News
Another scandal reported at HSBC; forex law violations under probe
HSBC Sri Lanka allegedly violated exchange control regulations by opening offshore current accounts in its Maldives branch for domestic corporate sector clients who used the Sri Lanka Government’s External Commercial Borrowing Scheme (ECBS), investigations have shown.
The regulator, Central Bank of Sri Lanka, is now looking into the matter.
The ECBS was available from January 2013 to December last year. It allowed local companies to borrow outside Sri Lanka up to US$ 30 million or its equivalent value in any other foreign currency. These transactions were done via various Sri Lanka-based banks.
According to investigations by the Sunday Times, HSBC Sri Lanka allegedly facilitated borrowings through the ECBS but, instead of setting up offshore loan accounts for clients, opened current accounts on behalf of several of them in infringement of Sri Lanka’s exchange control regulations. Authoritative sources confirmed that the regulator, Central Bank of Sri Lanka, was not informed of this alleged violation.
It was also revealed that HSBC stopped the practice after one of its own corporate clients — one that had been interested in using the ECBS — pointed out it would be an offence to open an offshore current account, as the bank was advising it to do.
There was no evidence even this week that the Central Bank had been notified.
The Sunday Times reported last week that HSBC Sri Lanka’s Chief Executive Officer was being moved out prematurely. Authoritative banking sources told the Sunday Times that Patrick Gallagher, whose term was scheduled to end in April 2017, would return to London and a new foreign CEO would be installed in his place this month.
During Mr Gallagher’s term, the multinational banking corporation’s local branch suffered its biggest ever shakeup with some senior managers having to leave over allegations that incentives-linked performance figures were fudged. Senior management positions vacated as a result of these changes have been or are tipped to be filled with foreigners.
The regulator usually places a limit on the number of foreign executives serving in domestic branches of international banks. It was not immediately clear whether the Central Bank has been informed that at least four foreign executives are due to occupy seats at HSBC Sri Lanka.
Since first publishing the story in June this year, the Sunday Times was made aware of other issues at HSBC Sri Lanka. These were investigated over a period of more than two months to establish veracity. The bank was afforded the opportunity and time to respond to a list of detailed questions.
However, a spokesman only provided a general statement: “HSBC Sri Lanka made important senior management changes following an internal investigation. We can confirm a number of executives have left the bank as a result of this investigation. HSBC is committed to implementing and enforcing the highest standards of practice and professional standards of behaviour worldwide.”
We have learned that the practice of alleged figure-fudging or manipulating interest rates had been going on for at least six years without being flagged by operations, internal audit, finance, credit risk management or external auditors of the bank. “The operations and control framework of the bank failed in every sense with regard to this issue for six years, at least,” said a confidential source. External auditors such as Ernst and Young and PricewaterhouseCoopers had also missed the signs.
It happened like this: HSBC has performance-driven remuneration schemes. The bank sets targets that are linked to incentives, particularly annual bonuses. The Corporate Banking team actively canvasses patronage from the business world in a bid to boost bank revenues.
Once performance targets are set for a particular year, however, there is no added reward for surpassing them or overachieving. “Under the bank’s Performance Management System, the rewards are locked in once you reach your target,” a senior industry source told the Sunday Times at the time.
It was typical for the HSBC Corporate Banking team (middle management) to surpass their targets in the first quarters of a financial year. But since it did not entail any additional benefit, they had contrived to spread out this increase–or to defer it–to the first quarter of the new financial year, thereby enabling them to kick off that year with a cushion. It effectively ensured that they were not under too much pressure to meet performance targets set for the new financial year.
This was done by manipulating interest rates on loans taken by corporate customers. “They would lower the interest rate due on loans by certain percentage points during the final quarter of the year, in October, so that revenues drop,” the source said. “They would catch up for this by increasing the interest rate by the corresponding number of percentage points in the first quarter of the following year.”
The practice, carried out by a handful in the Corporate Banking team, was brought to the notice of the Head of Corporate Banking in January this yar through a Relationship Manager who had detected a discrepancy. An investigation was launched, first locally, then by a visiting team of HSBC Hong Kong. The Head of Corporate Banking, who first initiated the inquiry, was fired along with two others. The Chief Risk Officer was suspended in July. He has since been reinstated, although it was not immediately clear why.
Meanwhile, three others, including the Head of Compliance and Head of Human Resources, were shuttled out of the bank through a Voluntary Retirement Scheme (VRS) offered exclusively to them. The junior officer in this group was directly involved in the interest rate deferment scandal and it is not known why she was paid off rather than her services were terminated.
The two senior executives had been part of the interest rate investigation from the outset. Industry sources speculated that the bank had wanted to buy their silence, and gave them no option but to leave.
The three employees were paid significant amounts of money, authoritative sources said. There was so much secrecy that they were instructed to provide bank account numbers outside HSBC for their individual payments to be deposited, it is learnt. The money was then remitted from Hong Kong. All this caused disgruntlement among other employees as the bank had been neither transparent nor fair in creating a VRS for a select group.
Our investigations also established that affected corporate clients were not notified by the bank that their interest rates were being bumped down, then up, all within a matter of months. This amounts to a fundamental breach of the bank’s contractual obligations to clients.
“A senior manager must approve a change in interest rate, after which the operations team must go physically into the system to reflect the adjustment,” said a banking source. “That automatically triggers a letter to the client, in keeping with Central Bank regulations and the Customer Charter.”
“When you have a contractual agreement with the bank, you must be notified of any changes in its terms,” he continued. “If your rate goes down in October and up again in January, you have a right to know and you might well question it.”
However, the requisite system-generated letters did not go out to clients whose interest rates were tampered with. We were not able to determine how these notices were withheld–whether they were suppressed or something else had been amiss with the system over six long years. The bank has not apologised to the impacted clients.
The Sunday Times also found that HSBC Sri Lanka’s Operations Department had misplaced a significant number of ‘account opening packets’ belonging to clients and are gathering, once again, such basic documents as Memorandums and Articles of Association, account opening mandates, lists of directors and signature cards. It is understood that these physical documents might have been lost while they were being archived.