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Senate report: European bank exposed US financial system to Iran, drug cartel transactions

A scathing U.S. Senate report charged that Europe's largest bank exposed the U.S. financial system to money laundering by Mexican drug cartels as well as potentially illicit transactions involving Iran and other countries. 

The extensive report on London-based HSBC Holdings PLC by the Senate Permanent Subcommittee on Investigations was released ahead of a hearing on Capitol Hill Tuesday morning. At that hearing, Irene Dorner, president and CEO of HSBC Bank USA, said "we deeply regret and apologize" for the lapses. 

Dorner and other HSBC executives say the bank has made deep changes to its policies and corporate culture to prevent illicit use of the bank. London-based HSBC, which is Europe's largest bank, changed its senior management last year. The chief compliance officer of Britain's HSBC also said Tuesday he was stepping down from that position -- though David Bagley told the Senate panel he will remain at HSBC.

The Senate probe focused on the bank's key U.S. affiliate, HBUS, and said U.S. regulators knew the bank had a poor system to detect problems but failed to take action. 

The sweeping allegations include accounts that two affiliates for years sent thousands of transactions through HBUS "without disclosing links to Iran" even though they were supposed to. For that period from 2001 to 2007, an auditor so far has uncovered nearly 25,000 such transactions involving billions of dollars. It's unclear whether the transactions violated U.S. law, but the Senate report said that by evading safeguards, the affiliates "may have facilitated transactions on behalf of terrorists, drug traffickers or other wrongdoers." 

The report also cited "potentially prohibited transactions" among the U.S. and other affiliates involving Burma, Cuba, North Korea and Sudan. And HSBC's U.S. division provided money and banking services to some banks in Saudi Arabia and Bangladesh believed to have helped fund Al Qaeda and other terrorist groups, the report said. 

HSBC executives brushed off complaints from other bank employees, so that the problems persisted for eight years, the report says. 

The U.S. Justice Department said it is conducting a criminal investigation into HSBC's operations but declined to confirm that the bank is in settlement talks. 

HSBC's net income last year was $16.8 billion. It operates in about 80 countries around the world. Its U.S. division is among the top 10 banks operating in the United States. It has assets of roughly $210 billion in its U.S. operations. 

Money laundering takes profits from the trafficking of drugs, arms or other illicit activities and passes them through bank accounts to disguise the illegal activity. 

The bank used its U.S. operation as a "gateway" into the U.S. financial system for other HSBC affiliates, Sen. Carl Levin, the subcommittee's chairman, told reporters Monday. Because of lax controls against money laundering, HSBC Bank USA "exposed the United States to Mexican drug money" and other suspicious funds, Levin said. 

The report indicates the drug cartels laundered money through the bank's U.S. division from 2002 through 2009. It cited a string of red flags, including the fact that the bank's Mexican affiliate transported $7 billion in U.S. dollars to the U.S. affiliate in 2007 and 2008, an amount so large that authorities repeatedly raised concern that it "only" could have been fueled by "illegal drug proceeds." 

"In an age of international terrorism, drug violence in our streets and on our borders, and organized crime, stopping illicit money flows that support those atrocities is a national security imperative," Levin said Monday. 

The bank said in its statement that it changed its senior management last year and has made changes to strengthen its compliance with rules to prevent money laundering. 

"We ... recognize that our controls could and should have been stronger and more effective in order to spot and deal with unacceptable behavior," the statement said. 

Levin also blasted the federal agency supervising the bank's U.S. operations, the Office of the Comptroller of the Currency. He said the agency "tolerated" HSBC's weak controls against money laundering for years. 

Thomas Curry, who heads the Office of the Comptroller of the Currency, also will testify at Tuesday's hearing. 

Compliance with anti-money laundering laws "is crucial to our nation's efforts to combat criminal activity and terrorism," Curry said in a statement. He said the agency expects banks to have adequate programs in place to comply with the laws. 

The Wall Street Journal reported Monday that HSBC and the Justice Department have been in settlement talks and an accord could be struck within weeks. 

Justice Department spokeswoman Alisa Finelli acknowledged that an investigation is under way but declined to comment on possible settlement discussions or a deal. 

The Associated Press contributed to this report.