Law School Discussion

Financing Plants in Iran

In March 2002, it agreed to be the lead arranger of a $155 million credit to help build an ammonia and urea plant for Iran's National Petrochemical Co. In February 2003, HSBC agreed to provide NPC a $108 million export credit to finance equipment and services to construct a petrochemical plant. In July 2004, Iran Khodro Industrial Group, the country's biggest maker of cars and trucks, selected HSBC and BNP Paribas to manage a sale of 300 million euros in bonds. Khodro, which is 40 percent owned by the Iranian government, hadn't sold the bonds as of April. In August 2004, HSBC's Tokyo office joined with ING Groep NV, the biggest Dutch financial services company, and Japan Bank for International Cooperation, Japan's export credit bank, to provide a $154 million loan to NPC to finance imports of Japanese equipment and services, according to the Japanese bank, which lends money to help sales of Japanese products abroad. HSBC also has clients in Syria, the other country the U.S. singles out as among the worst of the designated terror states.

Lebanese Office

"Through the Lebanese office of HSBC, there is business done with Syrian entities," HSBC spokesman Martin in Dubai says. Syrians opening accounts have to meet the bank's standards of acceptability and go through the same identification checks as other HSBC clients, he says. HSBC does additional Syrian business through London-based British Arab Commercial Bank Ltd. HSBC owns 46.5 percent of the bank, whose chief executive officer is an HSBC employee on loan. HSBC holds five of the 11 board seats. Other shareholders of British Arab Commercial Bank, known as BACB, are the Libyan government's Libyan Arab Foreign Bank, with 25 percent, and Iraq's state-owned Rafidain Bank, with 4.91 percent. Libyan and Iraqi representatives sit on BACB's board alongside HSBC bankers. During Saddam Hussein's rule, an Iraqi representative traveled from Baghdad to London for some board meetings, according to BACB. BACB is a corner of the HSBC empire that specializes in doing business legally with countries that have been marginalized by sanctions, BACB General Manager and Deputy Chief Executive Mohamed Fezzani says.

'A Small Bank'

"We are a small bank, and we know exactly what we are doing," Fezzani, 67, says. "As long as we don't finance the wrong stuff." BACB's Web site calls these "niche markets," listing Iran, Libya, Sudan and Syria along with other countries that aren't on the U.S. terror list, such as Algeria and Morocco. Leaflets promoting BACB's activities in Syria and Libya are displayed in the lobby of its London headquarters on Mansion House Place, a six-story modern cement building decorated with stripes of brick, nestled behind the 250-year-old official residence of the lord mayor of London. HSBC does its Sudan business through BACB, Martin says. BACB also provides HSBC with a base in Libya; HSBC's Web site lists the BACB Tripoli office as its address in that country. "We are their representatives in the countries where they have no presence," says BACB's Fezzani, whose corner office on the top floor of BACB's headquarters overlooks the Bank of England.

Sudan and Syria

Among BACB's clients, he says, are Commercial Bank of Syria, which the U.S. Treasury says has been used by terrorists; the Central Bank of Syria; Sudan's Kanana Sugar Co.; and Bank of Khartoum, a Sudanese state-owned bank undergoing privatization. Fezzani, a Libyan posted to BACB in 1975 by Libyan Arab Foreign Bank, says he, BACB and HSBC take measures to make sure none of the financing BACB provides is misused. BACB has a rule against financing weapons or anything related to the military, he says, and HSBC, as the biggest shareholder, provides legal help to keep the bank in compliance. BACB also hires a cargo inspection contractor to do spot checks of imports it finances to make sure countries such as Syria are actually buying what they say they are. Fezzani points out the window toward the Bank of England, which has been one of BACB's regulators. "They had a sanctions committee that came to examine us and found everything perfect," he says.

Enforcing Sanctions

Bank of England spokesman Peter Rodgers confirmed the central bank had audited BACB and said he couldn't discuss the outcome. The Bank of England helped enforce U.K. and UN sanctions against Libya and UN sanctions against Iraq. In the U.S., HSBC's business dealings -- like those of dozens of other banks including New York-based Citigroup and JPMorgan -- have fallen afoul of sanctions. The U.S. Treasury Department has fined at least 104 financial services companies for more than 300 transactions related to terrorists and terror sponsors since the beginning of 1998, according to a Bloomberg News analysis of Treasury documents that detail fines. The Treasury disclosed the records, which include copies of Treasury's letters to the companies, in response to a Freedom of Information Act lawsuit by Public Citizen, the consumer group founded by Ralph Nader, and the Corporate Crime Reporter newsletter, both based in Washington. Banks say most penalties stem from employees accidentally allowing money transfers to companies, people or countries blocked by the U.S. In some cases, banks voluntarily disclose the transfers after discovering the mistakes.

Modest Penalties

The maximum civil penalty per violation is $11,000 under Iran, Sudan, Syria and terrorism sanctions, according to a Treasury Department fact sheet, and they're often negotiated lower. That provides little deterrent, Arizona Treasurer David Petersen says. "Some of the fines are so puny it's laughable," the 55- year-old Republican says. The biggest banks have the greatest number of fines, according to Treasury records. Citigroup, the biggest U.S. bank, paid at least 22 fines from the start of 1998 to April 2005. JPMorgan, the No. 2 U.S. bank, had at least 32. Bank of America Corp. had at least 19, and Wachovia Corp. had at least 24. Both banks are based in Charlotte, North Carolina. American Express had at least 10. "We handle millions of international transactions, and occasionally, an inadvertent human or system error occurs," says Shirley Norton, a spokeswoman at Bank of America. "As soon as we become aware of such an instance, we voluntarily report it."

