HSBC 2007 Annual Report Download - page 198

HSBC HOLDINGS PLC
Report of the Directors: The Management of Risk (continued)
Regulation and supervision / Risk management
196
implemented Basel II by no later than 36 months
after 1 April 2008, including the completion of a full
12-month parallel run. HSBC is analysing the rules
to ensure that systems and processes, already largely
developed and implemented, are aligned with the
final requirements.
In addition, US banking authorities have
adopted ‘leverage’ capital requirements that
generally require US banks and bank holding
companies to maintain a minimum amount of capital
in relation to their balance sheet assets (measured on
a non-risk-weighted basis).
The Federal Deposit Insurance Corporation
Improvement Act of 1991 provides for extensive
regulation of insured depository institutions (such as
HSBC Bank USA, HSBC Bank Maryland, HSBC
Bank Delaware, HSBC Bank Nevada and Wells
Fargo HSBC Trade Bank, N.A.), including requiring
federal banking regulators to take ‘prompt corrective
action’ with respect to FDIC-insured banks that do
not meet minimum capital requirements.
HSBC Bank USA, HSBC Bank Maryland,
HSBC Bank Delaware, HSBC Bank Nevada and
Wells Fargo HSBC Trade Bank, N.A., like other
FDIC-insured banks, may be required to pay
assessments to the FDIC for deposit insurance under
the FDIC’s Bank Insurance Fund. Under the FDIC’s
risk-based system for setting deposit insurance
assessments, an institution’s assessments vary
according to the level of capital an institution holds,
its deposit levels and other factors.
The USA Patriot Act (‘Patriot Act’) imposes
significant record keeping and customer identity
requirements, expands the US federal government’s
powers to freeze or confiscate assets and increases
the available penalties that may be assessed against
financial institutions for failure to comply with
obligations imposed on such institutions to detect,
prevent and report money laundering and terrorist
financing. Pursuant to the Patriot Act, final
regulations are in effect which impose anti-money
laundering compliance obligations on financial
institutions (a term which, for this purpose, includes
insured US depository institutions, US branches and
agencies of foreign banks, US broker-dealers and
numerous other entities). Many of the anti-money
laundering compliance requirements imposed by the
Patriot Act and these implementing regulations are
generally consistent with the anti-money laundering
compliance obligations existing for banks prior to
the Patriot Act. These include requirements to
adopt and implement an anti-money laundering
programme, report suspicious transactions and
implement due diligence procedures for certain
correspondent and private banking accounts. Certain
other specific requirements of the Patriot Act were
new compliance obligations. The passage of the
Patriot Act and other recent events have resulted in
heightened scrutiny of the Bank Secrecy Act and
anti-money laundering compliance by federal and
state bank examiners.
The HSBC Group takes its obligations to
prevent money laundering and terrorist financing
very seriously. HSBC has policies, procedures and
training intended to ensure that its employees know
and understand HSBC’s criteria for when a client
relationship or business should be evaluated as
higher risk. As part of its continuing evaluation of
risk, the HSBC Group monitors its activities in
countries and entities subject to US economic
sanctions programmes administered by the Office of
Foreign Assets Control. HSBC’s business activities
include correspondent banking services to banks
located in some of these countries and private
banking services for nationals of, and clients
domiciled in, some of the countries. The Group
has a small representative office in Tehran, Iran.
The US State Department has designated certain
countries (Cuba, Iran, North Korea, Sudan and
Syria) as state sponsors of terrorism, and US law
generally prohibits US persons from doing business
with such countries. HSBC is aware of initiatives by
governmental entities and institutions in the US to
adopt rules, regulations or policies prohibiting
transactions with or investments in entities doing
business with such countries. The HSBC Group does
not believe its business activities with counterparties
in, or directly relating to, such countries are material
to its business, and such activities represented a very
small part of total assets at 31 December 2007 and
total revenues for the year ended 31 December 2007.
If HSBC were to fail to maintain and implement
adequate programmes to combat money laundering
and terrorist financing and to comply with economic
sanctions, or was found to be in breach of relevant
laws and regulations, including by failing to observe
economic sanctions, serious legal and reputational
consequences for the Group could arise.
HSBC’s US insurance agency and underwriting
operations are subject to regulatory supervision
under the laws of the states in which they operate.
Insurance laws and regulations vary from state to
state but generally require forms and rates to be filed
with, and approved by, the state insurance
departments, and cover licensing of insurance
companies; corporate governance; premiums and
loss rates; dividend restrictions; types of insurance
that may be sold; underwriting processes;