Sunday, March 24, 2013
Obama's New SEC 'Sheriff.' No Conflict of Interest When it Comes to Shielding Wall Street's Pin Striped Mafia
One indelible sign of state capture by pirate corporations and the financial jackals holding sway on Wall Street and the City of London is the ease with which former "regulators" slip into plum positions with the firms whom they supposedly "regulated" as "public servants."
While the drone kill-crazy Obama regime has done yeoman's work cementing in place extra-constitutional policies first enacted by the Bush gang--only to exceed Bushist depredations by a whole order of magnitude--kool-aid sipping "progressives" and troglodytic "conservatives" have given the president a free pass when it comes to policing the financial criminals who blew up the world economy.
But when it comes to US spy agencies probing and sweeping up your financial information, well, the sky's the limit!
As Reuters reported last week, the administration "is drawing up plans" to give securocrats "full access to a massive database that contains financial data on American citizens and others who bank in the country, according to a Treasury Department document."
That Treasury plan would give secret state apparatchiks, including those ensconced at CIA, NSA and the Pentagon free reign to rummage through the Financial Crimes Enforcement Network's (FinCEN) massive database of "suspicious activity reports" routinely filed by "banks, securities dealers, casinos and money and wire transfer agencies." The FBI and DHS already have full access to that database under the Orwellian USA Patriot Act.
Under the proposal, FinCen data will be linked "with a computer network used by US defense and law enforcement agencies to share classified information called the Joint Worldwide Intelligence Communications System," according to Reuters.
And since requirements for filing SARs are "so strict," banks often "over-report," this "raises the possibility that the financial details of ordinary citizens could wind up in the hands of spy agencies," where it will live in perpetuity, "criminal evidence, ready for use in a trial," as Cryptohippie famously warned.
Got that? While Wall Street drug banks are handled with care because of the "collateral consequences" that might result from a criminal referral for laundering billions of narco-dollars, the average citizen's financial data will be fair game.
Which brings us back to Obama's anemic regulatory regime and the "sheriffs" eager to do the bankster's bidding.
Wall Street's Choice
As one of the filthiest dens of corruption in Washington, the Securities and Exchange Commission (SEC) is in a league of its own.
In late January, when the president announced he was nominating former federal prosecutor Mary Jo White to lead the Securities and Exchange Commission (SEC), The New York Times, as they are wont to do, proclaimed that the "White House delivered a strong message to Wall Street."
A rather ironic assertion considering the tens of millions of dollars "earned" defending Wall Street criminals by Debevoise & Plimpton partner Mary Jo and her millionaire lawyer husband John, a partner at the white shoe corporate litigation shop Cravath, Swaine & Moore, as Above the Law disclosed.
Keep in mind that White will soon lead an agency that for years covered-up financial crimes by routinely shredding tens of thousands of case files on everything from insider trading, securities fraud, market manipulation and the Madoff and Stanford Ponzi schemes, as a 2011 Rolling Stone investigation disclosed.
As I reported nearly three years ago during my investigation into now-convicted fraudster Allen Stanford's ties to the CIA over his role in laundering oceans of cash for the Agency's narcotrafficking assets, the SEC's Fort Worth office "stood down" multiple probes "at the request of another federal agency," which regional head of enforcement Stephen J. Korotash "declined to name."
Indeed, a 2010 report by the SEC's Office of the Inspector General found that another "former head of Enforcement in Fort Worth," Spencer C. Barasch, "played a significant role in multiple decisions over the years to quash investigations of Stanford," and sought to represent the dodgy banker "on three separate occasions after he left the Commission, and in fact represented Stanford briefly in 2006 before he was informed by the SEC Ethics Office that it was improper to do so."
Barasch eventually paid a $50,000 fine for ethics violations and "moved on."
Despite the SEC's documented history of sleaze and lax enforcement of rules that would earn the average citizen a one-way ticket to the slammer, on March 19 the Senate Banking Committee approved White's nomination by a vote of 21-1; the lone dissenter was Sherrod Brown (D-OH). A vote by the full Senate could come as early as next week and she is expected to be confirmed easily.
As a former US Attorney for the Southern District in New York (1993-2002), White has been described by corporate media as a "tough as nails" prosecutor for her role in bringing down Mafia wise guy John Gotti and for running to ground criminal mastermind Ramzi Yousef, the architect of the 1993 World Trade Center bombing. (For a gripping account of how the FBI and US prosecutor's office botched that investigation and "foamed the runway" for the mass murder of 3,000 people on 9/11, readers should train their sights on Peter Lance's exposé, 1000 Years for Revenge).
White's record when it came to holding financial criminals to account however, was even more dubious; in fact, for more than a decade she's defended them.
Times' stenographers dialed back their glowing encomiums for the Obama nominee, writing that "translating that message into action will not be easy, given the complexities of the market and Wall Street's aggressive nature."
As reliable hands on the financial beat, Dealbook reporters routinely trumpet everything from the Justice Department's sweetheart deal with drug money laundering and terrorist coddling banking giant HSBC to kissing Jamie Dimon's hem over billions of JPMorgan Chase losses last year in what were euphemistically described as a "bad bet on derivatives."
