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Are Fines for Unethical Behavior Enough?

By Curtis C. Verschoor, CMA, CPA
May 1, 2018
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Bank giant HSBC paid $4.8 billion in penalties, yet its illegal and unethical acts continued.

 

The parent company and subsidiaries of the largest bank in Britain and Europe—the Hong Kong and Shanghai Banking Corporation (HSBC)—have racked up significant penalties from 35 settlements since 2000, according to data in the Good Jobs First Violation Tracker. Banking regulators and law enforcement agents in Britain’s Financial Conduct Authority (FCA) and the United States Department of Justice (DOJ), Federal Reserve, Office of the Comptroller of the Currency, and others are involved.

 

 

The largest settlement on the list relates to HSBC’s agreement in 2012 to forfeit $1.256 billion and to enter into a deferred prosecution agreement for alleged money laundering and violation of economic sanctions. A civil fine of $650 million also was assessed in the case. The activities were related to HSBC’s “global bank notes business” whereby the bank sends currency around the world on behalf of clients, allowing businesses to transmit funds to countries where they don’t have a banking presence. The practice leaves no paper trail.

 

When the settlement was announced, then-Assistant Attorney General Lanny A. Breuer said, “HSBC is being held accountable for stunning failures of oversight—and worse—that led the bank to permit narcotics traffickers and others to launder hundreds of millions of dollars through HSBC subsidiaries, and to facilitate hundreds of millions more in transactions with sanctioned countries.…Today, HSBC is paying a heavy price for its conduct. Under the terms of today’s agreement, if the bank fails to comply with the agreement in any way, we reserve the right to fully prosecute it.”

 

A July 17, 2012, report by the U.S. Senate Permanent Subcommittee on Investigations, “U.S. Vulnerabilities to Money Laundering, Drugs, and Terrorist Financing: HSBC Case History,” found seven deficiencies in HSBC operating policies and practices:

 

(1) opening U.S. correspondent accounts for high-risk affiliates without conducting due diligence; (2) facilitating transactions that hinder U.S. efforts to stop terrorists, drug traffickers, rogue jurisdictions, and others from using the U.S. financial system; (3) providing U.S. correspondent services to banks with links to terrorism; (4) clearing bulk U.S. dollar travelers checks despite signs of suspicious activity; and (5) offering bearer-share corporate accounts that are high risk.

 

HSBC increased its commitment to effective regulatory compliance. The 2012 Annual Report notes: “Our Compliance function has already been strengthened considerably. More than 3,500 people are now employed globally to work on compliance and compliance spending has approximately doubled since 2010 to more than $500 million.”

 

Yet the most recent settlement for significant HSBC misbehavior with resulting penalty and deferred prosecution agreement occurred in January 2018. To avoid a guilty plea to criminal charges, HSBC agreed with the DOJ to pay a $101.5 million penalty for attempting to manipulate foreign exchange markets. The bank said it also agreed “to enhance a compliance programme and internal controls in its investment banking unit.” In 2016, authorities arrested HSBC’s global head of foreign exchange cash trading, “charging him with fraudulently trading ahead of a client’s transaction, alleging he and others netted millions in profits for the bank while lying to the client.”

 

Some of the other settlements HSBC has reached recently include: (1) a $470 million settlement in 2016 with 49 states and the U.S. Department of Housing and Urban Development that alleged HSBC participated in “faulty mortgage origination and servicing practices,” (2) a 2017 agreement amounting to $352 million with the French government that alleged HSBC assisted clients to evade taxes, and (3) a settlement with the DOJ of $434 million for repossessing military service member cars without proper court orders.

 

HSBC has a statement of values that contains concepts that should have prevailed and resulted in prevention of the many scandalous events that have hurt its reputation. These values are explained and applied in a document called a Charter. The foreword to this document simply states, “Do the right thing!” But apparently that message didn’t permeate its operations. The Charter defines the principal core value of courageous integrity. The values are: “(1) Being dependable—always doing the right thing, (2) Being open to different ideas and cultures, and (3) Being connected to customers, communities, regulators and each other.”

 

The Charter also states that “Success is about the long term” and outlines changes in business practices that may cost in the short term but benefit in the long term. The next item in the Charter is “Meeting the spirit and the letter of the law.” The last concept is “Courage to do the right thing,” which asks five questions designed to use values to help guide behavior: (1) “POLICY: Are you operating within the rules?” (2) “PRINCIPLES: Does this decision sit well with our sense of right and wrong?” (3) “PROFIT: Does this make commercial sense for our customer and for HSBC?” (4) “PEOPLE: Do you understand the impact of this decision on others?” and (5) “Do you have the courage to do the right thing?”

 

Making sure that HSBC’s values are understood and applied consistently by all 225,000 employees who speak 144 languages is a monumental task. It appears HSBC has adopted a legalistic, compliance-oriented strategy rather than attempt vast ethics training of its diverse, widespread workforce. Perhaps the details of the deferred prosecution agreement call for this approach.

 

In the South China Post, financial writer Peter Guy wrote: “Compliance alone cannot ensure integrity.” Changing culture is difficult but necessary to avoid future ethical lapses. Culture drives good behavior, particularly when it’s aligned with core values.

 

IMA ETHICS HELPLINE

 

For clarification of how the IMA Statement of Ethical Professional Practice applies to your ethical dilemma, contact the IMA Ethics Helpline.

 

In the U.S. or Canada, dial (800) 245-1383. In other countries, dial the AT&T USA Direct Access Number from www.usa.att.com/traveler/index.jsp, then the above number.

 

The IMA Helpline is designed to provide clarification of provisions in the IMA Statement of Ethical Professional Practice, which contains suggestions on how to resolve ethical conflicts. The helpline cannot be considered a hotline to report specific suspected ethical violations.

 

Curtis C. Verschoor, CMA, CPA, is the Emeritus Ledger & Quill Research Professor, School of Accountancy and MIS, and an honorary Senior Wicklander Research Fellow in the Institute for Business and Professional Ethics, both at DePaul University, Chicago. He is also a Research Scholar in the Center for Business Ethics at Bentley University, Waltham, Mass., and Chair-Emeritus of IMA’s Committee on Ethics. Trust Across America—Trust Around the World awarded him a Lifetime Achievement Award in 2016. In 2017, IMA published his book, Curt Verschoor on Ethics. His e-mail address is curtisverschoor@sbcglobal.net.
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