HSBC

HSBC revealed that it is under investigation by at least six jurisdictions for potential manipulation of interbank lending other interest rate markets as CEO Stuart Gulliver admits Europe's biggest bank has "lost its way" and warned that legal penalties could be significantly higher than the $700m it has earmarked to settle rate-rigging and money-laundering charges.

In an earnings statement released Monday, the bank said that "various regulators and competition and enforcement authorities around the world including in the UK, the US, Canada, the EU, Switzerland and Asia, are conducting investigations related to certain past submissions made by panel banks in connection with the setting of Libor, Euribor and other interest rates. As certain HSBC entities are members of such panels, HSBC and/or its subsidiaries have been the subject of regulatory demands for information and are cooperating with those investigations."

"In addition, HSBC and other panel banks have been named as defendants in private lawsuits filed in the US with respect to the setting of Libor and Euribor, including putative class action lawsuits which have been consolidated before the US District Court for the Southern District of New York. The complaints in those actions assert claims against HSBC and other panel banks under various US laws including US antitrust laws, the US Commodities Exchange Act, and state law."

However, HSBC's Chairman Douglas Flint was keen to point out that "based on the facts currently known, it is not practicable at this time for HSBC to predict the resolution of these regulatory investigations or private lawsuits, including the timing and potential impact on HSBC."

Gulliver told reporters on a conference call that the figure could be "significantly higher" than the $700m the bank has provisionally set aside to cover legal liabilities and that the bank had "clearly lost its way" amid the scandals related to product mis-selling, alleged rate-rigging and money laundering.

HSBC reported that pretax profits rose 10.4 percent to $12.7bn in the first half of this year and set aside $1.3bn to compensate retail customers who were mis-sold payment protection insurance products and small businesses which were mis-sold interest rate derivatives.

HSBC at the Crossroads

HSBC has a number of fraud, anti-trust and mis-selling scandals over the last year.

While Barclays became the first bank to settle with US and UK regulators for a record fine of £290m for manipulating Libor submissions, other banks including HSBC are being investigated for falsifying and colluding to falsify submissions across a number of jurisdictions.

Although HSBC did not forecast a definitive impact the Libor rigging scandal may have on its bank, it says that it will "also need to take concrete steps to resolve its own issues, particularly in the US."

"In response to this risk, we are progressing a number of initiatives which seek to address the issues identified, including creating our new global management structure, enhancing our governance and oversight, increasing our compliance function resource, emphasising our values and designing and implementing new global standards as outlined elsewhere," said the group in a statement.

Meanwhile, HSBC said it is setting aside a total of $2bn to cover US law enforcement and regulatory costs and compensation for UK customers for mis-selling derivatives.

In tandem with Libor investigations, HSBC has been embroiled with money laundering probes and convictions in the US.

HSBC and Money Laundering

HSBC's head of compliance David Bagley told a US Senate committee that he will step down after investigators released a damning report detailing more than a decade of lax controls and linked Britain's biggest bank to money-laundering, terrorist funding, tax evasion and financial ties to Iran that violate US sanctions.

Speaking at the US Senate Permanent Sub-committee on Investigations in mid-July, Bagley said, "as I have thought about the structural transformation of the bank's compliance function, I recommended to the Group that now is the appropriate time for me and for the bank for someone new to serve as the head of Group Compliance. I have agreed to work with the bank's senior management towards an orderly transition of this important role"

HSBC spokespeople after the event told IBTimes UK that Bagley "will continue to work with HSBC to secure a smooth transition for this important role."

The Senate probe also laid heavy criticism on HSBC's prime US regulator, the Office of the Comptroller of the Currency (OCC), and warned HSBC that it would consider revoking its charter to operate in the United States.

The 335-page report by the US Senate permanent subcommittee on investigations, which draws from 1.4 million documents and interviews with 75 HSBC officials, describes a "pervasively polluted" culture and a "dramatic failure of accountability" at HSBC, according to Senator Carl Levin, the committee's ranking lawmaker.

