Swiss and French Authorities probing HSBC on Money Laundering

HSBC Holdings plc, the British multinational banking and financial services company, has revealed that its Swiss private banking division is currently under investigation for suspected money laundering activities by authorities in both Switzerland and France. This announcement coincided with the release of its quarterly earnings report, which fell short of analyst forecasts.

The ongoing investigation focuses on what HSBC has described as 'two historical banking relationships' that have drawn the scrutiny of law enforcement. While the bank indicated that these inquiries are in the preliminary stages, it has cautioned that potential penalties or sanctions could have a profound financial impact.

In a statement to investors, HSBC acknowledged the uncertainty of the situation, stating that it is 'not practicable' to predict the outcome of the investigation. The bank’s communication suggested significant repercussions could arise, a warning that typically points towards potential legal costs in the future.

As the investigation unfolded, HSBC released its results for the second quarter of 2024, revealing a profit before tax of $6.3 billion. This figure represents a 29% decrease compared to the same period in the previous year and falls short of the consensus estimate of $6.99 billion. Additionally, revenues for the quarter reached $16.5 billion, slightly below the expected $16.67 billion. Factors contributing to this revenue shortfall included impairment charges from a Chinese banking partner and reduced income from various business divestitures completed in the first half of the year.

To soften the impact of the disappointing earnings report, HSBC announced a $3 billion share buyback programme. However, this move failed to prevent a decline in its Hong Kong-listed shares, which dropped by 3.82% following the announcement. Further compounding the issues, the bank reported a 10% rise in operating expenses year-over-year, primarily due to restructuring initiatives and increased investments in technology.

In his remarks, HSBC's Chief Executive Officer Georges Elhedery acknowledged the difficulties posed by the current global economic climate. He noted 'structural challenges' that impact inflation and interest rate forecasts, pointing to broad-based tariffs and fiscal vulnerabilities as sources of economic uncertainty. Elhedery stated, 'Even before tariffs take effect, trade disruptions are reshaping the economic landscape.' He also mentioned that while the immediate effects of tariffs on revenue may be minimal, overall economic decline could cause the bank's return on tangible equity to drop below its goal of reaching mid-teens.

The current investigation adds strain to an institution that is no stranger to compliance issues. In 2022, the Swiss financial regulator, the Swiss Financial Market Supervisory Authority (FINMA), issued a serious critique of HSBC's compliance practices. It found that the bank had failed to perform adequate due diligence on high-risk accounts associated with politically exposed persons—individuals including politicians and government officials who may have a higher risk of corruption.

This investigation revealed violations involving over $300 million in transactions from 2002 to 2015. FINMA's assessment noted that HSBC 'failed to conduct an adequate check of both the origins and the background of the assets involved,' a situation that called for a significant overhaul of HSBC's anti-money laundering systems. As a condition of the findings, HSBC was required to halt new business with politically exposed clients until it could demonstrate compliance.

The scrutiny faced by HSBC reflects a broader trend within the banking sector. UK regulators have handed out over £250 million in fines for anti-money laundering violations since the beginning of 2024, and experts in compliance anticipate that the enforcement of such penalties will continue.

A recent survey of compliance officers at UK banks revealed that 82% do not consistently verify new individual clients adequately, and only a minimal 6% perform daily checks on existing client accounts.

The added pressure of the current investigation comes at a time when HSBC is working to restore its reputation after several years marked by regulatory issues, including fines and sanctions across different jurisdictions. Given the history of compliance failures, this latest inquiry represents a significant challenge for the bank's management and its shareholders.