HSBC Money Laundering Case: “Too Big To Fail” does not mean “Too Big to Jail”

Too Big To Fail is not too big to jailThe Problem

Some banking institutions have become so large criminal prosecutions resulting in revocation of banking charters may negatively affect the national, and perhaps the global, economy. The U.S. Attorney General and other prosecutors are thus left with a moral dilemma: ensure justice through prosecution or forego criminal proceedings to protect the economy and society at large.

HSBC and Money Laundering

In December 2012, multinational banking institution HSBC was penalized a record $1.92 billion by the United States for violating laws designed to prevent money laundering and other illegal financial activity. HSBC was under consistent suspicion and twice given warnings and orders to strengthen its anti-money laundering programs by the U.S. between 2003 and 2010 but failed to make the proper adjustments. The $1.92 billion penalty, issued under the Bank Secrecy Act, was handed down after a report and subsequent investigation that confirmed the bank had set up offshore accounts for drug cartels and suspected criminals in Jersey. HSBC banking executives admitted to laundering as much as $881 billion dollars.


HSBC North American Holdings, Inc.: parent company of HSBC Group, one of the world’s largest banking and financial services groups. HSBC has more than 6900 offices in over 80 countries.

HSBC Bank USA: federally chartered subsidiary of HSBC North American Holdings, Inc.; headquartered in McLean, Virginia with its principal offices in New York City. HSBC  Bank USA is the specific entity charged with violating the Bank Secrecy Act.

Eric Holder: United States Attorney General; publicly defended the decision not to criminally prosecute HSBC Bank USA executives.

HSBC Bank USA Executives: Specifically those responsible for the lax monitoring programs and other negligence that violated the Bank Secrecy Act.

HSBC Bank USA Employees: would lose their jobs if HSBC were forced to cease banking operations in the United States.

The United States’ (and possibly the global) economy: As stated by Attorney General Eric Holder, the national economy will suffer greatly if HSBC’s U.S. banking charter is revoked.

United States Department of the Treasury: As one of the regulators of HSBC Bank USA’s financial affairs the Treasury is tasked with advising the Department of Justice on the economic effects of prosecuting HSBC.

Office of the Comptroller: As the regulator of HSBC Bank USA’s banking charter, the   Comptroller can revoke HSBC Bank USA’s banking privileges in the U.S. if its executives are prosecuted and convicted.


Bank Secrecy Act (31 USC §5311): enacted by Congress to require banks and other financial institutions to create and maintain anti-money laundering programs and other practices to prevent terrorist financing and other financial crimes. In addition to internal programs and monitoring, the Bank Secrecy Act (BSA) also requires ongoing employee training and due diligence for foreign correspondent accounts.

Deferred Prosecution Agreement: To avoid criminal prosecution for violations of the BSA, HSBC executives agreed to pay a $1.92 billion fine and comply with elevated monitoring standards for a probationary period of five years.


From 2003-2006, HSBC Bank USA was under heavy suspicion by United States regulators and operated under a written agreement to correct the deficiencies of their operational practices. HSBC Bank USA specifically agreed to enhance its anti-money laundering program to achieve adequate compliance with the Bank Secrecy Act.

Between 2006 and 2010, HSBC Bank USA violated several components of the BSA: Money laundering risks associated with doing business with certain Mexican customers were ignored, compliance issues at HSBC Mexico were overlooked, and a BSA-adequate anti-money laundering program was not implemented. The Court notes four significant HSBC Bank USA failures:

  1. HSBC failed to obtain and maintain due diligence on HSBC Group Affiliates.
  2. HSBC failed to adequately monitor over $200 trillion in wire transfers between 2006 and 2009 from customers in nations classified as “standard” or “medium” risk ($670 billion in wire transfers specifically from HSBC Mexico).
  3. HSBC Bank USA failed to adequately monitor billions of dollars in U.S. banknote purchases.
  4. HSBC Bank USA failed to provide proper staffing and resources necessary to maintain an effective anti-money laundering program.

As part of the Deferred Prosecution Agreement, HSBC Bank USA admitted to gross violations of the Bank Secrecy Act, including failure to establish and maintain an effective anti-money laundering program, failure to establish due diligence, and involvement in the laundering of over $881 billion.

The Penalty

The record-setting fine, comprised of $1.256 billion in forfeiture and $665 million in civil penalties, allows HSBC to temporarily thwart criminal prosecution pending a probationary period of compliance with anti-money laundering standards. The probationary period consists of a five-year agreement with the U.S. DOJ that includes an independent monitor of HSBC’s internal anti-money laundering programs, bonus deference by the bank’s top executives, and retraction of bonuses from some current and former executives who had particular involvement in the willful breach of U.S. regulations.

Public Controversy

In March of 2013, Attorney General Eric Holder defended the U.S. government’s decision not to pursue criminal prosecution of HSBC by claiming that prosecution of such large institutions has a negative impact on the national economy. His statement stirred some outrage. The notion that the largest corporations, deemed equal to people under the law by the U.S. Supreme Court in the Citizens United case in 2010, are now afforded freedom from criminal prosecution as well.

At the forefront of prosecution advocates is Senator Elizabeth Warren, who voiced publicly her disdain for the decision not to prosecute HSBC for money laundering. She posed this question to the Department of Justice (DOJ): “How many billions of dollars of drug money do you have to launder…before someone will consider shutting down a bank?” Not one Treasury or Justice Department official offered her a direct answer. One thing is evident: The Justice Department seems to hold all the cards in deciding the fate of HSBC’s ability to continue operating in the U.S. The Comptroller cannot revoke its charter without a criminal conviction and the role of the Treasury is simply to advise the DOJ on an institution’s impact on the economy. Regardless of the economic reasons, the decision not to prosecute questions the integrity of the entire justice system. Can we justify deferring prosecution for willful criminal activity in the name of protecting the national economy? The debate presents an ethical dilemma between justice and utilitarianism.

Utilitarian Approach

Utilitarianism, also known as the “greatest happiness principle” holds that decisions and actions are proper as long as they promote proportional utility, and by the same accord improper as they produce an overall negative utility. A utilitarian view, then, would advocate an act if a greater benefit would be afforded to a larger number of individuals in society. This principle supports the Department of Justice decision not to prosecute HSBC, because not prosecuting HSBC benefits a greater number of individuals in society through protecting the economy from harm, even at the expense of letting criminal activity go largely unpunished.

Under a traditional utilitarian view, then, the Justice Department’s decision not to criminally prosecute HSBC officials seems sound, as a larger portion of society benefits from HSBC maintaining operations (not to mention the number of saved jobs) and keeping the economy from further suffering in already difficult financial times. The record-setting monetary penalty and the probationary monitoring period are presumably aimed at deterring future wrongdoing by HSBC and other large financial institutions. However, in spite of $1.92 billion being the largest fine imposed on any banking institution in history, it does not reflect an amount that could effectively deter a financial institution the size of HSBC. According to Bankers Almanac, HSBC’s annual before-taxes profit totals more than $23 billion.

The $1.92 billion fine handed down by the U.S. represents roughly a month’s profit.

If HSBC and other large banks are not effectively deterred from continuing illegal and unethical financial practices, at some point in time the utilitarian outcome of laundering money for illegal organizations becomes adverse to the greatest number of people in society.

In fact, a deeper analysis shows that pursuing criminal prosecution of HSBC’s executives likely yields a greater utilitarian outcome in the long run. While the immediate effect of prosecution may adversely affect a great number of individuals in society by means of a blow to the economy and the loss of jobs, the long term effects of allowing a banking institution like HSBC to engage in criminal activity with no risk of criminal prosecution, jail time, or even the loss of its banking license, presents a moral hazard. A $1.92 billion fine for laundering upwards of $881 billion hardly seems like incentive to exercise due diligence in future practices. In fact, the outcome of HSBC’s case can actually provide incentive for other banks to be more lax with their anti-money laundering practices.

Among the most alarming effects the non-prosecution decision produces is the harm done to the large number of individuals affected by drug trade. That being the case, both justice and utility seem best served by criminal prosecution of HSBC executives.

