::l f~ur:, jr.:cidi.'l.g O\'tt 3 l~sa! ~st= ~::I (l:l Sh:tria !;:;w. Followina: 

Permanent Subcommittee on Investigations 

EXHIBIT #47 

Confidential- FOIA Treatment RequE~, ----------.. HSBC DCC 8873949 
794 


76061.220

IRAN - STRHEGY DISCUSSION PAPER 

Kl:lO:neiai's dellth in 199..) the conrotilulioo WIlS 3lll(lnded QDd sollle of ifill supreme Teii.~ious. le:aacr's ex=tiYl! 

power>. .... ·ere trunsfcncd 10 the elcct-cd pre$idcD'L As iI- «suI! Lite C'l\uury nQ'" has ll!I, at tima., "U:;~OfDrCltablc" 

dua! powef SL'1lC'tU..>'e in which ded!i~n m!!-;in: euL~-crity i3 lhercl between (ern.",n,£s! ()L;'.c~) '..~ SUp~lnC' 

~l!&iousleadr:rllndanelrctedpresidf'Ar 

~ Thefe h:l:l m-n :;igr.if.=t m::dla co. .. ·::rngc, In rucnt ~cn:-.:, or1,... c OT./ioitlg ir.s;m;<! wnniCtS wW",ill f'J'llII bt:\\'ccr. 

tile so-e~11ed -con~r"ati\'iI's" (ncolaHy 1"e Vl.laroia" COUI'Jdl, n ltgisJatiyoe wwbdog flMJ by tOJlS':"r,uive o;::l!:rl"s) 

mod we "rdonnjsts~ (ied \:r:-' President Khll:olll1i). Althou\I:!I Khawni's. ~ovemlJlenl has ::I diHlI 11l>lll&'le from The 

populace (be WilS l1l~elecled wilt:. 7!1% or the va.e In June 2(01). the GlJanii.aa, Co~cll have ruc(eeded li:I 

bloo:kiDg a nlJ1!lt-cr cf social, ~li:icall!nd CCOflC'nlit refCm!l! th;!J bud bcc~ ~\.ro :.-y !be Jl1!'1;(,:Ill·~l. 1k 

EJ:p:diency f'.mmeil (Il"Dtn~ EovemmMl oody ir!'~d b1 fotmrr P'r1".!lideIl1 Akbar Rllfsanjani) ha ... howev~T, 

help~d medialot wmt (ifm~ displites. en:lbliug tht illirDductiDI'l of"urious rcf(lffllS. FOf exafl1ple: 

a nl".w Foreign Dirt~ lr.ve~lJnent Law; 

::iholiti.~:m of fGrcigr. e:o;dl~ c3lllrel; 

(hl';uniiicaii(inClfthce~d111Il!lcll1(e; 

,:Ox &. t;nff~fn.no.s: 

Ute en:,ltion of.;w ofl.n.ahills:nioll rund; 

111""'$ il;llo'llria.ll ~;c1;st"bl.islllllcni{)rpri"ate banks. 

These refol"!ru have helJ'ttl erellle !l. Mort posith't envifOllTllul for fordi:IJ invtstmtrlt anil hfII'VC fudHt!:ted, 

;amongst olher things, I~'J ~~sr~l C,'Mallce 11110 the io!cl'U.."olicl1lal eRpiUli lUatkclS wilh 2 EurobondisMI¢&. 

ThaI notwiths!i\Jldiflg. ~. pa-N' (>f cllJln2~ 1S, fotmaJ1Y. 1101. fu! ::nll'Ulih and the' ~O!l!ltry'~ dem(!grnphre P~!:rures 

aDa unempioyrlltn! prohiems (6\f ... of In fiSC liu.1 i1re llnempl<ryed nre l>e\lI.'eeJII 16--24) provfd1; for PQll1'.r,ti<tl Wlrt:st 

The fr,.!:;tr.;liil1l amMI!!>l ~Or.1t 51udtil! ~ro.up.~ boj\eil oller 11:t\l> 6.lr'~t d;;lllOll~ir;;.tiorJ&; raTJier rhl;; yeJr. Tht.sc wac 

q!.lCllc!l t!lSiI), ~Ilou,h but [!'1M! m\e!!!.£l~iOtla1 COCll!l:C!!l!\.oflol":l t:~t.ettc!c- believe ~::l! oomc!'ic lCnsiort~ wi!! re!l'Iliin jor tt>e f(lltl:;t''!3b}e fulu~ $lnwil1J!. lilt pace of refonn and eronmnc: deveklpmeTIL 

~ In 2(~1l. Ilre US ~.e\\'ei ~ndQ-r.s or. Ir.m fur 5 yea;s llooer :he Jr;;t. UtI'''' SsnC;iO;lS A=l (!L5,1\). TIu:y aI~ 

!UCC'e(l:!ed in bt~k.i!lg Ir.m'i. ;:<:C't~s:iml tll !fJ,::< World Tm6t Orgwiu!imJ (\\.'TO) Teruic!n! tsett~_!d 1:l!t year 

wn\,:A ff~idclll Bush Q."1iJgllilIOO ian ;15 one of the prmdpal ClJllhlriCS liupportin¥ inlCTllaLiona1 lCmlnsm. 

Rdsli .. us btlW~{.n Irnn iIild ,be US (a.i,d r',... in ~th\:r CiOlll!llril;':S) h .. ".e funher dettd"ralcd ill the ~t 12 mconILi, A 

feY'l!ouble e:otamp!es ofTtcen! prclJtems !!lchi!e: 

1) The witbdrow.al of Moody'$ a:a r.mllg Oil: lru.. ~ fotkowfllg.:l US Tre::l5Ury inv~ti~!ltion llll':" wueiller !he ratlog 

agt::!!.cy :nil)' have "louted US s;mc!icn, agaim{ ti-.,. cC'\ll}vy ~ further ro'.Jrtd r.;:llil,iO'!l:s, 

') The US hil$- rcp¢nk~dl}' 1IC~'>uSC";l Irati or h:ul"uring tmorisl!l: ;u.d dC$1;.I;biHsmg n;:f<l-TlIl drorl! ill lr.tq. 

3) 'lbc death of l). C:u;.;::dian Journalist, III !raman polke CUStody, kas Wkiermined from's relatire.s wilh. C'..anroa, 

4) The UK ~ L~ h;:-.-c b;:d ;. dipl~~tic $~t Q\~ ""c d~"li;lm(;n1 (f{lr po!er:tial cxw.;di(i01!) of 1m l:--aninr. 

dipl(lm>l( who WOlS &tudying in Ih~ 11K. Th.e: tJri1i~ em/orlq~y ill T~T! wn~,5\lbst<()uenrly ghm m i:n wh~t may 

«()rmaY1\Ot)h~"e~"arel~edevl!'I\t. 

5) 1m's. nur:kor po:olicy (nombly its l:utwllli%lgnes'! til' sig.r. iHklitionlll protocC'ls 1.0 allow tllh:mced i'ls~~Ii'.!!I!' of 

jill nuclcar f;lcilhics) b~ p~ lhe ¢Ql,Ultry 1Il1oE'i:,"rhcads with, Ml ()rliy the US. bl.ll al$o some oflbe (1)unIOCS 

lhi;;~ fJ(0« [3\'Qu.... bly dIsposed to rr~ p:olitielllly (e,g, v,Ilrious European cour,tries an~ Russi ... ), 

THR teil~>'e "Post expericnce shnw! mal Ir:m will eventually filld a pra,esnati!:;: so1ution \0 Stllbm2~ t1tt siruatil)ft ", 

II j,. wer'-.b noting thal Fre!\Cb :wei German CC.ffiP"llli('i .' PaaXS h:ot .. 't; be~l :..bk to g:r.ill ccru:i.denible cl~djbmty and 

busi.!l~ r.i !!:l.."l l.':rro\lSh lb~ir ildcpo.:QII cf!l pl'l:gm~,,;~ ;:pprtlllctt to the i:llcrr.Ill:~:n politice! !CDsj(Itt~. 

HSBC'~ J\~J,,"leillticn with Iran 

1.o=.g Mister}' in kin:. HeME was f(),,rndcd u."')de~ a Brili!ih R~ya.! Chart.. .... :l!j th~ In'lp~nal Bod: I'JfP.e.ni~ in 111$9, 

Th~ R1I'IIw'~ 1i""'1 (1Iir.fMlInllgl" rru,Yt.<ll" Tr,'I1T<!.II thai YN'rtlt'l<J.l7 jSQ\ !.hI: Bn!\k ~.d C'~~!Y.:d brN!(ht$ iTl I'a<:-h of 

P:rs.ia'~ ei~ht larg>!£t ciues, By me Setond World W[rr the Drmlllll.d 14 hnnclae£ IlCroU \Vh! WlS, \1.;.0 1h~n, lraQ. 

Afil::r tlIe ~ar. tile Bank z:dtlplCd a.1 ~:,:pillUioT1ary polk)' ..... liIU ~ Middk [oiIst, tll*,l~hir,g l:iran.::bes iii Dilba~ 

Mused, Leba.,otl, S)'ria. Jon:!:m :s:ld $;ludi Ar-bil bo:.~·>::cn 1S146:1rQ 1950. The 60-)'C!!.f banking cODc~ub!] 

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 8873950 
795 


76061.221

IRAN -STRATEGY DlSCVSSION PAPER PRIVATE Af'lD(:OI"FIDENTlAL 

txpi~ci. ill 1949-. foilowing wbkb •. he vmou:; W!linn br.mch~ wen: gmdoolly dosed. The Tehr;w main offict Will 

lbc lilsllo cI~ it! Jut)' 1.952. ill which 1ime U:u; Bunk II,';U ~·namcd BaME. 

SBME. ~~lcmi the country \hrough lIjoilt\ vcnlIlre iBank oflraTllll1d the Middle Enst} in 1959. This bani: W!lS. 

bQWr-,'Cf, n;lIt,ODlllis:oo in 191!;l r"lIowillg tl:.c }sll1iUic r~ .. olulJoll. 

l.iti..1 Kt:-u-cactllle'lll. H$~ ~-("D.lCred Imil 1n IYW, estabbslllAg,:I.D. H8ME n:prrsent3ttvc ollicc Ul TcbrOOl 

(THR;. 'Thi~offi"e hiiSi,durinS ihepa!;( ihut yem, frlcn.-;rn nil a) ni~!! l'nc PfQri1C a-ffhc H.I:OFiC Gr.>urlr, r:nm and 

b}nclh·dy ~...,rtjns ,,:Jrio~ Group me.-r.bc:1.I in ;herr ptlr:;uit ofb~lnc:;s opportunities ill Irilll. The Il1'rtX'Ma:i~ 

m'tia: hns. he~n very $~nll Oft oolh Cn.lllll'<> ...... ilh "'i~nm(':;ml hll';i~<:.~ wi..,,; in m~ (I/"I'.IIS <;tf PrQj~('1 l'nri F.:Jf":l" 

Fjn3!lc~. Trude Fic.:mcc :md Trt::I.S'IIl"j &. C.apiul Mmeu.. TIlR el:um:ltc !h.lt IDmall blll.iness b'lll)er"te::l.I::. USD1111 

p;;.jU1"Cv~-aiJc:!ifn; Yl:riousilionpcn\.ilin. 

The llI1kulOded: SlrlItegy of tht' reprrunutive offi~¢ haI bcC11 onc cf"gndwJ engagement'. Thc objective has been 

1.0 system;:l.licillly dc .... dG~ the Group's r-;:;:n:oc~ >:<!pilbiliti;,:s ~nJ bu.-;.illl::n llows ill Imll ill a. st<!ady 000 Ill~wre:d 

mnrme-r, Whil~1 busme5~ vDlum::t. and \hi: I"lI\g~ crv.!"':itts offered, have cCI-!ltinued 10 grow In !be !itS! \\"0 y\!~~ 

dIe JI'11cc or"~ua1 cngagement" has :reIDllincd somewhat c!ltdiaus. ~ a cOllocquencc. s\r.lH;:gic mili~tivcs ucb ;u 

"r~ojcCl B.:I!l£a" (tmtny d,H"rihtc,1 1:<1" .... ) ltavco, f(jJ a v<lri.o1:r ofj\l$iifiable rt!!I;;.:Jih. been pu1.0Tl hoW. 

"r~jtct "IMagl". This i!ljliati\'~ proposed ille t:5Ulblisr.meJlt of an olT~IHlre bank, modelled \"Ul f'inl Direet., that 

.... (.llki ... dr!::', ;l '<ill~O:: ~,n"lllkill1: Sl;:nrK-t:-l> iu l'USWm't"TIi 0fI1bc II-anian lTlainland through remote dhtribuUQlI ch~nel~ 

!f..ut!:ctdcL:.ib urc prtwid.ecl j-o Appendj~ A). Giv~n leg:!l res.llietieotl:, whi;:h inhibil foreign b2ftk.s ~ eru.bll:;bi:rg. 

OtIshoft 1)'""Wlbng "']"I<'r:IIlioll!il in lnlJl, Rdu,e:n ..... :u: ~~ Il.!.lh.l' 11"IO~~ Insic~1 \1.'11)" Ito pn:!~~ Ill.\"" 5\TIltr.gy nf"gr:td\J~ 

fng.;lgCmcn(". The must fe("~nt ilnolt.i011 of this init;ative (in 20m) di.d nat pmg.~S5 VeT)' far.:U GHQ indic::ated that. 

I,\Ir.il..~ ~tJ:;.l::\j:ic.:!lly wuOO., t:;~ l!mil"l£ tlfwas ;10t rilht ,Iran w .. ~ t.~tl. n.<; Uou,"",', (;cir.g stm\r.s. in ilS rcliti(1I1.<;i1ir- with 

llv- US ~"rrnm~\ and Ih"Orollp W1$. iI\ ~J\.t" tim!:", ;!!c!J~1:4 PUBu1r!S ~cqUU-\Il.(!Jl '){lpC!ritJllitics"![' the US}. 

Tb~ Nut Stag4!? lIiIIJ dellrly rcpT"t:scms Crnc or we mOSI sii1\inur..I p.'llClIlial IltvwUi rtHltkclS (Ill' HllME in the 

$}I~,..~ Il!~ditlm I!Jlod hme term (I briefs),l1cp21g l'rthc poterlt,:!l bl.!!;iJ"te!l;~ o?;)':'rtlL'1itk! is numBed beJo.w). HB!'>lE 

bclic\'csthBlihc-re isaneedru: 

~ Adopt;l roo~ pmnctlv!' I eggtessive approach to Ihe pursuit <;l(IlC"W bU$w'!Jl in. Inn::m.d 

• M"rc dllart) -dc(j1\C UIIl !'I.C;olI ~~c uf i1:, p..'CIIX;~S of &...,;I~al C:llg;l~II;IIi. 

GUlmnce is n.-quired thlrn GHQ (and HBUS) or, \''''hf.I''~toey ""oold hav(, any ctl1lcrrrs with HBME's proPO\a1s ttl 

3ccekr.ncolLl'lIlC:3sdc.alingswithlnm. 

Business OpP{lrtuDitie5 

HOME bdi[;~,t !hul th~ :;Ir,ntgy should !lOW be pmWCncd in \WI) pbllSts: 

l! J>h:;IIl;I!'" J. The Gn,tIIp .sllould st>."1o: 3n imm:dirlle:. inm:l~ in ill;:: qt",..,lurn Qr cro.l1li-oorot'r buslIlC'Ss undffillkt'Jl 

with holl\inn coumcr~panit's. Such wiil etlkCl"3tc i:'I1:rcm<;flt~l bl1$inC5l!l rewnUE'$ whilst demoni;tr.l.liTl\l-. til both lr.r. 

lJ<mi<l.n lIulh-orities ar.d ou: «l$tCl",e~, the. Grol:p"$ comiilu<d commitr.tt'nt;v deveiGpir.g iu busiileiis,' j)~~UI: 

in this g\nleg.iclIlly imptlttll!:t m:ui:ct 

2) rhiO! 2. In the medium tfi1l1. th.m: L<;a need f"r /l more larl&!bl~Jlre$elil';: m the ,:mmlry IflC!lI~!mk'JI wcre III 

pbce:. ~(J allClw us ~ -::~ub!J1lb 1Il oll-tbe--gro>.m.d p~~n~. tJo.e ;mf~;-ro~ :-;>= wouk! 00 tbe -csI.:Ib~sbnC!nt of-= 

HBME branch or wh{)Uy owned HSMi: ~ull~lfl:lry ill Tcbr.lB. tn lbe absr.lltr: nr surh lr..gidation, .1 

"rt.\"il.:llisi.lioo" (lfPtoje¢t Belugti, 111 rom.;: r'mn, mllybc;J; viable:. oplion. 

Funhc:r del/lils 11'1:: pro\·idcd belr;rn' 

P"ltll$t 1 - [ma.\!di.a:tt Opportu~ities 

We p!!rt"civt th!ze !o be im.medi;lle oppcrtl!Ili!1et tCt Ulldi:rt.::ll:e £:S~ifi\)":ll1~!Y r.lcre profilO!ble lITId credit'N~:<.!I.y 

busitlci!I in 411 variety of dllTe1'I";l'lt b~i(\(:s~M'~~5 Srctiri(;"IUy 

1. Trnd-t Flllon(:'t". Tl-.: f"..m::llp htl.s, :11 pte:>t"".nt. a USDt21)m sl'l.on·;::rm (-C;.M dtys) trode cap for !!"";In, \Illth 1I. 

forla-1l1l'11t sub-lit!lit (lfU5D20m. The otilization d tl:.is limil i$ vel)' hi:b {coDsis1cnt!y;> 85%) and. bns~,j till 

markl!'1 feeob:lcit. our limiu ~ suOOutiaily below tMSC of our camp.ttilon (StandMd Ch.~red, far tx:lmp!e. 

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 8873951 
796 


76061.222

IRAN - STRATEGY DlSCUSS10N PAPER PRIVATE AND COfo,"YlDE.";'11AL 

r:pcl'tedly l!:we %I USD5C'Om limit). HSME b::tie~'C theJ:1: l¢ be i~il:di:lt;l ~rtur.lu~s for f"mt;er profilabl~ 

llUliu:;s lflhe HSBC cT~di11irt,i! were <:ignir>.:;r.:nll:i jncrrpl/f:d lIrloil tit\; 'm<lXlmurn t~!lOr rX\tnded t1p IJJ ~ yt!lIj. 

2. PrDject ::cd Export C~ed'it F==:llIce., HBEt: prod~~ a multi·wlr.;;;c ECA c""cad M>:di<.m<·T:nn E;;.pcrt 

Credit lim of US ';la, S1 k~ Thl; Grcocp hllYt tK!lbIi:;h~i i.l strong wNkiJ:g t'tlatiof:!!iip wlL;" 

~p~~ ~~~n ;dit tr-;;~ct:C!l:~;': :Gm:lt:nd f~;:~;!:v~··~::it~r:~~~,;;'~~:~O~i~8~~¢~~~ tb~ 1l: il cinnW!t thl\I: l1e (j!'pup \\Jill I(lFot- its t:(l1TIllelitiv~ td~e UIIltsB' i1 ia ~k i~ ~lPP{)1'\.1 ~'.QPlt~enl tIl~ ECA 

bor;i..~d J'.acilnies ~:jlllil ti.eg~= of COiJIDlcn:ill lendios. Se\'cra! Europt:;J[J (Pot:Jbi)' Frel'1(;h !1Ild G~""iI!I) baJlb 

h.. .... 'e meeil.lr.l Il::rm cot:unercld !:lldiDg limit.> (Br.Y:. Jimi~ i9 3Did to !x: USDSOOm) nl'ld me)' .1r~ h.:co..j\i~lt 

~::~!;:::f~~I':nJ~~~~~e~~:s~~Rto ~~a':!:I::~sj~~~~; ~:u~g~~~~1 

~c~I;;,..e;f ~i!!;ck:~ S~~~,~~~!1)'r:i!nl!rn:: ~11 ~n g~S~ ~,:r~r :~i,:~~~=~:;:~ :~ !nol.~PU";i1iuli pttIjc.;;t.e.. 

J. bla.u: and Cerporl1fe 8(tnd~, Tht-I!'(I\'tmT11'1cnt 1:111'1111 lire ~M:'iid~TiJlg i~~llin! nn 19nmk C'r(\W:~!1)::"ll Bond 

(Sukw..) -II1'd V.;lI1(111~ ro\n;[;wtial b;uti;JD eOJpoulc bocUc$ bil\,C exp.-eucd un hnc-~sl in llY1,jc",~killg hlamit: or 

c~r.~'&r.lio:!:ll corpe:-::ltel:xmd b~~. H$SC Amilt~::.h bas alrcai.y 3ti':\L""td a wc~ir:g os.r.~ from ~ ~lud, 

the possibility of iS5ul!lg tl COT'PQl1lI: 1s\pmk bnnr:1 aod. !iho!t1d :h.i:; Ir.lld 10 ~ ~rc('mt im,Jart.t'!'. m¢~ \I'ilI 1;10: 

n;la\ul iI.:U;;ll!iIJ)' bt.;.~;oc,.... "l'f'IlrtllnuicliO. If·he Gr(lUP is t·) hlrVC illlY Cb;\D~ oiwi!!ow1ll ruch. bu:sin~~ it \l,.iI! need 

aT:tedil1'!1!.\er:n~::!illimj!fbr!ra!1. 

4. AI,h»ory SuV;crw. ~ i" 10 gTl)will!l, de:nu.nd in lT311, irom both priv;ne allo public S«:1Cr bodies., for 

!;o:pora~c fill~e ~rh";lOl)' scr":;;~, HSBC wi!! l~::me soch b',J~ne;;s opportllnit;~ ;;wspecth·e <iillo'h~t};n ;h~:;l:: 

is a~ incTt:e!<C in ~~it rjik Umi'S, TIle Ill:elih.xd <'If m:g:!:!i would. OOWI:'~'tt, I'll: ellha!lCl"d if HSw". C(llllillued 

Wlllllli ........ ui w JC\ldu\llr.. tr.llliir:rt Ou:.-inc'>S (;i!ll b~ clearly dcmllnsn!i'wd 1;1 "ir.m iec.~, 

S. Fill:rrnci'llJ )lH-titlltiO.llJ. UtR b~ b~('n able lQ nurtul'C p!'Qril;lbl~ b,,~inr;$J1:i:uiooships "'ilh It ~·nrio;:.\)' ,,!'!r.miruJ 

banks. As~ocialed (r\e1)I'Ii~ is d"=,rivtd fum) mm ~eTViees, project fin,n<:''!', trtaSU~ i mooe)' markl:\ opel'lltk,"s 

unl CT.)1'rr'...p.:l::ldE'lll ~ng. 11:.e l=i~ ba;:;:'t.:i:lg: Si~l:C1 :l;, e!1e::tivcty. ~ont..-elJ.::d by t!lc ];;mi.1:J !.::r ... ~rnt;lcnt. 

THR believe thaI £1ur ~lalJ.vdy r,.mfll! appt!jl~ to I:o:rok t·! :J.nJ,1 nH JWlIi;ln ri~k undtml;n~s Ibco C;rnl1p'~ r(l.~ilin1l 

;:11 .1... I;'yl,:~ of ihl;' Iromiml 1r.J.I..i.critic$. T:,js oould uncicrmice \Jar cnil:lc;c$ oi'n:kiining Wi): curttl)\ "oiumcs of 

to~e:ssr.'Vmlrani::'lIb:ml;s. 

6. P.~lPellh & Cuh M".q~IlI'1!.11t. Ir.m underu!'\..c~ appn:nnm:neiy USD25bn of in[tmal:enlli trnde arlnuall),. c. 

~!l% of whid! i:l. de1lomi:n..-t::d jT) usn. 

HBEl! POt c .. rm:nlly offer uSa pllrm~nl se:rvi(.es to -4 lrl\.li.a.!l blDks. TI.nl:' ll; .an Q~portllDi.ry !o artivdy 

r.::::k~t oct PCM c:cyebmtlc:; t\J vtb.~r {;anian ~~lmcn;i<Jl ~lt"'. rndudiil~ [r:r,fs O .. -nlr.J Sink (1331111 MirBU1J. 

MlJMt:: PLM t>elICYCIhaL tbe polcullaJ bQintss M.br; "'m wt!\Ild 00 worth up ,(I tJSDJ.rn p .. 

The US s3m:tb:5 ~:Ul lJ:r. i:r.lptn.11:lg \Jf, Iel9s1a:io~ Tt'sulti:llg fr.cJm Ihe FA "IF ~,~;::;:mero;ltiG~, l:rowcver, 

S1!r1-111ronLly romplka~ Ibe lSO Jl,,1,.,lncnUl pra~t~~ for trt'rti~n ('~\m'(lr·p1l.ik~. naME. PI-M 1m.'; i;.ti;-Itliriet\ ;J 

pliiCi:b;! :>::JIut'u., lhj!:\ '......,,\l1r .. ) w.).1.iliorll'l SlIpP"fl from both HSEU:mo HBUS. As fx~laincd IJl1d.e1" "Is~~ fur 

Cb[l5;dern~jc;l.W bd(lw, tl=-r:::=-::: ~.::'"!! t.~-:TIe re~r.·dli""l~ aOOUlllMl;rtal:bg m<)~ I)fl~,i~ <;ype ofburinC"os. 

Te s.~ HBME'$ dcsirn 1-0 m£1ll! lle:En:~l\'dy p!l~~ Jr.'tHl'll bU$inc't'$ 0PVN"I\.Il'1l1ies., lI1td ~ prtIvi\k: 1\ foundtltion 

for(l;t ocgoiuS .:wl:lti"'ll ur<out ilt(3\t~~ o[ .. gJ.>l.~l eng~em<:lJc. HEME wili s1tcn,iy prep;u--e a POJK'l" for GHQ 

eRFs cc~'siJ:~l'3timl ftqtJes!mg t.ppropriul:-. inL"re~l';' ill :tk'~llnt ::-mmtry ris.;limits fer ]nf •. 

The i<!t:ntilled PCM opp,J;fi~itie5 haH. ir JhI'!oU"'d., !,oI;:verJ.l pl.lt::nllu1 im~licallOll$ (c::t.:l!II,mcd .. nder ~l~sUl::" for 

Ciln$j:lcr;l,I,i~" below). j\$ suc:t. HB~.f.E roqu:Tc: Ille "j:!l"print:ipk" $I"lPPt'1't o.rGHQ (;:md HBU$) bereT': activc!y 

marketing our f'CM cspabllities in 1m.. 

Pbue 2 - Mediu,1} TenJ,1 Slf.l~ 

'The rtoqUl!SI foOr:m il1ctf!:Urt in crl:6illil1'lit~ will, if:l.ppmvt<:l. f1!r,tt[~ the Glt)1J"p to g('!lerntc ine~,llstd mcome from 

ir.w ill OJ ~ariliy ofUwiOC"ss lne.u .. III (he m~diwn 10 ion~ u:n:tl. iJ.c-wever, woe Deed. Slf3k.g'! Wt ?l"m':des Ille Group 

wid! {he Olbilhy to pm-v:.dc II wider m."'Ige (If corpGl'Iltc b.midllg s-:rrictS, dorr.~iP~ pcriQnal rillilndal 3otmc.cs 

Redacted Material 

Confidential· FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 8873952 
797 


76061.223

IRAN - STRATEGY DISCUSSION PAPER PRIVATi: .J,.ND CO?o."FIDENTIAL 

(jHob.lbly.;a Ijroil~d Ctfi''Ori!l!, [.,.r lli/!lh eOO CU~k'Il't<!~) ikl\d 'Viir1.0US hbmil;- bwU.lng st:rviee:l... (The «llmtilit b.:in1i::l~ 

ftlll;n:CI ift 11'1111 is Cnli~!y Sltati~ (~mI'iJ~\, Th~ are p::>v;nti::l\ opportunilic& fo.r nsnc AmiI!Iiili Fiumt\; \{]I 

dewJop products for sale i ilislribution O\!'I)Il!Jl tlt"er ~Ul H!:!8t. owned I m~a!:led entIty (IT 'hraue:h loCll.t "a~t:s). 

HB;\'ffi'~ pn:fzmd St ... :I1:egy, \>"1'l~\l the legist...lic.-, .a.-.d tc.a.-tw: 1;{)ndmolls in il1iil alll1\\,', w.,;I1;1 he 1:..1 c~t:lbl1*, IQ. 

('I ... ~hl'JTt'. bornuct. {tiT, irl!lr. !/lW fe'lt!irr..t, ~ I"'-~Uy jf'lc~~f'lI~d wh{)n~ cwrt~d ~t!Midi1lt'}'). 

In tb.:: .. bsent' Gf aroy su.::h 1eklis1.ation iI "Prcj.;-ct Beluga" type- J'ru\:t"olR. oIT, .. :; an ilI\;::mlrtiv, whicle thro~h wb~l. 

!Jc~ plQC?,~ "r"!n!(hl~l !('I>e~m('[1I~ Will Ix "rogft"t>'!I('d. nne ntll.blish.!:nen! ofa reIlYlt'! bil'lkiDg o~ration Y;<QUJ.d 

DOL pl\,. ..... ~nllhe Croup from polCDlmlly c~biWllntl lID onsboro: brMch a{ a fa'.Urt date), 

The bU$;llt~~ t~~t for !he tSl!:!hli!JmJl!'!11 oru Pnjec1 Bel!!g!! type vddck is oot!l£ robt!$ricC'rIlpc!!i!'.g.:tl w(lu!db~ tbe 

euc: f01 311 onslH;lf\; br;U!ch. Tltat $:lid, HBME believllth. tbe 8c:llJ!.lil optIOn i$ still worthy of (;onsidmti(lI; in the 

mt:dii.lm t~r\tl as ol1l'1e.tbod ,,[e-ns.uriIll!llbal HBME ~wril\ OM uflile (j'Jruioact illlcroaliooal bowk. in Irolil. tStJ...w,r-d 

Qul'1~d :h]!VC a!~!ldy :m:)i!l~d "fi~1 moyer ~t2tus by :l:I.llO!lcc:r.g I.h::.ir in!enti!1::1 10 ¢t!!!bli&h c bDncb in Kish 

lslilTl(!.1. Whilst HBMl::.aR not Oldv<Kllting my imootdill\e arliOtiln l.b.ls rt'gard they ",,,u:1d like to U'i!!l ~ir ~pLiClfl& 

opoen to )l-W'Su,:: s~h ;11. lfIitiatlVt in otIlI Of t .... o- year's lime, subj.ec". ((I mark!:'! de-... dopm:n!s. 

HBME requt.!lt gwd~ct. from GHQ ildd HBUS l'lIf \ht: pott:n'b~ impliations rnr !m: (imup of ~n.m;:uing ~ch an 

ioilillU\'C s.ou:1~r tlli.i1er Ih;m lllter, botl! iA rertnK ofrepUI:ltioll ad OUT US inl~ness interr:sL~. 

h5l1le~ for COMideratioa 

... z.~=:;.>:iI\S HBMF.'~ fl:c(lmmcn:'Ulfmn. GHQ witl (ill crmJ.lll:.aliM. with HBUS). r,<:"I:;:I 1(1 co.,,;ii!e:r ;; ilU",bti" ,,[ 

st:'('nfi<:lsst!'='9' 

I, D(''"~~t~ PNili(1l1 Sil.l'!!i;;.o 

On.: ofth.: r.:.u.:ms to Il..:cdcra:c ~ur proCO:SJ .:>f ~r;ga.Gtment is IV ikmoliw .. te, \V \ho=. tomhoriiic$ wilbiTi ban, .hal W~ 

~re l'lImrr,itf.ed to tb~ dllY~klpltle!"lt of tl":.eil et'lullhy Thi!> is ~(>1'l1 t~, !Ie' p.u1iru!lIrty importilRt given lhe more 

nggressivc IIlmgmll11c I\]:'pf(I"ru:h to btmiEll1 blJsiIJCS:llldopLed by Frco..--h and Gcm11Jf1 compctwrbaus. 

Such a dtT1"lons!nticrr should, ll1e-oren:!":!l!,. (:!1~!.:' H:RME I:) G.eve~ ~ ~tt"Orl£f.':- m:r.bt jXI!iitio!l 1r: whlll rt":~13i"ll~ 

for tbf lime bci1i~. <l-Uate-controlkd ecor:omy. That ~id, Iho inU:rr·ru c~1"Iflk\s wilhin lrllll's polit1cal '""""'1111>:" m 

:.i:\:uiflC,JII! mKl Ilut all Pilrtic:; wilhia 1r.Jll wiLl welcome jnt:'ll:1l~rd invu!velliclIl or IQT'eign IJWfler.i IT.ln'u in 1r.0I. W~ 

co::::;idcr there ~ be two ?O!.eoti;l s.."e::::rio~ wi!.; I:CsFct to l.i.c d~lCc~tie polilk:::! ~illlalioo: 

a) Slltlllilieat Uphanl. Ttl cxlremc cin:\lJIISlancci (which HBME consider 10 be highly unlildy) it is pMsibk 

t,!:;;ilt the oog..,lr.g jr;!~i1i.1Io1 p;:;lhiC3l coolHc:\ .;,'111 c~3blC:, lciiKlina ;v fl.irtbctSGci:ll UIlI"'" and, ullimatdJl, c:nfGrc;:.i 

reghll(, ch!ll$c. If sud! 11 stenario wue ool!sidered likely it I'f!ll:\d, Dr c(!!1ti.t:. !'t!'io..!S.!y da.'!\pel\ t.lle Gn:lup"s. 

il.:ppcti~ for inmi3ll ercdit risk nod y.oul::l tl(:(:C'"$$ll.alC" 3. dc:itrml of;my Project Bdu8(!t~lype inh.i:nin:. (Such a. 

sCi:OIilri{J nC\:d i:()\ • .Ilt::ccsslUii), t1i~(,u:tagc ihl: inuw;di.llC Pllisuit ofPQ..i llllSWesS). 

b) Gradual Pr~l!JS.or N.efOnIJ. H&ME bellcve Willi, farmorc fellillulc to lIIi$umC lballhcre will be II g:rldUllI 

P10CUli cl' ~(luol1tic '!.lld !iOdill J,[vrl11 wilh, atimitledly, inc ... i(l;lble iTl1!:nlsl ronnic15 ulong the way. Whll.stlhh 

1:.t!I~r s~eD:rrio ".':11 rel.."ult ill sub-oplim~ c:co::;ua'oic g.rowtb, it does :;:Jsgest U::ilI ~h>:: ttcDomk situ..UOll v,'ill 

continue to i~ o\lcr time 1111<1, ~ such, :Ill ln~O\~c [11 c!"Mit limits ;rod rro ... isi(r1\ e>f PCM M'f',';Ct;!' i~ 

cntlrely BPPlOIJrulil. ~ bUfCllucrut:y thq[ might be cref\le~ by /1ft)' inkm3i cOl1nki couid nel fJS n ric.lerrenll(1 

"'ll: p'.Ul'.Lit of iI .. Ptwsc 2" illi:imin: in t"!;~ sh(J;t t~rm. That said, if futrt: is. EI: belief thlit Ir/ii"i will, c\'-cr 1i.""lIC, 

hecome il"Il iroc1~N'ingly .:lllr.!C!jy~ rolJl"~l, t1lrn f! C"C>fTI~~!Ii\'lg rlf~t un he "-"'nile fDr ulr.-reMi!!g .)tlt IJr.ofilt Y'C'1'1!!" 

rather (jllltll.It:~, nolwilhsUlllding tM iOj\is\K:lli chtli1C11!-t:). 

2. US R~lIlatiDiU. There IlJC 11<1" PlillcljlAl ;LIt:Il$ctUSl;tw llhl.! \~ould aJr~lllllt allCUl:pt to ,,) pru .. iil~ USD reM 

J:::rv:ices to lI1l1li.tl\ COWl1ctw pacties l'F.a b) establish ~ mor.: I3ngibk prc~:Itt in IrJIl. (Th~c n:gt:btions ~n: unlikely 

UI d.i.r«:tly impact tht VlInOUS lJlJtiatIVt:S Iholt olrt- reh:!:n! no rhe p-myjlHO"ll (II ;no;:r¢'"~ed crt.dlt !imj~); 

fJS Olfi~ of Fordgr; A:gl!!~ C'!:rlr-Jl ~OF,K',I :?!,mlq(icnJ, ;dlicb prcl1ibit US ~T;\Jlsn:;;tinn:lO wilh Trar:liill ;;:nlitics. 

HBME hu rec:eh'~d legal 3dvice in lOW, 200 I :rrad 11m2 l'I{I.1he OF A(' regllll!.rlo!1.~. 

• Irnplitiiri;,f1$ (,1f the pro .... i5ipr' Or [CM pmi;;;? The S&IKticm. ili;iiiiii J;;i!) p-iOhltit lIS b.nks filrm 

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 8873953 
798 


76061.224

IRAN - STR.<,.TEGY DISCUSSION PAPER fRlVATt Ai'tIOf"ot'nDF.NTIAL 

pro:viciirtl c;!(T'e5lX'ndc!lf ha~ldnlt st"l"l'ic:es for Intn!U!l I.w>.ks. The Of.lo.t 1e'.,;:!l1mic~ cb, b' .. ·.~\·er, ~!3W :I 

IQc(Mnislll (\he ·'U·Tum ~C-C:pti01l") "fh~r(;by USD p;'ymrols~.;m be scllklCi ton OOt.:llr iff IrarJiasl \:OUr.IC, 

PlIItH:\, ::llc:,uijh .. U5 1'e'.lleme!l( hank, Ffll"iJed \!",&l lleitller Ihe arfi,-irlftdng Of ben".riCia,'y ban1: aft US 

itt!l.!!l'jl~~tS l!'! :"t'!t!lce, !!H: U-T= :n~{.b.d~UI Cl-"Ttnt!y wtds:1, fuH~\l.'s ir. HSBC: 

:o} An hnr.1®. 1J.;rn}, ~pc:ru; jJ USD IlCCOWlt ..... illi HBEC. 

b) HBEU re..:rn'e USD payme"l in.strllell(l!1f Itnm 1./1 Itll1linn b11lk ill I'3vour (If So bi:r.dlcilll)' 3I:count held:R 

;,; nGtii·US banl. HEE.U ius,nullO Ibe b;:ndk'.}ry bomk .1f .. :l (l/tllIliC'$ filt So(:ttle1'll<'1'rt Ihrt,uKb iu Own USD 

oce(\lIl!1.",j·.hHBUS~ 

cj T'royidcd Ihrn:; is :lil r~t'~:I,:;e 10 Inc In:.nicn cOI.mIN4J(l!1:r .i!:;. :he US:D SU!k<llCljl i"shue!l.,:;.:., t1c 

tmn,sllctiM ""iluid pa93. through HatS !ta:nJ.:~~ly. If, bcW(:Yu, \.-:'e l"!:m~ of tr,t ll'a",lEtr. CO\]!'ller-p:r~>, is 

inciutled in rn: g.:t1cment i!1stI1Jl;:ti!;>1J, EBUS will :.e ob!i:g!lted 10 check ~bC'lhrr 'Ill~ l.mlJ.:Jllct!Oil qUlilli:cs 

foc!he Of,-\C V-Tum c:l(cl:oU011.1fi::l dou'l, HBUS will It:fcr Lljc tnrn.'Oi:..:li(j1'! U">OfAC OFAC ",\),,),1 

then ciL.~r i!pprn\'~ -or r.:j~1 the lr!!nS<!cUcn, In ~~~hl dW.m!g1.~ecs (c- g. W. rtl.~i!lcr ie r: k~\\'" 

teJrorut>, OF AC h;u tl:t rigbt to An1IIlge i.w 1M fands In t.: froiU:l1. 

Until now HR"E.U h!l'~t not b<-t':l I\'qulrt-d tr- m~al ih~ idmti['/ !)flJ\e Mlt;nM:T1& ln1I1;.J,n f~!I1I(T""p~l1y UK 

i.::ili.&JalioQ alate.d (0 FA'TF re-gui.ll.tions wilt hCDt:donb ~ui..: !.he identity <If the <I .. de";n~ CUSi(an('r I(l be 

.c~.,"["ly corr.:l"1IL"li;;s.l<:c iill an .;\OCh ~yn.eu\s. If, ae.cfwi:, !hi: Oro;lp <L::o;iJ~ii 10 p<V·~cliv~l)" pr ... mQk,: USD 

p;lrmf"l~ :;tl"jces It) lrnnio:n OO.,ko;. '/It P.'JyTl"ltllts ",ill nt:=d !l:< bt: ?,,"Dcr5~d by HBt:S with full &tail, Ii' 

sll.1isfy OFi\C p:Q.uin:lneu[], 111m 1'1'\11. Ihcrefarc, will be II n::cd l~Jt &ddi\j.oul Tt!rOIJJ\!es in HilUS 10 

ia.:l1tif;.-.chtck .. lid pr.lccSJ,· s .. cll ptl}-mWtlS. rw~ o;:vocnas, in addi.ioil'ti thc<;;l)w. and kl',i£lical dim::l/l;;c;;, 

h:l"l'(:l::eenn'!Sed' 

HBllS t.Ould ~ hdd liib1c (i;ll-d i;.Iafl"''''''thlll HBUS.p~r.t;}lIa(1)- Hable) ifmiMlikts a~ ffiadr 

iii The inc~.u;ed vl)Julne oflr.m 11:1:)(:.;1 ~s:aclio::lS \\lo.~ be noted boy OFIIC. In !he .cumll! ~jjtit:1ll 

e:!" it:.'l'Tlm(:n{ it 1.\ c.~cd;:a!:;lr. Lba( th~ US i-dmiD1Slntio:1 ",lit IH."lk k$s hii!.hly of [lSnC if it gr-"w~ 

It~ ~\51llC3S dl:3.hn/I'> wil~ lnlll {~M belo\Of c~",<!:r.!.ary <"IF II"I(!' p1Tem?li(m~llX'll!l(aj ~nUl .. :i(lIl). 

We tl.'ld::""la::::ld &.::II the 1:n~oCi::'3 .::h:J.llBt ill UK lei;l&l::rlior. h:I~ led Ullyds TSB :0 ~;''" nodct :h:;t th~' 

will h; wi'I,,~';nE !hdr ~xis-tinE p~y~nl~ So:'J"'Iice ('IITe~d t .... Inolsn o,tDi;:s. 

n Jlt,f~JL~.{.l'~"'/Jr.i!!/ ,.&..c. passed in me ;tft.!;"!'TTIrJl -of (he vllrlOi.'-~ a!t:!ch ~r. 11 Sep!t~~f 2!;'(l!. 1:t='t'!':'l"!S US 

C'.!~!POlldeD:t b.uki!l& IIlrOll\g.emenlS fQr rmei~:J har.b Hen«,~ll'f 

U'l!:lCf (he OFAr reg111~\x-ns 1]'"' [rn:ti:n'i ml."~rpt'f1i!trd b«:lk co.!!! b\!\IC a ~1l...'1k !!Ceo1...'1!.~ in L'1e US As such, ~ 

ptU\"isiaRs ofihe Pl!u10\ AC1 apply in.din.:I/.I' 1(1 ;:no!)' Inmian b:.mk lhat IlIin HBEU IU proct;$$ tJ-Tum pll~·meflls. 

PllriOl A~ .e.:;uirett.Cn.IS ,",,,<lid, iii S"oiC"h c:i1Cim!';-~CtS. b~ ia,po:oed on mmu by vinllC ur its mr..ilJlaioin!; ;;. 

!x1m,;poodrll,"ee()lJ!1t !II. HBUS. H8'ElJ wi,uirl !~LCTtr1"~ h.~~c w ~lIlisrl' i\5dfL~:n e:r..!l cf!h-: !t'kvt'!!! Ir.zd!l.!. 

mnk. __ has a rijlamll5 kno"'-,('IUr-CUSlomvf nr.d ~(j.moo~y lll:mde:-iog prtI.srom, 

Nei,/ler r.f Ihe :U'{) ~lic:tble law,; pre£tJ!t .... " insllmIC'tllIl!Ibie barrier w eit~r"tlle RleV3nt Pltu~ J ~tr:ltcgy (i.e. thc 

I"rt: .... ·isio., (of PCM service .. to lrmian bMb, indudintt. B~ Mukltl'i', or the potentia! J>baee 2 stmt=l!:v" rhm. uid. 

the !::w~ ;!Ie c;'C(l.1C ;. si.g;ific;liI\ ;unOiJilt of JciGitio,,1.'l:] · .. ·orldc;:i.;1 and, in ih. ~ c.f lh~ OF Ai: ~.fU::Wons, Opel! tbe 

(ir.(lU-P to Rddi.ljM1tl p>:'lcUlk!l risks:. Ot~er i~L!!OS !!to:" l1ri~ by !.h~ "!K'c<! to tilli$c .... i!.1t "1hz es :!Uiliorili.q; (0 cr>SlUt 

OOmplill"llCcwhbllwS(",lrr.vs.(seebe10w;. 

J,I.terll:atiouIPolitiCliISitnoolli 

Ir.m bas, as already '-:J.p!aincd, faced II \I!UiCIY (Ii Inicl1l:fJtio:nlal p(liiliC<ll problems io rcrclJI }'zun. The ro,\Uu)I'S 

Sl .. r...;it.IE io \."~ il\ler:".~u>Jn~ Cl)OO!'tllf".ily is,.1: 1m.>; "r~riting, ;WI st.."Ollg iIfId it Il)(lks C~l.i"t:md} (f,I!;l:dy lil3l. (1'", US ~nr.r;nl1~ ,1e:~jl1~' l~n ... ·m ht lifloo in lh(: sll.Or1 10 mt:ctillffl t~T11r. Th", nid., ~ p~Sp«t ofth4: US e~calatm8 its lind· 

i1"'iJ." :iu:aOMI,: ;)lid lukins dlml mililllJ)" JI~tiOll ~lli!lst "\he country l::IJl 'x ~1"In~idtJecl ir) be hlj!:i\ly 1"tc1I101(. The 

mltrn:cicr:al pc.!iticlll tcru:;ions, JIln\JCllC;;: di!T;:~r;[ dt1\ltltl~ or \.\'11): ~T"ill"ll.'i iu ditkreni \liii:)l 

Credit Limits.. If tile ulmlal JX'1h.ical -enviTOm"'~nt fur l~ rem:OllllS ler.se, It could cOll1flllciltt the oorr.e$tll~ 

nf;}rm effvn amI. 11I Nm, U[jd~rmine!he tc.:oLlomi" Im,&ptclS [Qf t1J1; w-UHr1. Thai ~d.llie cl>unlry Di:.:I i!.Slroo~ 

Redacted Material 

Confidential· FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 8873954 
799 


76061.225

IRAN STRATEGY DISCUSSION YAYER PRIVATE AND COI\l'1DE!III1A.L 

Get:lflOmy, dr."pife il".~ I.'IIislllliCe "rs.ancliol1s. As to!:.!! ~ we btlieYc th:it "!hen: is little chilocr. (J( e:tler: 

~) the imposition ortJN $4J:CUOtl! rclaled 10 fuc fUldcnrconftitHhigblr I!nlilely) Or 

r.) a direct miH181}' c(!l'II'!.ict ~'ltlllra."1 (eJllref!le!yunjikdyl, 

wo; nt.'cd nul 1;( the rlltbcr dolitalc mlernalK.'IllI.l political situatioll deter U'l f."'fJfD !/oec.ldtl~ klcn::1I3IXI crcdh limits t 

busir!:5.!. nf.l"'~ from 1:1111. tTh~ US bUYl'mr.le"ll\ 4ur.lill:t'!y to '.ic:-.:.' ihc:prnvlsiorl ofUSD7SOm.of CfS.:iit fu.::i!iuu 

rlr.!m.:J.Uc;ally differwl fM:ll'Jllhe rm\';~;c<n "rllSDJOI;m or USD25l1m) 

PCM BII~illll5l:.. ~ internauona.l p.)li~ ltndrlJlS He, holl.'t,,,,., of rch'l'anct WhCD CQ1l.Sidtrin~ I\'helh:r tE> 

"n~r USD PlIyll!<::!!t J.-1"fll!lgcmcIlH b !M!l'S b:l.!U::n:g a~c!c: J!.od, rpecifie.t1!y. its Cc~1n1 Sci. Suc}. 

aITiln!;CmtllL;;; l\>onld (a.~ explain!''''' ;1»oVf:) ncC'C"nall" the me of US based Danks for U5D elearmg. Th~ US 

wtllVritl('s W(;;Ad, !liven chaol:le~ ill the C'K J.,w, be aware nf!he Group's im:nm5ed int<!r.:lcrio-n with b"ani;J.n. 

efF1lI!tt"!'-p:!.l""ies .. Oil'e.!I :h~ (!~!i;':lt~ pol;'jCilI c!!m~~, tbe~ :s the pc.:ntWl for HEVS to t:J~ die vlllu:..!>!t 

good ...... ,11 nf (ne US lIutllGrilies if the GroJiP Ii p~Jt:~ived Ie< hr Cf>-l;Ipc,.."in.s · ... !ilh wll;'111bc US pclt"ci'>e \0 1:>c 11-1' .. 

Ilcdiicl1dl). liJ,ii(;n .. F1Uill "iI Mitklll: E;I:>I p'-'1'5pt!ctiyc i(s i:> in ille GTI)~p's c-IJmmcrcial MId Slr.1tCgic ant'rest5 \l.I 

Im'vide ~31:!" PCM servic~:!: to l:::..'l'~ t"i:t;m~i~1 secw .. GHQ, in «-M'.,ll~!cr: with HBUS, need to iid· .... is;:-

~hc!bcr it is in ItIt Oroup'~ str.J1egk lIlICrrooI.IStf.('\n VI 

Mi:'lIe :t st'.it.:lQi'<L The most ftccm i.f.r ..... iln .. f rroj«t 1k11lSil. (inrvrma.lly IJI~ ill lH(J2) dR:lllot frlUC.,~J 

il~, in 1M: vkw ofOHQ, the timil1g WI$ not riSh/Sh'e:!, iDlt1" alit!, Ihe ongolo!; t::ntieru with !he US. mr.'s 

Pft:'!tllt imcJ"!1ntKmal pnliTical :sif' ..ulliDn is, if nnythins, 1IlG"n:' lense OIan in mid-Ol. ThaI ;aId, the HSBC $rtu:ltlOrr 

I.as CIr"hed 5iu..c:e HIat Lime J.S llie Htlu!.(boid ac:quisiiiolllw beet"! COOlpl~lr.d. roi~ could. d.eptt:ndirlK f)a one'$: 

p'.;!"Spo.'~iv'::t jm.!if:t lll!.. i!dCpCOIl or cilbl:r :l ~::r.er or lc~r ie\'d of ~culi(ivilr ~ iJ::\:;:r"IllluOtIZ {US po.llticlll 

etJ-neemsvis II vis 11"lIl .. 

Summary & R..et(lmmendt!ti!JofReque-st 

Inn h ~ "'tSCB..lrrt" rich oollntrl wh~h is in ~he pro~ess \:'f deveb.,il1g {!ibernlis.in; it3 cccncmy :mel flnl.'1ce ~cm: .. 

There \l.'ill, in the short 1.e:1Ti. h~ an~Jlc.tivt tranS3Ctionnl opportcnilie! for imOlllei:1l lostitutions !hal have lb.e 

::.pprcpriate uW"cting j\:s~rws .1Ild req:..lis~!e credi. ~?tUic. ill the rolly-tell]. it .;um~'eliir.g ~tralct.K; C<lJ;C can 

l!1I~:1"'.!!h~ b~ m3dc fot lilt· Gro:.:p 10 s!rens:th~ ilS fooU',cl:!. in .... ·!-.:::t ... 'ilJ beccmc :1..1:; incn;ssb...aly iIr.pvrtan~ Ui.lr'.-c( .. 

Will> ;,IIi:> Ill. !'Iind, HBME wi5h{:s to IICtclcr;ate .he PlCC of iUl enR~p.emell~ "HI ir.J.!lThe e;o:ltnl uf H.6ME'~ 

er...£:!l>~:n~m I!.Z!', .. in !..il: 'l1:'~c:ct ~~, h~m CII:t:ri.!e:i by ~ith<r: 

s} 1:.!\.:i; clrcraih11p;Jcutc (1aJ"!i'c!Y lllGHQ iC'~ci) C11 

1:1) r:nl1(X"m~ r!"s.:Jrdine 1ft1': :po'i'k~l iml'iio:'<lI.iC'il..$.,r l dose! i1!<~;.::.-;:1ati~r, will! lrll!1. 

Th~ ;:;ap.er h:u- bern ~std !o szal GHQ's ~iJ":u\' .. 1 (::'lId HaUS' "Uu "Q:!~C""l':;D")]U ll!wv-P:IIIS .. d .• btu ~(Oo~od 

~lnl!r.gy ..... ·hieh SCJ::S ttot Group, inu'e s\xln term: 

fo-tm!l:lty a.ck;;{lwf~dgir,g 0IiT in..."TIMeG ~PfIt!ite fil~ lrar.i~ risk: 

in tlcth'el)' muTkeliQ~ PCM 3ervjce~ to a largtr IIl.lTllber C!f lrilllJlDI fiDanci;);1 jnsnDJI:flris. mcllldine Irnl"l'~ 

uJltraID;lli\.:. 

and, in the medium 10 lOll! term: 

iii) 3..Clively pUrnlWg the oppal"tWlit}' to ctlh:uw:¢ oW' p~n« in ir:lr1 mrough elthe,!he establishmeflt or l:!1 

oftsho..tt bnlDch..lsubsidiary or, if tbe 1i!'II! dnC..'I MI.allo ..... !tnt 1h~ pllnl'il of it Project Bduga lyflC offshore 

bankillg.5lli .... tion. 

\Vtiilil re1:llromendiJ1g I~ IIwl prr<~ "r t:"tIZ~NIImt 1$ t1("cclm!C!i. HBME :!l"l: mindf1J1 of ilic: pC!!cEltkll 

impH~ion! for other HSBC businesses and L"'te KSEC !lame Ml I!-enernl As SlIciJ, lh~ guid3l1ce and ..,it.ws of hoth 

GHQ =d HBU5 nit: ~Cill!;ht. 

Confidential- FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC DCC 8873955 
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76061.226

IRAN - STRATEGY DISCUSSION PAPER PRIVATEAr.'"D COy.;FU)[:"nAL 

Appendix A - Background ttl Project Beluga 

lID-Me bQ3;. sitlee. D,io:i'-2001l, btl!'A CQnsido:ril4J; "f'roj~ Se:l"t£a" fill yaOO\lS ilJnIlli) as the li>li!ical next itep in tlJ: 

?l""'C'.tSI> ().f "grndual engagroKl'lt"'. The miC1lllale ~hinrll~s ioiti;nivoC, iJIl.:l1I b;1si.; outline of the bu;ineu m:cdd. 

r"lkw's: 

,'lwtwm;r~·l. ViJi.1gT; hanks <'Irt nM pre!Of.nl1y peTlilitied 1(1 t<rilbli~b auytlling ~ril iha[l :I .'~pr("se.\wl·"e offioC( "D 

ihr irnniao mainlmw:l. VmiOU!i Central Bm ollieials I!:I\'C mdlcatC"dtl!.tilt\c ll)3JkCl wiU "S()OO" O~:!1 uplO rOl'l!igll 

banks bl!t >JpinKns dit:er on when eXac'lly ttli;; might happ:n. Lt-g~13!ji"J'!l !fltrod"~«Iln 2utJU doe~ Mu.'ever, :sliow 

furci]!;!'! biilloU t .. ili':iJrpor.rI\: a whrrty DWllI'd "o.rr~l:;lHe bank~ ill vh~ (jof Im'~ ,~ ftct Ti'OOe Zc.~ (FT'l;l) 

Such b.:m.u elL .. ()ffer sl!;ldces RO'lOlely !o individll:l!~ :rod .:cr,x;r;niOl::s ill! tt.c !ra.'l:"n m;r.\n!3l.d 

,~IiCJl!ale. ill ~ ""i'~ we Sll'lliCi\Y gr"iP-.aoual rni[!;~¢1I~" IlDME L.i.vc, in boi.h tHOI & lII02.lookrd ill Lhc 

~.J.~ihiJhy of e!rt:lhlj~lIirl:g. YI HSec bI-;t:ld::1 ! ::'I.1l!\~~d l'Cl':'Il}te $st'ri'b~km bzr,'k, (l'1\6deled ~ Fitst Dh't-,I) ir. 

Iran'~ 1(11:h [~l~d n:L Such "1:!'iS, at me tim~, $eCOl \(1 be the 1I'.(l511tlekai w~'10 progres$ (fUr Inn s!mtegy. 

D,/slne..>;;,; Mr,y,x{ The mcs: fCcell1 her=-io-n of t!!.h i::.ili~lve iilyt\['J~ a JV wi1:h tw;:. (If Jnm'~ 11l18esllhov.:; (Bank 

Mrllj ;):il:! Brink SIldr.nIt). ·l1Ie lIu<;in~~ m~' \'II"j!<il£~d Ill.:': Kjs1:J inl'('rtpor:J1<x\ 1'" prCll:idine, ~ lim.i1cd rung\' of 

fin!lm:i~1 SC'J"\'icl:s I.G eusUlrne;s en the mailllSf1d l~rouSh a c~rnbil1atl(ln of aj differ banld'l'lll eh""J'ei.!. and b) JV 

~r~cve. b=d iT, sch:C'ted M,,1I1 :;nd SWtfat tranche:!. II tJIvisage.:::l a ril.uively simple ~i'Od>.lc-t offenil!; 

i'lit<nHy (i t C!~~~;ts, p:!j'1I1f'nt~) 1.,h!{n w(\'\1.ld grndupJ!y e\'(1~ (i.e. cr:,!!jt cards. well!t.b. rolmDgtlll:al,. ~rnde 

fociHtks) over time. The primary c~iertives. of the initl3.UVe \W'1'e to: 

.. build the HSfJC brs.ru:I in tbe Ir.l.'lia.'11:\arl:et. 

• eMU "fir;n cnJ.ry~ SnllUJ iIIId posnion the B<lDk fOt" filum: Srowlh; UP 

• dC~'ck>p ncw I':;n;:n~c ~L"Cl!ms. 

Negcu3.<1c;"S v,.;t," Mo:l1i ,:md Sddera;. did not progreSi very rolr ~n 2ni'12 ill GHQ i"dita!ed thJ., .... l1ils( ~w.lit:giC::l:\)' 

sound, tne !=mir:s of ruch 3D ~ni1illtivc was n~t !io;hl 

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 8873956 
801 


76061.227

From! JOhn F ROOT 

s.nt Ttru Oct 23 11;07:~1 2003 

To~ DBIo1d W J BAGLEY; SU58.n A WRIGHT; John ALLISON 

Cc: Paul PROCTOR; John F ROOT 

SUbjecl: USC Cleamg -Iranian Bang 

ImpofUlnctl: Normal 

£PS HBEU 11_ been manual), IntBrverW1g In Itto pnxeu,1ng af Iranian bank paymel11 itlSOuc\ioni; by 

IRMTOVIng the renWtle(s name alld country to prevent the probable trigger-of a fillBr In the US, and the 

6ut1seQlJcnt declaraUOn to OFAC (811(1 po5$lblo fHIel:lng) of the! "mels. 

EFS have apparently b88n 1nstn.K:tsd by Com~ to CGaSU this ~ce. [ft is 5OIr.ewft5t 1SIcl9ar 

lIfheth@rtnIsMtnJd\()n .... .II$lnwrttlng..orwhenltwasglvenandby..nom.)HCNo'e\Ier,gtwn"1Ong-stsndlng 

wluable relationships·, !BL rme purpadedly negoCIlI1ed a c.ul-Orrclate of31DECD3 br the C\Jnv:nt practie.e 1:0 S'IOp. (Brtan RlcJ1ImJson and John YWklnson In e:NeI"It:e deny that ltIey were aven BWare of !he 

practIoe,l6I alone thM tillr; have been pU5hinu for a.,o~u.n31On "'I.) 

Aftar 310EC03 complete pa)'ltll!lrtt Instructions wUll:le sent on to HBUS. EPS also Inll8ncl1D conaliar 

MT'202co ..... paymant!llo be ·unacceptable- &fter$UCh drdS, and payment instructions will be fuI~ 

bnnetted on. hIT10Ci103 S6I1at basis onty. H!JWfN&J, 1hantP'laS been sorm quatlDn mI 11:1 wt1e1her U'I9 r.rr1 001100 forJ'naIls an actlJallegal ~I8T1111nl So t=r this does n~ awe- 10 be the cagel. A fUrthar 

wrtn-.Ie Is FAlP" Special R8COf'IYnendaUOn 7, whiCh calls ft'lr IMXlUI'3.I8 8(1[1 meaningfUl o~n.ator 

i"Il'om'\atbL Irxll'llfdual countr1es are then I!:IIPsclBd 10 4IXtII'T'pl R-Io-FI tr4R!lfars.. 

There are appraXlmately 11 payments 8'YeI)' bldnes5dBy. USC CIe8rtng servfCO$ B1'8 pruWjed fOrthfl 

~lngbanks: 

Melli 

Tajlirat 

t""..ahav;n; 

..... "" Expo-I1 oewtbpment Bank 

SOps. 

AI oflhe IIl1n1cS amon the OFAC list of sta18-owned banks, ncapt for !hili ~ Development Bank. As. it is a reasonable 85SUmpt\on thattha Export OevelOplnent Bank is a SlaI&-owntid b8nt;, either lis 

omIs:sion isa."O~r.lignttlfiOPAC. crone-oftlleo!her!)anb n'I!IY 11\ tact be tt1eExpod OeveloprneM 

Bank. Nay _, JfISprud9flt'lO a~ tt1at 11 IS aIso.a targetoftllll OFN; S8nc:UOM. 

Two bankS ~ Te:jarat &Ad 1ha export D .... bpment Baflk - a¢c:OLlnl fOr _fOUnd 90% of mcmmty P8Y!T'18nta 

(210 outof233). 

JQbn ~.IM! HBEU RM, shOukl notll'y the IrlJllian ban"" 0111'1e abow pa-f1"I"I6nt Irnilr~on::;tJ~ 

b)l1eHer at thII Et!K! of OGtober. Wlklnson br! tlWf!rllng HeUS.;grellfT1e!llt befDltt sandlng !he '-hr. The 

Iranian banks wit be: given a disclalmar 0I'I1he pcIIS5lbillty of1he agpIltation ofOFN:; aanclbts. The dl8cladlT\ll!ll"wl.lQta Ihst the ITWlIIm bank 111 question _II T8maln responsI:lIe lor QOmPlylng with OFAC 

salililbnl, n- _, oIi"ffecti .... l'lah of iLId'l a e5ac:ielrnar csn be dot/bled, pardcu/arly lIS It Is not mat'kfllt 

pcactICe to ha...a wnttan agresr;1iinl;. wt=1 oorrespondsnt benlt:, 

Permanent Subcommittee on Investigations 

Confidential EXHIBIT #48 - FOIA Treatment Requel .. _________ .... HSBC OCC 8875217 
802 


76061.228

with the"U-tum" paymeots 8J!COptian. acoording 10 Paul Procter. "MlIh fOcus wi! be 10 s.ereen !'of, •• ~ •• tenerlsb and drug b'aRickets agmst gowemmem-lSsued 1i513. HBUB WII tiDfltlnua 10 ba rasjXIliSlbie tor 

full s~inO with Iegard 10 OFAC sancUOns, wh~ nlJ\Olt i!I broadef appllC".3.b'I than me- names $c::r-nad 

tryml!l.lNoI'!t~lI!m. 

A ntlsled Issue i9 Ina I!IlT'Bc::Ifo.eness of Iranian eo~CJenc banlr n"CIley·lEWndBf1ng control procecluros 

fa"ttJl!I~ 01 USA Patr10t Act CI!Irttftc.alion. 

ibe business :slat. that they lnlen!:l to ~iMp p8!1'f'18f1ts "at III low ~r but tt".en adcI m-Iit I'llgl".or payments will M:julflJ lIrs-negotIatIon of 1899, .A.lao, tMrt3 M!I plsn8 under COI"I$Iderdon to IncruIlSa thlil USD 

cteslf1ng ~!tIl'loe!lS III'" l"-nlan bartks - pl'O'olld6Cl that HBUS 819 In -rull aQlreement". 

JohnA'oot 

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC acc 8875218 
803 


76061.229

() 

From: John F ROOT 

&'111: FrI Oel: 2413:08:332003 

To: David W J BAGLEY; SU51i1n A 'lNRIGHT; John AJ.LISON 

Ce;:: John F ROOT 

Bubjact: Iran Imporlllnt:8:Normal 

AtCachme,*: imB98_0.gif; kna~_1.gif 

Please see below 'IfH!I memo tom Rod Moxley In Paymont Services. 

John Root 

-- Forwarded by Jonn J- R{)QTIHGHOIHSaC t11'124 OCI2U031J:otI -

_. 

, 

Ty ' John f ROOT 

T .. : 7W1277& 

~ 2tI 79;12176 

Latest status Into an this i~~ue frOO\ Rod Moxley In P"ayments Se:rvlcss. 

The practk;e of an"l6ndli~ jnstruC'llom; 15 <:1ear1V Q "'ng st:mdlng oroll! 1t.'hlCh has hlthQ;1O eo,,,tlnuM da$j)!M 

tne RMs belle>4ng It had ceasod $OfJ1I!I)/$Io1If$ QgQ. I h8~ never AC!IfWI a,-.ythlng in wrllng to show 

l'lowfWhen this practiee cotT'ltlenCed or who aulhorlled It bul r;earty the proposed termination wVl nead to 

Permanent Subcommittee on Investigations 

EXHIBIT #49 

Confidential - FDIA Treatment Reques .. ----------. HSBC DCC 8874660 
804 


76061.230

o 

be- handled \/tilth sensItivity" relatiOnshipS wtth 1he Iranian bltnu am nollO be damaged. 

I am on leave n~ wsek. lam $l.Jre that Johr1 WIIldnso~1an Ricllards. (Landon FU\4$) woukl be happy to 

answer an)' Allther quesUOl1$1f'l my ab$enc:a. /4l "'1i5 Uma though, they am unaware from me of your tligllIm.'al imr-lvomant. 

Pout 

.-FOfWlIrd&cl bof .pa~ PROCTORIHeEUIHSBC D1'124 OC! 2003 12:"M -

From: Rod MOJU..EYIHBSJIHHC 

John R WILKINSON et al 

JeMo R \WJ(INSOHIHBEUlHSBCCIHSBC 

CC': GeoI' ,ARMSTRQI'IIGft'I8EUItISSCOf"lSBC 

Quan&' Ii: AVL\lVARD.oNDBKlHSBCOHSaC 

.9tianW~KlHSBC~ 

Paul PROCTORIH8EUJHSBC~ 

N ..... HOMAPOURlHSBUHSBCAPACQHSBC 

Julie A ctARKEJHBEUIHSBCGHSBC 

MIIkloIm G EASlVVOClOiMOBKIHSBC(QHS8C 

TonyP COUJNStiBEUIl-IS9C@HSBC 

OOnSAI..EtHBEUIHSBCOHSBC 

Simon RVICKERYIHSEUlHSBC@HSBC 

Gary BOONJMGR PCM ~UlH8MElHSBC@HS8C 

:Sll~ If8Il 

.!O..,. 

R.lrtIleI" 10 n.tOenlcut:hE:!nges at emalls. I detail bebW my resPOr1&85 to the querIeS Tabed. lOCIelherwith 8 

s.ynopsts of my .concerns on this issue. 

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 8874661 
805 


76061.231

o 

HBUS hlilllO not been advlsed 01111e NM' prooedure$~ we I'Iava al1empted 10 engage them ill our 

PropcniII!s before but h8\1e been ~euIy lOrtIitaien fi'om continuing dialogue with them. I "ave been 

g~'1 a 1urther directive !'om Malcolm Ee!l!wDOd., Senior Mansge:r P!!Iym9ni SI!I1'VIC:es ;, l11e !9St few d.eyS. 

not to COfltr"8vePe thule InstnJelions II'om Dur ooleague$ In US. 

The procedures haw lherafora nD1 buun 1Igi'Md and any pot$ntial chaoges in ¥OIUlI"85- Df taflic we 

unknown 10 tham. 

I .. nlan baMl: haWl not tleen pmlolidetl with Clear guiddlna$ with l'egerd kl tI» TftM fumlilllil"iJ 

requirements.. P'ossble sol\lti:ons. t.sve been put brward by HBEV Payment Ser.t:ee but I do not ~1feooIe 

they h"8\ole Deen cammunic.ated to Ih6 Iranian bar\b, 't"oII8 can .. UOQHt thllt paymet'lts on betlalf of the 

Iranians for smtIU ~nt8 are sent., us. on a IItCt basis but thts (I(le& not giYe us 01 them a guarantee 

thai aH payr1"ICnls wi. be eft9t.ted wfthoul problem. 

Ttl, il'f1)Wca1Ions ~lrU'dino OFAC are puraIy what we haYe gleaned tom the OFAC W8b61te ena P"'IIIiQUI 

N!!Dnca! eorraponderloe:. \r\fI!!I how had nodlrecteontsQ1w!tn:OFACarw3,1)91ng aUSg~ml1'1!$1t 

agency, t urOiIl$tand thai this would p(OW8 I\dlless. In shOrt. I baileY&' ItnIilght MT2tJ2s are &ec:8J:Cabie 10 

US banks, ptDYldI~ full dbBcioBUnt Of tha lJ.tum pavrnant 1& apparent, allhougttMT202 IXMtf pa)'fM"nlli In 

support of dlfect MT103s are nO! ac:«)ptable. MdIdon:lMt;. OFAC tlaY8 a1atBd ths1 they retain the right In 

heze pa)mentl iiI t~.atr 0WI'l clac:nr6cn. 

lJ..Nm p&ymants~ there nave been 81 number of views expressed regarding the validity, «otherwise, of 

the UMIUm payments subl'11ltWd to us. N a UK baIWt, our awn l.Jn(Ie~dlng QI' VS legIslation Is Ilrmed 

and, whlsl 'Iffl fright iJelieYe we know whal c::on$ti1ut&$ iii U-bJm pS)'1TlEIr;t.lt would &(10m e~1y r~y 

~rusto stsrtteillng If!!nlan bam WhatwHIllind WhatwW notoomply. L.$ngt"y~lons, perM, mII'/ 

~ us 10 unnecessary risks. 

It was"" undetstatding that IhIiI or'G1nal busll\ltA case submitted by RIc:t PLlon •• HeR(! or ClB, Nkld!a 

East in January 2003 W8$ nol signed D1f. Indeed. MarIlyn Speartng has I.IndednecI the stitlTlliOl operctJonal 

end reputat!Onai r\sk!. inyO!Ye(I and ft.IrIher ~uppol1 10 this \4ew' W1fi alVM'l by Bng~ who 5~ 

hoIcIing gil' due ID tMl &CQulslHon Of Househotl, , wou~ be grateful If you ooutl confirm that the appetite 

brth\l5 bU51mrs5 has been authc.w"iSed at the appropriate lem. 

The positIOn of Risk ManagetnlHrt Setvfces (RMS) is becomInG inctelStlng,ty unmnabJe. A:MS conVOb !he 

Project Wolf tllter and: yet YR!I hsWlI:leeO requested (0 find ways 10 CRUiTlI'II1;v!gate OI.ir own and O1l'1er 

It'Istitutlons'oomplienceflltets. My own role" predominantly to pt(Jt&Ct the Bank fi'om fCP\!tatlOnalfi!lk and 

I now feel uncotl'lfortabil ., campronISInCJ my positiOn by leading l6L, PCM or tranlan Ctlunterpertles 

down ~rtaitI routbS WhICh rnBy directly ccntraveno the $pInt of the Co01)llanee ffameWOI'k. tlthit 

buAine:SS Is to be pn:lIgflI5&ed or eJpilnde<l (as inCfical.6CI in Nigel 'Nell's note) the lropehls R;Jr tcriTl"lall1ng 

solutions 'ill. nHd 10 tIOm!! ~ PCM t.lEM. HSEV'tI TOle 1& to pay .. 11"!f.11\ICIt9(I Wld 'IIrifh ~ from 1 

January::'004 ttll. III'" b& tIIlnforoe(l, It!'! no IrMian p&)'I'T"IBnts wII. be amended. 

Despite coheHintargum&nts beitlg put Iblward by III nonCMn' ofpal1les .... hln HSBC. II is sliM wo11l1 noting 

thllll: some US banb, notably Bank of New YClrk, tef\.IH 10 d8lil1 wUt! \.I~Nrn payments dlJEl to the hlgti riSk 

nature of lhase transacl,iont end ttwt potenliil tor POhibte flnS5. CliO~ra or repl,ItafiQn::Il ri!>.k. 11'18\18 

oop+e-d Group Compliance In 0" "'Is note to 8I\Sum \My 11M aware of ar.:l do Mt ha'tlfl a probSem with this 

Mntlnull'lg r1Gk to HSBC. 

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 8874662 
806 


76061.232

lilave been atarmttd by recent infererJC8$ that Payment Services have be8n amending the lrania(l banks' payments without the kncwtedge or 0QIlS8nt oIlBL RM or let. COff1)l8flCQ. This has b60en & Dog mooing 

praolice and Ie c\Old flItUl'e dOUbt, I wid r-e~!e the ~nts l"Mde In Malcolm Es!;lWood., memo 1O Nigel 

Weir of 22 Jan 03. tt we are to continue to ailed these ~flts. we will raquira ~ corrmI'trne.llt that 

lran.lan. custornlWS -.vT. be provided with a template and it is made clear at the proposal stage lhat 

-p&ym9rJts must be subrrVtted t1 thb brmat only . 

...that payments submitted In the YffOJI(I formal Which may be ~$ltal1!Jd ~ OFAC are entlr61'! 

oM G'\e Iranian ~& ril;k., albeit w. wUl 'Submit ttle a~ate OFAC reqwst fOrrm licences 

kl M1rieve runcb when ~Ion!l .are lifted . 

..1J'I"t'MI wig not De liable fer 3ny f\mdt. aequeslralM'l &11 & rea.&.lllof et'Iange In lraniara S8nCtions 

by the US alJthOri'ie5 wl'lJoh rnIgh\ lead to a psymenlMCOmKIW formattelj tMting SequMb'aled. 

::) I am \lneen:aln ill to tile extant to whICh the ltanian hai'liai are aware- of the differing ..... 8W$ i"nd procedures 

adop(od by nlNtlutd US banb .... hk:n eompllca!l9$ thl:S issue, but it is i~ Ih!rt they ere aware of 

our!obUJOe from 1 JenLJa1')' 2004. 

o 

llhlnk you now haveallhe intrrnaDon WhICh Hi a\lllliJable at this stage bUi pleB981et me flave your W!w!i 

when you haw laid • dlance to digest and dlsWSS witn your CUSmm&I'!.. 

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 8874663 
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76061.233

From: DEN.!SE A REtLLYIHBUSIHSBC 

Sent: 12111f2oro e:40:38 AM 

To: TERESA PESCElHBUSIHSBC@HSBC 

CC; 

SUbject: COMPLIANCE~ OFAC ISSUES IN GENERAl. AND SPECIFIC TO IRAN 

AfulcI1~d i5lhe memo th.t_ discu$$et! yesterday In our meetng I'o1'Ih Michael 

GeUagher. 

---Forwart!~d by Denise A RGiII:#HBUS/HSBColl 1211712003 09:4fJAM ___ _ 

Dll'l1i5flAReilly0(114NC'V200215:02 

Note 

104 Nav200215:02 

From: DenlslJA RIMlly Tet 

Tille: Senior Vice Presiderlt 

'NorkGroup; 

PaymentServicll"S 

302.635.2500 Del 

Location: DeIIlW1"lrl: 

MaliSiu: 45451 

To: Carolyn M Windll-iB!JSAiSBC@HSBCAMERICAS 

cc: Michael B GaHaglHml18USlHS8C@t1SBCft.MERICAS 

SUbject: COMPLIANCE ~ QFAC ISSUES IN GENERAL AND SPECiFIC TO IRAN 

---Forwarded by Denise A RelltyfHBlISlHSBCon 1111412002 01;03PM ___ _ 

ValerieROUE@HSBC{Ifl14Nw2D0212:55 

Memo 

104 N01l200212:5t'I 

From: Valerie ROLLE@HSBC 

442QnSo5557 

Te.l: 79045557 

Tifle; Location; 

WorkGroup: 

M&lISi,e; 111980 

To: Denin A R""myfHBUSlHSBC@HSBCAMERICAS 

Geoff ARt.lSTRONGlHBEWHSBC@HSBC 

ct:: Pat N CONROYIHSe;UJHSBC@HSBC Marilyn H SPEARING/HO PCMlH8EUJHSBC@HSBC 

Quentin R AYLWAROIM05K1HSBC@HSBC 

Rod MOXLEY/HBEUIHSSC@HSBC 

Paul PROCTORIHBEUlHSSC@HS8C 

Dems~fGeofl, 

For your Inl'llrmatlon. 

Permanent Subcommittee on Investi ations 

Confidential. FOIA Treatment Reques .. __ E.. X.H.I.B.I.T .. #.5.0 .. 3 __ .lS, Inc. HSB03793159 

Confidential. FOIA Treatment Reques HSBC acc 3407517 
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76061.234

Malcolm 

Attachment COMPLIANCE· OFAC ISSUES IN GENERAL AND SPECIFIC TO IRAN.doc.zip 

Confidential - FOIA Treatment Requested by HSBC N. America Holdings, Inc. HSB03793160 

Confidential- FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 3407518 
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76061.235

HSBC Bank pic Memo 

To Date Denise Reilly 14 November 2002 

Geoff Armstrong 

From Sender's Reference 

Malcolm Eastwood 

CC 

Pat ~onToy 

Marilyn Spearing 

Quentin Aylward 

Rod Moxley 

Paul Proctor 

Steve Webster 

Nigel Weir 

John Chappenden 

Subject Receiver's Reference 

COMPLIANCE - OFAC ISSUES IN GENERAL AND 

SPECIFIC TO IRAN 

To Facsimile No. I From Facsimile No. Total No. of pages 

020 7260 9796 

This note forms a discussion paper formulated following various C{Jnversations that have 

taken place over the last few weeks. As the custodian of HBEUs payments operation I 

currently feel that we may be exposing ourselves to unnecessary and unacceptable 

Reputational and Operational Risk when we are handling payments originating from FIs 

domiciled in or who are a local branch of an FI domiciled in an OFAC regulated country. 

As a result there is a need to firstly clarify both the OFAC and HEUS position with regard 

to these payments and then to detennine/communicate the way forward to the RM and 

PCM Sales teams. 

I would emphasise that in no way we are se~king to avoid the OFAC filtering/sequestration 

arrangements here. Indeed whilst HBEU are not bound by these requirements the FATF 

principles which are scheduled to become legislation early next year and our own 

payments filter which is currently being built will take us closer to the US modeL I merely 

wish to establish which way OF AC are looking to deal with the sequestration issue 50 that 

we can plan compliance and avoid substantial potential losses which can result from the 

"incorrecf' processing of these payments. 

BACKGROUND CASES 

The above comments are prompted by two high profile OFAC related cases seen in the last 

few months. 

The first is a case involved Ing Bank sending a payment for USD 3M to BBVA from and 

to the account of the same Cuban Bank beneficiary. HEEU fonvarded this payment to 

HDUS via the Serial Payment route, The HBUS filter identified the Cuban bene and the 

funds were sequestrated by OF AC. The result of all this is that we are in the closing stages 

of correspondence between HBEU and Ing lawyers pending a Court case between our two 

banks. Ing are contending that HBEU should not have scnt this payment via a Serial 

method and that we should have converted the message to generate a cover payment which 

would not have then been sequestrated by OFAC. We are defending our action vigorously 

and have a strong case. built around the fact that we «paid as instructed". prudence dictates 

Confidential- FOIA Treatment Requested by HSBC N. America Holdings, Inc. HSB03793161 

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 3407519 
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76061.236

that we have found it necessary to raise a general provision of GBP 2M to cover a potential 

negative result if and when this goes to Court. 

Continued 

2 

Compliance - OFAC Issues In Genera) And Specific To Iran 

The second case involves Iran and Bank Markazi when a payment for USD 7.5M was 

frozen again because the payment was sent via a Serial Route and the OF AC filter 

identified it as being subject to OF AC rules. Following assertions by HBEU that there was 

no commercial transaction involved (this was the Iranian Central Bank paying itself at 

another European bank ie a Money Market transaction) these funds were released but only 

after a couple of sleepness nights for all of us in London. I have subsequently been 

advised that this sequestration may have been the result of a clerical error by HEUS but 

this has not been confirmed to me. Nevertheless HBEU are left settling Standard 

Chartered's interest claim for late receipt and with an underlying feeling of uncertainty 

with regard to the Iranian payment issue and the subject of U Turn Payments (we believe 

that the above payment should have been treated as U Tum) and had thought that this 

practice was established in the US as a valid payment method specifIc to Iran. 

COMPLIANCE WITH OFAC ISSUES GENERALLY 

HBEUs historical practice has been to send these types of payments where the U Turn 

principal applies (ie funds are generally moving from an European hank to another 

European bank for the credit of an OF AC regulated entity) via the Cover Payment method. 

This means that the payment instruction received by HBUS contains no mention of the 

country or entity involved. My understanding is that this has been accepted practice for 

many years and that HBEU ffiL hold accounts, some in USD for FIs domiciled in these 

countries ie Cuban) Iranian etc. 