In the January puff-piece, reporters Ben Protess and Benjamin Weiser outdid themselves, claiming that with the White nomination "the president showed a renewed resolve to hold Wall Street accountable for wrongdoing."
However, a less than laudatory piece published by Bloomberg News took those fatuous claims to task. Financial columnist Jonathan Weil observed that while "The Securities and Exchange Commission couldn't get Ken Lewis on any securities-law violations after he helped drive Bank of America Corp. into the ground as its chief executive officer," the agency "is poised to get his attorney as its new chairman--and Morgan Stanley's, too."
But hey, it's not like the SEC is chock-a-block with conflicts of interest, right? Well, if a bracing read is what the doctor ordered, then turn your attention to a damning study released last month by the Project on Government Oversight (POGO). Entitled, Dangerous Liaisons: Revolving Door at SEC Creates Risk of Regulatory Capture, author Michael Smallberg takes us on a 60-page tour of insider dealing and corruption that would make a Roman emperor blush.
According to Smallberg: "Between 2001 and 2010, more than 400 SEC alumni filed nearly 2,000 disclosure statements saying they planned to represent employers or clients before the agency. These alumni have represented companies during SEC investigations, lobbied the agency on proposed regulations, obtained waivers to soften the blow of enforcement actions, and helped clients win exemptions from federal law. On the other side of the revolving door, when industry veterans join the SEC, they may be in a position to oversee their former employers or clients, or may be forced to recuse themselves from working on crucial agency issues."
Talk about an agency blind in both eyes by design!
A Counsel with 'Juice'
One of the more egregious cases which came to light was SEC's handling of a 2005 insider trading case involving former agency enforcement head, Linda Thomsen, White and her client, Morgan Stanley CEO John Mack.
Before her tenure as the agency's chief enforcement officer, Thomsen was in private practice at the powerhouse New York law firm, Davis, Polk & Wardell. During the capitalist financial meltdown, the company represented upstanding corporate citizens such as AIG, Freddie Mack, Lehman Brothers and drug-tainted Citigroup. Bulking up a stable of attorneys well-versed in regulatory matters, the firm has hired other former SEC officials, including Commissioner Annette Nazareth and Linda Thomsen.
Before sailing off to greener shores at Davis, Polk, Nazareth's claim to fame was standing up a voluntary "supervisory regime" for the largest "investment bank holding companies" who "policed" themselves by cratering the economy and costing taxpayers trillions in bailouts.
That program, the Consolidated Supervised Entity was scrapped in 2008. Why? According to a press release by then SEC head Christopher Cox (no slouch himself when it came to defending his corporatist masters): "The last six months have made it abundantly clear that voluntary regulation does not work. When Congress passed the Gramm-Leach-Bliley Act, it created a significant regulatory gap by failing to give to the SEC or any agency the authority to regulate large investment bank holding companies, like Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers, and Bear Stearns." (emphasis added)
A "gap" large enough to fly a fleet 747s through and still have enough wiggle room to launch a dozen Saturn 5s into deep space!
And that insider trading case?
According to Matt Taibbi's Rolling Stone investigation, in September 2004 SEC investigator Gary Aguirre was tasked to look into an insider trading complaint against "a hedge-fund megastar named Art Samberg. One day, with no advance research or discussion, Samberg had suddenly started buying up huge quantities of shares in a firm called Heller Financial."
Samberg was the founder of the multibillion dollar hedge fund, Pequot Capital Management, a firm which invested in a multitude of private and public equities and what are known as "distressed securities." These are investment instruments held by firms or government entities (paging Fannie Mae!) that are either in default, under bankruptcy protection or will soon be heading south. The most common securities of this type are bonds and bank debt (think residential mortgage backed securities and other toxic assets). Since the financial crisis, a booming market in distressed securities have earned savvy hedge fund mangers billions in fees as they seek influence with regulators over how that debt is restructured.
And since "influence" in Washington and the "juice" that comes with it on Wall Street is the name of the game, well, you get the picture.
"'It was as if Art Samberg woke up one morning and a voice from the heavens told him to start buying Heller,' Aguirre recalls. 'And he wasn't just buying shares--there were some days when he was trying to buy three times as many shares as were being traded that day.' A few weeks later, Heller was bought by General Electric--and Samberg pocketed $18 million."
"After some digging," Taibbi wrote, "Aguirre found himself focusing on one suspect as the likely source who had tipped Samberg off: John Mack, a close friend of Samberg's who had just stepped down as president of Morgan Stanley."
According to Taibbi, "Mack flew to Switzerland to interview for a top job at Credit Suisse First Boston. Among the investment bank's clients, as it happened, was a firm called Heller Financial. We don't know for sure what Mack learned on his Swiss trip; years later, Mack would claim that he had thrown away his notes about the meetings."
Rather conveniently, one might say.
In any event after returning from his Swiss Alps sojourn, in a classic case of "you scratch my back" Samberg cut his buddy Mack into a deal with a tech firm called Lucent, "a favor that netted him [Mack] more than $10 million." Shortly thereafter, "Samberg began buying-up every Heller share in sight, right before it was snapped up by GE."
