28 Oct 2016

KYC360 investigative reporter Clementine Wallop examines the unusual case of Zapata vs HSBC Holdings PLC. Families of several US citizens killed by Mexican drug cartels are suing HSBC under the Anti-Terrorism Act, which creates civil liability for supporters of terrorism, for the bank’s role in laundering billions of dollars of drug money.

An American lawsuit that relies on counter-terrorism legislation is keeping up the pressure—and the scrutiny—on HSBC, the bank whose dealings with Mexican drug cartels has already cost it $1.9 billion in penalties and led to interrogation and a continuing overhaul of its anti-money laundering practices.

The case, being brought under the Anti-Terrorism Act, is a lesson in how tough it is for financial institutions’ anti-money laundering divisions to guard against involvement with criminals whose activities and earnings are so deeply embedded in a society’s institutions and establishment.

Lawyers Elias, Gutzler, Spicer (EGS) filed the case, Zapata vs HSBC Holdings PLC, in the federal court in the Southern District of Texas in February on behalf of families of several American citizens killed by Mexican cartels. The plaintiffs say the bank was complicit in laundering billions of dollars of drug money generated by Mexican cartels responsible for the deaths of tens of thousands of people.

“The plaintiffs seek to hold HSBC accountable under the Anti-Terrorism Act, a statute that creates civil liability for supporters of terrorism. HSBC was complicit in laundering billions of dollars for the drug cartels for nearly a decade leading up to the terrorist attacks on the victims—two US federal agents ambushed by Los Zetas cartel members; a pregnant US consulate worker and her husband gunned down by the Juarez cartel; and a groom abducted from his own wedding, tortured, and killed by Sinaloa cartel assassins,” EGS said in its complaint.

Mexico is a major producer of heroin and methamphetamine, much of which is destined for the US market. The country is also a key trafficking route for cocaine produced in South America on its way north.

The impact drug trafficking has had on Mexico and its people is enormous. Since 2006, Mexico’s drug wars have killed at least 100,000 people, Drug Policy Alliance analysts estimate. Tens of thousands more have gone missing. Cartel activity and attendant corruption has pervaded all levels of society from politicians to police, schoolteachers to prostitutes.

Though it’s hard to gauge, the sums of money involved are huge: Mexican drug operations and their Colombian suppliers generate, launder and remove from the United States between $18 billion and $39 billion a year, according to the last available data from the now defunct National Drug Intelligence Center. The US Department of Justice was unable to give more up-to-date figures, telling KYC360 it doesn’t track this data.

Aggressive push

The case is pending and it is uncertain when it will come to court, Richard Elias, a partner at EGS, told KYC360.

“HSBC has moved to transfer the case from Brownsville, Texas to New York.  We have opposed that motion, and the issue is fully briefed.  We are awaiting a ruling from the court […] It is hard to pinpoint, and depends on the outcome of the motion to transfer.  Once the preliminary motions are decided we are going to push for an aggressive discovery schedule and will attempt to get a trial date at as early as practicable,” he said.

Noting observations from some that it could be difficult to bring a case under anti-terrorism legislation since the cartels are not classified as terrorists under US law, Elias said “the provisions that we are proceeding under do not require that the cartels be designated as a Foreign Terrorist Organisation. They define terrorism broadly by reference to specific crimes, such as killing or kidnapping United States nationals outside the United States, which the cartels do regularly, and more generally as any act dangerous to human life that appears to be intended to intimidate or coerce a civilian population or government.”

HSBC’s counsel conceded this final point in a recent hearing, he said.

A spokesman for HSBC had not replied to repeated requests for comment from KYC360 at the time of writing. The bank told the Financial Times in February it would vigorously defend itself against the lawsuit.

HSBC has previously tangled with law makers seeking to stop illicit cash flows from Mexico. In 2012, the bank paid more than $1.9 billion to the US authorities for allowing the laundering of $881 million in drug money from the Sinaloa cartel and Colombia’s Norte del Valle cartel. Since 2012, the bank says it has put in place systems to ensure better practices to protect itself against involvement in similar lapses.

Billions lost

Mexico lost a total of $528 billion in illicit financial flows from 2004 to 2013, according to Global Financial Integrity. This cash was the product of corruption, bribery and kickbacks, criminal activities, and efforts to shelter wealth from tax authorities.

While GFI cautions its reports don’t represent proceeds from drug trafficking, Christine Clough, its program manager and acting communications director, says drug money would be implicated in these flows.

“We can’t reliably estimate how much of the illicit flows we measure are linked to the drug cartels. However, this is [an] aspect that’s relevant to the discussion on trade misinvoicing, because one of the reasons to engage in trade misinvoicing is to hide the movement of illicitly earned money from one jurisdiction to another. It’s a safe bet that a sizeable percentage of this activity is linked to drug cartels,” she said.

