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Stuart Gulliver
HSBC chief executive Stuart Gulliver has tried in vain to distance the bank from scandal-hit rivals. Photograph: Lucas Schifres/Bloomberg News
HSBC chief executive Stuart Gulliver has tried in vain to distance the bank from scandal-hit rivals. Photograph: Lucas Schifres/Bloomberg News

HSBC sets aside further £500m for US money laundering fines

This article is more than 11 years old
Provision is more than double amount initially allocated and underscores seriousness of UK bank subsidiary investigations

HSBC will set aside an extra £500m to cover fines for alleged money laundering by its US arm when the bank releases its third-quarter results on Monday.

The provision is more than double the £445m allocated by the bank in July to cover punishments by US regulators.

The development will prove hugely embarrassing for the chief executive, Stuart Gulliver, who has tried to distance HSBC from scandal-hit rivals since taking the top post last year.

The bank, the UK's most valuable, is known for its financial strength. It burnished a reputation as one of the more conservative financial institutions in the runup to the collapse of Lehman Brothers in 2008.

But its US operations, primarily the lender Household, were caught cold by the sub-prime mortgage crash and plunged the UK listed firm into years of write-offs and regulatory probes.

The revised estimate of the bill for fines and charges by US regulators will underline the growing seriousness of investigations into the activities of UK bank subsidiaries.

Standard Chartered has also come under scrutiny for allowing terrorists and criminals access to its banking facilities, while Barclays admitted playing a part in the Libor rigging scandal. Royal Bank of Scotland is expected to be fined for its part in the Libor scandal. Barclays faces another potential fine, following claims it rigged the price of electricity in the US.

Gulliver has already apologised for "shameful" system breakdowns, which failed to stop the bank from laundering money for terrorists and drug barons through operations in Mexico.

In the summer the bank set aside $700m (£445m) for potential fines in the US and another £900m for mis-selling financial products in the UK.

Gulliver conceded that the eventual fine from the US authorities could be "higher, possibly significantly higher", after a Senate report found that its US arm had allowed it to launder money for terrorists and drug barons because of its "pervasively polluted" culture.

At the time he refused to say how much more money would have to be set aside. Many shareholders, however, were braced for regulators insisting on a much larger sum, given the strength of feeling in the US against lax controls at UK banks.

Gulliver, who took the helm last year after 30 years at the bank, lastly as head of the investment banking division, said at half-year results that the bank was reforming its "federation structure" to try to avoid a re-run of the problems in the US.

"I very much regret HSBC's past failures and very much apologise for them," he said. "What happened in Mexico and the US is shameful, it's embarrassing, it's very painful for all of us in the firm."

Executives responsible for the Mexican business have since left the bank. It is understood staff at the London HQ, on the Isle of Dogs, London, are preparing to claw back millions of pounds in bonuses paid to senior officials, who allowed billions of illegal dollars to be funnelled through the financial system.

The bank, which is expected to announce quarterly profits of £5bn, has confidently informed shareholders that it is no longer run as an operation with a presence in 80 countries "where the country head is king" but as an integrated business with four global heads to centralise standards and controls through a beefed-up compliance operation.

Insiders say it will take Gulliver longer to reform structures that have dominated the bank for decades and provided a power base for many valued senior executives.

The bank is also caught up in the Libor rigging scandal, along with several US and Swiss banks. They are accused of artificially inflating interest rates ahead of the crash to increase profits, and massaging them down in the wake of the crisis. This made it appear that their reputation was unharmed and they could access cheap funds in the market.

However, Gulliver, whose bonuses are tied to the bank's reputation, did not make provision for any fine or legal cases. Barclays has been fined £290m for Libor manipulation.

Since the summer HSBC has hired Preeta Bansal as its global general counsel for litigation and regulatory affairs, adding a third Obama administration official to support damage limitation efforts.

Bansal will help manage litigation and regulatory risk, and report to the chief legal officer, Stuart Levey, the former sanctions official in the Bush and Obama Treasury offices, who was appointed in January. In August, the bank hired Robert Werner, a former head of the Treasury department's trade and economic enforcement arm, as head of global standards assurance.

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