US court approves contentious HSBC settlement with Justice Department, keeps eye on future conduct

In a decision that may incite a new round of “too big to jail” public scorn, a US District Court judge has approved the deferred prosecution agreement, including a $1.92 billion penalty and forfeiture settlement, that the US Department of Justice reached with HSBC Bank USA and HSBC Holdings Plc. over charges of money laundering and sanctions violations.

While noting the “heavy public criticism” that surrounds the case, federal Judge John Gleeson of the Southern District of New York said in an order on July 1 that his approval of the December 2012 Deferred Prosecution Agreement, which allowed HSBC to avoid criminal prosecution, was “easy, for it accomplishes a great deal.”

The judge did not let HSBC off scot-free, however. He ordered the institution to keep the court “apprised of all significant developments” in implementing the terms of the DPA and said he will “maintain supervisory power” over the case for five years.

No one prosecuted in global case of widespread misconduct

The court’s approval of the settlement is a disappointing anticlimax for bank reform advocates who hoped to see HSBC or its executives involved in the misconduct face criminal charges. The wrongdoing included permitting Mexican and Colombian drug traffickers to launder at least $881 million from 2006-2010, according to the memorandum.

HSBC also violated U.S. sanctions laws by processing about $660 million in payments “on behalf of banks and other entities located in Cuba, Iran, Libya, Sudan, and Burma.” In the Justice Department’s 2012 announcement of the settlement, Assistant Attorney General Lanny A. Breuer cited HSBC for “stunning failures of oversight” and said the “record of dysfunction that prevailed at HSBC for many years was astonishing.”

Many thought the deferred prosecution agreement let the bank off easy. Their hopes that the DPA would be struck down were dashed by Gleeson’s ruling.

“Indeed, I have received unsolicited input from members of the public urging me to reject the DPA,” wrote Judge Gleeson. “But even if I were to reject the DPA, I would have no power to compel the government to prosecute the pending charges against HSBC to adjudication.” He added that “significant deference” was owed to the government’s decision not to prosecute HSBC.

“Considered together, the DPA imposes upon HSBC significant, and in some respect extraordinary, measures,” continued Gleeson. “Indeed, taking into account the fact that a company cannot be imprisoned, it appears to me that much of what might have been accomplished by a criminal conviction has been agreed to in the DPA.”

DPA approved by judge “without hesitation”

These “extraordinary measures” in the deferred prosecution agreement included requiring the bank to forfeit $1.256 billion and admit to criminal wrongdoing. HSBC also agreed to pay an additional $665 million in civil penalties, making the $1.92 billion settlement the largest penalty the US government has ever leveled against any financial institutions for unlawful conduct.

Judge Gleeson’s order also pointed out that HSBC has been adhering to the remedial measures ordered in the DPA to correct its failures, such as investing in improving its anti-money laundering program, promoting greater internal information-sharing and restructuring its executive bonus system “so that bonuses are dependent on meeting compliance and AML standards.”

HSBC has yet to issue a statement responding to the ruling by Gleeson, but in December, the bank’s chief executive admitted responsibility for HSBC’s misconduct.

“We accept responsibility for our past mistakes,” Stuart T. Gulliver said in the statement. “We are committed to protecting the integrity of the global financial system. To this end, we will continue to work closely with governments and regulators around the world.”

Read the Court’s memorandum and order on HSBC here