Author: Azizur Rahman
27 February 2013
4 min read
HSBC is paying $1.9 billion in US money laundering penalties. The figure was reached under a Deferred Prosecution Agreement – something that is set to become increasingly common in the UK.
There was plenty of eyebrow-raising information to digest in the reports of HSBC’s massive money laundering case. The UK-based bank confirmed it would pay £1.2 billion ($1.9 billion) in what is the largest ever settlement for money laundering. Its settlement came after it admitted poor money laundering controls, accepted full responsibility for its mistakes and stated that it had spent $290M on improving its systems to prevent money laundering in the future.
When the evidence is considered, HSBC had little option but to hold its hands up and admit wrongdoing. A report by the US Senate had alleged that HSBC in the US had not treated its Mexican affiliate as high risk, despite Mexico’s extensive track record of money laundering and drug trafficking. The Mexican bank had transferred $7 billion in US bank notes to HSBC in the US. It had circumvented US safeguards designed to block transactions involving terrorists, drug lords and rogue states – including allowing 25,000 transactions over seven years without disclosing their links to Iran, providing US dollars and banking services to banks in Saudi Arabia despite their links to terrorist financing and clearing $290M in “obviously suspicious’’ travellers cheques that benefited Russians claiming to be used car dealers.
The tale is a colourful one for the reader and a cautionary one for anyone involved in banking. But it is also gives us a glimpse into the future of regulation in the UK – not simply because it involves a British bank but because it involves a device that is set to become part of British prosecutors’ armoury. The HSBC settlement was reached after it entered into a Deferred Prosecution Agreement (DPA). Although they have been used in the US for some time, it was only three months ago that the UK government announced that it would be legislating to make it possible to use them in this country. So what is commonplace in the US and was seen so spectacularly in the HSBC case will soon be reality in the UK.
A DPA involves the authorities coming to an arrangement with a company that involves any criminal prosecution being deferred on condition that the company makes changes and agrees certain terms. In the case of HSBC and its DPA, it has agreed to introduce stronger internal controls. The bank has appointed Bob Werner, previously the head of the US Treasury’s Office of Foreign Assets Control, to work as its head of financial crime compliance as part of its undertaking. A DPA effectively means that a company has a prosecution against it deferred while it meets such terms as, for example, paying a fine, removing staff that committed the offences or agreeing to have its activity monitored while it introduces anti-corruption measures to avoid repeat offending.
DPA’s have helped the US Department of Justice weed out bad practice and illegal behaviour in companies. At the same time, the UK’s Serious Fraud Office has spent time and money prosecuting companies for similar behaviour but has had only limited success. When this is considered, it becomes clear why the UK government has decided to go down the DPA route. Companies that would be likely to deny all allegations of wrongdoing if a UK trial was looming may be more likely to admit any illegal behaviour if they are able to undertake a DPA. A DPA will mean less cost and less reputation damage than a trial. Supporters of DPA’s say they offer a company a chance to take supervised action to put right its wrongs. This, they say, is more attractive to a company than risking crashing out of business beneath a growing pile of allegations of wrongdoing.
In agreeing to enter a DPA, a company has to admit any criminal behaviour. This means that individuals guilty of criminality can still be prosecuted. Critics have accused DPA’s of giving guilty executives a chance to escape prosecution but the argument against this states that anyone identified as having done wrong will not be treated any differently to the way they are now. The main difference the UK will see with the introduction of DPA’s is that companies can face less severe consequences under them. This is based on the DPA principle that there has to be an admission of guilt and a genuine will - backed with action - to put right past wrongs. If wrongdoing is discovered and the SFO considers a DPA the right course of action, it is likely that a judge will be involved in overseeing any potential agreement. In the US, there is practically a sliding scale of punishments that can be consulted prior to entering into a DPA. The UK offers no such opportunity. It is likely, however, that DPA outcomes will be attractive because of their negotiated nature
After years of expecting the arrival of DPA’s in the UK, the government has finally signalled that they are coming. When they do arrive, the UK will have to ensure that they are not merely a cop out option for companies hoping to avoid the full force of the law for their illegal activity. The DPA in the UK could become both a hugely important way of making companies clean up their act and a means of gathering the evidence needed to prosecute those to blame for wrongdoing. But one issue that has to be addressed is when does negligence become criminal activity? A company may freely admit to certain instances of wrongdoing. But will it openly admit they did them with criminal intent? And how can a DPA be framed if such a company will only admit to being careless or sloppy rather than calculating and criminal?
The DPA will change the rules of the game in the UK. But it cannot be seen as an easy way out. In fact, they could well make it even more vitally important that a company under investigation gets the right expert legal help. Experience has shown that whenever a new aspect is introduced to corporate law only the right legal advice can guarantee that anyone under investigation is not wrong-footed.
Commentators seem to agree that HSBC could have faced heavier penalties if it had not entered into a DPA. Even the most fervent of DPA detractors could not claim that HSBC was let off lightly under its agreement. In future years, it will be interesting to see how many companies that come under investigation in the UK have paid heed to what DPA’s have achieved in the US – and how it affects their response to possible prosecution.
Aziz Rahman is Senior Partner at Rahman Ravelli and its founder. His ability to coordinate national, international and multi-agency defences has led to success in some of the most significant corporate crime cases of this century and top rankings in international legal guides. He is recognised worldwide as one of the most capable legal experts regarding top-level, high-value commercial and financial disputes.