There is also evidence (the lng Bank case being a case in point) that some other European 

FIs are using ABEU to transact business with these banks. primarily because the benes 

hold accounts with HBEU but also because they use us as a form of "Filter" for payments 

being made to the US. Whether we should be supporting this latter business going forward 

is highly questionable particularly in the Iigbt of the FATF regulat]ons. Indeed Ing Bank 

wiJI be asked to close their account shortly. ] feel that there is a need for HEEU IBL to 

examine the accounts of these· OF AC regulated customers to see if there are other 

examples of other banks with accounts in our books using us for this purpose. 

My understanding is tnat OF ACs tolerance of the Cover Payment method is lessening and 

that there is some pressure being applied to follow the Serial Payment route for an 

Iransact\ons (Denise can you confirm?). Clearly if this is reality this will have m~jor 

implications for HBEU both from a payments processing and LBL relationship stand point. 

We therefore need to seek clarification of HBUS/OFACs stance so that we can determine 

our future payments strategy. Certainly the FATF requirements, whilst not specifying 

Serial instead of Cover do point toward the principle of "'transparency" which the Serial 

Payment method would support. 

Continued 

Confidential - FOIA Treatment Requested by HSBC N. America Holdings, Inc. HSB03793162 

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Compliance - OFAC Issues In General And Specific To Iran 

IRANIAN PAYMENTS 

Twning specifically to Iran we have seen the various papers on the subject of U Tum 

Payments and I beHeve that we have a reasonable understanding of what these are. The 

above Markazi situation has put uncertainty in my mind on the validity of this payment 

method and also highlighted the fact that HBUS have yet to formally "sign off" the process 

described in your last note. Our conversation suggests that HBUS are now looking at 

another '<0" Turn plus" option and I would like to understand what this means for us as 

payment processors. 

I believe that we need to resolve this issue as a matter of some urgency if we are to avoid 

incidents like the one highlighted above. The lranian banks continue to send us what I 

describe as conditional payment instructions which for HBEU require an element of 

amendment by ourselves. This introduces operational risk and under FATF principles we 

should not be amending these payment instructions. Acceptance of these items over many 

years means that we are bound by the precedents currently in place) and I believe that we 

need to break these precedents by 

1. Establishing with HBUS and OFAC the validity of the U Turn Payment 

principles for Iranian payments. Whether tbis be by U Turn or U Turn plus I 

would like these to be Signed off by HBUS as soon as possible and certainty by 

no later than 31112/02. 

2. To agree a "templateU payment instruction for these U TUrn Payments which 

can be used by PCM Sales and the R.I~ team and sent to tbe Iranian Banks 

stipulating that payments must be formatted in this way, confirming that we 

will be sending tbese via the Serial method and tbat any deviation from this 

template will be at the Iranian Banks own risk. We would also have to state 

that tbe validity of this template would be subject to any change in OFAC 

legislation in the US. In this way we can give ourselves a level of protection 

from claims relating to capital or interest which may arise from funds being 

sequestrated or delayed ns a result of OFAC seizure. 

If we cannot ~chieve this in the sbort term tben I will have to recommend to 

my General Manager a view fb.at processing tbese payments is "unsafe" and 

tbat these items should be mtered out and cancelled. This would have severe 

repercussions for our Groups relationship within the Iranian FIs. 

FUTURE BUSINESS STRATEGY 

I believe that there is a need. based upon your responses, presumably fonnutated in 

conjunction with yow colleagues from Compliance for HBEU to consider its business 

strategy for the continuation/development of its business with OFAC regulated countries. 

Whilst I am told that there are significant business opportunities particularly with countries 

such as Iran there are also substantial Reputational and Operational Risks, not to mention 

Financial losses associated with it. 

Continued 

Confidential - FOIA Treatment Requested by HSBC N. America Holdings, Inc. HSB03793163 

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 3407521 
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76061.238

Compliance- OFAC Issues In General And Specific To Iran 

Whilst I am not suggesting that we should discontinue these established relationships there 

is a need, in the light of the charging regulatory climate for us to review our position and 

ensure that we have a correct balance between risk and reward, 

I apologise for writing at some Itmgth but there has been much happening on this front 

recently and I thought it appropriate to try and pull all of the somewhat fragmented 

information together and to share our concerns with you, 

The only certainty from all of this is that we cannot delay and prevaricate in this matter for 

too much longer. We have seen potential losses in excess ofUSD 10M in the tast couple 

of months and it is now time for HBUS to define exactly what is and what is not acceptable 

to them. 

Your views and those of your colleagues in Compliance would be much appreciated. 

Regards. 

Malcolm 

Confidential - FOIA Treatment Requested by HSBC N. America Holdings, Inc. HSB03793164 

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 3407522 
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76061.239

Ftllirf: J/:lhn F ROOi 

Sent: Tue Jun 17 lS;.2d.16 2oo:! 

To~ Da'o'id W J SAGLEY; Joh" AlLISON; SUssn A '.AJRIGIiT 

Slrb}9ct Re: PlC • Fl:e ~do ]'101 m~l"I!ioo o:,Jr nsme" 

'nporillln .. CI; Normal 

At".ac.hmorrts: image_c.glf; irr.ac~_~,Gtt, tmsga_:2.'IlI1'; liMije_:J.(l1f, Doc ~.Iitrn; r0074483,tir 

Funher information. as requested by DaVit:!. 

Kind l'eQ"ards 

John Root 

from: Elizabeth Prolomntroil-lO\J8IHSBC @ 

H£BCAMERICAS 

To: John F iIDOTIHGHQlHSBI;@H5SC 

CalOlyfll'wl WindfriBUSrri58C@HSBCAMERICAS 

'rhf:I ~l'\"E!!'It wa$ ~"ffi$te\:I by PLC alKl received in the HBUS Delaware Funds Transfer ~3 fo.r 

processing. IT stopped b'revlew in the OFACqu€,uli due to 1M orlgli'lGrer "M(l11i Banll PtC~. 'INhen Funds 

Transfer stslf noted Ille message In 1tNO BSI fiElld slating "<10 not r..ar.tion OUf namc-lha pliyrTli"..n: was 

rejected. per our policy,nue 10 tXll1r..efl1$ ~ut ~-..ai)io[l isslI8's urtler me OFAC reg\.!latk1r.~_ {EWn ifttle 

payrneot quaiifJti's 8S Ii "u-turt(. we wil not proCI!ISS iJ ifii r;onteins 5t)C/1 s meS58\l8 ... any fleid on the 

ps}'ment.j It \\-il be rept>r.e:J t!O OF,\C 3S 3 rejected item '/IS reQ:..:kee under th31r~nlar. T;"nsQctions 

Regt.d21fons. 

j dlecked '.,.mn our InV9'Sllg.atm~ ArlSf'!, and !hey c:al'l't tell wnat department In I-'LC inil~ted the payment 

An th~ 1nslr-K1fo,':i ~slvecl 00 tne wire appesr on L'l~ psyment cow attached, whICh i'ldwde "do nC'li rTle'ntion our namew In the 881 field. Funds Transfer in Delsware dces not el1ef the paymenl instructIons 

Permanent Subcommittee on Investigations 

Confidential - FOIA Treatment Reques .. __ E.XHI __ B;;;I,;,T.;#;;;5~O;.::b;..._...1 HSBC acc 8873922 
814 


76061.240

__ = Redacted by the Permanent 

Subcommittee on Investigations 

There 811:' 5!:!wrl'd re-l'erence numbers onlhe pBl}-'TT1Bnt tIlat mey l1I!!tpyou trace It!. pruct'Ssing in London. 

Thenv!rtJers. .. re 

In case you have trouhle reacing Ill-a attached payment detalis are gillen below. 

Business deW: 1l-Jun·2003 

~tlit. _HSec SsRk pte loi"iOOn usc C:1I8rin>l, International Divt5ioo, S Csr.aea Squsr$, 

L~o(l 

Creelit..!P Morgan C:MtHt sank, NY. NY 

3rd P9<flY: Lbyds TSe Bank PLC, L~nda."! 

B.SI: BN:FlREF_Pse dO not 'Mmion-our 1"'3me in n' 

ORO: M!:UG82L. Mall Banlr: PLe, 4 Moo!'ge(!!. London 

usn 150,000 

Please 1st me knOW' It you have any oltter qtJA!ltiollS. 

OIro1ynM\lltlnd 

E1~lJ~\1~Pre$ldem. 

Til: EIt:a~ .. 'l ~rotcm~alt"IG,VSlHseC@HSBCAM~R:Cl\.S 

Subjact: Re PLC.f'.J!·d{lr.~mar.llCl'lalJrn;f;;';';a" 

Pieee.e provide John the detsi!s :Jf !hCl tnm'-S.cticn. Thsrlk )'0\.1. 

------- FCf~.':Ifee:!ll:rf C3r~I)''' ~tv;'!lrl.'HeUs.1_lS9Cer:(tl!llri200.:!.(l9;IJ:lI'.·.t-----·---

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC acc 8873923 
815 


76061.241

From; 

Subjtu:;l; Rl:!. ?LC·Re ·ooJ~lmentiol1ourmme" 

Ca;;:;lyn, 

YOur.t 

John 

Cl'trolyn M Wind!lllWSmSDC @ HSBCAMER1CAS on 16 Jun 2003 1634 

From. C:umyn M W-InIlII-IBUSlHSBC C! 

HSSCM'IERU;'.o\S 

In: John F ROOT 

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC acc 8873924 
816 


76061.242

bclo: 

FYI 

Ill:...Carolyn )I.-t Wind 

.6.nnotUedyfH8US/HSBC@HSECt.MER!CAS 

,suh.!peI: PlC'; - r:I~ "I1n !'lOt 1T'f!'!\1!'ln our na!:'1!!'" 

FYI, atiac:tJed okrase Ifld a copy of Mel!! peyment rejecOOrj on Fridaywi{h tile abo~ rT"Ie$s&ge in '!he "eel" 

Mi':lH8US FlU: 

00'13r.ZW3ID5:j~ 

Confidential - FOIA Treatment Requested by HS8C 8ank, USA, N.A. HSBC acc 8873925 
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- = Rtdatted by the Permanent 

Subcommittee on Invutigations 

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 8873926 
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THIS PAGE IS 

INTENTIONALL Y 

LEFT BLANK 

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 8873927 
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76061.245

from: Oavld W J BA(';LEV 

Sent: TueJun 17 ,,:31;172003 To: Jotm F ROOT 

cc: .j~t1n AlLISON: $ll!5M A ~IGI-fT 

Subjed: f.iemo: Re: PLC ~ Roe -do nol rne'toon our name" 

ImPOI1llr.~ /IIQrrr;af 

JDhn, 

R6ij;:Hdless of the 'Hider tsUti as to tOO oppIIcability or CFAC i.V 11011 ~US persCoIlS sr-IOulCi we be e:llOwirtg B 

pa)'l"Mflt ""lth this sort olloslruc-tion 10 be p!!.ssed toO H8US. or ~ Ihere In fact nothing we can co to screen 

'fer INs at least pnpliO~F. 

RegarrJ:!. 

Confidential - FOrA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 8873928 
820 


76061.246

From: EUZAfIETM PROTQMASTI;.OIHDUSr'MSI3C 

Sent: S/4I20OS 9:59:42 PIA To: TERESA. PESCEIHBUSlHS9CCHSBC CC: ANNE UDDY/HBIJSIHSBC@HSBC:GRACE C SANT1AGO-DARVlSH1H8USIHSBCIiHS8C;~ISE A 

RElU. YIHBUS/HSSCOHSBC SUbjeoc: Re; fw; Wire Paymen1J Suapaid.d 

For the mold pan, 1he u~tum811'1at we lWoIe proceaed for HBEU an! fuMy 

dii$d~d .. per1he oondlons gated In the at:ached doGJrnentl!tSl" CIe'oember. 

(Oocum.",t subrntled bot Denise Rdtt to PCM rnBnagemen1 December 2004) 

Tn~ remlUet'. Credit S(J1&se Zuridw, • wd aware of1he u-~m prccCIcos of oItlC'T WS. Ofgeortimons and tho requtramlull klr lUI dildose ofth", name and 

adl:t'eu oflho OIfglnator aMi the benelo~. 

Fleeae lei U8 know If WlouicIi.dum the btd_ to CredH 5uia&e Zllrlch "815 p:tIIf 

lr!t!malpotioy-. 

Thal"lkyou. 

From: Teresa P_ce on 04 M~ 2OQ!5 08:15 

To.: Elzabeth Protornaatro Anne Udctt 

Sub;ecit Fw: Wilt Peym.\It1ta Suepended 

Anne mentioned Ihi!i 10 rna ye.erday. Is this standard per DavId'. question 

be""" 

Fmm Marion 0 ROACH 

s.rt: G5I04nCIiIS 08:11 AM 

To:Tefltll5lt~ 

Subjed: reo Wre p~ Suspended 

T6lTY, 

I o!IIIftBch a ulf.explanUtory uGhBr19't of correc.poI-.clen<ce brwarded 10 me, 

WliiIllOOnc:eJlll. nw Ja'WtleOlertlie anato,tnlillitdion laken ~ JOur or.d den0tB8 l1li 

c:hangeofp04lcJ "'dfllPP'0~ wIItWI HBUSIo _at I would narmaly expecttD be 

cover peynlllfttt:, 

JIwJ )IOU are aware, there are nD Group standarcI$ v.t;iI;:h ~R: Ih:t e-te 

~=a;O:~~t='~==~W:=~~:e Imderi)ttna rustDmer IMtrUCtion it. reoelYed on e ba ... penritted by the SWFT 

bmet and b\' local regul&tion. 

tflhaadton "lit ha. naw been taken te'Pt"enttne chanQ8 ofpolr:y on EM 

part of HBUS, ho¥rMYer undemanda_1n I'MI current nJgUtatDry an\ljronment. if 

concern. mEl that IIiInyilUd1 r;;h&R," of poIc:y msy not h.mr be~n aormn.nJcm:!.d 

e~ tie Group l!!!nd 1IUb!ed tJ;> appraprblte !I!W;. af con .... llIfion W1h 

bualnns colleagues. 

Permanent Subcommittee on Investi ations 

Confidential· FOIA Treatment Requ EXHIBIT #50c .. _______ ;.._ .... HSBC OCC 8874710 
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76061.247

I WQ:=!d be Ql"sDe:fUI if you wau!d dsrtty VIItIe1her1herel'ln mllctMoert. 

change 01 poRIVIf. 8S If U.1hare does ntll appe .. lo have been erryelClem8l 

col1!llJltation or fMlIification from HB.US. 

ARa'nativoly. "!'Ie ~ymcn! has been bloeked beoause ofa reference to lren 

then this ill. Lmderslood. 

K1ndregerda 

DllridWJBagley 

Memo 

04 May 2OD~ 06:21 

From: Susan /It. 'WRIGHTfHOHalHSec Tel: 7m 5554 

--= Redatted by the Permanent 

Subtommitt~ on Investigations 

..... 2079 925554 

Mllil SIze: 7848 

T",: Joe"E MOYVNLEEilBEUlHSSCOHSSC 

~: CavldW J BAGLEYIHGHQ/HS8CCIlHSBC 

bee, 

SUb;'ct: M'8. p.;;yment auspanded;. 'ran" -1JSO 13,912,607.82 

..... 

I tUNe copied thk- one to you tor .ardkln given the me of1he 1r~. RIIg.s.SW _ Fofw;udvd by Susan A 'NtIGHTItlGHQIHSBC un 04 May2005 08:20-

ElIzabeth Pro1DmlilOofHBUSlriSBC em. oa May 2005 22:D2 

-

03 MQ200522!02 

Fft:Im: Elizabeth Pl'oIOl'NlB'lnllHE!US/1iSBC 

Mall Size: 2857 

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 8874711 
822 


76061.248

o 

__ = Redacted by the Pennanent 

Subcommittee on Investigations 

Bel: BnfNJ~oflO'fi.(M.aUrtet BAHA_UCNo, gida . f1' .... ~"il ... 

Though". payment appearo to meet !he U-tum underttle IrarAn Trllriseetiorm R~&Ioi'i ........ r~ U;ort 1he P8'imenb choutd be fuIIr di!ldoaed ., to the 

m;inBtm atId beneiCiary Information befI;Jre processing. We kno.'ltud ItH. policy Ii \It I""WHh tha ~ ofoCher' U.S, ..... t::I .. lntlttua6oml. 8lIc:t1 

neantGfN-"Yortc.ncl Am.rioan~. YrN 1I",lIb.oh4r.,fi'omplI*l 

chwStiloos, 1hat IhIsllJ. required by t-eUS. 

Latus knowif)lW, have Inyquestiont, Ptn .. ad¥\$& on you elde of Ihe delay 

tnprownlng. 

Thank you, 

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC acc 8874712 
823 


76061.249

From: ANDY H IMlHBUSlHSBC 

-----lS .. eR~ 212812008.:21:17 PM TQ: JOHN AlLiSON/HGHQ/HSBC@HSBC;SUSAN A \lVRIGHT/HGHQ/HSBC@HSBC 

CC; GLORIA STRI\ZZAIHBUSlHSBC:EL1ZABETH PROTOMASTRO/HBUS/HSBC@HSBC02:MARY A 

CASKINIHBUSIHSBC@HSBC; 

ANNE LlDDYIHBUS"';SBC@HSBC;PATRICIADACCSTNHFSCIHSBC@HSBC;DENISEA 

REILLYIHBUS"';SBC@HSBC; 

DONALD W MCPHERSON/HBUSlHSBC@HSBC02;CAROLYN M W1ND/HBUSlHSBC@HSBC 

Subject: Rami Makhlouf 

Hello, 

We have determined that accounts held in HSBC Cayman are not in tt1e 

jurisdiction of. and are not housed on any systems in the United States. 

Therefore we will not be reporting this match to OFAC. Please let us know if you ha\le any questions. 

Thanks, 

Andy H 1m 

AVP, AML Compliance, HSBC Bank USA, NA. 452 Fifth Avenue, Tower 7 

New York, NY, 10018 

Phone, 212~525"8139 

Fax. 212-525~5769 

Email.andy.h.im@us.hsbc.com 

Pemcia DacostalHFSC/HSBC@HSBC 

02128/200809.01 AM 

To 

Andy H ImlHBUSIHSBC@HSBC02 

cc 

Michelle P Wlliams/HFSC/HSBC@HSBC, David ForcllPBRSJHSBC@HSBC,Amanda 

WaymanIHFSCIHSBC@HSBC 

Subject 

Re: Fw: Search #029-08· HFSC # 1028 - Due 25 February 2006 

Dear Andy 

Plt:!i:l'.o;1;;! be advi~ed lh<lt WI;;! cUflenUy maintain i:I u!latiun::;\Jip wilh SelUOI, 

Mohamed Makhloufin OLl, capacity as Trustee and the individual named in your 

search request {Rami MakhlouQ is actuaUy 8 beneficiary oftl'le Trust (hiS date 

of birth matches the individual named ln your search request which ls 

10July1969). The Trust is administered by HSBC Geneva. 

We raised concerns with this client in August 2007 however we were assured by 

David Ford that the relationship had been reviewed at Group level and a 

Permanent Subcommittee on Invedigations 

Confidential· FOIA Treatment Req EXHIBIT #50d Confidential· FOIA Treatment Req 1. __________ .. 

gs, Inc. HSB09255892 

HSBC acc 8878838 
824 


76061.250

decision had been taken to continue with the ralation~hip. 

I halle copied in David Ford to see If he wishes to add any com~n~ prior to 

you responding directly to OFAC. In the meantime, please confirm if OFAC 

Indicated grounds for their request? 

Kind Retlards 

Patricia DaCosta 

Head uf Compliance 

HSBC Bank {Cayman} Limited 

P.O.Box 1109 GT 

Strathvale House 

North Church Street 

Grand Cayman KY1~1102 

Cayman Islands 

Tel: (345) 914 7572 

Pvtdy t-t lm1HBUSJHSBC@HSBC02 

021271200805:39 PM 

To 

Patricia DacostaIHFSC/HSBC@HSBC 

cc 

Michelle P vVilliamsIHFSC/HSBC@HSBC 

Subject 

Fw: Seerrn #029-08 ~ HFSC "# 1028 - Due 25 February 2008 

Hi Patricia, 

Iw this cese is urgent, can you let me MO'N the details of the account(s) in 

question below? 

Thanks, 

AIldyHlm 

AVP, AML C()mpliance. HSBC Bank USA, NA 

452 Fifth Avenue, Tower 7 

Ne;vYcrK, NY, 1001e 

Phone. 212~525-8139 

Fax. 212-525~5769 

Email.andy.h.im@us.hsbc.com 

--Forwarded by A1dy H Im/HBUS/HSElC on 0212712008 05:36 PM -

Andy H ImlHBUS/HSBC 

0212712008 04:39 PM 

To 

Michelle P VViUiamslHFSCIHSBC 

Confidential· FOIA Treatment Requested by HSBC N. America Holdings, Inc. HSB09255893 

Confidential· FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 8878839 
825 


76061.251

--------------_ .. _--_ ••..... _--_. Subject 

Re: Search #029-08 ~ HFSC # 1028· Due 25 February 2008 

Hi Michelle, 

Can you make sure this is a positive match? This is an OFAC request. Does 

your client's DOB match up WIlt! the person in question? Also, can you teU me 

more on the account where Makh!oufis the trustee? 

Thanks, 

AnriyHtm 

AVP, AMl Compliance, HSBC Bank USA, NA 

452 Fifth Avenue, Tower 7 

NewYol1:., NY, 10018 

Phone. 212-525-8139 

Falt, 212-525-5769 

Email.andy.h.im@us.habc.com 

- Forwarded by Andy H ImlHBUSIHSBC on 021271200804;36 PM ~ 

MicheUe P Williams 

27 Feb 200B 16:24 

To: leRO BP@HSBC 

Subject: Search #029-08 - HFSC # 1028 - Due 25 February 2008 

Dear Coneague, 

Please note that we currentiy maintain a relationship with "R.ami Makhtouf as 

Trustee of a es.tabl~hed trust 

Kind!y confirm what actions if any HSBC Group has taken in relation to the 

above mentioned individual 

Sincerely, 

MicheUe WlHiams 

Internal Control Officer ~ Comp!iance 

HSBC Bank (CR~m~n) Limited 

2nd Floor, Stratlwale House North Church Street 

Grand Cayman KY1~1107 

Direct Une: 345 914 7560 

Confidential· FOIA Treatment Requested by HSBC N. America Holdings, Inc. HSB09255894 

Confidential· FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 8878840 
826 


76061.252

From: Sus:r. A WRIGHT SenI:: \Ned Mqr 10 14·,56·.d.Q ,.D04 

To: Davj,j W J BAGLEY 

glolbJect: Re: 8.JI1W:;r.\<lzl Pc;'Il'ICnt 

ImportanCJ!!; NorlJT.lt 

Attachmontll: imIl!;<tU).gif; il'!'laQe_1.Qif; imlllJlll_2.Wf; ilflage_3.gif; Doc link.htm 

David, 

A$ requested SW 

___ !"Ol'o'ml'l'tto<! hy S,~q;" A \ll,lR'1r.;r"IHr.-.;o!H!'~C. (111) >"19f 20:J.' t4 ~~. __ _ 

..... 

f""'l)1enfiD R. A YI.W ASjl eo! ttl 

Q ... ~rrt;" R A"'"WARDIYDB~3BC@Hsac 

I:;C: Pha BAl..aESlII.tOBKfHSBC@HSAC 

G.,ol\' ARMS7FiONGlHS;;:.JIHSBC~6C 

ROO ~OXI.EY/l'!f!:E:UIH..~G@H-58G 

SUSllI1 A ~!GHTlHGHQ{HS8C:;@HSBC 

txll:; 

Subj&C"t: Re: BankMarlcaz( P~vmel\t 

Q, 

let: 799 12300 

44201!.lfl1230C; 

T1l3nks. )o13vlrtg n;vfW,Ped the a"lbcruTwsnls. and tile ~me\'1t Itself! have a;kt'd Rod Mox~· to 'msuro that 

!!:!s paid 'l\'!1h immec!!ate eff8el. 

Re{lrettaO"l'j we ant new reaping tM rewaros 01 tfle inability of !6L ani:! Complian~ to res.ohle the Iranian 

pa'(ment issue for III e;¢ess of 12 months. W~ In CSD 1l0:\lll have the tools to idf:flliry both JXllelllia! 

S~(\ctiO!'l and Tefr01ist payment a"'wlly and we hew !tl1.!Se them one! protect the Sank. from l'Inerac!aI ':os$ 

and rewtalionaJ rb.k, thererore ! have no i!sue witl1 the aCTion ts.~ef1 by RMS. 

Permanent Subcommittee on Investigations 

EXHIBIT #51 

Confidential· FOIA Treatment Requel .. -------;;.;.--..I HSBC OCC 8873979 
827 


76061.253

The infrJrrnatloo about s!e~"-,, !)9:y~nts {l!~1(>'i wme comf!Jrt 21ttlOugn in my opL'1lOn OFAC would be 

oerfectly within ih'lir ~ to se~tl"a'W tills item, It is ooiy tile benefICial)! name and repea: nalllre of 

the pa~rt! wftiCh will pc:f'haP<' maiO-iOta ihls mk_ ft Is {l~ the Mi.1S that IfifllS 1$ 'io9QIJ€strattid Iti.s tlsk is. 

Jell;: or its cus1omert! 3.'ll fl'\EIrJng the p;:lymenl. 

On the wider Issue or Iranian pgymanls In {JlI'lnRfA! I Mmaln e:E;IrE'!'l"'$!~ I.IfI';C'I1Toklrtable- wRI'1 the pfecHce of 

amelldif19 Iranian paymen, ordal'$l'or whillel;ar means. A1lhoogh much of thls actIvity ls hlstOflClIle 

polifua! climal'e hes rmo\'~ on 2nd :.L.d"l practices are!"lc It:!ng~1 BCC9ptsb!e to the reg::latory /!:uLl-Jcri!le5 

On thi$ Oasis ! wvuk:l urglit boih Compliance and iBL to get thIs Issue resoived as soon as jXl'>siole. My 

O'~'n Comp!i~nOB ~I!lcSte Is l'!eG'lrtj" ~'\O'Sa~"l.O refte.ct w~t ~ af.s not compliant in ra-sp&c1 of ;i;r; and 

!t\i$ will beCome a flfOb~fTI for me if II\I~ h~ !"lot progresslXl a sotl)(tJn Wl1firt I <!m asked 10 ~Ig" Ihe nttXt 

i regret thai \Inti we acflie'o'a- c.leril:y 00 b'lis issue- .... e wll! OOfllinue tu ",Ele item:tl dekt~ IrOd dtlbtl\t;l\:l. 

Clearly! ne¥';! no wish 10 jeopardt5~ rpoCl r~I2tlonsl1!ps With !8L C.LEtcrne!'f; out whl!e! thls m~r remains 

in my pendlrlg file 1 am lek wJtrl little cnOlCe but 10 hDkl and challerlQG these. item9 on e. caS(! by case 

~siS. 

Ma!colm 

MllriaWYAITlH8EtJ/HSBCon jOM"IIt2004IJ-18 

lk.:IlO 

1()~"'~r!!~11:Ul 

Malcc.lm G FA STWQOD Ct al 

TQ: Mflk:oim G EAST'vVOOnrr.lOBKfHSEiC@HSBC 

A'Ii! SAiNESiMD6KiHSEiC@HSBC 

Goo!! AAMSTRONGlHSEUfIoiSBC@HSBC 

t.(:c; 

Sub,iett: IJBr.l<:ld6l1<.azi Paymerr! 

T.l· 79912ie.; 

Confidentlal- FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 8873980 
828 


76061.254

This is a c!as..!)-rc.! am SlUa \/)at \'0";; afe aw<!J(& !hat Bank MaBali J\O me Ira"ian Central banK. Fr-on Ire 

~~=;;!~~I~:r:~~!~~a;d~;,':!~f;13~sa~_,~~~;~~;~~'~ WI17iS I; is n;edil to B Sl.ipra "llitjOnef w~·1ct; Qljeti,tii: "",Uhcu\ CCIlfiiI)r Dl!rTlef5.. Ilowe-¥ef I fill(! it t,liiJQ ro 

~~w thaI we shculdsWp Ii!. mf:'eynl<3n.'Wn:.:]!f/1JU 

Q. 

----F~er,d~d Z'j M~r'.e""":'.t,r!HE!!:UJ"rlsac7.' tC<M:lrZXr41;.1:<--

T",!; 9714!i07i612 

David W J BAGLEY ct a; 

Te.: OS\ii::j ', ... J BAG...EYMGHQil·sac~c 

Ds'lid H I-lODCK:NSO~OC!- MEIAIHBI.'E.'}£,(]C@Ii$[!C 

Jo:.hn BLAN"1 !ORNEliiD em MEtNliBMfJHSBC@,-1::13C 

Ti:'! M P/,~.NSlHBAP"IHSOC@HseC 

QUltntm R A'r'I_WA.~DIIII!DBKil'IS3C@HSSC 

iSnan W R.~I1ARD5IMualVHSBC~Si3C 

bee: 

Davit!, 

A!;, Nig:ei is currentiy traveiiirtll. I enclose a -sekxplanotclV rTl9TOO from Nasser Homapour for y(lI.JT urgent 

al\e.r:~. It ts: 3 sariol.Js i$soo and we- must rer-..olve it irrmedial:ely. S10 Jt mal haw p'Jtr~-mj:ally damaging 

effeol on !;"l,Ir relflti~nstj~ w~h &r;/t Ma1:a;~t 

S!\anqSiUchqi 

Redacted Material 

Confidential· FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 8873981 
829 


76061.255

Th~jJ!-~lJ....wEIRIR.M iB ~ . .fEMIHBME 1-l'~BC vi al 

To Nl!il~jJW;;IR/R.~ 18NEMIHBM8HB-BC 

-':t Cil!il.'.d Ii HODGKINSCN,'OCH MEM!H8/o'IElHSBC@l-<SBC 

"l"hfl eLAN7I-IOR~"Ei~~C Cia MElJ.iHBMEI1iSScaHSBC 

T::':'1 i':I1 EVM.JSIHBAPfHSBC 

;:~r~~~~ !It~~ll:]j~~:~~f~:h:~~~~bn~~~~~ ~6~;~c:r~~~:n~ QfAC &alicl:nns. This is /I rSDeat MVI1'ef1I. and to aate It he$ alvray.;: beefl pmsed. ItwOtlId apoear thaI a 

cr:ar'::;e r; C;e 'scarmfn£' or 11a~S.3::-1!0f:$ Cy :he s-:r-,lem in :..ond«l !'las flaggGll i~ ULit ~s Ming \\'tIlth). of 

j"'\lMtiQ~tM. Tl'\i$ saga has been nn gOing l'j"inoe 5FEBl14 Bntl the Centtal R!I!\t: ill b.!.eomio'\(r II1r..!"f)aMlg~' 

lrr1tatt!:i wlt.';:t'.a- stanc.& 1aken by HSSC i.-.;toe- UK. ih~ 1¥i;n~;9.~foO'lIi';ll;a;iy ir ........ !'...::-i 2 HSSC ~Q'I!1ii. 

~:t th!C>refore d~ n~r:/~~n:l p·:nty ~n!<. Th!! delay tr. the pcyrrent I){ the il'!sta!!rnen!!s oSL!~'n~ 

d!:!!uys 'fl IJlh~~V~4 ';; m fa .... ;u,Ir of Iran which wm only beCOme effective once Ih1$ firtal 

instllil"1i!:ntj!itlffe.:.ted. 

Tho blod!:age appears to hew b9Sn caus.ed by Jenetkl- King in CQrJl)I!M~. Can I $ugg~$t you send an 

LN to Sagely ili(tlliQhlill1:l ihe lnlJact mat: this jntrall5ige~lt ppsiliol" wili ha'l8 on cor etfurG to glTJW 

busir,~ \'ffu~1 Bank MBrkazi 

Redacted Material 

Confidential - FOIA Treatment Requested by HS8C 8ank, USA, N.A. HSBC OCC 8873982 
830 


76061.256

From: Msleot:') G E.~sw.-::>oo 

Sam: Thu Mar 11 18:37:.11 7'oo.t 

To! D.avid W J BAGLEY 

~: QoJenlin !'I AYlWARD; Phi! 8A!N~S; Geoff ARMSTRot~G; Flo::! MOXLEY; &r.xm A \"JRIGHT 

Subject: Memo: Re' 6ar1!!; N~r1r::a;tl P~~nt 

ImportBnc&! NoHl"l91 

Attachment5: image_O,l}if 

David, 

Than'" you, i do l1r.<:ls.ro.!and the. co.opIexities havlng beE;l'I ~1T.broU~ ifllh-2m fer many (nc:mth~ lil)'self. tM 

mytCOOl are- ploeed I., an impossible poslHon, We either have to pavor return ite"" on e. dailytJ8s~ and 

Qivt.li the itlci<oi.;;lliIfil'f i em 5ure that you can I.IJfUt1n1laIIO my Cl)flCtmlS. 

My note mere1i' see!;S !I:l t3ise 3'''larel'l~t of !in issue '''~fCh in teITl".E of rer..oluHon appe:ll~ !a h::l'o'a G(me 

llIlComionably O4.uet of tale DUt i$ \lery mucl1 alive IfIlho world .of payments, I lake some comfort from ya,x 

(lota and that we ha'o'e a legal oplnio;;. HopeIu!lyVtO (an $liar"" the t.OI1ten~ shortly and Inail'!' prOO\jC'iJ 

sow.cU'lt:'Ig \,\'oi1lable for au co.~,cam8d, 

'f.~kl~cregard$. 

MolCnlm 

FI'1'!lm.: On-kl' W J BAGLEYIHGHa,,{SBC 

S9"nt by; Manon 0 ROA01 

MalcQlm G E'\.5TWQOD et .. I 

To: Miil:!cclm G EAST'NOOO".<DBlVH!;,6C@H$5IC 

Out:rrtin R A'r'lI."JAt:tD.'.IDSI'{!Hsac@HSSC 

PM ~1!'ft:::>fMWKIH1:l!:R!@H3l:lC 

T'l!I:;991~5 

+f~7991~5 

Permanent Subcommittee on Investigations 

EXHIBIT #52 

Confidential· FOIA Treatment Reque ... ---------.... HSBC OCC 8873985 
831 


76061.257

C~ ARM$TRONC..JH6-ELlIHSoc,·!1)HSEC 

R~ MOXLEYIHBEUIHSSC@1"t58C 

Sug;an A V'JRfGKT/HGHOft-ISSC@rC5;8C 

""', 

Ma!eolln 

I t-i!IoVI! had 'Sight ofy!!!J note of10 March 

Wliist I unde~tand your OOI1cems, wnidll stJare-, ~rticu!arty when raki:'lg a Group view, I bebeve )'Our 

"ot;z, mlh~r unooroCsti~:s the comp:edy 0-1 !n.; OFAC fugulstion, aM the co.-r.pering compalfti .... 1'1 

pressures ~rosz 1he Group. 

The compleldly oftM OFAC rfl9(l/otion!'l, and 1he fr:K.t Ih,,1 HBUS were !ln6W~lllI th..t 1Jf\y "mm~mt:1'11s 

masied wirh Imnlan ~ank.s. ha-:o maae soeedy resoillilon of tnls ISSue OiTfIClJI!. 

A l€-ija: Q-p:nlOn has flOW tleelll obOdifU!d tom Amerlcan ~wyeri", EinG B rewrnmendstic.n wlil be ITIBde 

shortly wi!l1 regan:! to w!'Iat we ,...'Ou!1 hOpe wi!! be a 0CI!l'lpII211t epproach, wtlk:.tJ ~ hCtIl: the ffi(Jtllemry 

situation. seeks tc addl'8ii1l1 the eo~ling eo!Tll'!JtlI:l~ dr1Y91",.and hopefully aiso addresses the poOuticaJ 

rislls. 

Dawld Bagle::; 

Confidential- FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 8873986 
832 


76061.258

From: Marion 0 ROACH 

Sent: Moo Apr 1Q 13:40;17 2004 

To; Richan:1 E T BENNETI 

Subject: Iran Correspondent Banking Services· OFAC 

Importance: Norma! 

Attllctunents: image_O.glf; irnage_1.gil': Doc Unk.htm 

Richard, 

! refer to your note concemil'lg the abO~, and attach the resuhs of II recent exchange of correspondence 

with DINid Hodgkinson on thIS subjeel You may recall that we discussed thiS matter in our previOus 

IT'IE'Ieting wi!l1 SKG where he gave B clear indication that Mart!n Glynn's vieYtS should be sought before 

there was any expansion of activity in relation to Correspondent Banking service'S fOr Iranian Banks. 

My nole of 22MAR04 to David was inten~d to ascertain e)3(:tlY what was intended, 8~hougll as you will 

see,l have received a slightly opaque response. 

! will follow up wilh Warren In terms of the worll David says is underway, but as you wiH see the most 

pressing issue to be resolved is that relating to the limited number of existing relationships that we have 

(lor two small Iranian Banks~ where! suspect that HBUS are not aware that payments may be passing 

throlJQh them.. Do not oolieve thet we can sHow this situation to coolinue very rta!ch \cnger, which is the 

point! win make to David in my reiPonse. 

J recognIse that there is a need to act on SKG's suggestion for a solution. It occu~ to me however that 

th~ solution may not be workable given the multipllcity.of pointers involved. We are dealing with 

payments for the customers of Iran!an Banks. These will notltJerefore lend themselves to e veiling 

approach given that we will have no COtlttol over who 20m ror the varioos remitters eM beoeficiariss. 

Kind regards 

Permanent Subcommittee on I!lvestigations 

EXHIBIT #53 

Redacted Material 

Confidential - FOIA Treatment Requestl HSBC OCC 8873994 
833 


76061.259

from: Oavid W J BAGl.EYIHGHQrH5BC 

Sent by: M8rion 0 ROACH 

David H HODGKINSON ct a1 

Ti!!I: 7991 5645 

442079918645 

David)oj I-iODGKINSONIDCH MEMIHBMEfHSBC@HSBC 

WBrren. G LEAMI~ LGA MEMlHBMEII1SBC@H$BC 

Subject: IRAN _ CORRESPONDENT BANKING SERVICES 

David 

Vlfhilst the above steps are possible. it is likely that HBUS will need to satisfy itself that 

the procedures are robust and adequatE! given the significant regulatory and 

reputatlonal risks they run if errors were to be made. 

Redacted Material 

r.nnfiripnti.1 • FnlA Tr,,"tment ReQuested bv HSBC Bank. USA. N.A. HSBC DCC 8873995 
834 


76061.260

_ r r f (I [ M I am uncomfortable with this activity in its current form 

and think that we need to make an early decision both with regard to this business and 

the extent to which we wish to expand our activities involving Iranian banks. 

I spoke personany to the US lawyer who has provided us with ad'Vice, and separately 

My reason for writing to you at this stege is that I think it would be sensible for us to 

make an earty commercial decision before we spend any more money on legal 

opinions, or in upgrading our activities in the UK so as to achieve a compliant approach. 

My sense of the value of the existing business is that it is relatively modest. When 1 

spoke to Nigel Weir, my recollection is that he was talking about the 'Value of increased 

business as being some US03m. If these figures are accurate, then the amount of 

revenue may not justify either the additional work and investment that will be required, 

nor would it justify running the reputationa! and regulatory risk in the US.l recognise 

however the significance of this activity in terms of our image in Iran and our ability to 

expand our business there, 

I would be happy to discuss this issue more generally with you jf that would help. 

although suspect that perhaps the next conversation you might wish to have would be 

with Martin Glynn. Could I suggest nowever that any such conversation taJle place, over 

the telephone, as we are seeking to avoid correspondence with HBUS on this sensitive 

issue other than through lawyers so as to preserve privilege. 

I would stress that I do think we need to make an earty decision given the current 

activity that is taking place, 

Regards 

Redacted Material 

Confidential· FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 8873996 
835 


76061.261

David Bagley 

0_. 

11Apr200401;55 

from: Oavk1 H HOOGKINSONIOCH MEM'HBME.lHS6C 

David W J BAGLEY et a1 

To: Davk::l W J BAGLEYIHGHQlHSBC@HSBC 

Marton 0 ROACH/HGHah-lSBC@HSBC 

VVBmm G lEAtJIlNGlRLA LGA MEMlHBMElHSBC@HSBC 

bt:~: 

Subject Re: IRAN· CORRESPONDENT BANKING SERVICE'S 

David 

! have been in regular conlael with Mukhtar Hussain and his team on this topic whid'1 is still open. The 

current position as briefed to me last week was that we have not yet found 8 w~ to handle major USD 

clearing busIness, and! am anticipating having to eJIPlain thls 10 the Central Bank on my '.'isH. to Teheran 

in earty May. ! haw asked our people 10 put fOiward Ihe basis 0tI whiCh ",ey beHeye !his could be 

undertaken with the lowest level of perceived list;, so that lfc.lrwmstances change we io:now our preferred 

way forward. 

David 

Confidential - FDIA Treatment Requested by HSBC Bank, USA, N.A. HSBC DCC 8873997 
836 


76061.262

From: Dl'lv!d H HOOGKINSON 

3IIoh1: Wed Jun 3u 11 :50.11 21}04 

1'e: M~f18e[ F GEOOHEGAN 

SlIbJf!.et: Melm~ Rp.' Imn 

tmpoQfl8u'l(;6:Nori'llal 

Ate..achF1't!ml!!: Doc Lbl\c..htm 

Mich~I.:1. 

J ~h()llld be ,gr;ncful [or yoar iSsis(o:mr(' Wl(b all iswe n:l:.uittg to the 

p:-o-;;~i!'~ of USD Fsyu~llS !I!f !mt:1:,! nll....ru. 

[~~~~~It~lmr:r'5pi1~mtnlSi~~;}lhav¢ 

ad"i~d :)'1:11 t~y r~lllfICM\f~"l!b1e r~{(l'!1Unc!t~.ins ~!lll'm!r'!li!lt'l ofthil 

bll>lJU:SS and 1mIe:.;s to!'l1\,xJhnl!. com~n:rfif I'C:;tKlJlS c;>.is! \~iH be advIsIng 

r~le~ :lnt ~i~ I!::!.! lllh I:u~j:u::!. wi!! ~CI~ ell ){;,9(!J4. 

You ",iillllJ~ [Will G.e ailic:tt.:l corre.1Xill!kl.~ Iblit ~c hli've.llppelll~d and tllt 

!e2!:QI'S hIno~ ben s.!'t!C".l!:).ted. 1.:!..'J.j !!11'.l' S~JdHg yn'..!.!' !n!!:I"'e!Ulo!'.:md $~,.)pO::'l 

in 1($0]:l.1511o!. pmitn'dj' 1l'\li Ior.g (I';ImalldUlg tsso:: ~ ttm we em contiulr 

l!l ~:T::;ct usn p~l'mea~s f."';r ,ml:' lr;;nilill ~nk ciJ~:,"'n'll'!l'! 11\ Jill>': II'i\ll us 

lo:':f,llizlory requilT.nl("tlls. J ~tn~Mt. t1~\ the ,,(,liln\ .. ,\rt"'."~r.:'J1I$ i~"'I'lall (2n 

p:rJH.Y)III;Unl3t!il!,'''t ... dl\.!cur.ma:11iyirottnsi~Duta;')'Quiwowiranil;cf 

~i£J\ir..;;a:1I ~Irt:l~ic jmp;t'rt&J~ iQ 11l~ Group <tn.;! OHt r~fl!s~ \0 ~OlCnJ\I~ (;J 

uud¢:1akc tli!S bmmcss fer Go-VC:~\Olt owned b-aaks wll1urni[!Ub«:dly ltave a 

\·crir..c~1V:jmpict. 

TIumkyouin:n1y\!RCC 

Pa.\'1iI 

.-••• rOnlf:.!'~~d vy J);l\'id H HOOCK1~lSO'\:!DCH ME.)"t.·'H3MElHSBC 011 (1(.!.l()t:W04 C::!:41 

PMNillclJWElil. 

R.M HI \fE~'l/H8ME 

':;0 ]UI1200414:00 

9'714!{!,.,622 

To: Ro.:lMOXLaI'[Ul.CUJBSBC@iHSGC 

Permanent Subcommittee on Investigations 

Redacted Material EXHIBIT #54 

Confidential· FOIA Treatment Reques .. -----------.. HSBC DCC 8874001 
837 


76061.263

cc; Dl!:vid H !-lODGI'".DISQN.1)('H MBI'.t'HSMElHSeC@HSBC 

MilkhIHrM J.lUSSAINfCEO JB&.M HfSMIJiBMFJHSBC@lHSOC 

Gi'oIT A.R1I-1STRONG"HBEUIHSBC(~HSBC 

Phil B,-'.rNESlMOeK'/)iSBC{~HS~C 

N'asscrHOM6.PQURHiSBLlHSBCAPAC@HSBC 

JDt.a ,UL:SO~1-JGHQ,'NS'BC@I .. lSBC 

Sm,,1-11 A WRfGHTIHGHQIHSBC@:IHSBC 

W,urcn G l.EAMINOIRLA (..(iA MEM,ltBMEiHSBCT\i'liSSC' 

Jobn E ROOTfHBEU!HS£lC€!~H!';BC 

Gary .BOO"'r~CR PCM MIM..'HBMF:;11SDC@HSOC 

Ajay BHANDOOLAlRM PCM MEMiHlIoME:1iS.BCI(i'HSBC 

Mnlcdm G EASlWOOD/MDBK.'HSBC(Si-"1{SBC 

Slmt'ln R V{CKER'YiHOElJfHSaC@HSBC 

Jemu)I K WALKERlHBEtJ/HSBC@.lHSSC 

r-:!!'W P COLUNSIHB!.LIIH$nC@;HS8C 

Stlb~ct:MertlD· Re:lun 

'1ourR~f: 

0urRr:f: 

T£1'.Ink YQU fiJI" your l)(lle.. l .... ou!d fiSk ,'OlliC reconsider your ~esH:d 

prcpo~;:J -a~ lllt"r:,! fI~ very ~"r.l})<:nillg .;"llmm=i;1 rt"~r.s ..... hidl ,:.ce.:l \(111" 

oon)e: If, nllnd 'I.'btllll".aking thi~ ~1~1(Xl, 1.01 k~sl O[ .... ilidl !$!Jle th!'2at t" 

ilx Crouj.l'~ ~l.r(t-ll if I and bll~irl~sil with Jrall O\'e1 (he medium 11:1111. 

VOil !naY be U\\OllIC 111M thE lr:lnL.'ln HIlllks t.'l!J111St H58C l"ilr tJl~ ~~'n~1I15 :lre 

Slalc,,~nedb,loi:.ks.lf\lo"": ad.vi!led:.em (liar we; willI)!) {!)IJC::>::r OJ.l1li~u~ kl 

p!t'Cess t:mse pa)1JlC0iS 'III!! wi!! ~ ~!tu...lvd}llns~!!;i!1g !he Go"em:'.lf:!l.1 ::r.1 

Slate of Iran. The lrupiiCi!I«l'll of tbi:l acti()n i& dime:ul! 10 pl'!:ldir.l "110'1111 

~e:rt,ih1~ bU1\1,~expec:t!ljtllit.,..jll"dversd) imp-.td-Dllfo\'UllU1;;usi.l)e'l:S 

<,!im lraniBn bIlnh and. mort iJr:t=<lr1!11tly, ~ur'3pen!i:m5 in !f1!l. [U 1he 

cunClll Klbitk~ poiilicaJ. ~tuatl{ln "'I! J>.a'ItC dcdirKd to IIl:CCplllCW uso p;;i,r>\;i;~ bmincss fru.."U IDitlw, banks hut l00-c:>Jl !Jus~r.s wl1ich \1.'0. haw t~~n 

.ro'1dncIJllg fl!-r !l",ll' yean w')l!!i:t ~~rruse all <;!!h!!"e.'I.~ri!l& busillC'SS 

aCli\.'ltic" il \IO'i1!spedflcailY ic~llht servieir'o.i of ow-track busiJlC~s 

~:iL". Irnr. wher: C\aw.~;-~ turnoverh in £"~s.$vrUSDt)jfi p.a, FVI'y.:m, 

infol":n(lluHl.Q\'I;mlll,llle Gl'tI~1!' t3ms Itbl:\\ll USDWM p~'" from the9» b~IIl .... "'S5 

tcCilv,llt$ 

w~ lJdk\'(' tile low ','OlUll)t'!, are re~ll\tlllallly ~! tITonivp 10 .f'.(1IW"lllOO ;,~ 

w.:.lll Eot!iluld llt tI.I<JIo::rul ifyuu OOLkC It,dl>il tbis i:l;~1l'C and, '4'~);inll wiih 

G~o!.:;l CQm~!b:w:1: (l:ll'J the PCH lelItIl!:l He!l!E Dd:o:i if3p{!lVjl.'iale}. i"<l:~':' 

soMicn wl:Jiet. \VilI tn"b:e HBElJ (" effect L:SD INYlllelllr. in accCiT'dut)(':C wllh liS 

re!lUliillOri$ tor our lmrisn Bank CUStOl1\t"IS. GHQ Cumpli,mce CtlU ~I;-ell P:t:~lJl 

!hi~ I',) );Iaus r!!;li I!leir conside!3tlc'U. 

NiF,c1 

09'JI1Il2(.(J4 

Memo 

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC acc 8874002 
838 


76061.264

To: John ALLISON>'l1G!{QlHSBC@HSBC 

e:: SuwlA WRIOH,,;"r'HGHQ/HSOC@liSeC 

.I6hr! t. ReD! !I1I:1EU1HSBC'f3lrISD(' 

r-iigel J wErRJRM 16 ME\I.lHBMEiHSBC@HSBC 

Ga..ry BOONiMGR. PCM MfY.lH.s~-iE.'HS'SC@HS.EC 

Malcol:n G EASTWOOOlMOBK!HSBC@,:HS5C 

Simon:l VICKF.RY/il~fU,'HSBc"@HS.BC 

J~~1r'~ R WALK.E'R:}HBF:,J:HS6C:,:f.H'5SC 

lony PCOLll"SiiiBa1/HSEC'kl-l~6C 

b.:t: -

GIURef: Y"IITRef 

Sll1ljectlrn:. 

I ft~[': W\'i~'rd US CD1U1:Scl'~ pro~d '«(,liu.tir.H on ill''lilHl U·mmp~·ruen~~ and 

Jr'1 1rkfO'}i:olC'::1ls as r.,lklv,~. 

i)Dtlplk,lllonofjXlYI::.ems, 

~!§~#:~~WI!!!tr,/(ll~l."tIt!!thoo.dilio1lllJdf'!!f:]!:'nLIJI." 

M~~ mw;\ i~ UJy hc:li\:f\ha1lh~ ~tX)jli(/:1tll de,lIil 1M! lI::ad 10 rome 

r:c;p~l'.:s ~!e:\Ijtl& Ihil::~:1 diw-\ pll}'rn~ .. m r;Jt!)!i!f l)u:!:m ~c:· .. er or:::: {lrl¥m!!.l ~.vuJent, o.Jplk.atwn Of~llt.ot nllly R;~j;.lt 

TIl;: P:-;:;U:CUl'; lOt;: WOOtdIDY, lr:! 6d::Ijl;i!'lS 'n'tlutd be:;.1 vlIIriaJlCl: Wilh st:m,1;:rd 

Jt'~rb:! prlItJi,:!' l1li11. \lti~ ill11~!']f~lIItld I',m"w:e pr<1Cl'~ .. mgrl'nh:,'ml. 

im-ST? 

l1;c sUU,sl~d PRlctd'.lR::wiJuld lt3;l.l0 !;;Oill r.o.-.ual interver.ti,,; .. gre~,~t eva, 

filii! l'lC:lltJ'l1;lIl1y If,s~ ~1l!~1. liS ~ fJf'; (fi:"fN'f:Ill ;it~ cBIll.- i!1l.'olve-d in 

1111: pn.1{~)i"g ur .my t'l:IlhiI~iiQtL< Ti,: ie~el vi ,"",'klirol which RM5 ({luld 

el'.ert!J:e ~\"e! SiA':!l p:lymflllF; d!',li.'lbllt!i [:5 ?~:'n·t:'l\ Jm:.ffi!.in~ ~"bi1ed 

btl'ol{Ctll RSC (NHQ2I),. EPS (LiVlIlg.o;IOII\ <olld (lse (lt~2). 

lilt' 8<lnce ofolh:r US lImlk!; woo Il;:r:e ~ittldnwn frG;.llil~ IrnniClll'!llllk;.'.t rr,car.s 

l:'l:l.! we are sull m a vWi\CiMle p;:lSltlo,rllfoUf' C!lS1iJmei1l are: a~1I:1Il6 !I:I to 

gi\-c guanmltts {t;.iJ JNtynJellli wlH r~h mel, UlliH);2i\: de~\IO.lti,,;, ~·t(h(Jut 

J"[ct-knL 

nf~ ~nniliuu lIr ... hlll cVI~liLut .. ~ a \J-iUI'll vaYllro1L! ~ tl~, iu i.ill~I].l!l.'llIjhm 

and !I,e aC~Uf3cy ftfinf~nm!:on or. tl~ OFAC weh~i!e l':.;l~.!lla It-....ell 

que~liQlled. This c~lIle.td us on (l!'c.a~i(m~ 10 rP.2kill . .!! $:lbj¢~lM (kd~;lJn, 

Redacted Material 

Confidential· FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC DCC 8874003 
839 


76061.265

rrlf thc rc~'imlS s,Clicd lIOO~, I fC'::! \'c,), lJP.COmti)nablc rcc(}rmncnl1ms ti'r;\l we 

c.ootirue ,0 process lranilill pa~mtflii. " is \X'!l$itole-IO cotltillue blliluehigher I!;'.<"el of (I)SIS, llie reduC{ioll <If ~mrol, poS$ibl: s)'s:tm~ 

ellhat/ct"mt'nlsam.l !ne potential lCTI'rror:'!':atC' Ihjslrf,::rI.!r:lC!h'f 

We Itav.e diSt't155'!,{I tl!lsslWilllon 1I11~I1g\lI aN' ro, r~lhet U<.1111~!! 

!l.ootl\C"rrcuntl"oftarn.lsbould~gllU,.iUlif)'QncouJdlel::r~h~yey-our 

:omlal ",spons:. (<ll1i: tMl OfUll), mk in:trrs:cd ~jJ1 part:cs l ... this e,~;l) h)' Fri<1~ U;,'l! In[1e ;U)(W 

n~::-t:1~r. =!cSi c:ompellh-llJ <:o.~dcl J""I!~"r.~~,;:;'tt. whid:ll£VC!;;c.:orl 

elll10rsed t1y (jnmp t,;f>mpI1311CeMld HB1JS.l .:ta!! be tMroa.lIy atvi~!Og 

iuICII:1>lw Rc!:;u(o,'!!-:wp Ma';:.I.!:iL'I~ '\ol!\ ""e ".,(1 on, l!llill'" h" ; ... 1.: ,11 h,!lIIJkl 

!nmian paymzll.s 1P.:cr 30 S-c:~t,:m!r.r 2"004 

R"dMc-:.Jcy 

R~'1II110ry;l.oo C~r.at;on.al Risk "bn~gcr 

Confidential· FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC oce 8874004 
840 


76061.266

From: John RANALDI 

S!!i!lt: lJVad J!.HlJO 12:23.23 2004 

To: Michael F GcOOHEGAN 

SlJb,l&et: ,V,fur.o: ~t!.: Fw: l;a:'" 

Irnportanes! Norma! 

ruik~ i was:rn'!l~ crIlli'>. ~'iII gc1 u; updil1>;: alII! Icl YO\l kllu!l,', tw;l;;~U)'. 

Otlf inie'1'~'1'I1i(l1l ""~ '1"131 we ""e~ b~'''!! :!Sl<eci [{' 'flldS~" 1he !'~h!1t orll'~ 

paymeu311l n'oiril;1Ie U.s. ~rub~r~\l alw.t seiY.\tre, a few d~ys; 

J' 

Permanent Subcommittee on Investigations 

EXHIBIT #55 Confidential - FOIA Treatment Reque &. __ ~~~~.;;;;;;;. __ ... HSBC OCC 8873999 
841 


76061.267

• 

From: John RANALDI 

Sent: Tue Ju! 06 15:01"222004 

To: MIchael F GEOGHEGAN 

Subjeu: HBEU Iranian Payments BU5ines~ 

lmportancu: Normal AHachments: IRANJAN PAYMENT EXECllTlVE SUMMARY doc: IRANIAN PAYMENT PROCESSING 

PROPOSALSJiJC 

T1\1chael:refereIlCCYOllrearJierq~ry. 

ttolS is cle:.u:l, nOt a simpk U\.;)ltcr. our posl1lre tus bet!lto respepj !tu:: tl'w 

and Ollrbmk.~ rq.'\!L~!lOrl lVe me being asked to amend !!lSlrUCliom Of. 

:I~sume re~pon~\billty thllt rhl: COJ\lerlls of the payment message do uol aitr;ll:.l 

th~ red.~ aJ,lcnllon u!ld loCi:l:e the p-1ymelli. we shoolduot take on that 

rc~poflliibiUry. eS$cntiaJly. ~ p!l,ment elm is asked 10 Jurig" 'lJ.'Uu a I"'y",,,,11 

kicked iJnl by Ill!:: lillCI!ng ~ystelll, ",,1\;;\11.:rlo rclca~e. arretum.lhcrc is 

un i::cny; SO!Jle1;1f:1:' could ~\le that tty ~rum"'l\ plIylflenll. 10 iran tlial we m'~ 

eomrevcmng the ollie fllle<;(office or roreign !Jl;:s.et control). 

ro~ywcrunthemk.ofl)M'Iing!hcPl:lyU\eUlsei1.edandincU!1in£the 

opcrallOal loss, 30d2ljeopardising Ibc group.5 l'l.}Jutll!lonsnd IllCllmng 

hdl)lines 

~ven If;;.e r<.cd~~:\l'I inc.;;:;nrllly. our people would ct'ntinuc to be as.kcrl 

perhllps to ckClde whc!lJer:t. p:1)'ITlC!lt is ,jccepl~b!c despite bcin'l kkkec-oul by 

the m[("ringsY~lCm, so 3$ 10 avoid sei7ll.rt .... c will nwce mislakes, !!D~d$ 

bas been flllCd Lm lold ::llld few ifauyu.k banks life in the OOSlIIesS. 

we may di!.cuss at your \eloJ;I.U'e. j IVlll bnn)! the cxpern. 

I' 

.••• _ fcrwa~d by ]e-Im fl!I,NALDI.HBElkHsaron 06 Jul2004 14 .. 1\--· 

Malcolm G EASn'iOOD/I~1DBK"HS[JC on Otl Jul ;?JJfJ-I I·~";H' 

\bno 

06]ull(()414:16 

From: Malcolm G EASTWOODlMDBK!r!.SBC Tel: 7')') 1230n 

44 20799123(() 

MlliISizc:94Qll 

To: Jehn P ... '\u"lALDT/HBEUfHSBC(a'HSB(' 

co: Pal N CONROYiHBEUIHSBC{ifHsBC 

Rod MOXLEY.'HBEU:lISBClq'HSBC 

bee· 

Sul.>j<!C! HOr.U franiilll raymcrus Business 

John 

Please lindanuche<.l a dcllliledoole on lllesubJetl ufll'lln IhaveaHl!ched 

to this em.:'Il!1l one p;lgc E~c':lili\'e SU<lUIJI\I) which pw"id;.:s tilt bead!incs 

TIlis it< ~n ~xm:mcly selUlIivc lIfl:a. To date we h.wt! ~Ieered away from 

dctail~e1i:;tcUy wblll we arc doin!,'- With lhesc pal1\culilr paylUculs b=cstlSc of 

LbesctlSitivltie'.lwmddcertairllycounseiagaillstilwidcdlstrlbutJonand 

wc should dcflmtcty fcsi.>t;my tllOVe to send tm dClaill0 anYl'II.' ill HBUS as 

iI m~y \VeU W1Ill!10lllise thcirpos!tior. wirh {he Us. AutiJorines. 

Permanent Subcommittee on Investigations 

Confidential - FOIA Treatment R! ... __ E_X_H~IB;;;;I~T.;#;.;5;,;;6 __ ... ~SBC OCC 8876861 
842 


76061.268

• 

TIlC Fed\<ould ccrtainiy rro~nona.ny proccsscithetdcl!bcratelYGf 

<\ccJd.!ntaUy designed to pre,'ent the !eglli!(l;llC seques~uon of !ruuan 

funds under OFAC rule~ which is ""it) wt:currently u~e the Wolt Iilll:r 10 

identify potcn!Jal tCMrist relatct. paYffienh Il:Jd not (:J blo::k other 

Il~yrne!\(;,. file pr(rpo~a!s ar(.l "irinen 1<) rcnCClll!lflrlj\L~lltIem U\ the usc of 

Wplfto check 1n.11 !r.lfllallpa}lnents 3fe Iegrt!l1\11IC U Tum ilemsand then to 

reJe<iSe these rallx:r fIfly attempt 10 prevent US lesisL:Uion dOlnY: irs job 

wbith nU\lht !hen compromise Ille Groups US Ikc1"lc~. II also pliK:es the ru1: 

and ~ponsibihry for l:"fiSuriJlg vaYUlculltl!,J1Wla~~ ruu)l~ '~lIhthe [ranunF! 

corrmmniry r.ith~ timn v;iih cur.:dve:s 

TIus IS 3 rutUcult artl~ for mam reasons, no\ tbe least ofwhicb is lhe fact 

ttlm the OFAC n:gujations rel;UlIg to han lend [0 tie grt-y and are sl~il:Ct 10 

dll1ercllt lfI1c~re\al.loU5LJy the LIS B,311ks.ln this proposal we a~ iIlICmpwlf; 

lu w(l1k II dlffi':llil pam between prOlee!illg. our US licence whilst 31:.0 

p:"O!~dinfl:l mt insubstantial i!)(om~ S!reiUn and !lirurl: potemi,/! ineorllC 

,tream from iT:)..n. The safest option from my pcrs-p;;ctil'l: "Would be 10 e~l! the 

Irani:mffpaymentsbusincssiUin(lc..:rlotbersba.vebuliolhck.now!cdgethat 

Ihi!> will dcnu& our i.nc.ome stream Rod and I hllve tried LO tluild an 

~11~mll1ve solullon 

Plea~e 1/;"1 me hmw if you wish LO diSCUSS 

••• w. Forwardell by Maleolm G EASnvOODiMDBKlHSRC on ()(i Jul2()()4 13:% --_ 

Rod MO)'l.;EY/HBEU.'HSBC ou or; Jul 2(~ LUS 

Memo 

tW'iJu11IX1411j5 

From: Rod MOXLEY/HB~U,HSBC Td: 7'N UI';64 

442079~13-<,&4 

Mail Si.~e: 541)54 

To Phil BAI.NESNDBK.tHSBC@!HSBC 

c.c. GeuiT ARMSfRONGiHBEUiHSBC@"tlSBC 

Malcolm G tASTWOODrMDBKf"rlSfK@HSBC 

Bcb.-\ WESTO~"HBElj(HSBC4i;HSBC -

Jerero:r R W,.u I(FRiHfHJJIH::inD€'HSSC 

TOlly P COLUNS/HBEU/HSSqt1'HSBC "',-

Subjw- i[lllJ 

Pm!, 

Funhcr to rteell1 dlsl:ussioll'l with Malwhn regMrlillg potential soimjQns fnr 

t1le lrJnlllll p3.ymems Issue, I auach a docurrcnr encompassing a potentia! \\.~y 

forwiUd. ls11aH be pLeiDed to have your~Omrn;:llts It, dEl(: c=e!l-r. ;fyou 

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.Al-!SBC OCC 8876862 
843 


76061.269

!erl it appropriate. we candlscussovcrlhe phone. 

Regard> 

RodMIl),lc. . RCgWRtOry IlIKI 0pcr.Jtional n!S~ Ill:m.:lj:;er. PaymeIllServK::C'S 

• 

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.AI:lSBC OCC 8876863 
844 


76061.270

From: DENISE A REILLY/HBUS!HSBC 

Sent: 11/30/2004 3:00:S4 PM 

To: SANDRA PETERSON/HBUS/HSBC@HS!J.C 

CC: "MICHAEL GAUAGHER" <MICHAEl,B,GAllAGHER@US<H$BC.COM> 

5ubj~ct; Re: Fw: U-turns 

Thanks for revjewlng, My responses are in blve 011 the attaci1ed. 

I'll let you know wh;)t comes out of the meeting, 

Sandra Peterson on 30 Nov 200414:42 

Note 

30 Nov200414:42 

from: Sandra Peterson T;::I: 302-636-2500 

Title: Senior Vice PresJdent location; Delawilre/3, Floor3 

WorkGroup: 

Central Services Mail S!ze: 10546 

To: Denise A ReiHy/HBU5/H5BC@HSBC 

«:: "Michael Gallagher" <michaeLb.gallagher@us.hsbc.torn> 

Subject: Re: Fw: U-!lITnS 

Dmise, thanks for ri'!-sendlngtne doc, Jus' a few questions: 

it is my u[1.derstanding that lnitia!lythere w('te concert'S about the potential 

intentional removal of wording "oH limit PClYJ!H!tllS" !rerm these payments. Based 

on whilt 'We are being asked to do now, has that concern been addreuced? 

r'm nClt famil!ar with the use/removal of "off limit payments" blI1lhe 

recommendation from a legal and compiiam;e perspedivil i~ to hilVP, folt 

disclosure of (It! parties i'lnd payment details, t-ltlElJ would be .,dvised to not 

alter the payment details in anyway. 

15 this proposal for Bank Melli only or Is the intent to grow this business? 

Whert this topic first arose it was to support Bank Mel!l but my understanding 

is that the business under discussion now is more general, with no spedfic 

client!> named to d;;tl!. I also heard sometime ago that Bank Melli established a 

elatlonship with another institution fortheir USD correspondent needs, I 

P~lSt! 1 

Confidential ~ FDIA Treatment Requested by HSBC N. America Holdlngs,lnc. HS802545303 

Confidential _ FOIA Treatment c.,. ........ ~ ...... " h. •• ucor 0<,>;..,1 .. 11(:!'A t\.11\. HSBC acc 0616127 

Confidential Treatment Req Permanent Subcommittee on lnvesti ations 

EXHIBIT #57 BC-PSI-PROO-0096165 
845 


76061.271

IiSBC-BN,_E 0067605,nt 

don't think the ....,lume oftransactioflS woulD be compar<lble to what was 

drscussed for a'lnk Melli (4QOjday). 

Out of curiOSIty, how did legal respond (internal find external)? 

lllg~1 advised tnat we shou!d have full disdo.sure of p.ryment details and ensure 

appropriate controls were in place. However, the final deCIsion on accepting 

the payments was viewed as a bu~ine~5 decision. 

Tnarlks, 

S;;ndr<l 

From~ Deflise A Reilly on 30 Nov 200<l 'J7:09 

To: "S .. ndrOl f'etfrson" <sandra.peterscn@us.hsbc.tom::-

cc: "Michael Gallagher" .:michael.b.gallaljher@us.n5br..com:. 

)UbjRct: Fw: U-turns 

1'1"1 not sure if you are aWMe tnZlt the possibllityof doing U·turn triln~ar.tions 

has bet'n filhed once ae;ain as a busil1e5S initiative, Tl1is topic has toT,e up 

se ... era! times since 1001. Teny Pesce was asked to meet wit!1 Martin Glyn;, on 

,he topic ';'1d she ~sked Michael and \ to Join her (today at 4pm). In 

prep<lratlan, attached are1he requir~d cnorm! ptoc~dures for doing such 

tf;msiJc\lo~s. The docul'Tlcmt was developed with '\Me LiddV and Carolvn Wind and 

was vetted bv e)ttNna! counsel when the topic was last aclive in 2001·2002. 

Pie<l5e let me know if you have any comments orconc:erns from a Pilylr.fnt Ops 

perspectille. 

From: Michael A Gallagher 

Sent: 11/29/2004 09:22 PM 

To: Denise RelUy 

Sub-jed: Re: U~turns 

~as SiJndra not rev:ewed? 

Page2 

Confidential· FOIA Treatment Requested by HSBC N. America Holdings, Inc. HSB025453D4 

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 0616128 

Confidential Treatment Requested HSBC-PSI-PROD-009ti166 
846 


76061.272

From: Denise A Rel!iy 

Sent n/2S/Z001J 07:45 PM 

To: Mich3~! Gallagher 

HSBC·BN!_E 005760S.t)(1 

Cc Teresa Pesce; Grace C Santiago~DiH'.Ijs:hiAlan TKd!ey 

Subjact:U·turns 

Attached are the control procedures (slightly updated) that i put toeetl1er when 

I VIas in Payments, This sbould be p;'lrt of our discussion with Martin tomorrow. 

Give me a call if you would !ike to discuss before our 4pm. 

Page3 

Confidential - FOrA Treatment Requested by HSBC N. America Holdings) Inc. HSB02545305 

Confidential- FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC acc 0616129 

Confidential Treatment Requested HSBCMPSI-PROD-0096161 
847 


76061.273

From: DENISE A RElLLY/HBUSlHSaC 

Sent 1212tzOO4-4:l9:01 PM 

To: MICHAEL B GALLAGHERlHBUSfHSBC@HSBC 

CC: TERESA PESCelHBUSJHSSC®HSBC;SANDRA FETERSONlHBUSIHSBC©HSBC;GRACE C 

SAIfflAGO-DAFMSHIHBUSIHSBC@HSBC 

Subject:U-Tuma 

Attadled are the corn:htions under which HBUS wiH aco:ept U-Turn transactions.! 

nave reviewed oMth Saodm and GraCIii. 

Pk!aseC8.llifycunaVilall'lques!lonsornelldaddrtionalinformarkln. 

Attltl;:hrltlmt;U·TumConditiol1&.doc.ljp 

Permanent Subcommittee OR Investigations 

Confidential- FOIA Treatment Requa ... _....:E~XH~~IB~IT~#;,;;58~_ .... ~s, Inc. HSB03793168 

Confidential - FOIA Treatment Requa HSBC OCC 3407526 
848 


76061.274

HBUS Conditions for Processing U~Turns 

Agreement to the following conditions is required for HBUS to accept U-Turn payments. 

Transactions will be fonnatted in accordance with SWIFT standards and will be fully 

transparent serial payments that reflect full payment details. Payments must include complete 

name. street address, city and country of the originator and beneficiary. 

• HBEU will agree to strictly abide by U-turn processing requirements (to be provided 

by HBUS) and will not alter "as received" payment instructions in a manner other 

than that required to meet payment formatting requirements, Payment details will in 

no case be dropped from the instructions forwarded to HBUS. 

• HEEU will indemnify HBUS for all potential penalties that may result from violations of 

OFAC sanctions, regardless of the cause and source of the action that precipitated the 

violation. 

• A separate processing account will be established under the name of"HBEU Special 

Account" on HBUS books. Only Iranian originated transactions will pass through this 

ae-count. 

• The account number of('HBEU Special Account" will be entered into the HBUS payments 

system OFAC filter so that every transaction for this account will be stopped in the OFAC 

queue for review and approval before processing. 

• HBUS will be reimbursed for any additional FTE's required due to increased process burden 

attributable to OFAC review of Iranian payments. 

• HBUS pricing faT the transactions will reflect incremental processes and risk. 

Confidential· FOIA Treatment Requested by HSBC N. America Holdings, Inc. HSB03793169 

Confidential· FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 3407527 
849 


76061.275

From: D;'Ivirl H HODGKINSON 

Sent: Mon Jun 27 11 :29:30 2005 

To: David W J BAGLEY 

Cc: Richard E T BENNETT 

Subject; Re: IRANiAN PAYMENTS 

Impor!:cmce: Nannal 

BI' way ot updJlte., HBME is C'IlITeurly seeking to o~n II L'SD accoun< WI,1I JP 

Morgan (basI' liS DIU Om cl10ice ~or Bank of America IU 5e.:'OIl(j cboicr\. in 

or<ler 10 proccss Irllnian rcll1ltd LSD P'lymcnts. \Vh!I~1 JPMC 1m"" ,,{'ronHy 

"gleed \0 open tile account thcy h~.·c Ilianu:dus dmt Ally co""~r paYIT'.!:-n!'could 

bCS\Jbjecl !O!11dtcomp1iilm:eproce~swhl'rtby lbe-ywould£o:t"1o;.rl1!1(ielaii; 

oIlhcwJ(icrJyin;lr.U1s.ac!ioneitlJerbdorcoTlIfterprocessil1g,Tllerc-cOI)ld 

lle 1I risk Df!l'.((TT1:l1 !O OF AC ~~lld !!i.eir illa:rpn:l~lion of" U-Tun' 

Il1lnM{:tioll bo different 10 DUTS. W;: hllve bcCll Rd~ised that all aceolln\ C0111d 

be OpC11I:rl wilhhlll lew week! ~hould we proceed down Ihis road. 

At the S:L.'"UC mne. llCW US!) :l.ccow.'ts fcroUT !r..:nj~; ccmsixlllde:m wi!! b~,'e 

10 be opelled wIth HEME in Dubat, which will have 10 be CortununlCJled., wHh the 

a'>Si<;mnce of om Tehnm oi'fice, in order In get their U::;D p~ymenlJ; l·t-rml1"ed 

appropnaleJy. We will also nced 10 cslablish l-'l"ClCcdurcs in order 10 ensure 

cornplJallcc wl111 OFACngu!a\101l;5l1!gllr.jm£ U-T\1Jll p3ymC'nt~. \I,-!'k.llIllVOl\·e~ an 

O\iCfllfionaJ 11.,.,:iew iloostafftnliniUl!. \\'ht LC>lldou's I!ssisrnnc:e, this s)1IJLh1 

be ~omple\cd by eady September. 

Tnole your C0!111nenl~ in poInt] wilh u·HereS! as. we '"otver envi~~~~ :mylhing 

OTher th:1lJ U· Tum compliant paymcJl~ being. processed. Accordingly we agrt:e 

(hm lllere is no reason !o use IInyone other a·,m HBUS 11lld CiJn conlinn Ihm 

{l~~ IS no misundcmanding in this ~gaId. 1 und=ood 11m the only 

rca~D .... 'C considered ,lSing an¢lhcr US cOrl"Cspcndcnt was V.Jl"Cly tCC;!USC fiE US 

llllr'l ~h(lwn an nnwmi"~n"'~~ In pT["I('f"~~ th~(1' tT;m~:IC'Ii.'m~ tnT rorllmlinll ri~\( 

reasolls. Ha\lilj; coru.ideredillis fllrilierit appe.an 10 us thlit ,liiUlg"lllother 

correspondelll tn.lI}" 1101 cOIDpt..!ely overcome the reptlflllionrisl( iswc. 

When the USD ll.ecowlLs oflramall Ila.tlk.;, llrc (I].1cucII iu Dub;;l, HBME wtll1al1.C 

>JnT loc "<.1yulCul~ UPlIl HEEL;. W" will ,;~tiil>lisLi a ~p''Cjillist il!iitlllO 'IliImUII1 .... 

review each tr.m5:ll:ticn {including mnnhtg {hem IhrollglJ WOLF) ensuring Ihey 

!lTC U.TlJnl compiiallt We ill!Clld to conliuue with the covcrLMymcD! metherl as 

(lUlU!\rler$lalldJllgiSTllatlfserllllpaymcllLsareusedol.llerUSbflnksll11h.e 

ch<lilllllil)' imerprellhe V-Tl.lm proceS"l; dlJTerelilly whkl! mil~ lead 10 dcJars 

and other problems as payll\ef\[!; are rei"ClTM Illlstakenly (0 OPAC. We elWl.Sf!.ge 

providing HilUS scpcrillc1y ,>:il\; f,lll (lct:ail. Df c~(""h }.mytllCnt (but m a ml;;mer 

!a ll"oid dllJ)lic!!1iou) SO !l);!1 t!icy t!It" W l! ~mil~D!.llo ~~ti3rr thC"ill,'"!;!"cs 

and anybody else thattilepa:l'nlems lU"egemliucrompliiIJJt!r<llUlXtioui. 

for tbe sake: ufdarity"l\"e would repeat llle definition ofll. U·Tw11paymcnt 

.... cfincdby OFAC on IheirwebsilClI.!5 Llp:rymellt" .. myol .... mglranwhcn: 1:S 

Dallal" lramactiQTlS a;c eieared througb!l US bank. Goltra!!> 'p::alcing. then:: 

ru • ..l.1 be a tnird-cQuutry bank on both sidts of ci tnllsactioil to qualify as a 

'U_T\lm: F(lt e"O(!lmr11'!. Rllnk Melli fT<l"c~n;encl r'J"rI~ (rom il$IICeOl)n{ ,,1 ~ 

GemlllJl bank Illfough the Gennan hank's corre~po!ll:kIl1l!l !'Jew York 10 an 11ali;uJ 

Permanent Subcommittee on Investigations 

Confidential - FOIA Treatment Requ ... __ E;;;;XH~.IB_IT_#iil59;;.._ .... HSBC OCC 8878026 
850 


76061.276

bank t.:l pny fo~ guOOs purrJiltic,l. irOI".:i It.aiy. TII¢ originating alia bcudidaT) 

{)finks m~y ntll ~ US b:mh." 

!nlil!h!nffhClln'l.jrinl1,llssumh:gflulithede(i~ionIOUSeaJladn:rlJanki:i 

re-visiled 1l1'ld llle abo~e pr()ce:;s is acceptllb!~ LO HBUS and I'ourseh'e~. HBME 

will be h3?py 10 meel HBUSconmerpi\l1Sl0jlmvli:le themwl\hany fuJ1hcr 

Cf)l)1rortore:o;platlll1ilJlltllallhey~uire.lha"ellolcoj)iedthismessa~elo 

Sh:pht:H G~JI. ~l> yO\Jl" llo::li!><tgC WiD lIuL 

Your rb~ught:s and gl1idance ',\'ill be appred<llcd. 

David 

HGHQ 

2~ .lun ~f105 19'27 

,7~1 gf:..d~:4421)79QlI'(.<!5 

~ .. m fly' M!1f'lnn (1 ROACf.f 

To: Da"id H HOOGKTNSONmCH l\.ff.\-fIJ{fl.lIfF::;'H~BC:@H~B\ 

Sl.:bJecl: IRANIAN PA'IMENTS 

Our Ref: 

'ioorRcf: 

Entity: HSBC H'o!dings plc - HGHQ 

The ahoyc lopr surfoccd in the rouline rncctmg wlueb Rlc1lard Bennett aid I 

Confidential - FOIA Treatment Requested by HSBC Bank. USA, N.A. HSBC OCC 8878027 
851 


76061.277

i):Jd 'I.llh Stephen Ul advance orlh: 1ll0!\lWy G!>iB u~elii!g. 

Slophcn rni~d wil:l me the fo!!owin~ poirt!,:· 

He .ougl:n my assnrance lh~t the :I.!¥tcd IImInl!CI.lICnls in relation \0 Iranian 

paYlllc!ll!lb!idbcenpuliupJ<!cc. F0J ob\'io.!sreasOl)$.lwa'llQl~\)letogh'e 

uU\t coniirnl,ltion but dJd er.l~l1ilSi~e thiltir. ftllli\1g to do 101 W~llot 

~Sl1ggcsli!\g ll>.!!! t!lC' a..tl',mgc.u~lts \;'(':1'(' !:N in facl cmnplW' J ,hallght if 

oulv light iUld propcrllOWC11C[to ~j:n YOU 10 thC' fu::t1hill StCpllCl1 is 

jookillg !'or etll1fimlation ThaI all payments arc !lilt bdng roU1ed through HElME 

\Cia a uon-Gn:r:tp dearer. or Ihat a Tea~(lnably pfo'iima1e date has heen sel b} 

wl';CI, tulle lilll~e 'ltr.r,"g:!(je"b" ill lie iI, pl .. 'e. HI~ ~:n.~ \If UJi!e.!lC~ i, 

!,lIs~ih!y t:l':p~ind by the: 1JIr(Jrm~::(}J1 ".:l.ll!!ail!ru iu ~I!: illinlbuikt pell!! 

