Islami Bank Bangladesh Ltd and Social Islami Bank Ltd came into the spotlight yesterday for their alleged links to terrorist financing after a US Senate report exposed British banking giant HSBC's internal governance failure to control flows of suspect funds.
One of the banks was allegedly funding al-Qaeda, and Osama bin Laden's brother-in-law held shares in a company that has shares in the bank.
In all these cases, profit motive rather than cautions from various levels within the bank and standard procedures ruled the game.
More thoughts were given to the bank's making $47,000 in revenue that might go up to $75,000 a year later than to the terrorist links the banks allegedly had, or the US authorities' view of the banks.
A report of the US Senate Permanent Subcommittee on Investigations, a congressional watchdog panel, has revealed these troubling information which show a “pervasively polluted” culture at HSBC Holdings Plc.
The bank acted as financier to clients seeking to route shadowy funds from the world's most dangerous and secretive corners, including Mexico, Iran, Saudi Arabia and Syria, according to the report.
The US report also mentioned that Al Rajhi Bank, a Saudi bank, was involved in suspicious transactions.
HSBC apologised to the US Senate, saying it takes “compliance with the law, wherever it operates, very seriously”.
In one instance, when Islami Bank wanted to open a US dollar account with the HSBC US office, questions were raised about the Saudi bank Al Rajhi's 37 percent ownership in Islami Bank. Ears of HSBC's anti-money laundering unit were cocked.
But the then head of HSBC Global Banknotes, Chris Lok, felt that his interest in considering a new account depended upon whether there was enough potential revenue to make.
“Is this an account worth chasing….How much money can you expect to make from this name? It's just that if the revenue is there then we are prepared for a good fight,” he wrote. “The money is there and we should go for this account.”
“Then Lok and others approved the account despite questions about its [Islami Bank] primary shareholder Al Rajhi Bank, whose past links to terrorist financing had received attention in the media …and troubling information about Islami Bank itself,” the senate report said.
HSBC's own Financial Intelligence Group (FIG) unit had reported that Shaikh Abdur Rahman, chief of Bangladesh's terrorist outfit JMB, had an account with Islami Bank. Bangladesh Bank found that two branches of Islami Bank had been engaged in “suspicious transactions” and urged the bank to take action against 20 bank employees for failing to report the suspicious transactions, according to the FIG report.
Six top militants including JMB chief Abdur Rahman and his deputy Siddiqul Islam alias Bangla Bhai were executed for killing two Jhalakathi judges in 2007.
HSBC's Know Your Customer unit had reported that Islami Bank be classified as a highest risk client but HSBC rejected the suggestion. It meant HSBC did not subject the bank to any enhanced monitoring.
HSBC's another internal report said a Saudi NGO, International Islamic Relief Organisation (IIRO), had been implicated in terrorist financing by the US government and included on the list of those prohibited to do business in the US. The IIRO had accounts with both Islami Bank and Social Islami Bank, and yet HSBC's Compliance Department denied an internal request of due diligence on the bank.
“Today, although HSBC exited the US banknotes business in 2010, Islami Bank remains a customer of two dozen HSBC affiliates,” the report said.
Similarly on Social Islami Bank, the HSBC's internal report said two shareholders of the bank -- the IIRO and Islamic Charitable Society Lajnat al-Birr Al Islam -- had alleged links to terrorism.
“IIRO has also reportedly funded al-Qaeda directly as well as several of its satellite groups. Osama bin Laden's brother-in-law Mohammad Jamal Halifa headed the Philippine branch of the IIRO,” said the FIG's internal report.
While the FIG cautioned about opening an account of Social Islami Bank, it failed to inform HSBC that Lajnat al-Birr, whose original name is Benevolence International Foundation, was designated by the US as a “financier of terrorism” with whom US persons are prohibited from doing business.
There were debates within HSBC about whether to open an account of Social Islami Bank, and yet the account was finally opened.
The FIG of HSBC also cautioned the bank about keeping Social Islami Bank as a client, an advice ignored by the British bank.
According to the US report, HSBC Bank USA, the US affiliate of the Asia-focused bank, supplied US dollars to Islami Bank and Social Islami Bank despite evidence of their links to terrorist financing.
The report, prepared by a team led by Senator Carl Levin, said in the case of Islami Bank, the factors included substantial ownership of the bank by al Rajhi, the central bank's fines for failing to report suspicious transactions by militants, and an account provided to a terrorist organisation.
And in terms of Social Islami Bank, the factors included ownership stakes held by two terrorist organisations whose shares were exposed but never sold as promised, and a bank chairman found to be involved with criminal wrongdoing.