An insider trading case worthy of further scrutiny, right? But when Aguirre told his boss [Robert Hanson] that he intended to interview Mack and the other principals, "things started getting weird." Taibbi noted that Aguirre's boss told the investigator that Mack "had powerful political connections."
Indeed he did. Like other Wall Street banksters, Mack had been a fundraising "Ranger" for the 2004 George W. Bush campaign, and when it became clear that a new product line needed to be rolled out, Mack crossed party lines and backed Hillary Clinton's ill-starred 2008 bid for the Oval Office.
How's that for clubby "bipartisanship"!
A 2007 report (large PDF file) published by the Senate Finance Committee titled The Firing of an SEC Attorney and the Investigation of Pequot Management, disclosed that "at least three experienced SEC officials believed in the summer of 2005 that questioning John Mack was an appropriate next step in the Pequot Investigation."
Indeed, Senate investigators revealed that "the most significant aspect" of Mack's 2006 SEC testimony (after the statute of limitations for prosecution had expired) "is his acknowledgement that he went to Switzerland to discuss becoming CSFB's CEO from July 26-28, 2001."
"In view of the fact that Mack also spoke with Samberg immediately upon his return to the United States on July 29, 2001," Senate staff disclosed, "the trading day before Samberg began heavily betting on Heller Financial stock, and on the same night Mack was permitted into a lucrative deal, there was more than a sufficient basis to justify taking Mack's testimony in the summer of 2005."
After first being given the go-ahead to interview Mack, "Aguirre's direct line of supervisors" including Hanson, Mark Kreitman and Paul Berger, got cold feet. Unfortunately for Aguirre, this came after he had briefed attorneys at Mary Jo White's old stomping ground and "criminal authorities in the Southern District opened their own investigations" into dubious deals between Samberg and Mack.
At that point, Senate investigators averred, "his supervisors' attitudes shifted dramatically," that is, "when officials from Morgan Stanley began contacting the SEC to learn about the potential impact of the investigation on its prospective CEO, John Mack." Only then did Hanson warn Aguirre that "it would be difficult to subpoena John Mack because of his 'powerful political connections'."
Aguirre told Senate investigators that "in a face-to-face meeting" with his boss, "Hanson said it would be very difficult to get permission to question Mack because of Mack's 'powerful political connections'."
Hanson however, denied everything and said during his Senate testimony "That doesn't sound like something I would say."
"As a general matter," Hanson testified, "I try to alert folk above me about significant developments in investigations that may trigger calls and the like so that they are not caught flat footed. I also think that Paul [Berger] and Linda [Thomsen] would want to know if and when we are planning to take Mack's testimony so that they can anticipate the response, which may include press calls that will likely follow. Mack's counsel will have 'juice' as I described last night--meaning that they will reach out to Paul and Linda (and possibly others)."
And who was Mack's "juiced" attorney? Why none other than Mary Jo White!
Unbeknownst to Aguirre, his supervisors were trading emails about his imminent firing from the agency. "With no knowledge of those emails," Senate investigators disclosed that Aguirre wrote Hanson again stating, that "before and after the Mack decision, you have told [me] several times that the problem in taking Mack's exam is his political clout, e.g., all the people that Mary Jo White can contact with a phone call."
At the same time that Aguirre was seeking to subpoena Mack's testimony, Morgan Stanley's board hired Debevoise & Plimpton to vet their soon-to-be reinstalled CEO. "Only two days after being retained," the Senate reported, "White did what the SEC did not do until more than a year later. She questioned John Mack: 'The other thing that I did for the board to gather what information I could on that time frame was to interview John Mack himself,'" White told investigators.
But she did more than that, demonstrating she indeed had plenty of "juice."
"That evening," the Senate disclosed, "White sent Thomsen an e-mail message marked 'URGENT' and asked that Thomsen return the call 'this evening.' Aguirre complained that the next day White delivered the e-mails that he had subpoenaed from Morgan Stanley directly to Linda Thomsen."
"On June 27," Aguirre testified, "I learned that Mack-Samberg emails, which I had subpoenaed from Morgan Stanley, had been delivered directly to the Director of Enforcement, Linda Thomsen. Neither I nor other staff had heard of this happening before. Indeed, the subpoena explicitly stated that the documents were to be delivered to me."
Evidence reviewed by the Senate Finance Committee "suggests that the reluctance to question Mack represents a much more subtle and pervasive problem than an individual partisan political favor. SEC officials were overly deferential to Mack--not because of his politics--but because he was an 'industry captain' who could hire influential counsel to represent him."
"In a shocking move that was later singled out by Senate investigators," Taibbi wrote, "the director actually appeared to reassure White, dismissing the case against Mack as 'smoke' rather than 'fire'."
"Aguirre didn't stand a chance," Taibbi noted. "A month after he complained to his supervisors that he was being blocked from interviewing Mack, he was summarily fired, without notice. The case against Mack was immediately dropped: all depositions canceled, no further subpoenas issued. 'It all happened so fast, I needed a seat belt,' recalls Aguirre, who had just received a stellar performance review from his bosses. The SEC eventually paid Aguirre a settlement of $755,000 for wrongful dismissal."