I>rlmv 

Stephen illso asked for conIlmla!Wll Ihallhe 'D<lymellls Illat would pass mtough 

lhe US ...... ould iii!) be- payments whICh wele U·lunl exempl evell if they went 

1br0l1g11 ~IC U:S Ullhe Hmlloi ~ covt:rpaymtuL AlUllllll!Il1 lIIav uaH' 

,rJsun&:.:51uod our dJ$cussioJ1:i 1 \ ... iii 001 Pl'l:'v;U<l>ly iill'HC tbm tllis Wil~ a 

prcellndJ.tiollllcr d.'.d my origilJal paper ellms2SC ~la! If 11.'1:' used a IlQU-Group 

CCllTCspol'K1cmwct\·oulrtllCCCS.\srilycousidCTplUSilljl:owyU-1UmeJlcmpl 

paYlllclnl-1hftlugll them. in fllct in such ciTcllmrul~ Ih~re woulll b~ no 

re11-\OlIlO rue anynne other Ih1l11 HBUS given Inn! HBUS could mt bccritlClscd 

w.:re it 10 I;tlrry uulll"\:ILJp\ ).'ayu~!Ils. I woulu hI: ~,dld'uJ if YUli would 

COltnmllh~1l.here lS no miS~1"l1311.!1in:1; m lh!~ reg.:m1l!1!d 11m! \\'c will 

only;e P<l.S~1IJ!! paymell!5 !hroui/ll file US. whether or 110\ thn:lIllili our own 

thatwelllwe iils!)ei11SU-lUnI Jf{hi.not 

Illtte3Son1or:nVIl(\dinonll!cantionisthmflmdaUlImberofdiscuSSlo1lSa1 

ij reC':!!i W{)I[~bc;~ lUL'CtiU!: \~l!ich rd[o,cu my tuuccrus WilL rCIl;ud 10 (he k~c:I 

ofscrulinr \Jim US authorities are ~iving to eO\i~r p<l)melllS gellerall)' but 

~J~o sJlecitic;:l!y in re!alicll to OFAC c.ompli~ru:t' au iiI!: jlJrt of US b:!f'_'<s 

eff~rl)1g cOITe~pondem bmll:ing ;::-""ite~" 

One majm Europt:<Ul cnlif)' h.1S mIIde a decision io ~pol\' OFAC re~atioll ~lld 

res!J:iclions lIeros~ i.hceHlirelY ofils opcrntio1l5,ilUilk ~lC US.:.nd 

oUl.~iI1e. 1\1:l1! earnncles_ A !lfl!'!;lgh they were hesilsUI in c'tplamil1l?- their 

reasolls formking this dc.::;sion 1 stlspccl hisb!:CUllSClhc) lld\-\;I:wdrcccul 

fairly \\·eil·putlid.cd difficulties" ilh OFACc()mpJi~l\ec 

l\'lQrh~Euror-an ltt5'imtiolllntlkated thElll1!':) were faci!!g acri=l 

prosccliLiolllJlt])(; US for delibcrming eWlllinf( OFAC :!.<IllttirlllS by f;!i1illg til 

lillkocovet-paymclllandnnur.<ierlyingbnnkrobunkmcssagctogcthcr1.hus 

Redacted Material 

Confidential· FOIA Treatment Requested by HSBC Bank, USA, NA HSBC DCC 8878028 
852 


76061.278

"l1Qwi\le.lh~ qIJclioos In be l'v~drd Adr1i!le.t'l!y 111i.'ir!\OI\~ly ilPP("HWd!o 

havc bc~ lhrcmgh lho;lf own. cartLsl)omtcnl br.ulCh til th~ US. and 1 was uMble 

to elicit :ltly funhcr dClails. Nmiethc]ess tltis dOl:5 SeCtlll0 me 10 ju.nity 

til'1her5cru!iny and considcrajiOll Oil our paf1. 

Ab ! may have lfk!flll.H-..:d {he US Je!;u1"loly .lClll\O!lti"s, UCC «lid rederd 

Rec;en·e, ar~ C:lrryint om ajoll1l peer [n·lew cfconc:spollden! 11llnti1l3 frum 

IWA..\.U.. ~l1d OFAC eompli<llIcc perspective. The vj~il to HDUS will COUlIll;;;no: 

sllonJy if it has HoI ul.rc:udy cml!IO~cC. As par1 orlllal review I bdi~c 

llu!! WI(' US author-hies lxwc foeu.Kd 1.ipOn C01'Cf p1l)'mcms beth in rdalion !() 

AML pto~dures but also in relallou to ()t-AL complian:f.. ! believe !m, a 

r.o,emial <'ICC.(Inn; of the ~cnn ;ny lind t~ resuhmit reCCtn1mel·~"tIlinn, will be 

an eltpl'"ctation !lUll US banks ~l!ould not lL">ereiy tl!'.cep1: cowr p;lyment!: Y'it!Y.lUt 

s('d..tJll!.fulldellljl.sofanyu~o:1.crl.vjnt!\ranSae!lall. Tlt.3J: would o."I.feoll1'ic 

mean Ijl;:U we would probably br: req;lin:-d to disclose both details oflhe CO\'tT 

paymc))tllnd tlie lmkcd m~ssllgc to a:ly US com::spou!knl W~ employ evcn if!hc~ 

werc a t\on-Group torrc~pt'lldclll. j recogn.ise ilial !hi~ i~ something primarily 

for tb: US com:;pcndern t.:l r.:~oh·e bul I :;lJ:;pecl yot: !1lay need to !ltCtor tlli5 

pn!cnl1:d clc\"droJlT1l~1 ill!o your Ihnllglll {lmce~S1:<: gOlllg fOl""w:m1 or COII)"<;':: 

if!his is a wider rcqllircl"!1Cll\ of aJl US Dollar dearen lhen tile potcl1Iiai 

Jor damagillg our relatioHS with lr:ln wou!d be minimised ghen lhal "I'Ietlre 

met ely loHo-loUlgrestfiCUon&impa'edoll:lllIJLuJ..elplllHCIp3.rltsby lIll"lOl( 

~.calous ll~jJ1i'~I;\J\1 orus l!!w. 

1 llrrl in f~t! om of!!:te" otlie;e rr~vemnf! an t>u;;hle£1 !hls \"\!~ek. T will 

;'oVr'eve7 monitor my lHac1illeny, bU~ll ma)' be that you 1I!{J\;}d prefer 10 

correr;pondlVllhS!(:phenchreCl'A·lli1regan;llolhc:iirstlV<opomrsollwhic"h 

hcwasscckingas.$urancc. 

lflhcrcisanynewswilhrc.gardlotl1cfurtllcrlc]!aJadYiccliT.ltisbcing 

raken 11~n"l" mask JohnRool w e{lllsider ajoin1 nmc 10 us. 

DaviJDaglcy 

(~nlllol sml by DWJB) 

Confidential - FOIA Treatment Requested by HSBC Bank. USA, N.A. HSBC OCC 8878029 
853 


76061.279

From: ROB MUTH/HGHQ/HSBC 

S~nt: 5/B/2006 11:07:51 AM 

To: CAROLYN M WIND/HBUS/HSBC@HSBC 

cc: 

subjec.t: f'W: INFO: Fw: TP GATEWAYS 

~!~~lrak.e;r: ~~ ~e:i~~ ~~~~~ng I s~~¥ld a~~~~d t~h~Qbi. th~l~S c~~~~~~or~orUld ----. Forwarded by Rob Muti1/HGHQ/HSBC on OB/05/2006 17:06 ____ _ 

Peter C L DE MONTFORT/HGffQ/HSBC HGHQ 

08/05/2006 17 :00 phone No. 799 23755 +44 (0) 20 799 23755 !o1ail size: 5769 

To 

~~b Muth/HGHQ/HSBC@.H5BC 

subject. 

INFO: FW: TP GATEWAYS 

Entity 

Hsec Holdings plc - HGHQ 

As discussed. I am expecting the impact of this to be some delay in panama and MExico migrations from their current dates of 20MAY and 3)UN respectively. 

Dav; d W J BAGLEY /HGHQ/HSBC HGHQ 

Sent by: Marion 0 ROACH 10/04/2006 15: 58 phone No. 799l 8645 44 2079 918645 Mail size: 2830 

TO 

Luis EDUAROO/HBsR/HSBCtiHSBC. David Leighton/HBMX/HSBC@HSBC. Brigitte SCHIMUNEK/HBCL/HSBC@HSSC, David 5 OUNCAN/HBAR/HSBC!lIHSBC, Andy GENT/H88M/HSBC@.HSBC, virginia SUAREZ/HBUY/HSBC@HSBC, Joseph L 

SAL TERIO/HBPA/HSBC@HSBC 

cc 

John ALLlSON/HGHQ/HSBC(QHSBC 

subject 

TP GATEWAYS Entity 

HSBC Holdil'1gs plc - H(;HQ 

We propose that the countries in the Americas outside USA disconnect their Page 1 

Permanent Subcommittee on Investi ... ations 

Confidential- FOIA Treatment Reque' ... __ EiiiXHiiiiioi.IB_IT_#",60 __ ... IS, Inc. HSBD8D71341 

Confidential - FOIA Treatment Reaue' HSBC OCC 7687437 
854 


76061.280

.• HSBC-BNI_E 0699475.txt 

~1ie~;9~1~~1~ 1 ~~~ n tge~~¥i~~~ H r~~i~W~~e a~~i ~i~on~~c~a~~ ~~~m~~t~P in Th; 5 

'(urrenCl~S other than USD to countries/names/entit¥es sanctioned by USA OFAC as permltted by Gel 050047). and secondly to take data records outside USA. 

~~~p~~~l~lease advise Jonn Allison by 3D April 2006 whether you agree with this 

David eagley 

page 2 

Confidential. FOIA Treatment Requested by HSBC N. America Holdings, Inc. HSB08071342 

r.nnfiri"nti~1 • FOIA Treatment Reauested bv HSBC Bank. USA, N.A. HSBC oce 7687438 
855 


76061.281

From: AlAN T KETLEYtHBUS/HSBC 

Sent 5126/200611:14;07 AM 

To: "JUDY STOLDT'<JUDY.P.STOLDT@US.HSBC.COM> 

CC: 

Subject: U Tums 

Judy 

Can you look at this please and help be decode it. 

We are likely to be handling U turns for Dubai going forward. 

Alan T. Ketley 

First Vice President, Ant] Money Laundering 

Tel: 212 525 6147 

Fax: 212 382 7580 

-~ Forwarded by Alan T Ketley/HBUSfHSBC on 05/2612006 12:09 PM ~~-

Teresa Pesce/HBUS/HSBC 

051261200608:28 AM 

To 

Alan T Ketley/HBUS/HSBC@HSBC 

Subject 

Fw: 

Forget wat I said yesterday. 

Sent from my BlackBerry VVireless Handheld 

From: David W J BAGLEY 

Sent; 05126/2006 03:29 AM 

To: Teresa Pesce 

Cc: Warren GLEAMING; Alan KERR; Gary BOON 

Terry, 

The attached is an I hope self~explanatory and whilst! am not suprised at the 

reaction from JPMC, it is important to emphasise that we are talking about 

exempt U~turn payments. HBME have no choice but to now pass the paymments via 

HBUS, but as they are exempt, you have previously confirmed with Martin that 

HBUS are comfortable this does not seem to me to be problematic. 

I anticipate that you would prefer to see Field 72 completed, but this will 

mean more hits in the filters even if (hey will then be passed. Could you let 

me know and copy Gary Boon and Alan Kerr as I am out for part of today, Monday 

is a public holiday and I at Wolfsberg next week. 

Give me a cal! if you need to discuss and I appreciate that you may want to 

Permanent Subcommittee on lnvesti ations 

Confidential - FOIA Treatment Reques .. __ E.XHiiiiiiiiffi-.IT ... # .. 61 __ ... ' Inc. HSB03629424 

Confidential - FOIA Treatment Reques HSBC acc 3243782 
856 


76061.282

recheck with Martin. 

Regards 

-- Forwarded by David W J BAGLEY/HGHQIHSBC on 26/0512006 08:22--

Nan KERRlHBMElHSBC 

HBME 

26/0512006 06:45 

Phone No. 97145077674 

Mail Size: 7618 

To 

Warren G LEAMINGIRLA lGA MEM/HBMEfHSBC@HSBC, Ian EDEN/HBMEfHSBC@HSBC, Ben 

HOLT/HBMEfHSBC@HSBC, David W J BAGLEY/HGHQ/HSBC@HSBC 

co 

All, 

Gary BOONlHBME/HSBC@HSBC, Ken C MATHESONfHBMElHSBC@HSBC 

Subject 

Fw: US Dollar Transactional Activities via DDA at JPM 

Entity 

HSBC Bank Middle East Limited 

Please see attached message received from JPMC regarding transactions 

acceptable for transmission through our USD account with them, .....nich follo'N5 on 

from our discussion with them yesterday morning regarding our imminent move to 

serial payments + cover payments with Field 72 completed. 

Please could you provide guidance as to how we rrtay continue to effect OFAC 

U-turn compliant transactions on behalf of our Iranian rustomers. 

Alan Kerr 

Head of Institutional Banking 

Tel: 971 45077 674 

Fax: 971 43535079 

- Forwarded by PJan KERRlHBMElHSBC on OS/26/200609:37 AM -

PJi.Moosa@jprnorgan.com 

051251200609:49 PM 

Mail Size: 5256 

To 

Ga')' BOONlHBMEIHSBC@HSBC, Alan KERRlHBMEIHSBC@HSBC 

cc 

Layla.Oaseer@jpmorgan.com, CarmeLSpeers@jpmorgan.com, colin.j.nuH@jpmorgan.com 

Subject 

US Dollar Transactional Activities via DDA at JPM 

Entity 

HSBC Bank. Middle East Limited 

Confidential" FOIA Treatment Requested by HSBC N. America Holdings, Inc, HSB03629425 

Confidential· FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 3243783 
857 


76061.283

Dear Gary, 

It was a great pleasure speaking to you and Alan today. 

First, many thanks for keeping us informed on the group decision regarding 

the paymenls method. This is to confirm that we will be pleased to continue 

processing HSBC's Middle East dollar payment transactions, (both MT103 and 

202) with the exceptions of the Iranian referenced transactions that should 

be directed to other correspondent banking account, Unfortunately, as a 

business decision we will not be able to process such Iranian referenced 

details on the payment narratives. 

We look forward to continuing our excellent business relationship. Please 

do not hesitate to contact us if we can be of any further assistance or if 

you have any questions. 

Have a nice week end. 

Ali 

Ali Moosa 

Vice President & Area Manager 

Middle East & N. Africa 

Treasury Services 

Tel. +97317522741 

Fax +97317 535135 

Mobile 

db the Pemanent 

.--"" ~:::~~miitee on Investigations 

This communication is for informational purposes only. It IS not intended 

as an offer or solicitation for the purchase or sale of any financial 

instrument or as an official confinnation of any transaction. All market prices, 

data and other information are not warranted as to completeness or accuracy and 

are subject to change without notice. Any comments or statements made herein 

do not necessarily reflect those of JPMorgan Chase & Co., its subsidiaries 

and affiliates. 

-~ Forwarded by David W J BAGLEY/HGHQ/HSBC on 26105/2006 08:22-

David W J BAGLEY/HGHQ/HSBC 

HGHQ 

261051200608:15 

Phone No. 7991 8645 

+44 (2079) 20 7991 8645 

Mail Size; 16663 

To 

stephen K GREENlHSBH/HSBCMER!DIAN@HSBC 

Subject 

Confidential - FOIA Treatment Requested by HSBC N. America Holdings, Inc. HSB03629426 

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 3243784 
858 


76061.284

Fw: US DolJar Transactional Activities via DDA at JPM 

Entity 

HSBC Holdings pic ~ HGHQ 

Stephen, 

I apologise for troubling you on what I know is a busy day. 

fJ..s discussed I advised HBME DUB 10 continue to pass U-turn payments through 

JPMC, and! think quite rightly HBME advised JPMC that we would start to 

cross~reference the underlying 103 message in the cover message. 

fJ..s you will note from the attached JPMC have indicated tllat they are not 

willing to process these payments, I assume for reputational rather than 

regulatory reasons(given that they are within the U~turn exemption), which 

means tllat we will now have to pass these payments through HBUS. We have 

previously received concurrence from HBUS , confirmed by Martin. On tllis basis 

I do not believe we have any choice but to proceed on this basis. 

I would be grateful for your views, but anticipate that HBME will need to reach 

a decision in time for the opening of tlle USD payrnent window on Monday. 

David 

-~ Forwarded by David W J BAGLEY/HGHQ/HSBC on 26/0512006 07;58 ---

Alan KERRlHBMElHSBC 

HBME 

26/0512006 06:45 

Phone No. 97145077674 

Mail Size: 7618 

To 

Warren G LEAMING/RLA LOA MEMfHBMElHSBC@HSBC,lan EDEN/HBMElHSBC@HSBC,Ben 

HOLT/HBMElHSBC@HSBC, David W J BAGLEY/HGHOIHSBC@HSBC 

cc 

All, 

Gary BOONlHBME/HSBC@HSBC, Ken C MATHESON/HBMElHSBC@HSBC 

Subject 

Fw: US Donar Transactional Activities via DDA at JPM 

Entity 

HSBC Bank Middle East Limited 

Please see attached message received from JPMC regarding transactions 

acceptable for transmission through our USD account with them, which follows on 

from our discussion witll them yesterday morning regarding our imminent move to 

Confidential - FOIA Treatment Requested by HSBC N. America Holdings, Inc. HSB03629427 

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 3243785 
859 


76061.285

serial payments + cover payments with Field 72 completed. 

Please CQuid you provide guidance as to how we may continue to effect OFAC 

U~tum compliant transactions on behalf of our Iranian customers. 

Alan Kerr 

Head of Institutional Banking 

Tel: 971 45077 674 

Fax: 971 43535079 

-~ Forwarded by .AJan KERRlHBME/HSBC on OS/26/2006 09;37 AM --

A1i.Moosa@ipmorgan,com 

05/25(2006 09:49 PM 

Mail Size: 5256 

To 

Gary BOONlHBMEIHSBC@HSBC, Alan KERRlHBMElHSBC@HSBC 

00 

Layla.Qaseer@Jpmorgan.com, CarmeI.Speers@jpmorgan.com, colin.j.nutt@jpmorgan.com 

Subject 

US DoUar Transactional Activities via DDA at JPM 

Entity 

HSBC Bank Middle East Limited 

Dear Gary, 

It was a great pleasure speaking to you and Alan today. 

First, many thanks for keeping us informed on the group decision regarding 

the payments method. This is to confirm that we will be pleased to continue 

processing HSBC's Middle East dollar payment transactions, (both MT103 and 

202) with the exceptions of the Iranian referenced transactions that should 

be directed to other correspondent banking account. Unfortunately, as a 

business decision we will not be able to process such Iranian referenced 

details on the payment narratives. 

We look forward to continuing our excellent business relationship. Please 

do not hesitate to contact us if we can be of any further assistance or if 

you have any questions. 

Have a nice week end. 

Ali 

Ali Moosa 

Vice President & Area Manager 

Middle East & N. Africa 

Treasury Services 

Tel. +97317 522741 

Fax +973 17 535135 

Confidential - FOIA Treatment Requested by HSBC N. America Holdings, Inc. HSS03629428 

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.A. HSsC OCC 3243786 
860 


76061.286

Mobile1l ••• 1l 

This communication is for informational purposes only. It is not intended 

as an offer or solicitation for the purchase or sale of any financial 

instrument or as an official confirmation of any transaction. AI! market prices, 

data and other information are not warranted as to completeness or accuracy and 

are subject to change without notice. Any comments or statements made herein 

do not necessarily reflect those of JPMorgan Chase & Co., its subsidiaries 

and affiliates. 

--." Redacted by the Permanent 

Subt'ommitteeon Investigations 

Confidential - FOIA Treatment Requested by HSBC N. America Holdings, Inc. HSB03629429 

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC DCC 3243787 
861 


76061.287

From: Rod MOXLEY 

Sent: Tue Jan 02 09:55'48 2007 

To; Andy M NE'MI.'AN 

SuDjeet: Fw: TransactiOns with Iran! Cuba. etc 

Imponance:: NOI mal 

Fyi 

!'Ulet you know if I hear ~rther on this one-an interestlng concept. thOugh. let's set up a completely 

jjlfferent SWIft addresS \0 help avoid any problems with Cuba and Iran, Wish I'd thought of It. 

Regards 

Rod 

.'._ Forwarded by Rod MOXLEYIHBEU!HS8C on 0210112007 00 53 _.-

Martin S CLARKJHBEUIH$BC 2111212006 22:41 

Mo!!!Sile:7704 

HSBC Bank pic 

Roo MOXLEYIHBEUIHSBC@HSBC 

Subje Fw: Trensaeti011.'!; w,1h l/an 1 Cuba, etc 

Er.bty HS6C Bank pic" HBEU 

ReQlstered Office: B Canada square, Lon6on E14 5HQ 

Registered in England" Number 14259 

AuthOrised and regulated by the Financial Services ALrthoritV 

Malcolm (i EASTWOOD 

i'rQM! Malcolm li £1\,5'1' .. 100D 

sent: H!12!20C6 2l:4~ 

'1'0: Bill £: r IU:.:e:; ':;01'\ H CURT. 

Cc:: ',;U:.ram 6031.; DolJg13s t"l'A(;LEiiN; ~\art;ln ::; Cl.oAAK; All.s::Jn J ~OOr::; Jut.n ALLISQN; 

Pl!rmanent Subcommittee on Investigations 

EXHIBIT #62 Confidential - FOIA Treatment ReI .. --______ ...1 f:lSBC OCC 8876921 
862 


76061.288

.9ubj@ct: Fw: Ttl"''1Sdct.l.on$ ;"ith It~n I Cu.ba, etr:: 

8iJVJon, 

We have heard that this might be coming and here it is! j nole that they wani to spllttheirtraffic - is this 

possible ? 

What are the practICal IT and ~ralional ISSIJtlS With this· ie wnn GMG 9Oi09 dowl'\ In the middle of ltIe 

night fairly regularty could we betaking on a probtem we ckmt Ilt!t:u ht:!t!- ifB!i.'I.lil die op@nwt'''n this 

happens? 

I have copied John N!ison to see whe!!1er Group Compli;;mce have a \'iew given that they are only 

ptnfXl!;ln!J to !;end US sanctioned Items via this route, I have concerns that we might be breachinH at least 

the spirlt of the US Serial RouHng GeL if not tM letter ot It. 

Thanks. 

Malco!m Eastwood 

Head of Payment and Commercial Operations 

UKOpel'aliul\$ 

TeL 02:0 799 12300 (199 12300) 

- Forw-ariled ::,..,. ~ldJ.;.D!m G EASTWDOOIM08KIHSBC 00 21/12.'2005 21.34 --__ 

Morgana CASAGRANDEIHBBR/HSBC HBBR 

19112!200614'28 Man Si~e: ),196 

Malcolm 

To Makolm G EAS1WOOUlMlJI::IKlHSBC@HSElC 

Cezar JRtHBBRIHSeC@HSBC, Ertc 

STRIEGLERfHBBRII-\S8C@HSBC 

Sllbj.e Trnnsaelloflswln1lrsnICuba,ol!; 

Entity HSBC Bank pie - MOOK 

Your ccn'.act haS beer. provided by Mr Neil Chantry 

Appreciate jf you could assist us with t.i)e following. Not sure snyQJ'e has brief~d you yet 

HBBR has some payments going into iran, Cuba and otf1er sanclior'ted counb'ies, which are compliant 

with the Group Compliance Pofrc'j. Cun-entty our GMG is based 111 tile US, so we run the risk ot haVIng 

such paymenls blocked. For these specific transactions (circa 50Iyear), we would' like 10 use the GMG 

Desed J(l the lJK and perform me transacllons III EUR. To enable it, we haw been informed that we have 

10 create a second SWiFT a,jdress (etc 7) to be usl3d G"XClusl...cly fer !his purpose, which sl',ould atso not 

be publlshCd by SWIFT in their books_ 

Could you ass\st (IS wlttl obtaining ltIis second SVVlFT address? Any idea how loog it would take? 

Grateful for any other infO(malion you could provide. 

Confidential" FOIA Treatment Requested by HSBC Bank, USA, N.Al:iSBC OCC 8876922 
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76061.289

! look forward to hearing from you. 

Kind regards, 

MQrgana Casagrande 

Trade & Intematlonal· HBBR 

Tel: +S511 3e47Q1.:11 

Toe llnw 7 237 9141 

Fax: +55 11 3847 5869 

E-maIl: rnorgana.casagrande@hsbc.com.br 

Confidential - FOIA Treatment Requested by HS8C 8ank, USA, N.~SBC OCC 8876923 
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INTENTIONALL Y 

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• 

From: Rod MOXLEY 

Sent: Thu Jan 04 17:57:26 20[J7 

To; MalGOlrn G EASTVIOOD 

Sub./ect: Re: Fw: Trans3c\ion:s WIth Iran f Cuba, eft 

tmpomnce: Normal 

Attachments: Doc link.htm 

You ami me both. 

~~~~~~k~~i~~~=~:~~Ub~~d~,~~:~~~:~tho;t ~se a:: ::~C:~~R~e~~~~emma when trying to identify and then~l/8ntua!ly pay transactions whIch have so many conditions attached 10 

them. Slightly iIT1tating 100 thaI GHa CMP seem to have bent over bacll.wards to accommodate a s)"5"tem 

which iooks lIery OOdgy to me. How about flO you r;;a~'t do this? 

S(l'9ak further lorrorrow 

R~ards 

RoO 

Malcolm G EASTWQOOiMDBKlHSBC 

~icolm a EASlWOODIMDBK/HSBC MOBK 

04/0112007 16:38 Phone No. . 799 12300 

+411 {O)Z079912JOO Mail5i1e: 17121 

Roo, 

Jusl fri. This all makes me wry nervolr.i ! 

Malcolm East.vood 

Hfloo nf PRyrrent !'InrI CGrnrrfflt:lal Operatkms 

UK Operations 

Tel· 020 799 12300 (799 12300) 

To Rod MOXLEY!HBEUJHSBC@HSBC 

SUb.1lI f.: Tr~r1"'.."ctiorl!: w:th Ir::lr: I C:.;b~, et~ 

d 

-_ forwarded by Malcolm G EASTWOOOIMDBKlHSBC on 0410112007 16·36 .• 

Redacted Material 

Confidential" FOIA Treatment Requested by HSBC Bank, USA, N.Al-lSBC OCC 8876925 
866 


76061.292

MoII.:.olm G EASTWOOD,UJBKlHSBC "'-1OeK 

Q.4.'0112007 1e.37 f'ho!\e NCl 199 12lOO 

j 44 (0) 20 7991 2300 M~!! SIZe: 14i17 

Jim, 

To JimtJ.,RGEJHBEUlHS6C@HSBC 

SUbJe FW.1ransactJonswilll lraofCooa,etc 

Entity HSBC Bank pic - '-"DS!< 

t mer:tiOned this one Illis momi:!lJ and here is !M backgrouml, ! am doing some iTl'Jre wor1C. on ~ \/IIlth IT 

and my people, will thP'fl Mile a c.onTracall with Bra.z:il and give you SOO'l6 Input so thatwe can discuss 

wilt1Dyfrig, 

Malcolm Eastwood 

Head of Payment and Commerda! Operations 

uK Operations 

Tel: 020 799 12300 (799 12300) 

-- Forwardeo oy Malcolm G EASWVOODiMD8K,IHSSC on 04I0112(J07 \6'34 -_. 

John AL.LISONI'HOHOJHSBC HOHa 28112J2()06 To Malcolm G EASTWQOD.<UDBKiHSBC@rlSBC 

1611 Phone No, i~ 1864" AbonJWOOQIMDBKlHSBC@HSBC,BiliEF 

+44 (0) 20 79918643 MSlj Size: 11724 RICEtHBEUA-!S8C@I1SBC,Douglas 

Malcolm 

MACLEANIlBEUlHSSC@HSBC, James J Y 

MAOSENlHBEUlHSBC@HSBC, Jim LARGElHBEU/HSBC@HSBC, 

Jon H CURUHBEUlHS8C@HSBC,MarbnSCLARK@HSBC, VdvllIm 

SOSEiHBEWHSSC@HSBC, Da"lld W J 

a-'\G!..EY;HGHQlHSBC@HSBC 

Subje Re·Fw. Trarl58l.1l",n$wilhh8nfcub". ~c: 

Entity /1SBC Hok:iing, pic ~ HGiiO 

sending payments via USA GMG subjects Braza to an all currency prohibition br al! aFAC entries. Brazil 

IS, however, permitted under current Group poficy to maKa payments in currenCIes aliter than USD 10 

entries onlhe OFAC list, provided itlat tile leason ror inctusiun ali the list is a reason otller ttlan 

Tanurism'VVe<llX'ns of Mass Destruc'tion (whers payments cannot be made 10 any currency) we bell6''ffld 

that ttlis small votume of the'!le permissible payments would be sent by Brazil by ~marual" means (tele)C?). 

Wlils\ we thefmre do not have an issue with Brazil's request from 8 policy point ofvew, we would be 

concerned if a second S'w'VIA" address anlry drew attention to itsatf, Of contained soma rsl'arence to thiS 

ooclfess bE!lt'1g used fOr maKing paymems to entries on (he OFAC lis/. as tlJis cOt.M cesult ~1 If negafill'e. 

perception by tnase oot aware of the detail of our policy 

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.ItISBC OCC 8876926 
867 


76061.293

• 

Regards 

John 

Malcolm G EASTW()(l[).It.IIDBKlttSBC MDBK To BHI E F R!CElHBEUIHSeC@HSBC,JonH CURUHI:lI:UIH'SBC@HSBC 

211tV2006 21:43 Phone No. 79912300 

+44 (0) 2(l 7'9912300 Mail Sll~: 8019 

BillfJon, 

Vlkram aOSElHBEU/HSBC@HSBC,DougIaS 

MAClEANI1BEUIHS9C@HSSC, MMir, S CLARl(@HE;BC,AhsorlJ 

'NOOD/""OBKlHSBC@HSBC,.IoMALllSONIHGHQ/HSBC@HSBC, 

James J Y MAOSENlHBEVlHSaC@MSac. Jm 

LARGElHBEUI'iSBC@HSBC 

Sub~ Fw: TransactJ:l!1$ with !faIl I Cuba, etc 

,\ 

Entity HSBC &mk pJ<. - MOBK 

We have-ileai'd tl1atthis might be coming and hefe it is!! nuto;: iJlsttllejo want 10 split tMlrtr;::;ffic -j! this 

possible? 

What afe the prae.tlc81lT aoo Operational issues with this. -Ie with G",<1{3 gt'ing down In ll1e middle of tI1c 

night fairly regtJleriy could we be taking on a problem we dent MOO hefa if Brazil are open whoo til,s. 

happefls? 

I have eODie<! John A"ison 10 see whether Group Compliance have 8 view given that they are only 

prop:.tSing 10 &end US sanctJoned items via this route. ! have corteems that we mQ111 be brea(;hUlg at least 

Ihe spirit of ltie US Serial RoLrtlng GeL if not the letter of It, 

Thanks, 

Malcolm Eastwood 

Head of ?aymel"lt aM Commercia! OperatfOns 

UK Operations 

Tel: 020 799 12300 (7991?300) 

--- FOf'o'lll'tled by Mah'lm G EASTWOODrMDBKlHSeC l.l1l21112l200e 21 J.4--

Morgani!l CASAGRAt!DEfHBBRtHSBC HBBR Malcoln'l G EJ'.STWQOOIMDBKlHSBC@HSac 

Confidential- FOIA Treatment Requested by HSBC Bank, USA, N.AHSBC OCC 8876927 
868 


76061.294

• 

1811212000 1428 Mai!SI18' JHI6 

Malcolm 

C",zllrJPJHBBR.lHSBC@HSBC Ene STRIEGLERlHBARFHSBC@HS8C 

Sul:lje TransacbOnswllhlranlCuc8,etc 

" Elltlly HSSC Bank pic. MD6K 

Your contact hal; been proVIded by Mr Nell Chantry 

Appreciate if you could assist us with the followlflg. Not sure anyone has briefed you yet. 

HBBR has some payments gOIng Into Iran, Cuba and other sanC1ioned countries, whlcfl are compliant 

with the Group Compliance PolICy. Currently our GMG lS based iIllhi! US, so we I1Jn the f]sk of having 

5udlIJs.,-rroenis block.ed. For lhasa specific tnmsactions (Circa 50Iyear), we would I!t;e to use the GMG 

based in the UK and jX'rlOrm the lral1sacticms 111 EUR. To enable it, we have been Informed !hat we have 

to create a second SWIFT address (BIC 7) to be used exch.lsiW!!y for thiS purpose, wflich should also not 

be publrshed bv SIMFT in [heir books. 

Could you assist us with Obtaining this second 5WFT address? Any Idea how long IT. would take? 

Grateful for any other information you could provide. 

I look torwarCl to hearing fi'om you. 

Kmd regards. 

Morgana Casagrande 

T~dR o!t- kllNr>aliona! - HBBR 

Tel: +551136479141 

Tlahna: 7 2379141 

Fax; +55 i 1 38475869 

E·mai!: margana.casagrande@nsbc.com.br 

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76061.296

HSBC 8ukpLc 

To 

Lucas Fragoso 

CC 

MarisaOliveim 

Alison Wood 

Rod Moltley 

John Allison 

JooCurl 

Bill Ric~ 

Jim Lar"'e 

From 

Malcolm Eas!,,vood 

Subject 

TRADE TR.A."IISACTIO~ \\ltTl:! !RA.!"I/CVBA ETC 

To Fac~imile No iFrom Fa<;<;imile No. 

02() 7260 Q796 

Lucas, 

Memo 

D.", 

26 Januarv 2007 

Sendel's, Reference 

Receiver's Reference 

Total No. of pag~s 

Funher 10 our recent exchange of emails 1 have now soug:ln views from Group Compliance, 

IT aJld m) Operations tewn. 

\\'hilst what ~'OU are proposing is lechnicaHy achievable we are not attracted 10 B pr~aJ 

wbit.:b would segregate certain transactIons through sepannc SW lFT ad~ss, albeit that these 

propoSt-'<i transactions mighf be perfectly permissible undcr Group polky as this nlJgbt bring 

unwelcome attention from extemai parties and allenst make it sl!em as though we are taking 

Ill.:liuu lo avoid l,;~rUtlll traru.il.Ctluns bdng exammed by the US amboriries_ Group Complianc~ 

share t.'l.is view 

On trus basis if we were to make acnange T bcli:;vetbatitwoulc! have to be on theb,:\sls tha1 

ill Q-fyourcuffi'nt SWIFTtrnffi<.: be directed via en"UK GMG. Ofcoune this would be.a 

much more slgnifica.ntchallenge for alt ofu:'> but ifit iJ;; thi~ route that you wi<;n !(I pursue 

please could I ask your teIDTI to discuss with Bill Rice (UK OperatiOD.s) aa.d Jon Curl (UK IT) 

and Rod Moxley (Risk Management Services, UK Opcro.tians and Compliance). 

The points r wcu!d like oovered are 

I. Message volumes ineluding averages and peaks $0 that ..... e can ensure tllattflese 

volumes are mwa.!lcab!c. Whilst the UK GMG is currently meet'"~ our Deeds 1 r an: 

CWT~otly looking 10 reshape ollr GMG infraslTllcture 10 enslire better reliability We 

lllustavoid Cralill)!futlbcriul>l.ll.bililY. 

2. lb.;)! we can provide viable oper.l.twn:i.I :ruppon given the lim~ zone d:fferer.ces 

bc~·cc-n UK Ilnd Brazil. 

J WOLF terrorist filtering support, who would undertake tbis function lucluding ca!'lC 

esca1arkm? 

P<I$clM2 

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.AHSBC OCC 8876930 
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76061.297

Clearly This substantially broadens the scope of our orlgJoal f'Cquest, introdudl1!5 more 

opern.tioJla! cmnpie.'tiry ana reput;:niollal issues from ooth tbe UK and Brazilian bapks 

per.lpective 

If v.e are to progress thls broader request then 1 believe tbal it would be pruden! for me to 

discuss Lbe proposal u.'tlt the UK Baoks CEQ before we would fonnally agree to proceed. 

Happy to diS<:IlSS further with you unce yuu have cUUSlderr.d lhl:! lIbu\;t: 

With kind regards 

Malcolm Eastwood 

Head of Paymcrlt and Commercial Opemtions 

Page 2 of2 

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76061.298

From: David W J BAGLEY 

Sent: Sat Jun D9 06:38:13 2D07 

To; Michael F GEOGHEGAN 

Cc:: Stephen K GREEN; David H HODGKINSON; Douglas FUNT 

Subject: Re: /ran 

!mportam:e: Normal 

Mike, I should br.lefly clarify that there is very little left of our relationship Wit. although enough to mean 

that it wou!1d have been inaccurate to teU Levey there was nothing 

Without being able to look back over previOus corrnsspondence an the Issue my recollection of key recent 

decisions on Iranian banks include 

1. We decided some I1me ago tos!op using the U~turn exemption under OFAC, 

2. W, "'o,,'~' tca', lio" prev'ou,'y ,,,,,de, to """0 '''0'00 b"Ii, '00'""0'-'" ",," havevir!l..lally run off in the case of -

There are further oornptications surrounding the process of closure wlth all Iranian banks as we have 

some UsD 9m in reimbursernents due from Sepah, where we are running off trade Unes, where we may 

need co-operation from Central Bank of Iran_ David is in the loop here. 

I am in facttraveUing next week butwm monitor by BlackBerry, Apologies for !he length of the e-mail but I 

(flought the above detail may help deliberations next week: 

David 

HSBC Holdings pic 

Registered Office: B Canada Square, London E14 SHa, United Kingdom 

Registered Number 617987 

From: Michael F GEOGHEGAN 

S .. nt: 08/06/2007 20;30 GOT 

'l'Q: David W J BAGLEY 

C<;: Stephe:1 GREEN; David A HDDGKINSON; Douglas FLINT 

Permanent SUbcommiHee on Jnvesti ations 

Redacted Material EXHIBIT #63 

Confidential· FOIA Treatment Reque, HSBC OCC 8878214 
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76061.299

Subject: 

David 

This is not clear to me because some time 8QO r said to close Illis relationship other than for previously 

contractually committed export finance commitments 

Possibly we can discuss this next week when I wfll be able to review my past emaHs 

Mike 

HSBC Holdings pic 

Registered Office: 8 Canada Square, london E14 SHO, United Klngdom 

Registered Number 617987 

David W J BAGLEY 

From: David W J BAGLE~ 

S~nt: 08(06/200708:17 GDT 

'to: Michael F GEOGHEGAN 

Cc: Stephen GREEN; David H HODGKINSON; Douglas FLINT 

Sllbjecl:;; Iran 

Mike, 

Stuart Levey, the US Treasury Under Secretary for Counter Terrorist Financing and Sanctions was a 

speaker al the recent annual conference of the Wolfsberg Group, of which I currently act as Co-chair. 

Levey asked for a private meeting with me to discuss a nurnber of matters including Iran. Levey has been 

extremely active in promoting the US policy on Iran, particularly the use of sanctions to deter weapons 

proliferation. He has in the past met with David and r 10 encourage us to refrain from dealings WIth Iranian 

banks. The key points raised with me, and the subsequent actions agreed with David are best 

summerised as fulows: 

Levey ackmlW'ledgad thet we as a Group have acted responsibly on Iran and I took Ihe opportunity to 

emphasise 10 him that we applied OFAC across the Group when dealing in USD, and had acted 

whenever specific sanctions were enacted either by US, UK or UN. 

Levey however expressed concern that we were st!!l operating accounts for had 

~n 

~ 

idenljfied as having acted as a conduit I'orlranian 9 

this is a repeat of allegations made previously by the US which 

sanctions in the US , but have not had support within the UN. .. 

Levey essentlally threatened that if HSBC did not WIthdraw from reletionshlps with we may well 

make ourselves a target for action In the US. It appears that we have been approac e In is way as he 

Redacted Material 

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alleges th8t~e the fact that we have maintained accounts for them as an arguarnent in support 

ofrepresentatlons made to other banks foron~ort. 

We in fact have o~y limited relationships, with8Band in fact overall with Iranian banks. 

Following this meeting! have diS. approach we should take with David. His decision is that we 

should immediately withdraw fro and also withdraw from aU Iranian bank relationships in a coordinated manner, recognising tha ere may be soma 199ally binding committments we will hava to 

hOflOur( for example PEF facilities), and we mal' nsed to allow for an orderly run -off. 

Once the pasition is ciear on precisely what steps are being taken 1 will then advise Levey of the slaps we 

have taken. 

I am aware that levey has SQughtto pel'Euade other non-US banks to withdraw from Iran, but the tone of 

h~ remarks were notably more direct and strident 

David Bagley 

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• 

• 

From: John ALLISON 

Sent: Wed Jun 13 11_36:00 2007 

To: Clive BISSEn 

SUbject: Fw: GROUP MESSAGING GATEWAY FOR LAM - CLEAR CHOICE REPORT 

Importance! Normal 

Attll;:hments: Doc Unk.hlm 

Clive 

Any thoughts on how to deal with these countnes? 

Regards 

John 

---. Forwarded by John ALLISONttiGHQlHSBC on 1310$12007 11 :35 -

Neelillsh HERfOIAIHBMXn-iSBC HBMX 

11106120011602 Mall Sl~e; 261/;1 

John, 

To John ALllSON/HGHOfHSBC@HSBC 

Cli\l9 BISSElTIHBEUIHSBC@HSBC, 

Tomas davKlovlI::h@hsbccomrnx. Jon H 

CURUHBEUIHSBC@HSBC 

SubJe Fw: GROUP MESSAGING GATEWAY FOR LAM CLEAR 

ct CHOICE REPORT 

Enttly HS8C Holdings pk _ HGHO 

We have not engaged with CI and Nassau as we have no leadership responsibility for this geograpl"ly. ! 

trust they will deal direct with IT, PCM, at al and look afferthemselves. 

Regards, 

Forwarded by Neeiesh HEREDifVHBMXlHSI3C on 11/00t2007 09 59 a m ___ _ 

Safl(fy FlockhartlHBMJ(/HSBC 0110612007 06'34 To Neelesh HEREDJAlHBMX!HSBC@HSBC 

Alan BEAlTIE/HBARlHSSC@HSBC.AlltonroM 

lOSADAlHBARlHSBC@HSBC,Arturo 

RNERAlHBMXlHSeC@HSBC.Clive 

B1SSETTIHBEUIHSBC@HSBC, Dcwid W J 

BAGLEYIHGHO/HSBC@HSBC, Eduardo Palacios 

KahuamlHBMXJHSBC@HSBC. Emdson 

AlONSOIHBBRfHSBC@HS9C. Gary M 

PH1lllPSIHBMXlHSeC@HSBC,Graham 

MACNAUGHTON/HBMXfHSeC@HSBC,Jae 

PARKlHBBRtHS8C@HSBC. John 

ALL1SONfHGHQlHSBC@HSBC. John R 

RENDAlUHBMX!HSBC@HSSC. Joo H 

CURUHBEUfHSBC@HSBC, luIS 

Permanent Subcommittee on Investi ations 

EXHIBIT #64 

Confidential· FOIA Treatment Reque HSBC OCC 8874349 
876 


76061.302

• 

• 

Nee!esh, 

EDUARDOIHB8R1HSBC@HS8C,LUIS M 

MART1NEZlH6ARlHSBC@HSBC,lutz 

S!MIONE/HBBRIHSBC®HSBC, Manan 

JEFFERYIHBEUIHSBC@HSBC, Paul A 

THURSTONlHBMX!HSBC@HSBC. Ramon 

GARCIAlHBMXlHS6C@HSBC,TomBS 

DAV1DOVICHIHBMXlHSSC@HSBC 

Suble Re GROUP MESSAGING GATEWAY FOR LAM ~ CLEAR 

ct CHOICE REPORT 

As this 5 the most cost effective solution yOu have my approval to proceed as proposed . 

Regards, 

Sandy 

Alexander A, Flockhart 

President &. Group Managing Director 

laUn America and the Caribbean 

Paseo de ja Reforma 347 

Oticlna 23 Piso 32 

Col. Cusl.Jhtemoc 

06500 Mexico, OF. 

Te!:52-5S-5721-3914 

Neelesh HEREDIAIHBMX/HSBC 

Neelo8h HEREDIAlHBMXJHSBC 05131120(17 

05'59 PM 

To Sandy Flockhart, Gary M PHILUPSIHBMXlHSBC@HSBC, 

Eduardo PalaCIOs Kahuam'H8MXfHSBC@HS8C, Dav'" WJ 

BAGLEYfHGHQ/HSBC@HSBC, Ramon Gi!fcia.. Jae 

PARKlH88R1HSBC@HSBC,Gra.hamMacnau9hton,LU!S 

EDUARDOIHBBRIHSBC@HSBC, Alan 

8EATTIElH8AR/HS8C@HSBC,JohnR 

RENDALUH8MXlHSBC@HSBC 

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• 

• 

All, 

MART1NEZtHBARlHSBC@HSBC.LuIZ 

SIMIONElHBBRfHSBC@HSBC 

Sl.Ib,e GROUP MESSAGING GATEWAY FOR tAM • CLEAR CHOICE 

ct REPORT 

As you are aware, we ha...e been assessing tne most viable and Group policv compliant Group 

Messaging Gatewav (GMG) for future processing of LAM payments. Anached!s the final versiOn oft11e 

Clear Choice (CC) and to which I request your approYa! to proceed, 

For ease of reference, j advise that tfle CC report recommends migratiOn of aU LAM non US Based 

S\rV]FT addresses to the UKGMG, 

The CC was cofiective/y put together by: IT, PCM and CMP in the UK and IT, CMP, PCM in LAM, 

representallves from HBBR, HBAR and OPSCO (for HBMX, LAM Intemational and CC sponsorship), My 

thanks to all participants 

Post approval, priorfty next sleps include: 

Definition of: Project sponsor, Project Coordinators for LAM and the UK fr.am BUsiness and IT. Jn~ountry 

Busmess and IT representation and supporting LAM and UK Project teams, ActiOlJ: Davidovlr:h. 

Preparation and approval of a Project Terms of Reference. ActiOn: Projed Coordmators in LAM and UI<. 

Advice to all LAM counllies of CC decis·lOn. Action: Heredia. 

Progress with HBEU IT tile need for spanisl1 speakmg support during LAM's working hours at the 

SYDGC. Action: Heredia With Phirlips. 

Identify and agree Pilot site. Action: Heredia with Macnaughfon. 

Follow on actions wjlt include: prior/Used lIst of countries to be migrated, roU-ou! plan and timelines. 

project plans per country, SLAs betw"een countries and the SYDGC, formalisation of the migration of Keys 

and Access rights, demise of SWIFT AJ!Jance etc, 

Piease address any queries arising to me, 

Regards, 

Neelash 

lattachment "C!ear Choice· Non US S\rV]FT Address GMG Migration - FINAL.doc~ deteted by Neelesh 

HEREDIAlHBMXIHSBC] 

David, 

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• 

• 

The contact should be NeeJes/1 Heredia but Graham Macnaughton Head of IntematlOnal and Eduardo 

PalacIOs Head of PCM should be copied ill all correspondence. 

Sandy 

AlE'xanderA Flockhart 

President & Group Managing Director 

Latin Amelica and the Caribbean 

Paseo de Ie Reforms 347 

Oficina 23 Ptso 32 

Col. Cuauhtemoc 

00500 Mexico, D.F . 

Tet 52·55-5121-3914 

David W J BAGLEy/HGHO/HSBC 

Oavfcl W J BAGLEYMGHOIHSBC Sent by: 

Manon a ROACH 22/03/200711'11 a m 

Sandy 

j refer to your e-mail of 14th March 

To Sandy FIockhartlHBMX!HSBC@HSBC 

Subje GROUP MESSAGING 

Clive Bissett, Globa! Project Manager, GTS has been nominated 10 assist with tt1e preparation of a Clear 

Choices document Could! sl1Qgest therefore that someone be nominated for LATM to liaise closely with 

CUve which wi! ensure that a proper and complete consideration will be given, Jncluding to the capacity 

I am aware from my contact with eMP in Brazl! that they were giving some consideration 10 giving up 

certain payments activity given the challenges of passing that ectivity through the US. We ha'w'El indicated 

that any final dacision should be deferred in this regard pending a proper consideration 8S to whether the 

payments messaging can be migrated elsewhere thus allowing us 10 preserve as muc/1 activity and 

busineSS as possib+e, There may also need 10 be e conversation at some stage wilt1 Paul Lawrence If it is 

necessary to persuade HBUS to continue with payment messaging pending any migration.! will however 

advise further If thiS proves to be the case. 

At ITIY and I will ask one of my team, John Allison. to support Clive. I look forward to receiving details of 

'lour nominated contact whereupon I wi!! ask Clive to make appropriate contact and commence the 

necessaryworl<.. 

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• 

lamgreteful ror your ass!stance. 

Regards 

DaVid Bagley 

--Original Message--

F:r:olll; Sandy Floc:-I:hart 

Sent: 03/14/2007 1.2:45 PM 

Tc; D<lvid W J B1-.GLEY 

Cc; Davld :"cl;,hto,,; Ne",lesh HErtED!,r..! P"loll i\ THURSTON; Graham MA:::NA:JGHTON 

~je<::l;: Re: Group Me:o;:saOlinq 

David, 

VVe are simllar1y keen to ensure that paylOOflts continue to operate smoothly, whilst being comPletely 

compliant wiltl Group requirements, and to this end would not be averse In principle to re~routing 

payments traffic via Sheffield, rather than as present, via the USA. 

VVhilst clearly this would need to be fu!ly evaluated, not least in respect of the cost savings that would 

presumably accrue, as wei! as the abHity to meet spel;iric latin American requirements (time :zone, 

language etc), we would want to ensure Inat all latin American counlr~ mel the most stringent 

requirements. possibly by centralising all payments thr.ough a Payments ServiCes Centre such as the one 

we recently commissioned in Mexico. One component of this might be to ensure that we used precisely 

the same algorithms and screening pararnaters as are used by the US, but ttus too would be part of the 

abovementiOnad evaluat!on. 

Clear!ya decision wi!l need to taken soon as we are in the process ofdeflning tile migration of Banistmo, 

whiCh, until your communication was recoived. were going to be rout!nely routed through the United Slates 

in tile usual way. However, you mention there may be capacity iSsues in the UK, and of course these 

would need to be resolved without disproponionate cost implications for LATAM. II would therefore be 

helpful if you would advise the name of a contact with whom we could discuss various points of detait 

priOr to reaching a final decision, and with who we COuld work with afterwards 10 convert if such was 

decided to be me way forward. 

I look forward te receiving your thoughts on the above, 

RegardS, 

Sandy 

AJexanderA. Flockhart 

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President & Group Managing Director 

Latin America and the Caribbean 

Pasoo de la Reforma 347 

Ofic;ina23 Piso 32 

Col. Cuauhlerroc 

D6500 Mexico, O.F. 

Tel: 52·55·5721.3914 

David W 1 BAm EY iHGHOfHSBC 

DavId W J BAGlEYIHGHClHSBC Senl by 

Manon a ROACH 13/031200709:08 a.m. 

Sandy 

To Sand)' FIOCkhartlHBMXtHSBC@HSBC 

SUbje GroupMe$$aging 

Wiltl apologies Ibr tM length of the "o1e set ou1 below, I need to raise an issue with you whIch relates to 

payment messaging KIf large, if not ai!, parts of Latin Amenca. This is an issue that has been around for 

some time, but probably now needs a strategic high·leve! decision given the potential, commercial and 

cost consequences. The key issues are as ro!lows:· 

You wi!! of course be aware of the Increased Significance of compliance with the US sanctions 

promulgated by OFAC. TIlls has Jed to the Group reinforcing and reiterating a requirement for a1l Grovp 

offices to comply with OFAC in relation to transactIOns denominated in USD regardless aftneir place of 

incorporation Of operation. This policy is weJl--establistJed, and appears to ~ adhered \0 very closely by 

Group companies. 

Obviously our operations in trle us are obliged to comply with tl"le requirements ofOFAC in aU currencies, 

not just USD. This obviously reflects ttJe fact of either!heir US incorporation, orthe fact that they were 

operating within the US. Within the US however there is an increased focus upon effective compliance 

with lt1e requirements OFAC on the part ofbatn OFAC itself but also our bank.ing regulators 

At present, cross-border payments, regardless of currenc)" Initialed by most, /f fiat all of our operations in 

Latin America pass through the payment gateway operated by HBUS in the US. The increased focus 

upon OFAC compliance has Jed us to consider various situatIOns where transact10ns pass through the 

US. bul are not!nitJat~ by and do not in'oQlve our Group companies in the US. They are, m effect. merely 

a servk.eprnvider 

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This cleany has the potentia! for adverse commercial consequences, in that transactions in currencies 

other than USD involvmg countries or entities covered by US sanctions would be caught even though 

overall they were permitted by Group policy by reason of their non-USD denomination, For this reason, 

we are in the process of relocaUng the ,net and com sel"llices, and made a conscIOus deciSioo to develop 

a stand·alorte VVHIRl system server in the UK where the Original proposatwas to hosl an Group credit 

carel transactions ttlrough server.; located in the US. 

ObviOUSly the significance ofttle above is that where payments are processed Il1mugh the New York 

gateway on behalf of Lat!n American operations then HBUS, taking a cautious approach Justified by the 

GtJrrent regulatory environment, will need to filter all lransact;ons regardless of cur-rency and reject those 

transactions where Ihey would breach QFAC regardless of currency ThiS woufd clearly be 

disadvantageous from latin Amerk:a's perspecbve, anC! equally! suspect the logistics of having to locally 

pre-screen aU cross·border payments m all currencies would be commercially and operationally 

challengmg for our operations in Latin America, 

My own view is lt1at cOl11l'Tlercial1y you would ijnd the introduction of filtering by our US colleagues 

unattracti'le commercially, and I do remember the problems that a local US hotel chain got into when 

refusing access to certain Cuban VISrtOrs. If my assumption here is correct then on the assumption H1al 

you wi!! want to carry out as many Ifansactions permitted by Group policy as possible the most VIable 

option and way forward would seem to be to relocated your payment processing to a dH'ferenl Group 

Messaging (~G) gateway. ThIs however would need your support and the generation of an appropriate 

business case and clear choices proposal. Any such proposal would need to take account of likely 

impacts upon operatIOnal support, time zones, performance and cost. We have informally explored the 

possibility of relocating Latin American flows to the UK GMG, but this centre has experienced some 

capacity issues. 

Vohti/slwe have Ilved with the ClIrrent posrtJon for some time, it is rair to say that now that our US 

colleagues are on notice they feel extremely uncomfortable In allOWing Il<e posiliOn to contlnve 

indefinitely, In essence, we will either have to have a pass and timellne fOr a relocation oflhe payment 

messages or will need to turn the rll1erlng on. 

I thought it lmportant to canvas this issue with you tir.;t, but recognise that you will probably want to 

nominate one of your team to take mat1er.; forward, Similarty. we will provide as rruch assistance as we 

can here in GHa CMP, having developed some understanding and knowledge oflhe Issues posed by 

OFAC. and possible solutions and approaches to resolve those challenges. 

• Regards 

OavTd Bagley 

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.onr.oentta, & Non-public OCC Information 

u 

c 

HSBC-OCC,....E 0599421. txt From: ANNE LIDDY /HSUS/HSBC 

Sent: Sj19/Z00S 11:54:26 AM To: NANCY .HEDGES/HBU5/HSBC@HSBC02 

cc: 

Subject! Re: DFAC processing in csc's 

ok. thanks Nancy. We are all feeling the pressure re not hiring onshore: - only off. Keep me posted. 

Anne Liddy .SYPt AML Compliance I HSBC Bji.nk USA, N.A. 452 5th Avenue, Towel" 7, New York. NY lOOlg 

Phone 212-525-5906 Fax 212. 525 5769 Email anne.1iddy@us.hsbc.com 

S~/t~/~~~~et~~~S~SBC 

To 

Anne Liddy/HSU5/HSBC@H5BC02 

cc 

subject 

Re: OFAC processing in GSC's . 

fYi - I have put forth the suggestion of hiring up some first 1evel checkers for OFAC processing in the GSC .•• we're strapped and getting behind in investigations (on OFAC c..ases) and have some of our k~ managers in the queues 

~f}ih~~~~. : ~e~: : :. ~~~~t~!d g~ t ca~~~! ~!k~d f~~t t~;V~ ~e~~~t:h~n i~s~~~~ce further discussions With compliance and will set something up with you when 'I get it. 

Anne liddY/HBUS/HSBC 05/30/2008 08: 54 AM 

To 

Nancy Hedges/HBUS/HSSC@HsBC02 cc 

SUbject 

Re~ OFAC proc~ssing in GSC 1 s 

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Confidential & Non·public acc Information aCC·PSI·0089823 

eei 

.. -) 

c 6 

HSBC-OCC-E 0599421. txt 

~~~~~~e~U h~~~t~t~e o~:~ii ~t~s~~~e Je~~~~~~~e~og~u~~g~ f~~S~a~;V~ph:~1 ~:~ ~~ 

~~~i ~e~l~t~~~p:~~n t~f~to~~~g o~~~i ~~~~S~~e (~;k ~:tl~~ ~~r~~~h~~i~~i ~ rst 

l:~~ \~~i~~~er w~i ~o~~~i ;:~1 ~~ ~!~~~~ ~~ ~ k r~hl ~~ne ~~~o~~~t~~i~~n~~i; :~~e~g~n potentially let the regulators know if the Bank decided to move forward on this. - just my thoughts. I reached out to Denise on this as well and she agrees. 

Anne Liddy syp. AML compliance I HSBC Bank USA. N.A. 452 5th Avenue, Tower 7, NeW York, NY '10018 

phone 212-525"-5906 Fax 2U 525 5769 Email anne.liddy@Us.hsbc.com 

~~n~/~6gBe~~~~S'~SBC 

To 

Anne Li ddy/l-IBUS/HSBCQHSBCOl 

CC 

subject 

OFAC processi n9 ; 11 GSC' 5 

~t. !~suitt~~~ 1 ~o~h~~W I °thV~~h t~~~~e~~~ nge o~~ ~~~~e h!f~h O¥i ~~w O~~e °tejh~i ght 

view it and the fact that p~rsonal fines / incarceration of staff cou1d occur (hopefully never here) and how would that be handled / looked at if the staff are in Inaia I Malaysia? 

phone. 

Fax, 

Mobile. 

Email, 

302-327-2333 302-327-2363 

302-438-0336 

nancy. hedges@Us.hsbc.com 

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HS8C-OCCE 0041342. txt From: MICHAEL B GALlAGHER!HBUS/HSBC sent; 12/11/2009 2; 38: 40 PM To: CHRIS P DAVIES/HBUS/HSBC@HSBC 

CC: LESLEY MIDZAIN/HBus/HSBC@HSBC02 subj ect: FW: OFAC payments 

Thi 5 ; s concern; ng. 

Michael B. Gallagher Executive Vice president Gl aba 1 Transacti on Bank; ng 452 S1;:h Avenue 

New York, NY 10018 Tel; 212-525-5680 

Forwarded by Michael B Gallagher/HBUs/HSBC on 12(11/2009 02:38 PM -----

From! camillus P Hughes/HBUS/HSBC 

To: sandra peterson/HBUS/HSBC@HSBC02 

CC: charles G oelBusto/HBUS/HSBC@HSBC02, Michael B GallagherjHBU5/HSBC@HSBC02, 

"Thomas W Halpin" <thomas.w.halpin@u5.hsbc.com> Date: 12/11/2009 02: 28 PM Subject: Re: FW: OFAC payments 

sandra, 

We have considered all options at this point the Compliance team in DE is already fully deployed dealing with wire camp alerts and bank examiner requests for the current exam. There is no bandwi dth there at all they are behi nd on the current alert clearing process which we are also working on dealing with. 

Thanks and regards, 

Cam; 11 us P Hughes 

Grp oi r-specialized compl II ! HSBC Bank USA 

452 Fifth Avenue 

phone. 

Fax. 

Email. 

212-525-8607 212 382-5961 camillus. p. hughes@hsbcpb.com 

From: sandra peterson/HBUS/HSBC To: Michael B Gallagher/HBU5/HSBC@HSBC02 

CC; "camillus Hughes" <cami11us.p.hugnes@.hsbcpb.com>. charles G 

gii~~st:O{~i~i~~5g~@~~~i~2pM"Thomas W Halpin" <thomas_w. halpin@us.hsbc.com> 

subject: Re: FW: OFAc payments 

Michael, 

We have been providing headcOLrnt to the operations team here in Delaware as follows: 

Nov. 24th --->Nov. 27th stephanie Brown Deni se Ri chards Franci sca Fernandez 

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r HSBC-OCCE 0041342. txt 

Nov. 30----->De.C. 4th. Franci seQ Fernandez 

Dec. 11th The above individuals to assist on addressing the investigation OFAC queue today. 

Trying to rnana~e our day to day and assist as best we can. I do net have other resources to 91ve at this point, but will doub1e check with ops to see if resources can be shifted. 

cam, have we tapped the compliance team here in Delaware? 

Best regards, 

sandra Peterson, SVP J Global Payments and cash Management Regional Head client Management·, Americas j HSBC Bank USA 90 christiana Road New Castle, DE 19720 

302-327-2220 302-327-2128 phone. 

Fax. 

Email ~ sandra. peterson@.us. hsbc. com 

Michael B Gallagher/HBUs/HSBC 12/11/2009 10: 01 AM 

To 

charles G DelBusto/HBUS!HSBC, "Thomas W Halpin" <thomas .w.hal pin@u5.hsbc.colTl>, "sandra peterson" <sandra. peterson@us.hsbc.com> cc 

"cami llus Hughes" <camillus.p. hughes@hsbcpb.com> subject 

FW: OFAC payments 

00 we have same bodies we can lend. This backlog ;s concerning and it is in our collective interest to get this cleaned up_ 

Cam - ;·s this a blip or do we have a new staffing requirement?" 

F~~;~ g~~~~~! ~e~~~g~s ----- Sent: 12/11/2009 09:44 AM EST To: Michael Gallagher 

subj ect: OFAC Payments Michael, 

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( HSBc-aCCE 0041342. txt spoke with our OFAC team, we could use 5 or 6 peoRle for 10 days who can review payments to clear the 700 and building backlog of payments that have been held over and need to be worked to process. 

skillset is fairly straight fonvard. They would need to understand how to read a wire and be able to review the information provided by the client against 

payment information to determine if the item is a fals~ positive and can be processed. We have all of the materials printed for review and can set this up as an assembly line. 

You can reach me on 212-525-8607. 

Thanks and regards, 

camillus P Hughes 

Grp Di r-speci a1ized Campl II ! HSBC Bank USA 452 Pi fth AvenUe 

phone. 

Fax .. Email. 

212-525-8607 212 382-5961 cam; 11 us. p. hughes@hsbcpb.com 

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From; David W J BAGLEY 

Sent: Sun Aug 22 20:20:52 20 10 

To: Warrea G tEAMING 

SubJet:t: Fw: Project Topaz US Urge:::Jt Requirements 

Importance: Nonnal 

HSBC HoldingS' pic 

Registered Office: 8 Canada Squa."'e, London EH .5HQ. United Kingdom 

Rcglstered m Eogl~d number 617987 

From: ADdrew P LONG 

Sent: 2210812010 18:'51 GDT 

To: I..-ene M OORNERlHBUSlHSBC@HSBC02 

Page] of3 

Ce: D:nrid W 1 BAGLEY; Michael B GillaFIHBUSIHSBC@HSBC02;NiallSKBookerlHBUSlHSBC@HSBC02; 

Nichola.!l J TAYLORIHBUSIHSBC@HSBC02 

Subject: Re: P:'oject Topaz US Urgect Requirements 

Irene 

I wid worit:: with the rest of Group as r&quGsted. 

Because the relationships are not actually owned by ~IG. beina Of'phanS, I have sent the note to Heads of 

Intemational in the regions to forewam them and I expect to heat by tomorrow from them. 1 will try and push tt1ls 

through in the next 48 hours.. 

Andrew 

Andrew P LO~G 

Ph:m~(-«)(C)20-m1 2100 llltemlll: 7991210'0 

Enmilc!WT<='Nl"ug@lhsbe.aoln 

https:/lrelativitylRelativity.DistributedlDownload.aspx?ArtifactlD-4760279&GUI0=407... 1110112012 

// 

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Confidential - FOIA Treatment Reql ... __ E~X,;;H_m_liilT_#6 .. 7 __ .... HSBC OCC 8876104 
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Il1In." To 

DORNERlHBUSlHSSCGHSBC02 ~~ LONG" <and:~@t=bc.eom> 

Aug 2(t 201 0' 22:10 Ma" 5!:u: cc 

275155 Subjeof 

Andrew 

Nlal9 pi; BIlokes'l'HBU9/H9SC, NlctlolU J T."YLOR,+tBUSlHSBC@HSf 

GeJ!9gherlHBUS-IHSBC@HSBC02 

ProjectTopm: US urgent Requlmrnetml 

Following the Topaz meeting, I explained that the US would need some immediate 83$istance and probably an 

interim 6OJution as we cannot wait for the oulCome of iii romplex and prolOnged projad:. We need to move qUICkly 

to reduce the AML alerta and the connected KYC ISsues as it is imp~5ible to plan the required capacity unlass 

we do aoo In addition, we need 10 show prl'ogfe5S 10 Ou( Reguiator. 

We haVe completed PhasE! 1 of a review of international banks and countries and HBUS must now move quickly 

to withdraw from thoy which do not meet either rlsk or return hurdles. VVe cannot get sufficient traction across t~ 

HSBC world to exit these names in a timely fashion.We have COf"ISultad widely and achieved broad consensus 

from Product and Global banking but inevitably, for some, there are still pOCkets of dissent. usuaHy from 

regionallin-country teams. 

Attached Is a lhit of 121 international banks that we can no longer support and need to exit. For each It shows the 

country of Drigin, the country of parentage. the reason for exH and tfle direct revenue impllcatlons. The 10tal 

ravsnua estimate (or these banklJ is USD18.1 m (although for a small number of prim8l11y high risk exits this data 

is not immediately avaifable). However, you will note that of this total Angola accountsforovet USD15m and 

S!efra Leone and Belarus together close to another USD1 m. 

The rationale fer exU will be one of two broad categories: 

1. Where en independ~nt review by FEDD "'..as detem"1ined the credit or reputationa! risk is teo high, or 

2. Wh(!cre r~t1onalisatlon on the basis of commercrallty Is f9l"'..ommended fultowlng a counby by country Panel 

review compri5ing Global Banking, TSC and PCM. 

This is being managed and coordinated centrally by HBUS F~ but where there Is no GRM, PCM Executives will 

be required to write to Ihe dlents. n Is not viable for the CEO ofHBUS to ask rorctosur8 of an account In another 

country and 80, similar to Barron, I woutd be grateful for your help in getting prompt cooperation in the exit 

process. 

In the absence of a compelling business case (or retelltion. we need to start exlllng ltIese relationships next week. 

We cannot afford tf1.e Ume to negotiata each name, so (ather than HBUS asking for a closure, waiting for l"e 

pushback. and getting into mulUple debates, 1 propose thaI we \/IeW the situation dlfferently and 'oNe teb you which 

names we can no lOng&!" support and SEtt tlmelinn for ths exits 'Wt!ioh need to be accomplished in the mlEN'ant 

geographies. For hi~ risk clients we will give 30 days notioeoftermination end for all othere 60 days. lam happy 

to discuss howwo go about this but I believe that the communication oftl1e name$ to be e)dte(l and the tlmeUnes 

neads to come from GMO. 

Just to keep you in the loop. Phase 1 fOCtJses on USD PCM only but will be followed rapidly by Phase 2 as you 

.... 111 appmclate lhe urgency wfth \'U'hJch we- need to ~&O!V9 our regulatory lssuas related to KYC end AML aIMs. In 

Phase 2 there will be Trade names the exit for which may be more complICated bUt to give you a flavour or the 

problem, we seem to have 16 correspondent banks In Sudan which cannot be right. From our analysis of the 

situation askte from risk. it Is deat that the sheer volume of clients we have contributes to the current problems. 

Phase 2 of our review will therefore concentrate on revenue and for HBUS PCM alone. it appears that 

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approximately 1.200 names collectively earn less than US04.5m per yrlliili', TI1is is an average revenUB of lass 

than USD3,600 each. which In many instances, does not cover our ongoing compfiance costs. Whilst some of 

these are propositional, for hIgh rllk counb'les an<l high alart generators, we will propose a material further 

ralionalization 5>hortJy. We will need your help here too. 

Clearty, Ihe US requirements cut across business lines and It Is crucial that the Slrategies ofPCM. TSC and FIG 

are aligned to prevent L~ls srtuatiOi1 occurring In the future. 

lrer.l~ 

Irene M Dorner 

P~J.& CEO, HUS.£.&. I-l:BUs. 

H5'BCe3ttkUSA. 

Plllme, 

Em:IiI. 

212.'25-4339 

212·Y.ZS-!l213 

[attachment ·08-20 HBUS PCM Exits.xls.zip· deleted by Andrew P LONGlIBEUIHSBCj 

HSBC Bank pko may be soliCited in the course of its placement efforts for a new Issue, by investment clients of the 

firm for whom the Bank as a firm already prvyid88 olhttr Rlrvices. It rnilY equally decide to aliocale to its own proprietary boof( or ,,· .. Ith an assocfate of HSBC Group, This represents a potential conflict of IntBtest HSBC Bank 

pIc has intemalsrrangements designed to mruret Ihat the firm would give unbiased and full 3(1vlce to the 

corporate 'finance clten1 about the valuation and pricing of the offering <1$ wag aI$ internal sye.tems, controls and 

procedures to Identify aflCl manage conflicts of interest. 

HSBC Bank pJc 

Registered Office: 8 Canada Square, LondOl1 E14 5HO. United Kingdom 

Registered in Engand ~ Number 14259 

Authorised and' fflgul;:litfJ:d by the Financial Services Authority. 

----------------------

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EXCERPT 

RESULTS OF THE TRANSACTIONS REVIEW - UK GATEWAY 

March 29 2012 

This document J.s confidential and has been preparedsoJely tor use by HS8C Holdings pIc, Sullivan & Cromwell LLP and Cahill 

Ralndel LLP in accordance with DeloUle lLP's Terms of Reierence. The-finding$. should be read in the context afthe.se terms a

o$.socia1ed limitations. This document may not be used, reproduced or circulated in whole or In part to any third party without p

eon sent of DelalUe LLP. 

This document should b. read In conlunctlon with the explanatory not •• on page 71. 

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CONSOLIDATED RESULTS - TRANSACTIONS SENT VIA THE US PER SANCTIONS REG

, Reporting Category Itan Cuba' ·.·Myanmar· , Korea 

'I:, 

,Value $000 ' Value;$'OOO $'000 Value $'000 Value $'000 Value $,'000 v

(Volume) (I/glllnw), , (VolUme) (Vplume)' , (Volu"",) 

1. Identified US Nexus 19,422,415 53,932 21,836 110,231 502 188,546 

transactions (24,987) (151) (226) (435) (8) (2,882) 

2. Permissible 19,232,256 11,527 420 293 502 28,478 

Trtlnsaction& (24,651) (45) (34) (52) (8) (608) 

A. Iran/an U*lurn 18,950.651 

transactions (24.171) I,) (-) (-) (-) (-) 

8. OFAC license or other 271,252 11,475 420 139 502 25.335 3

exemption (402) (30) (34) (41) (8) (541) 

C. Blocked, rejecied or 10.353 52 154 3.143 

cancelled (78) (15) (-) (11) (-) (67) (

3. Trans.clions of Interest 190,159 42,404 21,416 109,938 160,068 

(336) (106) (192) (383) (-) (2,274) 

145,052 109 1,555 1.879 7,991 

4. Potentially Ilcensable 

(257) (29) (29) (51) H (340) 

5. Remaining 45,107 42,295 19,861 108,059 152,077 

Transactions of Interest (79) (m (163) (-) (1,934) 

._- -

No transactions santYlathe US Were idenUfiedas being SUbJ8Cfto Syrian or Iraqi sancllons. The Iran results include MU transaction!; rl'llallng to charges

thill 'A'ere processed flam the- correspondent accounts 01 two iranian banks after they warn designated as SONs. 

The lolal number of transactions sot Qui abovll' is hlgM( {hal'1 the total Ustedon Slide. 10. as there are a small number 01 trans.actlons wnlch relate to more 

sanc:tiot1s regimll'. These have been inciudedln ali applicable sanctions regimes in the lable above, 

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CORRESPONDENT ACCOUNTS BY SANCTIONS REGIME 

The lable below summarises the number 01 all USD accounts and non-USD accounts, with USD Iransaction 

by the location of the account and the related sanctions regime. 

.• UK: TOlal' 

... -

WSD.alds- .. USO';;cs-· N;)n-U

USD usa transa<;ti<;ms' USD USD u. SO tran

identiffed idel1t1fied' identified, . 'identi

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---

Cuba 

Iran 111 111 81 21 191 

North Korea. 

Sud." 18

1 

13

1 °1 °1 

18

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Syria 

Tot.1 381 311 81 21 4&1 

There are four additional accounts held by the Bank in another jurisdiction, subject to the Sudanese sanction

regime, which are not included in the table above. The names of these accounts cannot currently be disclose

however the SWIFT transactions relating to these accounts are included within this document. 

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PAYMENTS RESULTS -IRANIAN TRANSACTIONS SENT VIA THE US BY YEAR 

900 I 

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700 

600 

1500 

0400 

.!: i 3DO 

Iran 

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US Nexus 

Remainl" 101 

Nola: Country, city and porlseat'ch l&rms have only bef!.n npplied acroS$- the period June 1 2003 to December 31 2004. Country, cify and port search l

make up apptoXrmalely 25% by volume (11 % by value) o! Identified US Nexus transactions. 

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PAYMENT PROCESSING - CONSOLIDATED RESULTS 

Reporting Catogo,iy, Total 

VaIUO$',OOO , ' Value $'oqo' , 

" : .. ,' " (Voltlme), (Volume) 

1. Payment with sanctioned element 325,371 306,107 

disclosed!o Ihe US (1,395) (1.257) 

2. Cover payment - sanctioned element 3,920,304 3,553,661 

not disclosed to the US (22,339) (19,698) 

3. Serial paymenl- sanctioned elemenl 1,189,753 1,183,983 

not disclosed to the US (659) (569) 

4, Cancelled and re·submitted lNIthout 8,085 2,531 

sanctioned Eljel'Tl3nt present in the (128) (60) 

message to the US 

47,8511 38,366 

5. Other (683) (482) 

5,491,371 5,084,648 

Total (25,204) (22,066) 

, , 

COlltk/en\JaJ- FOI/VFQfL HDqullsted 

Trans'actlons ot Potentially Rem

Inlero.t, licensable Trans

In

": , 

, S'ooq, "\(ali

(Volume), ,,(Volume) , (Vo

19,264 16,888 

(138) (46) 

366,643 132,258 

(2,641) (590) 

5,770 16 

(90) (3) 

5,554 614 

(68) 122) 

9,492 4,061 

(201) (43) 

406,723 153,837 

(3,138) (704) 

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GeL 1150047 • Gompllance with sanctions (281JuIl2005) 

;l.antmtaC F.t.inc;.is I Pc!U.rgve$!! lerww: 1:am'ftX • 

. tntrtJdl.Jdio:l 

Grtlup 5bndard~ Manual {GSM) S.S tequlresthrt Old Gmup Officu O:lIhptr with aU JntH:emrrlsnl 'Mld oim21~t1on and wlth.an 

econon'ilc ~d t:ra.C~ nr.c:tiorES to the extcnt. ZlppUable PW"SUatlt tl:l lDal bws. iln.d regulatiOn$.. • 

lit addition. 'however, Group. COmplibl'\a: (GHQ CMP} ~ rr:qu~ by the »bDV!; rettlon. ortlle GSM tQ f:s:sue II drwlar i!lcMslng an re1e:wnt 

Group Offia5 when 401'( iegisllrtiort or sanctions have E:l1ra-ter;n:crial df~ 

OfACSbllc!iOns 

The Oftke or Foreign Assets: Control (OfAC) ls 1!. deparonentafthe US Department: o,(theTT"9$!;II')',Nlt! Is ~onslble fortb~ 

iu:1mlnlstratlon and ="Iforcement Dr ec;o~lc;md tr.!de sanctions: ~ Do, us foreign poliC1. ilu:se sandlonstarget (ardon eaunbi~ . 

suspe::tcd terrorists, drug$" mmdo::en and tho-se eJlga-ged In the proUfcratl'On ofw.eapons: or mlSS d~on. 

The: OfAC s.snct:ions OlnSist of b~ ccuntry-le:vel' gnctions (lndudlllQ sam:tlorLS' against OJ~I lnIn. Z1rntiabwe:f North Kom .. MyiI'runi!or and 

Sudan) i!$' well as $Jnctklns Ilgalnst Indlvldtnls (Speda-lly Deslona.ted NJltionals (SDNs»).. 'lhen! iII~ v;mations in -=:adl of ttJe mtub::S 

est3bfishirlg- the. t:J;U'I~el' santtlons ruth tNt there b na ls(I.ifQI'TQ approach (-e.g:. th.e lra:n s:a.ru:t:Jons: conbJo..a" ~t:fon whIch ~ not 

applicable to'ottu:.r cc~try .. leYeI' sanctlCM). . 

'Itt:vk~po!lr;y 

Wlth lrnmediilte.effed:, IU Gtl)UP Offices (lnpudJng thO$"~ Offices 1I'u:nrpot1J.te:d cr:opc:r.rttqg o1.lbddc 1:h1! I,JS) mw.t rduse to; 

pzrt:fdpate.ln any tnmnctlon.s: aDd a.:t1vltJd'. .. 'Or m;tJce any pilY1"M:nts denomina.ted In usc, WbidJ,. If ame.d out by a US 

pCISQI'\c WQut.d be pn;:lhlbl~ ,?y any GFACsandiDrI.$ (except f.or the spedfic. -U-tarn e"&:tt'r'Ipt:icn' rdiltlng to Irani.," pnct100s 

enscussed bclow). 

When ro.'"l5Jderlng tr.snsactlons for CDmpbnce wittllf1ese sanc:tlons, Ule tnma.ctIon as a wh~ shDuld be CDnSI~. Ihls r"eqtl!res that 

wh~.any ~n:sattlons lnvot...e the USf! til ~ ~ymenl::s (Mn02s) lmy nnkd message (e.g, lin HTl03) shl)u1d be: cOQSldtre.d tDgether 

with the cover payment. 

GfiQ eM? ~lrudy m!>lonlns II dattlbllSl!, whtc:h tndud'ts del:alls of IIlI bndlonn.ffed:lng Group Cfflo:s.lndutflng the OfAC sanctionS.. A 

Rnk to the- prindp31 prtMslons of the C1IlJ'C1t OFAC ctIUCltJy s:~nd;iOtt$1:; here 

In ,addition, further ad~ instnJd:l:Ins Uld g1JIa~ wltt"l reoard to the prindp;1l provisions of the OFAC san.~o~ 'WUI be 1s:$U~ by GHQ 

DiP 1:0 IO!:!.I CompllarJl:;~ functions to toIndde wJth t:hls Get to enable those loaf Compfrnnc:e fund:loru. to ptrNide advice. with n;9~ to. 

the pn.dic:al ~ppUOl!:Jon gfthls Get. " 

Group omc.es should, hl:Jwever .. ensure tl1a:t they mnttnue to u,dBt~ rcJewpt PI1l-~ures in response m d~ Df any future ouncndments. 

Qi ilId::fit:icn$' ttl appijl;abJe s?u'1d:ll)ns:r lnduClIng OFAC s:andions, lSS1;led by QiQ CMP In ~~rtfana: wIth GSM S.li. The guidance In ttl[$' GO.. 

shot¥ ,,!so be read in cgnjun.d:io"!. with GQ...[).qOQ7.11 US OfAC SMCtlons. WhJdl dl~tsl "mon~ gthtT things. hQW OfAC nnttions ~n 

"pp~ to 1JS dtm:ns CT·pennanent res\dent alIens, even wt-cen outside the Us. 

n ~ ar:kntJw1e.d.gr:..d th .. tCClmpUance wIth sandions wIth f!%triI-tenit:criaJ rad1., hu::lu-ding OFAC .s:andlons:. tnlty be.l:Inlllw1'UI 

undc;- lor;ai laws. Whe;e compliance. with tbis: GCl wowc resutt hrlll bn2.d!o of 10011 taw or..regula;tiDn or e:xistIDg bindlng 

contri\ctt:ral j1rr:aDg~etrts, the posiUan :ohculd be c.onddcred in r,..ison wJth loCil.l CompDaAI;.C" and Lega[ fundtons and GH'Q 

CMP. Any d~tr(;ltl from the. terms of this GCl reqtlires:" GHQ.. CMP concu.rn:nce... 

Ir.mtan ~"aion$ . 

The OFAC sa.nctI,ons aoppUcable to Inn lire. unIque. 1n lndudlng tll.; spedflt:"exemp~on ror paymentstl'r.!!lt quaUfy' as l "U-turn paytnent'. I.J. 

turn ~tme:nts am be ~rlsetl as. being .co;v~ payments lnvolvlnu Iran that are: by order-of a thin:!: c:ountry b",nk:: for payment to 

anoth~ thin::! Quntry bank - prollldd ttlM. tllcy do nQt cRrt:ct:Iy cr.edlt or debJt an nnloo Ao::ount'. Jr1.rdan Ac:tovntS" are. defmed as 

'ao:ounts of perscmS' lD"O~ in lnn W" th~ Gov.emment of lriul cootah'led on the: bco~ or. United Sbit1:S depository ln$t!tutlon'. In tnl" 

c:onte:d:, a thlnf tcuniry b2l.n~ m~ be non-u5 '2Ind ncn·IAIl!i!!IR a'nd an lr.Jf'Jt~ At:.cDunt penentlly IhciYOcs iln ilc:::ount for iii. mm·lrani&f'J 

suhSiObry in whlm ~ lnt.nla.n CC1tn:p~y hU]I: 30 per cent Dr gru;ter lnttrct. A more cot'niJlm 1:Itflnltlcn Is contained in the" gtJijjance to 

For 

~-~-~ 

the purp.os:es of thls SCL, 'lranliU, Payments" meMl PBymeflts made tg. C1' IrGro ~ 8~nt 

.' 

maIntained by a~ lrintan penon (whim 

lndudes. any Iranlan. nzstirma.l, any lJ'u:DvfduaI resident In, Dr'"l!ntlty doIng. buslnf55 in..lr.l~ or·a.ny tntlty lnr;orptlratw Of IOmltd In llilf'J and 

;sub.sldiari"..s Dr any Irani8l'l P.Ill:tty}~ ~ ~ lranlan ~oYernment body (1nd:udlng -gtrtemll\efltit1-owne:cl entitles) whether dIlutfy or indirectly. 

