HSBC Bank USA: Anti-Money Laundering and Terrorist Financing Prevention

Introduction and Mission Statement

The threat of terrorism and international crime is more than present in today's world. Terrorist and criminal threats appear to have proliferated in recent years, making an understanding of their sources of funding crucial to attempts to control this threat to order and stability. In an effort to combat this risk, the federal government of the United States has charged banking institutions with protecting, monitoring, and reporting on financial activity that may aid terrorists and criminals. HSBC Bank USA takes this charge very seriously, both because of its own institutional risk and out of a sense of social responsibility.

HSBC Bank USA, like other American banks, is subject to reputational, operational, and legal risks due to the threat of terrorist and criminal activity. To mitigate these risks, the bank strives for compliance within the legal framework set forth by the USA PATRIOT Act and the Bank Secrecy Act. Compliance requires the creation of a written Anti-Money Laundering (AML) program, which includes the designation of a compliance officer, ongoing employee training, designation of controls (including due diligence terms), and an independent audit function. Compliance, however, forms only the most limited aspect of HSBC's efforts, as the institution actively works beyond the base requirements set by national and international law.

HSBC Bank USA makes additional strides to improve upon compliance requirements. To do this, HSBC focuses on technology issues, including new challenges and advances as well as data quality and filtering concerns. Maintaining a secure, affordable, and dependable technology system is also crucial. HSBC must also grapple with internal operational changes brought on by new regulations. Matters of cost, business management, and personnel management are all concerns. By staying abreast of new issues and developments and communicating with other financial institutions, HSBC Bank USA intends to define itself as a leader within the industry and, within that leadership role, to help define financial security in the 21st century.

HSBC Bank USA is clear in its responsibilities as a financial institution. HSBC must meet the expectations of its customers, shareholders, and colleagues without neglecting the greater social responsibility inherent in banking. In other words, HSBC must be a successful business while also protecting itself and others against criminal elements.

This is no easy task, because it requires HSBC to both defend its own institutions against financial attack while simultaneously waging an offensive against criminal and terrorist threats in order to limit their financial resources.

HSBC Bank USA, as part of HSBC International and The Wolfsberg Group, commits itself to assisting governments in fighting terrorism and money laundering. Cooperation in matters of prevention, detection, and information sharing is key. By working together with financial institutions, HSBC Bank USA will forge new relationships that strengthen business opportunities. At the same time, these relationships will protect communities and other stakeholders by monitoring finances that could be used for illicit purposes.

HSBC's goals are supported by strong company values. HSBC strives to: develop lasting ethical relationships with clients; provide customer service that surpasses expectations; maintain the highest standards possible in areas of integrity; promote quality and competence in all dealings; pursue distinction and efficiency through communication and teamwork; and meet the challenges of terrorism, technology, and social responsibility head-on.

As a regulated financial institution, HSBC Bank USA has an important role to play in furthering both domestic and international efforts against money laundering and terrorist funding. Transactions involving money laundering or terrorist financing expose a financial institution to significant reputational, operational, and legal risk — risk that threatens the core functions of business and a bank's ability to serve its customers.

Compliance with federal standards requires many new functions within American banks, and HSBC Bank USA is no exception. The training of new personnel to participate in the security structure adds to the already complicated corporate structure of HSBC. Additional funding, technology investments, and risk assessment processes are also necessary and difficult to sustain over time.

HSBC Bank USA and other financial organizations have the additional responsibility of protecting the public and their customers. Through governmental cooperation and adherence to federal standards, banks can contribute to the safety of the global community and, ideally, help prevent terrorism and criminal activity. At the same time, banks must be diligent in protecting client information. Issues concerning the rights of the individual — particularly the protection of customers' financial and personal information — are critically important in an era when identity theft is an additional and growing concern.

The Risk of Money Laundering and Terrorist Financing in Banking

The banking industry plays an intricate role in the prevention and handling of money laundering and terrorist funding. Every bank must assess the risks associated with these critical areas of social, political, and financial importance. Additionally, every bank must work to understand the intricacies of money laundering and terrorist financing and collaborate with others in the industry to protect themselves and their customers.

HSBC USA recognizes the operational, legal, and reputational risks of working in the banking industry. Operational risks — including inadequate AML programs and regulatory problems relating to such programs — can hamper a bank's ability to do business. The related legal risks of failing to meet federal standards are also of major concern to the senior management staff at HSBC USA. Despite these considerable concerns, it is reputational risk that poses the greatest threat to bankers. Losing public trust through association with illicit financial dealings is the most dangerous outcome, because a bank's trustworthy reputation is closely tied to its commercial success. Through all of these threats, HSBC also considers its social responsibility to both its clients and the broader public in matters of money laundering and terrorist funding.

Since the events of September 11, 2001, the United States government has taken all aspects of terrorist financing and money laundering very seriously. Terrorist organizations attempting to funnel resources to a common source will inevitably attempt to use some form of financial institution. If allowed to prosper, money laundering by terrorists "could lead to a shift of economic power to organized crime, which could erode our political and social systems."

