Term Paper on "Money Laundering and Terrorist Funding"

Term Paper 30 pages (8176 words) Sources: 15 Style: MLA

[EXCERPT] . . . .

HSBC Bank USA: Efforts in the Prevention of Money Laundering and Terrorist Funding

Mission and Value Statement

The Risk of Money Laundering and Terrorist Funding in the Banking Industry

Legal Requirements and HSBC Compliance

Technology Issues

HSBC Operations and Internal Management

Impending Developments and Future Challenges

The threat of terrorism and international crime is more than present in today's world. Terrorist and criminal threats appear to have proliferated in recent years, making an understanding of their sources of funding crucial to attempts to control this threat to order and stability. In inside an effort to combat this risk, the federal government of the United States has charged banking institutions with protecting, monitoring, and reporting on financial activity that may aid terrorists and criminals. HSBC Bank USA takes this charge very seriously due to its own risk and a sense of social responsibility.

HSBC Bank USA, like other American banks, is subject to reputational, operational, and legal risks due to the threat of terrorist and criminal activity. To mitigate these risks, they strive for compliance within the legal framework set forth by the United States Patriot Act and Bank Security Act. Compliance requires them to create a written Anti-Money Laundering (AML) program, which includes the designation of a compliance officer, ongoing employee training, designation of controls (including due diligence terms), and an internal audit function. Compliance, however, forms only the most limited aspects of HSBC's efforts as the institution actively works beyond the base requirements set by national and international law.

HSBC Bank USA makes additional strides improve upon compliance requirements. To do this, HSBC focuses on technology issue, including a focus on new challenges and advances and data quality / filtering issues. Maintaining a secure, affordable, and dependable technology system is also crucial. HSBC must also grapple with internal operations changes due to the new regulations. Matters of cost, business management, and personnel management are a concern. By staying abreast of new issues and developments and communicating with other financial institutions, HSBC Bank USA intends to define itself as a leader within the industry. Within the context of this leadership role, HSBC hopes to define financial security in the 21st century.

Mission and Value Statement

HSBC Bank USA is clear in its responsibilities as a financial institution. HSBC must meet the expectations of its customers, shareholders, and colleagues without neglecting the greater social responsibility inherent in the area of banking. In other words, HSBC must be a successful business while also protecting itself and others against the criminal element.

This is no easy task, because it requires HSBC to both defend its own institutions against financial attack, while simultaneously waging an offensive against criminal and terrorist threats to limit their financial integrity.

HSBC Bank USA, as part of HSBC International and The Wolfsberg Group, commits itself to the assistance of governments in fighting terrorism and money laundering.

Cooperation in matters of prevention, detection, and information sharing is key. By working together with financial institutions, HSBC Bank USA will forge new relationships that strengthen business opportunities. At the same time, these relationships will protect communities and other stakeholders by monitoring finances that could be used for illicit aims.

HSBC's goals are supported by strong company values. HSBC strives to: develop lasting ethical relationships with clients; provide customer service that surpasses expectations; maintain the highest standards possible in areas of integrity; promote quality and competence in dealings; pursue distinction and efficiency through communication and teamwork; and meet the challenges of terrorism, technology, and social responsibility head-on.

Problem Statement

As a regulated financial institution, HSBC Bank USA has an important role to play in furthering both domestic and international efforts against money laundering and terrorist funding. Transactions involving money laundering or terrorist financing expose a financial institution to significant reputational, operational, and legal risk. Such risk threatens the functions of business and a bank's ability to serve its customers.

Compliance with federal standards requires many new functions within American banks, and HSBC Bank USA is no different. The training of new personnel to be part of the security structure adds to the already complicated corporate structure of HSBC. Additional funding, technology, and risk assessment is also necessary and difficult to maintain.

HSBC Bank USA and other financial organizations have the additional responsibility of protecting the public and their customers. Through governmental cooperation and compliance to federal standards, banks can contribute to the safety of the global community and, ideally, prevent terrorism and criminal activity. At the same time, banks must be diligent to protect information and their clients. Issues concerning the rights of the individual (the customer) and the protection of their financial and personal information are crucially important in an era where identity theft is an additional concern.

Chapter 1. The Risk of Money Laundering and Terrorist Funding in the Banking Industry

The Banking Industry plays an intricate role in the prevention and handling of money laundering and terrorist funding. As such, every bank must take stock of the risks associated with these critical areas of social, political, and financial importance. Additionally, every bank must make strides to understand the intricacies of money laundering and terrorist financing and must work with others in the industry to protect themselves and their customers.

HSBC USA recognizes the operational, legal, and "reputational" risks of working in the banking industry. Operational risks including inadequate AML programs and regulatory problems relating to such programs can hamper a bank's ability to do business. The related legal risks of failing to meet federal standards are also of major concern to the Senior Management staff at HSBC USA. Despite these considerable concerns, it is "reputational" risk that poses the greatest threat to bankers. Losing public trust through association with illicit financial dealings poses the greatest threat, as a bank's trustworthy reputation is closely associated with its success. Through all of these threats, HSBC further considers its social responsibility to both its clients and the greater public in matters of money laundering and terrorist funding.

The nature of money laundering and terrorist funding in banking

Operational risk

Legal risks associated with money laundering and terrorist funding

Reputation and risk

Since the events of September 11, 2001, the United States government has taken all aspects of terrorist financing and money laundering very seriously.

Terrorist organizations attempting to funnel resources to a common source will invariably attempt to use some form of financial institution. If allowed to prosper, money laundering to terrorists "could lead to a shift of economic power to organized crime, which could erode our political and social systems."

The banking industry in particular is in a critical position to both identify and intercept funds intended for illegal or illicit use, both within the United States and at the global level. Banks are also at the forefront in recognizing and reporting suspicious and unusual client activity.

Seeing this link, many governments, including the United States government, have seen fit to place requirements on financial institutions to protect the greater good.

Banks are responsible for keeping lists of questionable recipients, monitoring transactions, and filtering immense amounts of data to identify potential risks. Under new regulations, which will be discussed further in Chapter 2 and 3, banks must continue to meet AML program requirements and improve upon their methods to combat new methods of criminal ingenuity. At the same time, banks must consider the privacy and rights of clients. These actions necessitate an organization-wide effort and compromise other functions of business.

Financial institutions glean little reward for implementing effective prevention methods -- at least not directly in the business or financial sense.

However, HSBC Bank USA and other iHowevndividual banking institutions are at risk from their associated responsibilities and can lessen that risk through risk management and successful AML programming. Among the risks that HSBC USA and other financial organizations must grapple with are operational, legal, and reputaional risks.

Operational risk is a factor, especially where a financial institution has not committed the time and money necessary for proper controls.

Under the new laws, financial institutions with insufficient AML programs are likely to experience regulatory fines. Business disruption is a second reason why a HSBC Bank USA cannot afford to be without an adequate or more than adequate AML program in place; business disruption due to an investigation can be costly to a bank in both time and money.

As such, HSBC Bank USA must continue to devote enough money and time to the identification and measurement of operational risk.

Legal risks also pose a threat to a banking organization. Legal risks can be closely associated with operational risks, though often require more financial backing to restore order within an organization. Legal risks might take the form of lawful action against senior management for their lack of due diligence or controls, or other misconduct. The largest legal risk to HSBC Bank USA is the risk of non-compliance under federal regulation. Legal costs to defend the organization or individuals associated with the organization can be sizable.

Those in positions of leadership at HSBC Bank… READ MORE

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