Permanent Subcommitt~ on Investi ations 

EXHIBIT #70a HSBC OCC 3407560 

HSBC OCC 3407561 
902 


76061.328

In view, llcw~r, of the 'ttDTlplexttt or the. relevant prtI"o'h:lans governing the. ~ 5andJons ij"Dd the 'U-tarn exe.nipt1on'~ an Iranian 

Payments denomlrmted Ire USC ~ with effect from lSEPOS, ~ iWY eD:'1h: • .d:itle nctifi~ by HaM:: DUB, be ro'Uted thrtIugb. H.8ME DUB .. 

H$5C Middle Ezst H<lIlagtment Orncef DUbal Irmmei: Oty, POBoX 66, DUba.l; UAE,. Tel. No. l' 1971] (4) 390 4722, Which will ~bflsh :a 

ded(Qt~ team b) ~cre.t:n proposed lfi,nlan ~ents ror Compn~n~" with the lr.mlatl R;1'ld:1Dn$ and pro~ c:om~nt paymfnts: vlilI 

dedio:ted ~ndent 21o::ctm~ This. win requin Group Offices t:h2lt wlsh to con\:l.ntle: to I'nu::c Iranian Payml!l'O to" open usn ao:otmts 

wlth HEME PUB.. A!I requms to Gptn ;a:ounl:sshoutd be sent for the: 3tte~tlDn or Aian Kerr or Ahsan. Raza, oeM H6ME.Ii5Kf DUB will 

Issue more details to Group OffIces 'as to bow ~merrt:s'S.~ou!d be proc~ Wdtl immedlate: e!t'ed:,- and prlor to lSEPOSI an ~ 

payments must be 'elem~ to Rod °f\OXlor, Ttl. no. + [44J (0) "1IJ7 991361>4 {<maIl Rod I1OXLEY/HBSJ/H5IlC),.oo may only be 

processed DtlUccnrJnn2ltiao has: b~ gl'rol that the payment lS.compliant\.lOderthe "ll-tlrn {orOtb~ ~Jon'. 

Otfl,e; CUld:}ons with e:rt1ll-tr;rrltQrliIf etfc:t;t 

GHQ c:M.P ma1n!:alns ~ full and c:urrent Il::st or sand:Jons that affect Group Ol'fbs. 11lrs list k Zlcc:esslb!e through 1:h.e. GroUp CornpIia:nCe 

'!nmnet: ~ this Unk til" vii local tomprr.ma: furlaions.. ' 

Although c::rbJn sanllions onty apply 1o~, UN nn~fl$ should be \'I'ewed as h(!vmg GrwP-rrlde. appIk:llHOA....Sarctt1ans I~ed by th~ 

Europ~n l,fnlon b~ EU ~ (IndlvldUJls WhQ are natlc~a~ of member mtes and tDmpanle; inQ;lrpo~t~ Dr domicih:d 10 member 

s~.G) S1lo.b<!1ty as v.eII as thOse persons lo~ted or operating In member s::ates:~ Grw.p Offic:s, shou\.d' use WOlf or i!t:ny aJtem~ttve: 

~jJjJrolJe.d systems to load any i!IdditlOr'Jal name:s O)vered by lOw or a!:htr o:tra·tmttD~ sancrtons :appIiCAtll! to O'1ose c~ 

Im'plc:mentation 

l± is n::cognlseCltha.tthe use orilutomao::d payment roeerJnQ sys:tems'k n~~fortne eff~Jdent:ifk:aijan Df payments poterlUalIy 

subj~ tc rr..Ievanl: s:am::lions:. Inooding OFAC s:.md:JQil$,. Gel 040021 P1!ymentSaeening noquirecl at! GrnUP Otfu;e.s whose Il2lymmts Me 

ncit PTtlr;e.n;cd ttu'w!Jh one or the Group's 3 ~1on3l1P sites to ]nstall the Group''! solution WOLF b¥ 31MAAt)S. The names ~ded 

centraCly by Grvup MtssaVing Systems: wUl be $Opplemented br SlJJGOS ~ lndlSde a tun Jlst 0( OFAC country and SON names, thus 

ensuring l:tIa.t ~ C'oss·bon::lu USD pa'1'menI:s Group-wide wm b~ pre-screened for OFAC c:omplJ:a~ Group omces should ~tlsfy 

themselves that t:ney "'rt fully ctImp~l)t with the reqwement:1 01 Go. O400Zl and ~otIfy GHQ CMP lmmedi~y of any tI~Hon. 

Where then: are lOO/ill/Stl dearing systerm (e.g. Hong Kong: w UAE), !"cleftnt i:>mc:rs must e.ns1lrI!. that WOlf Is: capable of'm.enl.ng irtl 

loa! payments c:cr1sistent wtth the nqulrements Df this SClIn order to ensure that ncon--ccmptlant payments are rejected.. ThQse -Group 

Offloes with Itu:al USC dearing systmts mU:St con.Gnn to GHQ CMF- by lHOV05 that they ,Brr. s:crecr.lnglllIlloc::aI USC paymenti_ 

10 z!ljdllionf Group Offices sluauid take lit le.as:I: the r~!l0"0'!'in2.stepS where relevant: 

• ~ that they .ha-ve adequate proc~e:.s to "ldentlfi proposed tnt\Si!lctions and activities: o~ than payments whkh m~ bl:' 

prolUblU::::! by CFAC sand:Jons b~fo~ the Prtlposed b"!n:sactlons a-re: enterullDtD.. 1hi£ would Indude fn:..counby book transfers ~ef t1SO 

aa:ounts. 'Thls may require the \:SS1r.!Iru:;e or statT cirCJt.ars~ a~d'metlts to des$:.1nStruc:tion books and loeal ~u~ manua~ 

.• Once'the SON ~nd c:cuntry names (joN: leaded. ktto WOlF tt ls llkely that thl! number of payments identlned' a5 potenttai ma.td1e:s ~ the: 

OFAC sanctions wIll ino'use. Group OfrJtC:S need to ~nsure tNt they an: svffideptly reso~d to CQnslder anY"p0t~tlal matches: tor 

• \'n\.!rt propo.st:d trnns.u:tlDn:; or p"ymC'\ts bre ldenUr~ that would ~d1 the OFAC ~nctlons* nan-US Group Offices should dedlne the 

transaction iIInd refuse: to. make any payments reh1min9 the fun.ds to the remitter. US Offices are "'Om1~Y requ)r"ed' to. block or free2.e 

paymen~ 

• Consider, In conjund:Jon with IoO!I legal ~ Compllarice runctiDnS'r whether .a..ny~entsorClddlt1ons5hQu1d be made to prcrductor 

$en'ice terms a~ co.ndltions or ¥/I1oethcrill1Y at:l-..ance notlficatfon should be gIven to C;i..!:StOtI'Ier!O to 'darlry the; bank's nght-and intention 

to rejett or a.o;zpt rel'f:vant Instroct:lClrlS or requests 

.. Where Grou$I orrlCl:S a~ in dotJ~asto whclhera transadfOIl ?t'paymentls arre~ by ilny !l2.ndSon, ~ part:ic.lt~rty OfAC sanctfo~~ 

t,t'Jey should c;::.nsuIt thdr local Compliance fUnct10n which may In tum refer m, GHQ O'I:P 

a lt Shoult:l be noted that the policy con~ln'ed In thls Go.. ~l:I'e lt ~ I;l) OFAC ~nctlons. only ~ppTles' to transactions or P<JY1TJent:s: 

deno.mlnated in usr:J, ~pt fDl" thosa: us Offi~ whid1 ;arc r:quired ~ .appl)! OFAC sanctIon's m an transaClons re~rrlIt$S Qf the 

0lIT'enC')' of dcnom1rl3tlon 

• Note the speofic a.rran~e:nts ~d in relation to payments th:at ~ght: be s:ubJect to the OfAC sanctions: applicflble; tl:) Iran. 

Yot.n.falthfuny 
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~~~tn~aodl:hllR:l:llga~In~pr-..!Ifcro&invl~a(~~on. 

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esb.tnshLnllr-.QltIIItIy-Ievti'~SUdI!hattherels",,\II'IlfQnQ~(~tk\!lr'2IlI.DIId:Icr'IseoI'ltlolD8'I~whldlblllll: 

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W~tho!llM:TpII~ 

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~plftoUSdlln:mcr-P!<'lI'1~!ll!<ltresldeztllltrlS,_rrII~oubf<lt!tl>cus. 

1t ~ .. t:bpwi¢;!~ thaotcompll;mce~I:toAnd5"""wlth ~ '"",d>, k>dllo:lrr.g OFJ\C_ndJ"""" "'''Yb''''niawtul 

undo;rlccal~-Wh~~"",Jb!nQ-,,"t!ttfll:l!;CL~dreAlltlll".:n-o.acbaflocallzw .... ~btlDnor~bkllll">l 

co"tnol:tl:r;olarnl~e:nts,.th .. ~U=",ho"Id~c;>n.dd....e.ainr .. ;,; .... wI!:h\CCII10>mplla~l:e~l.ep[fun~""'d6HQ. 

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~~thIr1r~bJN:I1\I$=--VSlrldl'!llft-hoIItnDi-td""lnIr.w.Aaw:t~~ .... ~rorll"<ll""'lrvoI"" 

sub<idlal1'in"fl'hldl""1nnla<.~ ...... ":m",,,"l;IP.I"II::isr~htt=::!ot."'..--..~ddHIlml:!~intni~b> -----

~~~rJtIhtsGO.,'lBrIIa:Ihyment:s'_prflIICJIts"",dr.tI>lII""fmII:lIlll8lJ;ZO.Bl1;~b)'&nJ'lIintanptr:all(~ .. 

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=bsJ4iariel;DfaI'l'fIranll!nentltyJ.grlllllrardMg ... ~bgdy(lr>tlod!!1g~c:dC!ltltlu)~:lIrutJl'orln!llre<:tlt. 

lnvbr.~.a(tl>cW<l1pk>:ttyctthr.reII:onl:~g~W~"~ilr:rdtM\J.ti.Im~."alnlnl/r;!l 

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HS!ICKlddlt.fllt/f;lt>a\l!ltWlt"OtIkt,.OutaIIntt:m!::t.Qy,pceu.:~~"~Td.I'/O.,,"~1(4lJ!I/).(722.whId\wlDi:m~. 

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~mo:st.be.refemdb:lR:04Madt'f.TI!i..No.-+[441[O)"H11!i!l1.)6&4(1:ImIII1Iod1'lO~,-'mrrantrt... 

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Pagelof2 

ht!p:Jlgroup.ghq.hsbclgroup/homellsl7ByRoI7UKCM1GDJSB031803PM07092008?Open. 0311!J2010 

Confidential - FOlA Treatm(!nt Requested by HSBC N. America Holdings; Inc. . HSB03793202 

Confidentlai " FOIA Treatment Requested by HSBC Bank, USA, NA. HSBC OCC 3407560 
904 


76061.330

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GCL050047 

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Page 2 of2 

http://group.gliq.bsbclgroUj>lhome.ns!7ByRefflJKCM7GDJSB031803PM070920Q8?0pen 03/1112010 

() 

Confidential· FOIA Treatment Requested by HSBC N. America Holdings, Inc. HSB03793203 

r:nnfir(ont1~I_l=nla T~~tmcnt Rpnl1~~tprl hv HF;.BC R:::mk 11~A N A HSBC OCC'3407561 
905 


76061.331

Gel 050011 • US DQII~r Paym&nt& (06/Apr/2006) 

Il1trolfuctlon 

Gel 050047 "Compliance with SilIl1ctio!\S' Teit~rl5ted Group policy wlth regard to Compliance with local and In.ternational sanctlOM by Group 

otnce:s, (nerudIng SlInctions i$$tI.ed by the US Om'i! 01 Foreign Ass~t5 Control (OfAC). Group PoHcy arising 'rom the above Gel prohibIts 

any Group Office trom lnitlatlng MV payment denominated ill US Ootlus (USO) that would constItute a breach of aJ\y of the OfAC 

sanctloos. 

us re.gulatory authorities: cnntJnue to focuS' closely upon Compliance with OfAC sanctions: py US bankS', particularly where th~y act as 

correspondent banks raf" non·US banks, .. nd by foreign bar'lk.s wlth US operatlol1$. 

Payment Methodology 

USO payments made an behalf of underlYh'lQ customefS (an be made either as caver p"yments (MTl03 + linked MT202) tlr as ,erial 

payments; (two MTI03s). AA lIIustr"tlon of both payment types, using the same un4erlylng transaction, Is shown In Appendfx 1, Wflere 

CQver payments ;,re used, the payment message pUsfrtg vI" the us ~orrespond'ent (MT202) mlllce$ no mention or the under1y1ng remitt~r 

Q-r beneffdlJrv. ThIS Is contained in the lin-ked MTlO) mes:'''ge whIch panes out.side USA. 

Policy 

1. With. crfect from )OAPR06 aU USD payments Jnlttated by 11 Group Office and rtmltted Yla HeUS, or "ny other US correspondent, must 

be made 1I$ serli.'ll payments. 

2. The requlre'mel1t to make payments as serla[ payments does not vary th!: provisions of GCl 0.S0Q471n that cnly USD paymel1ts 

permltterf by OFAC may be Initiated or plocessed by 1I Group Otrice. 

3. The $bove requkemellts <10 not restrict the use or cov!:r pi>yments (Mn02) for genuIne bank~tQ-baok paymei'lt:$, for example In retation 

to foreign EXcJnmQe settlements.. 

4. Untll further notlOcatlon, U~turn payments, under the Iran country OFAC Sl)nctfons, should also conUnue to bi! made a$' cover payml!nts 

(MTl03 + Hnked MT202) as serial payments cannot Qualify as U-turn payments. In accordance with GCL OSO!l47, all U-tum paymeJ\ts 

must continue to be mDde via HBME OUB. Where U~tum payments are made, f~ld 72 of the Swlrt payment message must be completed 

so as to make retC'renc.e tE1 MY Unked Mn03. 

5. By 31DEC05 HBUS will require third-party ba.nks tE1 which HBUS provIde USC correspondent banking $ervl,es to make ..,n payments 

denornlnnted in USC and remItted waliOOS as serial payments. 

6. Ar'ly dispensations from the requkements of thfs Gel reQ1.dre appl'ovaJ by GHQ CMP wIth a!Jreement (tom HBUS CMP wherE relevant. 

GulcJalince 

Detalied guidance Is to be issued via GHQ CMPf CJnd any ~nquirie$ with regard' to the Implementation of tl'liS: Gel or relating to Go. 

050047 should be referred to local Compliance OUlcers. who can, ",5 reqtJfred~ seel( further darlnc.,Uon from GHQ CHP. 

Yours (aithfully 

Stephen I( Green 

Group Chief cx-ecLltiVe 

HSBC acc 3407587 

Permanent Subcommittee on Investigations 

EXHffiIT#70b 
906 


76061.332

GCL060011 

GeL 050011 pUS DOllar·pay;;,~·nt8·{ii6iApr/2006) 

l~IIIlLlllJ.<: f"'''''''''' ! Po$V'I~" t Eopo......r 1 m~' x 

Gel fI5O(I41 'COIIIpIi<antll wl:h SMCLiam.'relu<ated GrQUp Pelley with te<;I~n::IlD CMlpl!flltll with kite! lind Intl:tNtloo~ IOIInr:tJons by GO;IL'" 

OI'nCI!lI, Indu(IIrIg $~fletlM$/'o:SUe(l by tI'e us om~ 01 fundOro A<.ds C<I'I1lro! (OfAC). Group l'9I!cy a.H:in.go frem ttu. "b<IIIe GCLproNhits 

any GrCI\IP O/ltcl! from InIl;WJnl/"'Y poyment lIenamlnated;" US DoHa .. [USO) th~t wllUld constitute" I)re~ or <lny of Ihe OFAC 

us reQul3!OI'\" aulJlQril:les rnnllnue to fl>.;us doselyupOII Compllan<>lWlUl OfAC SI>"ct!",,~ Ify US ~n\cl:, par1!aJlal'ly """er.: Uley ~d: ~$ 

alfTt£loMer>t bankt I<Ir n",,-US bMb, anD by rtlndQn bMb wllh \IS Ilj)!lntlcll$. 

payment Heth"dol,,!IY 

USD p!ly_~ made "" t>el\fllf ofUYl6trlYfn-c CIIstMlelsafl b~ made elth ...... <:OYer paymtnls ("'TlQ3 + Ilnktd HT2(2) or- a$ ffrlll 

payments (two HTlQls) ....... lflustratiO)n 0( bath paVrTm\t type$, UAtg Iheume un!!Crlyl~g tl"lMadlon, Is shown In Appen.db: L WOOe 

OlVer poIymetlt5 are used, th.e paymellt mesuoe pj!1sf"ll v\II tI'e US toonq><lndent ,/>IUlJl) m~kQ no m..,tlofJ 0( thl:! lJ1Io'e~n~ remittir 

o<l>enefldllfY.ThIsI!:OIi1ta-loe<llott1el!'*edl1TlOlme~nge"'hlchli'8"'"Se\lti;ldelJS"" 

"""q 

1. With elfe-r:t f.rum 30APII06 ~I! USD P"Iymmt$ !nlllottQ by .. Group 000;1' ",d ,emitted '0'11 HallS, '" ~ny ctflerUS" ~OI'TeSllcndent, pnurt 

~""def$5M»Ip"Y~'" 

2. Th~ requlrem<:r.t to !J\iIke ~ay",~ts 1$ $erW P"\'fIIO!IIt.: does not wry 1M ,,","'~CII:S I>fGCL()S00<l71n that cnIy USD paYIl\e'ntl; 

P'!f1'!1ltted by OfAC may be 1o'1ltlat(!d orpro~ed bye ~orrro;l'. 

3. The ab....e 'eqIIlrements do nl>l: restrict the lISe 01 ~ver 1I"11 ...... nts (",n02) IQr I1rrN"'u~ ~nk-t"-b~1It 1I1'f1'M(1t5, /Qr example In relation 

to FlITelgrl bLb8t>gft IOlltlemerrts. 

'I, ~ /u1'll'l~notJrratlon, lJ-turnpayn>ef\tl;.umkrthelr;,n(lIUntry DfAC ~I\i:!!on$, Jt\OIJI<fatr.o eonIDlueII> ""- ..,a6e,,~ ~P")'1'!'tnts 

(MT103 ... Hoked M'T202) n stria! p.'f""'nl~ <IIrllte!; qualify U U-turn p~ytmT\tS. In ~ccn""",,~ ootth Go. 0SQU41, all U-I1I'" P"I'f'I'leAts 

mllSt ""ntm..e to b.!. rna<l!! "'. HaME OUB. When. U-turn PlI,.."e~t$ ~~ mode, Field n of tho! Swill Pilyment ~SSlg" m .... t be cQlI1pleted 

so~slomaker"'~l>tI!tuenynntctlMTI03. 

5. llV 3tDcCD!i-HBUS wll! ~"" u.lrd-party blJti<s te wliidl. HBUS ,,",vide- USD tortHpondeN ~kln\l ~trvlo;I'~to ma~~ all P"IytII!'na 

(knC<!'lnat!<flnUSD."dremlttedYl~HBUSnse'JaIPlymet\t ... 

6. My lIi~peiWItj()tJS ft'MI. the requlrem<:l'lt:.- cfthls l:io. reQWe<ll'Pl'OVlII hy l:iftQ CM" will> ~9reenleAt Ir"", HilUS 011' wl\elt rdcv8flt. 

Detal!elllluidantl!;5 tc be IS'lIe<fllla GHq CMP,>1Ind allY etlQujrj611'11tll. re~ard to~e Imple......-.t.ltlQll. oHhis Get. Ol ntlal:lnll to l:io. 

050047 should be referred to loea! COmpIlMa! OIHW"S,"h.a can, nfl!QlJirfll. leek furth~r di>l1n'8tlD<lI",,,, GHCI CM>'. 

5teoh~n K Green 

Gr<>UI'ChleI'E><~t;ve 

Page I of I 

http://group.ghq.hsbc/group!home.nsflTlyRetiUKCM7GF AU8083122AM07l12008?Dpen 03/11120 I 0 

::onfidential - FOIA Treatment Requested by HSBC N. America Holdings, Inc. HSB03793229 

::onfidential - FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC acc 3407587 
907 


76061.333

GCL 060041 - US OFAC Sanctions against Iran - U-Turn Exemption (2510cU2006) 

l..;lngll!l<;O; F(.oo.cAis J Portuguele I Ellpanol! ~~,rll:t 

B,u;.JqlI"O\lnd 

The Office of Foreign Assets Control (OFAC) of the US Oep&rtment of the Treasury is -rl!.Sponslble for th!! administration and enf-orcement 

of .economic and ~O'e s~ctlQns tl;,sed on US foreign policy. These 53nctJons target $f!(-ofied cotlntrfes( suspected terrorists, drugs 

t~fficker$ i!IIl'ld those engaged In the prol~(erat10n CrWI!';)pons af mass destrLIction~ 

The"OFAC $<)I\ct!ons {ndude cOl1ntry-l'eve{ :53rll:tions 2!gillinst ill numb-er of coontries fndl.ldlng lra~. The regulatIons contaIn an exemption to 

the: sanctions unique to [rans the. 5D~called ''i.Hum exemption"" ror payments that qlr.1l1fy CIS: a 'U~tum payment". U turn payments·can be 

summarl5l!d as beln!:,! 'aNer payments invotving Iran that are by ord'eror fI, third country bank for payment ttt ,mother third country bal'llt • 

provided that they do not dll"'t'ctjY credit or debit iln I.rimlan Accoont' (85 defined tn th~ regulations). This U~turn ~emptlon Is described 

fulfy In GCL 050047 (Compliance with S~nctlons). 

RevIsed policy 

With ImmeffiaJe (ffed 81! Group omc:~ (JndUdlng offices incorpan!lted Dr oporntlnQ' outside the US) rna-y no longer USe the U-turn 

exemllUon or (he OFAC sar.lI:tions- agalnst Iran. All oth.er requiremenu ot Get 050047 re:milllio In force. 

Valld U~tul"l'l payments can continue to be m."de In relation to binding contractual commitments (i.e. that annat be i!lmended or 

terrnfnated) tt'U~t pre-clat.e: this Get, provided that these payments are precessed through HBME as per"GCL 0500'17. Whe.re a U-tUI"l'l 

payment is made It must be through the serfa! methOd pl.lr'Wa.nt to GeL 060011 (US Dollar Payments). 

Also refer to related GCls; GCl 0400]4 (US OFAC Sanctions - Appliability to US Otlzen$t whe:revr:r Jocated, and otller US Person!:) and 

Gel 060011, where appropriate. 

Your.; farthfully 

o H Hoclg~tnson 

Group Chief Op~ratIng Omcer 

HSBC DCC 3407606 

Permanent Subco.mmittee on lnvesti atio.oS 

EXHIBIT #70c 
908 


76061.334

.J 

( 

GCL060041 

B;lIcli;!f"W<ld 

1'M Offict. ofl'orelgn A:io&otsContrlll(OFAqoftM 1.JS000000rtmenttll'ttII!TrPsury~ruponslbk for the ad~"," ande:ntcrt:em!l'll: 

of ~""1IQmIC; and" tno4 DOIctlons b~SI&d Ill'! \IS farelllO pttlh;'I. Th~e $an;I:lan~ ta<;let $pcdiltd o:>Unlrlu, swpected. tem!l'lm, dn.Jgs 

trlm~ a.>d ltIa't tng.o~ In the proI\l"tnltiM "rw~apo"l of man de:slnJd.;"". 

"Tbt"QfIlC AflctIQn$Ifl(lud~ o;cufIb'V-Ievef unctions agam$l: ~ "umber of count.ier Indudlng 11"111'1. Th2 r»gulallons cant3ln ~fl ~e'l'pUDtI t'O 

th' n~CIM UI'ilqUll 10 Inon, tho! Il)-ClIno.l""\Hum =ptl~n-f<>r I'~ym.enl.f; that qI,nInfy 3$ a 'U-Mn P<lytM'Rt' .. U tum payrnellt5 oon be. 

SUlMllrtof<f U blllng 'ccvw payments ItlVIIItII ..... II"" that lire by 'lrder-at ~ tllird D>\Jntry blink for I")'men.t tII~.". thin! o;:ourolry Ilank .. 

pnlVld.d thIIttne'Y dn not CIlrectly a-edlt or dd;tjt '" lnfll<ln .o.o::wnt' (a~ de/llle.d In the r~QUllItlCI\Sl. ThIs U-turn ~mptlvn Is de:s:;l\bed 

l\IlIy In Gel 050047 (Cotn.,~ar><:e..nn Sanctlgns). 

RCIIIs.odpOlicy 

W1tll~ III G",upOlliCM!lndu.dI"l10m.ui"(;"rpor1ItedQtOP'OflltlnlltlllUJdetIH!USjm~yn",longtrU5"tN=U,ru,.,.. 

nemptlon of Ll\f, OfAC. 1CII1Irtions ~1Irir>s1. lr1.n. AU other requ!=nenu 01 GCL 050047 r<.ml>lr! fn r"n:;", 

Vilnd lJ.turn P'lymertts an tOl1t1nw 10 tie ,"",tie In relH!i<>n!D bln""g o;.ntrildu~1 cnmmll.n!ei'U th. /;1031; ClImot b! ilImaKltd 01' 

tcTnl""'t~ IMt p"'-d~~ thl$ GCL.. pn:J1IiOtd thollt thea pByment$ J'" prMl!Ul'-d tl'rlc\lgh HBME S$ perGCI. D500~7, Wh= a ({-tum 

paymmt b: m.m.lt must be thrtllJ5111 the serial metMd ~ant to GO. (150011 (lIS DoII.r "~ymentt.).. 

IIlso ft:ferto rd;Nd CiCU:: Gel 040074 {US Of AI: san<:HCo~ _ "".,lIablllty to uS" lJtli!!M. whe"""" Jor;..t.:d, ~nd oUt.". US P<erJOns) arid 

GClC6!l(111,,..Io~al'P!1lprl3t~ 

OHl'!edgtm-. 

GrnlJpOllefO\>UlltfllODmcer 

Page 1 of I 

htip:Jlgroup.ghq.hsbc!groupihome.nsfIByRef/UKCM7GEKAX033659PM071 02008?Open Oln 1120 10 

Confidential. FDIA Treatment Requested by HSBC N. America Holdings, Inc. HSB0379324B 

Confidential. FDIA Treatment Requested by HSBC Bank, USA, N.A. HSBC DCC 3407606 
909 


76061.335

Group> News Desk> Group Circular letters> GCl 070049 

GCl 070049 - Sanctions Against Iran (24/SepI2007) 

Language: Francais I Portuguese! Espana!] t:G:I:P)t 

Background 

Gels 050047 end 060041 referred to compliance with economic and 

trade sanctions to the extent applicable pursuant to local laws and 

regulations 8r")d the applicatlon of certain Group mInImum required 

standerds in relation tel transactions end payments denominsted in US 

dollars. These GeLs remain In fun force and effect. 

Policy 

Reflecting the current international and political situation Bnd the 

potential risk of the inadverte('lt involvement of Group companies in 

transactions, payments or actlv!tles linked to the proliferation of 

weapons of mass destruction (WMD) and nUcleElf proliferation a decision 

has been taken to suspend all services and business with Iranian banks, 

irrespective of OJrrency to the e)(tent and as detailed below. 

Relationships with IiBni~n Banks 

.t.1! account reiatlonS[HPS with Iranian Banks must be closed as soon 8S 

possible after giving cny period of notice required by iocal law or 

regulation and which Ii 5ufAcient to allow .an orderly run down of a,:tlvlty 

(for example uncleared items), find the run-off of Elny outstanding 

exposures. In tI;")y event such accounts must be closed bV 30NOV07. 

Similarly, any remaining facilities extended to Iranian Banks and SWIFT 

BKE arrangements should be cancelled or withdrawn as soon as possible 

and In any event by 30NOV07. 

Where local law or the need to manage exit In an orderly manner will 

require accounts/SWIFT KEYS to. be maintaIned beyond 30NOV07 

specific dispensatior) must be obtained from GHQ CMP 

Pending closure of BCCouots and cancel\8tion of SWIFT BKEs any 

payments debited to accounts held for Iranian Banks, regarci!e.::;s of 

currency, should be made as MTl03 serial paym*nts. 

Existing Facilities Ilnd Transactions 

All existing facilities and trans~ction5 where there are legally bif'ding 

commitments should continue to be honoured, Such arrangements may 

!nclude committed facllltJes (for el<:amp!e Project and Export Finance 

tacilities), eXisting yU81antees (see below) and DOOJrnent0!9ry Credits 

lssu~d, advised or confirmed. Any payments !Inked to such pre-existing 

commitments may be made, but as serial payments. 

Permanent Subcommittee on Icvestigations 

EXHffiIT#70d 

OCC-PSI-00141S30 

OCC-PSI-00141S31 
910 


76061.336

Where there ~re pre-existing guar.;!ntees Issued on a payor extand basis 

supportIng bL!siness with Iri;ln these may ex.ceptlona!!y continue to be 

e){tended provided that: 

Group Offices review O)'<3ch such guarantee and are satisfied that 

the underlying transactlo<"l is not linked to WMD or nuclear 

prol,feration. 

Each such guarantee must be reViewed on ear:h extension and 

OJstomers encouraged to negotiate alternative arrangements. 

New Business involving Iran 

No new busine$ should be entered Into in respect of any transactions 

Involving Iran, Iranian resident entities or Iranian goods subject to the 

detailed poHcy guidance issued by GTS simultaneously wlth this GeL 

Further Guidance 

Further guidance In respect of FIG relationships can be obtained from 

FIG Duba! and/or FIG London (CHent Management Gro:.Jp). For guidance 

on payments Into or out of Iranian bank;; and for aU other matters, 

contact your local Compl!ance functIon. 

Yours faithfiJ!ly 

o H Hodqkinson 

Group Chief OpE-rating Officer 
911 


76061.337

GCL070049 

GeL. 070049 • Sanctions AgaInst Iran (24/Sepl2007) 

GQ.~(l47~r>dC(;OO41'"fef'edl~C<.o!npl"""ce,.IIt1""on"'''':''',<I 

tc8d~ ;""c~""s to ttle edeN &ppilcoOloo pu, ...... "t to 10<,,1 t(!W~ eM 

'~l.uonsMdtheapplt""t'lOnotl;erta"'G,aupmb"1lmun1rOQ<jlred 

sl""d ... d!; ,n fel~t,on to t' ...... ~""tHm5 ",,<1 peym""t. d<!rIomh"ted to US 

rol!!IIS, 1hese GelS rem~ln '" f~iI rOf~" ",,<I a/f~c~ 

Ran""\.,,. thecc>n""tlnte'n"tIO<'l~I""'dpohlkelsll"~II"" •• ":lIM 

pot",,! .. 1 ".., oft"" ... ..,;.,e'\en( irwolv""'""(o/G,,",,,p~omp"''''' ," 

Lr~""lICtlor)S.p ... mlffits{)r"adM!lesllnk""tothel>"ollf"'.tlono( 

"'''''P<>r1sot<'1''''';dest,ualoo(WMD)""dru::1ellfp;041farl'l!iarladecll;lan 

h!I!I hem t.!Ic .... to 9USP"'1<1 lin serv,ces end bo"Slness .. 1m Ir~n""" b.onks, 

I-r"ooo<:("& ofQ.irre.-.:~ !OVleexmnt ""d IISd!l'l.<IiIed t>elow 

All aCCOUl"lt retM''''''''{1S wlt~ 1,....,,,,,, !Iris mU$! h" cered ... !\OOrI lIS 

!>O!"'!Ole ~n", o"ln" ""~ perlot! of ",,1100 r"'1u;rO!(j bv 10",,1 la", Of 

'''O-JIBtlon''''dwhi<h's'<Ufflc.'''ttoal'' .... M\~f~ty'U>(j''''''''of''''U.I(y 

(f",e.r:rnpi<>l#1<:le",,,,,,acms),..-.dlheru,,·o/Tor,,,,,yrut;I,,,,d,ou 

.. "p.,"'re5.1"'enYe<'''''t.\Uct\ocO:''J''t5m'''5tbedo~bv3CiNOV!l7. 

S!mllllrly,""yr""'~lnlrqf~'lotle!;e.t ..... <ledt"lf""I~e...r-hllfldSWlFT 

BKE lIrTl"lOeme<'lt~!h"'-'ldb"C""celll!d"rwll'l&lIWn6sroonasDOS$lble 

Mdln~veventby3CNOY07 

Merel"""II_ or tI'w:! ~ to m~M~ extt"' "" ord.erly m~ .. III 

reqJl~""count;jSW!HKEc\'S tot>e"'all\t~lnedbey""dJONOY07 

""acme drspo>""$t,,", mU51 be Dtltair>ed frln> GHQ OM' 

Pwldtn3clos,,,"o/~~s,,,,dc,,,,oe!btlor>of$Wlf'T(J(Ecs"n1 

p~~",,,,,t!; ~ebltoo \0 ~<:<:ount!; ,>"Id It< If"''''''' S""ks, '''Q",dlc!;s Qf 

CU"'O!'<:Y.ohouk:lhemodeMMT!03S""al~ymW>t:!; 

Mer~ thac~",e .,-e-exl!;tnl) l:Uarerot@ .... !=Jed 0(\ a >",y Of e~t""d ba~l!: 

""'DoortJn~ bu~n .... with Ir!ll'1m""" me', "",eptlOn~lIy C<I<'trr.ue 1.0 bti 

e.~""ded p'<wldcd fOBt; 

Gr""pOffk .. ,e-YII>« e-a<:h wuc:h QtJ,Man.t .... and ... es~tl.fled m~t 

I:!'oe ur>de,lylng tran5b:tlon I!; nc>t Inko>d !n ~'lMD <>r nlJCiel>l' 

E!Id'lslJ(:hal.llll'"""'teemuotberev'e .. edOrlelidlext .... :IlOl'lMcI 

o.!S\"",..-5 er'oCOUf"lI"d \() """"at!~te lIRem .. tlve M"""Qements 

No"_b .... ,"e""s!'oukjO"(>nt...-"'''lntol'''''speclor''''ytf''''_Hon~ 

'l'wcMr"]lr"",lrM'",,re&fdec\teMltlMorlrartla->Qoods<ilbj"CttoiJ'-1l 

oot"illo<! poll"" ~,dan<:e j"....w bv [ns ",m"lt"""OlIs!Y WIth this GeL 

""rl" ... ,.,.,'d.o""el<1'e5Pl'<tofFIGrel",-.".,ih~c~be"bt .. IfW~"," 

FlG Dcb!>l .... d/orFlG Lon<1on (Cllooti'tfl,'''';.'"·,,mt (j'","p),for owld;,r.ce 

onpllvments."too,-OI.!to/r,...-,J""t;..ankSllr>dfor "J!otherm~t!"'s, 

contOO!lywrl",,"ICompUen,efunctlon 

Page 2 of3 

hltp:l/group.ghq.hsboigroupnlOme.nsfIByRefIUKCM7GJLP6045523PM07142008?Opell 0610312010 

Confidential· FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 0058887 

Confidential & non-public acc information aCC-PSI-00141S30 

nr.r..PSI.nn1o<1 <;11 
912 


76061.338

From: Rod MOXLEY 

Sent: Frl Sep 23 16:57 :362005 

To: John ALLISON; John F ROOr 

Cc: Jeremy R WALKER; Jkn F EBDON 

subject: OFAC sanctlOOS 

Importance: Norrnal 

Attachments: jlT\.9ge_O,gif 

John, 

You will be aware that I em keen 10 ensure thaI implemen1ation of1he GCl 050047 is carried out both 

professionally ::Ind effICiently. To ttllS end, ! have requested my colleague Jeremy Walk.er to supply MI for 

affected USD peyments over a 10 <lay period (5 a rouM the time of 1m p!ementaUOn of the GeL and 5 

more recently), so that I can revlew end address any issues arising, 

"fnese frgures, wtuctl you may nf1(llnterestmg, are de\.al!eC! belOW: 

12109J05 1319/05 14f09fOS 1S/0greS 161{;9JOS 

Sudan 406 476 371 353 362 

Imn 161 155 165 126 172 Cuba 144 236 220 169 144 

Myanmar 31 

TOTAL 731 '.9 TIS 650 729 

To clarify, these figures coostflute the number of payment transactiOns which have been identified by 

VVoii in UK::Is being possible hits. The figure ~hOWIl willlr.c!ude both MT202 end MT1 03 messages (so 

L!'1ere is an element of double CO'Jn!illil in t'le ri;;ures. supplied, as a t,'pical .single customer lransadi-<m • .,.ifl 

have bott-t an MTi03 and a.'1 MT2'J2) and is lOr all currencies·net purely USD -on a particlllarc!ay. 

!n particular regard to tne Sudanese paymet1ts, but also to a lesser extent, Cuban and Burmese, there 

are a considerable null't>er of USD denominated transactions. The precise amount Is difficult to quantity, 

unless manual counts are made and as you will appreciate. this is difficult In a volume driven paymerrts 

enWonment. Until 28 Juty,lhe above payments would ha','e been 1iltered by Wolf and providing they did 

not i;'ltrlnge UN! EU sanctbr.s or ie-lOris! paramelelS, they were paid or, the basis that HBEU were not 

affect~ directly by OFAC s<inctlons, 

SinC",Q filA l<1RIlar'I;'R l"If 1M GeL, it hR'"; ~n m~rtA ck:mr that lIS intl;!r<\.<;:B. S'\r~ of J'\."I.flUMI!n! ilTlfll'rt:IOt:ll. 

and we should do nothing. when processing payment transactions. which would /eave H6US in a 

Vlllnl'!!1:Ibl", position. T I1e iSRlJeS surrounding lrnn ha~ owrshadD\l,lec! other OFAC payments recenlly , 

howe','er, I can advise Ihet we have no1so fat physeaUy returned aoy USD payments i(l'VOI'JinlJ Sudan, 

Cuba or Bur!'na . I feel we now need to look far more closely at these payments to ensure compliance 

withtheGCl. 

Permanent Subcommittee on Investi ations 

Confidential- FOIA Treatment Request L._..:iE:;:;XH~I:.:B~I:.:T~#;.7:.:1~a~_ ... HSBC acc 8877213 
913 


76061.339

The choice at preseni:, from my ...,i!!'Wpoint, with regard to epplicat.'on of the Gel in rel>pect of Lllese 

payments is this: 

1, We continue to process Ihe USDtransactions but ensure Iflattl'\e meltiod of routing oflhe 

payments is such that they are not frozen in US. This will involve intelligent usage ofthe routing system 

but may perpetuate similar scenarios to those erlGOUntafBd WIth Iran (customer im.1ructions saying Do not 

mention SUdan orrouting which does not make it apparent that thase arB Sudanese payments), This 

would create the exact scenarios muslrated in Compliance's guidqnc8 exampies ra Sudan i.e the payment 

is prohibited under the sanction but is rmde because it pays a USD account outside the US . 

2. We appty srrlctly 1he wording of tl'Ie GCL .. ~ ... rGfusa to participata !n any :re.nsactions and 

activities. or m<lke any payments denominated in usn, which, ifcafried out by a US person. would be 

prohibited by any OFAC l>anctians .. ~ and return the payments unprocessed 

My instinct is to relum aU such USD payments but, before doina 50,1 would like confirmation that there 

shOLJld not be B cooHng off period when we continue 10 make such payments, pending the Relationship 

Managers' advi c e 10 their custormrbase. Additionally, I want to be sure that I am correct in lflinking 

tna! we should be ~ajopting~ OFAC sanctions in ltiese situations and nOi merely·in1erpreting~ the OFAC 

sanctions so that our US colleagues' position is notcornpromised. It is perhaps also worth bearing in mind 

Lhat OFAC sancllons are oct limited to USD 21M H we made a EU;>J payrnent t~ ClI.lbank.!n favour of 

Sudan, we s~ould lIKel'/lse be cancelling such payrrents. 

I hllVP. spoken in ;:! n!lrntJo>.r of RMs ff!r..P.l"\tly ;mc1, r'i]htJy or wmngly, thf!rE i<; !ltt!f') or 0:\ know'lRcl{jp. nf the 

practicaJ implications of the GeL The BPM is yet to be updated and so it Il3s 001 c.rOSS€d the fine Qf 

vision of many RMs. This does mean that, if we refuse to process OFAC related USD payments forfflwilh, 

the first time the customer will be aware will be when his payment rejects at our V'IoIf Queue, This could 

cause considerable customer servicing Issues. parllcular1y if It !nvol'iSS large cc.rpora'es or \'alued pr1vate 

cusbmers. 

To reiterate my stance above,! am keen to ensure that this is progressed proressiona!ly, and with 

minimum risk:, but I am acutely aware that wl1icnovar IDllte ! taKe may have other repsrcussiolls, albeit 

IJI'lwiltingly, I feel Ihat David Bagley Should be made aware of this situation but before adllising him 

directly lihought n scnsibla to involve YQursolves, so lOOt practical n;rncdial action can be drawn up_ 

; ..... oiJld be grateful for your Input, p€ffia:ps a shOrt ~etlng to pre-vent protracted emall correspondence 

could be arranged, bu11 will await your vl;r.vs, 

Reijar~s 

Roo 

Confidential - FOIA Treatment Requested by HSBC Bank, USA, NA HSBC DCC 8877214 
914 


76061.340

HSBCID 

INFORM_,TION' REQUESTED IN CONNECTION WITH: (NORTH KOREA., 

CVBA. AND MYANMAR) 

L DHc.ripli ... ut tJoc. IJoM _d C8t"~( b....iilr.t:d .c:tj"'fia, e ..... ril..tint ti) ""'"_t'Il {rvPl Ihe to.I_trr. f~ -with • 4uaiptlon or tM bU!linenn IInli COIhlcts 

cootrfb.Itn, tt,) tbdt rn-.tt. n.s..lIhouohllnel~ hi not be lhuil't"d lO, .JefWls ~d' 

tbe eatltfes a-.d pl'Vj«ts t"'III'hlc:h you .ne pl'V'lided flllanl:lII:. 

nnMX-Mt".s.Io::'V 

We ..... o:J~ natUl<ld 1tJat thon fir" rdationlhip5 with Cuban ~ f'/tN111 Kanan cw;twl~, 

MLD ntQ\I6~lolId 1h" ~Iation or than-- B<:COUJlU=, ..Jd fOUQW'IId LIp ... n tM P'fO"css until 

Budl. acoounls d"'''oninaleo in LJSD we~ C>lnceHed. Ax or fQday, ,",'e ... ~ round lOS 

North K~l el!$tom~~ with b.d!~ ofLTSD).ll!.{H.!tI.d 1,?6l! Ctlb-#!'\ c:ustome:'!; with 

h<illIIlOo9: in the: Jrnoum ofUSDlO.llM", PJe..lise rmt.e Ihlll the principal is d .. nomm~d 

inM:XP. 

Ph:~ fi.'1d b.;:low = t:p:!~d listorrl:l:tu:::·.l;hi;zwith CII.b;:n:lld North K~ID1 

crrizem:: 

JURISDICTION I o=~~ Icu:;.C!I'$I.-\~ul e.!:es. NnrlhK_ 108 174 311~.10o.2' 

CaD. 

M.\:y n 097,6t/4J:l4 

Bcfu MXPnr.d 

USD 28 2,174,988.17 

'OliD 9 46,507.15 

1I.!XP 

Both MXP ,,"d 

l.1SD 

USD 

t368 MQi. I I. 770.14 

12M 2249 3.900,194.29 

fil 19~ 966,656.17 

2J 2' 343.919.07 

1.416 2641 13334.810.40 

Note: the nbo,""" f'is.= .... "" ..... "" s~t 1:1) hm:i"l'$!; UI1its $on !hilt 1hey ""ill verify tt..c 

nationalityor1tl1:! abo~ J;ll:djruqhiplt, BlId so::u. k! oo-nfrrm tbcoittnigre.tory&t:ltLlS: ,inc" 1'I'C hav", dClcdcd tI,,., I:>:>ft'tc "rthcm tuw"C bee!"! n2lNtlllisalll!l Moio;">m tiliz<:nII. 

Permanent Subcommittee on Investigations 

EXHIBIT #71b Confidential· FOIA Treatment Reque' L._..:;;:.;,; ______ ... HSBC OCC 8876093 
915 


76061.341

__ "" Redacted by the Permanent 

Subcommittee on Investigations 

HSBCID 

HSDC Bani: hna.na S.A. don nof have rl;btiOlWhips with ClJI.lon~ of Iile 

~Q('elflt:JrtiCllJedJU.tiOD.lWlies. 

~ni,s.bM PIIIlMWI hu$ ChI/: fQIICIWing ~lationshijJ$ with Ct!tom lllltlOMI$ '\"1» ll::5i<.1e in P'lrtllm.: 

Dc:po:;if ACQOUnts wi1h. bnlllnCCl; ofUSD If,~K 

Crodi1 Ctn:Is"'ilh bolhmce:!l o[USD 39K 

Mooglllge5 in cbe -amount ofT.lSD 14SK 

~it Cards of Banirtmo PlU'1aUIlII lhI!I are llUthonse.d to ~" tl'llll\s~ious in Cub" 

Me c;l:pected to be .:anccllM on J01Ull)1. 

HDPE- l'enl 

HBl'E does nol. bft-c lWy ~btioll!ihips Itilhotr with lhc: IIln:,. ... -c:: jurisdictiura. bimb IlQC 

govcrwnmt8, 

The~ ji OM relatiorWlir PI tnn it ~~ r.~~I~~O=~V:o:e ~~aI~; 

ntidJ.er ~e tnsnsfen: to Cuba nor receive "*1innnces. 11wHr deposit! lin denomin.atcd 

in local.::urrtrJcy). 'Then! i:s lUI IIIX9Wt deoomioa~C'd m loo;:all.VlT<=ncy wjIb II ~cc of 

H9HN_Ha...Lonu. 

Th~ iI one bllliineu rolEltOrDhip with lhcy maimarn .. 1i4\-lngt 

i1~ lkrt<A'lliRllt~ in 1,.:SD Ihn!. "'lIS <1pCUt:d an 24-p.,,-Ol with • b~no::e """ of 

11MAY in me fJ;ftount of US'D93K The fl"Rns.actions tI>oel'lIled bv ~ :II"e clllth iiii" cll$.h withdf.~als thn ~ c:I.."Changcd Urn;. J<X"1l CUI'1WI~ f;r_ 

1.'1 "<Ii.tion. It= I~ one er.=~!.:l relMion:!hi.,. with +t Ctt>II:Q n:rtionil:: "'lth tho: 

r<>!(owitJgbal~! 

Ae.x.unt5denomintlkdinuSV: US:U:Zllh. 

Acc<JIJn::s d.:=m:,;in::nc:d in 1=1 Curn:."l.C)' (Lcmpir.u.): USD 11K 

HBeR - Con Rica 

n-c U- fJIIC comm<n:io.! relaliou$hip wilh J2 Cuban I:UlIlDIllf!r.; whQ bII.,,~ diffuec.t 

11~\:1ng. Imd do.bil "'1;."J\In1$ deDl;lmin.l«l in USD.....i1h blll~es oi'USDll.6K Imd credit 

CllTds with balanc4~ ill the amowttofUSD S.5K.. 

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 8876094 
916 


76061.342

HSBCID 

Thue is OM n.LatiO'l'ldUp ",·ith ,/I Cuban IIGtLOrw (A laving .=ount denominate" i.t 

}ocaIcu.,-~...cclonRl!vadon!ilo.wrth.t>a:IU\~ofl SDl3,ll.) 

HBNI-Nkaral!;Wl 

"l'.'i<:al1lgua doe. nOi t:l<et..'Ul" has not e;"c:culc:d l .... ~ions wilh Cubarl. Norm i.:OfUIl. 

D'rMy;l[lJnurJ\OlriOIl;z!~'erlfitia~ 

B;;.'nm1G f\::j)"0i'I~ thai It ~ [I{II. hal:';:: any rda4Q1idJips with Cubar. nlllionaii. 

n • .Au;:r Dew drvdopmenfS or tulDnr: IIIIIk:1patl.'!ll 1JQfI_ lIQMnu rdllfed to. or 

ettnfacf:l ... ltb., the coUlU:rlcsllaled.. 

tndh.e er,tire l"ql:iQn, _n ne«-snry Il1TJOg.mw:ntS hftve been m.ade. to ~lIfleellllt b'llsineu 

n:latior\$hip5 with dIe above ju.ri5dlc1ioll:l . .:ither in Nlarion l(l ~1tI'1$ denominaI.d in 

usn O'r GomrncrciAi ~llItiomt>ip~ with S'll~ jun&drctl~. ~ arc nO'1 DI:'Y bulincs.l 

",lmollshipa tQ k opened with the above jurisdN:liQDB:. 

IlL A ~ ofdIrcd or lndi..-. ~ -.riIb the r,ovef1lDVrKs ottbr.:und 

UlGh'trin: .mI ,..iflt indhid.uab or enUks .tIUblf.aI wit" or Q'WItroI\otd by tlooY 

1----. ,utili dw _ ",lOde by dime , • .-des ot fundt l-eeeivtd in thAe tdated 

tr.l~etfo=. 

FCII" tk ClItR ~ion. rOlm.l1 ,e.hlliQ7J$hiJ.$ mainWned "'ith suclI juri1'4ic1ioos lire wrth 

[he: emhwiel., 8S6~11 in &e.C1ion I hereof. 

1\'. Qu_tt8caU,* foreecb oI100J, lOO4. ZOO5wmd 2006" ur: 

(a) ~mUf!5 k'O"~ lilt COIlhtl)'; 

(h) pmfttllWlfty of the Itountry(pluoe 114""!U\.y lI~ficaM ullmato UKd 

lit diocllltitq: WIII:!I)! .114 

(e) t(Q(flae&lDtMrounfJ7. 

Noav;jbhle-wonnlllion. 

'\'. Detaibt II! ~ whedoer tht 1tdMfie" i*n!tfIfdI !!Ire $Ubjed' t.o e:stC'mt1; 

nlAlidnUbllty. 

For ttJ.e mlire region,. ronf"ld.!llli;tlity reniaiolt!. Ire lIppliroble Ind infQntudlOll may not 

lw:pl'O""i4=dtmk:s$jti:.~~t:ytMreSllI;:tOr. 

Confidential· FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 8876095 
917 


76061.343

• 

• 

From: David W J BAGLEY 

Sent: Mon Oct 17 17:13:572005 

To; John F ROOT 

Subject: Re; Gel 050047 - compliance with Sanctions 

Importance: Normal 

Attachments: image_O.gif; Doc Link.htm 

John, 

As per my earlier note. 

Regards 

._- Forwarded by Dalft(! WJ MGlEYiHGHQrHS8C on 17Oc! 200516 5-4 

From: Matthew J W KINGfGGM INA GHQ/HGHQlHSBC Tel: 7992 1176; 44 

2079921176 

Graham THOMSON et al 

To: GraMm THOMSON,-",SMXlHSBC@HSBC 

ee: David leightoruHBMXlHSaC@HSaC 

Ramon GARC!AA-IBMXlHSBC@HSBC 

SaIldy FlockhartlHSMXJHSBC@HSBC 

Sergio PINAJHBMXlHS8C@HSBC 

David W J BAGLEYiHGHQlHSBC@HSBC 

bee: 

Sl.1bJe<:t: Re' GCl 050047 - Compliance WIth Sanctions 

Gruham, 

Thank you for the update, 

Sandy collared me on this last week. I told him then, and I have since confirmed, that the new policy 

applies specifically only to USD payments. However, I have now been advised there is also an issue for 

non-USD payments where these are transmitted through the HBUS TP gateYfSY, as is the case in South 

America, Fernando Busnello is daaling wrth this on behalf of HBBRlH8AR and you may like to lalk 10 him 

directly if HBMX' pa)'mellts are Similarly routed. 

I nole HBMX continues to process USD payments inyO!ving Cuba. It is very import<lnl this is stopped 

immediately as the regulators are getting very tough and the cost to the Group could be considerable if a 

Permanent SUbcommittee on Ibvesti ations 

EXHffiIT#71c 

Confidential· FOIA Treatment Request .. ---------... HSBC OCC 8874357 
918 


76061.344

• 

• 

breach occur;;, both in terms of the fine and in the rectirlCation woli<; which IS likely to be a pre-requisite to 

any settlement. If this idenliries further breaches, Ihe cost could spiral 

'llVith regard to non-USD payments as described above, GHQ CMP are urging HBUS to screen out these 

transactions to avoid any risk, and HBMX would have to put measures in place to per-emp! customer 

dismay, 

I am happy to discuss further. 

Regards 

Matthew 

Grabam THOMSONIHBMX/H-SBC 

Graham THO~soNfHBMXlHSBC HBMX 

14/10/2005 17.55 Mail Size. 2J(i01 

Matthew 

To Matthew J W KING/GGM INA GHQlHGHOIHSBC@HSBC cc Sandy 

F(oc!(ha.rtlHBMXlHSBC@HS8C, Ramon GARCIAAiBMXlHSBC@HSSC, 

David Leighton/HBMXlHS8C@HSBC.Sergfo 

PINA/HBMXlHSBC@HSBCSubjedRe.GCl050047 _ Compliance with 

Sanctions Entity HS13C HoldlrtgS pic - HGHQ 

I have received the following commentary from HBMX CMP, which I relay in response to your Query 

OFAC List Verification Implementation 

Background; 

The implementation of the 'OFAC"/is! as directed by GCL050047 has not been C(lmpletely accomplfshed, 

This is due to the fact that the "\IVOLF" system for the onl!ne detection of ·OFAC· related matches will not 

be implemented until Apri! 06, and because neither USD demalld depoSit accounts nor \he Credit Card 

systems yet provide online validation against the ~OFAC~ list for new account openings. Please note thaI 

once these systems are updated, all other produch; and services will also be controlled as tl1sy aU require 

a ctleqiJe account to be operated. 

Pending these systems changes, manual controls have been impJerrented in Private Banking. TreaSUry, 

Trade Services, and Trus~ however, please note thaI no automated means eXIsts to ensure that these 

controls are properlY bemg carried out. 

Our greatest exposure, and hence principal focus, IS to the volume of business historically carried out by 

HBMX customers with Cuba in US dollars 

Regards 

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 8874358 
919 


76061.345

• 

Graham Thomson 

Head of Group Audit Mexico 

Tel (52) 55 5721 6236 

Matthew J W KI~G/GGM INA GHO/HGHO/HSBC 

Mal1hew J W KING/GGM INA 

GHatHGHCJHSBC Sent by. lIZ A TESTER 

04110120050023 

To Jon WADO!SIHD GM APHMBAP/HSBC@HSBC.MikeR 

AllSOPIHO GfA GHQIHGHOIHSBC@HSBC,PaterJBOLANDIHD 

GAMIHBMElHSOC@HSBC,AlainCADIOUIHDOiHBFRlHSBC@HS8C. 

GIC!ce Y M LAMJHD ITA GHOI'HBAPIHSBC@HSBC, VincentJ 

MancusolHBUSfHSBC@HSBC, (an MCMILlANIHBEUIHSBC@HSBC, 

John RAMSDEN·KNOWLESfHBBRlHSBC@HSBC, Graham 

THOMSONIHBMXlHSBC@HSBCcc Sub;ect Re: Gel 050047· 

Compliance wJth SanctIOns 

Please see the allached. Can you please speak to your local CMP functions tD ascertain the areas of 

highest riSk, Please ensure lt1al appropriate reference is included within your audit programmes and give 

due consideration to the associated risks when planning your audltwork for 2006. 

A copy of the HTV guidelines referred 10 roUows by separate email 

Regards, 

Matthew King 

_ David W J BAGLEY!HGHQ/HSBC 

David W J BAGLEYIHGHOIHSBC HGHQ Senl To Ma.tthew J W KING/GGM INA GHQIHGHOIHSBC@HSBC cc Subject 

by: Marion 0 ROACH 03110/2005 15:43 Phone Gel 050047. Col1llllance WIlt! Sanctions Entity HSBC Holdirogs pic, 

No" :7991 8645;44 2079916845 Man Size" HGHQ 

13949 

Matthew 

I refer to the above Gel, where the practical impact largely centres upon Ille OFAC sanctions, both at 

country and individual (SON) level. 

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 8874359 
920 


76061.346

• 

• 

Group CEO is particularly concemed to ensure as far as is possible that the GCl is properly and fl.lUy 

Implemented across the Group, recognising 1I1e significant US regulatory and reputationa! risks which 

might. arise were e .... en non.':lS GF?u~ Hili 111 m liinge or aid an~ abet infringement of the OFAC 

sanotlons. The recent case Involvmg perhaps provides a stark example of the 

potentia! consequences which arise in circumstances where the US authorities suspect inllOlvement in 

"breach-, 

I attach a copy of my note to Stephen dated 19 September which sought to both update him wrth regard 

to certain significant steps reqUired as part ofimpJementation but also lnd~ted that we would need to 

seek further assurance with regard 10 compliance with the GCl either by spec!flc and largeted reviews 

(which will need to lake place in the first quarter of 2006) and will be the subject of the Compliance 

planning process, but also presumably through relevant scrutiny as part ofaudilS. 

Areas partiCUlarly affected by the GCl would include Trade Finance (where HTB have issued specific 

guIdance), Payments areas, Correspondent Banking and possibly participation in lOcal USD settlement 

systems, I am happy to discuss retevantaspects of the GCl, and the practical issues which we have 

aJready seen arisIng Qut of implementation, with any of your team if you think. Itlis would help, and whilst I 

recognise that as a matter of routine your audit programmes considerGCLs, it is ciearthat Group CEO 

sees compliance with this Gel as being of particular significance, 

Regards 

David Bagiey 

{sent not seen by DWJB) 

19Sep200S1S'~ 

From: DavidW J BAGLEYIHGHQlHSBC 

Sent by: Mat;on 0 ROACH 

Stepben K GREEN et a1 

Tel: 79918645 

442079918645 

To: Stephen K GREENIHSBHIHSBCMERIDIAN@HSBC 

RclJard E T BENNETT/HSBHIHSBC@HSBC 

bee: 

Redacted Material 

Confidential. FOIA Treatment Requested HSBC acc 8874360 by HSBC Bank, USA, N.A. 
921 


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• 

• 

Subject GCl0500H 'COMPLIANCE WITH SANCTIONS· 

Stephen 

Given the significance of the above Gel, and conscious of the fact thai I wlU miss the nex! pre-GMB 

meeting whilst in Hong Kong. ! thOught 1 should update you with progress made in relation to 

implementation of the Gel since its issue. The key points are:-

The required specialist 'U-turn' team has been established in HBME DUB who have opened a 

correspondent account with J P Morgan Chase through whiCh the pre-screened complamt U-turn iranian 

Payments can be made. 

A number of Group Offices have opened USD accounts with HBME (through which they will route at! 

Iranian payments} I am not convinced that all Group Offices with IranIan payments are yet routIng those 

payments through HBME, which the GCl required they should do by lSEPOS. I have already isslled a 

reminder to Regional Cornp6ance Officers and asked that they review wrth their Business Heads if they 

do have relevant business which requires routing through HBME It is of course entirely possible that 

some offices may have no need oflhese accounts if they have no relevant activity. ! have asked for 

confirmations of the local position by cbse on 23 September. 

GHQ CMP have prOVided, and continue 10 provide, slgnificant levels of ad hoc advice in relation to OFAC 

sanctions, inctuding In respect of activitles within CIBM. The latter consiSted of FX and Bond dealing with 

Iranian banks, INhere necessary we have validated our advice with e:dernaJ lawyers, 

HlV, jn close consultation wilh GHQ CMP have issued detailed guidance with regard to operational 

procedures for trade transactions in\lO!ving tran. Most of the payment naws linked to trade transactions 

we have considered to date are U-turn compliant HlV's procedures are intended to ensur~ that no 

further frade commitments are entered into where the ultimate payments would be other than compliant. 

For operational reasons HlV have adopted an approach which is stricter than the requirements of the 

GCL 

'suspect that ASP is most heavily affected by the GCl, partiCUlarly in relation to trade by their customers 

with Myanmar. Wlilst j am sure that there wi!! have been some adverse reaction on activity involving Iran, 

most of the trade transactions have been able to continue as the payments are U-turn compliant. I have 

not received any feedback on the reaction within tran, 

I have indicated to the Compliance functiOll globally thai they wiU be required 10 carry out a 

comprehensive programme of reviews, against a standard tempJate to be provided by GHQ CMP, to 

consider whether the GCl has been implemented. I ..... in also distuss with Matthew King how we can use 

routine audits to provlde additional comfort. 

A recent meetlng of the Wolfsoorg Group confirmed both !he substance and timeliness of the approach 

we have adopted. II appears that at least 3 European banks have OFAC related Issues, a!!hough ABN 

are by far the worst affected, DaVId Hodgkinson advised me that he has heard thai the fine to be imposed 

on ABN may be as ~rge as USD350m, although this is unconfirmed. AddltionaUyWarren leaming, RCO 

Dubai, hilS been talied to a meeting with major benks at tM US Consulete where they will be addressed 

by a representati...e from OFAC. I suspect this follows on from the known visit to ABN's Dubal Office by 

representatives from lhe Federal Reser...e 

! will continue to monitor implementation of the GCl and at the Globa! Conference arranged in October 

Confidential· FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 8874361 
922 


76061.348

• 

• 

will re-emphasise to the funcUon the slgmficance and the reasons for our policy, and Ihe f)eed to mOnitor 

Compliance.! wonder ifit would also be appropriate for you to talk. brielfy about the signifICance of this 

Gel at thO AOP offsite 

No questions or issues were raised in connection with cover payments during the peer review carried out 

joinlly by FRB and oce of our correspondent bank.ing aclivitfes with HBUS 

! wfJI be discussing how best 10 address the USD clearing system in Hong Kong. where HB.AP act as the 

administrating bank, during my >'lSi! next week. Any changes to this system which we think are advisable 

in the context of the OFAC sanction wiD need to be discussed with HKMA. Given that there are obvious 

potentia! sensitivities in beiflg seen to apply US regulation extra-tenitorially I recognise the need to 

proceed with caution, whilst protecting us against US regulatory risk.. 

We have closed a number of USD correspondent relationships with Cuban and Myanmar banks . 

We have, as anUcipated withlrl the GeL, sUowed a number of pre-existlng comm~ments kl be honoured. 

but emphBsiSed that no fresh arrangements should be entered into which would breach the terms otthe 

GeL. 

David Bagley 

Confidential. FOIATreatment Requested by HSBC Bank, USA, N.A. HSBC acc 8874362 

76061.349

• EXCERPT 

Deloitte LLP HSBC 

Transaction Review Progress and Results Reporting 

18th & 19th October 2011 

Prlv<lla& ConfidenUal ConfidentIal Treatment Reqoostad 

confidential T.-eatment Requested 

• 

H5BC·PSI~PR

76061.350

Correspondent and other accounts· Summary of accounts subject to 

review by location and regime 

TI1e lable below summarises the number of all USC ;lnd non-usn accounl$ (eontalnlng usn Iransectio1'ls)with aanctloned banks 

or banks in sanctioned CQuotries tdenlifled, SPlit by the location of U,e accountartd tJ:Ie related sanctions. regime. 

ilK Tota' 

• ,. 

us. USD us. 

-,-' 

Cuba .. 

ItDll. ,. 11 11 121 11 

'''' 

Llby. 

North Korea . 

Sudan " 13 23 13 Syria 

T .... ., 31 55 .. 

.. The Hong Kong reviews. haw not commenced end the. Qverall number of accounts may cha.nge. 

See Append!. 1 (Q(' liSflng of corresponduntClnd Qlher accounts for 1he UK (USD and Non-USD accounf$) and (or Hong Kong 

(USO aceounlS only) 

Private & Confidential 

COnOdel'1t1al Trillstment Aequesled 

Confidential Treatment Requested 

101f1/1911!10ctober2Q11 " 

HSBC-PSJ-PR
925 


76061.351

From: TERESA PESCElHBUS/HSBC 

Sent: 1128/2005 11:01: 12 AM 

To: MICHAEL B GALLAGHERlHBUS/HSBC@HSBC;CHRISTOPHER LOKfHBUS/HSBC@HSBC;PETERG 

MERRITTIHBUSIHSBC@HSBC 

CC: TONY MURPHY/HBUS/HSBC@HSBC;JOSEPH M PETRIIHBUS/HSBC@HSBC;CAROLYN M 

VIIlNDIHBUSIHSBC@HSBC; 

CAMillUS P HUGHESIHBUSIHSBC@HSBC;AlAN T KETlEY/HBUS/HSBC@HSBC;VIIllLlAM M 

WONGfHBUS/HSBC@HSBC; 

SUSAN A VVRIGHT/HGHQ/HSBC@HSBC 

Subject; AI Rahji TradinglAJ Rahji Banking 

All· 

As some of you may know, the above named clients have been under evaluation by 

US and Group Compliance based, among other things, on relationships maintained 

with entttles/countries on the OFAC list. Additionally, US law enforcement has 

placed these entities under scrutiny. After much consideration, Group 

Compliance has recommended !:hat the US businesses sever ties wfth these clients 

based on the current regulatory environment and the interest of US law 

enforcement. Accordingly,! will not approve customer profiles for or 

transactions with these entities. Please make appropriate arrangements. I am 

avail",ble to answer any questions you might have. 

RegardsTerry 

Permanent Subcommittee on Investigations 

Confidential - FOIA Treatment Requel ... __ E.XH __ IB-.IT...,# .. 72 __ ... ~, Inc. HSB02269091 

Confidential"- FOIA Treatment Requel HSBC OCC 1884218 
926 


76061.352

From: ALAN T KETLEY/HBUSlHSBC 

Sent 3116/2005 4:45:02 PM 

To: PAUL PlESSERlHBUS/HSBC@HSBC 

CC; 

Subject: Fw: A! Rahji Guidance Clarified 

Paul 

Looks like you're fine to continue deallng 'Nith AI Rajhi. 

You'd better be making lots of money! 

Alan 

------- Forwarded by Alan T KetleyfHBUS/HSBC on 03/1612005 04:43 

PM--------

Teresa Pesce on 10 Mar 2005 12;26 

Note 

10 Mar200512:26 

From: Teresa Pesce Tel: 212-525-6099 

Title: Executive Vice President Location: 

WorkGroup: CaMP/ANTI-MONEY LAUNDERING 

To: Chris P DAVlES/HBUS/HSBC@HSBC 

Christopher LoklHBUSIHSBC@HSBC 

Michael B GaHagherJHBUS/HSBC@HSBC 

Alan T Ketley/HBUSiHSBC@HSBC 

Subject Al Rahji Guidance Clarifi~d 

452 5th Ave, Floor 07 

Mail Size: 1931 

Group has clarified the AI Rahji guidance issued last month, They have 

evaluated AI Rahji Banking and AI Rahji Trading and now believe that the two 

are separated enough that relationships may be maintained with the latter but 

not with the former. To be dear, recommendation is to sever 'Nith Banking only 

atthistlme. 

Permanent Subcommittee on Investigations 

Confidential - FOIA Treatment Reque~ .. __ .;;E~XH_.IB.I.l.'ioi#io73 ___ .. HSB03499664 ;, Inc. 

Confidential- FOIA Treatment Reques HSBC OCC 3114022 
927 


76061.353

oee-psi -00144350 From: CHRISTOPHER LOK/HBUS/HSBC 

Sent: 5/23/2005 10:28:51 AM 

To: TERESA PESCE/HBUS/HSSC@HSBC 

CC: STEPHEN J ALLEN/HBMD/HSBCMERIDIAN@HSBCMERIDIAN 

subj ect: FW: A 1 Rajhi 

Terri 

After the ace close out and that chapter hopefully finshed, could we re-visit Al Rajhi again. London compliance has taken a more lenient view, as per below. 

chri 5 

---------------------- Forwarded by chri stopher Lok/HBUS/HSBC on OS/23/2005 11:29 AM ---------------------------

Stephen J ALLEN on 23 May 2005 10:46 Memo 

23 May 2005 10:46 

From: Stephen J ALLEN Tel: 7992 4555 44 2079 92 4555 Title: Location: workGroup: Mail si ze: 759510 

To: chri stopher Lok/HBUS/HSBC@HsBCAMERICAS 

subject: Al Rajhi 

chris. 

Here's the rest; 

Steve 

Forwarded by Stephen J ALLEN/HBMD/HSBCMERIDIAN on 23 May 2005 15 :45 ----- stephen J ALLEN/HBMD/HSBCMERIDIAN on 23 May 2005 15:20 

Memo 

23 May 2005 15: 20 

From: Stephen J ALLEN/HBMD/HSBCMERIDIAN Tel: 7992 4555 44 2079 92 4555 

Mai 1 si ze: 5101 

To: chri stopher Lok/HBUS/HSBC@HSBCAMERICAS 

cc: 

bee: 

subj ect: 

chri s. 

we'll have to see if this wi" make any difference! I haven't seen the new kyc 

yet but, we are gett; ng a copy. 

steve 

page 1 

Permanent Subcommittee on Investigations 

EXHIBIT #74 
928 


76061.354

occ-Psi -00144350 

Dav; d W J BAGLEY 

HGHQ 

23 May 2005 16: 03 

; 7991 8645; 44 2079 918645 

Sent by: Marion a ROACH 

To: oavi d H HOOGKINSON/DCH MEM/HBME/HSBC@HSBC 

cc: Iqbal KHAN/CEO ISF HFSM/HBME/HSBC@HSBC 

Warren G LEAMING/RLA LGA MEM/HBME/HSBC@HsBC 

Susan A WRIGHT /HGHQ/HSBC@HSBC 

subject: AL RAJHI BANK 

Our Ref: Your Ref: Entity: HSBC Holdings plc - HGHQ 

David 

Hav; ng now rece; ved the updated KYC from shari q S1 ddi qui and rev; ewed the previous information received from Group securities I am pleased to confirm that we have revised our recommendation in relation to the above. 

Accordi nQl y we have 1 if ted our recommendati on agai nst the commence or expans; on of relatlonships with the above with immediate effect. We will communicate this decision to HBEU where I believe there are a number of pending 

applications. 

whi 1 st we wi 11 advi se HBUS CMP of the rev; sed vi ew wi thi n GHQ CMP nevertheless I believe it will remain appropriate for HBUS CMP in conjunction with HBUS senior management to reach their own determination with re!;lard to the expansion of business with Al Rajhi within the us. Although the revlsed view from GHQ 

CMP ought to be a material matter causing them to reconsider their position nonetheless, and particularly in the current US environment, I do not believe it is appropriate for us to seek to influence their determination one way or the other. This was somethin~ that I discussed as a possible outcome with Iqbal when we discussed Al RaJni. 

Regards 

David Bagley 

Attachment: A 1 Raihi HBME kyc 05.05. PDF 

Attachment: A 1 Ralhi Arti cl e 05.05. pdf 

Page 2 
929 


76061.355

OCC-PSI-00343527 

SOME EMAILS FROM ICRO ELECTRONIC FILES PERTAINING TO AL RAJHI 

Note 

10 Aug 2005 12:12 

From: Teresa Pesce Tel: 212-525-6099 

Title: Executive Vice President Location: 452 5th Ave, Floor 07 

WorkGroup: COMP/ANTI-MONEY LAUNDERING Mail Size: 777381 

To: Sally G LOMASIHBMDIHSBCMERIDIAN@HSBC 

cc: Lynda J CasseIVHBUSIHSBC@HSBC; Arme LiddyIHBUSIHSBC@HSBC;Alan T 

Ketley/HBUS/HSBC@HSBC; Gloria StrazzalHBUSIHSBC@HSBC; Stephen J 

ALLENIHBMDIHSBCMERIDIAN@HSBC; Susan SALAS/IBEU/HSBC@HSBC 

Subject: Re: Fw: Al Rajhi 

SaUy -

This is not so simple. David does not object insofar as HBEU is concerned, but has left it 

to us to assess the US risk. We've gotten push back from the OCC on Al Rallji Trading, 

which is less controversial than the bank. We can revisit this, but I am not inclined to 

push ahead precipitously, espcially in light of the regulatory scrutiny. 

RegardsTerry 

Sally G LOMAS on 10 Aug 2005 09:59 

Memo 10 Aug 2005 09:59 

From: SaUy G LOMAS Tel: 79911511 

442079911511 

Title: Location: 

WorkGroup: Milll Size: 773184 

To: Lynda J CasseIVHBUSIHSBC@HSBC 

cc: Teresa PesceIHBUSIHSBC@HSBC 

Arme Liddy/HBUSIHSBC@HSBC 

Alan T KetleyIHBUSIHSBC@HSBC 

Gloria StrazzalHBUSIHSBC@HSBC 

Stephen J ALLENIHBMDIHSBCMERIDIAN@HSBC 

Susan SALAS/lBEUIHSBC@HSBC 

Subject: Fw: Al Rajhi 

Lynda, 

please find attached an email sent by David Bagley, indicating that there is no longer a 

recommendation agillnst expanding relationships with Al Rajhi Bank. 

Permanent Subcommittee on Investigations 

EXHIBIT #75 
930 


76061.356

OCC·PSI·00343527 

1 have asked Fig to check, when they do their additional work, whether the same part of 

the Al Rajhi fanily is invloved in both Banks. We now need to wait until we have the 

more detailed EIDD information which you have requested, 

Regards 

Sally 

. Forwarded by Sally G LOMASIHBMDIHSBCMERIDIAN on 10 Aug 2005 14:52· 

Stephen J ALLENIHBMDIHSBCMERJDlAN on 10 Aug 2005 10: 17 

From: Stephen J ALLENIHBMDIHSBCMERJDlA,"! Tel: 79924555 

442079924555 

Mail Size: 767532 

To: Sally G LOMASIHBMDIHSBCMERJDlAN@HSBC 

cc: 

bee: 

Subject: Fw: Al Rajhi 

. Forwarded by Stephen J ALLENIHBMDIHSBCMERIDIAN on 10 Aug 200510:17· 

Christopher LokIHBUS/HSBC on 23 May 200516:28 

From: Christopher LoklHBUS/HSBC Tel: 212·525·2062 

Mail Size: 761889 

To: Teresa PesceIHBUSIHSBC@HSBC 

ce: Stephen J ALLENIHBMDIHSBCMERJDlAN@HSBCMERJDlAN 

bee: 

Subject: Fw: Al Rajhi 

Terri 

After the DCC close out and that chapter hopefully finshed, could we fe-visit Al Rajhi 

again. London compliance has taken a more lenient view, as per below. 

Chris 

David W J BAGLEY 

HGHQ 

23 May 2005 16:03 

79918645;442079918645 

Sent by: Marion 0 ROACH 

To: David H HODGKINSONIDCH MEMlHBMEIHSBC@HSBC 

cc: Iqbal KHAN/CEO ISF HFSMlHBMEIHSBC@HSBC 

Warren G LEAMINGIRLA LGA MEMlHBMEIHSBC@HSBC 

2 
931 


76061.357

OCC-PSI-00343527 

Susan A WRIGHT/HGHQIHSBC@HSBC 

Subject: AL RAJHI BANK 

Our Ref: 

Your Ref: 

Entity: HSBC Holdings pIc - HGHQ 

David 

Having now received the updated KYC from Shariq Siddiqui and reviewed the previous 

information received from Group Securities I am pleased to confirm that we have revised 

our recommendation in relation to the above. 

Accordingly we have lifted our recommendation against the commence or expansion of 

relationships with the above with immediate effect. We will communicate this decision 

to HBEU where 1 believe there are a number of pending applications. 

Whilst we will advise HBUS CMP ofthe revised view within GHQ CMP nevertheless 1 

believe it will remain appropriate for HBUS CMP in conjunction with HBUS senior 

management to reach their O\Vl1 determination with regard to the expansion of business 

with Al Rajhi within the US. Although the revised view from GHQ CMP ought to be a 

material matter causing them to reconsider their position nonetheless, and particularly in 

the current US environment, I do not believe it is appropriate for us to seek to influence 

their determination one way or the other. This was something that 1 discussed as a 

possible outcome with Iqbal when we discussed Al Rajhi. 

Regards 

David Bagley 

76061.358

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pago250f1J3 
936 


76061.362

11/17/200608:53 AM 

To 

Beth Fisher/HBUS/HSBC@HSBCAMER1CAS, .AJan T Ketley/HBUS/HSBC@HSBC 

Subject 

.AJ Rajhi Banking 

Beth/.AJan, 

Salman Hussain, the PCM Regional Sales Manager at HBME in Bahrain, who has 

recently visited the subject, has called to say that AI Rajhl has now run out 

of patience waiting for us to re-start our banknote trading relationship and 

unless we can complete the kyc formalities and advise them accordingly by the 

end of November, they will terminate aU product relationships with the HSBC 

Group - which I believe to be substantial. 

Their main point of contention is that they fee! that they were exonerated by 

all US lega! processes from TF suspicion some time ago and yet we have still 

not been able to fe-start trading with them. Gordon finished our !atest attempt 

at the pmfile on Tuesday and you will find the kyc profile to be currently in 

the 'IB Pending' inbox. Could I please ask you both to expedite your reviews so 

that we can attempt to prevent the loss of an important client to the Group? 

thanks and regards 

Steve 

Permanent Subcommittee on Investigations 

Confidential - FOIA Treatment Requa! EXHIBIT #77 '. Inc. 

Confidential - FOIA Treatment Reque! 1'------------ HSB03666147 

HSBC OCC 3280505 
937 


76061.363

occ-psi -00150795 

From: CHRISTOPHER LOK/HBUS/HSBC Sent: 11/17/2006 10:05:55 AM 

To: STEPHEN J ALLEN/HBMD/HSBCMERIDIAN@HSBCMERIDIAN CC: DAVID M WILENS/HBUS/HSBC@HSBC 

subject: Re: Fw: Al Rajhi Banking 

Steve 

At the end of the day, its compl i ance who' 5 the key" I'll speak to Ketley & ask him to re-evaluate this name. 

chris 

Stephen ] ALLEN/HBMD/HSBCMERIDIAN 

Tel: 799 24555; +44 (0) 20 7992 4555 

11/17/2006 09: 34 AM 

chris, 

TO 

chri stopher Lok/HBUS/HSBC@HSBC 

cc 

David M wi 1 ens/HBUS/HSBC@HSBC 

subject 

Fw: Al Rajhi Banking 

who do you suggest can/will sign this profile? 

You will see that it is pressing perhaps David could IS and you could IB 

approve if Susan and I sign it again? 

Steve 

Forwarded by stephen] ALLEN/HBMD/HSBCMERIDIAN on 17/11/2006 14: 30 -----

Beth Fi sher/HBUS/HSBC 

HBUS 

17/11/2006 14: 23 

Mail size: 7422 

steve, 

To 

Stephen ] ALLEN/HBMD/HSBCMERIDIAN@HSBC 

cc 

A 1 an T Ketl ey /HBUS/HSBC@HSBC. chri stopher ] Heusl er /HBUS/HSBC@HSBC 

subject 

Re: Al Rajhi Banking 

Entity 

HSBC Bank USA. London Branch (Treasury and capital Markets - TCM) 

page 1 

Permanent Subcommittee on Investigations 

EXHIBIT #78 
938 


76061.364

ace-Psi -00150795 

!p~~o~i~g t~h~ ~g n~~e ~e ~i ~~i ~~i t kn~~t t~i ~o b~~~. pe~d~~~~ ~~af~~ ~ ~~~~~~fae!:r~B 

~~~i d w~~k ~:U~U~~~i ~~~ a~~~~~h~h~ ~~~~o~e~i :~~~~nii~! ~h~h~a~:m~~pe~;~dgi~e~~e us newspapers. I do not know thi 5 bank personally and am therefore not qualified to render an opinion; I cannot answer questions if/when the Alrajhi name appears in us news media. 

Therefore, please ask another officer to IS approve. I am IB-Denied the KYC. so that my name can be removed as RM. 

Thank you. 

Beth 

Stephen J ALLEN/HBMO/HSBCMERIDIAN 

Tel: 799 24555; +44 (0) 20 7992 4555 

11/17/2006 08: 53 AM 

To 

Beth Fi sher/HBUS/HSBC@HSBCAMERICAS, Alan T Ketl ey/HBUS/HSBC@HSBC 

ee 

subject 

Al Rajhi Banking 

Seth/Alan, 

salman Hussain, the PCM Regional sales Manager at HBME in Bahrain, who has recently visited the subject, has called to say that Al Rajhi has now run out 

~~l~~~i :~c~a~a~~~~l e~~r th~ ~~c r~~~~:l~ ti~~ ~~dk~d~i s~r~~!~g a~~~~d~ ~~ihi by a~~e end of November, they will terminate all product relationships with the HSBC Group which I believe to be substantial. 