The banking industry is in a critical position to both identify and intercept funds intended for illegal or illicit use, both within the United States and at the global level. Banks are also at the forefront in recognizing and reporting suspicious and unusual client activity. Seeing this link, many governments — including the United States government — have placed requirements on financial institutions to protect the greater good.

Banks are responsible for keeping lists of questionable recipients, monitoring transactions, and filtering immense amounts of data to identify potential risks. Under current regulations, banks must continue to meet AML program requirements and improve upon their methods to combat new techniques of criminal ingenuity, while simultaneously respecting the privacy and rights of clients. These actions necessitate an organization-wide effort and impose demands on other business functions.

Financial institutions glean little direct reward — at least not in a business or financial sense — for implementing effective prevention methods. However, HSBC Bank USA and other individual banking institutions are at risk from their associated responsibilities and can reduce that risk through effective risk management and successful AML programming. Among the risks that HSBC USA and other financial organizations must contend with are operational, legal, and reputational risks.

Operational risk is a significant factor, particularly where a financial institution has not committed the time and money necessary for proper controls. Under current laws, financial institutions with insufficient AML programs are likely to face regulatory fines. Business disruption is a second reason why HSBC Bank USA cannot afford to be without an adequate AML program; disruption caused by a formal investigation can be costly in both time and money. As such, HSBC Bank USA must continue to devote sufficient resources to the identification and measurement of operational risk.

Legal risks also pose a serious threat to a banking organization. Such risks can be closely associated with operational risks, though they often require more substantial financial resources to address. Legal risks might take the form of lawful action against senior management for lack of due diligence or other misconduct. The largest legal risk to HSBC Bank USA is the risk of non-compliance under federal regulation, and the legal costs of defending the organization or individuals within it can be sizable.

Those in leadership positions at HSBC Bank USA — including senior management and the board of directors — are trusted and respected members of both the organization and the industry. It is highly unlikely that they would knowingly become involved in illegal activities. However, the complex nature of compliance risk and the high expectations within the banking industry make it possible that some legal matter could be overlooked.

Chief Compliance Officers are at particular risk due to the nature of their position and must be especially diligent in maintaining a thorough understanding of compliance expectations. Additionally, Chief Compliance Officers and the operations department should be aware of the current weaknesses within their own AML programs. In an effort to minimize these risks, HSBC Bank USA has recognized the need for more purposeful measurement and management of compliance risk.

Legal and operational risk can quickly hamper the activities of any bank. However, it is reputational risk that poses the greatest long-term threat to HSBC Bank USA. Banks associated with money laundering, terrorism, and criminal activity in the media experience severely negative responses to their brand. Since trust is one of the most valued attributes in the banking industry, the public perception that a bank is lax on matters of terrorism and crime can essentially destroy a bank's ability to conduct business.

Creating an efficient AML program is the best way for HSBC Bank USA to address these internal pressures and risks. HSBC recognizes that it plays an important role in the fight against terrorism and that by addressing these risks and managing a well-run organization, it protects both itself and the community from harm.

AML Requirements and HSBC Compliance

Under the Bank Secrecy Act (BSA) and the USA PATRIOT Act, American banking institutions are held to specific rules concerning the monitoring and prevention of money laundering and terrorist funding. They are both encouraged and expected to play a major role in prevention by conforming to and improving upon these regulations. HSBC Bank USA, as part of HSBC International and The Wolfsberg Group, supports these measures while also aiming to protect the rights of its clients.

Anti-money laundering (AML) programs are the primary mechanism by which banks manage data to prevent illicit use of funds. AML programs are required under current federal banking law. The key features of a banking AML program include: committing the program to writing; developing internal policies, controls, and procedures; designating a compliance officer; implementing ongoing employee training; and instituting an independent audit function to test the program itself. Controls concerning due diligence are also required. The methodology of these programs leads to the submission of Suspicious Activity Reports (SARs), perhaps the most important tool in identifying and preventing illegal financial activity.

The Bank Secrecy Act was initiated by Congress in order to prevent financial services — such as those offered by banks — from being used as intermediaries in efforts to hide or move money intended for illegal or criminal activities. The BSA placed controls and monitoring expectations on banks, giving them the responsibility of identifying when customer accounts were being used in a manner that suggested suspicious activity.

In October 2001, following the terrorist attacks of September 11, the PATRIOT Act amended the BSA in order to strengthen the actions and reporting requirements of banks. The PATRIOT Act required banks to conduct increased due diligence. Extreme pressure — both social and legal — was placed on banks to improve their monitoring and identification processes. Additionally, security was increased to regulate interaction with foreign entities and to control account opening in the United States. In essence, banks were drafted into the service of the American government in a manner not unknown to European and Asian countries. HSBC has since entered into a written agreement with the Federal Reserve establishing its intent to meet these compliance standards and requirements.

The main area of bank compliance under the USA PATRIOT Act is the adoption and management of an AML program. The designation of a compliance officer, ongoing employee training, and an independent audit function are the main tenets of such a program, which must be developed in writing and must outline internal policies, procedures, and controls.