The report said Al Rajhi Bank was associated with Islami Bank Bangladesh that provided an account to a Bangladeshi who had been accused of involvement in a terrorist bombing.
Islami Bank was fined three times for violating the anti-money laundering requirements in connection with providing bank services to “militants.”
Al Rajhi Bank provided a correspondent account to Social Islami Bank, whose largest single shareholder had been the IIRO for many years.
A second shareholder was the precursor to the Benevolence Islamic Foundation, also later designated by the US as a terrorist organisation, said the report.
In a statement on Monday, HSBC said, "We will acknowledge that, in the past, we have sometimes failed to meet the standards that regulators and customers expect. We will apologise, acknowledge these mistakes, answer for our actions and give our absolute commitment to fixing what went wrong.
"We have learned a great deal working with the Subcommittee on this case history and also working with U.S. regulatory authorities, and recognise that our controls could and should have been stronger and more effective in order to spot and deal with unacceptable behaviour.
"We believe that this case history will provide important lessons for the whole industry in seeking to prevent illicit actors entering the global financial system."
The bank said with a new senior leadership team and a new strategy in place since last year, the HSBC Group has already taken a number of concrete steps to augment the framework to address these issues including significant changes to strengthen compliance, risk management and culture.
(1) Islami Bank Bangladesh Ltd
Islami Bank Bangladesh Ltd opened its doors in 1983, designed its operations to be in conformance with Islamic requirements, and has grown to become one of the largest private banks in Bangladesh, which is one of the most densely populated countries in the world. It provides a wide variety of individual and commercial banking services. Several of the bank's most senior officials were politically important figures within the country or in Saudi Arabia, leading to their designations as Politically Exposed Persons in the World Check database. According to Islami Bank Bangladesh, it has an extensive network of more than 600 correspondent accounts.
Islami Bank Bangladesh applied to open accounts with HSBC in 2000, and currently has accounts with HSBC in 24 locations around the world. According to the bank, it opened a US dollar account with HSBC Bank USA (HBUS) in 2000, and US dollar clearing accounts with HSBC India and HSBC Pakistan in 2006. In 2007, the HBUS branch in Singapore also sought approval to open an account for the bank to supply it with physical US dollars, cash US dollar monetary instruments such as travelers cheques and money orders, process US dollar wire transfers, and provide other services.
Opening 2007 HBUS account. Documents show that proposals to open the 2007 HBUS account for Islami Bank immediately raised anti-money laundering (AML) concerns within HBUS AML Compliance, not only because the bank was located in a country ranked by HSBC as at “high risk” of money laundering and ranked by Transparency International as one of the most corrupt countries in the world, but also because members of the Al Rajhi group held a 37 percent direct ownership interest in the bank.
In the fall of 2007, Kwok Ying Fung at the HBUS office in Singapore asked Beth Fisher at HBUS AML Compliance to approve Islami Bank's Know-Your-Customer (KYC) profile, but she declined without explaining why. On October 24, 2007, after receiving her response, he asked HBUS AML Compliance to suggest someone else to approve opening the account. Angela Cassell-Bush suggested that he “reach out to Chris Lok to see if he is willing to be the RM [Relationship Manager] Approver.” Ms Fisher warned her colleagues that, given the connection between the Bangladeshi bank and Al Rajhi Bank, “[t]his is not just an RM issue. This is a KYC due diligence issue.”
On November 6, 2007, Mr Fung asked Mr Lok, head of HSBC Global Banknotes and located in HBUS offices in New York, if he would consider serving as the “RM [Relationship Manager] approver” of the Islami Bank KYC profile, so that the bank could become a “shared client” of HBUS Banknotes and HBUS Payments and Cash Management (PCM). On November 8, 2007, Mr Lok responded that his interest in considering a new account depended upon whether there was enough potential revenue to make the effort of vetting Al Rajhi worth it: “First, I'm happy to be the RM [Relationship Manager] if this is an account worth chasing. How much money can you expect to make from this name? If this can be answered positively then I will ask PCM to check out the … alrajhi connection.…The name Alrajh has been a name heatedly debated for many years. We terminated our trading relationship following 9/11 and only a year ago after London Compliance came back telling New York the group is happy to let us resurrect the relationship that we went back. … Not saying just because of this connection we won't do business. It[']s just that if the revenue is there then we're prepared for a good fight.”
Mr Lok's email suggests that he expected from the outset that HBUS AML Compliance would resist opening an account for Islami Bank and it would take a “fight” to open the account.
