HSBC has agreed to pay a record US$1.92 billion (NZ$2.3 billion) fine to settle a multi-year probe by United States prosecutors, who accused Europe's biggest bank of failing to enforce rules designed to prevent the laundering of criminal cash.
HSBC Holdings admitted to a breakdown of controls and apologised in a statement overnight announcing it had reached a deferred-prosecution agreement with the US Department of Justice, as first reported by Reuters last week.
"We accept responsibility for our past mistakes. We have said we are profoundly sorry for them, and we do so again. The HSBC of today is a fundamentally different organisation from the one that made those mistakes," said Chief Executive Stuart Gulliver.
"Over the last two years, under new senior leadership, we have been taking concrete steps to put right what went wrong and to participate actively with government authorities in bringing to light and addressing these matters."
The deferred prosecution agreement, when detailed by US Justice Department officials later today, could yield new information about a failure at HSBC to police transactions linked to Mexico, sources familiar with the matter said.
Details of those dealings were reported this summer in a sweeping US Senate probe.
The Senate panel alleged that HSBC failed to maintain controls designed to prevent money laundering by drug cartels, terrorists and tax cheats, when acting as a financier to clients routing funds from places including Mexico, Iran and Syria.
The bank was unable to properly monitor US$15 billion (NZ$18 billion) in bulk cash transactions between mid-2006 and mid-2009, and had inadequate staffing and high turnover in its compliance units, July's report said.
HSBC said it expected to also reach a settlement with British watchdog the Financial Services Authority. The FSA declined to comment.
US and European banks have now agreed to settlements with US regulators totaling some US$5 billion (NZ$6 billion) in recent years on charges they violated US sanctions and failed to police potentially illicit transactions.
No bank or bank executives, however, have been indicted, as prosecutors have instead used deferred prosecutions - under which criminal charges against a firm are set aside if it agrees to conditions such as paying fines and changing behaviour.
HSBC's settlement also includes agreements or consent orders with the Manhattan district attorney, the Federal Reserve and three US Treasury Department units: the Office of Foreign Assets Control, the Comptroller of the Currency and the Financial Crimes Enforcement Network.
HSBC said it would pay US$1.921 billion (NZ$2.3 billion), continue to cooperate fully with regulatory and law enforcement authorities and take further action to strengthen its compliance policies and procedures. US prosecutors have agreed to defer or forego prosecution.
The settlement is the third time in a decade that HSBC has been penalised for lax controls and ordered by US authorities to better monitor suspicious transactions. Directives by regulators to improve oversight came in 2003 and again in 2010.
Last month, HSBC told investors it had set aside US$1.5 billion (NZ$1.8 billion) to cover fines or penalties stemming from the inquiry and warned costs could be significantly higher.
Analyst Jim Antos of Mizuho Securities said the settlement costs were "trivial" in terms of the company's book value.
"But in terms of real cash terms, that's a huge fine to pay," said Antos, who rates HSBC a "buy".
HSBC shares dipped 0.3 per cent in early London trading to 639 pence, in line with a slightly weaker European bank index. Its Hong Kong stock nudged up 0.3 per cent to HK$79.70.
"It has been damaging for the brand, albeit not as bad as it might have been," said Ian Gordon, analyst at Investec Securities in London.
"Is it absorbable? Yes. Is it significant? Yes. But in the absence of a broader attack on the business structure or individuals, that explains why the market reaction has been relatively muted today and has been since the allegations came out," he added.