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HSBC Hit By £500m Money Laundering Charge

(c) Sky News 2012

HSBC (LSE: HSBA.L - news) will tomorrow prolong the latest wave of financial penalties for Britain's banks by setting aside hundreds of millions of pounds more to cover settlements for breaching anti money-laundering rules.

I have learned that HSBC will raise the likely bill for fines from US authorities to as much as $1.5bn (£935m) in its third-quarter results, a move that will underline the growing seriousness of the probes into the conduct of one of Britain's biggest lenders.

The revised estimate will mean HSBC allocating $800m (£500m) to potential penalties in its accounts for the three months to the end of September following a $700m (£437m) hit disclosed in its half-year results in July, analysts say.

The expected fines relate to inadvertent breaches by HSBC of anti-money laundering procedures in its Mexican operations which are now under investigation by a string of powerful US watchdogs.

If the eventual settlement does reach as high as $1.5bn, it would be one of the largest punishments ever meted out to a British bank.

News of the fine comes just days before the US presidential election and in the wake of public concerns from British regulators over the handling of banking misconduct inquiries by their American counterparts.

In its interim results in July, HSBC said the $700m charge was its "best estimate of the aggregate amount of fines and penalties that are likely to be imposed in connection with these matters. There is a high degree of uncertainty in making this estimate, and it is possible that the amounts when finally determined could be higher, possibly significantly higher."

Since then, the bank is understood to have held further discussions with US regulators, which have prompted it to increase its estimate of the prospective fines.

Regulatory sources familiar with the discussions on both sides of the Atlantic (Frankfurt: 640218.F - news) said that HSBC continued to possess no definitive guidance about the timing or scale of settlements with the relevant authorities.

At a US Senate sub-committee hearing in July - during which David Bagley, HSBC’s Head of Compliance, resigned - the bank admitted that it had fallen short of the required standards in processing transactions in Mexico. Days later, it was fined $27.5m (£17m) by Mexican regulators over the failings, which potentially gave drug-lords, terrorists and other criminals a gateway into the US banking system.

The investigations sparked by the Mexican offences prompted Stuart Gulliver, HSBC Chief Executive, to launch an overhaul of the bank’s compliance operation.

Since the summer, it has hired Robert Werner, former Director of the US Treasury's OFAC, as head of global standards assurance, a new role in the group. It also recruited Preeta Bansal, a senior official in the Obama administration, as global general counsel for litigation and regulatory affairs.

Mr Gulliver, who took over the running of HSBC in 2011, after the offences in Mexico took place, said in July that it was right that the bank be held accountable for them.

"We are profoundly sorry for our mistakes, and are committed to putting them right. With a new strategy and senior leadership team in place since the start of 2011, we are introducing new processes and structures to help us manage risk and ensure more effective compliance in the future."

HSBC is not the only UK-based bank to have fallen foul of US regulators in recent months.

Barclays (LSE: BARC.L - news) paid £290m in June to settle with authorities in the UK and US over evidence that traders had attempted to rig the key interbank interest rate Libor.

Standard Chartered (Other OTC: SCBFF.PK - news) , the emerging markets bank, paid $340m (£212m) to the New York (Frankfurt: A0DKRK - news) state Department of Financial Services after being accused of concealing illicit Iranian transactions. The department's handling of the probe led Sir Mervyn King, Governor of the Bank of England, to issue a rare public rebuke. Standard Chartered remains in talks to settle with other US bodies.

On Friday, Stephen Hester, Chief Executive of the taxpayer-backed Royal Bank of Scotland (LSE: RBS.L - news) (RBS), said he expected to begin settlement talks over Libor-fixing in the near future.

The quarterly results of Britain's banks have been overshadowed by the escalating cost of historic misconduct, principally relating to the mis-selling of payment protection insurance (PPI). Between them, Barclays, Lloyds Banking Group (LSE: LLOY.L - news) and RBS set aside a further £2.1bn for PPI compensation in the third quarter, with HSBC expected to add a comparatively modest sum to that total.

Beyond fines and penalties, however, HSBC's quarterly results are expected to depict a bank in rude health. Analysts at Deutsche Bank (Xetra: 514000 - news) say that it will report approximately $5bn in third-quarter profits, although that figure does not include PPI and money-laundering provisions.

Mr Gulliver has shed almost 40 HSBC-owned businesses since he took over, and has adopted a more pragmatic approach to the shape of its international operations, focusing on disciplines such as trade finance, where it has a competitive advantage.

HSBC refused to comment today.