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Exit rehab

11 Dec 2017 By Christopher Thompson

The U.S. government has given HSBC Chief Executive Stuart Gulliver an early leaving gift. A decision by the Department of Justice (DOJ) not to extend a five-year deferred prosecution agreement removes a threat to the bank’s key American banking licence. It also allows Gulliver, who steps down in February, to depart on a high.

The $1.9 billion fine HSBC paid to American authorities in 2012 for allowing Mexican drug cartels to launder hundreds of millions of dollars through its branches now looks modest: BNP Paribas forked out over $8.9 billion for similar misdemeanours three years later. But the agreement that merely deferred criminal charges against the bank spooked shareholders. It meant the U.S. government could reopen the case if any other misbehaviour came to light – and threaten HSBC’s ability to operate in the United States.

Rehabilitation was far from assured. Last year court-appointed monitor Michael Cherkasky concluded that HSBC still faced “significant challenges” in implementing effective anti-money laundering processes, according to a letter filed in a U.S. Federal court. The DOJ could simply have extended the agreement, as it did with HSBC’s Asia-focused rival Standard Chartered in November.

No one could accuse HSBC of not throwing enough money at the problem. Last year’s spending on compliance reached $3 billion, or 8 percent of total operating costs, rising 15 percent year-on-year even as other expenses flatlined. The bank has also risked upsetting customers by questioning transactions and, in some cases, closing their accounts.

Though shareholders may be spared further increases in compliance costs they are unlikely to fall much. The monitor will remain in place until at least July next year, reporting to UK regulators. HSBC’s position as a big, universal bank operating all over the world continues to make it uniquely attractive for people engaging in suspect transactions. Recent questions over its banking services for companies associated with South Africa’s Gupta family demonstrate the ongoing risks.

Yet while there may be little immediate financial boon, the agreement’s expiry removes a tail risk for investors. And Gulliver can credibly claim to have improved HSBC’s reputation, as well as its financial returns, when he hands over the reins.

 

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