The sums of money in play and influence of the cartels in Mexican society, especially in terms of corrupting officials, make it especially difficult for multinational financial institutions to protect themselves against laundering drug money or unconscious engagement with cartel cash.

“Mexico remains one of the most challenging money laundering jurisdictions for the United States, especially with regard to the investigation of money laundering activities involving the cross-border smuggling of bulk currency from drug transactions,” according to the EGS complaint.

Christine Clough agrees that Mexico presents substantial challenges to companies working there, but attributes persistent struggles to a global, rather than a national, problem.

“This is not just a developing country problem; one of the most infamous places for registering secret companies is the US state of Delaware. Banks need to know with whom they’re really doing business, not just the name of a business or a nominee director. Public registers of beneficial ownership information would eliminate this secrecy. We need this globally, but Mexico could start by requiring it for anyone moving money or conducting business within its borders.”

“Secret companies are not the only problem here. The banks themselves have also willingly turned a blind eye to the money they’re processing for clients. Banks aren’t being found to have let one or two drug-related clients through, they’re being accused of laundering upwards of hundreds of billions of dollars for these criminal groups,” Clough said.

The EGS lawsuit accuses HSBC of “knowingly providing continuous and systematic material support to the cartels and their acts of terrorism by laundering billions of dollars for them [in the decade leading up to 2010]. As a proximate result of HSBC’s material support to the Mexican drug cartels, numerous lives, including those of the plaintiffs, have been destroyed.”

“Driven by its desire to expand its business and increase revenue, HSBC intentionally implemented criminally deficient anti-money laundering programmes, processes, and controls, which were designed to guarantee that billions of dollars of illicit proceeds would go through its banks undetected or unreported. And that is exactly what happened […] Under the criminally deficient AML regimes, a culture of recklessness and corruption pervaded HSBC.”

According to EGS’s complaint, HSBC employees accepted and processed illicit cash showing “unmistakable” signs of money laundering, for example accepting deposits sometimes running into millions of dollars from people with no obvious source of income. Employees fabricated documents showing they had performed KYC checks that they had not and in some cases accepted bribes to process illicit cashflow.

Compliance crackdown

Following the 2012 prosecution, HSBC has said it has taken steps to address the lapses that allowed it to become—as the complaint says—“the preferred financial institution for drug cartels to launder money.”

HSBC has around 9,000 compliance staff now from about 1,500 in 2010, and the bank says it has speeded up hiring in this division since the 2012 settlement.

February’s Financial Times report quoted an HSBC spokesman as saying the bank is “committed to combating financial crime.”

“We are and have taken strict steps to help keep bad actors out of the global financial system,” the spokesman told the newspaper. HSBC did not respond to enquiries from KYC360 about what measures it is taking or has already taken to tighten its AML and KYC practices.

Earlier this year a federal monitor, appointed as part of the 2012 settlement, found HSBC hadn’t done enough to implement different AML practices and protections.

The monitor “remains unable to certify that the bank’s compliance program is reasonably designed and implemented to detect and prevent violations of AML and sanctions laws,” U.S. Attorney Robert Capers said in a letter filed with the federal court in Brooklyn, New York, and reported by Reuters, though he commended the “significant progress” made by the bank since 2012.

The information revealed in the monitor’s report indicate “ongoing AML deficiencies” and it would be wrong to assume changes the bank has made to its practices have already driven an industry-wide shift, Elias told KYC360.

The monitor’s comments show institutions must be vigilant to the risks from such influential and rich actors as the Mexican drug cartels. They must be prepared to put in place systems and staff to better protect them against becoming complicit in financial crime.

Clough’s key piece of advice is for companies to “know with whom you’re doing business,” she says.

“The best way to accomplish this is through public registries of beneficial ownership information. Then, no longer would a cartel, a terrorist, a corrupt politician, or anyone else be able to create secret companies with no recorded connection to themselves and then freely use the legitimate global financial system for their illegal transactions. False declarations will come with penalties, but more importantly, when law enforcement discovers a lie, they’ll then have probable cause to investigate further. Making the registries open to the public would also mean that civil society, the media, and others can participate in sharing and verifying information.”

Whether the lawsuit will create precedent for other bereaved families affected by Mexican drug cartels is uncertain, Elias says.

“I don’t want to speculate on what, if any, implications this case will have on other actions.  We are focused on getting justice for our clients, who are all the tragic victims of what can only be characterised as acts of international terrorism.”

Author profile: Clementine Wallop is a journalist and researcher based in London. She has lived and worked in Nigeria and Singapore and has reported from countries including Zimbabwe, Kazakhstan and the Democratic Republic of Congo.

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