A slap on the wrist for HSBC

Published Dec. 14, 2012

First there was "too big to fail." Now, with HSBC, there is "too big to prosecute." The British bank's avoidance of criminal money laundering charges is just one more glaring example that if a financial institution is big enough it can escape the full consequences of its actions.

HSBC announced last week that it will pay $1.9 billion to settle allegations that it illegally provided a conduit for money from Iran, Cuba and Libya; moved money for Saudi Arabian banks tied to terrorist groups; and transferred the illicit proceeds of Mexican drug cartels. Yet despite the gravity of the alleged wrongdoing, federal and state prosecutors declined to indict HSBC because of fears that destabilizing one of the world's biggest banks would roil the broader financial system.

Without the prospect of criminal charges, society gives up a vital deterrent for bankers to act responsibly. Writing a big check from bank coffers simply doesn't strike the same fear in a banking executive's heart as the threat of a jailer or having his institution thought of as a criminal enterprise.

That impunity was apparent for years at HSBC. To expand its operations, HSBC virtually ignored U.S. law that tells banks they must report cash transactions of $10,000 or more and disclose suspicious activities by their customers. In 2010, the U.S. Office of the Comptroller of the Currency found that HSBC's internal controls were so lax it failed to review $60 trillion in transactions and 17,000 accounts that were potentially suspicious. The bank's standards didn't tighten up even after it was discovered that $7 billion in suspected Mexican drug proceeds was transferred to the United States.

Indicting HSBC for this conduct could have led to the loss of its charter to operate in the United States, spelling its demise. This spooked U.S. Treasury officials and federal financial regulators enough to wave the Justice Department off its efforts at gaining a criminal admission from HSBC, according to the New York Times. It isn't clear why banking executives weren't held to account for their bank's unlawful acts.

HSBC's case mirrors the 2008 financial crisis when the Bush and Obama administrations used billions of dollars in taxpayer money to prop up AIG and Wall Street banks that were teetering on insolvency because of reckless gambling. Like them, HSBC is so big and interconnected that normal rules don't apply.

By giving big banks a pass on reckless and lawless behavior to protect the larger financial system, the U.S. government feeds a growing cynicism that the game is rigged. Criminal prosecutions are essential to returning public confidence that the system is fair. If an institution truly is too big to prosecute, then it is too big to operate, and steps should be taken to address the imbalance by breaking it apart. The next HSBC should not get off so easily.