It gets better.
In a subsequent piece, Taibbi followed-up and discovered "not only did the SEC ultimately delay the interview of Mack until after the statute of limitations had expired, and not only did the agency demand an investigation into possible alternative sources for Samberg's tip (what Aguirre jokes was like 'O.J.'s search for the real killers'), but the SEC official who had quashed the Mack investigation, Paul Berger, took a lucrative job working for Morgan Stanley's law firm, Debevoise and Plimpton, just nine months after Aguirre was fired."
As it turned out, at the exact moment that Aguirre's investigation was being sabotaged, Senate investigators "uncovered an email to Berger from another SEC official, Lawrence West, who was also interviewing with Debevoise and Plimpton at the time."
"The e-mail was dated September 8, 2005 and addressed to Paul Berger with the subject line, 'Debevoise.' The body of the message read, 'Mary Jo [White] just called. I mentioned your interest'."
Taibbi observed: "So Berger was passing notes in class to Mary Jo White about wanting to work for Morgan Stanley's law firm while he was in the middle of quashing an investigation into a major insider trading case involving the CEO of the bank. After the case dies, Berger later gets the multimillion-dollar posting and the circle is closed."
In later testimony to the Inspector General into Debevoise & Plimpton's eventual hiring of Berger by a firm that boasts on their web site that she leads a "team" which "includes eleven former Assistant US Attorneys," White's comments on whether Berger was considered too "aggressive" in prosecuting Wall Street criminals is all-too-revealing.
"You always have a spectrum on the aggressiveness scale for government types and was this an issue that was beyond real commitment to the job and the mission and bringing cases," White affirmed, "which is a positive thing in the government, to a point. Or was it a broader issue that could leave resentment in the business community or in the legal community that would hamper his ability to function well in the private sector?"
"It's certainly strange that White has to qualify the idea that bringing cases is a positive thing in a government official--that bringing cases is a 'positive thing . . . to a point'," Taibbi noted. "Can anyone imagine the future head of the DEA saying something like, 'For a prosecutor, bringing drug cases is a positive, to a point'?"
And what about Linda Thomsen? In 2008, the SEC's inspector general, H. David Kotz, urged disciplinary action against her over her role in Aguirre's squashed investigation of Samberg and Mack. While Samberg was eventually forced out of business, barred from working as an investment adviser and paid a $28 million fine for his shenanigans, Thomsen landed on her feet.
After refusing to answer relevant questions in 2009 before the House Committee on Financial Services probe into the SEC's failure to investigate the Bernie Madoff Ponzi scheme, due to a "collective desire to preserve the integrity of the investigative and prosecution processes" mind you, Thomsen resigned and rejoined Davis, Polk and Wardell.
Later that year, Kotz released a report to Congress of the IG's investigation into a "Senior Officer" who provided "inside information" to a "former official." As it turns out that "Senior Officer" was Linda Thomsen and that "official" was her former boss Stephen Cutler who had jumped ship and joined JPMorgan Chase.
According to The New York Times, "Kotz said his office has concluded its well-publicized investigation into whether the SEC's enforcement director, Linda Chatman Thomsen, inappropriately provided inside information to her former boss, Stephen Cutler, now the general counsel of JPMorgan Chase, amid the bank's negotiations to buy Bear Stearns in March 2008."
"The inquiry," the Times reported, "which began in response to an anonymous tip, confirmed that Mr. Cutler sought assurances from Ms. Thomsen before the takeover that JPMorgan would not be sued for prior actions by Bear Stearns."
And who was representing JPMorgan Chase in the wake of the Bear Stearns collapse? If you guessed Mary Jo White, you'd be right again.
Less than three years later, during Senate Banking Committee confirmation hearings, White told the panel that "the American people will be my client, and I will work as zealously as possible on behalf of them."
But when questioned by Sherrod Brown (D-OH) whether or not White agreed with US Attorney General Eric Holder's statement which affirmed that "federal prosecutors are instructed . . . to look at . . . collateral consequences" should a financial institution or its officers be criminally charged, White agreed.
In a follow-up question, Brown wondered whether there is "a two-tiered system where we exempt the biggest banks because they have the most employees and shareholders who could be affected by criminal prosecution?"
White's answer pretty much sums up everything that's bent about Washington's culture of impunity when it comes to the Wall Street crimes: "It's a factor that prosecutors are directed to consider."
"I do think the deferred prosecution instrument," White asserted, "has been used a great deal on a number of companies, [and] was designed to be tough in terms of monetary sanctions, monitors--everything but the charge itself that might cause what the prosecutor might consider to be negative and undesirable collateral consequences to the public interest."
But what about harsher sanctions such as stripped assets, handcuffs and a jail cell for drug money laundering and securities scamming banksters, punishments that might actually deter corporate crime?
Saturday, March 2, 2013
You can get much farther with a kind word and a gun than you can with a kind word alone. -- Al Capone
In Reckless Endangerment, a lively exposé of the frauds at the heart of the subprime meltdown, journalists Gretchen Morgenson and Joshua Rosner wrote that if "mortgage originators like NovaStar or Countrywide were the equivalent of drug pushers hanging around a schoolyard and the ratings agencies were the narcotics cops looking the other way, brokerage firms providing capital to the anything-goes lenders were the overseers of the cartel."
