A US fine for anti-money laundering rule breaches could cost HSBC significantly more than $1.5 billion and is likely to lead to criminal charges, Europe's biggest bank said on Monday. HSBC said the US investigation had damaged the bank's reputation and forced it to set aside a further $800 million to cover a potential fine for breaches in anti-money laundering controls in Mexico, adding to $700 million put aside in July.
"It could be significantly higher," Chief Executive Stuart Gulliver told reporters on a conference call, saying the latest provision was based on discussions with the various US authorities involved in the probe. The timing of any settlement is in the hands of regulators and is likely to involve the filing of corporate criminal and civil charges, the bank said.
A US Senate report in July criticised HSBC for letting clients shift potentially illicit funds from countries such as Mexico, Iran, the Cayman Islands, Saudi Arabia and Syria. HSBC had warned earlier in the year it could face criminal or civil charges as part of the investigation.
The London-based bank has said the issue was "shameful and embarrassing" after the report criticised a "pervasively polluted" culture and said HSBC's Mexican operations had moved $7 billion into its US operations between 2007 and 2008. "The report undoubtedly caused considerable reputational damage to HSBC. The extent to which that has resulted in loss of business is hard to measure, but it has undoubtedly damaged our brand," Gulliver said.
He said a number of staff had left the firm as a result of the investigation and a number had had pay clawed back. HSBC shares closed down 1. 3 percent at 61 8 pence, slightly weaker than a fall in the European bank index.
HSBC said a deferred agreement was not certain, however, and authorities have "substantial discretion" to do what they want. The issue is another blow for the reputation of British banks, after rival Barclays was fined $450 million in June for rigging Libor interest rates. The industry has also had to set aside more than 12 billion pounds to compensate UK customers for mis-selling insurance products. HSBC reported an underlying profit - after stripping out the impact of disposals and changes in the value of its own debt - in the July-September quarter of $5.0 billion, up from a revised $2.2 billion a year earlier.
It was helped by a bigger-than-expected drop in losses from bad debts and a solid performance by its investment bank arm. The bank said its trading performance in October had been "satisfactory". Underlying operating expenses rose by 16 percent in the quarter from a year ago due to higher compliance and regulatory costs, which it said amounted to $200 million to $300 million.
Gulliver is well into a three-year restructuring plan to streamline the bank and he said he expects to surpass his target of cutting annual costs by $3.5 billion, after driving through $3.1 billion of savings already. But subdued revenue growth and the higher compliance costs left its underlying cost/income ratio at 63.7 percent in the third quarter, well above his 48-52 percent target. Gulliver said hitting that was "proving challenging" but he remained committed to delivering it by the end of 2013.
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