Financial institutions are obligated to comply with a complicated set of national and international regulations, which determine far reaching responsibilities for these institutions and their leadership. At the top of the chain are the UN Instruments and Other Relevant International Standards on Money-Laundering and Terrorist Financing (AML/TF) which eliminates every attempt to claim “we didn’t know” in case of non-compliance by involved financial institutions. Transparency and traceability of financial transactions to be able to fight money laundering and terror financing are the drivers behind a complex set of rules and bodies which set these rules and enforce compliance.
National legislation and international treaties determine further details and liabilities and there basically is no escape from the obligations to Know Your Customer (KYC) and Know Your Business (KYB). The U.S. for example, has this clearly regulated since 2003 in its requirement for all financial institutions to have a Customer Identification Program (CIP).
If that is not complicated enough, the world is filled with sanctions regimes which further place restrictions and liabilities at the financial institutions and their leadership. The U.S. Sanctions Regime targets countries and individuals for a wide range of reasons, which can include freezing assets and prohibiting financial transactions and credit facilities. Since the U.S. launched its foreign policies based on economic and political priorities to “make America great again”, one could even argue that the tariffs and trade wars are a form of sanctions without being labeled as such.
When it comes to financial transactions, there are basically three triggers which could put financial institutions in serious problems with the U.S. authorities.
- Violation of the CIP/KYC/KYB obligations.
- Violation of the AML/TF regulations.
- Violation of the sanction regimes.
Besides financial transactions by individuals and institutions under its legislation, the U.S. also claims jurisdiction over transactions and assets which are executed using the U.S. Dollar as currency. The rationale behind this is that the currency is backed by the assets of the U.S. Federal Reserve Banks and the U.S. definitely is not the only country which follows this rationale to apply jurisdiction over transactions and assets in its currency.
Although complicated in substance, the rules for financial institutions are crystal clear and there is no escape from their liabilities for transactions by their clients. Non-compliance can lead to massive fines, losing licenses or even criminal prosecution of employees and leadership members. This explains why financial institutions invest heavily in projects to optimize the KYC/KYB programs and scrutinize new and existing business and partners. In addition, financial institutions have internal auditing teams and external auditor contracts to review processes and compliance and deliver mandatory reporting.
U.K. based HSBC is no exception to this and its Sanctions Policy Statement shows crystal clear that leadership and board understood their responsibilities:
“HSBC is committed to complying with the sanctions laws and regulations of the European Union, Hong Kong, the United Kingdom, the United Nations, and the United States, as well as other applicable sanctions laws and regulations in the jurisdictions in which HSBC operates, subject to the primacy of local laws and regulations.”
A look at the recent history of HSBC also makes clear that this has not always been the case. Just in the U.S. alone, HSBC has paid a staggering amount of 6.5 billion USD in fines for violations of regulations which include a 1.9 billion USD deferred prosecution agreement in 2012 for violations of the Bank Secrecy Act, the International Emergency Economic Powers Act and the Trading with the Enemy Act. The aftermath of this deal and the findings are integrated in Mr. Trumps latest round of sanctions against Iran and their objectives.
“Foreign financial institutions risk having their own U.S. correspondent accounts shut off if they facilitate any transaction with targeted individuals and entities in these sectors.”
We should ask ourselves how credible it is that HSBC was not aware of the business relationship between Huawei and Skycom against the light of very strict regulations which require every financial institution to know their clients and their businesses. Especially since Huawei and HSBC already had a long-standing relationship at the moment that this significant credit facility was agreed. We should also challenge the credibility of claims that Senior Management was not involved in the credit facility which allegedly violated the Sanctions Regime, and even if that was the case, it is an internal matter of HSBC which could indicate once more that “stunning failures of oversight” continued long after its Deferred Prosecution Agreement.
Recent developments in the extradition case of Meng Wanzhou in Canada have shown that there is more than just a gut feeling that the claims by HSBC might not be correct. Let us remind ourselves that it is the obligation of the bank to perform dully KYC and KYB processes, and HSBC clearly did. The Global Relationship Manager responsible for the Huawei business relationship, one of the largest corporations in HSBC’s portfolio, was fully informed about Huawei’s international relationships. For example, about the fact that Huawei sold Skycom to Canicula back in 2007, more than 6 years before the meeting between HSBC and Huawei which led to the accusations by the U.S. Administration. Contrary to the claims made by the U.S. Administration, the PowerPoint presentation used during the meeting in Hong Kong between HSBC and Huawei in 2013 outlines the business relationships between Huawei, Skycom, and Canicula. Indeed, the PowerPoint presentation that is the “key evidence” for the U.S. Administration contradicts the claims by both the U.S. Administration and HSBC. These parts were just “conveniently” omitted when requesting the apprehension and extradition of Meng Wanzhou.
The claims by HSBC that Senior Executives were neither informed about the relationships between Huawei, Skycom, and Canicula, nor that they were involved in the decision-making process and risk evaluation of the disputed credit facility contain at least 2 elements that continue to surprise everyone who understands the financial markets and obligations of financial institutions. In fact, they are nothing less than admission of violation of international regulation. It is the obligation of every financial institution to have risk evaluation processes, and to have Know Your Customer (KYC) and Know Your Business (KYB) processes. How and when these processes trigger the involvement of Senior Executives is solely up the financial institution, and definitely not something their customers can be held accountable for!
Huawei challenged HSBC in the United Kingdom under the Bankers Book Evidence Act to provide the internal documents which would show indisputably to which extend HSBC was informed Huawei’s business relationships, and with that to which extend HSBC fulfilled its obligations under international regulations. HSBC declined this request. Huawei is about to challenge HSBC under similar regulations in Hong Kong and HSBC is expected to decline once again. Odd, isn’t it? It would give HSBC the appropriate opportunity to deliver the evidence that Huawei misled HSBC. But it that would be the case, it would also deliver the evidence that HSBC violated the international regulations, again!
But much more than challenging the credibility of these statements, we should ask ourselves why the allegations against Huawei’s CFO Meng Wanzhou did not trigger a full investigation into HSBC’s role in this matter! Is it because the tough stance of Trump’s administration on Iran has to take a backseat to its desire to dictate terms on China and Huawei? Did HSBC strike a deal with the U.S. authorities to facilitate the persecution and extradition of Huawei’s CFO? On any given Sunday, the facilitator of a violation of sanctions would be under investigation together with the alleged perpetrator. We have all seen footage of authorities raiding headquarters of financial institutions and the homes of their executive leaders in other similar cases. None of that in the case of alleged violations of sanctions by Huawei, just its CFO…
No investigation of HSBC, none of its Executives have been apprehended, no extradition requests. Just Huawei’s CFO. Think about it…!