The Sunday Times June 5, 2022 7
BUSINESS
only jail would do. Yet,
because HSBC was so big, so
connected, it was felt that
charges and convictions
would result in systemic
failure — that the world would
enter financial meltdown.
HSBC paid the fine and
promised to improve.
Since then, corporations
have continued to expand —
to the point that several of the
world’s leading enterprises
are now bigger and more
powerful than many nations.
We and they should look at
what happened to HSBC. It
was a bank that was out of
control, that was ignoring
repeated warnings, that was
focusing on getting evendinner, then Bank of England
governor Sir Mervyn King
warned that “governments,
regulators, prosecutors and
non-executive directors have
all struggled to come to terms
with firms that pose a risk to
taxpayers, cannot be
prosecuted because of their
systemic importance, and are
difficult to manage because of
their size and complexity. It is
not in our national interest to
have banks that are too big to
fail, too big to jail, or simply
too big.”
In pressing for HSBC to
return to its roots, China’s
Ping An might
unintentionally be doing
Britain a favour.larger, even more profitable —
while being unable to manage
what it already owned. While
the eyes of HSBC managers
were elsewhere, the Sinaloa
had a ball.
After the 2008 financial
crisis, when banks were
deemed “too big to fail” and
were bailed out by taxpayers,
the largest institutions, such
as HSBC, were required to
hold more capital (one aspect
of the proposed split is that
investors are weighing up
whether it will free up
capital). What that meant, as
HSBC illustrates, was that we
in effect created banks that
are too big to jail.
In 2013, at his farewellToo big for its
own good
and too big
for our good
The question of size,
however, goes much deeper.
It is about a company’s ability
to manage itself properly — to
ensure checks and balances
are in place and effectively
deployed. We want our
corporations to get bigger but
we don’t pay heed to what
that means — whether they
can really be aware of what is
occurring in all their offices
and branches, among their
thousands of employees.
We listen and applaud as
they tell us how many
millions of transactions they
process, and how much they
make — without stopping to
register what is entailed.
Nothing illustrates theLike a hardy perennial, the
issue of the future shape of
HSBC has come round again.
This time, it is its largest
shareholder, the Chinese
insurer Ping An, that is
making waves by calling for
the bank to be broken up,
writes Chris Blackhurst.
As it happens, analysts and
investors were due to meet in
Birmingham on June 16 to
discuss the strategy for its UK
retail operation. Usually with
HSBC, the concern is whether
it should be based in Asia,
home to most of its business,
or stay in the UK. Ping An has
gone further, saying it should
split completely, between
Asia and the rest.dangers more than HSBC. For
Too Big to Jail, I have been
exploring how it was that this
seemingly most
disciplinarian of banks
became the laundromat of
choice for a Mexican drugs
cartel. It did not wash
millions for the Sinaloa, but
billions. We know this
because in 2012, the bank was
fined $1.9 billion and
admitted a litany of offences.
This, though, is only part
of the story. The fact is, the
US justice department and
other law enforcers were
anxious to prosecute HSBC
and its executives. So
egregious was what they
discovered that they believedMexican citizens
protest against
the many
murders carried
out by the
all-powerful
drugs cartels and
show pictures of
their missing
loved onesVOUCHED FOR BY DOWNING STREET
On Monday, October 8, 2012,
George Osborne delivered his
set-piece speech as chancellor
to the Tory conference in
Birmingham. He spoke of the
need to continue the
government’s austerity drive
after the banking crash of 2008,
and his theme was “we’re all in
this together”. To rapturous
applause, he pledged to crack
down on bankers. “We’ve never
allowed uncontrolled
capitalism free rein,” he said.
“Markets need rules.”
What he did not say was that
he was lobbying for HSBC not
to be so vigorously punished in
the US for the Mexican money-
laundering scandal.
Two days after addressing
the Tories, he flew to Tokyo for
the annual International
Monetary Fund meeting. While
there, he had arranged a
meeting with Ben Bernanke, the
US Federal Reserve chairman,and Tim Geithner, the US
Treasury secretary, to press the
case. Osborne said charging
HSBC and its executives would
threaten the stability of Britain’s
biggest bank — and with it, the
financial markets.
He warned that such a move,
which the US justice
department was on the verge of
making, would lead to a
calamitous fall in HSBC’s share
price. Many people were
suggesting, he said, that UK
banks in general were being
“unfairly targeted” by various
arms of the US state with bigger
punishments than American
banks were getting.
In advance of Tokyo,
Geithner was sent a briefing
note by his officials. They
blamed a UK regime that was in
thrall to the banks. They said
that while Osborne was
maintaining that the US was
singling out UK banks, theFinancial Services Authority in
London was being “particularly
problematic on enforcement
and adopting a light-touch
approach at industry’s request
... ” Attached to the note was a
backgrounder for Geithner
detailing the charges against
HSBC. He was told there was a
criminal case pending and it
would be brought that month or
in November.