Their observations are all the more relevant given the outrageous behavior by major banks which polluted an already terminally corrupt financial system with blood-spattered cash siphoned-off from the global drug trade.
It wouldn't be much of a stretch to insist that drug money laundered by financial giants like HSBC and Wachovia were in fact, little more than "hedges" designed to offset losses in residential mortgage backed securities (RMBS), sliced and diced into toxic collateralized debt obligations, as the 2007-2008 global economic crisis cratered the capitalist "free market."
And like Wachovia's ill-fated $25.5 billion (£16.96bn) buy-out of Golden West Financial/World Savings Bank at the top of the market in 2006, HSBC's 2002 purchase of Household International and its mortgage unit, Household Finance Corporation for the then princely sum of $15.2 billion (£10.02bn) also proved to be a proverbial deal too far.
Evidence suggests that HSBC stepped up money laundering for their cartel clients as the hyperinflated real estate bubble collapsed. Along with other self-styled masters of the universe who were bleeding cash faster than you can say credit default swaps, HSBC posted 2008 projected first quarter losses of "$17.2 billion (£8.7bn) after the decline in the US housing market hit the value of its loans," BBC News reported.
From there RMBS deficits skyrocketed. By 2010, as Senate and Justice Department investigators were taking a hard look at bank shenanigans, Reuters reported that HSBC Holdings was "working off $20 billion [£13.19bn] worth of loans per year in its US Household Finance Corp. unit" where "liabilities stood at about $70 billion [£46.17bn]."
However you slice today's epidemic of financial corruption, a trend already clear two decades ago when economists George Akerlof and Paul Romer published their seminal paper, Looting: The Economic Underworld of Bankruptcy for Profit, incentives were huge as senior bank executives inflated their balance sheets with "criminal proceeds ... likely to have amounted to some 3.6 per cent of GDP (2.3-5.5 per cent) or around US$2.1 trillion in 2009," according to a 2011 estimate by the United Nations Office on Drugs and Crime (UNODC).
To make matters worse, willful criminality at the apex of the financial pyramid was aided and abetted by the US Justice Department and the federal regulatory apparatus who allowed these storied economic predators to walk.
'Change' that Banksters Can Believe In
In late January, Bloomberg News reported that US prosecutors have "asked a federal judge to sign off on HSBC Holdings Plc (HSBA)'s $1.9 billion [£1.2bn] settlement of charges it enabled drug cartels to launder millions of dollars in trafficking proceeds."
Prosecutors justified the settlement on grounds that "it includes the largest-ever forfeiture in the prosecution of a bank and provides for monitoring to prevent future violations," arguing that "strict conditions, and the unprecedented forfeiture and penalties imposed, serve as a significant deterrent against future similar conduct."
Let's get this sick joke straight: here's a bank that laundered billions of dollars for Colombian and Mexican drug lords, admittedly amongst the most violent gangsters on earth (120,000 dead Mexicans and counting since 2006) and we're supposed to take this deal seriously. Seriously? Remember, this an institution whose pretax 2012 profits will exceed $23.5 billion (£15.63bn) when earnings are reported next week and the best the US government can do is extract a promise to "do better"--next time.
That deal, a deferred prosecution agreement (DPA) was cobbled together between the outgoing head of the Justice Department's Criminal Division, Lanny A. Breuer and HSBC, Europe's largest bank. At the urging of former Treasury Secretary Timothy Geithner, no criminal charges were sought--or brought--against senior bank executives.
Why might that be the case?
During a press conference trumpeting the government's "shitty deal," Breuer breezily declared that DOJ's decision not to move forcefully against HSBC was in everyone's best interest: "Had the US authorities decided to press criminal charges, HSBC would almost certainly have lost its banking license in the US, the future of the institution would have been under threat and the entire banking system would have been destabilized."
As if allowing drug-connected money launderers license to pollute one of the world's largest financial institutions hadn't already "destabilized" the banking system!
Although Obama's Justice Department smeared "lipstick" on this pig of a deal, their own "Statement of Facts" submitted to US District Judge John Gleeson paints a damning picture of criminal negligence that crossed the line into outright collusion with their Cartel clients:
From 2006 to 2010, HSBC Bank USA violated the BSA and its implementing regulations. Specifically, HSBC Bank USA ignored the money laundering risks associated with doing business with certain Mexican customers and failed to implement a BSA/AML program that was adequate to monitor suspicious transactions from Mexico. At the same time, Grupo Financiero HSBC, S.A. de C.V. ("HSBC Mexico"), one of HSBC Bank USA's largest Mexican customers, had its own significant AML problems. As a result of these concurrent AML failures, at least $881 million in drug trafficking proceeds, including proceeds of drug trafficking by the Sinaloa Cartel in Mexico and the Norte del Valle Cartel in Colombia, were laundered through HSBC Bank USA without being detected. HSBC Group was aware of the significant AML compliance problems at HSBC Mexico, yet did not inform HSBC Bank USA of these problems and their potential impact on HSBC Bank USA's AML program.