Later the same day, Benjamin Saram of HBUS Singapore emailed Mr Lok and others with information about the likely revenues if an account were opened for Islami Bank. He wrote that, because approximately 60,000 Bangladeshis travelled to Saudi Arabia each year on religious pilgrimages and would require about $1,000 to $3,000 each, “we're therefore looking at about $60 mio [million] of currency needs on an annual basis.” He noted that, in 2006, HBUS Banknotes had netted about $47,000 in profits in Bangladesh, and expected a 53 percent increase in 2007, to about $75,000, explaining, “[w]e are a monopoly here, and margins are decent.” Mr Saram estimated that, if an account were opened for Islami Bank, the “net profit would be approximately $75,000/ year.”
Mr Lok responded: “One, the money is there and we should go for this account. Two, I will jump in and wear the GRM [Global Relationship Manager] hat. … I believe we should be able to get the K[YC] sign off.” He also asked HBUS AML Compliance to look into the possible connection between Islami Bank and Al Rajhi Bank.
The next day, November 9, 2007, HBUS AML compliance officer Angela Cassell-Bush confirmed a direct link between the two banks:
“[P]lease note that there is a connection between ISLAMI BANK BANGLADESH LIMITED-Bangladesh and Al-Rajhi Bank …. Based on the information we have on file, the Al-Rajhi family has been associated with Islami Bank Bangladesh Limited, since its inception. They have at least 37 percent direct ownership … through their ownership within the following companies: Arabsas Travel & Tourist Agency, 9.999 percent; Janab Yousif Abdullah Abdul Aziz Al-Rajhi, 9.936 percent; Al-Rajhi Company for Industry & Trade, 9.94 percent; Abdullah Abdul Aziz Al-Rajhi, 7.58 percent. This same family has major controlling interest within Al-Rajhi bank.”
Troubling information. HBUS' Singapore branch actually opened the account for Islami Bank in December 2007. Mr Lok and others approved the account, despite ongoing questions about its primary shareholder, Al Rajhi Bank, whose past links to terrorist financing had received additional attention in the media during the summer of
2007. HBUS also approved the account despite troubling information about Islami Bank itself.
The troubling information about Islami Bank was contained in an internal report that had been prepared less than a year earlier by HSBC's Financial Intelligence Group (FIG). The May 2006 FIG report disclosed that, in March 2006, “Abdur Rahman, chief of the Jamaatul Mujahideen of Bangladesh (JMB), and his second-in-command, Bangla Bhai, were arrested for being responsible for the terrorist bomb blasts of August 17, 2005 in Bangladesh.” The FIG report noted that Mr Rahman had been found to have an account at Islami Bank.
The FIG report also disclosed that an investigation by the central bank of Bangladesh found that two branches of Islami Bank had been engaged in “suspicious transactions” and urged the bank to take action against 20 bank employees, including for failing to report the suspicious transactions. According to the FIG report, in response, Islami Bank reportedly suspended five officers and warned 15 others. The FIG report stated that Bangladeshi news articles had observed it was the third time Islami Bank had been fined by the central bank “for covering up militants' transactions.”
Islami Bank's KYC profile repeated this information and indicated that the HSBC Global Relationship Manager had visited the bank to ask about the matter, and was told that the incident did not involve terrorist financing. The Global Relationship Manager advised against taking any further action, attributing the AML failures to the bank's unsophisticated technology platform. Neither the KYC profile nor the FIG report indicate whether any steps were taken to verify the bank's explanation of the incident with the central bank. The KYC profile noted that, in 2006, FIG recommended classifying Islami Bank as a “Special Category Client,” or SCC, HSBC's designation for its highest risk clients, but that recommendation was rejected, which meant HSBC did not subject the bank to any enhanced monitoring.
2009 information on IIRO accounts. The account was opened near the end of 2007. About 18 months later, in May 2009, a FIG due diligence report prepared for another Bangladeshi bank with which HBUS did business, Social Islami Bank, discussed below, disclosed new information relevant to Islami Bank. This information related to the International Islamic Relief Organization (IIRO), a Saudi nonprofit organization which, in 2006, had two of its branches and a high ranking IIRO official designated by the United States as terrorist financiers and added to the list of entities with which US persons are prohibited from doing business.
