In 2012, HSBC Bank USA N.A. agreed to a $1.256 billion settlement with the U.S. Justice Department for its failure to monitor the activities of drug cartels using the bank to launder their money. HSBC USA, which is headquartered in McLean, Virginia, and part of the international financial conglomerate known as HSBC Holdings, didn’t admit any wrongdoing (no surprise there), but agreed to the massive settlement to avoid prosecution. According to documents released by the DOJ, HSBC essentially violated the Bank Secrecy Act (BSA), the International Emergency Economic Powers Act (IEEPA) and the Trading with the Enemy Act (TWEA) by not adhering to anti-money laundering measures and by not conducting appropriate due diligence of its foreign account holders as required by U.S. banking laws. In other words, they simply looked the other way while gladly accepting customer deposits and didn’t ask any questions.
HSBC (formerly the Hong Kong and Shanghai Banking Company) traces its roots to the ambitions of a Thomas Sutherland, a Scotsman with the Peninsular and Oriental Steam Navigation Company. Realizing the need for solid banking facilities in the Orient, Sutherland founded the Hong Kong and Shanghai Banking Company in Hong Kong in March of 1865. He opened its Shanghai affiliate a month later. Within a few years, the entity grew to become the largest financial institution in Asia. In 1992, the corporation acquired London-based Midland Bank and evolved into the present-day HSBC Holdings PLC.
Law enforcement officials in the U.S. and other nations like to talk tough when discussing the multi-national drug war. In June of 1971, President Richard Nixon formally declared a “war on drugs,” a direct response to the increased usage of marijuana, LSD and other narcotics. He advocated mandatory sentencing for even minor drug possession offenses and no-knock warrants. However, in 1972, an independent commission recommended decriminalization of marijuana and allowing it for personal use. Nixon, of course, balked at the idea. But, between 1973 and 1977 eleven states decriminalized marijuana possession. In October of 1977, the Senate Judiciary Committee voted to decriminalize marijuana possession for anyone caught with no more than an ounce of the drug. President Jimmy Carter tried to focus attention on treatment instead of imprisonment. But, by the 1980s, the tide had begun to shift against such reasonable approaches. Many parents were growing concerned about the rising rates of marijuana usage among teenagers. Ronald Reagan came into office in 1981 promising to intensify the war on drugs. The number of people jailed for drug offenses skyrocketed from 50,000 in 1980 to 400,000 in 1997. Even First Lady Nancy Reagan jumped into the fray with her quaint but laughable “Just Say No” campaign.
Today, the United States spends an average of $51,000,000,000 annually to combat illegal narcotics possession, transport and sales. In 2012 alone, 1.55 million people were arrested in the U.S. for nonviolent drug charges. We have more than 2.2 million incarcerated (more than any other nation), mostly on drug charges. The U.S. – Mexican border has become highly militarized. Both people and dogs are trained to detect illegal narcotics stored away in suitcases and vehicle glove compartments. Traffic flows on border crossings between the U.S. and México has slowed dramatically in the past decade, due primarily to drug searches.
But, we’ve seen no improvement. Drug usage in the U.S. remains high. So does the violence. The crack cocaine epidemic that exploded in the 1980s has metamorphosed into a seemingly persistent state of bloodletting. By the turn of the century, the narcotics trade had migrated from such far-flung places as Bolivia and Columbia to México. In 2006, Mexican president Felipe Calderón launched his own war on drugs. And, that’s when things worsened. The level of violence resulting from this half-hearted venture has culminated in the deaths of at least 100,000 people and the disappearance of more than 20,000 along the U.S. – Mexican border. México already has a reputation for police corruption, but the average Mexican citizen is vulnerable to the fierceness of drug cartels. Border towns have become especially dangerous. Even people who aren’t involved in drug activities can fall victim to the violence. Ciudad Juarez, just across the Rio Grande from El Paso, Texas, is one of the most dangerous cities on Earth.
But, this all goes back to the banks. Mexican drug cartels are not only incredibly brutal; they’re also unbelievably wealthy. Joaquin “El Chapo” Guzman Loera, former head of the Sinaloa cartel who was captured recently in México, had the unique distinction of being on the United States’ “Most Wanted” list as well as one of the richest people in the world, according to Forbes. In fact, Forbes estimated that the Sinaloa cartel’s annual revenue exceeds $3 billion.
People often ask where all that money originates. But, I always wonder where it’s stored. This isn’t digital currency, as in “bitcoin.” They’re hard dollars. U.S. paper currency is rectangular-shaped and measures 2.61” wide by 6.14” long with a thickness of 0.0043”. A stack of 100 pieces of U.S. paper currency, therefore, would stand 43” (3’ x 7”) high. If you multiply that into the billions, then it becomes obvious that the money not only weighs a lot, but it takes up a great deal of room. Where would one keep, say, a million dollars in hard currency?
Enter the duplicity of the banks. Drug cartels wouldn’t be able to operate and function without seeming impunity if financial institutions actually enforced laws regarding cash deposits, which are lengthy and detailed. Banks must notify the government if they receive $10,000 or more in a single cash deposit. They must also report to the government any cash withdrawals of that amount. They have to file a Form 8300 within 15 days after such a transaction. But, the laws grow vague regarding “suspicious activity.” If a customer suddenly starts making cash withdrawals in the thousands, for example, the bank is legally obliged to report it. That, however, leaves it up to the institution.
When I worked for a major bank in Dallas, each associate was required to partake in a money laundering seminar every year. We viewed videos and slide presentations of how money is surreptitiously moved through a bank to avoid detection of criminal activity. The “know your customer” rule was hammered into us. In retrospect, I realize my colleagues and I were on the low rung of the financial totem pole. Technically, we were the first line of defense. But, do the same rules apply to the executives who actually run the company?
In 2010, Wachovia Corporation, another large U.S. banking conglomerate, agreed to pay $160 million in forfeitures and fines after officials accused it of “willfully overlooking” the suspicious nature of $420 billion in transactions between the bank and Mexican currency-exchange houses. The movement of that much money should have alerted Wachovia associate to a nefarious undercurrent. But, it didn’t. Or, maybe it did, and no one bothered to investigate further. I suspect Wachovia and other banks often know exactly what’s going on with the transfer of so much money, but deliberately ignore it. Are drug cartels that intimidating? Or, is the lure of vast cash reserves just too great of an opportunity to pass up? Perhaps, it’s both.
The fiascos involving both HSBC and Wachovia remind me of Bank of Credit and Commerce International (BCCI), an international banking organization established in Luxembourg in 1972 by a Pakistani financier, Agha Hasan Abedi, with offices in London and Karachi. Within a decade, BCCI boasted more than 400 branches in 78 countries and assets over $20 billion in assets. But, its goals were purely criminal. BCCI deliberately avoided regulatory oversight in the countries in which operated for the express purpose of enriching its executives and shareholders. But, it all came to an extraordinary end in 1991 as bank regulators in seven nations became fully aware of BCCI’s activities and began shutting down its operations. It was one of the boldest and most flagrant acts of financial malfeasance the world had ever seen. Critics joked that BCCI stood for “Bank of Crooks and Criminals International.”
Every day in America someone gets arrested for minor drug possession. These individuals aren’t the brains behind the giant drug cartels wreaking havoc on the citizenry. They’re usually people just trying to make some quick cash, or hoping to get relief from the traumas of their everyday lives. Yet, they’re the ones who get caught up in the criminal justice system and are sent off to prison. The people inciting drug-fueled violence aren’t necessarily the ones stalking dusty streets and dimly-lit back alleys. They’re the folks in business suits, lunging in corner offices.