Ruth Keating, runner up of the BARBRI Global Financial Crime Blogging Prize, takes a look at this David and Goliath case
In the recently filed case of Zapata v HSBC Holdings Plc, families of several US citizens who were killed by some of Mexico’s most infamous drug cartels are suing HSBC.
The plaintiffs’ case is that HSBC facilitated the laundering of billions of dollars for the Mexican cartels who committed the attacks. In this way, HSBC knowingly or deliberately disregarded the fact that the funds would be used to support the Mexican cartels and their terrorist acts. The complaint filed in February of this year in Texas cites “as a proximate result of HSBC’s material support to the Mexican drug cartels, numerous lives, including those of the plaintiffs, have been destroyed.”
The plaintiffs argue that without the ability to integrate illicit proceeds into the global financial system, the drug cartels’ ability to acquire personnel, weapons, vehicles, communication devices and the raw materials for drug production would be substantially impeded. By facilitating the laundering of billions of dollars through its banks for drug cartels such as the Sinaloa, Juárez, and Los Zetas cartels, HSBC has materially supported the terrorist acts of cartels.
The plaintiffs claim the bank is liable under the US Anti-Terrorism Act. The reason for this is that survivors of those killed in terrorist incidents may sue for damages under the Anti-Terrorism Act. Drug trafficking organisations, such as the Revolutionary Armed Forces of Colombia, have been designated by the US Government as terrorists. In 2014, US citizens sued Arab Bank under the Anti-Terrorism Act for allegedly financing members of terrorist group Hamas. The bank was found liable and reached a settlement with the plaintiffs. In arguing that these Mexican drug cartels come under the act the Zapata case cites “torture, beheadings, hanging corpses, public assassinations of government officials and journalists, mass executions, kidnappings, attacks on civilians and car bombs”.
However, this case is the first which attempts to label Mexican cartels as terrorist organisations. The plaintiffs will face an uphill battle in this regard given that none of Mexico’s drug cartels are currently officially classified as terrorist organisations by US authorities. HSBC has said it intends to “vigorously” defend itself against the legal claims and is committed to combating financial crime.
Given that Mexican drug cartels have not yet been classified as terrorist organisations, the case may fail on that basis. But what is still interesting about this case is that the facts seem all too familiar.
In August 2010 HSBC first came under scrutiny when the Office of the Comptroller of the Currency criticised the bank for “highly suspicious activity” that could allow the unreported movement of large volumes of money. Following this, HSBC agreed to improve its procedures. Then in 2011 the US Justice Department worked to prosecute HSBC bankers for allegedly laundering Mexican drug money.
The new case of HSBC brings to the fore past failures with the relationship between banks and cartels. The history of these kinds of cases are well documented. Citibank was censured in 1999 for failing to stop money laundering by individuals allegedly including Raul Salinas. American Express Bank paid $32 million in 1994 to avoid prosecution for charges that it had laundered money for the Gulf Cartel and in 2007 payed a $55 million fine avoiding criminal charges over alleged money laundering.
Perhaps one of the most well-known examples of lax oversight is Wachovia. The bank was accused of “serious and systematic” violations of banking regulations. The result of which allowed $420 billion to pass through its accounts unmonitored. Amongst these unmonitored accounts Wachovia was found to have laundered funds for one of Mexico’s biggest drug trafficking organisations, again the Sinaloa Cartel. Amongst criticisms launched against the bank were that they had wilfully failed to implement anti-money laundering procedures between 2003 and 2008.
Wachovia was later taken over by Wells Fargo and managed to avoid prosecution, instead paying a total of $160 million to US authorities — arguably a small sum relative to the bank’s overall earnings. As noted by The Guardian on 3 April 2011, the total fine represented less than 2% of the bank’s $12.3 billion profit for 2009. If there exists any financial incentive to comply with these regulations, it appears to be a weak one. Charges were dropped against Wachovia once it showed it had implemented the required reforms.
At the heart of the money laundering investigations in Mexico are the “casas de cambio” or exchange houses. A common practice is for drug trafficking organisations to smuggle large amounts of hard currency collected from the US back to Mexico. These large amounts are then deposited into exchange houses and in turn wired to US and international banks. In the case of Wachovia, one casa de cambio used these funds to purchase a number of airplanes on behalf of the Sinaloa Cartel. Examples like this illustrate the extent to which these funds are central to cartel operations.
Yet despite the means by which these drug cartels finance their operations being well known, even some of the structural elements of banks fail to stop them or even attempt to do so. The plaintiffs in the Zapata case have accused HSBC of operating in a “culture of recklessness and corruption”. Some of the evidence against HSBC is that employees in their branches in Mexico “routinely accepted deposits of hundreds of thousands, sometimes millions, of US dollars from individuals with no identifiable source of income, delivered in multiple boxes specially designed to fit the precise dimensions of the teller windows.”
Financial services industry regulators have empthasised the need for a culture of compliance which is currently lacking. Due to the complex nature of financial services, detecting and preventing this kind of financial activity poses a significant challenge. However, the bottom line is no matter the complexity of these organisations the will to implement true financial safeguards seems to be absent.
If the court ultimately rules in favour of the plaintiffs in Zapata, this would represent a significant decision against HSBC and other banks accused of laundering illegal proceeds from the drug trade. If the plaintiffs do not win, the question is still as relevant as ever — why is the will to implement real safeguards so low.
Resonating are the words of President Felipe Calderon in 2011, “the truth is that the existing structures for detecting money-laundering were simply overwhelmed by reality”. How sad that those words are still true five years later.
Ruth Keating is a BPTC student at the University of Law and recent law graduate from Trinity College Dublin. Her BARBRI Global Financial Crime Blogging Prize article was highly commended by the judges.