Corporate-level policies and procedure guidelines should address: clearly defined explanations of terrorist financing, money laundering, and identification; the roles and responsibilities of staff and management; the AML training program; maintenance of and current listings of watched or restricted individuals; AML risk assessment methods; controls on account-opening procedures; controls on monitoring and reporting suspicious activities; information-sharing concerns; and compliance with the Office of Foreign Assets Control (OFAC).

Matters of due diligence are among the top priorities of HSBC Bank USA and other American financial institutions. In accordance with The Wolfsberg Group, HSBC International and its subsidiaries acknowledge that clients and customers who pose a greater risk will be subject to greater due diligence. This risk-based approach allows HSBC Bank USA to address high-risk banking activities — including electronic banking, wire transfers, and correspondent banking — with a higher level of due diligence in order to mitigate risk. Additionally, all banking matters are subject to the identity and verification due diligence standards required by the USA PATRIOT Act.

Where enhanced due diligence is warranted, HSBC Bank USA has established principles for dealing with clients in a straightforward, fair, and secure manner. When considering the initiation of a banking relationship, HSBC will consider a client's location, nature of business, customer base, and background. A business's products and services, history, and anti-money laundering controls (where applicable) will also be considered. The industry-promoted concept of "Know Your Customer" (KYC) allows banks like HSBC to ensure that due diligence is undertaken with a clear understanding of the level of risk associated with a given client.

Where a high level of due diligence is warranted, banks are likely to address individuals or groups that are suspected of criminal activities. Suspicious Activity Reports (SARs) are the primary tool by which banks identify such individuals to the federal government. Monitoring allows HSBC to identify changes in activity, high levels of questionable transactions, or activity not linked with certainty to a legal income source.

Cash transactions over $10,000 are subject to reporting, as are frequent wire transfers. Banks must also monitor and report on monetary instrument records and velocity of funds reports. Monitoring requires a significant amount of personnel and organizational support, since banks bear the responsibility of identifying which cases warrant a SAR in most situations. Each individual bank must delineate controls and procedures for determining which potentially unusual or suspicious transactions merit further investigation — an essential task, as the number of questionable transactions is large, while few are actually criminal. This task is aided by banks' due diligence procedures, since knowing the business and customer allows banks to better understand the financial transactions associated with them.

HSBC Bank USA and its affiliates aim to continue their work with government and the international community to fight terrorism and crime without sacrificing the rights of the individual. Supporting the identification of criminal transactions should not hinder legal businesses, yet it sometimes does. Through technology, communication, and cooperation with customers, HSBC intends to protect customers' identities and personal information through clear internal guidelines and controls on information sharing.

Conclusion

Banks are held to a certain level of responsibility in today's global society. Though HSBC USA is committed to its clients in the United States, it recognizes that its clients have international needs. It also recognizes that it is unreasonable to expect that customers will not seek to engage in activities considered risky in terms of the banking community. The role of the bank, then, is to provide customers with the best solutions for their needs — in this case, a safe method of banking that reduces the risk of enabling terrorists and criminals to benefit at the same time.

The complex needs of the industry call for an offering of services with due diligence calibrated to the level of risk involved in each activity. This methodology prevents the ordinary customer from being burdened by excessive due diligence while allowing HSBC to focus attention on higher-risk activities in order to identify those that may be illegal. At the same time, HSBC must assess its own risk in terms of reputation, legality, and organization. By internally managing controls that address these risks, HSBC can concentrate on the bigger picture of offering the best services to its customers without placing its organization or customers in harm's way.

Meeting the legal requirements set forth by the United States government is the first step in reducing risk to both HSBC and its customers. Taking the AML program seriously — and not merely meeting minimum standards — appears to be crucial in actually achieving meaningful prevention. Meeting compliance also allows banks to continue business ventures uninhibited by lengthy governmental and legal proceedings. HSBC must continually update and maintain its own AML program to remain fully operational and capable of serving its customers. Serving customers and preventing terrorism and money laundering are closely linked, given the deep relationship between reputation and service in banking.

Advances in technology have made it possible for HSBC Bank USA and others to pursue potential violations and criminal transactions while minimizing disruption to ordinary customers. While current technology is far from perfect in detecting all and only questionable transactions, it enables HSBC to monitor activity without committing excessive manpower to the task. Additionally, technology allows HSBC to identify divergence in the behavior of existing clients, potentially flagging new criminal activity among individuals who have previously left no suspicious trail.

Internal changes and innovations have allowed HSBC to adapt effectively to the legal and political changes of recent years. Challenges such as the necessary hiring of new personnel and expanded training have introduced new costs to HSBC as an organization. However, HSBC has managed to reframe the negative aspects of compliance as positive ones by reconceiving the AML program as a risk assessment and protection tool. With risk assessment tools in place and improving, HSBC Bank USA is positioned to prosper even under the new requirements and other legal demands.

HSBC Bank USA has additionally positioned itself at the cutting edge of changes within the banking industry. As a business, it is ready to take on new challenges and offer new tools to its customers. As a member of the banking community, HSBC is eager to open communication channels and set the pace for financial institutions across the globe. Its approach of embedding corporate social responsibility directly into company procedures makes HSBC Bank USA a leader in the field of banking — and it is this leadership that the organization hopes to sustain in the areas of money laundering and terrorist funding prevention.

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