The 2009 FIG report stated that the IIRO had accounts at both Social Islami Bank and Islami Bank. It quoted a 2008 local press article saying that, in response to the action taken by the United States in 2006, Islami Bank had frozen its IIRO accounts. The FIG report did not indicate when the accounts were first opened, what actions had been taken beyond freezing them, or how much money was involved. In 2010, an HBUS KYC profile for Social Islami Bank referenced a letter from the Bangladeshi central bank, dated June 30, 2010, indicating that IIRO had accounts at three Bangladeshi banks, including Islami Bank, which needed to be closed.
Islami Bank Bangladesh confirmed to the Subcommittee that IIRO had two accounts at the bank which opened in 1993 and 1994, when IIRO was a nongovernmental organisation in good standing. It stated that after the IIRO was added to a United Nations sanctions list in 2006, it froze the accounts and reported them to the Bangladeshi central bank. In 2010, according to the bank, it received an “instruction from the central bank at the direction of [the] Ministry of Finance” to unfreeze the accounts and “transfer the accounts” to a government owned bank, BASIC Bank, which it did.
Despite the 2008 published article, the information in the two internal HBUS documents related to Social Islami Bank, and Islami Bank Bangladesh's willingness to discuss the accounts, no information about the IIRO accounts appeared in the HBUS KYC profile for Islami Bank. While the IIRO accounts at Social Islami Bank were the focus of extensive discussions in emails and other documents by HBUS AML Compliance personnel and HBUS bankers working in Bangladesh, no similar discussions appear in any of the HBUS documents related to Islami Bank.
In September 2009, the Islami Bank KYC profile indicates that an unnamed HSBC employee requested a new enhanced due diligence report on the bank. HBUS Compliance denied the request, indicating an update “is NOT needed at this time.”
2010 SCC designation. In February 2010, HBUS AML Compliance personnel reviewed the Islami Bank account and recommended that the bank be designated a Special Category Client (SCC). One key reason given for the proposed SCC designation was Islami Bank's links to the Al Rajhi group, noting that the vice chairman of the bank and 10 percent owner was Yousif Abdullah Al Rajhi, that Al Rajhi interests held about a third of the bank's shares, and Al Rajhi itself had links to terrorist financing.1363 Another reason given was the information provided in the 2006 FIG report, that the Bangladeshi Central Bank had issued a “notice of cause” to Islami Bank “to explain accounts owned by suspected Islamic militants,” and reportedly fined the bank for the third time “for covering up militants['] transactions.” No mention was made of the IIRO accounts. Contrary to the outcome in 2006, in 2010, HSBC designated Islami Bank as an SCC client.
Later in 2010, an OCC (Office of the Comptroller of the Currency) AML examiner reviewing emails related to Islami Bank characterised the information provided about the bank as depicting “extreme circumstances,” and recommended that the account be reviewed as part of a larger AML “look back” effort at HSBC. In 2011, HSBC engaged in an extensive discussion with Islami Bank regarding its AML policies and procedures, also noting in its KYC profile that the bank acted as a “payout agent” for 53 money exchange businesses across the Middle East.
Today, although HSBC exited the US banknotes business in 2010, Islami Bank Bangladesh remains a customer of two dozen HSBC affiliates, including HBUS PCM, which continues to provide Islami Bank with access to US dollars, US wire transfers, and US payment systems.
(2) Social Islami Bank Ltd
A third bank serviced by HSBC despite suspected links to terrorist financing is Social Islami Bank Ltd.
Social Islami Bank Ltd was founded in 1995, changed its name from Social Investment Bank Ltd in 2009, and is located in Bangladesh. It operates 76 branches throughout the country and provides a variety of individual and commercial banking services, including deposits, loans, investment advice, commercial financing, foreign exchange, and wire transfers. It operates in conformance with Islamic requirements and is publicly traded on Bangladeshi stock exchanges. Its headquarters are in Dhaka, the capital of Bangladesh, one of the world's largest cities with a population of 16 million.
Until May 2012, HSBC was one of the bank's major correspondents, providing it with services in multiple countries. HSBC also has an affiliate located in Dhaka.
That affiliate, HSBC Bank Asia Pacific (HBAP) Dhaka, introduced Social Islami Bank to HBUS. In 2003, HBUS Payments and Cash Management (PCM) sought to open an account for Social Islami Bank, providing it with US dollar wire transfer and clearing services.
Opening of HBUS account. When HBUS first sought to open the account in 2003, it asked for an enhanced due diligence report on the bank from the HSBC Financial Intelligence Group (FIG). In addition to noting that Bangladesh was a high risk country due to its reputation for corruption, the resulting FIG report contained adverse information about some of the bank's owners and officials. Most serious were allegations that two shareholders, the International Islamic Relief Organisation (IIRO) and the Islamic Charitable Society Lajnat al-Birr Al Islam (Lajnat al-Birr), had links to terrorism. IIRO then held 8.62 percent of the total outstanding shares, and was the bank's largest single shareholder, while Lajnat al-Birr held 1.54 percent.
