Memorandum by HSBC Holdings Plc
1. INTRODUCTION—GENERAL
REMARKS
1.1 HSBC is pleased to be of help to the
Committee with its enquiry into the impact of economic sanctions.
Headquarters in London, HSBC is one of the largest banking and
financial services organisations in the world. Our international
network comprises more than 9,500 offices in 76 countries and
territories in Europe, the Asia-Pacific region, the Americas,
the Middle East and Africa. We have circa 125 million customers
and employ about 285,000 staff.
1.2 The HSBC Group, through its Compliance
policy, is committed to complying with the spirit and letter of
all laws and regulations applicable to its operations, wherever
it operates. Accordingly, HSBC has in place procedures designed
to ensure that all relevant sanctions are identified, distributed
and complied with in each applicable jurisdiction. In the case
of sanctions imposed by the UK government (normally via the Bank
of England) and by the European Union, all HSBC Group offices
operating within the UK and those falling within the definition
of a "UK or EU person" are required to adhere to relevant
sanctions.
1.3 Globally, HSBC Group members are required
to comply with a significant number of sanctions targeted at individuals,
entities and organisations as well as at specific countries and
all nationals of a specified country.
1.4 While HSBC adheres to all types of sanction,
targeted, specific or "smart" sanctions are preferable
to unspecific or country sanctions, although even smart sanctions
raise operational challenges, as detailed below. HSBC supports
fully the use of smart sanctions in relation to the counter-terrorist
financing (CTF) initiatives. However, even here a number of operational
difficulties arise and the value of the sanctions may be reduced
for the reasons set out below.
1.5 In the following paragraphs we set out
the approach and procedures adopted by HSBC Group companies bound
by UK sanctions to ensure compliance; the practical difficulties
experienced; some commentary on the costs associated with compliance
and on adverse or unintended consequences.
2. PROCEDURES
TO ENSURE
COMPLIANCE
2.1 A list of all current and past sanctions,
including those implemented by UK and EU authorities, is maintained
by HSBC and is available to all Group offices. New sanctions are
circulated to all relevant Group Offices who are required to:
— search against their existing customer
base for possible matches;
— properly investigate possible matches
and report any confirmed matches both to the HSBC Compliance function
and to the relevant regulatory body. In the UK this will normally
be the Sanctions Unit at the Bank of England;
— where required by the sanctions,
block or freeze any monies or assets held and act upon any instructions
from the appropriate body;
— add the details of any individual,
body or country to databases maintained to facilitate client and
transaction screening;
— screen all transactions on an ongoing
basis for possible matches with sanctioned individuals, bodies
or countries.
3. OPERATIONAL
AND PRACTICAL
CHALLENGES
3.1 The main challenges presented by the
need to comply with sanctions are set out below, with a particular
focus upon smart sanctions:
— There are approximately 6,000 individual
and entity names specified by US, EU and UN sanctions. These consist
of circa 470 names relating to Al Qaeda and the Taliban; circa
122 names relating to suspected terrorist activity with the remaining
names relating to individuals and bodies linked to regimes or
governments, eg Zimbabwe, Yugoslavia and Liberia. These names,
and any new names covered by sanctions, have to be searched against
a customer base of 16.6 million and some 30 million annual customer
contacts which result in a transaction. These figures are for
the UK bank alone.
— Most major financial institutions
will operate multiple compute systems which may require multiple
searches and technical solutions.
— Any search or screening using the
names of individuals or entities produces potential matches with
sanctioned names, most of which, on further investigation, turn
out to be "false positives". The investigation of these
potential matches is both time-consuming and costly, and can lead
to delays in processing transactions while any required investigation
is completed. Those delays can lead to customer complaints and
claims although, by applying appropriate resources to checking
potential matches, these risks can be mitigated. The number of
"false positives" is reduced if as many additional details
as possible are added to sanctions, for example—full names,
date of birth or passport number. The Wolfsberg Group, of which
HSBC is a founder member and currently acts as co-chairman, has
produced guidance on the role of financial institutions in CTF
and a paper setting out standards for monitoring, screening and
searching. (not included.)
— The increased use of sanctions, particularly
as part of CTF, clearly carries the risk that the practical issues
and difficulties posed in their application will increase in scale
and in terms of the cost to business. It is important that the
use of sanctions, even smart sanctions, is proportionate and considered.
— There is the potential for accounts
or transactions held or mandated in a name which appears to match
a sanctioned individual or entity to be wrongly blocked and inhibited.
While every effort is made to avoid this, the lack of additonal
identifiers increases the risk of "false positives".
— Often the same individuals or entities
are covered by sanctions issued by a number of countries or international
bodies. The relevant names may be shown in a variety of ways,
eg
Brown John A
J A Brown, etc.
— Dependent upon the systems and software
involved, searching the same database against these differing
representations of the same name can produce different results.
It is for this reason that the guidance issued by the Wolfsberg
Group encourages co-operations between governments and agencies.
— The effectiveness of smart sanctions
appears questionable in the long-term. While the use of smart
sanctions may be a helpful and effective measure to seize or block
funds or assets that have already been identified or are already
held, it is likely that any sanctioned individual or entity will
ensure that any accounts or transactions are conducted in a different
name once they become aware of the existence of a sanction on
them.
4. COST OF
COMPLIANCE
4.1 We are not able to separately identify
the costs of complying with sanctions as distinct from the general
cost of regulation and compliance. The current costs of complying
with the sanctions regime in the UK are, so far, manageable in
HSBC Group terms. However, any substantial increase in the use
of sanctions will increase the cost of compliance and increase
the risk of customer claims or complaints where accounts or transactions
are wrongfully blocked or delayed.
4.2 The focus on CTF has undoubtedly increased
the focus upon ensuring effective compliance with sanctions. Given
the sheer scale of the customer and transaction numbers involved,
this will necessitate the increased use of systems-based monitoring
and screening. The cost of implementing analogous systems for
transaction monitoring for suspicious transactions, in relation
to anti-money laundering, has been substantial.
5. UNINTENDED
CONSEQUENCES
5.1 HSBC has not to date experienced significant
adverse unintended consequences in applying UK and EU sanctions.
Nevertheless, any significantly expanded use of sanctions, even
smart sanctions, and particularly country sanctions, would increase
the chances of these materialising.
August 2006
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