~~ii Cs mi!~a~o~~~c~~s~~n~~~~i ~~ !~s~~~f o~h~~m~e~~m~h:t 0 t~~~ ~~~eW:xh~~~a~~~l ~y not been able to re-start trading with them. Gordon tinished our latest attempt at the profile on Tuesday and you will find the kyc profile to be currently in 

~~~t'!: ~~~d~~i~m~~b~~. p;~~!~t I t~! ei~~s a~~ ~~u i~~~~t~~t e~~i~~~e t~O~her~~~~~~ so 

thanks and regards Steve 

page 2 
939 


76061.365

occ-Psi -00150798 

From: CHRISTOPHER LOK/HBUS/HSBC 

Sent: 11/17/2006 10:31:07 AM To: STEPHEN J ALLEN/HBMO/HSBCMERIDIAN@HSBCMERIDIAN 

Cc: 

subject: Re: Alrajhi 

I would tell salman that he should relay the 'concern' Alrajhi has expressed to the higher ups. To cancel the Amanah business is much bigger than not dealing with banknotes. Hopefully somebody in London will listen and given NYK compliance a gentle push. 

Chris 

stephen J ALLEN/HBMD/HSBCMERIDIAN 

Tel: 799 24555; +44 (0) 20 7992 4555 

11/17/2006 10: 20 AM 

chri s! 

To 

Chri stopher Lok/HBUS/HSBC@HSBC 

cc 

subject 

Re: Al rajhi 

This is the note that I received subsequent to salman calling (1 sent it on to Alan) 

As ever, we are taking an inordinate amount of time to make our minds up. 

I di scussed thi 5 c1 i ent wi th Terry, Linda and Alan when I vi sited in February. 

f~o~V~i~d:l !~dr~~:i ~h~t a~~e hh~~ l~t~n~~ed~~b~ ~h:~e o~i llPg! e~~~~a~~e~~i~~! ons 

from Alan! 

Steve 

salman HUSSAIN/HBME/HSBC 

HBME 

17/11/2006 13: 56 

phone No. 0097317569599 

Mail si ze: 16093 

TO 

Davi d B ILLING/HBMD/HSBCMERIDIAN, Gordon BROWN/IBEU/HSBC, stephen J 

ALLEN/HBMD/HSBCMERIDIAN@HSBC 

cc 

ci ara 0' CONNELL/IBEU/HSBC, Shari q Z SIDDIQI/HBME/HSBC, John L 

SCOTT /HBEU/HSBC, 

Hammad Zai di /HBUS/HSBC, Stephen D Loffredo/HBUS/HSBC@HSBC 

subj ect 

Fw: Al Rajhi Bank KYC & AML policy 

Enti ty HSBC Bank Middle East Limited PaQe 1 

Permanent Subcommittee 00 Iovesti ations 

EXHmIT#79 
940 


76061.366

acc-psi -00150798 

Dear Dav; d, Gordon and Stephen. 

Further to my phone call with David last week after meeting Al Rajhi Bank in Ri yadh. I was gi yen a deadl i ne by Mr. (ass; m Docrat. Head of FI unt; 1 end of Nov, to respond to them weather we will be able to resume the banknote business or not. Mr. Docrat indicated that HSBC Amanah business will be at risk and they will cancel any dealings with HSSL 

Mr. Docrat understand Camp 1 i ance Dept. requ; rements and suggested we request further information from Moody (Attn. Mr. Anwar Hasson) or S&P. He also i ndi cated that J P Morgan chase, the; r rna; n US$ c1 earer had done the same and accordingly an OlD limit of $290mm established by JPMC for Al Rajhi. 

I can't stress on the fact that we do want to do business with this institution from PCM side. We do stand a good chance to win a US$ clearing account thru offering Islamic overnight Investment Product and the US$ check clearing thru check 21. 

Ki ndl y 1 et me know if you do requi re any further assi stance to obtai n compliance approval. 

Best regards. 

salman Hussain Regional sales Manager Global Transaction Banking 

chri stopher Lok/HBUS/HSBC HBUS 

17/11/2006 15: 11 Mail Size: 2435 

To 

stephen J ALL,EN/HBMD/HSBCMERIDIAN@HSBCMERIDIAN cc 

subject 

Alrajhi 

Entity 

HSBC Bank USA. London Branch (Treasury and Capital Markets - TCM) 

Steve 

~~s~a~~o~he tti ~ ~ ai ~ m~~~ s tfi~~ n~n ti n~ha~h~~k ~~dl he f~ 1 ~~a~~c~fd~h~ ~~~r:~~ 1 E~~~ passed along. His view is Alrajhi may not really walk away if we can't revert by November end, whi ch I agree. page 2 
941 


76061.367

acc-psi -00150798 

I told him frankly lets avoid the middlemen and go straight to the decision maker. WE should have an answer in the next few weeks. 

chri 5 

page 3 
942 


76061.368

From: ALAN T KETLEV/HBUS/HSBC 

Sent: 12/1/2006 10: 13 : 20 AM 

occ-Psi -00150892 

TO: STEPHEN J ALLEN/HBMD/HSBCMERIDIAN@HSBC; SALMAN HUSSAIN/HBME/HSBC@HSBC 

CC: TERESA PESCE/HBUS/HSBC@HSBC;CHRISTOPHER LOK/HBUS/HSBC@HSBC 

subject: Al Rajhi Bank 

Steve I Salman 

The purpose of thi 5 note ; 5 to confi rm to you the wi 1 1; ngness of HBUS to recommence a relationship with Al Rajhi Bank. 

f n~:~~i ~:~~~:e~e~~a~~~h~h~~n~~~ ~~~n; ~:~f~~~!~n b~S I~~6~ ~s h~~! ~~~o conducted some of my own research and am satisfied that we can do business with this 

~~i~~~c~i o~O~~ni~o~~~g d~~k~~ 1 ~T~~~eb~ 5 C~~~li~~~!Y a~~~~m~i~hd a ah~ gh' d~~ree of transaction awareness being maintained by the business. Over a period of years there has been much negative publicity associated with the principals of this entity - while none of these allegations has been proven or substantiated, the notion of 'no smoke without fire' is one we must bear in mind and any business 

~~i t y~~a~~~~ e:!~h t~~~ ~ ~~~~~y N~~~~ ~~~ng~~~~T~ {~e a~~s~~!:~e~e~!i~s butl w~tle try 

to do so before close of business today - to paraphrase an expression from English Banking, if it is in my hands and in order I will approve it. 

I am confident that our Banknotes transaction monitoring is sufficiently robust to keep a close eye on thi s cl i ent' s activi ti es and I woul d ask that your traders apply special vigilance when dealing with them. 

I'm addressing salman with this note because I know that he too is looking to further develop the Al Rajhi Bank relationship but here I have to place some condi ti ons. whi 1 e we have a robust method of moni tori n9 wi re payment acti vi ty, we do not have a corresponding automated method of mOnltoring check or cash letter transactions. Accordin91y, while I would be happy to see wire activity 

~~~hi ~~e °d~~r~e f~~u~io~~ ~~~~~o~f~~ ~h~~u~~~l ~ ~:n~~~r~~~~~f~. paper acti vity 

chris Lok has agreed to act as relationship owner for this name in place of 

!{~~ ~~ ~h~ho~l ~e a w~~~ ~~l~ti~~~hi p ad~v~~g~~v~ t t~~s~rb~i ~;\~ f t~~ !~pli~~ ~fied approval of HBUS' senior peM management. 

Alan T. Ketley seni or vi ce Presi dent 1 Anti Money Launderi ng Tel: 212 525 6147 / Fax: 212 382 7580 

page 1 

Permanent Subcommittee on Investi alions 

EXHIBIT #80 
943 


76061.369

From: DANIEL JACK!HBUS/HSBC 

Sent 7126/2007 1 :55:33 PM 

To: STEPHEN J ALLEN/HBMD/HSBCMERIDIAN@HSBC;GDRDDN BRDWNfIBEUlHSBC@HSBC 

CC: 

Subject: AI Rajhi Bank in Saudi Arabia 

Steve J Gordon ~ 

This article on N Rajhi Bank & TF was in the Wall Street Journal today. 

We realize that we re-activated the relatiionshfp with them last month. 

We in AML-NY will draft a reply to Joe Boss & DCC soon. 

Please review this below & let me know if you have any comments. 

Thanks and regards, 

Daniel Jack 

VP - AML Compliance 1 HSBC Bank USA, NA 

452 Fifth Avenue, 7th floor, New York, NY 10018 

Phone. 212-525-8686 

Email. daniel.jack@us.hsbc.cqm 

- Forwarded by Daniel JacklHBUS/HSBC on 0712612007 02:48 PM ---

-~- Forwarded by Alan T Ketiey/HBUSlHSBC on 07/26/2007 08:30 AM~-

"Boss, Joseph" <Joseph.Boss@occ.treas.gov> 

07126/200708:24 AM 

To 

alan.tketley@us.hsbc.com 

cc 

"Boss, Joseph" <Joseph.Boss@occ.treas.golP' 

Subject 

Saudi's 

Nan, for your information and review. Please let me know if there is 

anything. This appeared on the front page of today's Walt Street Journal. 

Thanks, Joe 

TERROR FINANCE 

U.S. Tracks Saudi Bank Favored by Extremists 

Permanent Subcommittee on Investi ations 

Confidential EXHIBIT #81 - FOIA Treatment Reque, ... _________ .. s, Inc. HSB03216516 

Confidential - FOIA Treatment Reque, HSBC OCC 2830874 
944 


76061.370

Officials Debated Vllhat To Do About AI Rajhi, Intelligence Flies Show 

By GLENN R. SIMPSON 

July 26,2007; Page A1 

JIDDA, Saudi Arabia -In the 19405, two Bedouin farm boys from the desert 

began changing money for the trickle of traders and religious pilgrims in this 

then-remote and barren kingdom. It was a business built on faith and trust, 

Sulaiman AI Rajhi once told an interviewer, and for many years he would hand 

gold bars to strangers boarding flights in Jidda and ask them to give the gold 

to his brother on their arrival in Riyadh. 

EXTREMISTS' ACCOUNTS 

The News: U.S. intelligence reports say Islamic extremists often use Saudi 

Arabia's AI Rajhi Bank to move money. The bank has denounced terrorism and 

denies any role in financing extremists. 

The Issue: A confrontation with AI Rajhi would be politically difficult for 

Saudi monarchy, and U.S. isn't satisfied with its efforts to curb the financial 

infrastructure essential to terrorism. 

Result: U.S, has periodically debated taking action on its own against the 

bank, but chosen instead to lobby the Saudis quietly about its concems. 

Today, Mr. AI Rajh! is a reclusive octo,genarian whose fortune is estimated at 

$12 billion. And At Rajhf Bank grew into the kingdom's largest Islamic bank, 

with 500 branches in Saudi Arabia and more spread across the Muslim world. 

Following the Sept. 11,2001, attacks, the bank also set off an intense debate 

within the U.S. government over whether to take strong action against its 

alleged role in extremist finance. Confidential reports by the Central 

Inte\!lgence Agency and other U.S. agencies, reviewed by The Wall Street 

Journal, detail for the first time how much the U.S. learned about the use of 

AI Rajh! Bank by alleged extremists, and how U.S. officials agonized over what 

to do about it 

After 9/11, the Saudi monarchy pledged its full support in the fight against 

global terrorism. And following violent attacks inside the kingdom in the next 

two years, the Saudis did launch major strikes against militants operating on 

their soil. But the Saudi government has been far been less willing to tackJe 

the financial infrastructure essential to terrorism. U.S. intelligence reports 

state that Islamic banks, while mosUy doing ordinary commerce, also are 

institutions that extremism relies upon in its global spread. 

As a result, the Bush administration repeatedly debated proposals for taking 

strong action itself against AI Rajhi Bank, in particular, according to fonner 

U.S, officials and previously undisclosed govemment documents. Ultimately, the 

U,S, always chose instead to lobby Saudi officialdom quietly about its 

concerns. 

The U.S. intelligence reports, heretofore secret, describe how AI Rajhi Bank 

has maintained accounts and accepted donations for Saudi charities that the 

U.S. and other nations have formally designated as fronts for al Oaeda Of other 

terrorist groups. 

In addition, Mr. AI Rajhi and family members have been major donors to Islamic 

charities that are suspected by Westem inteUigence agencies of funding 

terrorism, according to CIA reports and federal--court filings by the Justice 

Department. 

A 2003 CIA report claims that a year after Sept. 11, with a spotlight on 

Islamic charities, Mr. AI Rajh! ordered AI Rajh! Bank's board ''to explore 

financial instruments that would allow the bank's charitable contributions to 

avoid officlal Saudi scrutiny.~ 

A few weeks eariler, the report says, Mr. AI Rajhi "transferred $1.1 billion to 

offshore accounts - using commodity swaps and two Lebanese banks - citing a 

concem that U.S. and Saudi authorities might freeze his assets." The report 

was titled HAl Rajh! Bank: Conduit for Extremist Finance." 

AI Rajh! Bank and the AI Rajhi family deny any role in financing extremists. 

They have denounced terrorist acts as un-Islamic. The bank declined to address 

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specific allegations made in American intelligence and law-enforcement records, 

citing client confidentiality. 

RELATED DOCUMENTS 

AI-Rajhi bank became a target for U.S. terrorism sanctions less than two months 

after Sept 11, 2001. 

No action was taken, but in mid-2003, the Centra! Intelligence Agency concluded 

that the AI-Rajhi family and their bank were financing terrorists, probably 

knowingly. This is the summary pagel from the agency's report. 

The bank sued The Wall Street Joumal Europe for libel in 2002 over a report 

that it was under scrutiny in connection wfth terrorism funding, but dropped 

the case in 2004 and The Wall street Journal published the bank's statement2. 

The CIA's report and other U.s. intelligence on AI-Rajhi remained secret, and 

in 2005 a federal judge threw out a lawsuit against the bank. by victims of Al 

Oaeda, saying there was no evidence AI-Rajhi provided anything but routine 

banking services to terrorists. Read the order.3 

The AI-Rajhi family and the ruling AI-Saud family of Saudi Arabia have been at 

odds for decades, in part because oflhe accidental death of an infant AI-Rajhi 

family member in a botched police rescue attempt during a kidnapping. Saudi 

dissidents in London issued a communique recounting the incident4 that was 

highly critical of Saudi authorities. The document was made available by the 

Investigative Project on Terrorism, a Washington-based nonprofit group. 

This 1992 State Department cableS from the U.S. ambassador in Riyadh discusses 

the Saudi press coverage of the AI Rajhi bank's purported role in the BCCI 

scandal. 

One oflhe AI Rajhi bank's major longtime cHents is the Intemationallslamic 

Relief Organization of Jeddah, Saudi Arabia, a powerful charity backed by some 

oflhe country's wealthiest businessmen. This fundraising solicitationS is from 

the IIRO's March 2007 newsletter. The group strongly denounces terrorism on its 

Web site7. 

U.S. intelligence has alleged connections between a! Oaeda and the BRO since 

1996, and the Treasury Department now aUeges8 the IIRO has been deeply 

penetrated by al Qaeda. The group denies supporting terrorism in this statement 

9 from its most recent newsletter. The group also claims it no longer sends 

money overseas, and that its accounts are frozen by Saudi banks. Yet its most 

recent fundraising letterl0 solicits donations to AI Rajhi bank and touts a 

variety of ongoing projects in overseas conffict zones. 

In 2004, !iRO funded a medical facility in Fallujah while that central Iraqi 

town was under the control of Iraqi insurgents. The U.S. Marine Corps blew up 

the clinic, and says aU three of the city's hospitals were being used by 

insurgents as fighting positions. See the PowerPoint slides11. 

In 2002, the bank sued The Wall Street Joumal Europe after an article said 

Saudi authorities were monitoring some AI Rajhi Bank accounts at U.s. request, 

in a bid to prevent them from being used, wittingly or unwittingly, for 

funneling money to terrorist groups. The bank dropped the suit in 2005 and the 

Joumal published a statement saying its article hadn't reported any allegation 

that the bank. supported or financed terrorism. 

Also in 2005, a U.S. judge dismissed AI Rajhi Bank from a lawsuit filed by 

relatives of Sept. 11 victims. The ruling said banks couldn't be held liable 

for providing routine services to people who turned out to be terrorists. In a 

statement in response to questions about suspected terrorists among its 

clients, the bank noted that "AI Rajhi Bank has a very large branch network, 

and a very large retail customer base." 

U.S. law-enforcement and intelligence agencies acknowledge it is possible that 

extremists use the bank's far-flung branches and money-transfer services 

without bank. officials' knowledge. The U.S. has never obtained proof that the 

bank or tts owners kno"Wingly facilitate terrorism, according to documents and 

former officials, despite ......nat they describe as extensive circumstantial 

evidence that some executives are aware the bank is used by extremists. The 

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2003 CIA report concluded: "Senior AI Rajhl family members have long supported 

Islamic extremists and probably know that terrorists use their bank:' 

Most major banks around the 'NOrld are bound by a patchwork of treaties and 

agreements that, in effect, require them to know their customers and report any 

suspicious activities to regulators, The n.des are designed to fight terrorism, 

money laundering and narcotics trafficking, It's generally acknowledged that 

Saudi banks are bound by these rules, although experts differ on 'When 

compliance became mandatory. 

The top counterterrorism official at the U.S. Treasury Department, while 

declining to comment on ,AJ RaJhi Bank specifically, says Saudi officials 

haven't met a promise to create a commission to oversee Saudi charities, many 

of which bank with ,AJ RajhL ''They are also not holding people responsible for 

sending money abroad for flhad," says the Treasury official, Stuart Levey. "It 

just doesn't happen." 

The Saudi govemment maintains it has been work.ing diligently with the U,S. and 

others to counter terrorism. It cites its arrests of several alleged terrorist 

fund-raisers in recent years. The Saudis didn't respond to specific questions 

about their efforts to counter terrorist finance or oversee banks, 

A V\nlite House statement said that ''the Saudis continue to be a strong partner 

in the War on Terror .... We have made significant progress on numerous frontsincluding the freezing of assets and the shutdown of known conduits of 

[terrorist] funding." A CIA spokesman said ''publishing details of how our 

govemment seeks to track extremist financing" could undermine those efforts, 

For the ruling Saud famity, any confrontation with the AJ Rajhis could be 

politically treacherous. To stay in power, the Sauds rely on the tolerance of 

clerical and business elites, many of whom view the royal family as corrupt. 

The wealthy AI Rajhls are a clan long at odds with the royal family. And U.S. 

intelligence files show the ,AJ Rajhis also have close ties to another group 

critical of the royals: Saudi Arabia's conservative clerics. 

The AI Rajhl empire includes hotels, housing developments, commodities trading, 

shipping, aviation leasing and poultry. Its core is the bank, with more than 

500 branches in Saudi Arabia and other offices abroad, from Pakistan to 

Malaysia, For 2006, the publicly held institution reported $1.9 billion in 

profit and $28 billion in assets. 

Sulaiman AJ Rajhl grew up in the Nejd desert, the birthplace of a seVere form 

of !slam, called Wahhabism, that forbids birthday parties, musical instruments 

and photographing people. In the 19405, he and a brother, Saleh, went to the 

Saudi capital city. "From literally nothing - making change on what were then 

the dirt streets of Riyadh - Sulaiman and Saleh al Rajhi built the Al Rajhl 

Bank," Sulaiman's lawyers told a U.S. court in New York in 2005. 

Sulaiman described the business in a rare interview with Euromoney magazine in 

1983, Wrth two other brothers, he and Saleh began changing money for pilgrims 

taking camel caravans across the desert to the holy cities of Mecca and Medina. 

\!\'hen throngs of migrant workers came to Saudi Arabia during the 1970s oil boom, 

the AI Rajhis helped them send their eamings home to places like Indonesia and 

Pakistan. 

In 1983, the brothers won permission to open Saudi Arabia's first Islamic bank, 

one that would observe religious tenets such as a ban on interest. 

But relations with the IlJling family frayed. The govemment~contro!led press in 

1992 publicized AI Rajhi Bank's tangential role in an intemational scandal of 

that era, that of the bank called BCCt, U,S. diplomats reported, Then in 1994, 

an infant relative of the AI Rajhis died in a kidnapping. Official press 

accounts said the kidnappers slit the child's throat, but Saudi dissidents 

claimed police shot the child. Mr. AI Rajhl blamed the royal family, the CIA 

report says. 

Although,AJ Rajhi Bank continued to make a show ofsupport for the Saudsannual reports had flowery tributes to the royal family ~~ the bank began 

refusing to make loans to the Sauds or to finance their projects, U,s. 

diplomats said at the time. 

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\/Villi its Islamic procedures, the bank was a magnet for the clerical 

establishment, ......nich grew rich from alms amid the oil boom. As the clerics' 

charities spread, they became entwined with AI Rajhi Bank and the conservative 

AI Rajhl family's own extensive financial support for Islamic causes. 

There is no reliable estimate of how much the AI Ra}his have given to promote 

Islam over the years, but an endowment holding much of Saleh AI Rajhl's wealth 

gives an indication of the scale. Its Web site details neany $50 million in 

direct donations within the kingdom to Islamic causes and at least $12 million 

in donations abroad. The overseas money went to aid embaHied Muslims in 

Kosovo, Chechnya and the Palestinian territories and to finance Islamic 

instruction. 

There are indications not aU the giving was for such purposes. The Al Rajhl 

name appeared on a list of regular financial contributors to a1 Oaeda that was 

discovered in Sarajevo, Bosnia, in 2002. The list was authenticated for the 

Federal Bureau of Investigation that year by America's top judicial witness 

against al Oaeda, a onetime al Oaeda business manager named Jamal Al Fadl, ......no 

is in the federal witness-protection program. He called the contributor list 

the "golden chain." 

A 2003 German police report said Sulaiman AI Rajhi and other family members had 

contributed more than $200,000 in 1993 to a charity that financed weapons for 

Islamic militants in Bosnia, in addition to providing humanitarian aid. 

The 2003 CIA report tells of efforts by two PJ Rajhi brothers to keep some 

giving secret It says that Sulaiman and Saleh transferred $4 million to 

parties in Germany and Pakistan in December 1998 using "a unique computer code 

to send funds at regular intervals to unspecified recipients, suggesting they 

were trying to conceal the transactions and that the money may have been 

intended for illegitimate ends." 

The report says extremists "ordered operatives in Afghanistan, Indonesia, 

Pakistan, Saudi Arabia, Turkey, and Yemen" to use AI Rajhl Bank. MamdtJh Mahmud 

Salim, convicted mastermind of the 1998 embassy bombings in Kenya and Tanzania, 

was carrying records of an PJ Rajhl account (number 001424/4) when arrested in 

Germany in 1998, German police found. 

In 2000, the CIA report says, AI Rajhl Bank. couriers "delivered money to the 

Indonesian insurgent group Kompak to fund weapons purchases and bomb-making 

activities." 

A U.S. intelligence memo dated Nov. 16,2001, says a money courier for Osama 

bin Laden's second-In-command, Ayman al-Zawahri, traveled on a visa that the 

bank: had obtained for him. The memo adds, however: "Reporting does not indicate 

whether bank management was wftting" of the courier's terronst connections. 

AI Rajhl Bank maintained at least 24 accounts and handled unusual transactions 

for AI-Haramain foundation - a charity that Treasury officials say has acted 

as a front for al Oaeda in 13 countries - until the Saudi govemment ordered 

the charity shut down in late 2004, according to intelligence and 

law-enforcement reports. The United Nations has deSignated top officials of 

AI-Haramain foundation as terrorists, and most of its offices now are closed. 

According to a federal indictment in Oregon, a top Al-Haramain official in 2000 

carried $130,000 in $1,000 traveler's checks from Portland to Riyadh and 

deposited them with AI Rajhi - funds the indictment says were for the ultimate 

benefit of al Oaeda fighters in Chechnya. The indicted official, Soliman 

AI·Buthe, now works for the city of Riyadh. In an interview, he confirmed 

carrying the checks and depositing them with PJ Rajhl Bank but said that they 

weren' for al Qaeda and that he did nothing wrong. 

A Jidda-based charity called the International Islamic Relief Organization, or 

IIRO, arranges for donors to send their donations directly to the AI Rajhl 

Bank. The IIRO's chairman, Adnan Khalil Basha, says the charity is "absolutely 

apolitical" and has elaborate spending controls to prevent illicit diVersions. 

The charity says it worKS with AI Rajhl Bank simply because its fees are low 

and its service is best 

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However, the U.N. has labeled two of the IIRO's branches and some of its 

officials as a\ Oaeda supporters. In 2004, the IlRO solicited donations through 

AI Rajhl Bank for the Iraqi city of Fa!!ujah, then largely under the control of 

insurgents and the base of the late Abu Musab al Zarqawi, who led al Oaeda in 

Mesopotamia. The !lRO's workers oversaw construction of a trauma clinic in an 

insurgent-controlled area of Faltujah. The U.S. saw the clinic as a haven for 

insurgent fighters, and Marines destroyed it in November 2004, That was "a big 

tragedy for us,~ says the liRa's chairman, Mr. Basha. 

He denies the charity had any involvement with the Iraqi insurgency. Charity 

officials complain that the U.S. has produced no evidence of their alleged ties 

to terrorism. 

Two years earlier, federal agents raided the Virginia offices of a network of 

charities funded by Sulalman AI Rajhi that worked closely with the liRa and 

that - according to Justice Department court filings - pn;lVided funds to 

Palestinian terrorists. No charges have been filed. 

A year after the 9/11 attacks, U.S. authorities began to lament the lack of 

Saudi action in taking down terrorists' financial infrastructure. A November 

2002 CIA report said the Saudi government "has made little independent effort 

to uncover terrorist financiers, investigate individual donors, and tighten the 

regulation of Islamic charities,"largely because of "domestic political 

considerations." 

The report advised against a noisy confrontation: "A key factor for continued 

successful counterterrorism initiatives with the Saudis, 'Nhose society is by 

tradition private, closed, and conservative, will be to ensure that their 

cooperation with the United States is handled discreetly and kept as much as 

possible out of the public eye." 

The U.S. began to rethink that approach after an al Qaeda attack. in Riyadh in 

May 2003 that killed 26 people, including nine Americans. Deputies from the 

National Security Council, CIA, Treasury and State departments debated a 

proposal for legal and political action against AI Rajhi Bank, including the 

possibility of covert operations such as interfering with the bank's internal 

operations, according to Bush administration documents and former U.S. 

officials. 

One idea kicked around was "listing or threatening to list" AI Rajhl Bank as a 

supporter of terrorism. Such a listing can be done if recommended by a 

committee representing the Treasury, State and Defense departments and the CIA 

and NSC, and signed by the president. The designation bars U.S. companies from 

doing business with the named entity. A U.S, designation also normally is 

forwarded to the U.N., and If that body puts the name on its own 

terrorist~supporter list, aU member states are obliged to freeze the entity's 

assets. 

Other ideas U.S. officials discussed included enlisting friendly countries to 

step up scrutiny and regulatory action against the AI Rajhis. The CIA report 

said that "a successful effort against the AI Rajhis would encourage efforts 

against other donors, or at a minimum, would discourage private funding of AJ 

Oaeda." 

Ultimately, the Bush administration again chose merely to continue privately 

exerting pressure on the Saudis to stiffen their oversight. 

This message originated from the Internet. Its originator mayor 

may not be who they claim to be and the information contained in 

~!.~*~~~*~~;_~~~~~~!:~~~!~~~~~~;;~~~L~~~~r~~~:~;.~~~urate. 

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From: CHRISTOPHER LOKlHBUSJHSBC 

Sent 11/812007 9:23:11 AM 

To: BENJAMIN J SARAM/NBO SIP/HBUS/HSBC@HSBC 

CC; BENJAMIN J SARAMINBD SIPIHBUSIHSBC@HSBC;KWOKYING FUNG/NBD 

SIP/HBUSiHSBC@HSBC;ROGER T K SOtHO NBD RNH/HBUS/HSBC@HSBC; 

\NING KIN - SG CHANfCEO SIP1HBUS1HSBC@HSBC 

Subject: Re: ISlAMl BANK BANGLADESH LIMITED 

Ben 

One, (he money is there and we should go for this account. 

Two, I will jump in and wear the GRM hat. 

Three, I wonder where will can you get that much Saudi. Just relying on 'Nhat 

you and HKG can pickup in the region is not enough, Even including London's. 

So how? 

Four, I WOUldn't rely on Herse! to help you get the business. And he certainly 

can't help on clarifying the link to A1rajhi. ! would instead suggest we 

ourselves visit the cHent and sell our service directly. 

I believe we should be able to get the KCY sign off. 

Chris 

Benjamin J SARPJAfNBO SIP/HBUS/HSBC 

11/081200703:13 AM 

To 

Christopher LokIHBUS/HSBC@RepubHc 

" Kwok Ying FUNG/NBD SIP/HBUS/HSBC@HSBC, Roger I K SO/HO NBD 

RNH/HBUSfHSBC@HSBC, 

VVing Kin - Sg CHAN/CEO SIP/HBUSfHSBC@HSBC, Benjamin J SAAAM/NBD 

SlP/HBUSIl-ISBC@HSBC 

Subject 

Re: ISLAMI BANK BANGLADESH LIMITED 

Chris, 

Some background on the issue; 

According to our colleagues in Dhaka, approximately 60,000 Bangladeshis make 

their way to Saudi Arabia annually to perform the Haj, It is estimated that 

each pilgrim will require approximately USD1 ,000-3,000 in currency for 

expenses. On the low side, we're therefore looking at about USD 60 mio of 

currency needs on an annual basis. 

Permanent Subcommittee on Investigations 

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There is a shortage of SAR in the market. Most of it is now supplied by money 

changers and banks who recyde SAR notes that come in from the transient worker 

population worldng in the Middle East. Pilgrims who can't secure enough SAR 

will carry USO notes with them to Saudi Arabia, where they will change them 

into riyals. 

There is therefore an underserved demand here, one that Islam! Bank is looking 

to capitalize on. Assuming that about half of aU pilgrims would prefer to 

change SAR in Bangladesh instead of in Saudi Arabia, that's an annua! 

requirement of about SAR112 mio. Assuming again that we take a conservative 

margin of 2.5 per mille, our estimated net profit would be approximately USO 

75,0001 year. 

Bangladesh is a relatively small market, but there is potential. Our total 

volume in '06 was US037.1 mia, garnering us NT! of approximately US047,000. 

Comparatively, our volume YTO Oct '07 is USD 46 mia, garnering us NT! of 

approximately US072,OOO. We expect the full year's NT! to be around 75,000, 

representing growth of about 53% year-an-year. We are a monopoly here, and 

margins afe decent 

I understand that Hersel Mehani is quite close to Islam!, and PCM already has 

dealings v.ith the prospect. Would this help in supporting our bid to open the 

account, should we decide to proceed? 

Regards, 

Ben 

Christopher Lok/HBUS/HSBC 

08 Nov 2007 01 :29 Mail Size: 80B6 

To 

Kwok Ying FUNGINBD SIP/HBUSfHSBC@HSBC 

00 

Benjamin J SARAM/NBD SIP/HBUSfHSBC@HSBC, VVing Kin - Sg CHAN/CEO 

SIPIHBUS/HSBC@HSBC, Roger T K SOtHO NBO RNHfHBUSfHSBC@HSBC 

Subject 

Re: ISLAM! BANK BANGLADESH LIMITED 

Our Ref 

Your Ref 

MrFung 

First, "m happy to be the RM If this Is an account worth chasing. How much 

money you can expect to make from this name? If this can be answered 

positively then I wil! ask PCM to check out the connection between the aJrajhi 

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connection. I've looked at the Alrajhi Bank profile and found out an identical 

Abdul Aziz Alrajhi (chairman of the papermill co. in the islamic profile) also 

appearing in the alrajhi profile. !fthis is the same person then we have to 

asssume there's cross-{:onnection be-twen the AJraJhi Bank and !slamic Bank. We 

need clarification. 

The name Alrajh has been a name heatedly debated for many yean;. We terminated 

our trading relationship following 911 and only a year ago after London 

Compliance came back telling NYK the group is happy to let us resurrect the 

relationship that we went back.. You should check out the Alrajhi Bank profile 

- done by Gordon Brown and comprehensive. 

Not saying just because of this connection we won't do busniess. tts just that 

if the revenue is there then we're prepared for a good fight. But before that 

tets get the facts straightened out. 

So come back to me with the expected NT!. Also tel! me the entire Bangladesh 

market's worth please. 

Chris 

Kwok Ying FUNGINBD SIP/HBUSfHSBC wrote on 11106/2007 11 :12:44 PM: 

> Chris 

;. The following mails are self-explanatory. VVould you consider to be 

> the RM approver of subject PCM-BN shared client? 

> 

> Regards. 

> 

> KY 

::. --- Forwarded by Kwok Ylng FUNG/NBD S!P/HBUS/HSBC on 1110712007 

> 12:00 PM ---

::. Beth Fisher/HBUS/HSBC 

> 07 Nov 200703:07 Mail Size: 15898 

> To 

> 

::. Angela Cassell-Bush/HBUS/HSBC@HSBC 

> 

> cc 

;. Benjamin J SARAM/NBD SIPIHBUS/HSBC@HSBC, Gillian E 

::. Bachstein/HBUS/HSBC@HSBC02, Kwok Ying FUNG/NBD SIPIHBUS/HSBC@HSBC 

> 

> Subject 

> 

> Re: Fw: KYC BankNotes Profile is IB Denied for: ISLAMI BANK BANGLADESH LIMITED 

::. Our Ref 

::. Your Ref 

> Additionally, ! had mentioned to Gillian the past relationships with 

::. AI Rajhl. tn particular, a couple/few years ago, HBUS exited the 

::. relationship with Al Rajhl Banking & Investment due to Compliance 

::. concerns. (I do not recall all the details). I do see that the 

> relationship was re-activated. Gillian was going to cross-check the 

::. AI Rajhl ownership of Islami Bank with our old KYCs for Al Rajhl 

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> Banl(ing & Investment and AI Rajhi Trading Establishment. 

> 

> This is not just an RM issue. This is a KYC due diligence issue. 

> 

> Beth 

> Angela Cassell~Bush/HBUS/HSBC 

> 11/061200701:41 PM 

> To 

> Kwok Ying FUNG/NBD SIP/HBUSIHSBC@HSBC 

> 

> cc 

> Gillian E Bachstein/HBUS/HSBC@HSBC02, Benjamin J SARAM/NBD 

> SIPIHBUS/HSBC@HSBC, Beth Fisher/HBUS/HSBC@HSBC 

> 

> Subject 

> 

> Re: Fw: KYC BankNotes Profile is JB Denied for: ISLAM! BANK BANGLADESH LIMITED 

> Kwok: 

> Unfortunately, the KYC profile for !SLAM! BANK BANGLADESH LIMITED 

> has been IB denied by Beth Fisher because the client is not known to 

> CIB. As it stands, we have not been able to identify the RM 

> Approving person for this relationship. I would suggest that you 

> reach out to Chris Lok to see if he is v.riUing to be the the RM 

> Approver. Once this is confirmed, let me know and I will resubmit 

> this through the approval chain. 

> 

> Regards, 

> Angela Cassell-Bush 

> Compliance Officer! HSBC Bank. USA 

:> 90 Christiana Road New Castle, DE 19720 

:. Phone. 

> Fax. 

:> Email. 

302-327~2017 

302~327-2128 

ang el EI.casse!l~bush@u s ,hsbc.com 

> Kwok. Ying FUNG/NBD SIP/HBUSfHSBC 

> 10124/2007 10:41 PM 

> 

> To 

:> Jarrett L Payne/HBUSlHSBC@HSBC, Angela Casse!!~Bush/HBUSfHSBC@HSBC 

> 

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:> Benjamin J SARAM/NBD SIPIHBUS/HSBC@HSBC 

:> Subject 

:> Fw: KYC BankNotes Profile is IB Denied for: ISLAMI BANK BANGLADESH LIMITED 

:> Dear Jarrett I Angela 

> 

> Our banknote profile was ~!B Denied" by Beth as she is not the RM. 

:> Could you please update the client profile with the correct RM? I 

> understand the client profile right now is also "IB Denied", kindly 

:> advise us once you put the profile back to approval process. Thank you. 

:> Best regards. 

> KY 

:> --Forwarded by Kwok Ying FUNGfNBD SIP/HBUSfHSBC on 10125/2007 

:> 10:14 AM ----

:> Beth Fisher/HBUS/HSBC 

:> 24 Oct 2007 22:29 Mail SiZe; 1908 

> To 

> Kwok Ying FUNG/NBD SIP/HBUS/HSBC@HSBC 

> 

> CC 

:> Subject 

> 

:> KYC BankNotes Profile is IB Denied for: ISLAMI BANK BANGLADESH UMITED 

> Our Ref 

:,. Your Ref 

> A BankNote Profile in BANGLADESH for HSBC Office Singapore, has been 

:> IB Denied (Reference #20501761). 

:> Click on the attachment to link to the BankNote Profile. 

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oce-Psi -00154139 From: ANGELA CASSELL-BUSH!HBUS/HSBC Sent: 11/9/2007 10: 57:40 AM To: CHRISTOPHER LOK/HBUS/HSBC@HSBC 

CC: BENJAMIN J SARAM/NBD SIP/HBUS/HSBC@HSBC;WING KIN - SG CHAN/CEO 

SIP /HBUS/HSBC@HSBC; 

GILLIAN E BACHSTEIN/HBUS/HSBC@HSBC02;PSRR@HSBC 

subj ect: Re: ISLAMI BANK BANGLADESH LIMITED-Bangl adesh 

chri s I 

In response to your i nqui ry, pl ease note that there is a connecti on between ISLAMI BANK BANGLADESH LIMITED-Bangladesh and Al-Rajhi Bank (aka: Al Raijhi Banki ng and Investment corporati on) . 

Based on the information that we have on file, the Al- Rajhi family has been associated with Islami Bank Bangladesh Limited, since its inception. They have at least 37% direct ownership wlthin ISLAMI BANK BANGLADESH LIMITED through their ownership within the following companies; Arabsas Travel & Tourist Agency, 9.999%, Janab Yousif Abdullah Abdul Aziz Al-Rajhi, 9.936%; Al-Rajhi 

company for Industry & Trade, 9.94%; Abdull ah Abdul AZl z A l-Rajhi, 7.58% 

This same family has major controlling interest within Al-Rajhi bank (aka Al Raijhi Banking and Investment corporation). 

Hope this helps. please let me know if this information is satisfactory. 

Regards. 

Angela cassell-Bush compliance officer I HSBC Bank USA 90 christiana Road New castle, DE 19720 

phone. 

Fax. 

Email. 

302-327-2017 

302-327-2128 

angel a. cassell-bush@us.hsbc.com 

chri stopher Lok/HBUS/HSBC 11/08/2007 10: 17 AM 

To 

Kwok ying FUNG/NBD SIP/HBUS/HSBC@HSBC 

cc 

Benjamin J SARAM/NBD SIP/HBUS/HSBC@HSBC, wing Kin sg CHAN/CEO 

SIP/HBUS/HSBC@HSBC, Angel a cassell-Bush/HBUS/HSBC@HSBC, Gi 11 i an E 

Bachstei n/HBUS/HSBC@HSBC02 

subject 

ISLAMI BANK BANGLADESH LIMITED 

KY 

Further to my email exchange with Ben, I like to confirm that I'll be happy to be the GRM of this banknotes prospect/PCM client. However I would like to ask page 1 

Permanent Subcommittee on Investigations 

EXHIBIT #83 
955 


76061.381

Dee-Psi -00154139 Gillian and company to find out the possible link between this name and the Al rajhi Bank (an approved name for sanknotes business). 

Beth I 5 statement about A 1 rajhi Tradi ng Est is i rrel evant as thats name we long ago taken out of our profile. That name is not related to the Alrajhi Bank. 

lIve looked at the A 1 rajhi Bank prof; 1 e and noted a chap by the same name who owns the papermill (islamic). 

Chri 5 

Kwok ying FUNG/NBD sIP/HBUs/HsBC 

11/06/2007 11: 12 PM 

To 

Chri stopher Lok/HBUs/HsBC@HsBC 

cc 

wing Kin - sg CHAN/CEO sIP/HBUs/HsBC@HsBC, Benjamin] sARAM/NBD 

SIP /HBUs/HsBC@HsBC 

SUbject 

ISLAM! BANK BANGLADESH LIMITED 

chri 5 

The following mails are self-explanatory. would you consider to be the RM approver of subject PCM-BN shared client? 

Regards. 

KY 

----- Forwarded by Kwok Ying FUNG/NBD sIP/HBUs/HsBC on 11/07/2007 12:00 PM -----

Beth Fi sher/HBUs/HsBC 07 Nov 2007 03:07 Mail Size: 15898 

TO 

Angel a cassell-Bush/HBUS/HSBC@.HSBC 

cc 

Benj ami n ] sARAM/NBD sIP/HBUs/HsBC@HsBC, Gill i an E 

Bachstei n/HBus/HsBC@HsBC02, Kwok Ying FUNG/NBD sIP/HBUs/HsBC@HsBC 

subj ect 

Re: Fw: KYC sankNotes profile is IS Denied for: ISLAMI BANK BANGLADESH 

LIMITED 

Our Ref 

Your Ref 

page 2 
956 


76061.382

oee-Psi -00154139 

Additionally. I had mentioned to Gillian the past relationships with Al Ra~hi. 

~~jhir~~~~~ ~~' & a I~~~~~~~~~w d~:a~~ ~6~pl ~~~~e e~~~~~r~~~ r(ia~~ o~~~i ~e~~i~ :11 the detail 5). I do see that the rel at; onship was re-acti vated. Gill i an was going to cross-check the Al Rajhi ownership of Islam; Bank with our old KYCs for Al Rajhi Banking & Investment and Al Rajhi Trading Establishment. 

This is not just an RM issue. This is a KYC due diligence issue. 

Beth 

Angela Cassell-Bush/HBUS/HSBC 

11/06/2007 01:41 PM 

To 

Kwok Ying FUNG/NBD SIP/HBUS/HSBC@HSBC 

ee 

Gi 11 i an E Baehstei n/HBUS/HSBC@HSBC02, Benjam; n ) SARAM/NBD 

SIP/HBUS/HSBC@HSBC, 

Beth Fisher/HBUS/HSBC@HSBC 

Subj eet 

Re: Fw: KYC BankNotes profile is IB Denied for: ISLAM! BANK BANGLADESH 

LIMITED 

Kwok: 

unfortunately, the KYC profile for ISLAM! BANK BANGLADESH LIMITED has been IB 

denied by Beth Fisher because the c11ent is not known to CIB. As it stands. we have not been able to identify the RM Approving person for this relationship. I would suggest that you reach out to chris Lok to see if he is willing to be the 

~~~o~~h A~h~o~~~~oe~~e c~~1 ~. i s confi rmed, 1 et me know and I wi 11 resu mi t thi s 

Regards. 

Angela cassell-Bush compliance officer I HSBC Bank USA 90 Christiana Road New castle, DE 19720 

302-327-2017 

302-327-2128 

phone. 

Fax. 

Email. angel a. cassell-bush@us.hsbc.com 

page 3 
957 


76061.383

Dcc-Psi -00154139 To 

Jarrett L payne/HBus/HSBC@HSBC, Angel a cassell-Bush/HBUs/HSBC@HSBC 

cc 

Benjamin J SARAM/NBD SIP/HBUS/HSBC@HSBC 

subject 

Fw: KYC BankNotes profile is IB Denied for: ISLAM! BANK BANGLADESH LIMITED 

Dear Jarrett / Angela 

Our banknote profile was "18 Denied" by Beth as she is not the RM. could you please update the client profile with the correct RM? I understand the client profile right now is also "IB Denied", kindly advise us once you put the profile back to approval process. Thank you. 

Best rega rds. 

KY 

Forwarded by Kwok Ying FUNG/NBD sIP/HBus/HSBC on 10125/2007 10:14 AM -----

Beth Fi sher/HBus/HSBC 

24 Oct 2007 22: 29 Mai 1 si ze: 1908 

To 

Kwok Ying FUNG/NBD SIP/HBus/HSBC@.HSBC 

cc 

subject 

KYC BankNotes profile is IB Denied for: ISLAM! BANK BANGLADESH LIMITED 

our Ref 

Your Ref 

A BankNote profile in BANGLADESH for HSBC Office singapore, has been IS Denied (Reference #20501761). 

click on the attachment to link to the BankNote Profile. 

Page 4 
958 


76061.384

HSBC-BNLE 0050761. txt From: DANIEL JACK/HBUS/HSBC sent:· 8/18/2009 12:44:40 PM 

To: CHRISTOPHER LOK/HBUS/HSBC@HSBC02l1HSBC;HOW WEI ONG!LGA SGH/HBAP/HSBC@HSBC03 

CC: DENIS E O'BRIEN/HBUS/HSBC@HSBC02:GEORGE JAMES/NBO SIP/HBUS/HSBClIHSBC03.;GILLIAN E BACHSTEIN/HBUS/HSBClIHSBC02 ; 

VALERIE E COLE-HUOSON/HBUS/HSBCllHsBC02 

subject: EDD Report of Findings! _ank Ltd in Bangladesh (BN-SP & POt) 

~hri s f 

PSRR is reviewing th.is client and should reply soon with their analysis & 

reconunendation from PCM. 

HOW We; - AS LCO in singapore, please review the KYC profile t EDD report, and e-mails below. Then let us know if you recommend SCC classiflcation (for PEP and/or reputational risk) for this PCM and Banknote-Singapore client. 

_ Bank L irnited - in BANGLADESH 

KYC prof; 1 e --> 

EDD ROF: 

Thanks and regards. 

Dani el Jack Vice President - compliance officer, GTe 

HSBC Bank USA, NA 4.52 Fifth Avenue, 7th floor, New York, NY 10018 

phone. 

Email. 212-525-8686 dani el. j ack@.us.hsbc.com 

christopher Lok/HBUS/HSliclIHSBC02 

08/18/2009 01: 08 PM 

To 

Dani e 1 Jack/HBUS/HSBC@HSBcAMERlCAS cc 

Denis E o'brien/HBUS/HSBC@HsBC02. George JAMES/NBD SIP/HSUS/HSBC@HSBC03, Gi 11 i an E Bachste; n/HBUS/HSBClIHsBC02, val eri e E CDl e-Hudson/HBus/HSBC@HSBC02 

~~~j~~~ Report of Findings: _Bank Ltd in Bangladesh (BN-SP & po,,) 

Page 1 ~_--=-R-ed-.-ct-'d-b-Y-tb-'-P-,,-,.---i 

SubcommiHee on 1n· -.:J 

Permanent Subcommittee on lnvesti ations 

Confidential· FOIA Treatment Re' ... _~E~XH~I.B.I.T.#:;.;8 .. 4.a __ ... 

Confidential - FOIA Treatment Re' 

:lings, Inc. HSB08071921 

HSBC OCC 7688017 
959 


76061.385

( 

H5BC-SNI_E 0050761. txt 

Dan 

I support Hersel's 'stance that this is sLlch a large bank hence malfeasance is 

~~g~l~e~e c~~~:rffe~. do not agree that just on these numerous breaches the bank 

_.._Bank has a recent case of a bank officer in the private banking ~dmitted to tving stolen HI(0100 million from the bank. should we then c1 assify Bank, a 62% sub of HSBC, an SCC? 

chris 

Dani e 1 Jack/HBUsjHsBc 08/18/2009 11:45 AM 

m . Gi 11 i an E Bachstein/HBUS/HSBC@HSBC02, chri stopher lok/HBUS/HSBC@HSBC02 cc 

valerie E cole~Hudson/HBUs/HSBC@HsBC02, George JAMES/NBD SIP/HBUS/HSBC@HSBC03, 

oenis E o'brien/HBUSjHSBC@HSBC02 

~~gj:;~~rt of Findings: _sank L1:d in Bangladesh (BN-SP & PCM) 

Gillian / chris, 

Do you agree with scc classification for this BN & PCM shared client? 

Thanks and re~ards, 

Daniel Jack vi ce Presi dent - compliance offi cer, GTB 

HSBC Bank USA.' NA 452 Fifth Avenue. 7th floor, New York, NY 10018 

phone. 

Email. 212-525-8686 daniel.jack@u5.hsbc.com· 

----- Forwarded by Oaniel Jack/HBUS/HSBC on 08/18/2009 11:41 AM -----

Hersel Mehan;!HBUS/HSBC 08/17/2009 11: SO AM 

TO 

Oaniel Jack/HBUS/HSBC@.HSBC02 

cc 

Al1thony Julian/HBUS/HSBC@HSBC02, christopher Lok/HBUS/HSBC@HSBC02, Denis E 

0' bri en/HBus/HSBC@HSBC02, George JAMES/NBD SIP/HBUS/HSBC@HSBC03, Gill ian E 

Page 2 

--:= Redatted by the Pennanent 

Subcommittee on Investigations 

Confidential- FOIA Treatment Requested by HSBC N. America Holdings, Inc. HSB08071922 

Confidential- FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 7688018 
960 


76061.386

( 

HSBC-BNI_E 00S0761. txt Bachstein/HBu5/HSBC@.HSBC02, Jacob X Houseknecht/HBU5jHSBC@HsBC02, Roger T K 

~~~H~ ~~D c~:~~~~S'~~'~::~'~~~c@~~!~~l e E col e-Hudson/HBu.s/HSBC@HsBC02, wi ng 

subject 

Re: EDD Report of Findings: _Bank Ltd in aa"ngladesh (BN-SP & PCM) 

Dan; el Many thanks for your updated information, . 

~o w~~l a s~~~lr~eef~w C~fS~.~~1~~ig~n~O~r~ ~~~~ha~~ ;~~~e ~~:t l~~~!r~~ i6~t~~'s are in place. As you know the bank being t.he .... Gave owned will always faces such issues at a lower level .of bank ~ent's. I aI!1 ~ware ,that the 51'" Management and Sen; or offi eel'" are screened and offl clally chosen by the board of the central bank and from past experience they have chosen honest and professional Bankers. HoWever they will always 

~fV~he exg~~~~~c~~ti~O~~s~:~i~~r~h:hga~~l abuse their power and take advantage 

overall I am comfortable with the relationship we presently have on the PO'! and will support retaining this account 

Thanks and regards, 

Hersel Mehani Senior vice President I HSBC Bank USA N.A. 

Gl oba 1 payments and cash Management 452 Fifth Avenue, Floor 21, New York NY 10018. USA 

Phone. 

Fax. 

Mobile. 

Email. 

Internet. 

+1-2U-S2S-6239 +1-212-S25-S699 

hersel .mehani@us.hSbc.com 

HSse H~~~b~io~:,m~?i: and cash Management 

Daniel Jack/HBUS/HSBC 17/0Bn009 11:29 AM 

To 

valerie E Cole-Hudson/HBUs/HSBC@HS8C02" Wing '<in - Sg CHAN/CEO SIP/HBUS/HSBC@HSBCOl cc 

Gillian E Bachstein/HBUS/HSBC@HSBC02, Roger T K SO/HO NBD 

~~~{~~g~~~~B~~7~~3;jHS8C@HSBC021 Anthony Jul i an/HBUS/HSBC@HSBC02 J He:rse 1 Mehani/HBUS/HSBC@HSBC02, Denis E o'brien/HBUs/HSBC@HsBC02, Jacob X Houseknecht/HBUS/HSBC@HSBC02. George JAMES/NBD SIP/HBUS/HSBC@HSBC03 Subject 

£DO Report of Findings: _Bank Ltd in Bangladesh (BN-SP & PCM) 

page 3 

--:; Redacted by the Penn anent 

, Sulicommittee on Investigations 

Confidential - FOIA Treatment Requested by HSBC N. America Holdings, Inc. HSB08071923 

Confidential. FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC acc 7688019 
961 


76061.387

HSBC-BNI_E 0050761. txt 

Valerie / WK. 

~, w!~~. )e~~g:r~~~~o~h~ ~~~tt~: i~}~~i~ o~a{a~~~f~~ edn~ n t~hi ~u~~ge~~F :BNf~' is a POI and Banknote-Singapore shared client, so you may want to collaborate with each oth~r and the RM & Sales Manager on this - and determine/confirm whether you want to maintain them as a client in' each of your respective businesses. Resolution of the issues and risk mitigants would neec;f to be well-documented. 

And we need to consider scc classification due to.reputational risk.. 

_ Bank Limited KYC ---> 

Thanks and regards. 

Dan; el Jack Vice President - compliance office'r, GTB 

HSBC Bank USAf NA 452 Fifth Avenue f 7th floor, New York, NY 10018 

phone. 

Email. 212-525-8686 dan; el.jack@.us.hsbc.com 

----- Forwarded by Daniel Jack/HBuS/HSBC on 08/17/2009 11:1S AM -----

FIG H BUS@.HSBC03 

( ~~'i7}~bo~ag~~s~ :esala@HSBc03 

TO 

Daniel Jack/HBUS/HSBC@HSBC02 CC 

Jacob X Houseknecht/HBUS/HSBC@HSBC02, Jack"i e S K QUAH/NBD 

SIP/HBUS/HSBC@HSBC03, 

FIG HBUs@HsBC02 

~~~tOf Findings:..-,Bank ltd in Bangladeshj flU 

Please find attached Report of Findings on ~Bank Limited. 

;u:~ ~:~: ~~fi ~~!~e~~~ ~~~r b~~gv~~~:~~~d . i~a~~e fg~ti~~P~} a~~f s o~~~~~. and/or 

[attachment _Bank- Final-doc.zip" deleted by Hersel Mehani/HBus/HSBC) 

pl ease feel free to contact Jessi ca Dubensky (212-5255746) if you have any queri es. 

page 4 --== Redacted by the Permanent 

Subcommittee on Investigations 

Confidential - FOIA Treatment Requested by HSBC N. America Holdings, Inc. HSB08071924 

Confidential. FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 7688020 
962 


76061.388

HSBC-BNIJ 0050761. txt 

Daniel Jack 13 Mar 2009 22: 09 

To: FIG HBUS@IlSBC02 

cc: Jacob X Houseknecht/HBUS/HSBC@HsBC02 

Jackie S K QUAH!NBO SIP{HBUs!I-!~HSac03 •••••••• subject: EDD for Bank_in Bangladesh 

FIG, 

please provide us with an updated EOD RO~ for this PCM and Banknote: •••• client in Bangladesh. The prior ROF is dated 19~Jun-06. 

Refer to attached form and ALE below. 

[attachment IlEOD ROF for .... Bank iii Bangladesh (13-Mar-09) .xlsTzip" deleted by Hersel -MehaniJHB'Us7HSsc] 

Thanks and regards 1 

Daniel Jack Vice President -. compliance officer, GTB HSBC Bank USA, NA 452 Fifth Avenue, 7th floor, New York, NY 10018 

phone. 2U-S2S-8686 . Email. danie1.jack@us.hsbc.com 

----- Forwarded by Daniel Jack/HBu5/HSBC on 03/13/2009 12: 25 PM -----

Jacob X Houseknecht/HBUS/HSBC 03/13/2009 11:26 AM 

To 

Daniel Jack/HBUS/HSBC@IlsBC02 cc 

with 

Subj·.lle.ct....... • •••• FYI: .. (Bangl adesh) - --==: Redacted by the Permllnent 

Subcommittee cn 'rlvestigl'ltions 

oaniel I 

~g~~t:~ri~ n~~ng~id:~h. in I t~~v~r~~~i~h~~ ig~, ~~~U~~q~~~ 10:~r (score 25) for 

t~~~a~h~~~" ank limited.xls" deleted by' Hersel Mehani!HBUS/HSBC] 

I have also included the results from an RAU search' conducted on 3/12/2009. page 5 

Confidential- FOIA Treatment Requested by HSBC N. America Holdings, Inc. HSB08071925 

Confidential - FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC acc 7688021 
963 


76061.389

HS8C-BNI_E 0050761. txt The bank is listed as a PEP because it is owned by the government. There was information found on our internal database that seems to have al ready been 

~~~r~~!e~h~i~~!~~S,V l" the KY§ e, G:h6r~! j~~;~1;!~ a p~~~. ~:~v!~s~!n~o is 

10nger holds any 04 e Posltlons bted. It: seems to me that no further actl0n needs to be taken on these i1;ems, however I wanted to get: your opinion on the matter. . 

i~~~~ ~~~~u!n~~~ai~~n G~ ~~tg~~ r:c;!rp~~!:t~~rjO ~L~o 1 s ~'!t S~~!~i~~ I shool d 

questions would be relevant to_this situation. Your heip and guidance is much appreciated. 

Thank you, 

Jake Houseknecht PSRR 

HSBC Bank USA, N.A. 90 Christiana Road New castl e I DE 19720 (302) 327-2520 Jacob X Houseknecht/HBUS/HSBC ----- Forwarded by Jacob X Houseknecht/HBUS/HSBC on 03/13/2009 11:04 AM -----

RAU HBUS 

~~?i2'~bo~e3!~ln p~ Ciurdar 

TO 

Jacob X Houseknecht/HBUS/HSBC@HSBC02· 

cc 

RAU HBUS@HSBC02, ICRO ALES@HSBC02 

~~~jie.ct ........ (Bangladesh) ..... .

__ :: Redacted by the Permanent 

Subcommittee on Investigations 

Confidential - FOIA Treatment Requested by HSBC N. America Holdings, Inc. HSB08071926 

Confidential _ FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 7688022 

Reda~bylhe 

l'erm.nent Subcommittee 011 InvestigatioDs 

HSB08071928 

HSBC acc 7688024 

HSB08071927 

HSBC OCC 7688023 
964 


76061.390

c 

· HSBC-BNI_E 0006344. txt From: CHRISTOPHER LOK/HBUS/HSBC 

Sent: 9/2/200S 10:28:47 AM 

To: SHARYN MALONE/HBUS/HSBC@HSBCAMERlCAS 

~~bject: FW: Report of Findings - ............ FIG 

sharyn 

I'm v'ery fed up with these people. ----- Forwarded by christopher Lok/HBUS/HSBC on 09/02/2005 11:31 AM -----

christopher Lok/HBUS/HSBC 

09/02/2005 11: 20 AM 

To 

wing K;n - Hk CHAN/NBD RNH/HBUS/HSBC, Dan;el Jack/HBus/HSBC 

cc 

Betty F S NG/NBO RNH/HBUS/HSBC@HSBC. Bruce LI/RNH/HBUS/HSBC@HSBC, Gary C H YEUNG/SYP NBD RNH/HBUS/HSBC@HsBC, Roger T K SO/OO NBD RNH/HBUS/HSBC@HSBC, Tom K 

LAU/VP NBD RNH/HBUSjHSBC@HsBC. John 5 GUBERTjHGHQ/HSBC@HSBC, Lynda J cassell/HBusjHsBc@HSBC 

subject 

Roe: FW: Report of Findings - Bank - FIG 

I disagree Wh.ole-~.ea. rted1:t wit~'s recolMlendation. FIG displays ignc;>rance to the banking tierachy of the~anks. As said many times, all state owned banks in re appointed by the Govt and this ;s not the ground to think that the person is a PEP. 

yes corrugtjofl can be rampant in this ban~ it is not"unique to- .~ •• ank. Without excet;ltion all ~state owned banks hav~ and wil contlnued to be plagued by rmsuse of state's money, corruption and .. delinquent loans.--.Ib.ats why alone t his year the State has injected over billion into the _ banks.. 1his is all p~b11c knowledge~ 

Bank ; n whi c:h HSBC has a 19% stake is the '-'c;tate OWn~d Bank and I'm sure HSBC must have found impropriety. shall w~ classify this name as an SCC? 

My point is HBUS bein9 a ,-!S entity cannot simply use the excuse that because of us regulators' attentl0n and then say that 'I wan1: to classify this name as an see because of the adverse repu'tation tl1is institution has'. 

~~o~~e~~~~u1 ~a~~~~ ~~~iS b~o h!i~e a~h~~e v~~~u~ t c~~~ i ~~c~t L~G:l g~~~h ~h~e !~ni or 

fxecuv,p 'j [he B~~kn~~. examine this questlon :. Are the State owned Banks in, 

John: could you plea.se discuss this with Iain and get his opinion. I want to elevate this to a much higher level now as I want a quick resolution rather than continue engaging myself in these unnecessary discussions. 

chris 

page 1 

Permanent Subcommittee on Investigations 

__ "" Redacted by the Permanent 

Subcommittee on Investigations 

EXHIBIT #84b 

Confidential. FOIA Treatment R' ... ----------

r.nnfil'!<mtial • FOIA Treatment R, 

Idings. Inc. HSB00161691 

\. HSBC acc 7690024 
965 


76061.391

c 

HSBC-BNLE 0006344. txt 

wi ng Ki n - Hk CHAN/NBD RNH/HBUS/HSBC 

09/01/2005 09:21 PM 

To 

C chri stopher Lok/HBUS/HSBC@.HSBC, Roger T K SOtHO NBD RNH/HBUS/HSBC@HSBC, Gary 

H YEUNG/SVP NSD RJ-jH/HBUS/HSBC@HSBC, Tom K LAU/VP NBD RNH/HBUS/Hsaa!HSBC, Bruce 

LI/RNH/HBUS/HSBC@I<SBC 

cc 

Betty F S NG/NBO RNH/HBUS/HSBC@HSBC 

subject •••••••• FW: Report of Findings - Bank - FIG 

For your information. 

Best regards WK 

c---- Forwarded by Wing Kin - Hk CHAN/NBD RNH/HBUS/HSBC on 09/02/2005 09:15 AM 

Daniel Jack/HBuS/HSBC HBUS 

09/02/2005 05: 02 AM 

Mail size: 37403 

To 

wi ng Ki n - Hk otAN/NBD RNH/HBUSjHSBC@HSBC 

cc 

subject •••••••• FW: Report of Findings - Bank .... FIG OUr Ref 

YOlJr Ref 

FYI - FIG recommends this BN-HK client be an scc, so PCM will fo11ow-up ... 

---------------------- Forwarded by oa~iel Jac1<!HBus/HSBC on 09/01/2005 05:02 PM --------------------------- FIG HBUS an 01 Sep 2005 16: 30 Note 

01 Sep 2005 16: 30 

From: FIG HBUS Tel: Title: location: WorkGroup: Mail size: Sent by: Michael Ellis 28892 _ "" Redacted by t~e Perma~ent. 

Subcommittee. on Investlgntlons 

Page 2 

Confidential. FOIA Treatment Requested by HSBC N. America Holdings, Inc. HSB00161692 

~nnfk'gntl~1 • Fnl.lI. T .... ~tm"nl Re[]uested bv HSBC Bank. USA. N.A. HSBC OCC 7690025 
966 


76061.392

( 

HSBC-BNLE 0006344. txt To: shannon M Jones/HBUS/HSBC@l-fsBc 

CC: Ginny Tsuei/HBu5/HsaC@HSBC 

Rhonda Lee-Thomas/HBus/HSBCliHsBC Andree Galindo/HBuS/HSBCliHsBC Paul Di Benedetto/HBUS/HSBCliHsBC Nanayo Ryan/HBUS/HSBCliHSBC Pi erre Nasser /HBUS/HSBCIiHSBC George Tsu1ranes/HBus/HSBC@.HSBC 

~~~ e1 ~i~0~'~~~~f~~~~~~BC FIG HBUSIiHSBC 

~~~j~~:O'~~~~~il~~B~~~~~~~~B~C ••••••• Bank _ FIG 

REMARKS/RECOMMENDATIONS 

Shannon, 

~~eY~nr.! 1 s~~~gr ; ~~~~e~~~~ a~P~~~l ~;e~! n~!~~s b:~~ , nvo lved ; n numerou~ank,' significant instances of corruption, fraud; and embezzlement over the past few 

years HUPljghtj .o:a~k~~ :~~~~;~~t (~~~~~d~dt~~ ig~l~rn:;;s below) involving 

Redacted by the 

Permanent Subcommittee on Investigations 

Also, Bank should be considered for special category of 

g{~~{ c~f~~) E~~~~~a ~~~s~~ l~~?)u~~e~~r~d~~~~~kt (~:~~~1 ~a~~~~~~ed as a 

For the above reasons., and the additional instances of financial crime. i~~nviio~l~V.i~~e Bank's employeesj as detailed below, we recommend that _ ' ~ sank's account re ationshij:!s with HSBC be closely monitorecr:-The nu er of instances of corruption. fraud and embezzlement at this institution appears hi!1h when compared to other institutions that we have reviewed, and may 

~he;~~~~ai~~~ ~n~~fc~~~l~~~st~~v:a~~~oit!~ is especially of cO~~k~sgiven maJ1agement and top executives. 

Much of the info ticn ertainin to the instances of corruption, fraud and 

~~~~~~l~fe~~n~{ngs in Octo er 2 0 .B~~r~~r~~t~!n~~c~~~~Uihitt~o~u~o~~id!~Us these findings and discuss them with your Local Complianc.e offic!=!r (LCO). 

Sincerely, 

page 3 

HSBC OCC 7690027-032 

Redacted by the Pennanent Subcommittee on Investi ations 

__ "" Redacted by the Penn anent 

Subcommittee OR Investigations 

HSB00161693 

HSBC acc 7690026 
967 


76061.393

Reference: 

Know Your Customer Profile 

HSBC Bank USA, NA 

Status: CO Denied 

, ____________ Needs Re,Appro,-,v"ai __ _ 

Client Name: AL RAJHI BANKING & INVESTMENT CORP 

Country: SAUDI ARABIA 

L Generallnforma!ion 

Treatment Requeste-if HS8C,PSI,PROD,01 D2310 
968 


76061.394

02'\] 

Confldentl:Jl Treatment Requested HSBC,PSI·PROD·Oi02311 
969 


76061.395

II. OwnershlplManagement'Business Information 

Confidential Treatment Requested HSBC·PSI,PROD·01D2312 
970 


76061.396

ReJerrallnJormation 

IV, Visitation 

Visitation Details: 

V, Purpose/Nature of Activity 

Confidential Treatment Requested 
971 


76061.397

Financial Summary 

VII. Documentation Checklist 

Confidential Treatment Requested HSBC-PSI-PROD-0102314 
972 


76061.398

Know Your Customer: AL RAJHJ BANKING & INVESTMENT CORP 

VIII. Summary of Reasons 

• ALE search conducted on the bank, its management and owners. No matches W!:fe found on OFAC. World-Check 

Board of Directors as a PEP and this has been noted below 

DD ROF dated 10 March 2010 contained some negative news aJtides conceming the bank's alleged refusal to cooperate with a US 

ovemmenl Supoena in relation 10 its "investigation into 1errorist financing"_ The bank has !aund1ed COI.lnter"Pfoceedings in the US 

ourts in response to the US Governments stance. This case is cunently pending an outcome and the US Government has yet to take 

ny steps to make this a designated entity. London Banknotes flas discussed these news articles with the GRM, who is comfortable 

'th continuing this re\ationsttip. Until further developments London 8anknotes is comfortable lD continue 1he existing relationship, 

hilst monitoring the situation as is warranted fotthis sec Type 4 client 

DD ROF request made 13tt1 January 2009 Compliance says not required from NY. Own due diligence performed and no issues 

ound. No references were found to the history involving court cases 

DD ROF 4th December 2007· 

espite the overall reputation of the At..Rajhi family in Saudi Arabia, there have been numerous aUega1ions cf impropriety in the 

uslness dealings of ,!>.I-Rajhl and their group of companies, specifically in Europe and the United States. The controversy primarily 

nters around the patriarch. Sulaiman Bin Abdutaziz AI-Rajhi and somewhatditectly and indirectly to AI-Rajhl Bank, of which he is 

oth Chainnan and Managing Director. These cNIegations allude to tax evasion, money laundering and terrorist financing. Though 

evere in narure, none of these allegations have yet resulted in any convictions or sanctioned by either U.S. or foreign govemments 

his bank is already I<'Jled an SCC-1 due to the ownersllip and control by AbduHah Abdul AI Rajhi The KYC Customer profile indicates 

~,vo,;"u""te,,,,Ons against the bank but it is noted that no fonnal charges have been levied by US officials. We wi11leave this bank 

hree AI Rajhl brothers own 44.5% of the shares in me Bank, although the total AI Rajhifamily sharenolding is significantly higher Four 

Rajru brothers ara listed in Forbes Magazine as being part of "the 400 wealthiest individuals in the world. with a combined net worth of 

22.5 Sillion. No mention is made in Forbes about any connections to terrorist financing or terrorism for that matter Apartrrom"the 

eneral Organization for Social tnsul<'Jnc.e no portion of me remaining 45.4% is held by an individual orentrty with more than 5% share 

he founding AI-Rajhi family continues to hold a key stake and provides several of tile top managers, It is the largest Islamic bank in 

e Arab world At Rajhl 8anking and Investment Corporation is a major name in Saudi Arabia's banking DOd business world It has 

rown from a strong base, focusing on serving "the needs oftha nation and Its citizens, contributing 10 the Kingdom's construction and 

evelopment, and always operating witl1in the framework of Shariah principles. AI Rajhl Sanking and Investment Corporation is one of 

e largest joint stock companies in the Kingdom, with a paid up capital of SR 2,250.000.000. Head Office is located in Riyadh and 

ere are six Regional Offices. The Corporation has the largest branch network distributed througl1out the Kingdom and the largest 

TMnetwor1\ 

he foilowinO Board of Directors and managers ware checked against OFAC and Wor1d-Cl1eck as at 14 January 2009 No adverse 

nforrnation was found in "the detabases or on OFAC, London 8ankrioles believes thai the management is competent<ls assessed by 

ur meeting with management since 1998 

oardofDirectors 

ulaiman Abdul Aziz AI Rajhi - Chairman & Managing Director 

dunah Sulaiman AI Rajhi - CEO 

ulaiman Saleh At Rajl1i 

duDah Abdul Aziz. AI Rajhi 

alah Ali Aba AI Khail (PEP) 

bdul Aziz Khalid AI Ghefai!y 

ohammed Osman AI 8ishr 

ohammed Abdul Aziz AJ Rajhi 

ohamed Abdullal1 AI Rajhi 

i Ahmed AI Shudy 

aeed Omer Qasirn Alesayi 

8nagementTeam: 

bdullah Sulaiman AI Rajhl - Chief Executive Officer of the AI Rajhi Bank. He is a member ofa well-known business family in the 

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iddle EaSl6l1d the Gulf Area, He is a graduala in Business Administration. He was the Deputy General Manager for Investments & 

creign Relations. During 1994 he was promolad to First Deputy General Manager and he became Director & General Manager of the 

ank in 1996. In 2005 he was furtiler promoted to the CEO of the bank. He is also a member of the Board of Directors of a group of 

ther Saudi Business entities, He was nominated two 'limes as the winner of The Islamic Banker of the Year Award 2007 

aeed Mohammed AI Ghamdi ~ Deputy CEO for A1 Rajhi Bank. With over 16 years ofbank.irlg eXjJerlence, Saeed has held several key 

sroons with AI RajN Bank including Chief Information Officer, General Manager of IT & Operatitlns before becoming Heed of Retail 

anking in 2003. Saeed assumed his current role of DCEO in 2007 and in his previous role as GM of Retail BaJ1king, Saeed was 

esponsible for leading projects across the retail business, induding major projects in the 21reas of IT end CRM development 

ain Blacklaw - COO, M( Blacklaw joined AI Rajhl Bank as Chief Operating Officer in July 2008, in this role he has responsibility for the 

T, Operations and AdminiSlr2llive Services. lain has over 20 years ofe;q)erience in Banking and IT Service Management, having held 

eniar positions with EDS, Westpac Bank and Bank of Queens!and in Australia, with a successful track record of implementing major 

8nge initiatives. AI EDS lain was responsible for all operations across Asia for EDS dients, in the Bank of Queensland he held the 

sition Group Executive IT 21nd Operations and at Westpac he buill and ran the mejority of the Bank's operations centres. lain hold an 

anours Degree in Economics from Aberdeen University, a qualified accountant (CIMi\), obtained whilstworldng in London in !he Oil 

ndustry and attended Stanford University for post graduate studies 

ori Anand GM. Retail Banking Group. Anand was appointed General Manger of Retail Banking in July 2007. His is responsible for 

haping the Short and long tenn strategy for the Retail Banking Group. Anand, hes been wilh AI Rajhl Bank since AuguSl2003. Prior 

his current assignment Anand held senior management roles in the Consumer Asset business and Operaoons department within AI 

ajhi Bank. Anand has 18 years of Retail Banking experience with exposure to banking practices in countries BcrOSS the CEMA 

egion. He has rim e:.;periance in setting up green field projects in banking which indude new bank sel ups, off shOre outsoUl'cing 

ractices and banking affiliate set ups. Prior to joining AI Rejhi, he served as a Vice President in Citigroup, where he worked for 13 

ears. Anand holds an MBA degrel!! with specialization in Marketing and Systems. He is also a member of Visa's Advisory Board fO( 

EMA. Anand is married with 2 daugnlars 

arlin Lopez· General Manager of the Corporate Bank.irlg Group. Martin has oyer 23 years e:qlerience in the Corporate and 

nvestment Banking field. Martin spent 1 B years working with Citigroup where he held various management positons including, Head of 

inanciailnstiMions and Pub~c Sector, Senior Credit Officer and Head ofCorporala for Malaysia and Southern and Eastern Africa, 

ost recently whilst at Barclays, JoIiartin headed up Merchant Banking for the Africa and the Wlidd!e East 

onstantinos (Dinos) Constantinides· Genera! Manager for Strategy and has avel 13 years of international experience gained in the 

anoal services industry. His current responsibilities include the development of tha Bank's business strategy, together with their 

ansfotmation and executitln into robust business plans. Previously, Dinos has supponed the Bank in setting up and growing the 

etail Banking Group both as an external consultant as weil as a member of the executive team. Prior to joining AI Rajhl Bank Dinos' 

ain professional experience was with Accooture 'htIere he led several strategic initiatives for European banks and financal 

nstilutions. Dinos hol.ds an MBA degree, wilh e specialization in International Strategy from the University of Birmingham and is a 

raduate of the Economic University of Athens. Dinos is married with 3 d'iildren 

aud Abdul A:zjz AI Hoshan· Genera! Manager for Human Resources. Joined 1"11 Rajhl Bank in February 2008 as General Manager of 

uman Resources. Saud staned his career as a Civil Engineer For about 13 years in the governmant, and latertransilioned ttl Human 

esources, He has ovar 25 years experience in many lields and industries. Prior 10 joining AI Rajhi, he served as a Vice President of 

uman Resources in AisEllam Aircraft Company. Saud has an MBA and B.S in Civil Engineering from Gonzaga University in Spokane, 

Nashington State, USA. Saud is married with 1 son Bnd 1 daughter 

amien Whits· General Managl!!T Treasury Group. Joined AI Rajhi Bank in Jaliuary 2009 as Genem! Manager of the Treasury Group 

n his 20+ yearn of wafting experience Damian has held senior Treasury positions with the National Australia Bank Group aJ1d Lei1man 

fOthers in addition to ser.ing as an Officat with the Australian Army. Damian's focus in his current role is on building an international 

reasuryfunction with a full suite of Islamic Treasliry products Damian holds an MBA from 111e Melbourne Business Sd'iooL 

aleh Abdullah 1"11 Uhaidan· General Manager for the Shana Group. He brings a wealth of experience to the Bank. Associate 

rcfessor in the Department of Comp2lrstive Jurisprudence at the Graduate Institute of Justice, he l1o1.ds a PHD in comparative 

urisprudencefrom the High Institute of Justice. He wOl1r.ed in the FaD.lIty of Sharia in Qassim in 1407 AH., and then in the Faculty of 

haria in Riyadh in 1412 AH., folowed by El post as an assistant Professor in the Department of Comparative Jurisprudence at1he High 

nstitUle of Justice in 1416 AH, Dr Saleh also worked in administration of the Higner Institute for Justice for two years, and asa member 

f the Institute for six years He is also a member of the ScientifIC Council at !he University 

'sjtatNns and djlCUlSions iCall Re"o~ 

o January 2010 - Heithem Keterji, Director FIG metl/llith Nikolas Fotilas, Head od StT6tegy alAI Rajhi Bank 

et with Nikolas Fotilas on Wednesday 20th January, 2010. The purpose of the visit was to get an update on their M&A strategy for 

010 and run by them an opportunityil'l Turkey. The main focus for 2010 is oryanic growth where the bank is due to open branChes in 

uwait {1 branch) and Jordan {S branches). They will be very opportunistic on the M&A front and they are interested in GCC and Egypt 

urkey is not of in teres I as the Cllairmali is not convinced of the Islamic Banking proposition in the country 

e agreed to stay in toudl and have monthly calls Of visits. 

4 nO'lember 2009 - David B HUng met with Ahmed Baghazal, Senior Dealer 

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Knew Your Customer: AL RAJH! BANKING & INVESTMENT CORP 

el with Ahmed al GTB roadshow In Riyadh, 

e is vel)' happy with the increased business we have done this year,especially now that we repatriate our surplus SAR Mtes to 

em, The (ecent order they had for C100 mio was fulfilled with Commerzbank wno had no issues wilt1 the crecfit risk on the deal 

'srussiol1s took place in a later meeting about AI Rajhi opening a USD account with us in New York wnich would assist the Banknotes 

usiness 

Mardl 2009 - Shamzani Bin Md Hussain met with Mohammad Fazal Haque, M Farshad Cader 

iscussiofl Points 

Announced USD 1.7 bn profrt for 2008 - 4th Quarter 2008 profJtwas down 10% YoYto 2007 

Expect 2009 to be more maUenging 

Agreed that a Jot more business can be done between the two institutions 

Requested for CAD dearing with HBCA asap 

To increase yolumes of existing Banknotes business 

Perusing Docs for Structured Investment ProdUC1s 

To increase Brokerage Inmsections i.e. Metal Trading, once they ggt darity on fee reduction 

Trade transactions -ready to channel business if rebatas i'lrrangemenl is agreed 

Requested HSBC for Bilateral Murabaha -1-2 years tenor 

To build synergies with AI Rajhi Malaysia - immediate Treasury and Trade transactions'" mulli-currency platform 

Possibility for funding exercise by-4th quarter 2009 - either via Sukuk programme or SyndicatiOll -target USD 2,Obn EMTN - HSBC 10 

e advised 

ctlon 

Shamzani to continue overall engagemenls to increase Flow business and secure potential EMTN mandate 

John 1 Salman to follow up on CAD accounts 

David Billings to follow up on Banknotes 

Sulaiman 10 revert on brokerage fee reduction and follow up on Treasury Docs 

Sharnzani and Davies to follow up with Che Zam I Fadillah of AI Rajhl Malaysia's Treasury 

hariq Siddiqi. 23rd June 2008 

at with Mohammed F6Zal Haque, Manager Financial Institutions Mohammed mentioned ltiey have received Canadian Dollar 

roposalsfrom three otherbank$, and was asking if there is any updata on our side, AlJparently, he was not kept ill the loop by his tearn 

n this issue! told him that AI Rajhl had problems using our Agreement, and HSBC Canada nad reservations against the Agency 

greement sent by them. I explained that if we have to use their Agreement, we need ID go thraugn a tedious clearance! approval 

rocess. It was agreed to dose lhe issue one way or other by next week 

hey would be interested in working with Amanah 00 deals at Senior level Historically. the focus Ilad been on Saudi market but they 

ave now started looking at transactions outSide the Kingdom as weH. He said initial areas of interest would be infrastructure and FI 

xposures and they can come in transactions with USD100m and abolle. I told nirn we will certainly keep this in mind. With regards to eir own funding, the USD1.Om 5-rear fadlity disCl.Jssed earlier is l'I(Jt likely ID nappen this year due 10 market conditions. They will 

evisitthe issue next year. He was pleased with the relationship on banknotes side, and advised that Saleh AJ Jumai would be the best 

erson to meet in that regard. I also e~pressed desire to broaden the conlactwith their product teams, and he will arrange meetings 

ith asset management, strcutured finance etc during the next visits . 

...... , ..... " ......... " .... "." ..... " .... , .. . hariQ Siddiqi. 23rd July 2007 

et with Mohammed Fazal Haque, Manager Financial Insthunons. AI Rajhi 8ank is majority owned by the members of AI Rajhi Family 

ecentty, Fahad AI Rajhi (GM for Treasury and FI) and Cassim Docret (AGM fofTreasury and Fl) left !he bank. We had requested for a 

eeting with Acting GM ofTreasury and F! (Anand Anchan) and his team. but only the Acting Head of F! (Mood Fazal Haque) along 

. his assistanttumed up for the meeting, The bank has sLricl KYC Policies and monitors any unusual transactions through accounts 

s wen as reporting 10 the SAMA. (Saudi Arabian Monetary Agency), Upon opening an account, customers must provide sufficient 

nformation about themselves to satiSfylhe bank. Moneylaundenng is not considered ID be a major problem in Saudi Arabia due in 

art to the extremely severe penalties for drug related crimes 

hey advised that It has been At Rajhl's policy to primarily deal wi1h the largest 10C31 bank in each country. As regard to their 

rrespcndent banking relationship in Sudan, they confirmed thattt1e main correspond ant is Bank of Khartoum, wtlicf1 also maintains a 

BP account with HSBC London. Raju confirmed that relatiOllship with other Sudanese bents is either inactive or insignificant He 

Iso advised that the bank is reviewing its overaR relationship pmtfolio with a view to close the dormant inactive accounts. The bank 

onfirmed that it fully understands the risks associated with providing financial services or making funds available to listed 

rronsts/sanctioned names notified by the competent authorities. He confirmed that necessary due diligence besed 00 FATFfSAMA 

uidelines is pertormed at the relationship ioceptioo stage. They have an automated process to detect if the dient appears on the list of 

DN/sanctioned names advised by the regulatory authority. It also has a Ira/lsaction monitoring system to detect unusual activity in the 

ccount and provides daily reports, which are reviewed by complil'lnce. jf there is suspicion about an account, it is immediately 

eported to S.A.MA and the account is put under surveillance, If it is establislled that Ihe account is indeed being used for money 

aundering purposes, the relationship is immediately exited. 

imon Putt, Hissam Kema! - 1 Sth March 2007' 

at with Anand Mchan, AGM, Treasurer; Sarner Farhoud, Deputy Treasureranci Abdulaziz AI Amro, Senior Manager - Head of 

oducts, Meeting to pitch a rated international Sukuk issue by AI Rahji Bank. They were very open that they would very much !ike to 

ssue along the lines of ADIB and Sharjall!slamic Bank, and ltiat although tt1ey are highly liquid, lt1ey would do ittomorrow for strategic 

urposes. 

alman Hussain, Pallavi Kempaiah - 1Sth July 2006: 

et witt1 Mohammed Fazal Haque, Manager Financiallnslitutions and Mohammgd Ashraf. Gassim Docrat (head of Financial 

nstitutions) was attending the ADB Conference in Hyderabad, hence MH filled in for him MH eppraised us that the Org Wi'lS being 

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Signature Section 

6~EfLQVQpENY HISTORY: 

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<ApprovaU:!lCE!c_dep1> 

<Legal_dept> 

<ApprovaUegal_dep1> 

<legal dep comments> 

In Process: (Old Stallls Approved), 08fl5!2002 02:25 PM: Sharyn MalMe 

Purpose of account changed from: U to: rUSD Clearing) 

Ucense Country(l) changed from: IJ to: {SAUDI ARABIA] 

AM Approved: (Old Status In Process), 21/01/200412.08: AnnaT BROBERG 

No Comments 

CS p,pproved: (Old Status AM Approved), 21fOl/2004 12.19, Stephen J ALLEN 

No Comments 

IS Approved: (Old Status CS Approved), 01/21/200405:34 PM: Christoph-Sf Lok 

No Comments 

IB Denied: (Old Status IS Approved). 0211912004 G4 26 PM: Beth Fisher 

Pis remove Beth Fisher's name as RM for this bank. HBUS NYK CIB RMs have never met this bank. Since !his is an SCC, an RM is 

not in the approval chain on the Noles system. If an RM name is needed, we suggest to input the Banknoles Product RM ~ o( an RM 

in The Middle East who is familiar with the bank. 

