In Feb­ru­ary 2008, Mex­i­can au­thor­i­tiess told the chief ex­ec­u­tive of­fi­cer of HS­BC Hold­ings Plc's Mex­i­co unit that a lo­cal drug lord re­ferred to the bank as the "place to laun­der mon­ey," US pros­e­cu­tors said on Tues­day, as they an­nounced a record US$1.92 bil­lion set­tle­ment with the British bank.

Lax mon­ey laun­der­ing con­trols at HS­BC al­lowed two car­tels-one each in Mex­i­co and Colom­bia-to move US$881 mil­lion in drug pro­ceeds through the bank over the sec­ond half of the last decade, ac­cord­ing to pros­e­cu­tors and fed­er­al court doc­u­ments.

So ram­pant was the prac­tice, pros­e­cu­tors said, that on some days drug traf­fick­ers de­posit­ed hun­dreds of thou­sands of dol­lars at HS­BC Mex­i­co ac­counts. To speed things along, the crim­i­nals even de­signed "spe­cial­ly-shaped box­es" that fit the size of teller win­dows at HS­BC branch­es, ac­cord­ing to the doc­u­ments.

Pros­e­cu­tors said a mul­ti-year, mul­ti-agency probe in­to such trans­ac­tions re­vealed how HS­BC had de­gen­er­at­ed in­to the "pre­ferred fi­nan­cial in­sti­tu­tion" for drug traf­fick­ers and mon­ey laun­der­ers. And on Tues­day, that cul­mi­nat­ed in a far-reach­ing de­ferred pros­e­cu­tion agree­ment with HS­BC.

An HS­BC spokesman de­clined to dis­cuss spe­cif­ic trans­ac­tions or clients. But as part of the agree­ment, the bank ac­knowl­edged ma­jor laps­es in com­pli­ance and ig­nor­ing red flags. It al­so ac­knowl­edged en­abling clients to avoid US sanc­tions that pro­hib­it deal­ings with coun­tries such as Iran, Libya, Su­dan, Myan­mar and Cu­ba.

The bank agreed to take steps to fix prob­lems, for­feit US$1.256 bil­lion, and re­tain a com­pli­ance mon­i­tor. It al­so agreed to pay US$665 mil­lion in civ­il penal­ties to re­solve reg­u­la­to­ry ac­tions by the US Of­fice of the Comp­trol­ler of the Cur­ren­cy, the Fed­er­al Re­serve, the Trea­sury De­part­ment and oth­ers.

"We ac­cept re­spon­si­bil­i­ty for our past mis­takes. We have said we are pro­found­ly sor­ry for them, and we do so again. The HS­BC of to­day is a fun­da­men­tal­ly dif­fer­ent or­gan­i­sa­tion from the one that made those mis­takes," HS­BC chief ex­ec­u­tive Stu­art Gul­liv­er said. The set­tle­ment, the largest penal­ty ever paid by a bank, had been ex­pect­ed.

In No­vem­ber, the bank told in­vestors its penal­ty could ex­ceed US$1.5 bil­lion. And many of the de­tails of the bank's laps­es that al­lowed shad­owy mon­ey to sluice through HS­BC were con­tained in a US Sen­ate in­ves­tiga­tive re­port in Ju­ly.

Reuters