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U.S. probe of HSBC tangled up in bureaucracy, infighting

In the second half of 2010, a senior federal prosecutor in West Virginia drafted an impassioned plea to his bosses in Washington to end infighting as multiple government agencies pursued a high-stakes investigation of HSBC Holdings Plc.

William Ihlenfeld II had been fighting a losing battle against fellow prosecutors in Washington and Brooklyn, who were jointly conducting a parallel probe into the British bank's controls over illicit transactions.

Ihlenfeld, the U.S. Attorney in Wheeling, West Virginia, said in the draft letter, a copy of which has been seen by Reuters, that there had been a breakdown in the relationship, and his office had been told to stand down in June 2010 by the Department of Justice, just as they were preparing to indict the bank for as many as 175 counts of money laundering.

An earlier mediation had failed. So for the first time in 30 years, Ihlenfeld said his office was seeking an arbitration of such a dispute.

"We have made several offers to amicably settle this dispute by dividing the investigation in a way that guaranteed the two investigations would never interfere with each other," Ihlenfeld wrote. "Despite our best effort, all of our offers have been categorically rejected. None of our proposals has even induced a counter-offer."

"As a general proposition, there is no reason why the professionals from different DOJ components cannot work together for the common good," Ihlenfeld wrote in the letter addressed to Gary Grindler, then the acting deputy attorney general. "This particular situation is no exception."

It is not clear whether Ihlenfeld ultimately sent the letter or whether the Department of Justice agreed to arbitrate the dispute. But the draft provides a rare insight into the secret world of prosecutors, and sheds new light on a large and complex U.S. investigation that some two years later may lead to a settlement of more than $1 billion with HSBC.

At least 11 different U.S. departments, offices and regulators - largely comprising the two competing groups - as well as the U.S. Senate have probed HSBC for money-laundering lapses in investigations that date back to at least 2007.

Ihlenfeld's letter, other Department of Justice documents, regulatory filings and interviews with those close to the HSBC prosecution show how multiple - and sometimes overlapping - inquiries have slowed the prosecution and added to costs, as well as led to rancor within the department and between different government agencies.

They also underscore the problems the government faces in policing global banks such as HSBC that can enable a wide range of illicit transactions -- from small-time fraud to laundering of tens of billions of dollars for drug cartels and countries that are the subject of U.S. sanctions, such as Iran.

At one point, for example, a U.S. prosecutor in West Virginia was forced to explain to HSBC that dual Justice Department probes were not duplicative, according to a letter from the prosecutor to the bank's lawyer.

Such strife among different government agencies has surfaced in other complex investigations. In August, New York State bank regulator Benjamin Lawsky drew the ire of federal agencies when he independently pursued a $340 million settlement with another British bank, Standard Chartered Plc, rather than being part of an ongoing federal probe.

It is all at least partially due to a heightened effort by U.S. and state regulators to crack down on money laundering. Besides HSBC and Standard Chartered, a series of global banks including JPMorgan Chase & Co and Citigroup Inc have faced investigations into lapses related to money laundering.

A Department of Justice spokesman said in an emailed statement that the department continues to "aggressively pursue" the HSBC probe "in coordination with its internal components and external partners."

"Financial investigations, by their nature, are complex and time consuming," spokesman Dean Boyd wrote. "The department's track record in bringing successful enforcement actions in the banking industry speaks for itself, and has had a significant, positive impact on banking industry practices."

Spokespeople for the federal prosecutors in Brooklyn and West Virginia, as well as the other government agencies mentioned in this article declined to comment.

An HSBC spokesman also declined comment.

Parallel Probes

Prosecutors in Ihlenfeld's office had been working since at least December 2008 on the case, which originated with an investigation of a local doctor's use of HSBC accounts to move $3 million tied to Medicare fraud, according to the letter.

But as the investigators looked deeper, they realized the case was merely "the tip of the iceberg", Ihlenfeld wrote.

Prosecutors in West Virginia had been working with two units of the Treasury Department - the Internal Revenue Service's Criminal Investigation arm and the Financial Crimes Enforcement Network (Fincen), which enforces anti-money laundering laws.

Brooklyn prosecutors, meanwhile, had aligned with the more powerful Washington-based Asset Forfeiture and Money Laundering Section of the Department of Justice. Investigators in that enterprise also included the Drug Enforcement Administration and the Immigration and Customs Enforcement, a unit of the Department of Homeland Security.

The Asset Forfeiture unit had the power to veto any proposed money laundering indictment or settlement with HSBC, according to the letter.

Ihlenfeld touted the support of his own team, the IRS and Fincen, describing the agencies' investigators as "the best of the best when it comes to paper cases."

He also wrote that his office was much further along in the investigation, arguing that his group had devoted well over 5,543 hours to the investigation.

In one swipe at Brooklyn prosecutors, Ihlenfeld wrote that they did not realize that HSBC operated a bulk cash processing center "within walking distance" of their offices until West Virginia prosecutors pointed it out to them during the mediation.

He wrote that on March 24, 2010, the top prosecutor in Brooklyn had said that their investigation was "just starting".

"Even if DOJ's budget was unlimited, it would be wasteful for" the competing group to replicate what was already a successful investigation, he wrote.

In the end, Ihlenfeld did not win the battle. Prosecutors, including those in Washington, now oversee the probe, which is still ongoing.

For HSBC, after more than five years of investigation, a final settlement may be approaching. The bank has already set aside $700 million to cover those costs, and said in a regulatory filing in July that they could be "significantly higher".

[Source: By Carrick Mollenkamp and Brett Wolf, Reuters, 26Sep12]

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small logoThis document has been published on 27Sep12 by the Equipo Nizkor and Derechos Human Rights. In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes.