By Carrick Mollenkamp and Brett Wolf
NEW YORK/WASHINGTON (Reuters) - HSBC Holdings Plc
The settlement with Europe's biggest bank - which could be announced as soon as next week - will likely involve HSBC entering into a deferred prosecution agreement with federal prosecutors, said the sources, who spoke on condition of anonymity.
The potential settlement, which has been in the works for months, is emerging as a test case for just how big a signal U.S. prosecutors want to send to try to halt illicit flows of money moving through U.S. banks.
An HSBC spokesman said: "We are cooperating with authorities in ongoing investigations. The nature of discussions is confidential."
HSBC said on November 5 that it set aside $1.5 billion to cover a potential fine for breaching anti-money laundering controls in Mexico and other violations, although Chief Executive Stuart Gulliver said the cost could be "significantly higher.
In regulatory filings, HSBC has said it could face criminal charges. But similar U.S. investigations have culminated in deferred prosecution deals, where law-enforcement agencies delay or forgo prosecuting a company if it admits wrongdoing, pays a fine and agrees to clean up its compliance systems. If the company missteps again, the Justice Department could prosecute.
A deferred prosecution agreement could raise questions over whether HSBC is simply paying a big fine and nothing more, said Jimmy Gurule, a former enforcement official at the U.S. Treasury.
It would make a "mockery of the criminal justice system," said Gurule, who is now a University of Notre Dame law-school professor.
In his view, the only way to really catch the attention of banks is to indict individuals.
"That would send a shockwave through the international finance services community," Gurule said. "It would put the fear of God in bank officials that knowingly disregard the law."
An HSBC settlement, long rumored, has been slow in coming. Inside the Justice Department, prosecutors in Washington, D.C. and West Virginia argued over how to best investigate HSBC. According to documents reviewed by Reuters, the U.S. Attorney's office in Wheeling, West Virginia, was prepared as far back as 2010 to indict HSBC and include more than 170 money laundering counts.
Prosecutors in Washington ultimately took charge.
In July, the U.S. Senate Permanent Subcommittee on Investigations released a report saying HSBC allowed clients to move shadowy funds from Mexico, Iran, the Cayman Islands, Saudi Arabia and Syria.
The use of deferred prosecution agreements has surged in recent years because Justice Department officials believe they give prosecutors an option aside from indicting a company or dropping a case.
According to a report in May by the Manhattan Institute for Policy Research, a conservative-leaning think tank, there have been 207 deferred or non-prosecution agreements since 2004.
The agreements "have become a mainstay of white collar criminal law enforcement," U.S. Assistant Attorney General Lanny Breuer said in September during an appearance at the New York City Bar Association.
"I've heard people criticize them and I've heard people praise them. DPAs have had a truly transformative effect on particular companies and, more generally, on corporate culture across the globe."
If U.S. prosecutors agree to a deferred agreement, they still could wield a powerful legal tool by accusing the bank of laundering money.
That would be a much more serious charge than if prosecutors, in a deferred agreement, charged HSBC with criminal violations of the Bank Secrecy Act, a law that requires banks to maintain programs that root out suspicious transactions.
In March 2010, for example, Wells Fargo & Co's
A charge of money laundering would be a rare move by the Justice Department and would send a signal to other big banks that the agency is intent on cracking down on dirty money moving through the U.S. financial system.
(This story corrects month the Senate report was published to July in paragraph 13)
(Reporting by Carrick Mollenkamp and Brett Wolf; Additional reporting by Emily Flitter and Aruna Viswanatha)