Whether it was down to
Osborne’s intervention or not,
the US justice department
climbed down and agreed to
HSBC striking a deferred
prosecution agreement and, in
December 2012, accepting a
$1.9 billion fine.
Osborne had been worried
about the share price crashing
if the bank and its bankers had
been charged, but as a measure
of what the City thought, the
shares went up when the DPA
was announced.A
car pulls up in a square in
Mexico. Three men get out
and walk to the local bank,
an HSBC. Two are carrying
soft, full pouches, one is
looking around and there is a
bulky shape under his
jacket, suggesting he is
armed.
The folders are bespoke,
made to squeeze precisely under the tell-
ers’ windows. The teller takes a case, puts
it to one side, reaches for a credit slip that
has already been made out, tears off the
stub and gives it to the customer.
When the cases are opened, they
contain bundles of smoothed-out
used dollar bills.
Another scene. A pick-up
truck races into the same
square. A man on the
back tosses a bin
liner to the ground.
The truck roars off.
Passers-by examine the
bag. They rip the plastic
and tip out the contents. Six
human heads spill out.
Another. At a packed QEII con-
ference centre in London, a group
of mostly men in suits file on to the
stage. They are the directors of HSBC.
On a giant screen, the bank’s annual
results are displayed. Turnover is up,
profits are up. Mention is made of the
underlying strength of HSBC, its interna-
tional reach and size.
Questions are taken. None
is challenging. A point is
raised about executive
pay. It’s easily dealt with.
Votes are taken according
to a show of hands, and
universally carried. Minutes
later, the shareholders’
annual meeting at HSBC is over.
Three incidents — each differ-
ent, one horrific, all are said to be linked.
They join bank and client, HSBC and the
Sinaloa drugs cartel. The men who made
the deposits with the custom-made cases
are allegedly members of the same crime
organisation as those who decapitated
the six. They make their living from shift-
ing industrial quantities of drugs to the
US, and instilling terror in those who dare
to cross them or investigate them. To
enforce the message, they post videos of
their most gruesome slayings.
If quizzed, the HSBC hierarchy would
always condemn the Sinaloa’s practices —
of course they would. But these were
their customers. They were inextricably
tied: the one provided valuable services
to the other, and netted considerable
profits as a result.
HSBC, led from 2003 to 2010 by Ste-
phen Green, an ordained priest and
advocate for “ethical capitalism”, had
taken a decision that it wanted to be the
biggest bank in the world. In 2002, it was
named the best-run bank in the world.
Now it wanted to go a stage further.
To that end, it bought banks in the
emerging markets. One of those was Bital,
the fifth-largest bank in Mexico. So anx-
ious was HSBC to gain a foothold in the
country that the acquisition was given the
codename “Project High Noon”.
Warnings about Mexico — fears that
Bital was badly managed, that it had next
to no compliance, and that its customers
were concentrated in the drug heart-
lands of northern Mexico — were ignored.
HSBC would bring its own management
to bear and everything would be fine —
Bital would soon be sorted out.
It never happened. Instead, as HSBC
launched a massive sales push across the
country, rebranding itself “HSBC Mex-
ico” and building a new tower in Mexico
City — complete with “waterless urinals”,
according to the blurb — the Sinaloa car-
tel, led by the fearsome Joaquín “El
Chapo” Guzman, took full advantage of
the arrival of the “world’s local bank”.
The attention of the bank’s bosses in
London was elsewhere as HSBC went into
expansion overdrive, buying Household,
the US consumer lender, hiring invest-
ment bankers and “flag planting” — add-
ing more banks across the globe.
Within the group, “High Noon” was
soon a star, adding thousands of new
accounts and taking in mountains of
cash. That those deposits were in crum-
pled dollars was never questioned — not,
at least, by the high-ups at the bank’s Lon-
don HQ. Neither were the customers,
many of whom were running small busi-
nesses in up-country Mexico, close to the
US border. They would fill out forms, say-
ing what they expected their income lev-
els to be — and promptly deposited sums
that were a multiple of those.
On it went, this unlikely, undeclared
marriage between the bank that prided
itself on its discipline and the most bar-
baric of criminal organisations. HSBC
doubled in size, from 171,000 to 330,000
employees; subsidiary businesses, whichmove against HSBC. By then, however,
Green had left the bank. In late 2010, he
was approached by then-cabinet secre-
tary Jeremy Heywood and prime minister
David Cameron to be a minister. Green
was made a life pee and joined the senior
ranks in Whitehall.
In 2012, when Green helped arrange a
trade mission by Cameron to Mexico. As
the prime minister stood in the garden of
the Mexican president’s residence and
heard the former HSBC boss deliver a
speech about the importance of Mexico
to the UK, Mexican government officials
nearby were poring over the bank’s
records for the period of his reign and
supplying material to investigators in the
US.
At the time of the US findings, HSBC
expressed its regret at its failures. Green
said he he shared that regret. Gulliver
said: “What happened in Mexico and the
US is shameful, it’s embarrasing, it’s very
painful for all of us in the firm.”