AM Approved: (Old Status IB Denied), 201021200409:01: Anna T BR08ERG 

No Comments 

CS Approved: (Old StalUs AM AppfOved), 20/0212004 09:13. Stephen J ALLEN 

No Comments 

IB Approved: (Old Status IS Approved), 0:l!16!2004 12:10 PM: Brian Robertson 

No Comments 

CO Denied: (Old Status 18 Approved), 11/09/200404:51 PM: Terssa Pesce 

No Comments 

AM Approved: (Old Status CO Denied), 11/01/2005 17,30: Sally G LOMAS 

Proflleupdated 

CS p,pproved' (Old Status AM Approved), 12101/200508:33: Stephen J ALLEN 

NoCommenl,> 

IS Approved: (Old Status CS Approved), 01/27f2C05 11 :22 AM: Christopher Lok 

i would ask for conditional approval for another 6 monllls as tDdale despite negative news report no offICial commencement of 

investigations have commenced. If 3I1d when reliable info poin1ing to this dient not appropriate for our business relationship we can 

lIlen terminate immediately. 

IB Approved: (Old status IS Approved), 01/28/200506:11 PM: Timothy Waring 

No Comments 

CO Denied: (Old Status 18 Approved), 021021200510'14 AM: Lynda J Cassell 

Denied at the request of Danie! Jock 

i\-M Approved: (Old Status CO De·~n;-edc-I.-c'""41"",-oI2"'OO'"'6""'7oc''"'6-cGo-o-c'do-n~8'''RO'''W70'N 

Reactivating customer, feady for KYC reapprovalprocess 

CS p,pproved: (Old StalUS AM Approved), 14/11/200617'35; Stephen J ALLEN 

No Comments 

IS Approved; (Old Status CS Approved), 11/14/200602:13 PM: Christopher Lok 

No Comments 

IS Denied: (Old Status IS Acproved), 11/17/200609:20 AM: Betl1 Fisher 

Please remove my name as RM. I do not know this bank 

A-M Approvtld: (Old Status IB Denied), 04/121200614:08: Gordon BROWN 

RM approval dJanged to Christopher Lok, ready for KYC approval process. 

CS Approved' (Old Status AM Approved), 04/12120(l6 14:13: Stephen J ALLEN 

011'231'2012 02:13;18 PM 

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No Comments 

IS Approved: (Old Status CS Approved), 12104/200602:33 PM' David M Wllens 

No Comments 

IS Approved: (Old Status 1S Approved), 12104/2006 03:07 PM: Christopher Lok 

No Comments 

Approved: (Old Status IS Approved), 12/04/200604:44 PM: Alan T Ketley 

Approval is given for Bank.notes business ·if PCM busirless is added at some future dale it mllst not include cash letter or demand 

drafts. Should a PCM relationship commence, seniD( PCM management should approve it in writing 

In Process: (Old Status Approved), 06/0212008 11 :48: Christopl1er BAYLISS 

Name ofprin.:.-ipals changed from: [Sulaiman Abdul A:ZizAi Aajhi,Saleh Abdul Aziz /lJ Rajhi,Mohammed Abdul Aziz AJ Rajhi,AbduUah 

Abdul AzizAi Rajhi {foLlf brothers conIToI57%),Publidy held «5% sharel1Older)l to: {Su!aiman Abdul AzjzAl Rajhi,Salell Abdul A.ziz 

AI Rajhi,Abdullah Abdul AziL AI Rajhi (three brothers control 44.5%),General Organization for Social !nSlJl'ance,PubUdy held (<5% 

shareholder)] 

Own8(Ship percentage changed from: 157,43] 10: r 24.7,13 7,6.1,10,45.5] 

AM Approved: (Old Status In Process), 26/03/200812:03: Gordan BROWN 

KYC review completed, ready for reapproval process 

CS Approved. (Old Status AM Apllroved), 26/03/2008 1222. Stephen J ALLEN 

No Comments 

IS Approved: (Old Status CS Approved), 03/26/200804:38 PM: David M Wilens 

No Comments 

18 Approved.{Old StatuSlS""AjJproved), 0312612008 04~43 PM: Christopher lok. 

I fully support re--.activatif1g this account while we will diligently monitor the accounfs performance. 

Approved: (Old Status lEi Appro~04-1O 112008 05:42 PM: Ale;:;p Williamson 

AMl risk should be disC\Jssed in visitation/call report, including whether MSB payout agent. NOle that like prior approval, this is 

limited to banknotes only 

in Process: (Old St.:ltus Approved), 261011201013:40: Denise HOLDER 

Name of principa!s changed from: [Sulaiman Abdul Aziz. AJ Rajhi,Saleh Abdul Azjz AI AajIli,Abdu!!ah Abdul A.ziz AI Rajhi (Wee 

brothers control 44.5%),General Organization for Sociailnsurance,Publidy held «5% shareholder)] to: [Lehman AI Rajhl,Saleh 

Abdul Aziz,IIJ Rajhl,Abdullah Mdul A:J:jzA! RajN ,General Organization for Social. Insurance, Publicly held (<5% shareholder)] 

Ownership percentage changed from: (24.7,13.7,6.1.10,45.5] to: 1 24.9,13.9,5.9,9.9,45.4J 

AM Approved: (Old Status In Process), 08/03/201007.51: Denise HOLDER 

Temporary AM approval to anow HKto update their BN page 

CS Denied: (Old Status AM Approved), 08/0312010 11 :02: Stephen J ALLEN 

NoCommenls 

AM Approved: (Old Status CS Denied), 12/04/201009.22. Denise HOLDER 

Temporary AM approval to allow the London BN page to be updated 

CSDenied: (Old Status AM Approved), 12/04/201009:36: Stephen J ALLEN 

denied as requested by DH 

AM Approved: (Old Status CS Denied), 15108/2010 15.11: Denise HOLDER 

No Comments 

CS Approved: (Old Status AM Approved), 17/081201013:10: Stephen J ALLEN 

No Comments 

IS Approved: (Old Status CS Approved), 08117/201010:21 AM: David M Wilens 

No Comments 

18 Approlled: (Old Status IS Approved), OB/18i20iQ 03:32 PM. Christopher Lok 

No Comments 

CO Denied: {Old Status lB Approved}, 09/091201008.58 AM. Joanna S Flanagan 

tlusinessbelng exiled 

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Revision History 

Editor 

Denise HOLDER 

Denise HOLDER 

Denise HOLDER 

Denise HOLDER 

Denise HOLDER 

Denise HOLDER 

Denise HOLDER 

DenCse HOLDER 

Denise HOLDER 

Sally G LOMAS 

0112312012 02:13:18PM 

Confidential Tr@atm@nt Requested 

Date 

151101201008:12:31 

11108/201009:31"47 

26101/201013"48.10 

26101/201013:40:24 

01/121'200912:56:04 

15/091200908:01.10 

15/04/2009 09:32'24 

02/03/2009 08:28:42 

23101/200910,36'09 

151011200912:23:01 

Reasoo for Update 

Profile Deactivated 

Various updates - Financials, management, EDD ROF and ALE 

Updated GRM support 

Annual review - various updates 

Updated fmancials, auditors report and call report 

Updatedp-cert 

Updated Visitation 

Added Hong Kong to HSBC Banknote OffICe 

Updated EDD date 

GRM 

PagelS 

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__ "" Redacted by the Pennanent 

Subcommittee on Investigations 

Know Your Customer Profile 

HSBC Bank USA, NA 

Reference: _ Cllem Profile Approval Status: In Process 

CountJy Risk status: High Risk 

N<>eds Ro-Approval 

Client Name: Islam! Bank Bangladesh Limited 

Count!}': BANGLADESH 

• Changes to these flelds on "Approved" Profiles require Re-approval. 

I. General Information 

CI8nt Name: Islami Bank Bangladesh Umned 

ISthIS8C1entor~t8an~IrI&ttIJ1IonaiIBenkJrV (CIS)?' .Ves 0 No 

If yes. CIS lndustly: Banks & SeC\.uities Companies 

·C?nent~: '0 Domestic Financial Institution 

• ~Or~!,!"Fj~ll~tutiO!' 

'0 l,*'ei:tmenl AdviSor or Fund' 

o CorpOrate Client 

o Sole Proprietor -or Partnership 

o NOn~Bank 

a Branch 0 Subsidimy 

Dilkusha Commercial Area 

Permanent Subcommittee on investigations 

EXHffiIT#86 

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--"'" Redacted by the Permanent 

Subcommittee on In\'utigations 

T 10 or SSN : Pending 

New CientbrExfs'dng Cient: () New (pro.!ipect) 

eE>isting("""",) 

, Q.AgenCy Arrangement"! only . 

===::~~~~~~~ AcoountNurnber: 

Date : 10!1812000 

Account: USD clearing Services,Funds Transfer Clearing Account 

ls1h&atentorltsPatent 1 '.Yes 0 No 

If yes, Name-of Excheng&; Dhaka & Chittagon Stock Exchanges 

__ 

ClPV8riflc8tfonofID~Haath8originalCUSfomet eYesONo beenverlfied. aa perUSA PATRIOT 

Actregulll1Jc'JMfOrnew~ (ornewaceountsJJocatlonafor 

, (DoCumentaty ~ndiofNon~=::? Doaanentaty EYldE1!nc8 for CIP : (lNsm .. lnclude_."",,". __ of_.par1n<nhIp_. etc.-_ ..... _, In_VlI) 

Foril&8anklIigUcanse. ~ :es"lfyou ~~~c:n~~·JsaeenshotfrtlmIhelrCenhl Bank ~website 

Ifye&,waa~~~? .YesONo 

< " < Ir.'. ~'~'~tSl: B~~kin license 

-~--? eYesO~o "yes, h:ficatevertfl~ ~ods~sed: Customer ContactNisitalion, Financial Slal2menl5, Tilird Party 

031'0912012 04:37:44 PM 

Confidential Treatment Requested 

, Source (eg Banke(s Almarmc), Banker's Almanac, Client's 

website & Slock E:t.change. Regulator's WebsilR- Screenprint. 

Auditor's Report 

The establishment of Islami Bank Bangladesh Limi\ed on March 

13,1983, is the true reiJection of INs inner urge of its people, 

which soned functioning with effect from March 30, 1983. This 

Bank is the first of its kind in Soothesst Asia. It is committed to 

conduct aU banking and investment aClivilies on the basis of 

interest-free proftt-loss sharing system. In doing so, it has unveiled 

a new horizon Bnd ushered in a new siNer lining of hope towards 

materializing a long. c:trerished dream oflhe people of Bangladesh 

f~ doing their banking transactions in line wilh what is prescribed 

by !slam, With the active co-operation And panicipalion of Islamic 

Development Bank (lOB) and some other Islamic banks, financial 

inS1ttutioI'lS, government bodies and eminent personalities ofthe 

, MIddle East and tile Gut! countries, Islam! Bani<. Bangladesh 

, limited htJs by now etJfned the unii':!Ue po.<:;ilion of a leading priva1.e 

commercial bank in Bangladesh 

<source: http://wwwJslamibankbd.comfmtroductionpop> 

GRM Support provided by SadiQue Reza on 04!17/2011."You 

have OUf support for the. below mentioned relationship." 

Ill. ;!n.~~p~~ 

EOO ROF reQuested 9/2112009, Compliance denied responding, 

"I believe an updated EDD ROF is NOT ne{"..ded at 1t1is time for 

this PCMclient 

Page 2 

HSBC-PSI-PRO~117223 
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Kncm Your Custaner. Islaml Bank Bangladesh limited 

0310912012 04:37:44 PM 

Confidential Treatment Requested 

--"" Redacted by the Permanent 

Subcommittee on Investigations 

ROF 511112006. a notice of cause was issued by the Bank of 

to the CEO of Islamic Sank in March 2006 to explairl 

suspected Islamic Militants. Client was 

C : .... :~,-'-. -.-~~ ~:~~:e':!:;t~ ;~!~~~ ~~:~;-t~iS Islami Bank 8angladesh Ltd was fined for 

upmili~ntstransactions. 

b'ing c~"gn'"" as Politically Exposed P.erwns on 5ubject dient's shareholder JslOOlic 

/O''''q,m .. " B'ok Jedda, Saudi Arabia, (7.50%) has 

56 countries and field represenlatives in 11 

countries, some of which afe OFAC sanctioned countlies 

Page 3 

HSBC·PSI-PROO.()117224 
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KnO'o\l Your Custaner: lsi ami Bank Bangladesh Limited 

VI. Notable Information 

II. Ownership/Management/Business Information 

Arabsas Travel /I, Tourist Agency K.S.A 9.99 

AI Rajhi Company for Industry /I, Trade. Riy.adh AH<hobaraSaudi 9.94 

Arabia 750 

Islamic Development Bank. JeddaftSaudi Alabifl 6.46 

The Public Institution [or Social SeC\Jrity. Kuwait CityKuwait 5 25 

Kuwait Finance Housi! KSC, Kuwait CityKuwail 7.53 

Abdullah Abdul Azil. N-Rajhi, KSA 43.73 

Others, none wHh 5% or Greater 

Abu Nasser Muhammad Abdut-Zaher 

Yousif Abdullah AJ.Rajhi 

Abdul Mannan 

Shamsu! Haque. 

Mustafa Anwar 

Chanman of the BOl'lrd 

VICe-Chairman 

Managing Director 

DeputyMD 

Vice chairman 

-- .~~T_N~ofEmpqoeea; 9588 Source: Sankersalmanac 

WherelaUleC&entilcorporated: BANGLADESH 

Year ~i9h8d: 1983 

What ilCfient'l Rank In CQI,I'lby (assetbased): 3 Source. Banker's Almanac 

Howmany brarlches/oftloes does CUenthElve: 200 SO\JfCf!: Client's websile 

0310912012. 04:37;44 PM 

Confidential Treatment Requested 

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HSBC-PSI-PROD-0117225 
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Know YOUrCustOO1er: Islami Bank Bangladesh limIted 

Ban tadesh 

For RlIeIgn Rnanclallnsmutions only: Commercial/Retail Banking, Money Service Business Pay Out 

Inlicatat'l&tur8ofClletlt'abu8lness (~81Ih~appIy) Agent,Olher 

Pieased&sc:ribe: Other: Shariah Banking 

Indlca1ereporttnoagency«SU~~== BangladeshBank 

"Ustlcense "'Yearoflssuanoe: of Issuance: 

Commercial Banking Ucense 1983 BANGLADESH 

Please list prh:IpeI affiliates wIicIl have l'8Ialionstips with None 

. HSBC: 

III. Referral Information 

IV. Visitation 

General Visitation: 

Visitation Details: Most Prict'SIte VtsIlBlion : 

Dateofvtslta1lon: 10119/2010 I01120i2010 

ByWhom~ Shafquat HOl';sain. Sadique. Rf'.zf.I • Mgr [Quad, Ahsan H, RM, IS 

IBfHSS, Razi S Fak!h - Acting CEO Amanah, 

'., 

Amhad Rabiul Hasan 

PtIpose - BanIOOg ProductsIServlces Site V'lSit: Visit Head Office d_: 

____ ~~~== ClientAnendees:A1iqurRehrnanKtlEldem+ 

tl8I1t8md1itle,docun8ntalIonnMewed: Principa!Officer 

V. Purpose/Nature of Activity 

Trunsaalon$:" 

0310912012 04:37:44 PM 

AMLDiscussion 

.YasONo 

On site visit with Assistant VP Atiqur 

Rahman KHADEM 

Page 5 

Confidential Treatment Requested HSBC·PSI·PROD-0117226 
987 


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Know Your Customer: Islam! Bank Bangladesh Limited 

FJled< 

iAUel 

~p 

CH(CIeo..,. 

(Account 

Management 

CoIedl", 

Reccndlladon) 

...... 

"""" 

(Cash 

) 

l_) <>=sIonaI~ ~ nme_ 

p&amg (Funds TlMsfer) Dally radfog ~ Banknotes .. 

ommercta! 

_ Une rading-Bonds .. Tl"adOlg-Derivatlves 

onvm Disbursement Riding ~ Emerging Markets 

ulTOOtAccoUnt Daily mding-EquHies 

Derivatives F_ fading ~ Fixed Income 

radlng - Foreign Exchange 

Forward Rate A.greements rading-Futures 

1obaI1za1ion radOlg - """'ri1Ios (T""'...,,) 

to;~{CDoffset. radingJlendlng ~ PredouslBase 

Metals 

nn Day Expostn limit zero Belance Account 

~Cred;t/Ba-' 0=si0naI~ 

loans 

I.ockbox """", Refer to Client s file for anticipated vol ume of activity. 

M..,agkijJIorValU8~CIIanl's~forHSBC 100,082 (Annualiz.ed1'fWllnl8 .ac:b.BlOI'antk:ipeted,InUSDaqulYalent): ThIs. ImclloraHPCMdlenb!. 

VI. Financial Summary 

FlnanclaJStatementda1e: 12/31/2009 

CUmlrncy (Local): BANGLI\DESH T M.A 

Exdwlgerata (perUSD); 68.139100 

~~Actua! 

~: 3.939.140,000 

~ers EqufIy; 284,577,000 

Natincome: 48,174AOO 

VII. Documentation Checklist 

Jfno~ expI": Signalure~ are housed in OUI Buffalo Office 

Dally 

Ifoo, explain: "longstanding Relationship: Waived per Compliance's emai! dd 

10i5J04 

0310912012 04:37:44 PM PageS 

Confidential Treatment Requested HSBC-PSI-PROD-0117227 
988 


76061.414

Know Your Customer. islami Bank: Bangladesh limited 

Bank Client and Not a Central Bank CopyofBanklnQ L.k:enseInCBentll1e1jeves ONo 

Foreign Bank Client and Not a Central Bank lsaUSAPatriotAQCerlHicatlononfile-? eVes DNo 

lfyea.,da181"8Ci1ived HSBC: 03127/2011 

lfyes.da18tnOS1:recentC8ftifice1iono:rRe~was 0312712011 

_""'nedby~1 

<_byUST_NY....,. 3"....) 

VIII. Summary of Reasons 

We have reviewed lIIe infonnation provided above In the context of the bank's "Know Your Cust.omer" 

policy and "due diligence'" requirements and criteria. Based on the following summary of reasons • we feel 

comfortable recommending this client for banking bUsiness . 

he purpose of this acrount is to handle USD funds dearing services, Funds Transfer Clearing Account, Cash letter, Letters of Credil, 

weep Ovemightlnvestments. 

ariance: Clients actual activity for the period 051011200910 04130/2010 V'S 05/01f2010 to 04/3012011 showed no variance in actual vs 

FPeeted volumes 

.~~?~~~~~;~~~~!!~.!f!:k~:r.·.9.999% 

~:ab~~~;~~;~u:~tB~~~1i ~~~edt~~~;U~i~~~.~. ~~' l~~~~y~~~ef;:~~n~~~y A~aeb~. ~~I~(~~~)7o~~~~~ a:~~~s is 

-966·1) 4066009 Arabsas is a travel agency within the Kingdom of Saudi Arabia 

curee: GRM 

2:!~~~~~.~~~~~~*~!!:~!j.,! 9.936% 

us-if AbduHah Abdul AzizAl-Rejhi is a businessman within the Kingdom of Saudi Arabia and also the Vice Chairman of the Board of 

irectors, Islami Bank Bangladesh Limited. Please refer to the Ownership Section below for his deIQiIs. 

ource: GRM 

~:~?~~?~~!~~!?r~~~~!:~~~:: 9.94% 

~Ofdjng 10 the ownership confirmation provided by the GRM, Al-Rajhi Company for industry & Trade is represented by Janab Yusil 

bdullah Abdul NiL I>J·RajJ1i (referenced above), Vice Chairman of the Board of Directors, Islam! Bank Bangladesh Umited. Please 

efer to the Ownership Section below for his details. AI·Rajhi Company forindustly /I, Trade is member of the AI-Rajhi group of 

pompanies which specializes in manufacturing building material products and metal fabrication. The AI Raijbi family is {".onsidered by !nost in Saudi arabia as the country's wealthiest non,oyals 

ource:www.alrajhiindustrial.com;&httD:/ien.wikipedia.Olg.lwikilAl_Rajhi_Bank 

~~~~~~.~.u~~.~:~.~j.,!. 7.58% 

bdullah Abdul Aziz I>J·Rajhi is the Chairman of Gulf Paller Industries Faclory (GPIF), a subsidiary of the. I>J Rajhi group of factories. 

PtF is said to be a leading paper min factory in the Middle Ea.<;1: loCAted a1 the heart of Saudi Arabia. 

ource: YIWW.alrajhigroup.comfenglish'paperfpaperJllain.html 

0310912012 04:37:44 PM Page 7 

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989 


76061.415

Know Your Customer: Islami Bank Bangladesh Limited 

he functions of the Bank are to participate in equity capital and grant IOMS for productive projects and enterprises besides providing 

nandal assistance to member countries in other forms for economic and sodal developmemt. The Bank is also required to establish 

od operate spedal funds for spedfic purposes induding a fund for asmstance to Muslim communities in non-member countries, in ddition to setting up trust funds. The Bank is authorized to accept deposits and to mobilize financial resources througll Shari'ah 

mpatible modes. It is also charged witt1 the responsibility of assisting in the promotion of foreign trade esped2ll1y in capital goods, 

mong member countries; providing technical assistance 10 member countries; and extending training facilities for personnel engaged 

n development activities in Muslim countries to conform to the Shari'ah 

e present membership of the Bank consists of 56 countries. The basic conditioo for membership is that the prospective member 

untry should be a member of the Organization of the Islamic Conference, pay itsC(]ntribution to the capital of the Bank Bfld be wiDing 

accept such terms and conditions as may be decided upon by the lOB Board of Govern.ors 

ach member country is represented on the Board IJy a Govern.or and an Altemate Governor. Each member has five hundred basic 

01es plus one vote for every share subscribed. Generally, decisions are taken by the Board of Gavernors based on a majority of the 

oting power represented at the meeting, The Board of Govemors meets once every year to review the activities of the Bank for the 

evious year and 10 decide future policies. In its annual meeting the Board designates a D1airman, who holds offics until the election 

f another Chairman at the I"lext Board meeting. The Board of GovE!fnors is !he. highest policy-maklng body. It can delegal6 powers to 

e Board of Executive Directnfs for the general operation of the Bank. However, ooly the Board of GovernOlS can deal with issues 

elating 10 membership, increase or decrease in the Bank's authorized capital, authorize cooperation agreements with intemational and 

eg10nal organisations, election of the President and EKecutive Directors and decide their remuneration. 

he Bank's principal office is in Jeddah in the Kingdom of Saudi Arabia. Two regional offices ware opened in 1994: one in Rabat, 

orocco, and the other in Ku2lla LumplK, Malaysia. In July 199B, the board of Executive DireClors also approved th2 establis!1ment of 

lOB Representative OffICe atAlrnaty, Kazakhstan, to serve as e link between lOB member countries and CentraiAstan Republics. 

e offICe became operational in July 1997 and is now a full-Redged Regional Office. The Bank also has field represenlatives in eleven 

ember countries. These are: Indonesia. Iran, Kazaktistan, Ubya, Pakistan, Senegal, Sudan, Gambia, Guinea Bissau, Mauritania and 

geria. 

ouree: htlp:/fwww.isdb.orgliljlportalfanonymous?NavigationTarget=navurl:1I33Bb0248cc.316b93543d314b01231928 

~.:~?,,!:.~~.~~~!.~~~::~!.~~~;.KlNiait, 6.46%' 

uwail began a pension scheme on January 1, 1955 within the ffilmework of civil servant system in the public sector. The first. 

ndependen11awfof pensions was issued in Law Decree No.3 of 1960. This covered govemmentelTlllloyees, civil and militBry, and was 

allowed by an independent Jaw for pensions and indemnities for the military, in accordance with law No.27 of 1961, wIlid"! came into 

orce on September 9th,1961. 

e Public Institution far Sodal Security is a public institution of independent budget. having a legal personalfiy and subjl'!ct to the 

of Financ-e 

. managed by a Director General with four deputies. They are liable for me irnplemenla\h:Jn ofilie policy dfilwn by the 

s. The Director G2neraJ sp2cifi2S th21nstiMion's D2partm2nts and the sp2Ciali.zation Of 2ach 

e works afthe Institution are performed through five main sectors, whien are General Administration Sector, Insurance Sector, 

utomation SeClOr, Investment Sector & Insurance Service Personnel 

ouree: ht1p:f/www.pifss.gov.kw/englishlind~2_eng.htm 

uwait Finance House (KFH or the Bank) was incorporated in the State af Kuwaitin1977, and is listed on the Kuwait Stock Exchange 

ith a market. capitalizalion of US$ 1,950 million as of31 December 2001. KFH has a an investment grade rating, and has been rated 

by Moody's. The Govemmentof Kuwait owns 49% ofttle equity, and the generel public holds the remaining shares. KFH is 

ngaged in providing Islamic banking services, and its spectrum of activities include consumer banking, real estate financing, lease 

lOanOO9, trade finance and portfolio investing, all of which are C(]nducted in slrict compliance wntl !slamic Shan'a. The Bank is the 

arketleader inme Islamic banking industry in Kuwait, and holds an estimeted 20% of the total deposit base ofilia country. 

uring 2002, KFH received a number of regional and international awards, which affirmed the bank's financial strength, Quality of 

ssets, and its status as one of the leading banks in the region, In a study carried oul by Gulf Banking Consultants based on 2001 

tnancial periormance, KFH was ranked first among 25 Gulf based banks in terms of "economic value. 

n me global Islamic banking arena, KFH is on the forefrontofth2 industry in terms prorllability and total assets under its management. 

n terms of total assets and net profits, KFH is ranked second to 

Rajhi Banking and Inves!ment Corporation, Saudi Ambia. 

e brand"! network Ilas grown 10 29 branches in KUVIaiI with separate ladies section. In addition KFH has also recognized the impact 

fnon-branch distribution of servil::E!s, both in terms of customer service and reduced costs. The bank has become a leader in exploiting 

chnology 10 selVe business needs and its e-Services offer a range of services which we believe to be among the most comprehensive 

the world. 

ource:http://www.kfh.comlenglishfAboutuslindex.2sp 

0310912012 04:37;44 PM Page 6 

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Know Your Customer: lslami Bank Bangladesh limited 

pthers, none with 5% Of more shares, 43.34% 

~.~!;~!.!:'~~~~~~~.~~:;?~:!.- Chairman of the Board {Representalive: Ibn Sina PIlarmaceuticallndustry linited) 

om into a devoted Muslim famity at Comparlyfjo in Noakhafi on July 1, 1948. He adlievsd his Masters Degree in English literature 

om the University of Rajshahi. He is me Managing Diredor of Ibn Sina Pharmaceuticals Industry Umited. He started his professional 

ife with teaching at Khandaker Mosharrof Hossain Degree College in me seventies. Later, he was assigned atthe Royal Embassy of 

audi I\rabla In Dhaka as Secretary and performed duties for 13 years. He is the Chainnan of Industrialists and Businessmen 

ssociation of Bangladesh 

.?~;;~.~~~.~!~~.~!~~~: Vice Chairman (Representative: At-Rajhi Co. for Industry & Trade Industrial Division) 

ousif Abdullah AI-Rajhi Obtained his Masters Degree from U.S.A He is the General Manager of AI-Rajhi Company for Industry & 

rade, K.SA Earlier, he performed duties of Branch Manager and Project Finance Manager of AI-Rajhi Banking and Investment 

orporation during 1987 to 1995. 

Source: http://www"Mwagebd.comf2007/sepf04lbusi.html> 

~~~~~!!~~~~:~~f!i;;?::~;,:t~~H* 

~~~mR~~ti:~c!~~~ra:,a::~:~~~ ~f.!,:i~"':s=~er:~~e:;~~:~ ~': B~~~a~.:mU::~i:S~:~c:~a~!: assam. Mouchak and Head Office Complex Corporate branch for more man a decade with Success. He received !he First 8esl 

~anager award of the bank for his ou1standing performance in 1991 & 1993. He moved In Saudi Arabia in 1995 as the BankArtA,-,IlI.rts 

r.:a~~~a~~~~C:n~~~~~Sne::~"'G.~~E~~: =::~:~~:~~~ :!=~t;u~:~oa:~~; :no::: ~~~=r~'f:me~ 

~c~:~t&re,:at!~r:x~~: :~anc:~try:gu~~~oa~~ :;~:; ~:~~~~~r~~~g ~~~r:~~s~~:ar;:,:n~ aQ~r~~d~ ~~:eo~a;ge ank within a very sholl time. He was promoted to the post of Execulive Vice President in January 2003. Mr. Mannan took the charge 0 

ntemational Banking Wing in AuguSI2005. He was promoted as Deputy ExeClltWe President in 2006. 

Source - http://www.islamibankbd.com/management.php 

~.~~.~~~;.~~P!!~.~~~~!R,,~~~ .... ~d. Shamsul Haque, a career banker jolned !slami Bank Bangladesh Umiled in 1984 as Principal Officer and served in different 

Eapacities in IBBL. He worked as Second Officer of Narayanganj Brandl & Rajshahi Brandl. He also worlc:ed as Manager of Rajshahi 

ranch, Bogm Brandl and also worked as Manager of Foreign Exdlange Corporate Brandl, Dhaka. He headed Dhaka North Zone and 

[.~i~agong Zone to help affiliated brandles of respective Zones on progressive line to ensure growth. He also headed Assets 

~""nagement Division oflBBLand at present he has been entrusted with responsibility for Ioaking aftet!he Internal Conlfol & 

ompliance Wing ofltle Bank. He started his career in the Janata Bank as a ProbaliOllary Officer in 1979. Later on, he joined tha 

~rvices of United Commercial Bank umited in 1984 and switched over to lslami Bank Bangladesh urnited in the same year. He 

btained his Masws Degree with Honors in Accounting (Finance Group) from Rajshahi University. He obtained Banking Diploma from 

ft:e Institute of Bankers, Bangladesh, He participated in various training courses, seminars, conferences & wolkshops at hame and 

broad and traveled Hongkong, Thailand, Singapore, Malaysia, China, Saudi Arabia, Aus!ralia, Iran, UAE and Batvain. In recognilioo 0 

is meJitorious services, he had been rewarded with Gold Medal for best managerial penolTnartee in 1990 and again nominated as one 

f the Best Managers for the year 1991 He performed the Hoty Hajj in me yeao-2003. Mr. Haque was born in 1st September '952 in a 

espectable Muslim family of Noahata in the neighborllOod of Rajshahi Divisional City. 

ouree· ht!p:!!v.ww.is!amibankbd.com/management.php 

source: hnp:llwww-islamibankbd.comfmanagement_dtls.php?M!D::=16> 

ML Discussion - 03/2912011 

sse attendees - Saad Mmed 

lient Attendees - Aliqur Rahman J<hadem 

etaitedDescription 

~tingAltachrnents 

ince we conducted an FEDD visit to Islami Bank Bangladesh Ltd. aklngwith Mr. Paul M Kennedy, Managing Director, GB FlGand 

lien C H Chang, SVP, GB FIG on 01 Mar11, we completed me customer due diligence over phone. During the meeting, me roBowing 

sues have been discussed and details are given below; 

0310912012 04:37:44 PM Page 9 

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Know Yoor Custcmer: lsi ami Bank Ban!JIadesh Umited 

otroduction of New Business and Branch expansion: 

ere has been onfy horizontal expansion of branch network Total 55 branches including SME branches have been opened since 

008. 

ership Changes' 

ere has not been any major dlange in the Banks ownership. ARK confirmed that Mr. Abdullah Abdul Aziz. A.I-Rajhi is holding more 

an 5% of the Bank s total Shareholding as an individual. 

hange in AML policy: 

oth the Money Laundering Prevention Ordinance, 200B and Anti-Terrorism Act200B have been approved by the Govemment as 

oney Laundering Prevention Act and the AnU- Terrorism Act in 2009. However. there has been no change from the ordinances. There as been no change in the AML policy from last questioner completion. They have not sent any reponing to the Centra{ Bank regarding 

Ml transaction issue. They have an internal quarterly tJaining on AMl. ranging from the officer level to Managers. 

fienl on-boarding process: 

slamj Bank Ltd advised that theyfoliow very strict KYC policy prescribed by the central bank. For individual dients, photo tD of \he 

siemers like: passport, driving license etc. are obtained. In (sCl!nt days, copy of Natlonalldentlficatlon Card is preferred. Two copies 

f customers photographs duly attested by the inlroducer. whO is an existing customer/acceptable person to the Bank is obtained. 

arne procedures are followed while on-boarding local corporate entities for each of the Directors/Sponsors. In case of cross-border 

ients, all the related documents must be verified by the Bangladesh Embassy in the country of domicile of the dient. For cross-border 

ntities other than individuals, reports are obtained through crealt agencies fike Dun & Bradstreet and others. In addition totlle above, 

meet Money laundering Prevention Act requirement, possible transactian profile of the dient is also recorded. 

oliey and status regarding Money Business & other high risk customers: 

ealing with any shell is not pennissible in Bangladesh. !slami Bank Bangtadesh Ltd does not accommodaU! any sheH bank. According 

ARK, they maintain relationships with some exchange houses to facmtale handling of inward remittance business. These exchange 

ouses are maintaining account wtIh Ihem, But the accoW"lts are opened only after the endorsement of Central Bank. Bangladesh 

ank, Central Bank considers transacting with money exchange houses as high risk and prescribed specific guidelines to deal with this. 

t requires the Money Services license issued by the Central Bank or other appropriate authority of its country of domicile, Credit report 

rom any internationally reputed agency, audited rmancial of last three years, prolite of all the directors etc. Also a Cl!rtiflCate of 

earance from the Bangladesh Consular Office in the country of dOfl'licile of the Money Service is required before commendng the 

elationShip with them. ARK confifmed thatlslami Bank does not deal with any precious metal or gem traders. 

Ml Policy & screening process of reslricted dients while on-boarding and transactions: 

angladesh is a member of APG. an FATF style body on prevention of money laundering. All APG members commit In effectively 

plamant the FATF's international S1andards for anti-money laundering and combating the financing Of terrorism. Islami Bank advised 

at as per their AML policy and guidelines. the Brandl and Head Office AML Compliance Officers are regularly monitoring the 

nsactions against a list of persons and entities suspected for terrorism which is provided by the CenlCal Bank. Central Bank, 

angladesh Bank in its ANll Circular No, 02 da.ted 17 Jul2002 specifically identified the requirements of KYC and provided formats for 

egular reporting of abnonnallsuspidous transactions. The Branch Managers of Islami Bank Ltd are Branch Aoli Mone.y Laundering 

omp~ance Officer (BAMLCO) who require to submit this report to Chief Ami Money laundering Compliance Officer (CAMLCO) in the 

ead Office. CAMlCO deddes whether In report the transaction In Central Bank or not. CAMLCO is required to submit a querterty 

port to Cenlral Bank on abnormalfsuspic:ious transactions 

orrespondent banking and payable through accounts; 

I'~:~~~~':,",:,~~~~;~ is not allowing any oftheir cusmmers to provide correspondent banking serviCl!s through their accounl In SBC Bank USA, NA Peyable through aCCOU'lt is also not permissible within the Banking guideline of the country. 

SItaVisit:10l1912010 

sse Attendees: Shafquat Hossain. SBdiQue R&a - Mgr IB/HSS. Razi S Fakih - Acting CEO Amanah, Amhad Rabiul Hasan 

leitn Attendees: Client Attendees: Atiqur Rahman Khadem - Principal Officer itle: Visit Head Office 

he primary purpose of the visit was for Mr. Fakih 10 ascertain a greater underntanding of the Islamic banking market in Bangladest1 

and to have an insight into the performance of Islami bank in terms of market penetration, markel demographics, growth pmspecti've 

and product assortment. 

Mr. NUNI Islam, DMD gave a power point presentation to \he HSBC visitiog teem. The preserrtation contained an over all financial 

performance history of the bank. With specific deliberation on an overview of their business growth (average growth 21% over the last 

ecade), asset {USD 3 MUon as at 31 Dec2009) growth {oyer 20% in last live years, liability (USO 3.5 billion es at 31Dec2010) growth 

(over 20% in the last five ye8l3), liQUidity posilion and capital growth, also tlleirwallet sharI'! position in the Islamic banking marto;et of 

Bangladesh was eXlJlained in the said presentation along with the Islamic product propositions in offer by them. Mr. Islam also 

elucidated on the fubJre of tlle Islamic banking market in Bangladesh and its growth prospective in the coming yeal'S. With a markel 

size of 136 million (85% of 160 milion) people growth potentials are tremendou.!l for any sort of Islamic banking products in 

Bangladesh. Me. Islam mentioned that they were aware of the Shariah COIJncil of HSBC and !hey were very appreciative of the 

council's composition and the QUality 

Mr Fakih explained to the attendees to \he presentation about !he Amanah proposition of HSBC and its overall gamele and scope in 

erms of operations and business objecfives. Mr. Fakih also molklned that l1e we.!! very hopeful about "the prospective of the Amanal1 

0310912012 04:37:44 PM Page 10 

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Know Yoor Customer: Islami Bank Ban~adesh limited 

initiative of HSBC in Bangladesh both in talTTlS of growth and ma.t;el penetration He advised the Isl~rni bank's representaUves thai in 

future if lhey require any SlJppon Of darificeuons on any issues or product know how (lslamicbanking products) they are more than 

welcome to approach him for assistance. and auxiliary dialogue on the Quanies at hand 

Mr, Sadiq\Je R~ advised that lB DAK has already presented Ihe Automated Murabaha Servise product of HSBC (overnight swing) to 

Islami Bank Bangladesh Umiled. And the suhjed product is in discussion and consideration for availing by the said. 

Upon the complation of the presentation the HSBC team was directed 10 meet the. managing director (Mr. Md Abdul Mannan) Islami 

Bank. Mr. Mannan cordially received the visiling team and advised tlmt he was aware and welcomed the HSBC's Islamic bankillg 

initiatives in Bangladesh and reiteraredthe posilive prospects of such initiatives. Mr. Fakih thanked Mr. Mannan fer his insightful advice 

and infonned that his (Mr. Fakih) visilS to the counlrywill increasa in the coming days and years as the Amenah preposi1lon develops 

further to its growth to the pinnacle of lhe country's Islamic banking mar};et/segment 

nsite Visitation 1!2012010 

'09 the meeling Mr. Khadam confirmed that no inlfrvidual shatet1lldar of !he bankis holding over 10% oftoLaishares of the Bank. 

The late-st share-holding pOSition has been raQuested. lslami Bank confirmed that they do not have any oR shore banking ectiviti85 

hey do net entertain Dny anonymous customer. There was one change in their senior management in last Ofle year 

r. Khadem advised 'lhm Islami Bank got ilS own MIlL policies & guidelines in line with countty's Money I...aundering Pre.vention Act, 

009. !n lhe Act, all responsibilities have been entrusted with Bangladesh Bank to investigate and monitor ML cases in the Banks 

slami Bank has got a Compliance Department headed by a senior executive who is responsible for enforcing the AMl policies allover 

Bank. including the Branches. AMl training has been included in the induction training for all staff. Wor};shops, Seminar.; and 

ainings on AML are conducted by the Compliance Department in regularin1ervals. AML Iraining programs with is induded in the 

oundation course for new incumbents 

nsUe Visitation 10/291'2009 

romising branch for large value DCs. Brflnch is very much willing 10 get confirmations from HSBC wiLh competitive pricing. They are 

alisfied with HSBC's serviCe. 

How areth& CHent's KYC ~,AMLPoIldeul~d ~ Client's KYC and AML policies and procedures are communicated 

awnmunlC8l8d 8nd enforced Jn1he Client's rMdWort:of dorneS1k: and enforced via their Central Control Unn and each Branch 

and~nomees? Con!rol Unlt The CenLIal Conlrol Unit is reponsible IOf 

formulating the policies end procedures and monitor each Branch 

Control Unit 

ConInentQn1heCUent'$KYCantt~~Pf.8d1Ce8 Client has provided a copy oflheir comprehensive flML 

(past, presem8l1dior,fW.n): guidelines, which COvers areas such 913 identificalion procedu,es 

for new customers, rer.ord keeping, recognitkln ad (eporling of " ~:~=~!r~I~:~~~~:;:~~~!n~:'nd aware!leSS etc. A copy of 

0310912012 04;37;44 PM Page 11 

Confidential Treatment Requested HSBC·PSI·PROD-0117232 
993 


76061.419

Know YClJr Custcmer. Islarni Bank BEmgJadesh Limlted 

DoestheCOmtrytheCll~I5IocstadIn:~:;;;=L., .Ves 0 No 

pn398tdandlor.~) regaafingprevention of~taundering men! that dedsreO a state of emergency 

, andten'0ri8tfinanclnsl; when it came to power on Janu1'lfY 11, 2007, evidence of funds 

If yea. comment on the country" KYC and AML Pf8Cdce8 (paSt, at a fegional or offshore financial center. Under 

03/0912012 04:37:44 PM 

Confidential Treatment Requested 

Isunderf'..d Illrough the official banking system escalated. The new 

government irIstitutBd a stringent antiCl'lrruption [;8mpaigo !t1at 

netted more than $1 BO mil/i011 in proceeds--a fraction of Ille 

estimated 10tal Qmount of corrupt funds located both domestically 

and abroad Fighting corruption i~ a keyslone of the care!akf'J 

government under the slate of emergency. Maney lrMsfers 

outside the formal banking and foreign exchange licensing system 

are illegal and therefore nat regulated. The principal money 

laundering vulnerability remains Ihe widespread use of the 

underground hawala or llul1di' system to transfer money and 

value outside the formal banking network. The vast majority of 

hundi transactions in Bangladesh are used to repatriate wages 

from e)(pFHriate Banglades.hi workers 

In April and June 200a the govPJnrrNml promulgated the Money 

Laundering Prevention Ordinance (MLPO 2(08) and tile 

Anti-TerroHsm Ordinance (ATO 200S). The iawsfacilitE!1B 

international cooperation in recovering money illegally transferred 

to foreign countrie~ and mutual legal assistance in terms of 

criminal investigation. trial proceedings, and extradition matters 

The GOB has fomleo a naUonaJ Jeve! committee headed by the 

law Adviser and an inlel-Glg€ncyTask Fora:! headed by the 

Governor of Ihe CB \LJ retrieve illeGally transferred money 

For the past twenty years. ClJrrupt practices became so commDn 

thai, between 2001 and 2005. Tr8l1sparency Intemational ranked 

Bangladesh in its Corruption Perception Index as the coun!ry with 

Ins highest level of perceived corruption in the wortd. In 200a, 

Bangladesh was ranked 147 out of 180 ClJuntries surveyed 

Bangladeshis are not allowed to carry cash O\J\side of'rhe country 

in excess of the equiyalentof $3,000 to South ASian Associalion 

for Regional Cooperation (SAARC) counbies and!he equivalen! 

of 55,000 to other countries. Proper documents are required by 

authorized foreign exdlange banks and dealers. The GOB does 

not place a limit on how much currency can be brought into the 

country, but amounts over 55,000 must be declared within 30 

days. The Customs Bureau is primarily a revenue collection 

agency. aCClJunting for 40-50 pert:en1 of Bangladesh's aonual 

government income. 

Although positive legislalion has been pas.'led and progre~s l1as 

heen made, Ille GovernmEnt of Bangladesh should continue to 

strengthen its anti-money laundering/1errorist finance regime so 

that it adheres 10 world standards The GOB should support 

technology enhancements to reporling channels from outlying 

districts 10 the Centra! Bank. While the FlU is growing steadity, Ule 

FlU analysts and investigators need to enhance their ability 10 

conduct analysis, investigations, understand money laundering 

andte.ffOf finance rnethodolngies alld guide the ROs. Boogladesh 

law enforcement and customs llohould examir1e forms of 

trade-based mcney laundering and initialB money laundering aod 

financial crimes investigations at the 's1reellevel' instead of 

waiting for a STR to be flied with the FlU. A crackdown on 

pelVasive customs fraud would add new revenue streams fnf the 

GOB, Continued efforts should be made to IIgM corruption, whIch 

is il11ertwined wi!t1 money laundering, smuggling, customs fraud, 

and tax evasion. The GOB should ratffythe UN Convention 

against T!ansnalional Organized Crime 

Sourcehttp://www.state gov!plinllr1sJnrcrpV201 0ldatabasel141512 htm 

Pe.ge12 

HSBC.PSI·PROD'()117233 
994 


76061.420

Know Your Customer: Islami Bank BanlJladesh Limited 

HaslheCientbeeneudllacl? eVes 0 No 

lfyaG, date: 03129.'2010 

If yes. bywhom (Audit Finn): Aziz Halim Khatr Chowdhry (Chartered Accounlants) 

&. HowiadarYunu$ &. Co., (Chanered Accountants), Auditor's 

report was favorable 

DoestheCienthaveacredJtraUng? • Yes 0 No 

tfyes,wboh8ua41t (S&P. Moody"sor~er): Credit Rating Information & Services (CRISL) 

Jfyea,datels.9ued: 0612112010 

If yes. credit raflng. LT: M, ST ST-I 

HasnegattvelnfonnatlOnbeenldentflled? QYes. No 

Signature Section 

F""'*"'''_'''''''''''''''/~(IS)_: 

~ BanIdng ITeam leader (18) Approval: 

APPROVE/DENY HISTORY; 

Created; 05{29f2001 10,2226 AM Converted from ~ic 

05-23-200115.26 PM Created by; <EP!Cto KYC Conversion Process> 

.;Address>: 

Head Office 

71, Dilkusha Commerc:ial Area 

Dhaka-lOaD Bangladesh 

BANGLADESH 

<Status> 

<CIier1t Name> 

<Acccoftu~ode> 

<Ac..ct_offr> 

<ApprovaLacr.Cofficer> 

<UnlCoIfCcode> 

<Unil_mgr> 

.;:Approval_unicmgr> 

031Q9{2012 04:37;44 PM 

'N - Needs Approval 

"ISLAMI BANK BANGLADESH UMITED 

'343104 

;H*Graham, RusselH> 10119/0010:43:20:61 

Confidential Treatment Requested 

Page 13 

HSBC·PSI·PROD-ll117234 
995 


76061.421

Know Your Customer Islami Bank Bangla.desh Limited 

<Exec_dept> 

<Approvat_exec_dept> 

<LegaLdept> 

<ApprovaUegal_dept> 

<Legal dep comments> 

AM Approved: (Old Status In Process). 07/181200112:38 PM: Ra ..... R Polu 

No Comments 

RM Denied: (OIdSiarus AM Approved), 10104/2001 05:15 PM: Beth Fisher 

1. Pis check shareholders. Pis add list of shareholders in Summary section. Refer to list in Almanac 

2. Is shareholders' eQuity more or less than USD25M? 

Tks. 

AM Approved. (Old Slatus RM Denied), 101051200112:27 PM: Ravi R Pokl 

OWNERSHIP: 

AL RA.JH! COMPANY FOR INDUSTRY AND TRADE, RIYADU 14.453% 

ISLAMIC DEVELOPMENT BANK. JEDDAH 7.55% 

KUWAIT FINANCE HOUSE KSC, SAFAT 5,286% 

THE PUBLIC INSTITUTION FOR SOCIAL SECURITY , KUWi\lT 8.503% 

HE ABDYLLAH ABDUUAH Al-RAJH! 7.223% 

HE MOHAMMAD ABDUL AZIZ 7.223% 

REST OF THE SHAREHOLDERS ARE PUBUC SPONSORS. GENERAL PUBLIC AND GOVERNMENT OF BANGLADESH 

Approved: (Old Status AM Approved), 10111/2001 08.49 AM Beth Fisher 

Existing usn account with HBUS. 

In Process. (Old SlatusApproved), 07J3112003 01.09 PM. Rhonda lee-Thomas 

Customer is sem back for re-approval 

AMAWroved. (Old Status In Process), '07/31/200304:45 PM: Rhonda Lee-Thomas 

Updatedaltinfo 

A'PPi;Ned'-, ("'O"'ld"'S""taru'-,ccA07M"Acc •• ="c-,c-.d"-).-'O~71"'31"'12"'Oa"'3","",,,,,c;7'"PcoM.~M'"'an-w-.;~HO-Cuang 

No Comments 

tn-Process: (Old Status Approved), 121151200410:07 PM: Rhonda Lee-Thomas 

Customer is sent back for re-approval 

AM Approved: (Old Status In Process). 09.f28/200511:40 AM: Shannon M Jones 

KYC profile match supporting doc's on file 

CS Approved. (Old Status AM Approved), 09128/200512'05 PM: Sharyn Malone 

NoComrnenlS 

IS Denied: (Ok! StatuS cS'Approved), 091301200503:01 PM. Bob Shetty 

Please review and reconcile management I ownership information with details appearing on EDD 

AM Approved: (Old Status IS Denied), 061221200703:26 PM: Angela Cassell-Bush 

NoCommenlS. 

CS Dooied: (Old Status AM Approved), 00:12912007 02:39 PM: Gillian E Bachstein 

Pis update section VII! explaining the purpose of account and also update activity monitoring details, Under general comments, 

define Islamic Sharia banking. 

AM Approved: (Old Starus CS Denied), 07102/2007 11 :45 AM: Angela Cassell-Bush 

ALL CS concerns noted on 06/29107 have been addressed, 

CS Denied: (Old Status AM Approved), 071111200702'18 PM: GiHian E Bachstein 

Pis update %a92 ownership and variance report. 

AM Approved: (Old Status CS Denied), 07f1112007 02:45 PM: Angela Cassell-Bush 

ALL CS ccncems above have been addressed 

0310912012 04:37:44 PM 

Confidential Treatment Requested 

Page 14 

HSBC·PSI·PROD-0117235 
996 


76061.422

Kna.Y Your Customer: h.lami Bank Bangladesh limIted 

CS Approved: (Okl Sl:<.ltus AM Approved), 07/111'200702:44 PM: Gillian E Bachstein 

NoCommenls 

IS Denied: (Old Slatus CS Approved), 08/30/200706:45 PM: Bob Sheny 

Please darify the ownership position of AI Rajhis 

AM Approved: (Old Status is Denied), 091061200709:23 AM: Angela C~seJI-Bush 

Profile previously IS denied due no response from the GRM regarding IS Approver reQ>,Jesl for a comment on the ownership oflhe PJ 

Rajhi family within this bank!. GRM has provided his comment which is documented in Section 1: General Comments S(l...ction. 

CS Approved: (Old Status AM Appr(Ned), 09/101200] 10·-'!(] AM: Gillian E Bachstein 

No Comments 

IS Approved: (Old Slfltus CS Approved), 09/12/2007 OS·OS PM: Bob Sheny 

Based on GRM support and clarification fe awner.;hip by AI Rajlli Organization 

IB Denied: (Old Status IS Apprcved), 10/101200702:04 PM: Lawrence Kmp 

Subject bank not known to CIS. 

CSAlJproved: (Old Sta~sAM /\pprov-;;d),1Zi06J20-0iTijSAM"":"QiiianE-Bachstein 

No Comments 

IS Approved· (Old StatUs CSApproved), l2lii/2007 03:43 PM: Bob Sheny 

See my ear!ier ccmments 

18 Apprcved: (Old Status IS Approved), 121121200709.02 AM: Chrisklpher Lo~ 

No Comments 

Approved: (Old Status IB Approved). 03!1 0/2008 05:4[] PM: Alan P Wdli<lnlson 

Please provide explanation of aClivity vElriance in this account within 3(] days. AJso please note thai visitation is due within a month. 

tn Process: {Old Sta~- ApprOVEd), 031021201005:04 PM. Jon KJones 

Name of principals changed from: [Arabsas Travel & Tourist Agency,Janab Yousif Abdullah AI-RajhiJ'J~Rajhi Co, for Industry & 

Trade,Ahdullah.Abdul Aziz AJ-Rejhi,lslamic Development Ban~,The Public lmltitutioll fOf Social Security,Kuwait Finance House,Olhers, nooe wilt1 5% or mofe shares] to: fArabsas Travel & Tourist Agency,Janab Yousif Abdullah AI-Rajhi,Al-Rajhi Co for 

tndus!Jy & Trade.Abdullah Abdul Aziz At-Rajhi.!slamic DeV2lopment Bank.The Public Institution for Social Security,Kuwail Finance 

House,OltJars. nOfle with 5% oc Greater] 

BankNotes Activity changed from: [See Sanknoles Activity Sectionl to: n 

AM Approved· (Old Status In Process). 03.1021201005:05 PM: Jon K Jones 

No Comments 

CSAPproved. (Old Stah:;;A-MAP~~d)~·-63J3mo-lol1":4spwi:"GiiiiinE-Bachstein 

No Comments 

IS Approved. (Old Sta1lJs CS Approved), 061071201008:29 PM: 8cb Sheny 

NoCcmments 

16 Approved. {Old Status IS Approve.d), 06/29/20101148 AM. Wen LuWU 

No Comments 

Approved: (Old Status IS Approved), 06fJ01'2010 11:39 AM: Joanna S Flanagan 

NcCommenlS 

In Process: (Old Status Approved), 06103/2011 02:14 AM: Arijee1 NEOGI 

Name ofpfincipats changed from: [Arabsas Travel & Tourist .6{jency,Janab Yousif Abdullah AI-Rajhi,AI~Rajhi Co. fOf Industry II. 

Traoe,AlxiuUah Abdul Anz PJ-Rajhi,lslamic Development Bank,The Public Institution roc Social SeOJl"Ity.Kuwait Financs 

House,Others, nOrle willl 5% or Greater] to: fArabsas Travel & Tourist Agency K.S.A,,AJ RajN Company for lnduslfy & Trade, Riyadh 

A1-KhobaraSaudi N"abiaJslamic Development Bank, JeddahSaudi Arabia,The Public Institution for Social Security, Kl.MIBit 

CityKuwait,Kuwait Finance House KSC, Kuwait CityKuwait,Abduliah Abdul Aziz AI-Rajhi, KSA,Other.!l, none with 5% or Graater) 

Oymership percentage changed from: [9.99,9.94.9,94,7.58,7.-5,6.46;5.25,43.34J to. {9.-99,9.94.7-5,6.46,5.25;7.58.43·73] 

Revision History 

Editor Date Reason for Update 

0310912012 04:37:44 PM Page 15 

Confidential Treatment Requested HSBC-PSI-PROD-lJII7236 
997 


76061.423

KnowYOlIrcustcmer: Islarni Bank Bangladesh Limited 

Arije~! NEOG! 

FrashiahX Muiruri 

FrashiahXMuiruri 

KarynXSr.ar!o 

Danj~lIe X Fawra 

Danielle X Fawra 

Danielle X Fawrn 

Shannon M Jones 

Shannoo M Jones 

Jon KJones 

eRR Reyisjoo History 

06103/2011 02:14:58 AM 

04/061201110:28"57 AM 

02lD9I201110:03:00AM 

021021201109:03:44 AM 

0811812010 02.19"19 PM 

08l17f2(] 10 03:57:22 PM 

08117120100:'1:36"33 PM 

081101201003:29:32 PM 

07f28/201001:24.55 PM 

06130/201004:22:35 PM 

Annual Review, General Comments 

Upda1f! to US Pal Cert date 

For BAU Purposes 

Updatedvisitalian 

updated new RM---prev memo incorrect 

prev memo error--SMuld be updated new RM 

updllleforpolentialeXitofthisrelation!>hip 

Updaled cenification date 

updated certificalion date 

Update Review Date for Fully approved 

Last Updated By! On Update Type(FicldIGeneral) Old Value NewValue 

Arijet!t NEOGI· 6J3I2011 2:15;09 AM 

0310912012 04;31:44 PM 

Confidl!ntial Treatment Requested 

Dhaka·1000 Ektngfadesh 

Dhaka 

Approved 

M.Fa.rilildtfmAhmad 

Arabsas Travel & Tourist Agency JanabYousifAbdt.illahAl..fl:ajlll 

Al-Rajhi Co. for Industry &Trade 

Abdu!lah Abdul AtIz AI·Rajhi 

Islamic Development Bank Tl"IePllbUcln;;titutionforSoc!aISecunly 

KuwaltFlnanceHoo5e 

Ctllers,nonev.i1h5%orGi'"eater 

Dhaka,B:itngladesh 1000 

lnProeess 

AbQuIMannan 

ShafJl5ulHaqll8 

MustafilArlwar 

~bsas T~vel & TouristAgeney 

~~~;;;:~Y~~d!stry& 1 Islamic Development Bank, Jeddl 

I!;~ublic InstiutiOfl for Social 51 

KU'MlilCityKuwait 

Kuwait F1rh1nee House KSC, Kuw CItyKuwalt 

Abdutlall Abdul Aziz AJ-Rajh!, KSI 

at\ers,noneoMth 5%orGreater 

Page 16 

HSBC-PSI-PRO~117237 
998 


76061.424

From: 

To: 

Cc, 

Subject: 

Date: 

Bean EliSE (HSGAC) 

Robertson Mary (HSGAC) 

Schram Zachary fHSGAO' SlJ!ber ! aura {HSC..AQ 

FW: sel1ate Inquiry 

Attachments; 

Thuf5day, July OS, 2012 5:04:05 PM 

AM! PoliCY of !BBl odf 

From: Md. Nurul Islam [mailto'mnjslam@jslamibankbdcom] 

Sent: Wednesday, July 04, 2012 08:52 AM 

To: Schram, Zachary (HSGAC) 

Subject: Senate Inquiry 

Dear Sir, 

Greetings! 

Please find below the responses of your queries: 

1. What is Islami Bank's relationship with HSBC, including HSBC Bank USA (HBUS)? 

[slami Bank Bangladesh Limited (IBBL) is the largest private sector commercial 

bank in Bangladesh which has got around 600 hundred correspondent banking 

network including almost all globally reputed banks in different locations. HSBC is 

one of such correspondent banks of Islami Bank Bangladesh Limited. In this process, 

Relationship between [slami Bank Bangladesh Ltd. and HSBC began in early 2000 by 

arranging RMA (Relationship Management Application) with different HSBC Group 

offices. Later, an USD account in HSBC Bank USA N.A. was opened on ] 1 October 

2000. The USD ACU (Asian Clearing Union) accounts with HSBC India and Pakistan 

were opened on 28 April 2006 and 23 July 2006 respectively. So far, we have got 

Rl\1A arrangement with HSBC in 24 locations of the world which includes Australia, 

Brazil, Canada, China, Dhaka, Hong Kong, India, Indonesia, Italy, Japan, South 

Korea, Malaysia, Mexico, Pakistan, Peru, Singapore, Spain, Switzerland, Taiwan, 

Thailand, Turkey, UAE, UK and USA. The purpose of this relationship is to facilitate 

our foreign trade related transactions i.e. LC advising, trade confirmation, trade 

Permanent Subcommittee 011 Investigations PSI-IBBL-01-0001 

EXHIBIT #87a 
999 


76061.425

payments, trade receipts. customer receipts and treasury coverage. 

2. What is Islami Bank's relationship with the Al Rajhi group and the Al Rajhi family? 

At the outset, Central Bank took initiatives for establishment of Islamic Banklng in 

Bangladesh. Islami Bank Bangladesh Limited was incorporated in 1983 with the initiatives 

of Government of Bangladesh including renowned local and foreign sponsors. Among the 

foreign sponsors, Islamic Development Bank, Kuwait Finance House. Kuwait, Dubai 

Islami Bank, UAE, Bahrain Islami Bank. Bahrain, Ministry of Awqaf and Islamic Affairs, 

Kuwait (Present Name: Kuwait AwqafPublic Foundation, Kuwait), The Public Institution 

for Social Security, Kuwait, AIMRajhi Company for Currency Exchange and Commerce 

KSA (Present Name: A1MRajhi Company for Industry and Trade, KSA) and Ministry of 

Justice, Department of Minors Affairs Kuwait (Present Name: The Public Authority for 

Minors Affairs, Kuwait), Jordan Islamic Bank, Islamic Banking System International 

Hondlings S.A., Luxembourg were prominent. Government of Bangladesh joined with 5 

percent shares and continued until government decided to offload its shares from all private 

commercial banks. These entities along with AI-Rajhi Company for Industry and Trade, 

KSA have been elected Director of our bank from time to time. At present Mr. Abdullah 

Abdul Aziz AIMRajhi from AI-Rajhi family is also a shareholder and director of the Bank. 

3. What are Islami Dank's KYC and AML practices? 

We have adopted our AML policy in line with Central Bank regulation and relevant acts of 

the government and follow the same strictly and meticulously. For details, please find 

attached our AML Policy. 

4, Did Abdur Rahman, chief of the Jamaatul Mujahidden of Bangladesh have any accounts 

at Islami Bank? Please describe those accounts, including relevant dates. 

We have had no account in the name of either Abdur Rahman or the organization under 

question. 

5. What were the findings of any Central Bank of Bangladesh investigation into Islami 

Bank since 200S? 

Central Bank as a regulator of this Banking Industry conducts their regular and 

routine inspection & investigations from time to time since establishment of the Bank 

in 1983. Till today we do not have any mentionable outstanding issue with the 

Central Bank regarding the aforesaid investigations other than routine matters. 

However) an incident took place in 2006 in connection with some transactions 

originated from our Gazipur and Savar Branches through eight telegraphic transfers 

for an amount ranging from BDT IO,OOO(USD 144) to BDT 79,000 (USDl,137) of 

PSI·IBBL-01.Q002 
1000 


76061.426

altogether sum BDT 4,17,000 equivalent to approximately USD 6,000(lJnited States 

Dollar six thousand). The transfers were destined to an account in the name of one 

Mr. Saidur Rahman who had opened account with our Laldighirpar Branch, Sylhet in 

February 1999 complying all usual norms. Initially, the concerned officials did not 

find anything suspicious in good faith. Upon inspection from Head Office, it was 

revealed that the transactions were made in an inoperative account and thereby 

suspicious in nature and then we made STR to Central Bank. Instantly, Bank also 

suspended the concerned officials. As the reporting was not done in time, Central 

Bank fined BDT one hundred thousand (equivalent to USD 1,439) and !BBL paid the 

amount. Later on, IBBL carried a thorough investigation on the matter and terminated 

the delinquent officials from the service of the bank. Mentionable that several banks 

including some foreign bank were also fined by Central Bank at that time due to 

failure of timely STR. 

6. Did the International Islamic Relief Organization have any accounts at Islarni Bank? 

Please describe those accounts, including relevant dates. 

International Islamic Relief Organization (IIRO) had accounts bearing number 

••••••• and with our bank. These accounts were opened 

on l7.04.1993 and 06.06.1994 respectively as a regular and approved NGO and maintained 

with our bank till 03.08.2010 along with other 2(two) Banks. As the entity was a UN 

sanction listed organization infonned by Central Bank in 2006, we instantly freezed the 

accounts and confirmed our actions to the Central Bank and there Wa"i no transaction from 

that date to 03,08.2010 i.e till transfer. In 2010, we received instruction from Central Bank 

at the direction of Ministry of Finance, Government of Bangladesh to defreeze the accounts 

in the name of lIRO maintained with three banks including IBBL and transfer the accounts 

with IBBL to BASIC Bank, a Government owned bank and accordingly we confirmed our 

actions to Central Bank 

We feel our reply will satisfy your query and please feel free to contact us if you have got any query 

further. 

Thanking You, 

Md. Nurullslam 

Deputy Managing Director & 

Head of International Banking Wing 

Islami Bank Bangladesh limited 

-- "" RedActed by the Permanent 

Subcommittee on Investigations 

PSt-IBBl-01-0003 
1001 


76061.427

----- Original Message -----

From: AMM FAR HAD/Socia! Islam) Bank! imited 

To: Schram Zachary (HSGAC) 

Cc: 'GGjam Kibrja SIBL 10'; mds@sibl-bd,COffi ; 'MR MUHAMMAP AU ' ; 'MR QUAZI FAZLUL 

!WlJM: 

Sent: Tuesday, July 10,20127:57 PM 

Subject: Re: Senate Inquiry 

Dated: July 10, 2012 

Mr. Zachary Schram 

Senior Counsel 

Permanent Subcommittee on Investigations 

United States Senate 

202-224-9379, 

Dear Sir, 

This has reference to your email dated June 30, 2012 and our subsequent reply dated July 5, 

2012 on your questionnaire, pursuant to your investigations on HSBC. 

In this regard, we furnish below our response to all your queries chronologically. 

1. What is Sociallslami Bank's relationship with HSBC, including HSBC Bank USA (HBUS)? 

How has the relationship changed over time? 

Ans: Social Islami Bank ltd. had account relationship with HSBC Bank USA for the purpose of 

reimbursement of import Payments against letters of credit opened by our different 

branches; receive export proceeds and also inwards remittance. 

Effective from May 2012 we DO NOT have any kind of relationship with HSBC, including HSBC 

Bank USA. 

2. What are Sociallslami Bank's KYC and AML practices? 

Ans: Social Islami Bank Ltd. has its own AMl Policy and separate AML Compliance Cell for 

fighting money laundering, terrorist financing and ensuring "know your customer" KVC. 

Permanent Subcommittee on ]nvesti ations 

EXHIBIT #87b PSI-SIBL-01-0001 
1002 


76061.428

The Bank's Management strictly ensures the compliance with all statutory and regulatory 

requirements, including designating AMl Officer for this specific purpose and conducting 

training for staff at all levels. 

Bank's compliance with Anti~Money~laundering requirements and procedures is monitored 

by the Central Bank of Bangladesh (Bangladesh Bank) and also by Bank's internal and 

external auditors. 

Each and every account of the bank and any transaction in any account are fully complied 

with our KYC procedures. 

3, Please describe the relationship of Sociallslami Bank with the AI Rajhi group? 

Ans: Sociallslami Bank DOES NOT have any kind of relationship with AI Rajhi group. 

4. Was Abdul Majid of Singapore a director of Sociallslami bank? Was the same Abdul 

Majid arrested by the Singapore government for terrorism~related activities? What 

was the result of any legal action against Mr. Majid? 

Ans: SIBl Board had never a Director named Mr. Abdul Majid and as such the answer is that 

Mr. Abdul Majid of Singapore WAS NEVER a director of Socia! Islam! bank. 

5. Please describe the relationship of Sociallslami Bank with the Intemationallslamic Relief 

Organization (lIRO)? Is (or was) the IIRO a shareholder of Sociallslami Bank? 

Ans: International Islamic Relief Organization (IIRO) is a foreign shareholder of Sociallslami 

Bank who currently holds 1.61% share of the bank. It is of mention that the bank doesn't 

have any transactions with this organization except that this organization purchased some 

primary shares of the bank when it was floated in 1995, during the year of bank's inception. 

In 2006 we came to know that the United Nations Security Council enlisted International 

Islamic Relief Organization (ORO) under "Individuals and Entities Associated with AI QaidaH as 

one of the Directors of IIRO was accused of having association with AI Qaida, 

The matter was viewed with due concern by the management and the Board of the bank, 

The management of the bank placed the issue before the Shareholders of the bank in the 

11th Annual General Meeting (AGM) held on 06.11.2006 and adopted a resolution 

unanimously that the whole shares held by International Islamic Relief Organization will be 

disposed off by way of sale/transfer in accordance with the law of Securities and Exchange 

Commission (SEq, Bangladesh Bank and in line with the law of the land. 

The matter was also taken to the notice of Bangladesh Bank and Securities Exchange 

Commission. The Centra! Bank issued instruction on 10.12.2006 not to disburse any bonus 

shares, issue of right shares or pay any cash dividend to IIRO until further instructions of 

Bangladesh Bank, 

PSI-S1BL·01-0002 
1003 


76061.429

In compliance with the instructions of Bangladesh Bank, the bank immediately stopped 

issuing bonus shares, right shares and paying any cash dividend to IIRQ. 

To overcome the situation the bank communicated with IIRQ several times and requested 

them to dispose off their entire share held with the bank by way of sale/transfer but they did 

not respond to the bank's request to offload their shares. 

A Board Memo was then placed before the Board of Directors of the bank on 30.06,2009 and 

the Board unanimously agreed to dispose off the whole shares held by International Islamic 

Relief Organization (IIRQ). The Board of Directors also agreed to seek permission from the 

High Court praying for Court's intervention to sell the entire shareholding of IIRO in the 

capital market and the proceeds may be deposited in any government account/screw 

account or as would be determined by the Hon'ble court of justice to save the Bank from any 

unwanted trouble and for smooth operation of the foreign exchange business ofthe Bank, 

But in 2010 Ministry of Finance, Government of the Peoples Republic of Bangladesh has 

issued a circular dated 31/05/2010 providing IIRQ permission to run their business/ activities 

legally in Bangladesh. 

The Central Bank has also endorsed the circular issued by the Ministry of Finance, 

Government of the Peoples Republic of Bangladesh vide their letter No. AMlD-432010-2797 

dated 30,06.2010 and instructed us to comply with the Circular issued by the Ministry of 

Finance. 

Under the above circumstance, the bank is under definite obligation in paying dividendi 

issuing bonus shares/ right shares to IIRO as per the instructions of the Central Bank and 

Ministry of Finance which were not paid/ issued in their favour ti!l31/05/2010. 

06. Does (or did) IIRO have any accounts at Social Islami Bank? Please describe those 

accounts, including relevant dates. 

Ans: IIRO has only one Foreign Currency Account with the bank which they opened in 1995 at 

the time of buying primary shares of the bank. Present balance of the account is zero. Other 

than that the bank does not have any sort of transaction in that account of IIRQ , 

07. Please describe the relationship of Sociallslami Bank with the Islamic Charitable 

Society lajnat ai-Birr AI Islam (lajnat ai-Birr)? Is (or was) the Lajnat ai-Birr a 

shareholder of Sociallslami Bank? 

Ans: The Islamic Charitable Society lajnat ai-Birr AI Islam (lajnat ai-Birr) is a foreign 

shareholder of Sodal Islami Bank who currently holds 0.22% share of the bank. It is of 

mention that the bank doesn't have any transactions with this organization except that this 

organization purchased some primary shares of the bank when it was floated in 1995, during 

the year of bank's inception. 

PSI-S1BL-G1-G003 
1004 


76061.430

os. Does (or did) lajnat al~Birr have any accounts at Sociallslami Bank? Please describe 

those accounts, including relevant dates. 

Ans; lajnat ai-Birr DOES NOT have any account with the bank. 

Should you have any query or require further clarification please feel free to contact us. 

With thanks & Kinds.regards, 

A.M.M.Farhad 

Deputy Managing Director, 

Social Islami Bank Ltd, 

Head Office, 

City Center, Level (16-21) 

103, Motijheel CIA, Dhaka, Bangladesh. 

Tel: + 88 09612001122 150006 

Fax: + 88 02 9564944 

Email: Brrm""qrbad!O 51 bJ b..-l r""r 

web: '«11'e/" sjblbd ('om 

Skype: farhadamm 

__ ::: Redacted by the Permanent 

Subcommittee on InYestigatior\s 
1005 


76061.431

occ-psi -00409214 

From: ANNE LIDDY /HBUS/HSBC 

Sent: 9/9/2008 7:25:51 AM To: DENISE A REILLY /HBUS/HSBC@HSBC02 

CC: 

Subject: Fw: Hokuriku Bank Ltd- compliance query 

Denise, do you know when Denis was plannin9 on providing the overall summary document on this overall topic? I am anXlOUS to review, including together with the below info, to determine if we need to file any further reports. Thanks. 

Anne Liddy 

SVP, AML compliance 1 HSBC Bank USA, N.A. 

452 5th Avenue, Tower 7 J New York, NY 10018 

phone 

Fax 

Email 

212-525-5906 212 525 5769 anne. 1 i ddy@us.hsbc.com 

Forwarded by Anne Liddy /HBUS/HSBC on 09/09/2008 08: 20 AM -----

Judy P Sto 1 dt/HBUS/HSBC@HSBC02 

09/09/2008 07:25 AM 

To 

Anne Liddy /HBUS/HSBC@HsBC, Deni se A Rei lly /HBUS/HS'BC@HSBC, Mary A 

caski n/HBUS/HSBC@HSBC cc 

Jonathan Dean/HBus/HSBC@HSBC 

subj ect Fw: Hokuriku Bank Ltd- Compliance query 

Information from Hokuriku Bank regarding some of the car dealerships they do business with that we questioned. Its very limited information that took us over a month to get. 

Judy p stoldt 

Vice president, AML compliance I HSBC Bank USA, National Association One HSBC Center Buffalo, New York 14203 

phone 

Fax 

Email 

(716) 841- 6425 (212) 382 - 7586 judy. p. stol dt@us.hsbc.com 

Forwarded by Judy P stoldt/HBUS/HSBC on 09/09/2008 07:17 AM -----

Aka KOBAYASHI/TKY /HBAP /HSBC@HSBC 

09/09/2008 03: 52 AM 

To 

Judy p stol dt/HBU5/HSBC@HSBC02 

cc 

Anthony Julian/HBUS/HSBC@HSBC02, Garie S K HO/PCM ASP/HBAP/HSBC@HSBC, 

Jennifer 

E Kell eher /HBUS/HSBC@HSBC02, stephanie L 

EXHIBIT #88 
1006 


76061.432

Dee-psi -00409214 Napi er jHBUSjHSBC@HSBC02, saeka TAKEBAYASHljTKY jHBAPjHSBC@HSBC 

sUbject 

Re: Fw: Hokuriku Bank Ltd- compliance query 

Judy, 

~~k~~i ~~u B:~k =~~ t~h~' o~~e~~~n~~ ~~edt~~c~~~e f~~ or; gi nal copy prepared by 

Hope it helps. 

~~~a~~~~~v~~~ other batch, I shall forward the information as soon as details 

Best regards I 

Ako Kobayashi PCM cl i ent servi ces HSBC, Tokyo 

Judy P StoldtjHBUSjHSBC@HSBC02 

08 sep 2008 21:35 Mail Size: 49719 

To 

Ako KOBAYASHljTKYjHBAPjHSBC@HSBC 

CC 

subj ect Re: Fw: Hokuriku Bank Ltd- compliance query 

Ako, 

Our Ref 

Your Ref 

Thank you for your assistance in getting us the information. 

Regards J 

Judy P stoldt Vice president, AML compliance! HSBC Bank USA, National Association 

One HSBC Center 

Buffalo, New York 14203 

page 2 
1007 


76061.433

oee-Psi -00409214 

phone 

Fax 

Email 

(716) 841- 6425 

(212) 382 - 7586 judy. p. stol dt@us.hsbc.com 

Ako KOBAYASHI/TKY /HBAP/HSBC@HSBC 09/08/2008 05: 58 AM 

To 

Judy P Stoldt/HBUS/HSBC@HSBC02 

ee 

Anthony Jul i an/HBUS/HSBC@HSBC02, Gar; e S K HO/PCM ASP/HBAP /HSBC@HSBC, J enn; fer E Kelleher/HBuS/HSBC@HSBC02, Jennifer FONG/TKY/HBAP/HSBC@HSBC, stephanie L Napi er /HBUS/HSBC@HSBC02 Subj ect FW: Hokuriku Bank Ltd- compliance query 

Judy, 

I have called Hokuriku Bank and received the required information. However as 

i~~n~1:~i~~t~~nr!~d~~o~~d~~n1~ i~k~ni~~g.I shall foward it as soon as 

Appreciate your understanding. 

Best regards, 

Ako Kobayashi PCM eli ent servi ces HSBC, Tokyo 

----- Forwarded by Ako KOBAYASHI/TKY /HBAP /HSBC on 2008/09/08 18: 54 -----

Ako KOBAYASHI/TKY/HBAP/HSBC 06 Sep 2008 12: 14 Mai 1 si ze: 42762 phone No. 813 5203 3161 

To 

·stephani e L Napi er /HBUS/HSBC@HSBC02 cc 

Anthony Jul i an/HBuS/HSBC@HSBC02, Gari e S K HO/PCM ASP /HBAP /HSBC@HSBC, Jenni fer . E Kelleher/HBUs/HSBC@HSBC02, Jennifer FONG/TKY/HBAP/HSBC@HSBC, Judy P stol dt/HBUS/HSBC@HSBC02 

subject 

Re: FW: Hokuriku Bank Ltd- compliance query 

Our Ref 

Page 3 
1008 


76061.434

occ-psi -00409214 

Your Ref 

Stephani e I 

Noted. I shall call Hokuriku Bank again first thing Monday morning and give 

Judy the update. 

Best regards. 

Aka Kobayashi PCM client services HSBC, Tokyo 

steph ani e L Napi e r /HBUS/HSBC@HSBC02 

06 sep 2008 00:12 Mail size: 36347 

To 

Ako KOBAYASHI/TKY /HBAP/HSBC@HSBC 

cc 

Garie S K HO/PCM ASP/HBAP/HSBC@HSBC, Jennifer FONG/TKY/HBAP/HSBC@HSBC, Judy P 

stol dt/HBUS/HSBC@HSBC02, Anthony Jul ian/HBus/HSBC@HSBC02, Jennifer E 

Kell eher /HBUS/HSBC@HSBC02 

subj ect Re: Fw: Hokuriku Bank Ltd- compliance query 

Our Ref 

Your Ref 

Aka, this has been a long outstanding request. It: is imperative that 

~i~gl~ii~~t~eceive the response to our inquiry. please urgently follow-up 

Best regards. 

Stephani e L Nap; er AVP AML compl i ance I HSBC Bank USA 90 christiana Road, New Castle, DE 19720 

302 327 2161 

302-3272250 

phone. 

Fax. 

Email. stephan; e.1 . nap; er@u5.hsbc.com 

Ako KOBAYASHI/TKY /HBAP/HSBC@HSBC 

page 4 
1009 


76061.435

Occ-Psi -00409214 

09/03/2008 04: 33 AM 

To 

sl:ephani e L Napi er IHBUs/HSBC@HSBC02 

cc 

Jennifer FONG/TKY/HBAP/HSBC@HSBC, Garie S K Ho/pCM Asp/HBAP/HSBC@HSBC 

subj ect Re: Fw: Hokuriku Bank Ltd- compliance query 

Stephani e, 

Regarding the information requested, I have contacted Hokuriku Bank and was advised that the report has already been prepared. I shall forward it to you as soon as the copy has been recei ved. 

Best regards, 

Aka Kobayashi 

PCM Cl i ent servi ces HSBC, Tokyo 

Stephani e L Napi er/HBUs/HSBC@HSBC02 

02 Sep 2008 23:28 Mail Size: 28276 

TO 

Ako KOBAYASHI/TKY/HBAP/HSBC@HSBC 

cc 

subj eet Fw; Hokuriku Bank Ltd- compliance query 

Our Ref 

Your Ref 

Aka, I understand you have replaced Yum;. please follow-up on the promised information. 

Best regards I 

Stephani e L Nap; er AVP AML compliance I HSBC Bank USA 

90 Christiana Road, New castle, DE 19720 

Phone. 

Fax. 

Email. 

302 327 '2161 

302-3272250 

stephani e. 1 . nap; er@us.hsbc.com page 
1010 


76061.436

ace-psi -00409214 

----- Fonvarded by stephani e L Napi er /HBUS/HSBC on 09/02/2008 10: 26 AM -----

Kyoko OKAZAKI/TKY /HBAP/HSBC@HSBC 

08/07/2008 10: 54 PM 

To 

stephani e L Napi er /HBUS/HSBC@HSBC02 

cc 

Judy P Stoldt/HBUS/HSBC@HSBC02, Nanayo Ryan/HBUs/HSBC@HSBC02, Yumi 

SETO/TKY /HBAP /HSBC@HSBC 

subject 

Re: Hokuriku Bank Ltd- compliance query 

Dear stephani e, 

They are sti 11 prepari ng the: report and wi 11 prav; de us wi thi n 4th week of AUG08. 

~~~aor~~~~~ki PCM c1 i ent servi ces 

HSBC Tokyo 

stephani e L Napi er/HBUs/HSBC@HSBC02 

06 Aug 2008 00:27 Mail size: 21975 

To 

yumi SETO/TKY /HBAP/HSBC@HSBC 

cc 

Judy P Sto 1 dt/HBUS/HSBC@HSBC02, Kyoko OKAZAKI/TKY /HBAP /HSBC@HSBC, Nanayo 

Ryan/HBus/HSBC@HSBC02 

subject 

Re: Hokuriku Bank Ltd- compliance query 

Our Ref 

Your Ref 

Yumi, please advise status of information required. 

Thanks 

Best regards, 

Page 6 
1011 


76061.437

oee-psi -00409214 

st.ephani e L Nap; er AVP AML campl i ance I HSBC Bank USA 

90 christiana Road, New Castle, DE 19720 

Phone. 

Fax. 

Email . 