Justice Approach: Retribution and Deterrence

Society has always had a keen interest in providing justice for the wrongdoings of individuals. As for the intentional breaking of U.S. laws and sanctions by HSBC executives, justice can be readily sought in the forms of retribution and deterrence. Retributive justice is simply providing adequate punishment to lawbreakers in accordance with their offenses. Retribution provides two important results: disincentive for the offender to recommit the wrongful act and a general deterrence to the rest of society who may contemplate acting wrongfully. While retribution is generally served as a calculated punishment proportional to the wrongful act, deterrence is most often pursued by a punishment that outweighs the wrongful act, to ensure avoidance of future wrongdoing in general. Often, these punishments come in the form of large fines.

The conduct of HSBC’s executives in knowingly failing to adhere to U.S. sanctions and regulations is certainly unjust. In making the decision to defer prosecution of HSBC Bank USA executives, the primary consideration of the United States government was to prevent harm to an already struggling economy. While instances may exist when other consequences may mitigate an application of justice, the long-term effects of avoiding prosecution for the criminal acts of HSBC are too great. When government allows big financial institutions to go largely unpunished for laundering vast sums of money for criminal organizations such as drug cartels, it is essentially endorsing the immeasurable amount of harm associated with the day-to-day activities of global drug trade. Justice for perpetuating such criminal enterprises cannot be adequately administered by a mere financial penalty.

Deontological Aspect: Prosecutorial Duty

A deontological approach asserts individuals are morally obligated to act according to a set of principles regardless of outcome. Rational people have a duty to act ethically, no matter the consequences. The criminal justice system of the United States is based largely on deontological ideals. Prosecutors have a duty to carry out justice.

Prosecutors and Attorneys General, like all government officials, are elected or appointed under the promise to uphold the laws. Prosecutors, by design, are charged with the responsibility to fairly and appropriately pursue punishment for wrongdoers in society. While all human beings have the same general obligation to act morally, prosecutors take on a special obligation, or duty, when taking office. Prosecutors assume an elevated duty to make certain decisions as a part of their role in the justice system. As prosecutors accept taking on the role of pursuing justice for illegal behavior, they assume an ethical duty to do so fairly and diligently no matter the offender.

The Attorney General and the DOJ failed in their prosecutorial duties. They did not prosecute HSBC officials because of an uncertain forecast outcome (economic harm). Ultimately, they failed to provide justice for gross wrongdoing. The decision not to prosecute also prevents other regulators from punishing HSBC. The Court, in upholding the financial penalty and the Justice Department’s decision not to prosecute, stated its need to give broad prosecutorial discretion to the Executive Branch in matters like these. Hence, the Comptroller is unable to completely revoke HSBC’s U.S. banking privileges without some form of conviction by the Justice Department. The Deferred Prosecution Agreement essentially lets HSBC off the hook with a $1.92 billion pass for laundering more than $880 billion.


The ethical analysis above applies theories of justice, utilitarianism, and deontology to the Department of Justice decision not to pursue prosecution of HSBC executives. The analysis suggests that criminal prosecution is probably the right move, rather than the deferred prosecution agreement currently in place. The reasons are:

  1. The $1.92 billion fine and 5-year probationary monitoring period is unlikely to deter future misconduct.
  2. The long-term consequences of the Deferred Prosecution Agreement may outweigh its immediate utility.
  3. The DOJ is not fulfilling its prosecutorial duty to pursue punishment for those who violate the law.

While some may believe the Deferred Prosecution Agreement promotes the best interests of the United States, its long-term effects may ultimately pose a greater danger.



Works Cited


1. HSBC’s Deferred Prosecution Agreement, Statement of Facts. Case 1:12-cr-00763-ILG     Document 3-3, December 11, 2012.

Accessed online:     a.pdf

2. 31 U.S.C. §5311 (Bank Secrecy Act), Declaration of Purpose.

Accessed online:

3. Mill, John Stuart. Utilitarianism. Edited by Oskar Piest. Prentice-Hall, Inc. 1957.

4. Stempel, Jonathan. HSBC Wins OK of Record $1.92 Billion Money Laundering Settlement.       Reuters. Tue. July 2, 2013.

Accessed online:       settlement-laundering-idUSBRE9611B220130702

5. DeGeorge, Richard T. Business Ethics, Seventh Edition. Pearson Education, Inc. 2010.

6. Lopez, Linette. Elizabeth Warren Savaged A Treasury Official During A Hearing On HSBC’s    International Money Laundering Scandal. Business Insider. March 7, 2013.

Accessed online:   laundering-2013-3