As with Wachovia, oceans of cash generated through drug trafficking were laundered by HSBC via the Black Market Peso Exchange (BMPE), a nexus of interconnected firms controlled by Colombian and Mexican drug cartels.
According to the DPA, "peso brokers purchase bulk cash in United States dollars from drug cartels at a discounted rate, in return for Colombian pesos that belong to Colombian businessmen. The peso brokers then use the US dollars to purchase legitimate goods from businesses in the United States and other foreign countries, on behalf of the Colombian businessmen. These goods are then sent to the Colombian businessmen, who sell the goods for Colombian pesos to recoup their original investment."
"In the end," the Justice Department informed us, "the Colombian businessmen obtain US dollars at a lower exchange rate than otherwise available in Colombia, the Colombian cartel leaders receive Colombian pesos while avoiding the costs associated with depositing US dollars directly into Colombian financial institutions, and the peso brokers receive fees for their services as middlemen."
Got that? And it wasn't only plasma TVs, diamond-studded Rolexes or armored-up SUVs that cartel heavies were buying from enterprising businessmen on this side of the border. Add to their list of must-haves: fleets of airplanes and enough weapons to equip an army!
DOJ investigators discovered that "drug traffickers were depositing hundreds of thousands of dollars in bulk US currency each day into HSBC Mexico accounts. In order to efficiently move this volume of cash through the teller windows at HSBC Mexico branches, drug traffickers designed specially shaped boxes that fit the precise dimensions of the teller windows. The drug traffickers would send numerous boxes filled with cash through the teller windows for deposit into HSBC Mexico accounts. After the cash was deposited in the accounts, peso brokers then wire transferred the US dollars to various exporters located in New York City and other locations throughout the United States to purchase goods for Colombian businesses. The US exporters then sent the goods directly to the businesses in Colombia."
The investigation further revealed that "because of its lax AML controls, HSBC Mexico was the preferred financial institution for drug cartels and money launderers. The drug trafficking proceeds (in physical US dollars) deposited at HSBC Mexico as part of the BMPE were sold to HSBC Bank USA through Banknotes."
What's the "get" for the bank? Former Senate investigator Jack Blum told Rolling Stone's Matt Taibbi: "If you have clients who are interested in 'specialty services'--that's the euphemism for the bad stuff--you can charge 'em whatever you want." Blum said "the margin on laundered money for years has been roughly 20 percent."
How's that for an incentive!
'Big Audits, Big Problems. No Audits, No Problems'
In cobbling together the HSBC deal, the Justice Department ignored Senate testimony by whistleblowers, some of whom were fired or eventually resigned in disgust when higher-ups thwarted their efforts to get a handle on AML "lapses" by the North American branch during a critical period when it was becoming clear that losses in the subprime market would be huge.
We were informed that senior level officials at HBUS were keep in the dark about the extent of problems plaguing HBMX by HSBC Group (London) executives, "including the CEO, Head of Compliance, Head of Audit, and Head of Legal," all of whom were aware "that the problems at HSBC Mexico involved US dollars and US dollar accounts."
We're supposed to believe that Canary Wharf "did not contact their counterparts at HSBC Bank USA to explain the significance of the problems or the potential effect on HSBC Bank USA's business." This fairy tale is further enlarged upon when we're informed that "HSBC North America's General Counsel/Regional Compliance Officer first learned of the problems at HSBC Mexico and their potential impact on HSBC Bank USA in 2010 as a result of this investigation."
According to the suspect narrative concocted by government prosecutors, HBUS's General Counsel was informed by HSBC Group Compliance Chief, David Bagley, that she wasn't told about "potential problems" at HBMX because the bank doesn't "air the dirty linen of one affiliate with another . . . we go in and fix the problems."
Keep in mind that the Office of the Comptroller of the Currency had issued not one, but two toothless cease-and-desist orders between 2003 and 2010 ordering HSBC to clean up their act, all of which revolved around strengthening anti-money laundering controls which were promptly ignored.
But as the US Senate Permanent Subcommittee on Investigations revealed in their 335-page report (large PDF file) and related hearings last summer, despite the fact that "Compliance and AML staffing levels were kept low for many years as part of a cost cutting measure," Senate investigators learned through HSBC internal correspondence that those charged with monitoring suspicious transactions were "struggling to 'handle the growing monitoring requirements' associated with the bank's correspondent banking and cash management programs, and requested additional staff."
"Despite requests for additional AML staffing," the Senate reported that "HBUS decided to hold staff levels to a flat headcount."
"After being turned down for additional staff, Carolyn Wind, longtime HBUS Compliance head and AML director, raised the issue of inadequate resources with the HNAH board of directors. A month after the board meeting, after seven years as HBUS' Compliance head Ms. Wind was fired," Senate investigators disclosed.
