HSBC 2014 Annual Report Download - page 29

HSBC BANK PLC
Strategic Report: Principal Risks and Uncertainties (continued)
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• The Group has developed and is implementing a
global approach to the management of conduct and
have established a Conduct & Values Committee as a
sub-committee of the Board to oversee the
management of conduct across the Group.
• We have enhanced our governance around central
clearing counterparties and appointed specialists to
manage the associated liquidity and collateral risks.
• We continue to enhance and strengthen governance
and resourcing more generally around regulatory
change management and the implementation of
required measures, actively to address this ongoing
and significant agenda of regulatory change.
• We are implementing a comprehensive programme
of risk mitigation measures to raise awareness of –
and promote compliance with – competition laws.
Regulatory commitments and consent orders
Financial service providers are at risk of regulatory
sanctions or fines related to conduct of business and
financial crime. The incidence of regulatory proceedings
against financial service firms is increasing with a
consequent increase also in civil litigation arising from or
relating to issues which are subject to regulatory
investigation, sanction or fine.
In addition, criminal prosecutions of financial institutions
for, among other alleged conduct, breaches of anti-
money laundering (‘AML’) and sanctions regulations,
antitrust violations, market manipulation, aiding and
abetting tax evasion, and providing unlicensed cross-
border banking services, have become more
commonplace and may increase in frequency due to
increased media attention and higher expectations from
prosecutors and the public. Moreover, financial service
providers may face similar or broader legal proceedings,
investigations or regulatory actions across many
jurisdictions as a result of, among other things, increased
media attention and higher expectations from regulators
and the public. Any such prosecution or investigation of,
or legal proceeding or regulatory action brought against,
HSBC or one or more of its subsidiaries could result in
substantial fines, penalties and/or forfeitures and could
have a material adverse effect on our results, business,
financial condition, prospects and reputation, including
the potential loss of key licences, requirement to exit
certain businesses and withdrawal of funding from
depositors and other stakeholders.
In December 2012, HSBC Holdings plc (‘HSBC Holdings’),
HSBC North America Holdings Inc. (‘HNAH’) and HSBC
Bank USA, N.A. (‘HSBC Bank USA’) entered into
agreements with US and UK authorities regarding past
inadequate compliance with the US Bank Secrecy Act
(the ‘BSA’), AML and sanctions laws. Among those
agreements, HSBC Holdings and HSBC Bank USA entered
into a five-year deferred prosecution agreement with the
US Department of Justice (‘DoJ’) the US Attorney’s Office
for the Eastern District of New York, and the US
Attorney’s Office for the Northern District of West
Virginia (the ‘US DPA’); HSBC Holdings entered into a
two-year deferred prosecution agreement with the New
York County District Attorney (the ‘DANY DPA’); and
HSBC Holdings consented to a cease-and-desist order
and HSBC Holdings and HNAH consented to a civil money
penalty order with the FRB. HSBC Holdings also entered
into an agreement with the Office of Foreign Assets
Control (‘OFAC’) regarding historical transactions
involving parties subject to OFAC sanctions and an
undertaking with the FSA (the ‘FCA Direction’) to comply
with certain forward-looking obligations with respect to
AML and sanctions requirements. HSBC Bank USA is also
subject to an agreement entered into with the Office of
the Comptroller of the Currency (‘OCC’), the Gramm-
Leach-Bliley Act (‘GLBA’) Agreement and other consent
orders.
Under the agreements with the DoJ, FCA, and FRB, an
independent monitor (who is, for FCA purposes, a ‘skilled
person’ under Section 166 of the Financial Services and
Markets Act) is evaluating and regularly assessing the
effectiveness of HSBC’s AML and sanctions compliance
function and HSBC’s progress in implementing its
remedial obligations under the agreements. The Monitor
is discussed on page 9.
HSBC has fulfilled all of the requirements imposed by the
DANY DPA, which expired by its terms at the end of the
two-year period of that agreement in December 2014. If
HSBC Holdings and HSBC Bank USA fulfil all of the
requirements imposed by the US DPA, the DoJ charges
against those entities will be dismissed at the end of the
five-year period of that agreement. The DoJ may
prosecute HSBC Holdings or HSBC Bank USA in relation to
any matters that are the subject of the US DPA if HSBC
Holdings or HSBC Bank USA breaches the terms of the US
DPA.
While we still have significant work to do to build and
improve our AML and sanctions compliance programme,
and the US DPA and other settlement agreements
remain in place, the expiration of the DANY DPA is an
important milestone for the Group.
Potential impact on the group
• It is difficult to predict the outcome of the regulatory
proceedings involving our businesses. Unfavourable
outcomes may have a material adverse effect on our
reputation, brand and results, including loss of
business and withdrawal of funding.
• Our significant involvement in facilitating
international capital flows and trade exposes the
group to the risk of financial crime or inadvertently
breaching restrictions and sanctions imposed by the
US Office of Foreign assets Control and other
regulators.
• Breach of the US DPA at any time during its term may
allow the DoJ to prosecute HSBC Holdings or HSBC
Bank USA in relation to the matters which are the
subject of the US DPA.
• The design and execution of AML and sanctions
remediation plans is complex and requires major
investments in people, systems and other
infrastructure. This complexity creates significant
execution risk, which could impact our ability to
effectively manage financial crime risk and remedy
AML and sanctions compliance deficiencies in a timely
manner. This could, in turn, impact HSBC’s ability to
satisfy the Monitor or comply with the terms of the
US DPA, the FCA Direction, or the FRB Cease and