The 2003 FIG report stated the following with regard to the two shareholders:
“IIRO is a Saudi-Arabian charity. … The IIRO was named in the 2002 lawsuit brought forward on behalf of family members of victims of the September 11, 2001 terrorist attacks. The IIRO was accused of having 'played key roles in laundering of funds to terrorist[s] for the 1998 African embassy bombings' and having been involved in the 'financing and aiding and abetting of terrorists in the 1993 World Trade Center bombing.' The IIRO has also reportedly funded al-Qaeda directly as well as several of its satellite groups. Osama bin Laden's brother-in-law, Mohammed Jamal Khalifa, headed the Philippine branch of the IIRO in the 1990's. The Philippine government has charged that the group contributed to terrorist causes there.
Lajnat al-Birr Al Islamiah was established in 1987. It has been stated that Lajnat al-Birr Al Islamiah was the original name of the Benevolence International [F]oundation, and that it originally had offices in Saudi Arabia and Pakistan.
According [to] the US government, among the purposes of Lajnat was to 'raise funds in Saudi Arabia to provide support to the Mujahadeen then fighting in Afghanistan,' as well as to provide 'cover for fighters to travel in and out of Pakistan and obtain immigration status.' Benevolence International has been tied to terrorism and its director, Enaam Arnaout, was indicted in 2002 with conspiring to defraud his group's donors by secretly providing financial and logistical help to al-Qaeda for a decade.”
The FIG report also contained negative information about the bank's founder:
“Dr MA Mannan was the chairman and founder of Social Investment Bank Ltd. He was fired in 2000 after fault was found with his banking procedure. It was alleged that he created an obstacle to the team of Bangladesh Bank [Bangladesh's central bank] during their visit to Social Investment Bank Ltd. Additionally, he was accused of interfering with bank administrative work and with harassing a bank employee.”
The FIG report concluded:
“In conclusion, it is of significant concern that the leading shareholder of Social Investment Bank Ltd (at 8.62 percent), International Islamic Relief Organisation, has been accused in both the Philippines and in America of funding terrorist groups. The group is currently under investigation by the FBI. Another of the bank's shareholders, Lajnat al-Birr Al Islam (at 1.54 percent) has also been connected to terrorist groups. Additionally, the bank's founder and chairman was let go on allegations of interference and harassment. ... Finally, it is important to note that Social Investment Bank Ltd is located in Bangladesh, which was ranked as the world's most corrupt nation by Transparency International.”
The FIG report offered this cautious analysis about whether to open an account:
“Although the allegations presented in this report, primarily against the International Islamic Relief Organisation (IIRO) and the Lajnat al-Birr Al Islamiah, are highly adverse, no US or foreign government law enforcement or regulatory body has stated unconditionally, that these organisations are under sanction. The reputational risk is significant, however, and the possibility that further investigations by US authorities may ultimately uncover substantiating proof of a connection to terrorism. The risk of future sanctions and the reputational risk based on allegations noted in this report should be measured against the current risks involved in our relationship when ultimately deciding a course of action.”
While the 2003 FIG report provided significant adverse information about Social Islami Bank and noted that Lajnat al-Birr was the original name of the Benevolence International Foundation which “had been tied to terrorism,” it failed to state that, in 2002, the United States had designated the Benevolence International Foundation as a “financier of terrorism” with whom US persons are prohibited from doing business. This additional terrorism-related designation meant that when HBUS was considering whether to open an account for Social
Islami Bank in 2003, Social Islami Bank was partially owned by two organisations associated with terrorist financing.
Despite its failure to provide that additional information, the 2003 FIG report provided significant negative information about Social Islami Bank and squarely raised the question of whether HBUS should be doing business with it, given the “highly adverse” allegations.
Nevertheless, on October 14, 2003, HBUS AML Compliance approved Social Islami Bank as an HBUS PCM client. In addition, despite the bank's location in a high risk country, the terrorist links uncovered in connection with two of its shareholders and a director, HBUS opened the account without designating the bank as an SCC client warranting additional monitoring and due diligence reviews.
HBUS immediately began providing the bank with services that included clearing US dollar monetary instruments and US wire transfers. Those services produced revenues from Social Islami Bank totaling about $100,000 per year.