Wind, who had met with HNAH's board in October 2007 to discuss staffing, was reprimanded by her supervisor, Regional Compliance Officer and Senior Executive Vice President Janet L. Burak, for raising the issue. In an email to disgraced Group Compliance chief David Bagley, who dramatically resigned on camera during those Senate hearings, Burak "expressed displeasure" with Wind and told Bagley:
"I indicated to her my strong concerns about her ability to do the job I need her to do, particularly in light of the comments made by her at yesterday's audit committee meeting .... I noted that her comments caused inappropriate concern with the committee around: our willingness to pay as necessary to staff critical compliance functions (specifically embassy banking AML support), and the position of the OCC with respect to the merger of AML and general Compliance."
In marked contrast to the government's version, it appears that HBUS had been fully apprised of "cash management" problems three years earlier than claimed in the DPA, yet senior level executives choose to look the other way--so long as the cash keep flowing.
Burak's firing of Wind should have raised eyebrows at the Justice Department. As Regional Legal Department Head for North America, Burak was appointed by the HNAH board to serve as the bank's Regional Compliance Officer, a move which was even criticized by Bagley, but he was overruled by his Canary Wharf masters.
Her appointment as Regional Compliance Officer shouldn't come as a surprise however, considering that before joining the HSBC team, Burak "was group general counsel, Household International . . . as well as for Household's federal regulatory coordination and compliance function," according to a 2004 BusinessWire profile. And with the bank on the hook for some $70 billion (£46.17bn) and counting in toxic Household International mortgage liabilities, her choice by London to supervise AML operations was a slam dunk.
In her new dual-hatted role, Burak was taken to the woodshed by both the Office of the Comptroller of the Currency and the Federal Reserve "for her lack of understanding of AML risks or controls" according to the Senate report. Indeed, OCC stated that Burak had "not regularly attended key committee or compliance department meetings" and had failed to keep herself and other bank executives "fully informed about issues and risks within the BSA/AML compliance program."
But if the task at hand was to keep AML staff to a "flat headcount" and not make waves with pesky audits that might force compliance with trivial matters such as legal requirements under the Bank Secrecy Act, well you get the picture! Senate investigators learned however, that BSA compliance issues were legion and what they found was just a tad troubling:
The identified problems included a once massive backlog of over 17,000 alerts identifying possible suspicious activity that had yet to be reviewed; ineffective methods for identifying suspicious activity; a failure to file timely Suspicious Activity Reports with U.S. law enforcement; a failure to conduct any due diligence to assess the risks of HSBC affiliates before opening correspondent accounts for them; a 3-year failure by HBUS, from mid-2006 to mid-2009, to conduct any AML monitoring of $15 billion [£9.53bn] in bulk cash transactions with those same HSBC affiliates, despite the risks associated with large cash transactions; poor procedures for assigning country and client risk ratings; a failure to monitor $60 trillion [£38.14tn] in annual wire transfer activity by customers domiciled in countries rated by HBUS as lower risk; inadequate and unqualified AML staffing; inadequate AML resources; and AML leadership problems.
But wait, there's more!
After Wind's dismissal, the HNAH board hired Lesley Midzain to fill the posts of Compliance head and AML director. But as Senate investigators revealed, "Ms. Midzain had no professional experience and little familiarity with US AML laws." Indeed, in December 2008 "HNAH's regulator, the Federal Reserve, provided a negative critique of Ms. Midzain's management of the bank's AML program."
According to Senate staff, the Federal Reserve complained that "Ms. Midzain did 'not possess the technical knowledge or industry experience to continue as the BSA/AML officer'." It noted that she "was interviewed by OCC examiners from another team and they supported the conclusion of the OCC resident staff that Midzain's knowledge and experience with BSA/AML risk is not commensurate to HNAH's BSA/AML high risk profile, especially when compared to other large national banks."
As a result of these rather pointed criticisms, Midzain was removed from the AML post and HBUS hired a new director, Wyndham Clark, a former US Treasury official. According to the Senate report, Clark "was required to report to Curt Cunningham, an HBUS Compliance official who freely admitted having no AML expertise, and through him to Ms. Midzain, whom the OCC had also found to lack AML expertise."
Call it a small world.
It soon became clear to Clark that although the bank had an "extremely high risk business model from AML perspective," as director he was "granted only limited authority to the AML director to remedy problems." According to a memorandum sent by Clark to his boss Curt Cunningham, he complained that "AML Director has the responsibility for AML compliance, but very little control over its success."
If one were a "conspiracy buff" one might even argue this was precisely as intended.
Senate investigators revealed that as he continued his work, "Clark grew increasingly concerned that the bank was not effectively addressing its AML problems. In February 2010, Mr. Clark met with the Audit Committee of the HNAH board of directors and informed the committee that he had never seen a bank with as high of an AML risk profile as HBUS."
In May 2010, he wrote to a more senior compliance officer: "With every passing day I become more concerned...if that's even possible."
Less than a year after taking the thankless job, in July 2010 Clark quit. He wrote HSBC Group Compliance chief David Bagley that he had neither the authority nor the support from senior managers needed to do his job. He told Bagley in no uncertain terms:
[T]he bank has not provided me the proper authority or reporting structure that is necessary for the responsibility and liability that this position holds, thereby impairing my ability to direct and manage the AML program effectively. This has resulted in most of the critical decisions in Compliance and AML being made by senior Management who have minimal expertise in compliance, AML or our regulatory environment, or for that matter, knowledge of the bank (HBUS) where most of our AML risk resides. Until we appoint senior compliance management that have the requisite knowledge and skills in these areas, reduce our current reliance on consultants to fill our knowledge gap, and provide the AML Director appropriate authority, we will continue to have limited credibility with the regulators.
