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A federal judge on Thursday ordered the release of an independent monitor’s review of HSBC’s internal cleanup after a landmark $1.92 billion settlement for laundering drug money and for sanctions violations.
The U.S. Justice Department and the bank had claimed that disclosing the report could harm law enforcement efforts and provide criminals with a “road map” to holes in HSBC’s defenses against money laundering.
But U.S. District Judge John Gleeson ruled that the court and the public had a right to know whether HSBC was living up to its agreement to improve internal controls and merited a deferral of prosecution by the government.
“I care a great deal about the results of the monitor’s investigation,” Gleeson wrote. “[M]y review of those results is necessary to do my job properly.”
“If, for example, the monitor’s report disclosed that HSBC were systematically and extensively laundering money for drug traffickers, it would demean this institution for me to sit by quietly while the government took no action.”
Gleeson also said it was “equally appropriate and desirable for the public to be interested and informed now in the progress” of the HSBC settlement.
HSBC in 2012 reached a landmark settlement with the federal government, admitting that it had deliberately laundered funds for drug cartels and countries under trade sanctions. Prosecutors described the settlement as a “sword of Damocles” hanging over HSBC. Should the bank fail to improve, it would face prosecution for unbridled financial wrongdoing.
A condition of the settlement was that the bank submit to extensive outside review of its reform efforts. The former New York State ethics chief Michael G. Cherkasky was appointed as the HSBC monitor in 2013.
A leaked copy of his report recounted instances of U.S. bank managers bullying and shouting at compliance team members, and drew attention to the bank’s dealings with clients that had possible links to terrorism, according to Bloomberg.
Both Cherkasky and a spokesman for the Justice Department declined to comment. However in court papers Cherkasky had been quoted as saying that foreign government officials had only agreed to speak with him as part of his monitoring on condition that their communications remain confidential.
HSBC told 100Reporters that both British and American authorities had argued against releasing the report, citing the terms of the 2012 settlement.
“We therefore regret this decision and are considering our next steps,” said Rob Sherman, a spokesman for the bank.
White Collar Impunity
The HSBC settlement sits at the center of public outrage at perceived leniency in the federal government’s white-collar criminal law enforcement.
Under the terms of a so-called “deferred prosecution agreement,” the Justice Department will drop all charges — leaving HSBC with no conviction or criminal record — if after a five-year period prosecutors believe the bank has sufficiently cleaned up its act.
Since the early 1990s, such settlements have become a preferred tool for policing the corporate world and similar methods have recently been introduced in the United Kingdom. Prosecutors have defended them, saying they encourage cooperation and reform by targeted companies.
However, lawmakers and critics have denounced deferred prosecution agreements as symbols of white-collar impunity, reducing penalties for corporate crime to nothing more than the cost of doing business while less powerful defendants end up behind bars for lesser crimes.
Outside monitoring by independent experts, who often are awarded highly lucrative contracts to inspect companies’ performance and report back to prosecutors, have been a key feature of such settlements.
However, their reporting has been closely held and previous efforts to pry them loose from courts and the federal government have failed.
A federal appeals court in 2013 refused to allow the release of outside monitoring reports for the insurance giant American International Group Inc., which was bailed out with public funds during the global financial crisis.
Its outside monitor, James M. Cole, — who recently stepped down as the Justice Department’s No. 2 official — produced the reports as AIG was building the very derivatives portfolio that caused its liquidity crisis — a central element in the ensuing economic meltdown. The reports had been sought by the business reporter Sue Reisinger.
(100Reporters is currently also suing the Justice Department under the Freedom of Information Act for access to outside monitoring reports on anti-corruption compliance at Siemens, the German engineering colossus which pleaded guilty in 2008 to systematic bribery across the globe.)
Key to the decision in the AIG case was whether the reports were “judicial records” to which the public is entitled.
Federal appeals judges in Washington found that no judge had based any decision on the requested records and so they were not judicial records and could not be released.
But in his ruling handed down in Brooklyn on Thursday, Gleeson said that the HSBC case remained a matter before him and that the court would oversee any future prosecution of HSBC, based in no small part on the Cherkasky report — meaning the review was a judicial record.
Gleeson gave the Justice Department and HSBC until February 12 to submit proposed redactions after which he said he would release the “majority” of the report.
Gleeson’s decision was prompted by a seemingly obscure source — a November letter from a Pennsylvania man Hubert Dean Moore, who asked to review the report for a complaint against the bank that he had lodged with the Consumer Financial Protection Bureau.
Moore had sought a loan modification from the bank but believed that without the Cherkasky report, “my complaint is essentially a ‘he-said-she-said’ argument.”
Brandon L. Garrett, a professor of law at the University of Virginia who analyzes corporate settlements, said Gleeson had struck a blow for transparency in the annals of white-collar criminal law.
“So much of what these monitors do remains totally out of the public eye. We do not even know who the monitors are in some of these prosecution agreements,” Garrett wrote in an email.
“We have no idea when these prosecutions quietly end whether the company actually complied. It is only because of Judge Gleeson’s supervision that the public knows so much about the apparently slow progress HSBC has made towards compliance.”
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Bernd Pulch 