302 327 2161 

302-3272250 

st.ephani e. 1. nap; er@u5.hsbc.com 

Yumi SETO/TKY /HBAP/HSBC@HSBC 

07/28/2008 04: 43 AM 

To 

stephani e L Napi er /HBUS/HSBC@HSBC02 

ee 

Judy P Sto 1 dt/HBUS/HSBC@HSBC02, Kyoko OKAZAKI/TKY /HBAP /HSBC@HSBC, Nanayo 

Ryan/HBUS/HSBC@HSBC02 

subject 

Re: Hokuriku Bank Ltd- compliance query 

stephani e 

They are preparing the report. 

yumi Set.o PCM cl i ent servi ce HSBC Tokyo 

Stephani e L Napi er/HBus/HSBC@HSBC02 

26 Jul 2008 04:23 Mail size: 14298 

TO 

Yumi SETO/TKY /HBAP /HSBC@HSBC ec 

Judy P Stoldt/HBUS/HSBC@HSBC02, Kyoko OKAZAKI/TKY/HBAP/HSBC@HSBC, Nanayo 

Ryan/HBus/HSBC@HSBC02 subj eet Re: Hokuriku Bank Ltd- Compliance query 

our Ref 

Your Ref 

Yumi, just a quick follow-up. Any update? page 
1012 


76061.438

Dee-psi -00409214 

Best regards. 

stephani e L Nap; er AVP AML compliance ! HSBC Bank USA 

90 Christ-iana Road, New castle, DE 19720 

302 327 2161 

302-3272250 

phone. 

Fax. 

Email. stephani e.1 . nap; er@u5.hsbc.com 

Yumi SETD/TKY /HBAPjHSBC@HsBC 

07/15/2008 02:46 AM 

To 

s1:ephani e L Nap; er/HBUS/HSBC@HSBC02 

ee 

Judy P s1:01d1:/HBUSjHSBC@HSBC02, Kyoko OKAZAKIjTKY/HBAP/HSBC@HSBC, Nanayo 

Ryan/HBUS/HSBC@HSBC02 

subj eet Re: Hokuriku Bank Ltd- compliance query 

stephan; e 

We have today contacted Hokuri ku Bank Ltd. On receipt of their reply, we will advise you. 

Thanks and regards, yumi Seto PCM cl i ent servi ce HSBC Tokyo 

stephan; e L Napi er/HBuS/HSBC@HSBC02 

15 Jul 2008 01:13 Mail size: 173608 

To 

yumi SETO/TKY /HBAP jHSBC@HSBC 

ee 

Kyoko OKAZAKIjTKY /HBAP/HSBC@HSBC, Nanayo Ryan/HBUS/HSBC@HSBC02, Judy P 

51:01 dt/HBUSjHSBC@HSBC02 

subject 

Hokuriku Bank Ltd- compliance query 

our Ref 

Page 8 
1013 


76061.439

acc-psi -00409214 Your Ref __ "" Redacted by the Permanent 

Subcommittee on Investigations 

Yumi, hope all; 5 well. As you know I moved on to Campl i ance. I am tasked with Taraet Mitoring. We have undertaken a review of Hokuriku Bank acet II _ we've noticed a pattern of payments which we seek information for the Beneficiary & originator (if known). Our inquiry is based on either insufficient details within the payment or lack of internet information to adequately research BEN or ORG, 

~~~~r~~~i~~~ ateTh~~k ~~~c~~ n~d~~~c~~ the c1 i ent to obtain requested 

Part; es inquest; on: 

Name #Trans period $total 

De Araujo Rosel; Aparecida 4/08-5/08 $24,480 

Aksys Corporation, Japan 3 all 5/7/08 $60,000 

R 5 corporat; on 5/08 $54,000 

sanhu corporation rmizi-shi shitim 15 4/08-6/08 $810,800 

I have attached a sampl e payment for each. 

[attachment "r1495569. ti f" del eted by stephani e L Nap; er/HBUS/HSBC] 

Below Informati on bei ng sought 

Indi vi dual Address & DOB or Customer Locati on ( whi chever is appl i cab 1 e): 

place of incorporation ( if applicable): Nature of business: Beneficial owners (if applicable): 

~~:s~~n~o~ ~~!e~;~nsfer(s): Does the bank I s due di 1 i gence on thi s customer and transacti on (s) appear sati sfactory. Rel ati onshi p between the, ori gi nator I benefi ci ary if known 

Best regards f 

stephani e L Napi er AVP AML Compliance I HSBC Bank USA 90 Christiana Road, New Castle, DE 19720 

Phone. 

Fax. 

Email • 

302 327 2161 302-3272250 

stepha,ni e.l . napi er@us.hsbc.com 

page 9 
1014 


76061.440

Attachment: image. ti f. z; p Attachment: rnformation.xls.zip 

oee-psi -00409214 

Page 10 
1015 


76061.441

2008-09-09 15:49 FROM HSBC TOKYO CASH MGMT TO Koba\:lash i P.~~ 

~~~9 lji;f;f ~ OCC-PSI-00409215 'Ji. ::1t:f%M~ ~'IiJ;~). 

(*") ;tfJ) (::)7. ",") (/l::.I);t /J) 

~ ve AAAVJO A/(!.:Ys «8 ~DHV 

ROSELl CDR.fOR/q) fJIV CiJRpoR/!TIbft/ CtJRpoRI;7I1N 

Aft'R8::tDA 

:TNPIVlPVA !.. \tu.-l-$l¢l<if tllu.~M>J'~ ~~;j>l<ij 11!;u.,,*M>J<<I> A~SS" tfi!irIl<JI-3 tltt!'rJ 200 p~e .~ (}.:l? S..oo bP-f 't~3y. 

C\ls70"r4! -20 2007, ,,~ "-002.3. /2 2001,10,2. . LOCI<TIOII 11~.2. ,$l(Dd [) ~:lz:. -5:R.. -ru.U~~ll"! l 

PL/ICE Dr / 1tt-/<tp ="'.AATIQ/ 

NATVf!E '&~ -

OF o/C;~ qM~Me <tt'*9Mb 

6VSfN'e::U 

i3eNEF/cl~L ';it-It.. 

Olltjl/l!~ 1"';,1.-

19~/, /0./ 

(008) 

R.EASOIV ~~~r.1>'e <f't~ ~¢.F.M: <ft!f~ foR. THE lffl~UHt. f\;~ tf\.t: lt~ TR.It~Fe~ ~L.<'DS 

-h7ev!:x-.~ 

iXI&r 71/< "Kt.l:-~ -t " (~/t-€') r: ~ ""1' ?:a;,!J , {"I'!",'it..:fL 

P,4NI4 DrJE .(if,':~Bc i<-L.::it,.L. Dli.I rJreNu: 

Re~ TloNJ'illf .:t-ill2. 7c.~.;RI). JC:.n.VM Jtnz,j BETfW;(N l' t- ...-'" 711'-f)N~~71"" ~1'[\'Pii"", 

~v'?:!f;"I: ~4'fq~ttr. 

A@iJ.. .:fJf>t~k MI'G&~ i¢iFH&M. 

.k~."'~~~ '*'~~ 

ili),Z,\,"·d· 

¥ 

.. 

TnTAl P.fH 

76061.442

De Araujo Rosell Aparecida Aksys Corporation R S Corporation 

Address Shoseimachf, ImizuRshi, 200 Shichimi Nakano, lmizuRshi, 608·1 Kosugishiraishi, lmizu·shi, 

Toyama Pref, Japan Toyama Pref, Japan Toyama Pref, Japan 

Postal Code 934-0001 933-0253 939-0304 Date of Establishment 04Feb1958 08Jun2007 12Mar2Q02 

Place of Incor oration -

Nature of Business Business man Sales of Used Cars Sales of Used Cars 

Beneficial Owners 

Reason for Transfer(s) Te is required in order to identify Sales of Used Cars Sales of Used Cars 

the reason for transfer 

Sank's Due Diligence 

N/A (They maintain a savings account only.) 

Relationship between Satisfactory (no issues) Purchase of TC ofTC 

Originator (" Visit made by Hokuriku staff.) .. Visit made by Hokuriku staff.) 

AOe The owner works with a company Public company Company with limited liability 

Sanhu Corp ImiziRshi Shlti34 Shichimi, lmizu·shi 

Toyama Pref, Japan 

933-0252 

020c12001 

lmizuRshi, Toyama Pref 

Sales of Used Cars 

Rahee1 Akutal (7??) 

" not sure about the spelling 

date of birth: 010ct1961) 

Sales of Used Cars 

Purchase of Te 

(* Visit made by Hokuriku st

Company with limited liability 
1017 


76061.443

occ-Psi -00808695 

From: ANTHONY JULIAN/HBUS/HSBC 

Sent: 11/13/2008 8: 39: 04 AM 

To: DENIS E 0' BRIEN/HBUS/HSBC@HSBC02;JUDY P STOLDT /HBUS/HSBC@HSBC02 

CC: 

subject: Fw: Hokuriku Bank 

Machi ko M YAMASHITA/TKY /HBAP/HSBC@HSBC 

09/12/2008 06: 52 AM 

To 

Anthony Juli an/HBUS/HSBC@HSBC02 

cc 

Ako KOBAYASHI/TKY/HBAP/HSBC@HSBC, Alan P wi 11 i amson/HBUS/HSBC@HSBC02, Cam 

ADAMS/PCM ASP/HBAP/HSBC@HSBC, Hideki MATSUMOTO/TKY/HBAP/HSBC@HSBC, Michael B 

Gallagher /HBUS/HSBC@HSBC02, Navi n GUPTA!TKY /HBAP/HSBC@HSBC, Ri chard JAGGARD/PCM 

ASP /HBAP /HSBC@HsBC, Takahi ko KANECHIKU/TKY /HBAP /HSBC@HSBC, Thomas W 

Hal pi n/HBUs/HSBC@HSBC02 

subject 

FW: Hokur.; ku sank 

Anthony 

My apologies. I sent: mistakenly to Julian Anthony. 

sorry and Regards 

Yamashita 

----- Forwarded by Machi ko M YAMASHITA/TKY /HBAP/HSBC on 2008/09/12 19: 49 -----

Machiko M YAMASHITA/TKY/HBAP!HSBC 

12 sep 2008 19:01 Mail size: 35523 

phone No. 813 5203 3328 

To 

Julian H ANTHONY/PFS PUN/HBAP/HSBC@HSBC 

cc 

Ako KOBAYASHI/TKY/HBAP/HSBC@HSBC, Alan P Williamson/HBUS/HSBC@HSBC02, Cam 

ADAMS/PCM ASP/HBAP/HSBC@HSBC, Hideki MATSUMOTO!TKY/HBAP/HSBC@HSBC, Michael B 

Gall agher /HBUS/HSBC@HSBC02, Navi n GUPTA/TKY /HBAP /HSBC@HSBC, Ri chard lAGGARD/ PCM 

ASP/HBAP /HSBC@HSBC, Takahi ko KANECHIKU/TKY /HBAP /HSBC@HSBC, Thomas W 

Hal pi n/HBUS/HSBC@HSBC02 

Anthony 

Subject 

Fw: Hokuriku Bank 

Our Ref 

Your Ref 

We informed them that due to regulatory burden, HBUS decided to cease page 1 

Permanent Subcommittee on Investigations 

EXHmIT#89 
1018 


76061.444

occ-Psi -00808695 

processing ~ulk TCs used for business purpose but continue processing other 

~i~~ n~~ku~~~~ Ba~~ Sbu~ n~l~~e~O~h~~y t~i~e~e~~~~~~ is not made only for the deals 

Their response is as follows. 

They wish you to allow respite until they will fix time frame to meet with your decision given the following internal situation at their end. 

- First of all, .they should consider whether or not they will continue dealing thi 5 bus; ness. - If they continue the business; 1) th.ey have to select alternative provider. As you mentioned, it is true that there are several candidates in Japan but it may not be easy for them to select the most appropriate provider as they should consider pricing, procedure and etc through selecting process; and 2) they need to change thei r internal system and procedure. (AS mentioned in my previ ous LN, the, r systems including accounting system are arranged to deal with HBUS. They also have to change thei r procedure manual etc. to meet with the alternati ve provi der I s processi ng manner. ) . As you may be aware, september is the month for their interim fiscal period and due to this, it is one of the busiest months for Hokuriku Bank (not only for them but also for Japanese banks). . 

As to sort out TCs which HBUS can continuously deal with, they wish to know the clear definition of bulk TCS 

~:gi~~~iS~a~C~~ :~rl~oi~d v~~~h~~~il ~ery Ifa~~f~~~ l' ~~~hn H~~~rf~~t d;~~ii ~~)i~~se HSBC may likely have bad reputation on our PCM business in this marketplace. Your feedback would be appreciated. 

Regards 

Yamashita 

----- Forwarded by Machika M YAMASHITA/TKY/HBAP/HSBC on 2008/09/12 18:55 -----

Anthony J U 1 i an/HBUS/HSBC@HSBC02 

12 sep 2008 06:48 Mail size: 30103 

"fa 

Machi ko M YAMASHITA/TKY /HBAP/HSBC@HSBC cc . 

Ako KOBAYASHljTKY jHBAP /HSBC@HSBC. A 1 an p wi 11 i amson/HBUS/HSBC@HSBC02 1 Cam ADAMS/PCM ASP/HBAP/HSBC@HSBC, Hideki MATSUMOTO/TKY/HBAP/HSBC@HSBC, Michael B 

~~~ }~~~~/~~~~~~~~~:@~~~~~~ 1,0 N~~~C~~~~'~~~/~~~~j~~~~~~~~:' T~~~~re JAGGARD/PCM 

Hal pi n/HBus/HSBC@HSBC02 subj ect Re: Fw: Hokuriku Bank 

Our Ref 

Your Ref 

pl ease note that HBUS senior management has rev; ewed thi s servi ce extensively page 2 
1019 


76061.445

occ-psi -00808695 

~~di ~~~~rf~~e~e~~~f a~io~a~i ~ht H~k~~~ k~~ t~B~~Ph~;td~~~ de~u~~ n:iihdr~~i }~o~ s not 

~~~~:~i~~ilb/l~e~~i~~~~~e~i~~ r~s~o~s a~~:p~:51~~tory burden is costly and the 

We respect Hokuriku's perspective! and 30 days notification should be acceptable for withdrawal of serVlces (as stated in our cash letter documentation) . 

~~s~~~h w~~~t~he~ s Shi~~~~~l thi~Cb~~i n~~~r~o s~~~~~~~e p~~/i~~~~fi ~~k~rik~temi c 

maintains accounts with all of the major USD service providers Ccit;. chase. BoNY, wachovia, Deutsche, Amex, etc), each of whom offer competitive cash Letter services. They can shift this business relatively easily. and we would appreci ate the; r cooperation in ceasi ng bul k TC deposi t as soon as possibl e. We will return bulk TC deposits received by HBUS after october 12. 

Thanks and best regards 

Anthony J u 1 i an First vice president HSBC Bank USA, N.A. Global Transaction Banking 

offi ce: 002",).3.2ii7.-.26.6.5 •• Mobile (BB): • 

Machi ko M YAMASHITA/TKY/HBAP/HSBC@HSBC 

09/11/2008 05: 07 AM 

To 

Alan P will i amsori/HBUS/HSBC@HsBC02 

cc 

--~ Redaded by Ihe Pennanenl 

Subc:ommittee on 'nvcstigarions 

Ako KOBAYASHI/TKY/HBAP/HSBC@HSBC, Anthony Jul i an/HBUS/HSBC@HSBC02, Cam ADAMS/PCM Asp/HBAP/HSBC@HSBC, Mi chael B Gall agher/HBus/HSBC@HSBC02, Ri chard 

JAGGARD/PCM ASP/HBAP/HSBC@HSBC, Takahi ko KANECHIKU/TKY/HBAP/HSBC@HSBC, Thomas W 

Halpi n/HBUs/HSBC@HSBC02" Navi n GUPTA/TKY IHBAP/HSBC@HSBC, Hi deki 

MATSUMOTO/TKY IHBAP IHSBC@HSBC subject ' 

Fw: Hokuriku Bank 

Dear Alan 

Matsumoto-san and myself visited Mr. Takahashi, GM and Mr. Takarada, Deputy MGR of ' International operations Center to advise of your decision. 

~~k~~n6~y~~k~~i k~e~~~~e a~h~~t~~n~n~~~~~~~~d t~~~ ~~ g~i~~s~e; i n~~~d~~r~~tel y 

discuss is how we enhance process to avoid unnecessary internal process on our side. 

During the discussion, we confirmed again the background of relevant transact; ons. 

page 3 
1020 


76061.446

occ-psi -00808695 

- Most of their customers related to this issue are used-car dealers for Russian buyers who are cash account holders of Hokuriku Bank through 

appropri ate AML process. 

;a~~~t d~h~~~~o~~e c~~~ ng/~~~ ~~e d~~~~ilr y t~~~d aia d~~~~mm~~i~e b~h~;~' ~~ai~~ 5 As 

such Hokuriku Bank considers it is difficult for its customers to shift their payment method to wire transfers or commercial check from TCs. 

- HBUS is currently the sole cash Letter 'provider for Hokuriku Bank and if we 

~~o~i ~~o~~~i ~~t~~~!ti~~V!~~vi~/g~~~~ ~~r ~:~~ I r!:a~j~~~ i~~s~n~~!~ ~hi~h ~~ri ad currently arranged/designed to meet HBUS'S requirement and a4so make sure the new internal process with all relevant branches/offices. 

- since relevant customers are limited around 20 - 25 names and ,they are all cash account holders of Hokuriku sank, Hokuriku sank is well prepared to cooperate with HBUS by providing necessary information / arranging operational process in order to help HBUS to streamline the process. As such if there 

~h:t ~ny m~~~u~h~t ~,o th~~u~i sho~~ E~d~~~~~ga eh~~ei ~ ~~~~ti~e th~ei s~~e d~ ~C~~~r on 

processing of the TCs in problem. They have al ready been following your requirement on high value deposit (exceeding USD20k per deposit), under which they have been provi di ng the; r customers' i nformat; on ; ncl udi ng name, address 

~g~e bi~}~~~~ti~n w:~~/~~ diff~~e~~d p~~~~~~ I o~o~~~i ku Bi~k H~~S r~~d~i ~~s df~~~~~r on that. 

Your feedback woul d be appreci ated. 

Regards 

Machi ko Yamashita, FIG TKY 

----- Forwarded by Machiko M YAMASHITA/TKY/HBAP/HSBC on 2008/09/11 17:34 -----

Alan P wi 11 i amson/HBus/HSBC@HSBC02 

11 sep 2008 01:22 Mail size: 18427 

To 

Hi deki MATSUMOTO/TKY /HBAP/HSBC@HsBC, Navi n GUPTA/TKY /HBAP/HSBC@HSBC, Machi ko 

M 

YAMASHITA/TKY /HBAP /HSBC@HSBC 

cc 

Ako KOBAYASHI/TKY /HBAP/HSBC@HSBC, Anthony Jul i an/HBUS/HSBC@HSBC02', Cam' 

ADAMS/PCM ASP /HBAP /HS BC@HSBC, Mi chae 1 B Ga 11 agher /HBUS/HSBC@HSBC02, Ri chard 

JAGGARD/PCM ASP/HBAP/HSBC@HSBC, Takahiko KANECHIKU/TKY/HBAP!HSBC@HSBC, Thomas W 

Hal pi n/HBUS/HSBC@HSBC02 

subject 

Re: Hoku ri ku Bank 

Our Ref 

Your Ref 

Gentl ernen page 4 
1021 


76061.447

occ-Psi -00808695 

Can I ask for the status on thi 5 matter? 

Thank you all for your help. 

Alan 

original Message -----

From: Hideki MATSUMOTO 

Sent: 09/05/2008 09:35 AM ZE9 

To: Navin GUPTA; Machika M YAMA.SHITA 

Cc: Aka KOBAYASHI; Alan P wi 11; amson; Anthony 

Juli an/HBUS/HSBC@HSBCAMERlCAS; Cam ADAMS; Mi chael Gall agher; Ri chard JAGGARD; Takahiko KANECHIKU; Thomas W Halpin 

subject: Re: Hokuriku Bank 

Navin 

RM is Yamashita san for Hokuriku Bk. 

Yamashita san 

it seems internal due date is tight for them to change structure involving their own clients. shall we move quickly to discuss on this with Hokuriku Bk. 

rgds, hi deki 

Nav; n GUPTA/TKY /HBAP/HSBC 

05 sep 2008 08:29 Mail Size: 14141 phone No. 813 5203 4252 

To 

Takahi ko KANECHIKU/TKY /HBAP/HSBC@HSBC, Hi deki MATSUMOTO/TKY /HBAP/HSBC@HSBC 

cc 

Alan P wi 11 i amson/HBUS/HSBC@HSBC02, Anthony Jul ian/HBUS/HSBC@HSBCAMERICAS, 

Cam 

ADAMS/PCM ASP/HBAP/HSBC@HSBC, Mi chael B Galla~her /HBUS/HSBC@HSBC02, Ri chard 

JAGGARD/PCM ASP /HBAP/HSBC@HsBC, Thomas W Hal Pl n/HBUS/HSBC@HSBC02, Ako 

KOBAYASHI/TKY /HBAP /HSBC@HSBC 

subject 

Re: Hokuriku Bank 

Our Ref 

Your Ref 

Kanechi ku san J 

Request your support in commuincation to Hokuriku bank as below. 

Warm Rgs, Nav; n 

page 5 
1022 


76061.448

Fred SHYUR/PCM ASP/HBAP/HSBC 09/05/2008 07 :40 AM Mail Size: 3916 

To 

Dee-psi -00808695 

cam AOAMS/PCM ASP (HBAP /HSBC@HSBC, Navi n GUPTA/TKY /HBAP/HSBC@HSBC" Anthony J ul i an/HBUS/HSBC@HSBCAMERlCAS@REPUBLIC cc 

Thomas W Hal pi n/HBUS/HSBC@HSBC02, Mi chael B Gall agher/HBus/HSBC@HSBC02, Richard 

JAGGARD/PCM ASP/HBAP/HSBC@HSBC, Alan P Williamson/HBus/HSBC@HSBC02 subject 

Re: Hokuri ku Bank our Ref 

Your Ref 

Cam and Navi.n I 

FYI. please kindliwoTk with Anthony and Alan on the AML issue below. 

R-egards, 

Fred shyur 

'*' ** *** **' *~ ***'**************   ** *********** ** * *** ***** * 1;-*** The Hongkong and shanghai Bank; ng corporat; on Limited whose registered address is 1 Que'en' 5 Road Central, Hong Kong 

  **  * ********** '* **' *** *** * * * ** ******** ** *' ** *'Ir* 1< ****** * **** '* 

----- original Message -----

From: Alan P williamson Sent: 09/04/2008 11:05 AM EDT To: Anthony Julian/HBUS/HSBC@HSBC02; Fred SHYUR Cc: Thomas W Halpin/HBUS/HSBC@HSBC02; Michael B Gallagher/HBus/HSBC@HSBC02 

subject: Hokuriku Bank 

Anthony, Fred 

As you may know, compliance meets monthly with senior management in the Payments and Cash Management AML Management Review committee. Recently we discussed the fact that Hokuriku has been sending a large number of sequential traveller's checks from a number of similar businesses through cash letter here in the us. This use of cash letter is inappropriate and the committee has concluded that peM should no longer allow Hokuriku to send travelerls checks through cash letter. Hokuriku should therefore cease the activity and make alternative arrangements, such as to make the deposits by wire, by September 

~gkur~r~ ~nds~o~fi r~o b~~kt~hit t~he~P~~~~r~~~~ ~~; s to convey thi s message tq 

page 6 
1023 


76061.449

Dee-psi -00808695 Thanks for your help. please let me know if you have any questions. 

Alan williamson PCM compliance 

212 525 8043 

Page 7 
1024 


76061.450

occ-Psi-0081B58 

From: DENIS E 0 1 BRIEN/HBUS/HSBC 

Sent: 12/19/2008 11:16:25 AM 

To: AKOKOBAYASHI/TKY /HBAP/HSBC@HSBC03 

CC: ANTHONY JULIAN/HBUS/HSBC@HSBC02;DENISE A REILLY /HBUS/HSBC@HSBC02;HIDEKI 

MATSUMOTO/TKY /HBAP /HSBC@HSBC03 ; 

JONATHAN DEAN/HBUS/HSBC@HSBC02;JUDY P STOLDT/HBUS/HSBC@HSBC02;MACHIKO M 

YAMASHITA/TKY /HBAP /HSBC@HSBC03; 

SAEKA TAKEBAYASHI/TKY /HBAP/HSBC@HSBC03;SHINJI 

KAWAMURA/TKY /HBAP/HSBC@HSBC03;STEPHANIE K BROWN/HBUS/HSBC@HSBC02; 

TAKAO TAKENAKA/TKY /HBAP /HSBC@HSBC03;WILLIAM WEHMEYER/HBUS/HSBC@HSBC02 

subject: Re: FW: Hokuriku Bank - information needed 

~~9~~d. ae~rh~~~t~l~s~~ ~~~r ; ~e~!~~~~~i o~n~s t~~n~e1~~e~O~oY~hi 5 d~ !!~~~ce in thi s 

Than~s and regards, 

Denis E o'Brien 

Vice president, Head of Global Transaction Banking Compliance, I HSBC securities (USA) Inc. 452 Fi fth Avenue, New York, NY 10018 

phone. 

Fax. 

Mobile. 

Email. 

Ako KOBAYASHI/TKY /HBAP/HSBC@HSBC03 

12/19/2008 02: 00 AM 

To 

Deni 5 E O· br; en/HBUS/HSBC@HSBC02 

cc 

_;;; Redacted by the Pe.-manent 

Su~ommittee on Investigations 

Deni se A Reill y /HBUS/HSBC@HSBC02, Hi deki MATSUMOTO/TKY /HBAP /HSBC@HSBC03 • 

~~~~~i~S;:~~~~~~~;~;~~~~;~~g~: ~~~kaP T!~~~~~~~~~7?~~/~~~~/~~~i:@~;~~6~~ M 

Stephan; e K Brown/HBus/HSBC@HSBC02, wi 11; am wehmeyer /HBUS/HSBC@HSBC02, Anthony 

Jul i an/HBUS/HSBC@HSBC02. Takao TAKENAKA/TKY/HBAP/HSBC@HSBC03, shi nji 

KAWAMURA/TKY /HBAP /HSBC@HSBC03 

subject 

FW: Hokuriku Bank - information needed 

Deni s J 

Hokuri ku Bank has provi ded the i nformati on at the; r ri sk and confi rmed that the purchasers of the travel ers checks.- Alexander Tokarenko. Andrey Davydov, Yuri y zimchuk, Leoni d Efimovi ch E\1orov, Kopychev val ery or Bul garov Maxi m; are not signers or are NOT connected ln anh way to the 1reViouSly requested named 

~~~~~~ o~~~~h~r a~r H~~~~i ~~s~~~~nc:h}~o~ ~h!~. be the ast favour and we cannot 

Permanent Subcommittee on Investigations 

EXHIBIT #90 
1025 


76061.451

oce-Psi -00811358 

Best· regards J 

Ako KOBAYASHI 

Ass; stant vi ce Pres; dent I Gl aba 1 Payments and cash Management, As; a paci fi c HSBC Building, 3-11-1 Nihonbashi, chuo-ku, Tokyo 103-0027, Japan 

phone. 

Fax. 

Email . 

813 5203 3151 

813 5203 4235 

aka. kobayashi@hsbc.co.jp 

Forwarded by Ako KOBAYASHI/TKY /HBAP!HSBC on 2008/12/19 15: 58 --- -

shi nji KAWAMURA/TKY /HBAP/HSBC@HSBC03 

17 Dec 2008 17:11 Mail Size: 59442 

To 

oen; 5 E 0 I bri en/HBU5/HSBC@HSBc.o2 

cc 

Deni se A Rei lly /HBUS/HSBC@HSBC02. Hi deki MATSUMOTO/TKY /HBAP hHSBC@HSBC03 • 

~~~~~~~S~~~~~~~~~~~~~t~~m: ~~~k/ T1~~~~~~~~~7~~~'~:~'~~~i:@~~~c~~~ M 

Stephani e K Brawn/HBUS/HSBC@HSBC02. will i am Wehmeyer /HBUS/HSBC@HSBC02. Ako KOBAYASHI/TKY /HBAP /HSBC@HSBC03@HSBC. Anthony J u 1 i an/HBUS/HSBC@HSBC02. Takao 

TAKENAKA/TKY /HBAP /HSBC@HSBC03 

subj ect 

FW: Hokuriku Bank - information needed 

Denis, 

Our Ref 

Your Ref 

I am shinji Kawamura, MLCO in Japan. 

They have been good enough to provide information so far .but as you may understand from bank secrecy view point, they should not or cannot disclose custom~r information. So they will no longer provide information. If you need my suggestion to clear those backlogs, I w,ll tell you that you should file suspi c, ous transact; on report to your authori ty. 

Regards, 

sh, nj; Kawamura Money Launde ri ng Cont ro 1 offi cer The Hongkong and shanghai Banking Corporation, Tokyo TEL: 813-5203-3354 FAX: 813-5203-3794 

Forwarded by shinji KAWAMURA/TKY/HBAP/HSBC on 2008/12/17 16:49 -----

Takao TAKENAKA/TKY /HBAP/HSBC 

17 Dec 2008 08:31 Mail size: 54754 

To 

shi nj i KAWAMURA/TKY /HBAP/HSBC@HSBC03 

cc 

page 2 
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76061.452

occ-Psi -00811358 

Subj ect Fw: Hokuriku Bank - information needed 

Our Ref 

Your Ref 

----- Forwarded by Takao TAKENAKA/TKY /HBAP/HSBC on 12/17/2008 08: 30 AM -----

Deni s E 0' bri en/HBUS/HSBC@HSBC02 17 Dec 2008 03:03 Mail Size: 54194 

To 

·Takao TAKENAKA/TKY /HBAP/HSBC@HSBC03 

cc 

Deni se A Rei 11 y /HBUS/HSBC@HSBC02. Hi deki MATSUMOTO/TKY /HBAP /HSBC@HSBC03 • 

?~:~~~~A~~~~;~~~~;~~~~~~~~g~: ~~~kaP T!~~~~~~~~~7~~~~~~~~i~~~i:@~~~~~~~ M 

Stephan; e K Brown/HBUS/HSBC@HSBC02. wi 11; am wehmeyer /HBUS/HSBC@HSBC02, Ako 

KOBAYASHI/TKY /HBAP /HSBC@HSBC03@HSBC, Anthony J u 1 i an/HBUs/HSBC@HsBC02 

Takao. 

Subj ect . 

Re: FW: Hokuriku Bank - information needed 

Our Ref 

Your Ref 

By way of introduction, I am responsible for Global Transaction Banking compliance in the u.s. 

~~di ~i~~~is~~f~~~a~i~~ ~~r~ t h~!I~~~s t~~s H~k~r1 kU a~~~kt~~;t~;e~~ ~~~~i ~~~~ utilizing our Cash Letter (Pouch) services. In response to the additional questi ons Hokuri ku Bank has requested for our specifi c request: 

1. The reason you> are reviewing transaction from first and second quarter of 2008 at thi s time of the year. Internal backlogs 

2. Where did you get the name of" the 30 companies? From Hokuriku Bank bulk deposits 

3. Are you only asking Hokur;ku Bank to provide such information? Yes, as it relates to Hokuriku Bank transactions 

4. What would be the course of action you would take if any of the Russians are page 3 
1027 


76061.453

occ-Psi -00811358 

related in any way with the named relationships? (repeat of prey; ous response) We are requi red to understand and vet transact; ons processed that are al erted in our systems because of patterns or trends. To the best of our knowledCJe, we are unaware of any ~ending criminal act and would appreciate any 

~h~o~~~~i ~~ ~~~~s c~~r~e i d~~~i~i~t du~i n~e&~~d~~~ di1i ~:~ce ~~fg~~~~~~~r~c~~ ons .. travelers checks on behalf of third parties that used the items to purchase goods from your clients. Our request for i t:Jformati on di reetl y relates to transact; ons processed and al erted in our 

sb~'~~~~e of the lar e volumes, this processing is normal as we review in arrears and current~ yare backlo9ged rev; ewi ng transact; ons from f; rst arid 

in~~~~~~s ;uii~~r thf s 2~~~: !~e~~ed n~~s~~ ~~t~~n~u ~r~u~~~~e~~n~~m~~~vide inmost 

add; ti onal i nformati on. 

5. What is the reason for the request when there is no more outstandi ng travelers checks with Hokurku Bank To clear the pending HBUS system generated alerts on previous activity. 

We understand from the previous e-mails that Hokuriku Bank has requested some time to gather information for us, which we greatly appreciate anp understand that we cannot expect completion by year-end. Again, we cannot stress enough, that all we are asking is confirmation that the purchasers of the travelers checks - Alexander Tokarenko, Andrey Davydov, Yuriy Zimchuk, Leonid Efimovich Egorov, Kopychev valery or Bulgarov Maxim; are not signers or are connected in any way to the previously requested named relationships at Hokuriku Bank. 

Thanks and regards, 

Deni s E O'Brien 

vice President, Head of Global Transaction Banking Compliance, I HSBC securities (USA) Inc. 452 Fifth Avenue, New York, NY 10018 

phone. 

Fax. 

Mobile. 

Email. 

212 525 1147 

.J1-229-5257 

deni s. e. 0' bri en@us.hsbc.com 

Aka KOBAYASHI/TKY/HBAP/HSBC@HSBC03 

12/15/2008 01:43 AM 

To 

Deni sED' bri en/HBUS/HSBC@HSBC02@HSBC 

cc 

R\'dacted by the Permanent 

Subc:ommitteeon Investigations 

Denise A ReillY/HBUS/HSBC@HSBC02, Jonathan Dean/HBUS/HSBC@HsBC02, Judy P 

Stol dt/HBUS/HSBC@HSBC02, saeka TAKEBAYASHI/TKY /HBAP/HSBC@HSBC03, stephani e K 

Brown/HBUS/HSBC@HSBC02, willi am Wehmeyer /HBUS/HSBC@HSBC02, Machi ko M 

YAMASHITA/TKY /HBAP /HSBC@HSBC03, Hi deki MATSUMOTO/TKY /HBAP/HSBC@HSBC03 

Subject 

Fw: Hokuri ku Bank - i nformati on needed 

Page 4 
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76061.454

Dcc-psi -00811358 

Denis I 

please be advised that. other contact of Hokuriku Bank called us today and he has requested for further background for your specifi c request. The reason you are reviewing transaction from first and second quarter of 2008 at thi s ti me of the year. 

~~~r~o~i gn'ou a~kt n~h~Ok~~~ k~f B~~~ i~ ~~6e~d! e~~ch i nformat; on? what would &e the course of action you would take if any of the Russians are related in any way with the named relationships? what is the reason for the request when there is no more outstanding travelers checks with Hokurku sank 

Please be advised that apparently they are not very happy with your request as they have other matters to attend toward" the end of the year. Besides they are only given a very short timeframe. 

Hokuri ku Bank is not sayi ng that they will not ass; st you to provide the requi red i nformati on however they are upset wi th the nature of the request without being given sufficient back!ilround. Given the nature of the queries, 

please understand it is time consumln!il and consider to allow them more time. They might not be able to supply the lnformation by the end of the year. 

Appreci ate your understandi ng on the above. 

Best regards, 

Aka KOBAYASHI 

Assistant vice President! Global Payments and cash Managemen.t, Asia Pacific HSBC Building, 3-11-1 Nihonbash;, chuo-ku, Tokyo 103-0027, Japan 

phone. 

Fax. 

Email. 

813 5203 3161 

813 5203 4236 aka. kobayashi@hsbc.co.jp 

- --- Forwarded by Aka KDBAYASHI/TKY/HBAP/HSBC on 2008/12/15 14:58 --- -

Ako KOBAYASHI/TKY/HBAP/HSBC 11 Dec 2008 14:24 Mail size: 40837 

phone No. 813 5203 3161 

To 

Deni SED' bri en/HBUS/HSBC@HSBC02@HSBC 

cc 

Deni se A Rei 11 y /HBUS/HSBC@HSBC02, Jonathan Dean/HBUS/HSBC@HSBC02, Judy P 

Sto 1 dt/HBUS/HSBC@HSBCOZ, Saeka TAKEBAYASHI/TKY /HBAP/HSBC@HSBC03, stephani e K Brown/HBUS/HSBC@HSBC02, Wi 11 i am Wehmeyer/HBUs/HSBC@HSBC02 

subj ect Re: Fw: Hokuriku Bank - information needed 

our Ref Page 5 
1029 


76061.455

Dcc-psi -008113 58 

Your Ref 

Denis, 

I have had. dialogues with the Hokuriku Bank and they do not appear to retain ownershi p i nformat; on. Accordi ng to the c1 i ent. they have i dentiti ed the name of the branches where those named entities maintain an account with and shall shorlty make a request to each branch to supply them with the required i nformat; on. 

please bear with us some time for the Hokuriku Bank to complete the whole process. 

Best regards I 

Ako KOBAYASHI Assistant vice president I Global payments and cash Management, Asia pacific HSBC Building, 3-11-1 Nihonbashi I chuo-ku, Tokyo 103-0027 f Japan 

phone. 

Fax. 

Email. 

813 5203 3161 813 5203 4236 ako. kobayashi@hsbc.co.jp 

Den; 5 E o'eri en/HBU5/HSBC@HSBC02 

11 Dec 2008 14:12 Mail size: 35895 

To 

Ako KOBAYASHI/TKY /HBAP/HSBC@HSBC03@HSBC, stephani e K Brown/HBus/HSBC@HSBC02 

cc 

Sto 1 dt/H~~~)~~ B~~~m~~H~~~'~S~;~~~!~~;HI~~~~l~~~p ~~~~~~~~~~~j~C~~~~{~~, wehmeye r /H BUS /HS BC@HSBC02 subj eet Re: Fw: Hokuriku Bank - information needed 

Our Ref 

Your Ref 

Thanks Ako, 

I may be rni 55i ng something here, all we are ask; ng is if any -of the named individuals are owners or account signers in the named entities. Doesn't Hokuriku Bank retain ownership information & signature cards on there customers. 

Judy P 

please advise as we would appreciate closing this investigation out before year end. 

page 6 
1030 


76061.456

Thanks, 

Den; s 0 ' sri en vi ce Pres; dent Head of GTB compliance 

Tel._-4 cell 

cell 

----- original Message 

From: Aka KOBAYASHI 

occ-psi -00811358 

__ 0= Redacted by the Permanent 

Subcommittee on Investigations 

Sent: 12/11/2008 01:54 PM ZE9 To: Stephani e Brown Cc: Denis o'brien; Denise Reill¥; Jonathan Dean; Judy stoldtj saeka TAKEBAYASHr/TKY /HBAP/HSBC@HSBC03; wll.l i am Wehmeyer 

Subject: Re: FW: Hokuriku Bank - information needed stephan, e I 

I have called Hokuriku Bank and was advised to allow some time. As they do not know how those Russian names are pronounced, Hokuriku Bank needs to visit the companies listed below one by one and it would certainly require certain amount of time. please consider to wait till the end of this year. 

Appreci ate your understand; ng. 

Best regards, 

Aka KOBAYASHI Assi stant vi ce presi dent I Global payments and cash' Management, As; a pacifi c HSBC Bui 1 di ng I 3-11-1 Ni honbashi I chuo-ku, Tokyo 103-0027, Japan 

phone. 

Fax. 

Email. 

813 5203 3161 813 5203 4236 ako. kobayashi@hsbc.co.jp 

stephanie K Brown/HBus/HSBC@HSBC02 11 Dec 2008 05:41 Mail .Size: 31533 

To 

Ako KOBAYASHIjTKY /HBAP/HSBC@HSBC03 cc 

saeka TAKEBAYASHI/TKY/HBAP/HSBC@HSBC03, Judy P Stoldt/HBUS/HSBC@HSBC02@HSBC, 

Deni se A ReillY/HBuSjHSBc@H5BC, Jonathan Dean/HBUS/HSBC@HSBC, william wehmeyer/HBus/HSBC@HSBC, Deni s E 0' bri en/HBusjHSBc@HSBC 

subject 

Re: FW: Hokuriku Bank - information needed 

our Ref 

Your Ref 

page 7 
1031 


76061.457

acc-psi -00811358 Hello Ako, 

Do you have any information concerning the below matter? 

please note it is imperative that we received an answer as soon as possible. 

Thanks and regards. 

Stephani e K Brown HSBC Bank USA, National Association Account Manager I GPCM cl i ent servi ces 90 chri stiana Road, New castle, De. 19720 

phone 

Fax 

Email 

0302 327 2291 212 642 4065 stephani e. k. brown@us.hsbc.com 

Hello Ako, 

Here is additional information concerning our questions related to Hokur"iku Bank: 

The back!ilround of our queries stem from our requi rement to understand and vet transactlons processed that are alerted in our systems because of patterns or trends. To the best of our knowledge, we are unaware of any pending criminal act and would appreciate any information that can be shared with us regarding 

~~1' i ~~~c~n~~r~~~~g~s~~~i ~~s tr!~:l ~~~s~h~Ck~m~~ b~h~l} d~~ti~~ ~~ ~~~i~~s o~ha~ue used the it~ms to purchase goods from your clients. Our request for information 

~}r~h~11 a~~~ a~~l u~~s ~r~hi~c~~~~!s~i~~ei~e~o~~~ 1 a~~r~:d r!~i ~~r i ~y~~~~~r~e~~dse current 1 yare backl og~ed revi ewi ng transacti ons from fi rst and second quarter of 2008. These investlgations are time consuming. as in most instances, like this one, we need to rely on our customers to provide additional information. 

Your immediate attention would be greatly appreciated in advising us if Alexander Tokarenko, Andrey Davydov, Yuriy Zimchuk. Leonid Efimovich Egorov. Kopychev Valery or Bulgarov Maxim are signers or are connected in any way to the previously requested named relationships at Hokuriku Bank. 

Thanks in advance your assistance in this regard. 

Thanks and regards, 

stephani e K Brown HSBC Bank USA, National Association Account Manager I GPCM cl i ent servi ces 90 chri stiana Road, New castle, De. 19720 

phone 

Fax 

Email 

0302 327 2291 212 642 4065 stephani e. k. brown@us.hsbc.com 

Ako KOBAYASHIjTKY jHBAPjHSBC@HSBC03 

Page 8 
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76061.458

Occ-ps; -00811358 

12/03/2008 08: 56 PM 

To 

gpcmc1; entserv; ces/HBUS/HSBC@HSBC02 

cc 

saeka TAKEBAYASHI/TKY /HBAP/HSBC@HSBC03. stephan; e K Brown/HBUs/HSBC@HSBC02 subj ect . 

Fw: Hokuri ku sank - i nformat; on needed 

stephani e. 

Hokuriku Bank has raised the following questions: 

what is the background for your queries? Does it relate to your compliance reason or does it relate to criminal act and the police asks such information? 

~~~~~ ~~d cF;~~u~~th~~o~~€~u~~!~~n~~de~~ you since NOVOS, why such information is requi red now? 

Appreciate your feedback on the above. 

Thanks and best regards, 

Ako KOBAYASHI 

Assistant vice President I Global payments and cash Management. Asia pacific HSBC Build;ng. 3-11-1 N;honbash;. Chuo-ku. Tokyo 103-0027. Japan 

phone. 

Fax. 

Email. 

813 5203 3161 

813 5203 4236 ako. kobayash;@hsbc.co.jp 

----- Forwarded by Ako KOBAYASHI/TKY/HBAP/HSBC on 2008/12/0410:50 -----

Ako KOBAYASHI/TKY/HBAP/HSBC 01 Dec 2008 11: 21 Ma; 1. s; ze: 20181 

phone No. 813 5203 3161 

To 

gpcmcl i entservi cesjHBUS/HSBC@HSBC02 

cc 

saeka TAKEBAYASHI/TKY/HBAP/HSBC@HSBC03 .. stephan; e K Brown/HBus/HSBC@HSBC02 subject 

Re: Hokuriku sank - information needed 

Our Ref 

Your· Ref 

stephani e I 

page 9 
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76061.459

occ-psi -00811358 

I have forwarded your message to Hokuriku sank. Upon receipt of their reply, I shall revert to you. 

Best .regards 1 

Aka KOBAYASHI 

Assistant vice President! Global Payments and cash Management, Asia Pacific HSBC Building, 3-11-1 Nihonbashi, chuo-ku, Tokyo 103-0027, Japan 

phone. 

Fax. 

Email. 

813 5203 3161 

813 5203 4236 

ako. kobayashi@hsbc.co.jp 

gpcmcl i entservi ces/HBUS/HSBC@HsBC02 

Sent by: stephani e K Brown@HsBC02 

29 Nov 2008 04:31 Mail size: 16116 

To 

Ako KOBAYASHI/TKY /HBAP/HSBC@HSBC03 

cc 

saeka TAKEBAYASHI/TKY /HBAP /HSBC@HSBC03 

subject: 

Hokuriku Bank - information needed 

Our Ref 

Your Ref 

Hello Ako, 

Can you please contact Hokuriku Bank and request they provide us with the following information: 

please advise within a week if Alexander Tokarenko, Andrey Davydov, Yuriy 

~~ m~~~k ~O~~~~~~d Ef~ m~~~ C~a~g~~O~j,e Kfg11~:¥ n~a ~~l~ti~'n~~~ ~~r~~ ~~~~ ~i ~~e B~~(~ers 

MARIC TRADING CORPORATION 

I.K. AUTO LTD 

S.K. TRADING CO., LTD. 

DEAN CORPORATION CO LTD 

GONDAL CORPORATION 

SHIN KYOWA INTERNATIONAL 

JAMSOU TRADERS CO • LTD. 

CHOWDHURY TRADE INTL CO. LTD 

AWAN INTERNATIONAL K.K. 

SHIWA SANGYO CO • LTD 

CARLAND HOKURIKU CO. 

MALIK SEKINE BOEKI COMPANY 

SHAKI CORPORATION 

M.A AWAN CORPORATIoN 

AUTO SAM CO. 

Page 10 
1034 


76061.460

occ-Psi -00811358 A.S. U. CORPORATION 

P J ENTERPRISE 

SUNRISE TRADING CO LTD 

FRIENDSHIP MOTOR CAR K. K. 

SANDO CORPORATION 

GROMAKOV BORIS 

AUTD STAGE L TO. 

CHACHA ENTERPRISE CO •• LTD. 

COSMOS CORPORATION 

JAPAN TREK INC 

KABIR AUTO EXPORT CO" LTD KG COMPANY CO. I L TO 

SEIIN YONEDA 

SEKlZAWASYOUJI CO LTD 

ZHELOMKO RUSLAN 

Feel free to contact me directly, if further information is needed. 

Thanks and ki nd regards I 

Stephani e Brown GPCM client services HSBC Bank USA, N.A. 

90 christiana Rd., New castle, DE 19720 Telephone: 302 327 2171 

Facsimile: 212 642 4008 

T- 3 inquiry, 

Nanayo Ryan 

PCM c1 i ent servi ces I HSBC Bank USA NA 

90 Christiana Road, New Castle, DE 19720 U.S.A. 

-phone. 

Fax. 

Email . 

302-327-2256 

212-642-4065 

nanayo. ryan@us.hsbc.com 

_C ___ Forwarded by Nanayo Ryan/HBUS/HSBC on 11/26/2008 01: 12 PM -----

Judy p Stoldt/HBUS/HSBC 

11/26/2008.10:14 AM 

To 

Nanayo Ryan/HBUS/HSBC@HSBC02 

cc 

will i am Wehmeyer!HBUS!HSBC@HSBC, Den; 5 E Of bri en/HBus/HSBC@HSBC subject 

Fw: Hokuri ku Bank 

Nan, 

page 11 
1035 


76061.461

acc-psi -00811358 We do need the i nformat; on so can you send the request to Hokuri ku Bank? Keep us posted. 

Judy P stoldt vice president, AML compliance I HS8C Bank USA. National Association One HSBC Center 

Buffalo, New York 14203 

phone (716) 841- 6425 Fax (212) 382 - 7586 Email judy.p.stoldt@us.hsbc.com 

Forwarded by Judy P Sto ldt/HBUS/HSBC on 11/26/2008 10: 14 AM -----

Judy P Stoldt/HBUS/HSBC 11/24/2008 04:30 PM 

To 

Nanayo Ryan/HBUS/HSBC cc 

Den; s E 0' bri en/HBu5/HSBC@HSBC, will i am Wehmeyer/HBus/HSBC@HSBC 

subj eet Fw: Hokuriku Bank 

Nan, 

We talked this over and can you hold this request until tomorrow. I'll let you if we need you to send it. 

Judy P stoldt 

vice President, AML compliance I HSBC Bank USA, National Association One HSBC Center 

Buffalo, New York 14203 

phone 

Fax 

Email 

(716) 841- 6425 (212) 382 - 7586 judy. p. stol dt@us.hsbc.com 

Forwarded by Judy P stoldt/HBUS/HSBC on 11/24/2008 04:29 PM -----

wi 11 ; am wehmeyer/HBUS/HSBC 11/24/2008 04:15 PM 

To 

Nanayo Ryan/HBUS/HSBC@HSBC cc 

Judy P Stoldt/HBUS/HSBC, Denis E a'brien/HBus/HSBC, Jonathan Dean/HBus/HSBC@HSBC subject 

Hokuri ku 8ank 

page 12 
1036 


76061.462

Occ-Psi -00811358 

Nan. 

please reach out to Hokuriku Bank and request that they advise within a week if Alexander Tokarenko, Andrey Davydov, Yuriy Zimchuk, Leonid Efimovich Egorov, Kopychev valery or Bulgarov Maxim are signers or are connected in any way to the following relationships at Hokuriku Bank: 

MARIC TRADING. CORPORATION 

I.K. AUTO LTD 

S.K. TRADING CO., LTD. 

DEAN CORPORATION CO L TO 

GQNDAL CORPORATION 

SHIN KYOWA INTERNATIONAL 

JAMSOU TRADERS CO. LTD. 

CHOWDHURY TRADE INTL CO • LTD 

AWAN INTERNATIONAL K. K. 

SHIWA SANGYO CO. L TO 

CARLAND HOKURIKU CO. 

MALIK SEKINE BOEKI COMPANY 

SHAKI CORPORATION 

M.A AWAN. CORPORATION 

AUTO SAM CO. 

A,S.U. CORPORATION 

P J ENTERPRISE 

SUNRISE TRADING CO LTD 

FRIENDSHIP MOTOR CAR K.K. 

SANDO CORPORATION 

GROMAKOV BORIS 

AUTO STAGE LTD. 

CHACHA ENTERPRISE CO. I LTD. 

COSMOS CORPORATION 

JAPAN TREK INC 

KASIR AUTO EXPORT CO., LTD 

KG COMPANY CO •• LTD 

SElIN YONEDA 

SEKlZAWASYOUJI CO LTD 

ZHELOMKO RUSLAN 

pl ease confi rm to me when the message is sent and not; fy me on the response ~ 

Thank you for your assistance in thlS matter. 

Regards. 

William Wehmeyer AVP - AML Compliance officer I HSBC Bank USA NA 

90 christiana Road, New Castle, Delaware 19720 

phone. 

Fax. 

Email. 

302 327 2052 

212-642-4013 

will i am. wehmeyer@us.hsbc.com 

page 13 
1037 


76061.463

From: &>55, Joseph 

Dilorenzo, Anthony; 

__ "'" Redaded by the Permanent 

Subcommittee on Investigations 

To: 

cc 

Subject:: 

Date: 

Boss, JosePh; 

SKTrading 

Monday, December 01, 200810:48;54 AM 

Tony, HSBC Compliance management provided me with an update on the 

situation involving SK Trading. 

If you recall, we uncovered huge amounts of ~avelers' checks (daily 

averages of $500M to $700M per day) being processed by HSBC for their 

correspondent Hokuriku Bank in Japan. The travelers' checks were being 

processed in bulk and all checks were payable to SK Trading, with each bundle 

(average size of $250M) signed by the same individual and in $1000 

denominations and sequentially numbered. VVe were infonned that the 

aforementioned amounts we identified during our sampling was the peak amount 

sent in for processing for SK Trading. 

We were infomned that once _received a 314 request from HSBC regarding 

the matter; they_disp~ investigators to Russia to conduct 

surveilliance at ~k in which the travelers' checks were being purchased. 

The result was that ~dentified five individuals who were purchasing the 

checks with cash at the Russian Savings Bank and signing the checks. In tum, 

the five individuals were providing the checks to Mr. AlexanderTokarenko who is 

the owner of SK Trading. Mr. Tokarenko then stamped the checks payable to 

SK Trading. HSBC identified all accounts, including SK Trading, at Hokuriku 

Bank that were forwarding bulk deposits of_travelers' checks to HSBC for 

clearing. There were 30 a=unts at Hokuriku Bank that were sending bulk 

deposits of travelers' checks. HSBC is attempting to discem if Mr. Alexander 

T okareriko has ownership interest in the other 29 entities. HSBC advised that 

the total dollar amount of bulk travelers' checks processed by HSBC for the 30 

entities during the period of November 2007 to October 2008 was over $61 

million. 

Recently, HSBC informed Hokuriku Bank that HSBC could no longer process 

travelers' checks for them. Once HSBC management ascertains if Mr. Alexander 

Tokarenko has ownership in any of the other entities, management will_ 

Please let me know if you reqUire any further infonnation. 

Thanks, Joe Permanent Subcommittee on Investi ations 

EXHffiIT#91 

Confidential & Non-pUblic OCC lnfonn OCC-PSI-0088B526 
1038 


76061.464

ATTORN£'!'S AND COUNSELLORS 

By Email and FedEx 

Zachary Schram, Esq. 

Seruor Counsel 

Fox HORAN & CAMERINI LLP 

825 THIRD AVENUE 

NEW YORK, NEW YORK !0022 

June 26, 2012 

Permanent Subcommittee on Investigations 

United States Senate 

Washington, D.C. 

TELE:PHONE: !.21214S0_4900 

T£LECOPIERS: (;,!121 2B9_2.393 

Re: Questions Posed to the New York Representative Office 

Of The Hokuriku Bank, Ltd. 

Dear Mr. Schram: 

Our client, the Hokuriku Baok, Ltd. ("Hokuriku Baok") has asked us to respond 

to the questions you posed to it in your email of May 21~ 2012. The information 

conveyed here came from our client. 

What i. Hokuriku's relationship with HSBC. including HSBC Bank USA ffiBUS) ? 

Hokuriku Bank's relationship began with HBUS's predecessor in interest, Marine 

Midland Baok, in May of 1973. In September of 1985, Hokuriku Baok and Marine 

Midland entered into an International Cash Letter Service Agreement. pursuant to which 

the two banks cleared travelers' checks for each other. In October of2008, the bank, by 

then named HBUS, stopped clearing travelers' checks for Hokuriku Bank, and on May 

21,2012, HBUS terminated its relationship with Hokuriku Baok entirely. 

Hokuriku Baok also has a correspondent relationship with Hong Kong and 

Shanghai Banking Corporation, Ltd. However, this relationship will be terminated by 

mutual consent on July 4, 2012. 

Hokuriku Bank currently has a correspondent relationship with the four branches 

ofHSBC Banking (China) Company, Ltd. pursuant to a Relationship Management 

Application ("RAM"). Hokuriku Baok also has a RAM arrangement with the Taiwan 

branch of HSBC (Taiwan) Ltd. 

Hokuriku Baok aiso maintains correspondent relationships with HSBC Banking 

Middle East, Ltd. and HSBC Baok PLC (now known as HSBC PLC) pursuant to an 

agency agreement. 

Permanent Subcommittee on In'Vesti ations PSI-Hokuriku8ank-01-00D1 

EXHIBIT #92 
1039 


76061.465

Zachary Schram, Esq. 

United States Senate 

June 26, 2012 

Page 2 of 4 

Until May 29, 2012, Hokuriku Bank had a correspondent relationship with HSBC 

Malaysia Berhad, pursuant to a RAM. 

Questions 2 and 3 

Vlhat is Hokuriku's experience with submitting U.S. dollar travelers' checks to 

HBUS for cleanDce from 2005 to the present. including the volume of checks 

submitted each year. why HBUS stopped processing the travelers' checks in 2008, 

and when and why HBUS restarted processing them. 

Hokuriku's understanding of the travelers' checks cashed by clients in Russia 

involved in the used car business. HBUS's 2008 inquiry into those travelers' checks, 

and whether Hokuriku is still processing those checks. 

Due to the geographic proximity of Russia across the Sea of Japan, many 

Japanese dealers of pre~owned automobiles are located along the coast, including the 

Hokuriku region. (Hokuriku meaos "North Land" in Japanese). Hokuriku Bank is 

headquartered in this area and has several branches in the surrounding areas, Some of 

such dealers have accounts at Hokuriku Bank. 

In a typical transaction, a customer ofHokuriku Bank (that is to sayan accOWlt 

holder) sells a used car (or cars) to a Russian buyer who is a passenger or crew member 

of a ship at a nearby port. The buyer pays with travelers' cheeks. The seller/account 

holder brings the travelers' checks to its bank (Hokuriku) and deposits them into its 

account. Hokuriku Bank accepts the travelers' checks, credits the customer's account, 

and sends the checks to clearing banks. About 90% of the travelers' checks which were 

cleared by HSBC were in denominations of$l,OOO or $500. All the travelers' checks 

were issued by American Express. 

Until October of 2008, HBUS was the clearing bank for Hokuriku Bank in the 

U.S. HBUS would clear the checks and credit Hokuriku's correspondent account at 

HBUS.ln or about October of2008, HBUS notified Hokuriku Bank that it would no 

longer clear travelers' checks for Hokuriku Bank. The reason offered by HBUS was that 

the cost of processing the travelers' checks, especially the ones submitted by used car 

dealers, had become too high. 

Hokuriku Baok then turned to Bank of New York Mellon which has been clearing 

the travelers' checks ever since. HBUS has not restarted clearing traveler's checks for 

Hokuriku Bank. 

PS1-HokurikuBank-01-0002 
1040 


76061.466

Zachary Schram, Esq. 

United States Senate 

June 26, 2012 

Page 3 of 4 

Hokuriku Bank does not have "clients in Russia" who bring in travelers checks. 

The traveler's checks are brought in by Hokuriku's account holders which are companies 

incorporated under Japanese law. Hokuriku does not accept travelers' checks unless 

deposited by customers into existing accounts (other than travelers' checks total of which 

is less than $1,000 brought in by individual tourists). Please refer to the attached 

document whlch is an excerpt of the compliance manual of Hokuriku Bank. The pages 

attached lisl identification and other documentation required the Hokuriku Bank in order 

for them to engage in various transactions, including processing traveler's checks. 

Hokuriku Bank still accepts traveler's checks brought in by its customers, which 

are now sent to Bank of New York Mellon for clearance. 

Hokuriku Bank does not have any knowledge regarding "HBUS's 2008 inquity 

into those traveler's checks." 

Please see the attachment for the volume of travelers' checks sent to HBUS for 

clearance each year. 

Whether Hokuriku clears its U.S. dollar travelers' checks with any bank other than 

HSBC 

As stated above, The Bank of New York Mellon has been clearing Hokuriku's 

U.S. dollar travelers' checks since November 1, 2008. 

What is Hokuriku's KYC and AML practices? 

Hokuriku Bank has established comprehensive Compliance Regulations to assure 

CDmpliance with all applicable laws and regulations including, without limitation, the 

Laws Preventing Transfer of Profits Generated by Criminal Activities and the Foreign 

Exchange and Foreign Trade Control Law. Hokuriku Bank reviews and updates the 

Compliance Regulations annually and as required by law. 

The legal section which is created within the Compliance Office is responsible for 

overseeing the bank compliance matters. 

All branches perform internal inspection on a monthly basis to ensure their 

compliance pursuant to certain procedures set up by the bank. In addition, the Internal 

Auditing Department conducts thorough investigations of an bank activities including~ 

without limitation, compliance with AML matters. 

PS1-Hokuriku8ank·01-0003 
1041 


76061.467

Zachary Schram, Esq. 

United States Senate 

June 26, 2012 

Page 4 of 4 

Hokuriku Back accepts U.S. dollar traveler's checks oniy on the following 

conditions: 

• No more than $1,000 per person per day. 

Two exceptions may apply: 

(1) If a regular customer brings in a travelers' check in excess of 

$1,000 and ifby Hokuriku'sjudgment, it is deemed that the funds 

will be collected from the customer should it tum out that the 

travelers' cheek was not duly issued; or 

(2) If the travelers' checks were issued by Hokuriku Back. 

• In either case, Hokuriku Bank requires an ID to clear travelers' checks in the 

excess of¥2,000,000. (approximately $25,000 at the exchange rate of$l = ¥80) 

• 'Whenever someone who does not have an account at Hokuriku (such as a 

tourist or sailor) whose address is not verified brings in travelers' checks in 

denominations of $500 or $1,000 or more, Hokuriku would check ifa lost or 

stolen report has been filed regarding them. 

• 'Whenever a non-Japanese customer opens a new account, Hokuriku wil1 

confirm if the customer (as well as the person in charge in case of a corporate 

account) is subject to economic sanctions or their assets are frozen. The 

Hokuriku Back has a database for such C<lnfirmations and performs searches 

based on the surname, given name, middle name and corporate name. 

WMB:kg 

wlEnc1s. 

cc: Mr. Sbigeo Hikage (wlo Encls.) 

/ ve: tru,yours, 

~~~ Cbizuko S. Dena 

PS1-HokurikuBank-01-0004 

76061.468

Volume of US.Dollar Travelers Checks 

to H8US for Clearance by year THE HOKURIKU 

International D

MA

.... k.>2· .,·@lIiJaringBank 

76,983, 897.00 

71,802,654.00 

200?... I HSBC Bank USA,N.A. 90,248,281.00 

2odtJl:;t6.oct . 

.... ,.:, .. <::':. '.... ." 

... 

20/0 

20:ft.;, ,".",. ::'" 

.. Lto Apr 

52,539,290.00 

3,992,610.00 

7,031,660.00 

10,598,030.00 I Bank of New York Mellon 

7,991,460.00 

2,181,210.00 

PS1-Hokur
1043 


76061.469

From: 

To: 

c," 

Subject: 

Date: 

From: William M. 

SChram Zachary (HSGAC) 

Robertson Mary IHSGACl 

Stuber ! 9U@ rHSGAC)' Bean Elise rHSGAC} 

FW: Hokurtku Sank 

FridaY,June29,201111:50;SlAM 

Sent: Friday, June 2.9, 11:07 AM 

To: Schram, Zachary (HSGAC) 

Cc: Chizuko S. Ueno 

Subject: Hokuriku Bank 

Zach, 

Here is our client's response to your queries: 

1 When did the limits on the use of travelers checks mentioned in your answer to question 5 take 

effect? 

The current policy has been in effect since 1984 or around that time, 

2. Why do so many purchasers of used cars use travelers checks at Hokurlku? 

The bank does not know why travelers checks were the primary method of payment 

in the past Currently, most payment are being made by wire transfer. 

3. How does Hokuriku receive travelers checks from its customers? 

The customers (account holders) would bring them to the branch offices and 

give them to the tellers. 

Bill Brodsky 

Fox Horan & Camerini 

825 Third Avenue 

New York, NY 10022 

212-480-4800 

PSI-HokurikuBank..Q2-0001 
1044 


76061.470

oee-psi -00318438 

From: ALAN P WIllIAMSON/HBUS/HSBC 

Sent: 8/27/2007 12: 09: 51 PM 

To: TERRY WESTREN/HBUS/HSBC@HSBC 

CC: CAROLYN M WIND/HBUS/HSBC@HSBC;CLARA HURTADO/HBUS/HSBC@HSBC;JEFF 

ClDUS/HBUS/HSBC@HSBC; 

lOUIS MARINO/HBUS/HSBC@HSBC;MANUEl DIAZ/HBUS/HSBC@HSBC;MARTIN HOLY /HBUS/HSBC@HSBC; 

STEFAN HARDY /HBUS/HSBC@HsBC;TERESA GARCIA/HBUS/HSBC@HsBC 

subject: Re: Bearer Share campan; es 

Stefan 

Note from Terry: 

Alan, 

As requested, below is the list of New York Bearer share accounts. It also gives the status of the documentation for these accounts and other:- i nformat; on. The total is at the bottom of the spreadsheet. 

Thanks and regards, 

Terry Westren SVP, Head of Internati anal ope rat; ons I HSBC Private Bank 452 Fifth AVe. 6th Floor, New York, N.Y. 10018 

212-525-5325 

212-525-1680 

phone. 

Fax. 

Email. terry. westren@hsbcpb.com 

Terry Westren!HBUS/HSBC 

08/27/2007 01: 00 PM 

To 

Stefan HARDY /HBUS/HSBC@HSBC 

ee 

Alan P wi 11; amson/HBUs/HSBC@HSBC, carolyn M wind/HBUS/HSBC@HSBC, clara 

Hurtado/HBUS/HSBC@HSBC, Jeff C10US/HBUS/HSBC@HSBC, lOU; s Mar; nO/HBUS/HSBC@HSBC 

Manuel D; aZ/HBUS/HSBC@HSBC, Mart; n Holy/HBUS/HSBC@HSBC, Teresa 

Gare; a/HBUS/HSBC@HSBC 

subj ect Re: Bearer share Campan; es 

Stefan. 

OK. I have al ready prav; ded the information on Bearer shares you requested to Alan. Do you need it as well? 

Thanks and regards, 

Terry Westren 

Permanent Subcommittee on Investigations 

EXHIBIT #93 
1045 


76061.471

Dcc-ps; -00318438 SVP, Head of International operations, HSBC private Bank 452 Fifth Ave. 6th Floor, New York, N.Y. 10018 

212-525-5325 212-525-1680 phone. 

Fax. 

Email. terry .westren@hsbcpb.com 

stefan HARDY /HBUS/HSBC 

08/27/2007 12: 49 PM 

To 

Alan P w;ll; amson/HBUS/HSBC@HSBC, Jeff C10US/HBUS/HSBC@HSBC, Terry West re n/HBUS/HSBC@HSBC 

cc 

Carolyn M wind/HBu5/HSBC@HSBC, clara Hurtado/HBU5/HSBC@HSBC, Martin 

Hol y /HBUS/HSBC@HSBC, Teresa Garc; a/HBUS/HSBC@HSBC, Manuel D; aZ/HBUS/HSBC@HSBC, 

Lou; 5 Mari no/HBus/HSBC@HSBC 

Subject 

Re: Bearer share companies 

Thank you Alan. 

Jeff - do you have a simi,lar policy for new and existing ales? 

~~~~ n~. \:~ 1 ~o~a~~o~i~e t~ ~~~~~r~O~n~~y~i :~~ege:~~~ ~gir~ei~~~~n~~ ~~~ ~~; ~nd ~~~ui~~~Uby f~he Bg~l i c~hii~~e~nb~~~~o~r e~~~? for new and eX; sti ng ales as 

Stefan Hardy SVP. PB us Risk Management New York 

phone. 212-525-0392 

Alan P w;ll;amson/HBUS/HSBC 

08/27/2007 12: 30 PM 

To 

Stefan HARDY /HBUS/HSBC@HSBC 

cc 

carolyn M wi nd/HBuS/HSBC@HSBC, Te resa Garci a/HBus/HSBC@HSBC, cl ara 

Hurtado/HBUS/HSBC@HSBC, Marti n Holy/HBUS/HSBC@HSBC 

subject 

Bearer share Campan; es 

page 2 
1046 


76061.472

Dee-Psi -00318438 

The following is our current policy for Bearer Share corporations in NY: 

New Clients: For this purpose, new clients are consiqered to be new relationships to HSBC. 

Bearer share corporations will only be accepted if: · CEO - NY IPB and AML lCO approval is received; and. · client commits to registering the shares or the shares are held in custody with an approved non-US resident third party custodian, who is authorized to advi se HSBC of any changes in ownership 

Ex; sti ng cl i ents: 

t~: ~~i ~~1 ~~i ~li ~~~~n~e~~i~~ ~gt~dCb~l~w W!~~li e~~arer share Corporat; on I then 

For Bearer share corporat; ons cl ass; fi ed as "hi gh-ri sk" (see below), the cl i ent 

~~~~~~a~i~~ ~~m~~~ ~~a~~~v~h~~~~ i~~ h~t~o~~t~~~t~dy awi~gi ~~:~e~r s~~r~pproved non-US resident thi rd party custodian, who is authori zed to advi se HSBC of-any changes in ownership. For all other Bearer Share corporations, the Beneficial OWnership letter must be completed and renewed every three years. 

Each of ' the factors noted below wi 11 be consi dered in determi ni ng if the Bearer share account should be classified high-risk: 

· Risk classification of ultimate beneficial owner/decision maker · Involvement of HSBC in the creation of the Bearer share corporation Cif HSBC created the corporati on, the Relationshi p Manager wi 11 already have si gnifi cant knowledge of the client) · Number of accounts the Bearer Snare client maintains Cif the only account wi th HSBC is the PIC (Bearer share corporati on), then the cl i ent may be cons; de red hi ~h ri sk) · Length of t'm~ the Beneficial OWner of the Bearer share corporation has been a client 

· Level and nature of activity in the Bearer share corporate account(s) 

Excepti ons : 

Exceptions to this polic¥ must be approved by any two of the following, one of whom must be the AML off, cer: the CEO - NY IPB or desi gnate, coo and chi ef AML off; cer, PB Ameri cas. 

Attachment: Bearer shares Account Total.xls.zip 

page 3 
1047 


76061.473

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76061.478

r ReW:cted by the 

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1- Red .... erl hv the I Permanent SUbCOIIII'"lIt'(' on Investigations 

-"" -

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Redacted >, '~e 

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Rec, ,:hJ b) t~e I 

Permanent Subcommittee on Investigations 
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76061.483

Redacted by the 

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76061.484

.-___________ c_ccc 

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1059 


76061.485

Dcc-psi -00226652 

From: JEFF CLDUS/HBUS/HSBC 

Sent: 12/11/2007 4: 13: 08 PM 

To: PAUL J 0' SULLIVAN/HBUS/HSBC@HSBC02 

CC: ALAN P WILLIAMSON/HBUS/HSBC@HSBC; MANUEL DIAZ/HBUS/HSBC@HSBC;TERRY WESTREN; LOUIS 

MARINO/HBUS/HSBC 

subject: Re: FW: Bearer share Corporation policy 

~~~~i o~~i~C~:~t a~~ ~, a~oi~e~~gt~~b~~~ draft Bearer share pol; cy that I had 

AS you know, IPS Miami has ceased accepting Bearer share company accounts so draft requi rements for establ i shi ng new bearer share accounts are not rel evant. IPB Miami maintains existing accounts for 1,679 Bearer share corporations of whi ch 126 are consi de red Hi gh Ri sk. (See attached report.) These campan; es hold $2.6 billion in PUM and generate an estimated revenue of $26 million per year. 

# Bearer share PUM Bearer share 1679 2,626,134,512 1.00% Est. ~6~~~~. 345 Est; mated Rev 

I believe there would be a significant impact to the IPS business if we enacted the draft policy of requiring all existing bearer shares to be held in custody 

by the end of next year. I would duestion why the draft policy would require BOTH holding bearer shares 

~~a~~~to Tha~n~e~~;c~~t~~y~~?o~~e t~~n~~~~~~~ti~~e~fh~he 1 ~~~~l a~~~~: t~~e~ 

g~~~~~~ c o~~_~~~~ifi ~~~i ~~t~faih~cbe~~~i~~~ii ~~n~~~hr ~ ~~s b~~~~~l ~h~~~t:~c~~~is is acceptable for well known established customers. (The average age of the Miami bearer share relationships is 13 years.) I woul d also question the ti mi ng of the draft pol i cy. whi ch requi res exi sti ng Bearer share companies to convert to registered shares or be held in custody by 

~~e th~d e~~ ~~O~609. y~hi s a~~~~ d o~a~~e a B~ij~~g~~~~~~n~n r~~~i ~!~f ~~e a~~~~pi~~hs 

:~~i ~~~~ d i ~i ~;~~blt~~i n~ o~~ei~a~~~~~n~~BC cli ents many of whi ch HSBC has 

Is there any room to revise this policy or obtain a dispensation for IPB? 

~:f~r~lbus, SVP 

IPB operations 1441 Brickell Avenue, 16th floor, Miami, Florida 33131 (305) 539-4810 (phone) (305) 374 6466 (Fax) 

A 1 an with respect to exi sti ng bearer share accounts the BSA/AML EXAMINATION MANUAL has changed thei r comment on the mi ti gati on of ri sk of bearer share 

~~~~~~~ifi c!~i ~go{ s - a~~~~~~bl ~~s the only opti on. Thi s changed in 2006/7 and 

EXAMINERS MANUAL 2005 - BEARER SHARE 

If ownership is held in bearer share form, the bank should maintain the physical control of the bearer shares either inhouse or with a trusted third party to ensure that the ownership of the corporate entity does not change wi thout the bank's knowl edge. 

Permanent Subcommittee on lnvesti ations 

EXHmIT#94 
1060 


76061.486

ace-psi -00226652 EXAMINERS MANUAL 2006/7 - BEARER SHARE If ownership is held in bearer share form, banks should assess the risks these rel at; cnshi ps pose and determi ne the appropri ate controls. For exampl e I banks may choose to maintain (or have an independent third party maintain) bearer shares for new clients, or those without well established relationships with the institution. 

For well-known, established customers, banks may find that periodically recertifying beneficial ownership is effective. 

~:f~rg~ ~us. SVP 

IPS Operations 1441 Brickell Avenue, 16th floor, Miami I Florida 33131 (305) 539-4810 (phone) (716) 626 6922 (Fax) 

paul J a' Su 11 ivan/HBUS/HSBC@HSBC02 

12/10/2007 06:36 PM 

To 

Terry westren/HBUS/HSBC@HSBC, Mason C sal it/HBUS/HSBC@HSBC02, Teresa 

Garci a/HBU5/HSBC@HSBC02. Antoni a suarez-Obregon!HBus/HSBC@HSBC, Jeff Clous/HBUS/HSBC@HSBC, Manuel oi aZ/HBUS/HSBC@HSBC, cl ara Hurtado/HBuS/HSBC@HSBC, 

patrick M campion/HBUS/HSBC@HSBC, Steven J Rockefeller/HBUS/HSBC@HSBC, Dennis J 

ouggan/HBUS/HSBC@HSBC 

ec 

Marlon YOung/HBUS/HSBC@HSBC, Loui s Mari nO/HBUS/HSBC@HSBC, Alan P 

wi 11 i amson/HBUS/HSBC@HSBC subject 

Fw: Bearer share corporation policy 

All , 

~if:~~~~ i ~h~~~ f~n~\ ~~~f~ ~~r~r~~~~igi~il~ C~h~~v~~~ n~r~~i~~ll ~h~l~n~~~P~~~ we 

will be able to maintain bearer share company accounts once the requirements of the policy are met. 

I will follow up with each group individually (OPB, IPB NY, and IPB Miami) to 

discuss implementation steps. 

regards, 

Paul 

----- Forwarded by paul J a'sullivan/HBus/HSBC on 12/10/2007 06:21 PM -----

Ali 5 Kazmy /HBUS/HSBC@HSBC 

12/10/2007 04: 38 PM 

To 

paul J a'sullivan/HBUS/HSBC@HSBC02 

ec 

subj eet Bearer share corporation policy 

page 
1061 


76061.487

Dee-psi -00226652 

Attached is the aforementioned document for implementation purposes. please note that we will be announcing the policy by the end of the week. 

[attachment "Bearer Share corporation Account policy Guidance (Final Draft 082907) .doe.zip" deleted by Jeff ClouS!HBUS!HSBCl 

In case of any questions, please let me know. 

Regards I 

Attachment: A 11 Bearer share Accounts. pdf. zip 

page 3 
1062 


76061.488

Mr. Cohen: Hello 

Claude: Yes, Mr. Coheb, you're sure that Gregoire told you that? 

Mr. Cohen: Why? Yos. 

Claude: He told you that he'll set up aP3lll!IJlam.n company for you [again]? 

Mr. Cohen: A Panamanian, he gave me names and everything. 

Claude: He gave you names too? 

Mr. Cohen: Yes, Panamanian companies. 

Claude: Because if s ... sooner or later you are going to register Mr. Coben, it's 

better to have registered shares. 

Mr. Cohen: I don't want registered shares. If I place relatives as assignees. I don't 

want these assigne~ one day saying that the money is theirs. 

Claude: [sighs 1 

Mr. Cohen: Eh yes, do you understand? 

Claude: Yes, I s~ butbecause sooner or later~ it's gomg to be registered, do you 

understand Mr. Cohen? That's why, why you will pay money, now you will pay money 

all over again. 

Mr. Cohen: So what do you want?'That I close the account with you and that I go to 

Gregoire? 

Claude: I didn't say that, but I didn't say iliat you should close the account ... 

Mr. Cohen: I can't do that. 

Claude: ... close the acCOlIDt 

Mr. Cohen: Neither Safra nor Gregoire told me that It's just you telling me that. 

Claude: That what? 

Mr. Cohen: Maybe in Geneva it can't exist ... 

Claude: ... but Mr. Cohen, I am honestly telling you ilia! if ilisn't today, its 

tomorrow, or the day after, it's going to be ... 

Permanent Subcommittee on Investigations 

EXHIBIT #95 

Confidential T~tment Requested 
1063 


76061.489

Mr. Cohen: Maybe in the United S\>IIcs, but not New YoIk ... in Geoeva. 

Claude: Alrigh~ do you Want io speak with Evelyoe and have her better explain it 

to you? 

Mr. Cohen: No, I do not want to speak with her [laughs]. Why? 

Claude: OK, listen, I will verify with compliance and compliance will verify with 

Geneva if it's OK to open Panamanians and that's il 

Mr. Cohen: Check, aod check if the laws in Switzerland are different than American 

laws. 

Claude: The laws in'Switzerland are different than those in the United States, we 

are going to verifY that Mr. Coben. Believe me, I'm doing the best for you, that's why I 

am going to ask.. 

Mr. Cohen: And older companies, no, 

Claude: Older compardes what 

Mr. Cohen: They don't need to register. 

Claude: No, no, no, older companies no, but now new companieS are asked to, all 

of them are going to be registered, all. 

Mr, Cohen: But older companies, no. 

Claude: No. 

Mr. Cohen: So, I still have the old ones. 

Claude: Yes, but this has nothing to do with the old ones. Now you want to open 

for .... 

Mr. Cohen: ... no I can give you an old one. 

Claude: Panamanian? 

Mr. Cohen: Yes, there are old Pm:lflIIlanians. 

Claude: I'll ask ... 

Mr. Cohen:. I have old ones that are ten and fifteen years old. 

Confidential Treabnent Requested HSBC·PSI·PROD-Il024792 
1064 


76061.490

Claude: Ten and fifteen years old, but there always needs to be a new torificator, 

good standing, anew this, anew that, a new this, what do we .. .Ifit's ten years oldt there 

is a new certificate of good standing. 

Mr. Cohen: Yes. 

Claude: There is a new ... some new, the ... new secretaries. (InaudI1>le) you know 

that the directors, bosses, have changed? Of the ... of that compaoy. 

Mr. Cohen: Yeah, so? 

Claude: And so it would need a new director, the list of new directors, the list of 

new ones ... 50 it's the same thing. You need to open a new one ... there needs to be a new 

one. 

Mr. Cohen: There needs to be shareholders. 

Clande: Yos. 

Mr. Cohen: I'll give you the beneficial owner, but I do not want the shares to be in the 

name of the beneficial owner. 

Claude: No, you can ... you can diversify the sbares. 

Mr. Cohen: And so? 

Claude: That meaos that the hundred, [inaudible] you can give all of the names, 

that one, that one, that one, that one. 

Mr. Cohen: And so? 

Claude: It's easier than giving it to just one. 

Mr. Cohen: Wait, wait a minute, but the sbares, you bave to, you want shares? 

Clande: No, you will have the originals, but you can put for example X - M. Leon 

- 40; Soma- 50... . 

Mr. Cohen: But I can't put that; otherwise I have to declare them in the United States? 

I can't do that. I don't want to declare ... otherwise, I have to close the accounts with you 

and go to Geneva. 

Clande: Yes, I see, I see what you want. .. 

Mr. Cohen: I can't do that because weI I'm a resident here. 

Confidential Treabnent Requested HS8C~PSI-PJ:;!nn.nnn7Q1 
1065 


76061.491

Claude: Yes. 

Mr. Cohen: Why do you think I put Habib ... 

Claude: Yas, right, right 

Mr. Cohen: ... my brother~in-law, he's ... he agrees with me. It's not lilre I'm doing it 

without ... 

Claude: OK, OK, alright, I understlmd, I underntaod. 

Mr. Cohen: He gives me his passport, he gives me everytlring. 

Claude: OK so you ... you absolutely waut to change to Pauamanian. OK, j'll ask, 

j'll ask compliance and we'l! see, alright and I will eall you back. 

Mr. Cohen: Keep me posted because [inaudible] ... Geneva is free. 

Claude: OK, I will keep you posted. He gave you names too? 

Mr. Cohen: He gave me names; he's going to make them companies. 

Claude: Alright, OK, I will ask and I will call you back. 

Mr. Cohen: OK. 

Claude: Bye bye. 

Mr. Cohen: Talk to you soon. 