According to the DPA, despite the risks associated with HSBC's highly-profitable Banknotes business, used and abused by all manner of shady customers, "from 2006 to 2009, Banknotes' AML compliance consisted of one, or at times two, compliance officers."
In 2006, the Treasury Department's Financial Crimes Enforcement Network (FinCEN) issued an Advisory warning that "US law enforcement has observed a dramatic increase in the smuggling of bulk cash proceeds from the sale of narcotics and other criminal activities from the United States into Mexico. Once the US currency is in Mexico, numerous layered transactions may be used to disguise its origins, after which it may be returned directly to the United States or further transshipped to or through other jurisdictions."
What was HSBC's response? The Justice Department informed us that despite the FinCEN notification "Banknotes stopped regular monthly monitoring of transactions for HSBC Group Affiliates, including HSBC Mexico, in July 2006."
And despite multiple notifications from government regulators, the bank accelerated their shady purchases: "Banknotes purchased approximately $7 billion [£4.51bn] in US currency from Mexico each year, with nearly half of that amount supplied by HSBC Mexico. From July 2006 to December 2008, Banknotes purchased over $9.4 [£6.06bn] billion in physical US dollars from HSBC Mexico, including over $4.1 billion [£2.64bn] in 2008 alone."
As a result of these rather willful "lapses" by senior executives, the Justice Department's "Statement of Facts" cited HSBC's,
a. Failure to obtain or maintain due diligence or KYC information on HSBC Group Affiliates, including HSBC Mexico; b. Failure to adequately monitor over $200 trillion [£126.9tn] in wire transfers between 2006 and 2009 from customers located in countries that HSBC Bank USA classified as "standard" or "medium" risk, including over $670 billion [£425.1bn] in wire transfers from HSBC Mexico; c. Failure to adequately monitor billions of dollars in purchases of physical US dollars ("banknotes") between July 2006 and July 2009 from HSBC Group Affiliates, including over $9.4 billion [£5.96bn] from HSBC Mexico; and d. Failure to provide adequate staffing and other resources to maintain an effective AML program.
Yet in the face of evidence that laundering drug money was anything but a mistake, Judge Gleeson was told that DOJ's decision not to criminally prosecute senior HSBC executives was predicated on the fiction that the $1.9 billion settlement's "strict conditions, and the unprecedented forfeiture and penalties imposed, [will] serve as a significant deterrent against future similar conduct."
Never mind the lack of evidence that DPA's are a "deterrent" to financial crimes. Indeed, a 2009 study by the US Government Accountability Office (GAO) concluded "that the Department of Justice (DOJ) lacked performance measures to assess how Deferred Prosecution Agreements (DPA) and Non-Prosecution Agreements (NPA) contribute to its efforts to combat corporate crime."
Well, if the Justice Department lacked "metrics" as to whether or not their agreements with corporate criminals act as a deterrent to future crimes, were there other considerations behind the sweetheart deals forged between the Criminal Division, HSBC and other banks?
You bet there were and it's worth recalling statements by former UNODC director Antonio Maria Costa in this regard. In 2009, Costa told The Observer that "he has seen evidence that the proceeds of organised crime were 'the only liquid investment capital' available to some banks on the brink of collapse last year. He said that a majority of the $352bn (£216bn) of drugs profits was absorbed into the economic system as a result."
Costa said that "in many instances, the money from drugs was the only liquid investment capital. In the second half of 2008, liquidity was the banking system's main problem and hence liquid capital became an important factor."
"Inter-bank loans were funded by money that originated from the drugs trade and other illegal activities... There were signs that some banks were rescued that way." Although Costa declined to identify the banks involved because it would not be "appropriate," he told The Observer that "money is now a part of the official system and had been effectively laundered."
"That was the moment [last year] when the system was basically paralysed because of the unwillingness of banks to lend money to one another," Costa averred. "The progressive liquidisation to the system and the progressive improvement by some banks of their share values [has meant that] the problem [of illegal money] has become much less serious than it was."
In other words, as illegal cash propped up the banks while the crisis was being sorted out, at the expense of the working class mind you, the financial pirates responsible for the capitalist meltdown have become even larger, thanks to taxpayer bailouts, in effect holding the economy hostage as they became "too big" to either "fail or jail."
As Matt Taibbi observed in Rolling Stone, "At HSBC, the bank did more than avert its eyes to a few shady transactions. It repeatedly defied government orders as it made a conscious, years-long effort to completely stop discriminating between illegitimate and legitimate money. And when it somehow talked the U.S. government into crafting a settlement over these offenses with the lunatic aim of preserving the bank's license, it succeeded, finally, in making crime mainstream."
What we are dealing with here is nothing less than a perverse economic system thoroughly criminalized by its elites; a bizarro world as Michel Chossudovsky pointed out where "war criminals legitimately occupy positions of authority, which enable them to decide 'who are the criminals', when in fact they are the criminals."