HSBC warns money-laundering fines could top $1.5bn

Bank braces for 'significantly higher' fines from the US authorities as it sets aside further $800m to cover money-laundering fines

guardian.co.uk, Jill Treanor, Monday 5 November 2012

HSBC has warned on rising fines from money laundering claims. Photograph:
David Levene

HSBC is braced for fines from the US authorities of at least $1.5bn (£940m) – one of the largest in the financial services industry – for laundering billions of dollars, and warned on Monday that the final penalties could be even greater.

The scale of the potential cost of the revelations contained in a US Senate report, which showed how billions of dollars were laundered into the US for drug barons and terrorists, came as the bank set aside an additional $800m in the third quarter to cover the potential fines. The additional provision comes on top of the $700m set aside at the half year, taking the total cost so far to $1.5bn.

Stuart Gulliver, the bank's chief executive, admitted even more money may be needed to cover the actions that it faces from a number of US regulators under anti-money-laundering laws covered by the Bank Secrecy Act and Office of Foreign Assets Control. The bank also warned there was a "high degree" of uncertainty about the fines and that it could also face "corporate criminal as well as civil charges and the imposition of significant fines, penalties and/or monetary forfeitures".

"We are actively engaged in discussions with US authorities to try to reach a resolution, but there is not yet an agreement. The US authorities have substantial discretion in deciding exactly how to resolve this matter. Indeed, the final amount of the financial penalties could be higher, possibly significantly higher, than the amount accrued," Gulliver said.

He put his own reputation on the line. "It's up to me and my team to restore the trust of the public and the reputation of the firm," Gulliver said, adding that a "number of people have left the bank or had clawback according to their compensation" but had refused to say how many.

"We deeply regret our past failings and we must work individually and as an industry to rebuild trust," said Gulliver, who was appointed 20 months ago during a boardroom reshuffle caused by Stephen Green's decision to resign as chairman, accept a peerage and become a government trade minister. He conceded the money laundering allegations, which date back to 2002, had "undoubtedly damaged" the HSBC brand.

A further provision for UK "customer redress programmes" – largely the payment protection insurance (PPI) scandal – led to a further $353m charge, taking the total to $2.1bn. HSBC is the last of major UK banks to report its third-quarter results during which the PPI scandal has emerged as the costliest mis-selling scandal in the UK, costing more than £12bn.

Gulliver also made clear that the PPI provision could also rise further.

The provisions led to a fall in pre-tax profit in the third quarter to $3.5bn pre-tax, compared with $7.1bn in the same quarter last year. Some $5.8bn of the fall was due to changes in the value of the bank's debt and it stressed that underlying profits were $5bn. HSBC's shares were among the biggest fallers in the FTSE 100 in early trading, down 1.6% to 615p.

The bank, which under Gulliver has embarked on a retrenchment from some of its international outposts, has cut 22,000 roles so far this year to take its workforce to 267,000. But, as around 15,000 of these roles went when businesses were sold off, more roles would need to go until 2013 to achieve his target to cut 30,000 roles in total, Gulliver said.

"We have announced 24 disposals and closures this year, including eight since 30 June 2012, making a total of 41 since the beginning of 2011, exiting non-strategic markets and selling businesses and no-core investments," Gulliver said.

The results are overshadowed by the damaging US Senate report that described the bank as having a "pervasively polluted" culture that exposed the bank to not only drug-trafficking but also financing of terrorism.

At a hearing before the Senate in July, David Bagley, HSBC's head of compliance, dramatically resigned. According to the register maintained by the Financial Services Authority, Bagley remains with the bank and authorised in a series of compliance functions although last week the bank named – only in an "acting" capacity – his successor as board adviser David Shaw. It is not immediately clear what Bagley's future role will be.