2005 review. Two years after the account was opened, as part of a broader HSBC effort to update its KYC client profiles in 2005, Social Islami Bank was the subject of a second enhanced due diligence review. The resulting 2005 FIG report again identified IIRO, the bank's largest shareholder, as linked to terrorism, noting that it was “alleged to have provided funding to terrorist groups such as Al Qaeda in the past,” and is “alleged to have acted as a cover for Al-Qaeda operations in the Philippines.” The FIG report stated: “Based on the frequency with which the group is connected to terrorist financing in the press, it is likely that their activities will always be under scrutiny, and future government sanctions against the group are highly probable.” The report also noted that Social Islami Bank did “not appear to have correspondent relationships with many of the other major global banking corporations.” The FIG report “strongly recommend[ed]” that the account not be approved “until the matter is discussed with Senior Compliance Management.”
Despite the concerns raised in the FIG report, HBUS retained Social Islami Bank as a client. At the same time, to address concerns about the account, HBUS AML Compliance required the HSBC CEO for Bangladesh to provide annual approval of the account for it to stay open. Despite this requirement, the Subcommittee uncovered only one instance in which approval was granted, and when asked, HSBC was unable to provide any additional documentation.
2006 terrorist designation. Eighteen months later, on August 3, 2006, the United States designated two branches of IIRO and a high ranking IIRO official as terrorist financiers and prohibited US persons from transacting business with them. Treasury Under Secretary for Terrorism and Financial Intelligence Stuart Levey said: “We have long been concerned about these IIRO offices; we are now taking public action to sever this link in the al Qaida network's funding chain.”
In response, on the same day, HBUS AML Compliance placed a block on the Social Islami Bank account, so that no funds could be withdrawn. The email imposing the block noted that the Social Islami Bank brought in HBUS revenues totaling $44,000 per year.
The next day, August 4, 2006, the HSBC Financial Intelligence Group (FIG) issued an updated due diligence report on Social Islami Bank, containing significant adverse information about IIRO. Among other information, the FIG report noted that the World Check database relied on by HSBC for KYC information classified IIRO as associated with terrorism, linked it to providing assistance to al Qaeda and other terrorist organisations, and described it as “allegedly linked” to the World Trade Centre bombing, “plots to assassinate Bill Clinton and the Pope,” and “the planned destruction of the Lincoln Tunnel and Brooklyn Bridge.”
Two days after that, on August 6, 2006, an HSBC institutional banker from HBAP Dhaka, Muhammad Shohiduzzaman, met with Social Islami Bank to discuss IIRO. He wrote to the HSBC CEO in charge of the operations in Bangladesh, Steven Banner, that Social Islami Bank had told him that IIRO “never took part in any activities” at the bank, “did not even take possession of the shares,” and had never been a board member. Mr Shohiduzzaman advised: “we are of the opinion that since IIRO is not involved in the operation of SIBL [Social Islami Bank Ltd.], there [are] no issues of concern locally. But since the matter has been raised by the US treasury, HBUS should take appropriate measure after careful examination of all the present and potential aspects.” Mr Banner wrote to Hersel Mehani, the HSBC sales person assigned to the account: “Based on the feedback from SIBL, IIRO's role remains that of a minority shareholder that does not seek to engage in the management of the bank. We have no reason to disbelieve SIBL's statements. There are therefore no grounds for me to recommend an account closure or account freeze.”
Mr Banner continued:
“I appreciate, however, that HBUS may feel compelled to act firmly in the light of OFAC's (Office of Foreign Assets Control) position. This is obviously a decision that rests with HBUS and I can confirm that we will not object to such action. That said, we would much prefer it if SIBL is allowed to withdraw the balances held with HBUS before you freeze or close the account. From our perspective there appears to be no justification for depriving SIBL of their funds and to do so would open HSBC to unwanted reputational damage/regulatory scrutiny locally.”
In essence, Mr Banner asked for the account to be kept open but if it were frozen, to allow Social Islami Bank to pull its money first so that none of its funds would be affected.
Later that same day, August 6, 2006, HBUS AML Compliance officer Alan Ketley forwarded the email exchange to his AML Compliance colleagues, George Tsugranes and Andrew Rizkalla, and asked for their thoughts. Both advised closing the account. Mr Tsugranes wrote: “Although the Philippine and Indonesia branch offices were cited, the Treasury action also cited Abd Al Hamid Sulaiman Al-Mujil who is a high ranking IIRO official. So although only the two branches were cited, having a top official in the organisation mentioned should be cause for concern involving the IIRO. As this organisation has a 9 percent stake and does not involve itself on the day to day operations or mgmt -- who is to say that they won't sooner or later or start moving funds through this acct.”