HSBC has now set aside $700 million to cover "certain law enforcement and regulatory matters."

His committee accuses the bank of using a global network of branches and a US affiliate to create a gateway into the American financial system that led to more than $30bn in suspect transactions linked to drugs, terrorism and business for sanctioned companies in Iran, North Korea and Burma.

The report, compiled in conjunction with a sweeping investigation that involved the US Department of Justice, the Federal Reserve, the Manhattan District Attorney's Office and the OCC, says that between 2007 and 2008 more than $7bn was shipped from HSBC's Mexican operations, which had been set up with the purchase of Grupo Financiero Bital.

HSBC's own anti-money laundering director was said to have expressed concern that as much as 70 percent of "laundered proceeds" in Mexico was running through the bank's affiliate.

Nearly $20bn in HSBC transactions were found to have involved Iran or Iranian companies, the report said, with as many as 90 percent of them having no disclosure of ties to the sanctioned regime.

Similar transactions were found linking HSBC to businesses in Sudan, Burma and North Korea.

Investigators also allege that more than a $1bn was shipped from the bank's US units to an affiliate in Saudi Arabia, Al Rajhi, which has ties to terrorist groups. The report revealed an HSBC attempt to cut ties with Al Rajhi in 2005, a decision the bank reversed a few months later before exiting the business of shipping "bulk cash" in 2010.

Further allegations include the assistance of tax evasion for some US citizens through HSBC India.

HSBC and Mis-selling Derivatives

In June, HSBC, as well as Barclays, RBS and Lloyds Banking Group agreed to stop selling interest rate hedging products to small-to-medium enterprises (SME) after regulator Financial Services Authority (FSA) found them guilty of mis-selling derivatives products.

"The FSA has found serious failings in the sale of interest rate hedging products to some SMEs," said an official statement. "We believe that this has resulted in a severe impact on a large number of these businesses. In order to provide as swift a solution to this problem as possible we have today confirmed that we have reached agreement with Barclays, HSBC, Lloyds and RBS to provide appropriate redress where mis-selling has occurred."

In a settlement with the FSA, the four banks agreed to stop marketing interest rate structured "collars" to retail customers, which have included fish-and-chip shops and family-owned electrical goods stores.

However, the during the period 2001 to date, banks sold around 28,000 interest rate protection products to customers.

Interest rate swap agreements, or IRSAs, are contracts between a bank and its customer where typically one side pays a floating, or variable, rate of interest and receives a fixed rate of interest payments in exchange. They're used to hedge against extreme movements in market interest rates over a given period. Companies that have seen the value of these products move against them as rates fell during the recession, now owe banks crippling sums of money in interest payments each year.

But if these businesses want to cancel these contracts, the cost of doing so would be even higher in a lump sum payment, as banks demand cash upfront in lieu of future revenue.

"For many small businesses this has been a difficult and distressing experience with many people's livelihoods affected," said Martin Wheatley, managing director of the Conduct Business Unit at the FSA. "Our work has focused on ensuring a swift outcome for these businesses that form such an important part of the economy. I am pleased that Barclays, HSBC, Lloyds and RBS have agreed to do the right thing by their customers and offer redress or a review of past sales. These firms have responded to the need to provide a fair deal for customers by working with us, and I welcome this outcome."

Over the past two months the FSA conducted a review of these 28,000 sales and reviewed a significant amount of documentation from the firms, including sales files, customer complaints and taped conversations.

After its investigation, the FSA said it found a range of poor sales practices including failure to ascertain the customers' understanding of risk, poor disclosure of exit costs, non advised sales straying into advice and the concept of "over-hedging" - where the amounts and/or duration did not match the underlying loans.

The FSA added though that not all businesses will be owed redress, but for those that are, the exact redress will vary from customer to customer and could include a mixture of cancelling or replacing existing products, together with partial or full refunds of the costs of those