Official emails and briefing notes show
how much the Americans wanted to
prosecute HSBC and its executives. Furi-
ous lobbying, not least by then-chancel-
lor George Osborne, that the resulting
ripple effect would lead to “global finan-
cial disaster” saw them back down and go
for a deferred prosecution agreement
and a $1.9 billion fine. By growing so big,
HSBC had made itself too big to jail.
It’s an episode that shocks and reso-
nates still. No banker went to jail over the
financial crisis in 2008, no banker went
to jail for facilitating money laundering
for the Sinaloa. El Chapo did go to prison,
but the bank that helped him wash his
cash was fined five weeks’ profits. As part
of its settlement, HSBC promised to
reform its ways. Last December, it was
fined again, £63.9 million by the UK
Financial Conduct Authority, for “serious
weaknesses” in its anti-money-launder-
ing processes.
To a company like HSBC, such a charge
is the cost of doing business. We encour-
age our corporations to grow, but what if
they are so big, they cannot manage
themselves properly? Until bank-
ers go to jail, there will be more
scandals like 2008 and HSBC
in 2012.Too Big to Jail by Chris
Blackhurst is published by
Macmillan on June 9ILLUSTRATION: PETE BAKERTHE GHOST BANK IN
AN OFFSHORE HAVENEl Chapo had a problem.
Once he had got his drug dollars
from the US, and deposited safely in
HSBC in Mexico, they were held in
peso-denominated accounts. He
wanted them switched back into
dollars, the universal, less volatile
currency.
HSBC afforded the perfect
solution: the “Cayman Islands branch
of HSBC Mexico”, enabling Bital’s
customers to hold dollar accounts in
the secretive offshore haven. After
“High Noon” and the purchase of
Bital, the Caymans branch of Bital
had been renamed HSBC Mexico and
continued to operate the licence.
Except there was no actual HSBC
Mexico branch in the Caymans; it was
all done from HSBC in Mexico City.
The bank was - perfectly legally -
able to bypass the Mexican rules
forbidding residents from holding
dollar accounts in Mexico. Officially
— on paper, on electronic screens —
they were held in the Cayman
Islands. In next to no time, more than
60,000 accounts were opened at the
“Cayman Islands branch of HSBC
Mexico”, serving 50,000 customers
with total assets approaching $2.1
billion.
The ever-helpful HSBC staff, who
never went to the “Cayman Islands
branch of HSBC Mexico” because
there was no such place, would open
accounts there and transfer the
balance — and the pesos had
switched to dollars. They would do all
the paperwork, fill out the forms, and
if the client wanted to go further and
form a Cayman Islands shell
company, they would do that as well.
As for supplying the security
details, that wasn’t a problem either.
At least 15 per cent of the accounts,
according to internal HSBC findings,
contained no detail on the account
holder that could be checked.
Later, under scrutiny, one HSBC
compliance officer admitted that the
accounts were being “misused by
organised crime”. Some 7,500
accounts had no files at all. “How do
you locate clients when you have no
file?“ noted one bank executive.
As for the rest of HSBC, it did not
know what was going on.
HSBC in the US, for
example, had no idea the
accounts in the Caymans
were so dodgy.
As they saw it, they
were dollar accounts,
same as dollar accounts
anywhere else in the
bank.Until
bankers
go to jail,
there
will be
more
scandals
like 2012
all required managing, rose from 417 to
2,277. Meanwhile, El Chapo was cement-
ing his position as the world’s No 1 drug
lord. On a single visit to an HSBC branch
in Mexico, one of his couriers deposited
$933,000 in dollar bills, in 18 bundles of
$50,000 plus the remaining $33,000.
The Mexican authorities were suspi-
cious. They inspected HSBC branches
and observed the customers turning up
with specially made pouches. They came
into possession of a recording of a drugs
leader saying HSBC was “the place to
launder money”.
The American authorities, too, could
not help but notice the truckloads of dol-
lar bills brought by HSBC from Mexico to
the US. In Mexico, it was taking in more
dollars in cash than all the other Mexican
banks combined; in the Cayman Islands,
its clients were sitting on billions of dol-
lars in 60,000 newly opened accounts.
Separately, investigations by a New
York cop called Frankie DiGregorio and a
West Virginia public prosecutor, Bill
Ihlenfeld, pointed to a breakdown in con-
trols at HSBC and it being targeted for
money laundering on a vast scale. To the
consternation of officials, HSBC seemed
oblivious, installing as head of compli-
ance in the US Lesley Midzain, a Cana-
dian lawyer with little experience in
that area.
When a whistleblower, Everett
Stern, started telling the CIA what
he was uncovering while at HSBC,
US law enforcers and bank supervi-
sors said “enough”. They worked
with their Mexican equivalents toIn an extract from his new book, Chris Blackhurst examines the hidden link between HSBC and the Sinaloa
drugs cartel. Both harboured ambitions to be the biggest players in their respective fields. To the fury of US
and Mexican authorities, bank and drug mobsters were able to assist each other in achieving their aims
Banking
the
Narcos
Stephen Green
was at the helm
as HSBC
expanded