Mr Rizkalla wrote:
“I remain firm to my first opinion, the account should be closed in an orderly fashion. We still don't know if there is a nominee shareholder interest to IIRO, the US government has designated IIRO for supporting terrorism, so even the small shareholder ownership entitles them to profits and dividends from Social Investment Bank to reinvest where??. …. Hersel says monitor the accounts for six months, will he be doing the monitoring??”
Despite their advice to close the account, Mr Ketley lifted the block on the account four days after it was imposed and approved keeping the account open:
“After reviewing the information provided by HSBC Dhaka my provisional decision is that this relationship be allowed to continue. It will need to be designated as an SCC Category 4 (reputational risk) with immediate effect and will be subject to closer monitoring as a result …. I am not willing to commit to the six months suggested by Hersel and we will review activity and determine what further action may be required as events warrant. … IIRO's shareholding is a minority holding and information received indicates that they exert neither management control nor have board representation. While this entity clearly represents a heightened reputational risk to the bank, I believe that with the knowledge we have today and the controls that are being implemented we have mitigated that risk adequately.”
A few days later, FIG forwarded its report on Social Islami Bank to the head of HBUS AML Compliance, Teresa Pesce. She wrote to Mr Ketley: “This makes me very uncomfortable. Can we talk to the business about this?” Despite the discomfort she expressed and the advice of two AML compliance officers, the account was kept open. Mr Ketley reported to the Subcommittee that he understood that IIRO was a passive shareholder, that Social Islami was attempting to expel them, and that he talked about the account with Terri Pesce and Denise Reilly and believed they supported his decision to maintain the account. Ms Pesce told the Subcommittee that she did not recall much about the relationship, but the bank should have reached out to OFAC with regard to it. HBUS OFAC Compliance officer Elizabeth Protomasto told the Subcommittee that she contacted OFAC about this relationship after the SDN designation, and was told that the bank could continue to do business with Social Islami Bank, because only two branches of the IIRO had been designated by OFAC as SDNs (Specially Designated Nationals and Blocked Persons), not all branches and not the branch in Bangladesh. Social Islami Bank was also designated an SCC client.
IIRO remained a shareholder for six years.
In September 2006, Mr Ketley asked Mr Mehani to obtain additional information from the Social Islami Bank about its relationship with IIRO. In response to a question asking whether IIRO was “a customer of the bank,” Mr Mehani wrote that the bank had told him: “IIRO has no relationship with the subject bank and do[es] not maintain or operate any account with the bank.” In 2009, however, an internal FIG due diligence report quoted a 2008 local press article stating that the IIRO did have an account at Social Islami Bank, as well as over 50,000 bank shares which FIG estimated might then be worth $733,000. In 2010, the HBUS KYC profile referenced a Bangladeshi central bank letter dated June 30, 2010, stating that IIRO had accounts at three Bangladeshi banks, including Social Islami Bank, that needed to be closed. Social Islami Bank told the Subcommittee that IIRO did have a “foreign currency account” with the bank that was opened in 1995, but has a current balance of zero.
In 2006, Mr Mehani indicated that the bank planned to “oust” IIRO as a shareholder at its next board of directors meeting and sell IIRO's bank shares. Mr Mehani wrote: “IIRO never responded to their request to provide a full address rather than a PO box and they will use this to oust them by November [2006] which is allowed according to their Articles of Association which I have a copy given by them to me.” Despite that communication, a 2006 Social Islami Bank board resolution authorising sale of the shares, and HBUS' repeated inquiries into their status over multiple years, IIRO has remained a shareholder of Social Islami Bank, although its ownership interest has gradually dropped from 8.62 percent in 2006, to 3.85 percent in 2009, to 1.69 percent by 2010. IIRO currently holds a 1.61 percent interest in the bank, six years after Social Islami Bank promised to ensure the shares would be sold.
In 2009, Social Islami Bank sent a letter to HBUS indicating that it was planning to seek permission from the country's High Court to sell the shares still held by IIRO. In 2010, Social Islami Bank informed HBUS that the Bangladesh government had reached an agreement with IIRO that, after certain safeguards were put in place, would allow IIRO to begin operating in the country again. One of the conditions was that the IIRO would have to “dispose” of its Social Islami Bank account, although that account remains open today with a zero balance. Social Islami Bank informed the Subcommittee that, due to the government's actions, “the bank is under definite obligation in paying dividend/issuing bonus shares/right shares to IIRO as per the instructions of the central bank and Ministry of Finance which were not paid/issued in their favor till 31/05/2010.”
