US Considers Filing Criminal Charge Against HSBC Holdings PLC Unit that May Void Deferred Prosecution Deal

The deferred prosecution deal between a HSBC Holdings PLC (HSBC) unit and the US government is now at risk as prosecutors consider whether to file a criminal charge against the bank. It was in 2012 that the HSBC said it would pay $1.92B to resolve a money laundering investigation involving its top executives and lax oversight that allowed drug cartels and terrorists entry into the U.S. financial system. HSBC admitted that it did business with sanctioned countries, such as Iran, and helped Mexican drug cartels launder funds.

As part of the deal to avoid prosecution, the bank agreed to retain an independent monitor to make sure that it complied with anti-money laundering requirements. HSBC is still on probation.

Now, however, the Justice Department is looking into whether the bank has broken any U.S. laws since the deferred prosecution deal was put in place. That deal includes a section stating that HSBC could still be held responsible for its conducted related to the money laundering charges.

The potential criminal charge is over the fraud case brought in July against Mark Johnson, HSBC’s ex-foreign-exchange cash trading head in London, and Stuart Scott, also an ex-HSBC employee. The two men are accused of wire fraud and conspiracy involving a forex transaction. They allegedly rigged prices at a client’s expense so that the bank could profit.

Johnson and Scott are the first two individuals charged in the US government’s ongoing probe into currency manipulation. They are accused of conspiring to avail of insider information about one company’s plans to sell a portion of its stake in a subsidiary in India. HBSC was retained to trade about $3.5B in sale proceeds to pounds.

However, Scott and Johnson allegedly started purchasing pounds days prior to the sale so that the pound’s price would jump up. They are accused of encouraging the client to make the deal at 3p to supposedly obtain a better rate when, in fact, there was less liquidity at that time. The government said that men made about $8M because of their actions.

Scott’s lawyers have denied the criminal allegations. Johnson has pleaded not guilty.

The alleged misconduct would have taken place before HSBC signed its deferred prosecution deal with the U.S. government. A law firm retained to review Johnson’s trades found that the conduct wasn’t illegal. Prosecutors disagreed. They said that HSBC failed to impose disciplinary measures over the matter.

Although voiding a deferred prosecution deal is not common, in 2015, the DOJ did just that with the one it had UBS group AG (UBS). The Swiss bank signed a non-prosecution agreement in 2012 and admitted to illegal conduct on its forex desk.

UBS and other banks were accused of rigging benchmark interest rates that impacted loans and derivatives. The government ultimately decided that the bank’s misconduct was serious enough to warrant cancelling the earlier deal even though UBS had self-reported its involvement in rate rigging,

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U.S. Said to Weigh HSBC Charge That Could Upend 2012 Deal, Washington Post/Bloomberg, September 8, 2016

HSBC Holdings Plc. and HSBC Bank USA N.A. Admit to Anti-Money Laundering and Sanctions Violations, Forfeit $1.256 Billion in Deferred Prosecution Agreement, DOJ, December 11, 2012

HSBC Forex trading head Mark Johnson pleads not guilty in first criminal charges from DoJ FX probe, Leaprate, August 29, 2016

FBI arrests senior HSBC banker accused of rigging multibillion-dollar deal, The Guardian, July 20, 2016