32.
One area in which KYC was particularly poor was HSBC
Mexico’s Cayman Island U.S. dollar accounts.

Mexican law
prohibited most individuals from maintaining U.S. dollar
denominated deposit accounts in Mexico unless they lived near
the U.S.-Mexico border or were a corporation. However, Mexican
law permitted almost any Mexican citizen to maintain offshore
U.S. dollar accounts. These HSBC Mexico accounts were based in
the Cayman Islands, but were essentially offshore in name only,
because HSBC Mexico had no physical presence in the Cayman
Islands and provided the front and back office services for
these accounts at its branches in Mexico. Customers holding
these accounts did all of their banking, including depositing
physical U.S. dollars, at branches in Mexico. Nevertheless, the
accounts were legal under Mexican and Cayman law.

33.
In January 2006, HSBC Mexico conducted an internal audit of
the Cayman Islands U.S. dollar accounts. At that time, there
were only approximately 1,500 such accounts. Over 50 percent of
the audited accounts lacked the proper KYC information, while 15
percent of audited accounts did not contain any KYC
documentation. Over the next two years, nothing was done to
address the KYC issues with these accounts. By 2008, there were
35,000 Cayman Island U.S. dollar accounts. At least 2,200 of
these accounts were designated high risk due to suspicious
activity within the accounts and/or negative information
regarding the account owners.

In July 2008, the total
outstanding balance of these high risk Cayman accounts was
approximately $205 million. Without adequate KYC information,
HSBC Mexico knew very little about who these high risk customers
were or why they had such large amounts of U.S. dollars.
However, even without the benefit of adequate KYC information,
the risks were obvious. Indeed, one HSBC Mexico compliance
officer noted “the massive misuse of [the HSBC Mexico Cayman
Islands U.S. dollar accounts] by organized crime.” One example,
identified by HSBC Group’s Head of Compliance in July 2008,
involved “significant USD [U.S. dollar] remittances being made
by a number of [HSBC Mexico’s Cayman Islands U.S. dollar]
customers to a US company alleged to be involved in the supply
of aircraft to drug cartels.”
Case 1:12-cr-00763-ILG Document 3-3 Filed 12/11/12 Page 12 of 30 PageID #: 65
13
HSBC Mexico Failed to Terminate Suspicious Accounts

34.
When suspicious activity was identified, HSBC Mexico
repeatedly failed to take action to close the accounts. Senior
business executives at HSBC Mexico repeatedly overruled
recommendations from its own AML committee to close accounts
with documented suspicious activity. In July 2007, a senior
compliance officer at HSBC Group told HSBC Mexico’s Chief
Compliance Officer that “[t]he 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.”

35.
Even when HSBC Mexico determined a relationship should be
terminated, it often took years for the account to actually be
closed. In December 2008, there were approximately 675 accounts
pending closure based on suspicions of money laundering
activity. Closure had been approved for 16 of those accounts in
2005, 130 in 2006, 172 in 2007, and 309 in 2008. All 675 of
these accounts remained open into at least 2009, with
transactions being actively conducted through them despite
facing pending closure based on suspicion of money laundering
activity.
HSBC Mexico’s High Volume of U.S. Dollar Exports

36.
Between 2004 and 2007, HSBC Mexico exported over $3 billion
U.S. dollars per year to the United States through Banknotes.
In November 2007, Banco de Mexico, the central bank of Mexico,
expressed concerns about the volume of U.S. dollars exported by
HSBC Mexico back to the United States. Specifically, Banco de
Mexico wanted an explanation as to why HSBC Mexico’s U.S. dollar
exports were significantly larger than its market share would
suggest.

37.
In February 2008, HSBC Mexico’s CEO met with the head of
the CNBV and the head of Mexico’s financial intelligence unit,
Unidad de Inteligencia Financiera (“UIF”). Again, the volume of
HSBC Mexico’s U.S. dollar exports was raised as a concern.
Specifically, HSBC Mexico’s CEO was told that law enforcement in
Mexico and the United States were seriously concerned that the
U.S. dollars being deposited at HSBC Mexico might represent drug
trafficking proceeds. HSBC Mexico’s CEO was also told that
Mexican law enforcement possessed a recording of a Mexican drug
lord saying that HSBC Mexico was the place to launder money.

http://www.justice.gov/opa/documents/hsbc/dpa-attachment-a.p...