A second terrorist financier shareholder.
Also in 2009, a due diligence report issued by the HBUS Financial Intelligence Group identified a second, long-term Social Islami Bank shareholder that raised concerns. It disclosed that Islamic Charitable Society Lajnat al-Birr Al Islam still held a 1.54 percent ownership interest in the bank. The 2009 FIG report explained that World Check, the database relied on by HSBC for KYC purposes, had classified the charity “as a terrorist organisation with reported tie[s] to Hamas. In September 2008, the Israeli government reportedly declared it an illegal entity.” Despite this new information in the 2009 FIG report, the HBUS KYC profile on Social Islami Bank does not acknowledge it, stating instead in a note: “Updated EDD [Enhanced Due Diligence] ROF [Report on Findings] received May 5, 2009. Report provided no new, or, up to date information.” Social Islami Bank has informed the Subcommittee that Lajnat al-Birr remains a 0.22 percent share owner, but does not have any account at the bank.
Sobhan misconduct. The ongoing ownership of the bank's shares by IIRO and Lajnat al-Birr was not the only troubling development. Social Islami Bank's initial Chairman of the Board, Ahmed Akbar Sobhan, also known as Shah Alam, was a well-known businessman who held, with his son, a 3.35 percent ownership interest in the bank since its inception. Beginning in 2006, however, Mr Sobhan and his son became the subjects of several criminal investigations involving bribery, corruption, fraud, and tax evasion. In 2007, Mr Sobhan and his son reportedly fled to the United Kingdom, after which Mr Sobhan was the subject of corruption charges brought in his absence by the Bangladeshi Anti-Corruption Commission which sentenced him to eight years in prison. This troubling information was detailed in the 2009 FIG report that was later described in the Social Islami KYC profile as containing no new information.
In May 2012, HSBC terminated its relationship with Social Islami Bank. David Bagley, head of HSBC Group Compliance, told the Subcommittee, when asked, that the closure decision had been a “no brainer.” He did not explain what factors led to the termination decision. Social Islami Bank currently has no open account with any HSBC affiliate.
Analysis
HSBC is a global bank with a strong presence in many countries confronting terrorist threats. If safeguards are lacking, HBUS offers a gateway for terrorists to gain access to US dollars and the US financial system. HSBC has a legal obligation to take reasonable steps to ensure it is not dealing with banks that may have links to or facilitate terrorist financing.
Banks rarely carry explicit links to terrorist financing, but in the three banks reviewed here, an array of factors raised troubling questions. In the case of Al Rajhi Bank, the factors included the naming of a key bank official in a list of al Qaeda financial benefactors, a US law enforcement search of Al Rajhi nonprofit and business ventures in the United States to disrupt terrorist financing, a CIA report targeting the bank for being a “conduit” for extremist finance, the bank's refusal to produce authenticating bank documents for use in the criminal trial of a client who cashed travelers cheques at the bank for use by terrorists, and multiple accounts held by suspect clients. In the case of Islami Bank, the factors included substantial ownership of the bank by al Rajhi interests, central bank fines for failing to report suspicious transactions by militants, and an account provided to a terrorist organisation. In the case of Social Islami Bank, the factors included ownership stakes held by two terrorist organisations whose shares were exposed but never sold as promised, and a bank chairman found to be involved with criminal wrongdoing.
In each case, HBUS and HSBC personnel were aware of the information, but approved or maintained the accounts anyway. When an AML Compliance officer like Beth Fisher declined to approve an account, HSBC personnel found someone else to take her place. In several cases, Christopher Lok, head of US Banknotes, took on the role of relationship manager fighting for account approval. His test for taking on that role depended in part upon how much revenue an account would produce. Al Rajhi Bank's threat to terminate business with HSBC affiliates also appears to have galvanised HBUS' renewal of the account.
Another striking feature of these accounts is the fact that a decision by one HSBC affiliate to terminate a relationship with a bank due to terrorist financing concerns did not always lead other HSBC affiliates to follow suit. In the case of Al Rajhi Bank, for example, HBUS terminated the relationship, but HSBC affiliates in the Middle East continued to do business with the bank. One HBUS executive later argued that, since HSBC was already exposed to the reputational risk posed by Al Rajhi Bank through the accounts at other HSBC affiliates, its reputational risk would not increase if one more account were opened. In May 2012, HSBC changed its policy to apply decisions to terminate a client relationship to apply globally to all its affiliates.
.jpg)