Confidential Treatment Requested HSBC·PSI.pROD.(1024794 
1066 


76061.492

6J 

TRANSPERFECf 

ALBANY 

AMSTE?DAM 

ATLANTA 

l!>ERLIN 

SOS10N 

af\USS£LS 

CIiAAlOTIE 

CHICAGO 

DAU-AS 

DENVER 

DUSAI 

DUllLIN 

F/tANKFURI 

GENEVA 

HONG KONG 

IRVINE 

LONDON 

LOSANGELE5 

Ml"MI 

MILAN 

MINNEAP0L15 

MONTR.EAL 

MUNICH 

NEW YORK 

PHIU>.DELPHIA 

RESEARC" 

TRIANGLE PARI( 

SAN FitANOSCO 

SANjOS!: 

SEATTLE 

SINGA?Oi'tE 

STOCKHOlM 

STUTTGART 

SYCNf:Y 

TOi\ONTO 

V .... NC.oUyUl 

WASHINGTON, DC 

City of New Yorl<, State of New York, County of New Yotk 

J, Anne Lutz, hereby certify that the document "C. Mandel 0412512007 11 :32:53 AM 

(43452433_C. M!md.! 4_15_07 to 5_5_07 XV..JDD.wav.zip)" is, to 111. best of my 

knowledge and belie~ a 

Sworn to before me this 

November 23. 2009 

and sccumte translation from French to English. 

lsi ~1A1vtAA tOre, Notary Public 

Stamp, Notary Public 

THREE PA.RJt: AVENUE, 39TH FlOOR, NEW YORK, NY 1001& T 112.689,5555 'F 212.689.1059 WWW;TRANSPERFECT.COM 

Confidential Treatment Requested HSBC.PSI-PROD~n2.4.7!=1'" 
1067 


76061.493

From: TERESA GARCIA/HBUS/HSBC 

Sent: 6/20/20074:05:47 PM 

occ-Psi -00214516 

To: ALAN P WILLIAMSON/HBUS/HSBC@HSBC 

CC: 

sUbject: Re: waiver Request 

Alan, 

That's where my problem comes in. 

The pol i cy reads: 

__ "" Redacted by the Permanent 

Subcommittee on Investigations 

For new Relationships: Bearer share corporations will only be accepted if: CEO - NY IPB and AML LCO approval is received; and, client commits to registering the shares or the shares are held in 

~~~~~~¥ z~~ t~o a~d~~~~O~~~c n~f-~~Y r~h!~~~~ ~~i ~~n~~~~¥ p ~U(~~~i ~~~c~~~r!~) 

In this case, the client does not want to commit to either option. Thatts why Manuel suggested if we can give them a waiver to the above. We are ta~ 

about a potential client with an estimated net worth is in excess of_ million in liquid assets. 

woul d havi ng a conference call wit.h Manuel, the RM and the two of us hel p? 

We always try to work with the business, but sometimes we just can't. 

Thanks 

Teresa Garci a 

~~~~o~r~~~~~e~a~ke~!~l ~6~~ compl i ance 

452 Fifth Ave., T6, NY, NY 10018 (PH)212-525-6014 (F) 212-525-8255 

Alan P wi 11 i amson/HBus/HSBC 06/20/2007 04: 43 PM 

Teresa 

To 

Teresa Garci a/HBUS/HSBC@HSBC cc 

subject 

Re: waiver Request 

Thanks. Is there a procedure for waiving bearer shares - i.e. do Manuel & I have the authority? 

Alan 

Teresa Garci a/HBuS/HSBC 06/20/2007 01: 44 PM 

Permanent Subcommittee on Investi ations 

EXHIBIT #96a 
1068 


76061.494

Dec-Psi -00214516 

To 

Alan P wi 11 i amson!HBUS/HSBC@HSBC 

cc 

subj eet Re: waiver Request 

Following are the RM responses: 

The name of the account.s are: - urigeler International S.A. - Holding company - Birmingham Merchant S.A. - Holding Company 

These two are companies that were established several years ago in panama, whi ch establ i shes compani es- wi th bearer shares. 

Thanks 

Teresa Garci a 

~~~~ O~r~~~~~e~a~ke~~:l ~~~~ Campl i ance 

452 Fifth Ave., T6, NY, NY 10018 (PH)212-525-6014 (F) 212-525-8255 

Alan P will i amson/HBus/HsBc 06/20/2007 11: 15 AM 

Teresa 

To 

Teresa Garci a/HBU5/HSBC@HSBC 

cc 

SUbject 

Re: waiver Request 

Thanks for the info. What are the bs companies and why are they bs? 

Alan 

From: Teresa Garcia 

Sent: 06/20/2007 09:58 AM EDT To: Alan p williamson subject: Fw: waiver Request 

Alan, 

I would like to discuss with you. The RM is anxious for an answer since he is page 2 
1069 


76061.495

ace-Psi -00214516 traveling to meet the client next week. 

Thanks. 

Teresa Garci a 

~~~~ 0 ~ r~~~~~e~a~ke~!! 1 ~~~~ ccmp 1 i ance 

452 Fi fth Ave., T6, NY, NY 10018 (PH)212-525-6014 (F) 212-525-8255 ----- Forwarded by Teresa Garcia/HBUS/HS.BC on 06/20/2007 09: 57 AM -----

Teresa Garc; a/HBU5/HSBC 

06/14/2007 03: 14 PM 

To 

Susan Hoggarth/HBUS/HSBC cc 

subj ect waiver Request 

Sue, 

Jaime carvallo ;s looking to open a relationship for F 9 . The two accounts are bearer shares. The client does not want neTtner to register nor custodize the shares, and they do not want to sign the BDL. 

Jaime and I have discussed this issue with Manuel Diaz. Manuel is willing to sign a waiver in order to open the two accounts, as he is very familiar with the family and interested in establishin"t relationshie with them. I also know the family very well since I worked for for 19 yeifs. I have eersonally met Here is a brief summary of 

--"" Redaded by the Pennanent 

Subcommittee on Inllestigations 
1070 


76061.496

pl ease 1 et me know what: your thoughts are. 

Thank you. 

Teresa Garc; a 

~~~~ 0 ~r~~~~~e ~a~ke~!~ 1 ~~~~ comp 1; ance 

452 Fifth Ave., T6, NY, NY 10018 (PH)212-525-6014 (F) 212-525-8255 

page 4 

__ = Redacted by the Permanent 

Subcommittee on Investigations 
1071 


76061.497

ace-Psi -00214534 From: ALAN P WILLIAMSON/HBUS/HSBC 

Sent: 6/20/2007 5: 48: 38 PM To: MANUEL DIAZ/HBUS/HSBC@HSBC 

cc: 

subject: Re: Fw: waiver Request 

! ~~~iT~~ ~itua~i~~~ld do it without going to Geneva but audit wrote up DPB on 

Alan 

Manuel oi aZ/HBusjHsBc 06/20/2007 06:32 PM 

To 

Alan P wi 11 i amson/HBUS/HSBC@HSBC cc 

subject 

Re: Fw: waiver Request 

I FULLY SUPPORT THIS WAIVER 

Manuel L. Diaz 

~~:~i g~i~a~e M~~~~i ~~t~~~~~f~~a 1 

1441 Brickell Ave. 17th Floor Mi ami, FL 33131 (305) 539-4747 Tel ephone 

Alan P williamson/HBUS/HSBC 06/20/2007 06: 28 PM 

TO 

Manuel oi aZ/HBUS/HSBC@HSBC, Marlon Young/HBUS/HSBC@HSBC cc . 

Teresa Garc; a/HBU5/HSBC@HSBC, Susan HoggarthjHBuS/HSBC@HSBC 

Subject 

FW: Waiver Request 

Manuel, Marlon 

I have no objection to this request, however I believe the requi rement to register bearer shares is a group mandate. I understand the process to be that if you want an exception we will have t~_~~ :;0 Geneva. I am willing to pass on 

Permanent Subcommittee on Investigations 

EXHmIT#96b 
1072 


76061.498

Dee-Psi -00214534 the request if that is what you want. 

Thanks 

Alan 

----- Forwarded by Alan P williamson/HBUS/HSBC on 06/20/2007 06:24 PM -----

Teresa Garc; a/HBU5/HSBC 

06/20/2007 05: 29 PM 

Alan, 

To 

Alan P willi amson/HBus/HSBC@HSBC ee 

subj ect Re: wai ver Request 

__ "" Redacted by the Permanent 

Subcommittee on Investigations 

Because they wi sh to rna; nta; n confi dent; ali ty. and they have never been asked by our competitors with whom they ba~ this. The is the most visible and influential family_ 

Teresa 

Alan P will i amson/HBUS/HSBC 06/20/2007 05: 21 PM 

Teresa 

To 

Tere~a Garci a/HBU5/HSBC@HSBC 

ee 

sUbject 

Re: waive r Request 

why do they not want to reg; ster or depos; t the shares? 

Alan 

Teresa Garci a/HBU5/HSBC 

06/20/2007 01:44 PM 

To 

Alan P wi 11 i amson/HBUS/HSBC@HSBC cc Page 
1073 


76061.499

From: ALAN P WILLIAMSON/HBUS/HSBC 

Sent: 6/26/2007 4: 24: 22 PM 

Occ-Psi -00214880 

__ = Redacted by the Permanent 

Subcommittee on Investigations 

To: JAIME CARVALLO/HBUS/HSBC@HSBC;MARLON YOUNG/HBUS/HSBC@HSBC;"MANUEL DIAZ" <MANUEL. DIAZ@HSBCPB.COM>; 

"TERESA GARCIA" <TERESA. GARCIA@HSBCPB.COM>; "SUSAN HOGGARTH" 

<SUSAN. HOGGARTH@U5.HSBC.COM> subject: Re: _ Family 

Marlon. Manuel, Jaime 

I spoke to Susan wright, Group Head of AML. she is reluctant to grant the except; on but wi 11 consi der it. 

Jaime 

~~~1edt n~S~ei~i 1 ~o o~r~~~rja~i ~~m:~~jY th:i ~h~u~i~~~~:~. re~i!!~~S~~~cil!i~~i 1 address whether there are any undisclosed ownership interests or politica1 

connect; ons wi th these accounts. ci rculate it to thi 5 group for rev; ew. 

I know you already did something of this - no reason you can't re-use most of it. 

Alan 

From: Jaime carvallo Sent: 06/26/2007 02: 23 PM EDT 

2~~ ~~~~o~ ~i'l~ amson subject: Re: _ Family 

Marlon, 

I forgot to menti on agai n that thi s fami ly' s 1 i Qui d net worth is esti mated in excess of and total net worth in the $ area. 

I hope thi s can be done. 

Thank you again for your help. 

Waem regards 

Jaime 

From: Marlon Young Sent: 06/25/2007 06:33 PM EDT To: Jaime carlJallo Cc: Teresa Garcia; Thomas Flory; Ana Da silva; Alan P williamson subject: Re: _Family 

!x~:~~i g~ ~CU~~~~y ~ ie~~~ i~d a A ~~~h w~~ 1 i ~~e~n f~i~a;~ 1 i l!~~~o~Y t~U~~~dtm~o thi s 

approval. 

Regards. 

Marlon 

From: Jaime Carvallo Sent: 06/25/2007 01:48 PM EDT To: Marlon youn9 Cc: Teresa GarCla; Thomas Flory; Ana Da silva page 1 

Permanent Subcommittee on Investigations 

EXHIBIT #97a 
1074 


76061.500

Subject: _ Family 

Marlon, 

ace-Psi -00214880 

-- "" Redacted by (he Permanent 

Subcommittee on Investigations 

Teresa Garcia must have given you heads ug on the _family and the issue 

~i~ir~~~gs~~~i~h~o~g~~g companies having earer shares and the fact that they 

I will see one of the family members tomorrow mornin~ and this still seems to have no resolution. This is too important a family In Peru for us not to want to do business with, and one that has taken a lot of my time and effort to convince to start a relationship with us. JoaQ Luiz has met members of the family as well. I would appreciate your involvement at this point, as this has become extremely sensitive. 

Thank you and regards, 

Jaime 

page 2 
1075 


76061.501

From: TERESA GARCIA/HBUS/HSBC Sent: 7/5/2007 11: 33: 35 AM 

Occ-Psi -00215211 

To: ALAN P WILLIAMSON/HBUS/HSBC@HSBC CC: SUSAN HOGGARTH/HBUS/HSBC@HSBC subject: Re: Fw: Fw: Fw: ~amily 

Alan, 

__ "" Redacted by the Permanent 

Subcommittee on Investigations 

Not quite resolved yet, but there is nothing else for us to do. The RM and the Group Head are not seeing eye to eye on this one. Therefore, it is now between them. 

I'll keep you posted. 

Teresa Garci a 

~~~~ 0 ~r~e~~~e~a~ke~!: 1 ~~~e comp 1 i ance 

452 Fi fth Ave., T6, NY, NY 10018 (PH)212-525-6014 (F) 212-525-8255 

Alan P wi 11 i amson/HBUS/HSBC 07/03/2007 04: 30 PM 

To 

Marlon YOung/HBuS/HSBC@HSBC, Jaime Carvallo/HBUS/HSBC@HSBC, Manuel Di aZ/HBUS/HSBC@HSBC, Thomas Fl ory /HBUS/HSBC@HSBC cc 

All 

Teresa Garci a/HBUS/HSBC@HSBC, Susan Hoggarth/HBUS/HSBC@HSBC 

Subject 

Re: Fw: Fw: Fw: _ Family 

Just checking to see if this is going well or if there is anything more you need us to do. 

Have a good holiday 

Alan 

Marlon YOung/HBuS/HSBC 06/29/2007 05:33 AM 

To 

Jai me carvallo/HBUS/HSBC@HSBC, Teresa Garci a/HBUS/HSBC@HSBC cc 

Manuel Di az/HBUS/HSBC , Alan P wi 11 iamson/HBUS/HSBC@HSBC, Thomas FlorY/HBuS/HSBC@HSBC subject 

Fw: Fw: Fw: _ Family 

page 1 

Permanent Subcommittee on Investigations 

EXHIBIT #97b 
1076 


76061.502

acc-psi -00215211 

Jaime and Terry I 

__ "" Redacted by the Permanent 

Subcommittee on Investigations 

See if you can work within the MLPP policy on bearer shares. 

Regards, 

Marlon 

From: David Ford Sent: 06/29/2007 10:17 AM CEDT To: Alan P williamson Cc: Marlon Young; Manuel Diaz 

subject: Re: Fw: Fw: _Family 

Alan, 

Attached is the relevant MLPP policy which allows either BO declaration or 

?l!~~ gil ~~~ ~~~~~s tg~ ~~:~e~r c~~i ~~ sgab~Y h~rdkby ~~he~L~:n~;O~~~~~t~~~~i:~ cant 

HSBC. As long as us requi rements are not more stringent than our GPB KYC 

policy, suggest that USPB offer the client the choice of the various options under the policy. 

Regards, 

David 

[attachment "MLPP-Bearer share. doc" del eted by Alan P wi 11 i amson!HBUS!HSBcj 

F. David Ford Global Money Laundering control officer 

~~:c d:r~~~~:n~:n~~~~o Ho 1 di ngs (Sui sse) SA 

Geneva, switzerland 1211 Tel: 41-58-705-5284 

Alan P will i amson!HBUS!HSBC 28.06.2007 19:18 

To 

"David Ford" <david.ford@hsbcpb.com> cc 

subj ect Fw: Fw: __ Family 

David 

Does the sU9gestion referred to in Jaime's email below seem viable? sorry to keep botherlng you, I didn't realise we might have so many issues. 

Alan page 2 
1077 


76061.503

Dcc-Psi -00215211 

From: Manuel oiaz Sent: 06/28/2007 11:49 AM EDT To: Marlon Youn~ 

Cc: Alan p willlamson; Jaime carvallo subject: Re: Fw: __ Family 

__ = Redacted by the Permanent 

Subcommittee on Investigations 

THANK YOU MARLON FOR YOUR INTEREST ..... ENJOY YOUR VACATION !!!!! 

Manuel L. o;az 

~~:~i g~~~a~e M:~~(i ~~t~~~~~~~~a 1 

1441 Brickell Ave. 17th Floor Mi ami, FL 33131 (305) 539-4747 Telephone 

Marlon Young/HBUS/HSBC 06/28/2007 09: 58 AM 

To 

Jaime carvallo/HBUS/HSBC@HSBC cc 

Manuel Di aZ/HBUS/HSBC@HSBC, Alan p wi 11 i amson/HBUS/HSBC@HSBC subject 

Re: Fw: _Family 

Jaime, 

This could be a good compromise and could resolve our problem. Marlon 

From: Jaime Carvallo Sent: 06/28/2007 09: 47 AM EDT To: Marlon young Cc: Manuel Di az subject: Re: FW: _ Family 

Marlon, 

I have asked Teresa for a draft of a letter that client could sign in lieu of the BOL, as have few clients in the past. while the letter states similar information to that in the BOL is kept separately from account opening docs and may be a viable option. I am just waiting for her draft before trying anything el se. 

Thank you for your follow up! 

Jaime 

From: Marlon Young page 3 
1078 


76061.504

Sent: 06/2B/2007 03: 39 AM EDT To: Jaime carvallo 

Dee-Psi -00215211 __ "" Redacted by the Permanent 

Subcommittee {In Investigations 

Cc: Manuel Diaz subject: Fw: Fw: ~ Family 

Jaime - Below is a response I receive from Mike Finnamore who works for me in DPB. He 

f~~~ 1 i~r b; ~y~e~~li c~~~ ~~~~! a ~~dtth~ ~~~~ ~~o~~ b~!~~~e s~:~~s. He is very 

Would any of the options suggested below work for the client? would client alow us to keep bearer shares in safekeeping or execute a confidentiality 

agreement as suggested by Mi ke? 

Regards. 

Marlon 

From: Mi chae 1 G Fi namo re Sent: 06/27/2007 10:3B PM EDT To: Marlon young subject: Re: Fw: _Family 

Hi Marlon, 

In this day. it is not likely that any us based private Bank would allow an account to be opened without knowing all the owners unless an exception/di spensati on was granted. ci ti Pri vate Bank woul d open an account for an entity whose shares were issued in bearer form for a client with an ex; sti ng 2+ year re 1 ati onshi p, but I never saw an excepti on requested because the client did not want to sign the Beneficial ownership Letter. 

would this client feel more comfortable if we open the account for his bearer share entity without a BOL but he would allow us to hold the certificates in safekeeping? In that situation, we could make a very reasonable argument for di spensati on. 

Or would the client provide the BOL if we provide him a confidentiality 

~g~~e~~~~~i n T~~~~l i ~a~n t~:~kr~~e~o v~~k! o~~e t~i{ e~~ ~~~i ~~~~ ~~mj~~t~~~:: 

Hope thi s hel ps. 

Than ks and reg a rds, Michael Finamore, VP, CAMS Bus; ness Ri sk offi cer HSBC PBUS Tower / 26th fl. NYC, NY. USA tel: 212-525-B451 

Marlon Young/HBUS/HSBC 06/27/2007 OB: 19 PM 

To 

Mi chael G Fi namore/HBUS/HSBC@HSBC cc 

subject 

Fw: _Family page 4 

but 
1079 


76061.505

Dec-Psi -00215211 

__ "" Redacted by the Permanent 

Subcommittee on Investigations 

Here are more info regarding why the family will only provide bearer shares. Marlon 

From: Jaime carvallo Sent: 06/26/2007 01:47 PM EDT To: Marlon Young 

~~bj !~~~S~e ~arcl a i T~~~if Y Flory; 

Marlon, 

Ana Da silva; Alan P Williamson 

I met with the prospect today. while they 'understand our policy. he reiterated the family is extremely concerned about confidentiality and they are afraid this klnd of information could put them at risk. He added that neither cit; nor JPMorgan (banks they have relationships with) have asked for them to sign a BOL. He does understand that eventually they will have to register the shares, but will only do it when absolutely necessary. 

I wanted to add that another piece of business that is on the table l for which 

:i n~i~~ ~i~~e o~~ ~~~~r t~:n~i ~~~p~~i ~~pr~~~h w~~~~ ~~. hi~e t~ ~~~~ ~~:~c~e~~gani ze 

i~~a~~i~i y a~~~~~eg~~s ~ 1 ~~d t~:i; 1 ~~:~~i ~~e c~~~i~i~! ~n T~~~ ~~~, d o~e t~e~~ry si9nificant piece of bussiness. Not opening accounts will eliminate us from 

;~l !t~~~!~i~s w~~ht t~~m v~~~r S~i~~~g!~d f~~e~~~s~a~~ l~a~~d v~r~a~r~fi ~~~~~~ a 

Thank you for your help with this! 

Regards, 

Jaime 

From: Alan p williamson Sent: 06/25/2007 06: 54 PM EDT To: Marlon Youn9; Jaime carvallo Cc: Teresa Garcla; Thomas Flory; Ana Da silva subject: Re: _ Family 

Marlon 

I a~ol ogi se but I thought I forwarded you Davi d Ford I s response 1 ast week - I 

~~~pe~g~~ n be !i~~ c~~!y h~:d w~ft~r~~p t~m~ei ;i 1 ~x~~~t~~~ i~~~w ?rou p. since I 

Alan 

From: Marlon Young Sent: 06/25/2007 06: 33 PM EDT To: Jaime carvallo Cc: Teresa Garcia; Thomas Flory; Ana Da Silva; Alan P williamson subject: Re: _Family 

I have discussed w Terry and Alan williamson and will give my support to this page 5 
1080 


76061.506

Dcc-Psi -00215211 

-- "" Redacted by the PermAnent 

Subcommittee on InvestigatiOlIS 

exception. sorry. I was in a rush to leave friday, I forgot to send my approval" 

Regards. 

Marlon 

From: Jaime carvallo Sent: 06/25/2007 01: 48 PM EDT To: Marlon Youn~ 

Cc: Teresa GarCla; Thomas Flory; Ana Da silva subj ect: _ Farni] y 

Marlon, 

Teresa Garci a must have gi Yen you heads u

b on the _ fam; 1 y and the issue 

~1~ir~~~g s{~~i ~h~o~g~ ~g compani es havi ng earer shares and the fact that they 

I wi 11 see one of the fam; 1 y members tomorrow morn; n9 and thi 5 sti 11 seems to have no resolution. This is too important a family 1n Peru for us not to want to do business with, and one that has taken a lot of my time and effort to convince to start a relationship with us. Joao Luiz has met members of the family as well. I would appreciate your involvement at this point, as this has become extremely sensitive. 

Thank you and regards, 

Jaime 

page 6 
1081 


76061.507

HSBC-OCC,...E 0179327" txt From: JANET l BURAK/HBUS/HSBC 

sent: 2/24/20l0 9: 52: 24 PM To: BRENDAN MCOONAGH/HBUS/HSBC@HSBC02jIRENE M DORNER/rlBUS/HSBC@HSBC02 

subject: Re: OCC Meeting 

The backlog issue is an indisputable problem, and resulted from a number of 

~~i~o~~:-~~~r~~~g!~ i~~ns~~~~~gl v~~~~~~s ~~~~fia~; ~~~~~~ ~hi c~o e~¥~~ifvelY e1im~nated cover payments~ and a failure to increase resources early enough to deal with this. Some of the volume and alert activity should have been 

~ii ~!~~fidi n s~~~a~~~~~n n~j' th~~rg6~~:s~t ; ~~u~a~¥r :~O~~h ~~:~e o~:; ~i~ di d 

management could address the issues--the KRIS are being revised, and I do not expect this problem to occur again, but it is taking an enormous effort to eliminate the backlog. You may recall that in December you authorized the hiring of significant temporary staff to work the backlog, and hiring and work began in January. 

----- or; gi na 1 Message ----- From: Brendan MCDonagh Sent: 02/24/2010 08:22 PM CST To. Janet Burak; Irene M DORNEIl 

Letr~U~~~~~sR~n~i~ ~~e~~gwhen you are back from overseas. I will be in oC on the 16/l7/18 March and can see the OCC then. 

one fair question is hoW did the alert backlog buildup? 

_ ... _-- or; gi na 1 Message ----- ~rom! Janet l Burak Sent: 02/24/2010 08:39 PM EST To: Brendan MCDonagh; Irene M DORNER subject:: OCC Meeting 

fn~~~a~~h t~~~ ~~;y t~~~l' Sh~~ti~g~~ i~s~~~g e~t~~~e~~i~~~y a~~~e~aff~~~~g sally 

violations of the reqUirements to file a SAR in certain defined circumstancesb and ~enerally within 30 days of detection of facts that may 

~g~s~~ tfii e a a ;~~ s af~~r f~ i~~ e~t St~· revr:w~d~ea~d ~et:~m~~~~~~ ~!a~~~th~~e~~ are a significant number of aged alerts. whlle the DCC is unable "to point to specific situations where they believe that SARs should have been filei:t, but were not, they have concluded that, in light of the size of the backlogs, these situations must exist. The letter will reflect the fact that we self-identified the backlog issue, and that are taking actions to address ;t. 

~~!~1;:~~~ ~i~~ c~~~~~~~t t~~y tt~~:k~o~~~~ef.~~~i~~~~;~~~g ai~~~~g~s~:f~~ent of 

~g~~~;{~~ ~iL!f ri~~~g~a~~i~~a~o~iai~!~~;n i~ ~ll (~~i;!~~~~~~: :~~k~~uld not likely impact the Management rating component (also a "2"). For Irene's benefit, national banks are rated on a number of component categories--capital, 

~~~~~~~~al ~~~~e M~~:~~~:~~s a~f~~~~~ ~~~U~~~~~Si ~~d rii~~~t~~i ihe t~n~~~~~ii on. This is, a quite surprising development, since compliance as a function was deemed effective in the OCC's July 2009 report of examination, and the occ's July 2009 separate Compliance Management examination also concluded that camp 1 i ance management was sat; sfactory. whil e the 1 atter report i ndi cated that compliance leadership needed to be strengthened in the BSA/AML area, and recormnended the hiring of a dedicated ana qualified BSA/AML Officer, it also noted that a search Was then underway at the t.ime to fill this position. sa11y indicated that the reason for their reconsidering their assessment page 1 

Permanent Subcommittee on Investigations 

Confidential - FOIA Treatment Req .. __ E.XHiiiiiiiiiIB-.IT_# .. 9 .. 8 __ .. ings, Inc" HSB03790957 

Confidential- FOIA Treatment Req HSBC OCC 3405315 
1082 


76061.508

HSBC-OCC-E 0179327. txt relates to the issues 'they have identified coming out of the "expanded 

~;~~~~f~!tf~~~~a~~~n;s!i ~~1 ~o:l~~~c:aci !~;~rn~h:r~e}:r~c~n~~i ~fie tg~~~. party 

~~ ~ e ~n ah~ f~g~~i~! nih~~r w~e~~~ n~i ~~ridr~~m~~;~hf~~Y ~t~hi~~~ n~: ig ~ays 

g~f~~~! c th~~b!:~ ~:t~~~e t~ggu~n:~o~~ ~~~c~~~tihat AffS~~~' 06J ai n!:~i~ ~:~i ~~ actuall~ results in a negative findin9J the oce will be criticized for not having- ,dentified and acted on those lssues earlier. We intend to provide 'the occ Wlth a response next week to the issues they ;dentified~ and I am hopeful that the response will positively influence their view on compliance Risk Management. IT tha1: appears to not be the case, I think that we will need to take this to DC (Grace Dailey), as this is becoming an untenable si1:uation. 

please let me know if you have any questions. 

Janet L. Burak SEVP and General counsel HSBC North America Holdings Inc. HSBC USA Inc. HSBC Bank USA, N.A. 452 Fifth Avenue, 7th Floor New York, NY 10018 CT) 212-525-6533 CF) 212-525-8447 email: janet.l.burak@.us.hsbc.com 

Page 2 

Confidential - FOIA Treatment Requested by HSBC N. America Holdings, Inc. HSB03790958 

Confidential- FOIA Treatment Requested by HSBC Bank, USA, N.A. HSBC OCC 3405316 
1083 


76061.509

from: O;Md W J BAGLEY 

Sem! TueJun 0914;07:42 2009 

To: Emlleon ALONSO 

Cc: cad1erlne BUSSERV'; Matthew J W KtNG; MiChael P ~OOHEGAN 

Sybject: Re: GMO Businusllo fUviBW'lll ~LATAM 

Importar.CQ: No,"I'I'\al 

~n, 

I fully acknow~e the Javet of p~ am fQCIJS that yOu and the team have glwm iD these ls5ua and the progress that has been rn:.de pArlitulerl'JlltI. Maxl.co AI1Cl h&Va takan arl of thIs into account. catherine 

h6$ kept us lily uJ'dated a."'Id I am eiso aware ofth4! 1EIct that CNBV' has e~ their satlsractJon with 

the. progJ"ll55 made. It Is 10000000000nt to 0QI8 that thIS mtirQ da~ notslgnlf;' that we take the vtew that Ihere 

nas been an inadeQuato fespDrtIe. FotexamplB US ttM been rated red on soma eetagorIM. of risk In the 

GAC risk map beCaUse. of Inoorent risk. 

The inherent AML risk In Me-xli:o lSi &1.'11 '«1rf high end I thsm.Qn!l not rTal', ottm- pans of the Group that 

have whet h! etrectlYely a dl'ugs war being ~d on ftle street9 and also have the risk posed by 

potential sling and other opera.1Ions by the US aulhoritles. "N9 haw of course remedfHld OUT high risk 

accounts, but the hb'torlc weak BCCQUnt opIBtllng processes; mean thet we ha_ owralll:w.rer laveis of 

KYC across the cuslOrner base as. B whOIo. 

Thera aJ"I3 otiler counb1as wilflin. CA wI'1ere we hll"l'9 OilgOlng rem&da:b.., pmjacb I~udlng Pan8l'n:lii end 

~ta R)c.a wttere sj;aitl ~ete is:ll relseO AMl mit wt,ere it 19 not ye1 clear to !1lf;I:.Ml we have COff1P*eted 

th9 remediation of nigh r1sk acrounl$. 

Happy to diaculis lJrtfler, 

Permanent Subcommittee on Investigations 

Confidentlal FOIA Treatment ReQue_. __ .. EiiiXH __ I.B .. lTiioii#.9 .. 9 __ .... HSBC OCC 8874895 
1084 


76061.510

C) 

Washington. DC 20219 

September 20, 2012 

The Honorable Carl Levin 

Chairman 

Permanent Subcommittee on Investigations 

United States Senate 

Washington D.C. 20510 

Dear Chairman Levin: 

Thank you for your letter of August 2t 20]2, following up on the Pennanent Subcommittee on 

Investigations' July 17, 2012, hearing on U.s. Vulnerabilities to Money Laundering. Drugs and 

Terrorist Financing: HSBC Case Study. 

At the hearing1 I confirmed the OCC's support of the recommendations contained within the 

Subcommittee's staff report to strengthen our BSN AML supervision. Thls letter provides you a 

brief update on the actions we have taken since that hearing to implement the report's 

recommendations. 

On July 18, 2012,1 notified all OCC staff of my commitment to adopt and implement the 

recommendatioDSy and I described other changes' we are making to enhance our supervisory 

process. As I stated at the hearing, it is my objective to promote an environment within the OCC 

that will empower our examiners to conduct effective BSNAML examinations and escalate any 

findings of deficiencies to appropriate agency departments for action. A copy of my message to 

our staff is enclosed. 

On August 1,2012, we issued Supervisory Memorandum SM2012-3, "Consideration of Bank 

Secrecy Act! Anti-Money Laundering (BSN AML) EXanUI1!Ition Findings in the Uniform 

Interagency Rating Systems and OCT's Risk Assessment System" to all examining personnel 

(copy enclosed). This memorandum provides that, effective July 18, 2Q12. the results ofa 

BSAlAML examination are no longer considered under the Federal Financial Institutions 

Examination Council's (FFlEC) Uniform Interagency Consumer Compliance Rating System.. 

Consistent With the Subcommittee's recommendation, acc examiners are now required to 

incorporate BSNAML examinations fmdings as part of the Management component rating when 

determining bank ratings in accordance 'With the FFIEC Uniform Financial Institutions Rating 

System (CAMELS ratings). This guidance also clearly states our policy that a presumption 

exists that serious deficiencies ina bank's BSAlAML compliance area could adversely affect a 

bank's Management component rating. 

PS!·QCC-45·Q00001 

Permanent Subcommittee on Investigations 

EXHIBIT #100 
1085 


76061.511

I also committed to revising and clarifying the operation of our cross-functional Large Bank 

Review Team. Pursuant to this commitment, we issued Supervisory Memorandum SM 2012-5. 

«Bank Secrecy Act Large Bank Review Team Structure and Operation" that more clearly defines 

the mission, membcrship~ organizational structure and functions of the Large Bank Review 

Team. This guidance implements our policy designed to ensure that appropriate steps are taken 

in a timely fashion to address BSA!AML deficiencies identificd in national banks and federal 

savings associations and includes provisions to ensure that I and the OCC's Executive 

Committee are briefed on the Review Team's activities on a yegular basis. 

Furthermore~ 1 directed the OCC's Committee on Bank Supervision and Ombudsman Office to 

develop a process that will provide examiners with a mechanism to appeal a supervisory issue 

directly to me. I have reviewed their recommendations and the internal appeals. process will 

commence on October I, 2012. 

Finally, we are in the p~ess of drafting policies and procedures for ci~ation of violations in 

components ofa bank's BSA compliance Program. We agree with the Subcommittee's 

recommendation that this flexibility will provide our examiners another mechanism to address 

weaknesses and violations related to compliance program components. 

Compliance with BSA! AML is a safety and soundness issue and a matter of national security. 

Under my leadership, the acc will continue to implement the needed changes to ensure the 

safety and soundness and integrity oflhe U.S. financial system. 

We would be happy to provide additional information about our continued progress in 

implementing the Subcommittee's recommendations, should that be helpful. Please feel free to 

have your staff contact Carrie Moore, Director for Congressional Liaison, at 202-874-4844. to 

=:.'UCh~ 

~~/--

-2-

PSI~OCC-45-000002 
1086 


76061.512

OCCNews 

To: All OCC Employees 

From: Thomas J. Curry 

Date: July 18, 2.012. 

acc News Posted on Ju'Y 1S, 2012 

Subject: Lessons From Our Experience With HSBC 

Page 1 01'2 

On July 17, Deputy Chief Counsel Dan Stipano and Grace Dailey from 

Large Bank Supervision JOIned me in testifying before the Senate's 

Permanent Subcommittee on InvestigatIons regarding Our supervision of 

HSBC Bank USA, N.A., and its BSA/AML program. The hearing followed a 

year-long investigation by the subcommittee into BSA/AML failures at 

HSBC. I want to thank the dozens of OCC team members who 

partiCipated In interviews during the investigation and helped prepare 

Grace, Dan, and me for the hearIng. 

There are important lessons from this experience that we must use to 

improve our supervision of BSA/AML issues. BSAlAML is more than just a 

compliance Issue. It is an issue of safety and soundness and a matter of 

national security. As the investigation showed, we could have and should 

have acted sooner. We must be vigilant in banks and savings associations 

of every size. 

To enhance our supervision of BSAlAML across all of the banks we 

supervise, we embrace the three recommendations from the 

subcommittee's report. Interim guidance on implementing these 

recommendations will be provided shortly, to be followed by revisions to 

our examination policies and procedures. 

First, effective immediately we will no longer reflect BSA/AML findings in 

the "compliance" rating, rather we will fully consider BSAlAML findings in 

a safety and soundness context as part of the "management" component 

of a bank's CAMELS rating. Examiners should presume that serious 

deficiencies in a bank's BSA/AML compliance area adversely affect a 

bank's management component rating. 

Second, we are clarifying the operation of our Large Bank 8SA Review 

Team to ensure we bring different perspectives to bear and react more 

quickly when a bank has multiple matters requiring attention, or apparent 

violations of its BSA/AML program. We will also explore how we track and 

review relevant information and whether additional initiatives are 

appropriate. 

http;//domino02.ocdapps/paloccnews.nsflf439d4efD36891 b2852570abOO725cf4113db54e24... 91612012 

PSI-OCC-45-000003 
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OCCNews Page 2 of2 

Third, we will provide more flexibility for citing BSAjAML violations for 

individual "pillar" violations, and we will identify what steps we can take 

in our examinations to obtain a holistic view of a bank's BSAjAML 

compliance more promptly. In implementing these changes, we must 

take care not to create disincentives to making the tough calls. That is 

fundamentally our job. 

More generally, we will also review training, staffing, recruitment, 

policies, and Interagency coordination to make improvements in our 

BSAjAML supervision program. 

Finally, we must foster a culture that encourages people to speak up 

about weakness at the banks we supervise and to escalate those views 

for action. 

OUrs is a difficult and important mission. I am proud to be part of this 

team of dedicated professionals, and I appreciate the extraordinary effort 

of everyone working to ensure that the financial institutions we supervise 

operate in a safe, sound, and fair manner. 

My oral statement and ~ are available on OCc.gov. 

http://d nlln 02.occlappsipaloccnews.nsUf439d4ef1)36891b2852570ab00725cf4113db5~~;2~cc-4~Jt1o'll2 
1088 


76061.514

c) SUPERVISORY MEMORANDUM 

Comptroller of the Currency 

Administrator of National Banks 

Washington, DC 2021S 

To: All Examining Personnel 

From: Committee on Bank Supervision 

Date: August I, 2012 

SM2012-3 

Subject: Consideration of Bank Secrecy Act/Anti-Money Laundering Examination Findings in 

the Uniform Interagency Rating Systems and OCC's Risk Assessment System 

This memorandum provides interim guidance for incorporating Bank Secrecy 

ActlAnti·Money Laundering (BSA/AML) examination findings into the CAMELS 

ratings and the OCe's risk asseSSment system (RAS) assigned to national banks and 

federal savings associations (collectively, banks).J This guidance also applies to 

federal brancbes and agencies of foreign banking organizations. 

Consumer Complia"ce Rating 

Effective July 18~ 2012, the results ofa BSNAML examination are no longer to be 

considered wben assigning a rating under the Federal Financial Institutions 

Examination Council's (FFIEC) Uniform Interagency Consumer Compliance Rating 

System. 

Manngemetrt Component Rating 

In keeping with current policy, examiners must consider BSAJAML examination 

findings in a safety and soundness context as a part of the management component of 

a bank's FFIEC Uniform Financial Institutions Rating System (CAMELS ratings), 

For federal branches and agencies, BSAJAML examination findings must be 

considered as part of the risk management component of the ROCA rating system. 2 

Examination procedures used to evaluate the adequacy or a bank' s BSAi AML 

compliance remain unchanged. 

1 This supervisory memorandum (SM) rescinds SM 2006-2 (is.sued as l\.1M 2006-2), "lncorpornting 

BSA. AML, OFAC, MId USA PA TRlOT Act Compliance Into SupeT'\lisory Ratings," as well as 

SM 2004-1 (issued as MM 2004-1), "BSA Examinations," 

Z ROCA stands for Risk management, Operational controls, Compliance, and Asset quality. 

PS!-OCC-45-000005 
1089 


76061.515

In addition, serious deficiencies in a bank's BSNAML compliance area will create a 

presumption that the bank's management component rating will be adverSely 

affected. For example, significant deficiencies in a bank's compliance with 

BSNAML that result in an overuJt BSA compliance program violation3 would reflect 

risk management practices that are less than satisfactory and would genera1ly warrant 

a management rating of "3." Other adverse BSAlAML findings, such as those 

resulting in "Matters Requiring Attentionn (MRA) or less severe enforcement actions. 

may also negatively affect a bank's management component rating. depending on the 

circumstances. This may be the case, for example, when a bank has BSAlAML~ 

related MRAs across several lines of business. If, however. management is already 

deemed in need of improvement and r1sk management practices are deemed Jess than 

satisfactory as reflected in a "3" management rating, a further downgrade in the rating 

as a result of BSAJAML deficiencies may not be warranted. On the other hand, for 

those situations that raise greater supervisory concerns, a downgrade of the 

management component beyond a "]" may be appropriate. Notwithstanding the 

circumstances, the support for the management rating should be fully documented in 

the appropriate supervisory system. In addition. examiners should be alert to 

situations in which management weaknesses identified in other areas of a bank reveaJ 

potential deficiencies in BSNAML program oversight. 

Risk Asse\'sment System 

While examiners will no longer consider DSNAML examination findings as a' part of 

the interagency consumer compliance rating. BSNAML findings are still considered 

as a part of compliance risk under the OCC's RAS. Compliance risk considers a 

bank's compliance with all applicable laws and regulations. The overall quantity of 

risk and quality of risk management related to BSAlAML compliance as welJ as the 

four pillars ofa bank's BSAJAML program are considered in assessments of 

compliance risk. BSAJAML examination findings should also continue to be reflected 

in the ace's assessments of reputation, strategic. and operational risks, as applicable. 

The Committee on Bank: Supervision expects to incorporate this guidance ~nto 

revisions of the "Bank Supervision Process," '4Large Bank Supervision," and 

"Community Bank Supervision" booklets of the Comptroller's Handboolc-and other 

guidance and systems, as neede~y September 2012. 

) Ovel1l.ll BSA compliance program violations are cits:tiollS of 12 CFR 21.21 [or national banks or 

12 CFR 16],177 for fedenl savings associa.tions. These violations an: cited for deficiencies tbat rmder 

the BSA compliance program ineffective wlu:n viewed as a whole and result in the issuance or a cease 

and desist order. 

-2-

PS!-OCC-4s..000006 
1090 


76061.516

c) SUPERVISORY MEMORANDUM 

Comptroller of the Currency 

Administrator of National Banks 

Washington, DC 20219 

To: All Examining Personnel 

From: Committee on Bank Supervision 

Date: August 17,2012 

Subject: Bank Secrecy Act Large Bank Review Team Structure and Operation 

The Office of the Comptroller of the Currency (OCC) established a cross-functional Large Bank 

Review Team (LB Review Team) to ensure bank supervision and enforcement consistency in the 

area of Bank Secrecy Act/Anti-Money Laundering (BSNAML) compliance. The LB Review 

Team is also part of the OCC's «Process for Taking Administrative Enforcement Actions 

Against Banks Based on DSA Violations," as outlined in DCC Bulletin 2005--45 1 which states 

that potential BSA compliance program violations are to be considered by a review group. 

The LB Review Team comprises the Director ofthe Enforcement and Compliance Division. the 

Senior Counsel for BSNAML. the Director for BSNAML Compliance Policy, and the Midsize 

Bank Supervision R,isk Officer. The team's Objective is to provide expert input into the 

supervisory process and develop recommendations to promote and e!lsure consistency in DSA 

compliance and enforcement across the LB popUlation. 

To this end, the LB Review Team: 

• reviews and provides written comments, recommendations. and conclusions in a timely 

manner on all draft supervisory letters and conclusion memoranda related to LB BSNAML 

and Office of foreign Assets Control (OFAC) matters to ensure they are consistent with 

DCC policy, 

• reviews all proposed LB BSA/ AML and OF AC enforcement actions and termlnations to 

ensure they arc wen supported and consistent with the "Interagency Statement on 

Enforcement of Bank Secrecy Act} Anti-Money Laundering Requirements" as well as with 

the OCC's "Process for Taking Administrative Enforcement Actions Against Banks Based 

on BSA Violations" and other applicable guidance. 

• makes reasonable efforts to resolve in a timely manner any disagreements that may arise with 

LB Supervision on BSAfAML and OFAC-related matters. 

reports on its activities to the Comptroller and Executi .... e Committee on a regular basis. 

I The BSA enforcement process set forth in oce Bulletin 2005-45 has not)'et been fonne]l), ilpplicd to federal 

Sllvings associations through rescission pronouncementS; however. the Gee applies this process for both national 

banks and federal savings associations. 

PSI-OCC·45-000007 
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76061.517

Accordingly, LB Supervision: 

• provides the LB Review Team with complete and timely BSA supervisory letters and 

conclusion memoranda, including relevant BSAlAMLIOFAC '"Matters Requiring Attention." 

• inCClrporates LB Review Team comments, recommendations. and conclusions into 

supervisory letters and conclusion memoranda, making reasonable efforts to resolve in a 

timely manner any disagreements that may arise with the LB Review Team. 

• provides the LB Review Team with written explanations of any disagreements with its 

comments) recommendations, and conclusions. 

• provides the LB Review Team with final copies of the supervisory letters upon issuance to 

the bank and the finat version of the conclusion memoranda. upon completion. 

Uagreement cannot be reached between the LB Review Team and LB Supervision. the matter 

will be referred to the Committee on Bank Supervision (the Senior Deputy ComptroUers for LB 

Supervision; Midsil.e and Community Bank Supervision, and the Chief National Bank 

Examiner). the Chief ofSlaff. and the Senior Deputy Comptroller and Chief Counsel 

(collectively. "the Committee"). If agreement cannot be reached by the Committee, the Senior 

Deputy Comptroller for LB Supervision win consult with the Comptroller. who may elect to 

decide the matter under the May 10,2012, delegation of authority. 

PSI-OCC-45-DOOO08 
1092 


76061.518

() 

Comptroller of the Currency 

Administrator of National Banks 

Washington, DC 20219 

September 20, 2012 

The Honorable Tom Coburn 

Ranking Member 

Pennanent Subcommittee on Investigations 

United States Senate 

Washington D.C. 20510 

Dear Ranking Member Coburn: 

Thank you for your letter of August 2, 20 \2, following up on the Permanent Subcommittee on 

Investigations' July 17. 2012, hearing on u.s. Vulnerabiliries to Money Laundering, Drugs and 

Terrorist Financing: HSBC Case Study. 

At the hearing, I confirmed the DCC s support of the recommendations contained within the 

Subcommittee's staff report to strengthen our BSAlAML supervision. This letter provides you a 

brief update on the actions we have taken since that hearing to implement the report's 

recommendations. 

On July 18,2012, I notified all acc staffofmy commitment to adopt andnnplement Ihe 

recommendations, and I described other changes we are malting to enhance our superviSOI)' 

process. As I stated at the hearing, it is my objective t{) promote an environment within the DCC 

that win empower our examiners to conduct effective BSAI AML exarrrinations and escalate any 

findings of deficiencies to appropriate agency departments for action. A copy of my message to 

our staff is enclosed. 

On August 1,2012, we issued Supervisory Memorandum SM 2012-3, "Consideration of Bank 

Secrecy Act/Anti·Money Laundering (BSAI AML) Examination Findings in Ihe Uniform 

Interagency Rating Systems and OCC's Risk Assessment System" to all examining personnel 

(copy enclosed). This memorandum provides that, effective July IS, 2012, Ihe results ofa 

BSAI AML examination are no longer considered under the Federal Financial Institutiom 

Examination Cowell's (FFIEC) Unifonn Interagency Consumer Compliance Rating System. 

Consistent with the Subcommittee's recommendation. OCC examiners are now required to 

incorporate BSAf AML examinations findings as part of the Management component rating when 

determining bank ratings in accordance with the FFIEC Uniform Financial Institutions Rating 

System (CAMELS ratings). This guidance also clearly states our policy Ihat a presumption 

exists that serious deficiencies in a bank's BSAJAML compliance area couId adversely affect a 

bank's Management component rating. 

PSl-OCC-45-0DOOQ9 
1093 


76061.519

I also committed to revising and clarifYing the operation of our cross-functional Large Bank 

Review Team. Pursuant to this conunitment, we issued Supervisory Memorandum SM 20I2-5~ 

"Bank Secrecy Act Large Bank Review TearnStructure and Operation" that more clearly defines 

the mission, membership, organizational structure and functions of the Large Bank Review 

Team. This guidance implements our policy designed to ensure that appropriate steps are taken 

in a timely fashion to address BSAI AML deficiencies identified in national banks and federnJ 

savings associations and includes provisions to ensure that] and the OCC~s Executive 

Conunittee are briefed on the Review Team"s activities on a reguJar basis. 

Furthermore, I directed the acC's Committee on Bank Supervision and Ombudsman Office to 

develop a process that win provide examiners with a mechanism to a.ppeal a supervisory issue 

directly to me. I have reviewed their recommendations and the internal appeals process will 

commence on October 1, 2012. 

Finally, we are in the process of drafting policies and· procedures for citation of violations in 

components of a bank's BSA compliance program. We agree with the Subcommittee's 

recommendation that this flexibility will provide our examiners another mechanism to address 

weaknesses and violations related to compliance program components. 

Compliance with BSAlA..\fL .is B. safety and soundness issue and B. matter of national security. 

Under my leadership, the OCC will continue to implement the needed changes to ensure the 

safety and soundness and integrity oftbe U.S. financial system. 

We would be happy to provide additional information about our continued progress in 

implementing the Subcommittee's recommendalions, should that be helpful. Please feel free to 

have your staff contact Carrie Moore, Director for Congressional Liaison, at 202-g74-4844~ to 

:~:,~U~ 

~---/?-

-2-

PSI-OCC-4S-000010 
1094 


76061.520

OCCNews 

To: All OCC Employees 

From: Thomas J. Curry 

Date: July 18, 2012 

acc News Posted on July 18, 2012 

Subject: Lessons From Our Experience With HSBC 

Page 1 of2 

On July 17, Deputy Chief Counsel Dan Stipano and Grace Dailey from 

Large Bank Supervision joined me in testifying before the Senate's 

Permanent Subcommittee on Investigations regarding our supervision of 

HSBC Bank USA, N.A., and Its BSA/AML program. The hearing followed a 

year-long investigation by the subcommittee into BSA/AML failures at 

HSBC. I want to thank the dozens of OCC team members who 

partiCipated In Interviews during the investigation and helped prepare 

Grace, Dan, and me for the hearing. 

There are Important lessons from this experience that we must use to 

improve our supervision of BSA/AML issues. BSA/AML is more than just a 

compliance issue. It is an issue of safety and soundness and a matter of 

national security. As the investigation showed, we could have and should 

have acted sooner. We must be vigilant in banks and savings associations 

of every size. 

To enhance our supervision of BSA/AML across all of the banks we 

supervise, we embrace the three recommendations from the 

subcommittee's report. Interim guidance on implementing these 

recommendations will be provided shortly, to be followed by revisions to 

our examination poliCies and procedures. 

First, effective immediately we will no longer reflect BSA/AML findings in 

the "compliance" rating, rather we will fully consider BSA/AML findings in 

a safety and soundness context as part of the "management" component 

of a bank's CAMELS rating. Examiners should presume that serious 

deFiciencies in a bank's BSA/ AML compliance area adversely affect a 

bank's management component rating. 

Second, we are clarifying the operation of our Large Bank BSA Review 

Team to ensure we bring different perspectives to bear and react more 

quickly when a bank has multiple matters requiring attention, or apparent 

violations of its BSA/AML program. We will also explore how we track and 

review relevant information and whether additional initiatives are 

appropriate. 

http://domino02.occiappsipa/occnews.nsflf4 39d4ef036891 b2852570ab00725cf4113db54e24... 916(2012 PS!-OCC-45-0D0011 
1095 


76061.521

OCCNews Page 2 of2 

Third, we will provide more ftexibility for citing BSA/ AML violations for 

individual ~pillar" violations, and we will identify what steps we can take 

in our examinations to obtain a holistic view of a bank's BSA/AML 

compliance more promptly. In implementing these changes, we must 

take care not to create disincentives to making the tough calls. That is 

fundamentally our job. 

More generally, we will also review training, staffing, recruitment, 

policies, and interagency coordination to make Improvements In our 

BSA/AML supervision program. 

Finally, we must foster a culture that encourages people to speak up 

about weakness at the banks we supervise and to escalate those views 

for action. 

Ours is a difficult and important mission. I am proud to be part of this 

team of dedicated professionals, and I appreciate the extraordinary effort 

of everyone working to ensure that the financial institutions we supervise 

operate in a safe, sound, and fair manner. 

My oral statement and testimony are available on OCc.gov. 

http://dorruno02.ocolappsipalotcnews.nsf7f439d4ef036891 b2852570abOO725cf4/13db5p~~1~c .. ~~~?12 
1096 


76061.522

c) SUPERVISORY MEMORANDUM 

ComptTOl!er of the Currency 

Administrator of National Banks 

~ash!ng.ton, DC 20219 

To: All Examining Personnel 

From: Committee on Bank Supervision 

Date: August 1, 2012 

SM2012-3 

Subject: Consideration of Bank Secrecy ActJAnti-Money Laundering Examination Findings in 

the Uniform JnJeragency Rating Synems and OCC's Risk Assessment System 

This memorandum provides interim guidance for incorporating Bank Secrecy 

ActiAntiMMoney laundering (BSA/AML) examination findings into the CAMELS 

ratings and the oce's risk assessment system (RAS) assigned to national banks and 

federal savings associations (coUectively, banks).1 This guidance also applies to 

federal branches and agencies of foreign banking organizations. 

Consumer Complig.nce Rating 

Effective July 181 2012, the results ofa BSA/AML examination are no longer to be 

considered when assigning a rating under the Federal Financial Institutions 

Examination Council's (FFIEC) Uniform Interagency Consumer Compliance Rating 

System. 

Management Component RoJing 

In keeping with current policy. examiners must consider BSNAML examination 

findings in a safety and soundness context as a part of the management component of 

a bank's FFIEC Unifonn Financial Institutions Rating System (CAMELS ""ings). 

For federal branches and agencies~ BSAlAML examination findings must be 

considered as part of the risk management component of the ROCA rating system. 2 

Examination procedures used to evaluate the adeql..L<.lcy of a bank's BSAlAML 

compliance remain unchanged. 

I This superviSOry memorandum (SM) rescinds SM 2006--2 (issued as MM 2006-2), "1ncorporating 

BSA, AML, OFAC. and USA PA TRlOT Act Compliance Into Supervisory Ratings." as well as 

SM 2004-t (issued as MM 2004-1), "BSA Examinations,'" 

1 ROCA stands fur Risk management, Operational controls.. Compliance, and Asset qua11ty. 

PS!·QCC-45·000013 
1097 


76061.523

In addition, serious deficiencies in a bank's BSAlAML compliance area wiU create a 

presumption that the bank's management component rating will be adversely 

affected. For example. significant deficiencies in a bank's compliance with 

BSAlAML that result in an overall BSA compliance program violation) would reflect 

risk management practices that are less than satisfactory and would generally warrant 

a management rating of'·3." Other adverse BSAlAML findings, such as those 

resulting in "Matters Requiring Attention" (MRA) or less severe enforcement actions, 

may also negatively affect a bank's management component rating. depending on the 

circumstances. This may be the case, for example, when a bank has BSAI AJ'vfi..-

related MRAs across several lines of business. Jf, however, management is already 

deemed in need of improvement and risk management practices are deemed less than 

satisfactory as reflected in a "3" management rating. a further downgrade in the rating 

as a result of BSAlAML deficiencies may not be warranted. On the other band, for 

those situations that mise greater supervisory concerns, a downgrade of the 

management component beyond a "3" may be appropriate. Notwithstanding the 

circumstances, the support for the management rating should be funy documented in 

the appropriate supervisory system. In addition, examiners should be alert to 

situations in which management weaknesses identified in other areas of a bank reveal 

potential deficiencies in BSAJAML program oversight. 

Risk Asse.ssmellt Svstem 

While examiners will no longer consider BSAlAML examination fmdings as a part of 

the interagency consumer compliance rating, BSAI AML findings are still considered 

as a part of compliance risk under the OCe's RAS. Compliance risk considers a 

bank's compliance with aU applicable laws and regulations. The overall quantity of 

risk and quality of risk management related to BSAlAML compliance as well as the 

fourpiHars of a bank's BSAlAML program are considered in assessments of 

compliance risk. BSAJAMI ... examination findings should also continue to be reflected 

in the OCC's assessments of reputation. strategic, and operational risks, as applicable. 

The Committee on Bank Supervision expects to incorporate this guidance into 

revisions of the "Bank Supervision Process/' "Large Bank Supervision,.'· and 

"Community Bank Supervision" booklets of the Comptroller's Handhook-and other 

guidance and systems, as needed--by September2012. 

3 Overall BSA compliancl!' program violations lin! citations of 12 CFR 21.21 fOfDalionaJ banks m12 CFR 163.177 for federal savings associations' ~ viollltions are. cited fur deficiencies that render 

the BSA compliance program jneffective when viewed as /I. whole and r~ult in the issuance of II cease 

and desist onkr. 

·2· 

PSI-OCC-45-000014 
1098 


76061.524

C) SUPERVISORY MEMORANDUM 

Comptroller of the Currency 

Administrator of National Banks 

Washington, DC 20219 

To: AU Examining Personnel 

From: Committee on Bank Supervision 

Date: August 17,2012 

Subject: Bank Secrecy Act Large Bank Review Team Structure and Operation 

SM2012-5 

The Office of the Comptroller of the Currency (OCC) established a cross~functional Large Bank 

Review Team (LB Review Team) to ensure bank supervision and enforcement consistency in the 

area of Bank Secrecy Act/Anti-Money Laundering (BSAfAML) compliance. The LB Review 

Team is also part of the oces ''Process for Taking Administrative Enforcement Actions 

Against Banks Based on BSA Violations," as outlined in oce Bulletin 2005-45,! which states 

that potential BSA compliance program violations are to be considered by a review group. 

The LB Review Team comprises the Director of the Enforcement and Compliance Division, the 

Senior Counsel for BSAfAML. the Director for BSAfAM"L Compliance PoHcy, and the Midsize 

Bank Supervision R,isk Officer. The team's objective is to provide expert input into the 

supervisory process and develop recommendations to promote and ensure consistency in DSA 

compliance and enforcement across the LB population. 

To this end, the LB Review Team: 

• reviews. and provides wrinen comments, recommendations, and conclusions in a timely 

manner on all draft supervisol)' letters and conclusion memoranda related to LB BSAI AML 

and Office of Foreign Assets Control (OFAC) matters to ensure they are consistent with 

OCCpolicy. 

• reviews aU proposed LB BSAiAML and OFAC enforcement actions and terminations to 

ensure they are well supported and consistent with the "Interagency Statement on 

Enforcement of Bank Secrecy ActlAnti-Money Laundering Requirements" as well as with 

the oces "Process for Taking Administrative Enforcement Actions Against Banks Based 

on BSA Violations" and other applicable guidance. 

• makes reasonable efforts to resolve: in a timely manner any disagreements that may arise 'With 

LB Supervision on BSNAML and OFAC-related matters. 

• reports on its activities to the Comptroller and Executive Committee on a regular basis. 

j The BSA enfort:ement process set forth in OCC Bulletin 2005·45 has not y~ been fannan)' applied to federal 

savings associations through rescission proooun<:emems; however, the OCC applies this pl'OCCS5 for both national 

banks and federal savings associations. 

PSI-OCC-45·D00015 
1099 


76061.525

Accordingly,LB Supervision: 

• provides the LB Review Team with complete and timely BSA supervisory letters and 

conclusion memoranda, including relevant BSN Mfl.lOF AC '"Matters Requiring Attention." 

• incorporates LB Review Team comments, recommendations. and conclusions into 

supervisory letters and conclusion memoranda, making reasonab1e efforts to resolve in a 

timely manner any disagreements that may arise with the LB Review Team. 

• provides the LB Review Team with Written expJanations of any disagreements with its 

commentSy recommendations, and conclusions. 

• provides the LB Review Team with final copies of the supervisory letters upon issuance to 

the bank and the tina] version of the conclusion memoranda upon completion. 

If agreement cann01 be reached between the LB Review Team and LB Supervision, the matter 

will be referred to the Committee on Bank. Supervision (the Senior Deputy Comptrollers for LB 

Supervision. Midsize and Community Bank. Supervision, and the ChjefNational Bank 

Examiner), the Chief of Staff. and the Senior Deputy Comptroller and Chief Counsel 

(collectively, ·'the Committee"). ffagreement cannot be reached by the Committee, the Senior 

Deputy Comptroller for LB Supervision wiU consult with the Comptroller, who may elect to 

decide the matter under the May 10,2012, delegation of authority. 

PSi-OCC45-D00016 
1100 


76061.526

HSBC~X~ 

Sc!)tcmhcr 11. 2012 

11" 11(111(1 {[lUI Electronic Emuil 

lion. Car! Lcyin. Chairman 

lion. Tom Coburn. Ranking Member 

J\:rmancnt Subcommi!lc(' 011 In\ cSlit!<ltions 

Committee on Homeland Security al~d Governmental :\ flairs 

1. ;nitcd Stmes Scnntc 

SR~ 199 Russell Senate OrtiCI.' Building 

Washington. DC 205 J 0 

Ikar Chairman Levin and Rnnking ~vkmhcr CLIburn: 

Thank you for thl' opportunity to testify altbl.: Suhconunitk:c's .Iuly 17.2012 hearing 

and for the foHow~up questions prcsL'lltcd in your August 2. 2012 letter <lnd during a call \yith 

th!.! Subcommittee starfoll Augus! ~2. 2012. Responses to lhL'sL' question:; follow. 

1. .-11 Ihe hearing. IISIJ(' (lJIIlOIIJICi',1 !lUll llB.\lX mmld he dosing all {!! if>; U::';. do{{(/!' 

('{~mum Islaml t/(TOllllf,\ 

c/o WUI I1BM'\: olso close Ilw ('lI.1'I11I111 Island hrml('h? 

'\{cs, 

IIsnc lIoldings pic 

~\~~;~; :::~'\~'~'~~:~~~~I~quar~> l.nml!, .. " 1~:I.:.1 ;;.:51,::,10'-_________ 1 

Permanent Subcommittee on Investigations PS1-HS8C-BD-OODOD1 

EXHIBIT #101 
1101 


76061.527

HSBC~:X~ 

b. Will some! of/he Cayman Is/and OCCOUJltS. Cllr,.el1/~)' descrihed as hdllg sl!/'viced 

Ihrough fhe f /Bil-IX· Cl{\!J1/Wl hranch he reopened as accounts at ol/olher lilli/within 

IlnAIX or wUhin jJ5;BC? !(yes. Ji'Ju..'J'c '!'illrhose accOlmls be /oCClIt'd:' 

All J ISJ3C ivfcxico S.:\. ("HBMX") Cayman Islands accounts will b~ closed. ('w~iOmcrs 

\\"110 have USD accounts at IlBivlX's Cayman Islands branch and also haw p~sos 

accounts at HBMX. m<l)' transfer their limds into their PI.!SOS accountS al I IBMX when the 

Cayman lsJands accounts arc closed. Those who do not hold a peso account at IIBMX 

will receive a check or a transfer oj'lhcir funds to an account that they designated. The 

designated account could be an already open nccount that the customer has at another 

I-lSBC affiliate. Additionally. usn Cayman Islands accollntholdcrs whose <lCCOtlllts me 

closed will have the opportunity to open pesos accounts at HBMX. sul~iecl 10 appropriate 

review and in compliance with establisheJ account-opening procedures. 

Former HBMX Caymnll Is.lands accollntholdcrs may also seek 10 open Ilew accounts at 

other HSBC affiliates. subject to KilO\\, Your Customer ("K YC") and other account~ 

opening procedures. 

C. lrillllSBC contiJ/ue 10 sen'{{-e (fl1rjimll(,1' ('lll'l11un1slund c1h'III .... ? lln>s. (1/ \1'''01 

locations will these clients he SL'r~·ict'''( . . 

Sec m)S'wcr to l{b) above. 

2. JVilh regard 10 Rami J\t{ukhlOl!f (see page.\' 176 and 177 (?flhe 5ill/)commiflee's rep0/,I), 

please reslJOnd 10 Ihe/iJ//olt'il1g: 

o. Please provide the ({(If!' WhCII!lIJU,c...,· added Mr. Makht01!rS /lame (o ils O[-:'lCjillt'r. 

HSBC Bank USA. K;\. C'HBUS.") added i'-.k !\'lakhlollfs name to its OFAC tiller on 

February 11. 2008. the same day he was lh.·signatcd by the U.S. Department ol'lrc3sLlry 

for corruption. 

With respect to questions 2(hHd). we arc working to !wO\'idc- rclc\'anl injclnnatlon 

consistel1l with local pri\'acy 1;I\\"s. 

- 2-

P$I·HSBC·BD-OOOQ02 
1102 


76061.528

HSBC~X~ 

J. On ,h/~)' 2j, ]0/2. Illl\Lrpuid a S2H lIIillionfil1(, thaI had been imposed on 'he hunk all 

Novemha 7. 20! I. hy the ('NHF. due to tlll/i-moHey laundering deficiencies ident!fied in 

200-; alld 2008. Please explai11/he (h:licknci('s thai serred as the fwsi.\/ol' Ilw./il1e and 

lrhy J-//U/X did nol jl((I' l/tejll1(, 1II1fil.!1I~1' ]0/1. 

The finl! issued by eNBV resulted primarily !i'om ul1tlmdy liIing orunusua! transaction 

reports. all of which I IBl'vlX ultimately fikd with lhe prop~r authoriti~.-:. In addition. CNBV 

identified deficiencies in IIBj\·IX's KY(' rCl:ords. periodic reviews of high-risk customers. 

systems ror monitoring client profiles. and processes for detection. analysis. and reporting of 

unusual transactions. Following the issuance of the Jin!.! in :--lovcmbcr 20 II. HBMX brought 

administrativc litigation proceedings 1)L~j()re thL! Federal Tax and Administrative Court (SaiD. 

Especializuda t,;ll I{esoluciollcs de ()rganos Rcguladllrcs de In t\clividad del Estado * Tribunal 

Feueral de Juslicia Fiscal y Administralivu) and indirect proceedings bl..'fore the Tenth 

Administrativc District C01ll1 for the Fcdl'ra! District (Jucz iJccimo de Dislrilo cn ivlatcrin 

AdministraliYa en cI Distril0 Federal) ehalknging the basis of some of the alleged underlying 

violntions and thl.: amount of the proposed line. IlBtv1X. however. voluntarily paid the line 

prior to resolution of those proccedings. CNI~V made a series ofrceolllmcndutions with 

respect to identified deficiencies anLl has conlirmed that I I Brvl X implemented them 

complelely. 

-I. Please indicale whether ({lId H'henll11{/5; has cOlldueled a due diligence renew (~f IlBl\{'r. 

fhe nature of Ihal rel';(,\l', alld fh(' ]'t'.\'lIlfs. 

r II3US has conduckd n K YC rL'view or all or its IISHe aJTiliatc Cl1stomcr~. including! II3MX. 

As a correspondent banking customer. J IBMX was sUt~iect to I.!nhanccd due diligence 

(·'IJ)[)·"). 11BUS completed its initial K Y(' Oil IIHMX in September 20! O. updated it in 

2011. and rcrnl!diatcd J II3MX K YC to liB{ IS' Ill'W K ye standards in M.:l)' 2012. In 

accordance wilh IlBUS' Jll.!\\, KYC policy, the !~D!) review conducted with respect 10 HlH.,,1X 

was H lllulti~stcr process that included. among other things: ohwining. information 

conccmill!.! the countries where J IBMX has br:lIlchcs and suh:ddinries; screcninll for nCllutivc 

news on \!;c bnnk: inquiring abo11t I mrV1X's h,mking I'datiol1shiPs. with other in~titutiOl~'i and 

determining thai nOlle has closed 1 lBMX's accounl(s) in the last 5 ycars: obl<lininu 

infonnutiOJ~ regarding the type nfhusillL'SS HB!vIX engages in alld ~\'hethcr HBLJS~ believes: 

thill business to be high risk: g;:uhcring ini'olTIwtioll n:garding any regulatory enforcement 

actions lind tines: and gilthcring dctaikd informatioll rcgardi!)g I IBMX's AtvlL policies and 

procedures. 

PSI-HSBC-80-000003 
1103 


76061.529

HSBC ~::::~ 

Furthermore. as recommended in the PSI's .luly 17.2012 l"I.:porl, IIBUS has commiHed to 

unucI1aking an additional specil:ll rcvic'.\' or the IIBMX rclalionship. Currently, the J-IBUS 

Financial rntcIligcncc Unit ("FlU"') is conducting an assessment or, among other things. the 

economic and security situation in Mexico. the risk associated with the banking services 

~Ircrcd by 1 1 BtvtX. !lmds 110\,... in anu out of Mexico by I IBUS business line, reportable 

events and suspiciolls ~lctivity reports related to Mexico. and anti-money laundering processes 

and procedures at HBlvfX. Once its as.scssmcnl is Cllmpktc, the FlU \\"ill issue a report for 

consideration b) HBUS senior management. 

5. Please prol'hle the date or al1ficipafcd dale 011 which l{//iliole.\· will begin x/wring 

j}?fhrlJ1(f(iol1 with olle al10ther awl the pmens I~r lI'hit:h 111m \l'ilI he accomplished. 

IlSBC has taken steps 10 enhnnce information sharing betwcen afJiliatcs. Earlier this year. 

thc new Steerinl! Committec on Glohal Standards. which 1 co-chair alon!! with Chici' Risk 

Onieer lvian; M~scs, cnaeted a new glohal sHmdard (0 maximi%c the sha;ing of infommlion. 

to thc extent permitted by J:.m·, across allllSBC alTiliatcs and all Global Businesses and 

Functions lor risk management purposes. 1 lndel' this standard, the following enhancements 

to information sharing have heen nwdc: 

IISHe is creating an internal Intranet site \0 hlcilitatc the sharing ofCompliallcL' 

Assurance rep(1I1s~whkh pnlYidc a summary of the status of mute rial AlvlL and 

compliance issues in regions and business lin~s ·-autommically on a monthly basis. 

All Regional and Glohal Busill~ss Compliance h~ads will ha\'e access to thc reports 

Oil this inlnlnct site. which is anticipated to be opcratiol1:11 by the end or Sepu.!l11b,,'r 

this year. 

C()mp!ianc~ Assurance' team reports produced aftt'r tllHhe-ground reyiews or specific 

Regional Compliance functions have mandatory distrihution to the Regional CEO. 

R.:gioJlal CRO. local compliance, and (iwup Chief Risk Officer. 

HSBC is making changes 10 its Group Compliance reporting system to allow any 

material or systemic AMI. control weakness at any allHiute that is reported hy the 

Regional and Global Business Compliance heads to be viewed by all other Regional 

rmd (Jlohal Business Compliance h~'H.b. Thes,,' changes arc expectcd to he 

opcr<ltional by the end of ScptcmbL'r this year. 

- ~-

PSI-HSBC-80-000004 
1104 


76061.530

HSBC~:::~ 

Overthe course oCthe last year. HSBC has made its Risk Man£leemcilt m~~tinl.!s more 

effective forums for shuring detailed information about complja~1cc and other risks 

among affiliates. Among other things. attendees look at a '"Risk ivfap" that identities 

risks (icross the Group. including AMI. risk. Regional and Global Business ht!l.llls 

must takc the inf(1rIn<ltion they receive at the meelings back to their Compliance and 

Risk tcams. 

IISBC will continue to look for additional opportunities to increase the now of'inrormatiol1 

throughout the Group. 

o. Please provide fhe 11(11111:S (~fthc HSEe <?!Iiliales located;n tax hawlIs lrhere 

jllrisdiclioHal df(ferenct's prec:lude the x/wring (~rh~fiwmalion. Please pnil'it/e additional 

delail on relevant priwU.T reslrictions 10 infimJlufifJ1h\'/J(lring 

The: Bank is noi aware of a single. universfllly agrcl:d-upoll list of'tax ha"cll~. 1I()\\'c"cr. the 

Stop Tux Haven Abu~c Act (S, (81). introduced by Chainnan Levin in 2007. contains a list 

01'34 "offshore secr~cy jurisdictions:' which h11'·C becn identificd publicly as such hy the 

lntcma! RCyenllC Service in federal court procl:cdings. The S. 681 list proyidcs the basis for 

this response. From the S. 6Hllist. I1SBC has onices in: Bahamas. Bcrmuda, British Virgin 

Islands. Cayman Islands. Cook Ishmds. Costa Rka. Northern Cyprus. Guernsey. !long Kong. 

I5le of j.",lan. Jersey. Luxemhourg. iv1alta. Pan;:tma. Singapon::. and S·wilzcrland. We arc 

compiling. a list or citations to the applicable laws in these jurisdictions thaI we will send to 

lhe Subcommittee. 

u. Plea.'w descrihe who! l/Cliol7.\' l/l1US' \l'iII /(Ih' OJ' bas Jaken lfone (~rfI1l!""(, affiliates 

does no/provide rCl/lfes/et/ il?/imllaliol1. 

IIBlJS performs KYC on each of its customers, including its alliliatcs. In the !;(HII'Se of 

the KYC process. IlBUS requests and maintains 11 significant amount of information 

relating to all of its customers. This informmion is coJh:ch~d for multiple pmvoscs. and 

the consequcnces or a particular customer's hlilure 10 provide requcsted information will 

depend on the context. Importantly. HBUS In:a!s its affiliate customers the s:unl: ns any 

other Ihird~parly customer. Where an afl;liatc hlils tn provide requested information after 

diligent inquiry by HBUS. HBliS will escalate the matter to Group. and ns I IBllS CEO 

Ircne Domer lesliJicd allhc PSI's July 17,2012 hearing, where an affiliate fail!' to 

provide sufficient K YC illformation~ I IBUS "would have 110 hesitation in not opl'ning the 

account or indccJ dosing nn account:' 

PS1·HSBC·BO·000005 
1105 


76061.531

HSBC~X~ 

7. With regard 10 bearer share {K('OH/1fS. please pm\'itle fhe Humber (~f cliellfsjil1' 1I'hol1/ (I 

waiveI' was gramed./i'(}JJl)w1/IalY j, 2(j(J8 to the presl.!llI.f/'om lIny I/BU.\' due diliXl'm.'e, 

henC?/icia! O1I'l1(!I'S/UJ), or ami-moncy laundering reqlliremem, flie lIatUl'e (d',he waivc]' 

grunted the dale on which Iha/woh'er was gra/1lL'd. and who ~ranl('d the lI'oii'er, 

As the Committee is D.\\'arc, accounts- of bearer share corporations ("bearer share aCl:oun!s") 

were most likely to he held with the priv<IIe banking cnti(ics~the Priv(ltc Bank 1nternational 

in Miami and the- International Pri\'ate il<ll1k in N~w York (collectively. "Private Bank 

America"). With regard to bearer shafl~ accounts heJd at Private Bmlk America. the Bank is 

not aware orany waiver granted. on or after January 1.2008. from any urlhe dul' diligence. 

beneJicial ownership. or antj·moncy lmm(kring n:quircmcnls in the applicable hearer share 

policy .. Thc Bank is also undertaking a rc\'icw to determine if there mc hearer share accounts 

in other IISBC' North America Iloldings. Inc. C"IINAII"} business units. ILmy nrc identified. 

they will be subject 10 prompl rl!"J1lcdiation in conJ(xmancc with llNAJ I policy. 

Thank you ft1r the opporllmity to pro\'idc this response. 

Sincerely. 

PSI·HSBG-8o-{)OO006 
1106 


76061.532

HSBC ~:::~ 

StlJlIrt Lt\C~) 

{'hl<'; 1.,'gI.lIOllko 

Scpkmbcr 25, 2012 

HI' /land flnd Electronic Email 

Ijnn. Carl Levin. Chairman 

i Inn, rom Coburn. Ranking f'..·lcmhcr 

Permanent Subcommillc .... on Investigations 

Comminee on Ilomdnnd Security unli Clo\,crnml'nt;l! Amlirs: 

Unih:d Slates Senate 

SR~ 199 Russell Senate Olfice Buildirlg 

Wa:>hinglOn. DC 20510 

Dear Ch::linnan I_cvin <lf1U Ranking ~1L'mhL'r Coburn: 

rhank )OU again lor the opportunity hI testify at till' Suhconllllincl"s Juiy 17.2012 

hearing Ilnd ror the rtllltl\v~up quesli(llls presenled in yom August 1. :! 1 01 !eller. Responses to 

qucslinns 2(a) (d) rollow. 

y, Il'jfh regard ((/ Rami ,\fakhlnll/Isl'(' pages 176 a/U.II~- nflhe SlIhcofJImifll/(':" reporl}.l,/em(· 

rnplllldro f}n' fiJI/owing' 

a. P1eaxe I'nll'itic 11It-.lule Whl.!llllJJl I,)' added Mr, Makh/OI!rs I1WlIt! 10 ifs (J/·:·f(' jill!'r. 

IISBC BanI.: liSA. ~ ... \. {"H13lS'} ::Iddcd ~lr. i\1:Jkhl(}ufs 1l<1Inc to tIS OF,\C rihcron 

Fdmmry 2!. :W08. til.: ~amc Jay hI: W;H; dcsignn!..:=d hy ,hI..' U.S. Dcp~lr1tn~nl nfTreasury for 

Lllrruplion. 

What was 'lie uppntxim(I{(! maximum (1/11011111 o/JIII/ds in/he IIS/Jl.· ('!lyman lIiund 

accoulif th!lt W(JX opem .. d ill/h!'lIame f!fthe trust hl·l1t:filin~ ,\11'. Alakhloue 

Hsnc IIl1ldin~s pit' 

I e\'d -12. 8 C~nLlJ.l Squ:m:, I nuli;1I1 F 1,,\ 5111) 

Wch\\\\\\h>hcC"11l 

PSI-HSBC-81-000001 
1107 


76061.533

As rclkcted in documents availuble in the U.S. that havc been produced to the Suhcommillee 

(HSBC OCC OI60~5]), the trust benefiting r-.-1r. t',·1akh!ourwas <1dminislercd by HSBC 

Gene\.';\ (HSBC Caym:m did not maintain an a(;counl for any trust benefiting Mr. \·1akhlouf). 

We arc not able 10 provide tbe inrormation Tl!'411l:stcd bC(;3use reIL-v,mt priV:IC), 1<1\\5 rc.stril:l 

HSBCs ability to discuss confidclllial client inrormatiorl. 

c, Is !lml account or m~\' LJlhcr IISI)(' accmwf hcm:jiting .\11". ,\fakhlmls(iJI OpL'II? !fYl!s. 

ph'use idem!()' lin' !!SIlC of/llialt' where each sllch (JccO/mt is /OC(1/t'(i. (111(1 intiicaf{' 

whL'lilt'J' and lI'J1I.!1I film ucctJtl1l( has ht'£'I1/rlJ:cll 

A.'\ descrihed above. the trust hcnefitinl:! ~1r. Makhlour\\;;\S administered by HSBC Geneva. 

i\k ylllkhloufw:ls removed as a beneGciary of the trust :after his Fcbnl:Jf):21. 200& 

dcsigmllion by the \).5. Depanmcl1l of Treasmy for corruption. 

Currenl privacy laws restriclllSBCs ability tll discuss ~ollriuctltia! dient inrormation in 

spt:cilicjurisdiclinns. HSBC is commineu to t.:ol11plying with ;lpplkahle sanctions and \~hen: 

accou!Us arc sUbject to sLlnctions. IISBCs pnlic)' is to frceLc accounts as required. 

Additionally. IISBC docs not hold an) accoullts hy or I'nr Ihe benerll ofivlr. Makhluurin 

countries where ~illldi{)ns. dn not apply. 

d. WIIl'lI flSflC CI~n1lim lslwul\ rai.\('d I.-'onn'r/J\· lriJl, rc)!urd III .\11' Ma!o.hfOl{f' ... aCt'()lI1l1.~ ill 

1mr. 

If'luJ/ wen' Ih .. concern>: rctis('d hy 115."11C Cayman Islmuls? 

A~ rci1ec\cd in documeots Jvailable in lhe lIS. thOlI hav!.! been produced to the 

Sllbc('Immiltcc (I !SHe DCC OI6(453).IISB(' (',lYnliln rniscd questions about the 

approprialcmess oi'lhc rclati(ln~hip with f\k ~\'Iakhlourin August 2007. prior 10 till! 

stllH:tioning oPv1r. Makhlouf in ,my jurisdictiun. IISBC Cayman's com:crns were basl.'u 

Oil media C(\\cr.!gc rcgardinglht! :-"-lakhlnur !~mil). After Mr. \.1akhlnufs dcsignalit)n by 

lhe tl.S. Depm111h.'llt of Treasur) ror com1rnion on Fehru::try 21. :!008. he was rl.'nlmcd <.I!'i 

a b~neflclary oflhc Irust. 

ii What stcl'.\ t/id IISB(' GrollI' f(lk(' /0 address ,110.\1' CIJlln'fns:1 

! !SBC Group Com[1lianc\!. Ri:>k. SCCUril). and the rek"an! business c~Hlrerrcd :mtl 

worked together In assess the rdilli(ln~hip. 

PSt-HSBC·B1·000002 
1108 

Æ 


76061.534

HSBC ~:r~ ·3 

iii. Who at ll.',me Group was rl!spOIlxfhlej(u- making a ddcrminalion abolllthi.\' !It'COllllt:' 

As explained nbovc. dilTcrcnt paris ofllSBC firollP, including. among others, 

Compliance. Risl\. Sccurjt~. anJ Ihe rdc"',ant bllsinC's~ \\Cfe involved. 

ir. Why did IISDC allow un inl(.'J'JIuliOlw/ ((:I'mri.w /0 mail1l11ill WI nccmmf with thl.' bank? 

As rl'j~rellccJ above, Mr. Mnkh!oufwilS designated by thl.! U.S. Department nfTrcasury 

ror corruption ,and WtlS :JddeJ to IIBt:S' riltl.!f on Jhe- same day. IISBC is committed to 

complying with applicable s;,mctinns ::md \~here >Iccounts Ufl..' subject [0 simcll()lls. 

HSHes policy is 10 freeze accounts as required. IISBC is moving to implement a nc\\ 

!!Iobal sanctions policy under which llSOC will Sl.!feCn for key illicit actors. dt'sig.natcd by 

OFAC in nlljurlsdiclions. in all currcnt'!l!s< 

Thank )OU for the opportunity to pnn<iJi! this r1.·~p()l1SC. 

SinCl.'rcly. 

(\/:.......~~ L~ ./ I 

~!u:m Lc\ cy J W HS(JC Chief Legal O!1in:r 

PS!-HSBC-81-000003