Fined 18 Times

The Treasury Department has fined HSBC at least 18 times under terror-related sanctions since the start of 1998. One penalty was for a transfer in April 2000 of $100,000 benefiting the Taliban, which at the time was running Afghanistan and providing bin Laden and his al-Qaeda organization with the base from which he plotted the Sept. 11 attacks. Some U.S. regulators say HSBC's controls are inadequate. In April 2003, HSBC Bank USA agreed with the Federal Reserve Bank of New York and the State of New York Banking Department to improve its system of monitoring incoming and outgoing fund transfers for suspicious activity, according to the New York Fed. The agreement said there were "deficiencies" in the bank's anti-money-laundering policies and procedures, customer due diligence practices and internal controls. "We are taking a number of steps to upgrade our systems and procedures," then HSBC Bank USA Chief Executive Youssef Nasr said in a statement at the time.

Selling Shares

Petersen says he's taking action, too. In April, he sold $5 million of bonds issued by HSBC's Household Finance, partly because of HSBC's business in terror-sponsoring states. He also declined an opportunity to buy American Express shares in April at a "good" price because he wants to know more about the company's businesses with terror-sponsoring states. "I do not want to have any of our investments in companies that could possibly aid and abet our enemies," he says. The government isn't taking the companies to task, Petersen says, so he -- and dozens of other state fund managers -- are creating their own accountability.

As I go through and read the other reports on HSBC I realize that I am just another sucker in a long list of people these folks have ripped off. We refinanced our mortgage in 2002 to pay off our credit cards.

Unbeknownst to us, they purposely appraised our home $11,000 higher than it should have been (we've been told by three other appraisers) and included a buy-down on the interest rate that we did not know about (they listed it as a "fee" on our paperwork) and the mortgage aka "sales" person continually told us we would never get refinanced with anyone else even though our credit scores were good.

The HSBC experience is a daily, on-going blood pressure blowing, headache-inducing nightmare!! They have withheld our payments to collect late fees (it takes a minimum of 16 days for them to cash my check!) They have continually screwed up our escrow, it is short every year even though our taxes and insurance never changes?! Yet they can never explain why it is short, if we don't pay it then we incur late fees and/or foreclosure notices.

They calculate our adjustable interest rate wrong constantly (it has escalated to 11.25%!) and then our only recourse is to write a letter and wait for a response that never comes. You can never get through to anyone in the States your call is automatically routed to India. There they have no other information than what your payment is, and it is wrong 99% of the time. They have no manager available to talk to EVER and they ALWAY say that it has to be handled by another department. I was actually told today when trying to fix the incorrect interest rate (says it should be 11.25% when they are actually charging 11.5%) that it has gone to the research department and they "don't have phones" unbelieveable!!!

We are totally upside down on our house and have no options HSBC will just keep increasing the rate and upping the escrow and there is nothing we can do. Can't someone go after these crooks?!

I would love to be in on a class action lawsuit! I have every bit of my documentation since day one!

Glenna
Indianapolis, Indiana
U.S.A.

From their offices atop Tehran's 15- story Sayeh Tower, HSBC Holdings bankers have helped lend more than $825 million to the Iranian government, which the U.S. says sponsors terrorism and provided a haven to al-Qaeda members after the Sept. 11, 2001, attacks. Half a world away in New York, where London-based HSBC is the biggest retail bank in the state, with 412 branches, the company takes deposits just two blocks from the site of the twin towers that were destroyed in the Sept. 11 attacks. HSBC is doing business in other countries that the U.S. says sponsor terrorism, including Libya, Sudan and Syria, through direct and indirect ties, according to bank documents and interviews with executives. HSBC also banked for the Iraqi regime of Saddam Hussein, according to a CIA report published in October 2004. Such dealings by HSBC and other non-U.S.-based banks are unfettered by U.S. sanctions, which generally don't apply to foreign companies acting overseas. Even U.S. companies, which must conform to sanctions against terror-sponsoring nations, can avoid them by using foreign subsidiaries. New York-based American Express Co. uses a Bahrain-based unit to issue and accept charge cards in Syria.

Pressure to Stop

As the U.S. wages a war on terror, financial services companies are collecting deposits and fees in the U.S. while lending money in countries the U.S. says sponsor terror. An increasing number of state and city officials and pension fund managers are pressuring the companies to stop. "You are feeding that terrorism pipeline," says New York City Comptroller William Thompson Jr., who manages more than $80 billion in pension funds, including money for city firefighters and police officers, 366 of whom died in the Sept. 11 attacks. "You're enabling the government to be able to funnel dollars to terrorism," says Thompson, 51, who administers funds holding $100 million in HSBC stock. U.S. sanctions, which vary from country to country, bar most U.S. commerce with nations that sponsor terror. Financial institutions are generally prohibited from operating bank accounts for or transferring or lending money to the governments and citizens of those countries. Exceptions include the financing of some imports and exports such as humanitarian aid, sales of medical supplies and limited money transfers to ordinary citizens.

Libya and Iraq

The U.S. lifted most economic sanctions against Libya in 2004 for cooperating with weapons inspectors, yet it still considers the country a terror state. The U.S. State Department also designates Cuba, Iran, North Korea, Sudan and Syria as state sponsors of terror. Iraq was on the list until Oct. 20, when then Secretary of State Colin Powell removed it. "We put the world's financial institutions on notice," President George W. Bush said at a Nov. 7, 2001, news conference. "If you do business with terrorists, if you support them or sponsor them, you will not do business with the United States of America." Four years later, dozens of banks with offices in the U.S. have helped provide billions of dollars to Iran's government and the other nations accused of being terror sponsors. Frankfurt-based Deutsche Bank AG, which has an office in Tehran, led a group of lenders extending $1.75 billion in credit to Iran in 2003 to help pay for development of its South Pars gas fields, according to a company press release. Paris-based BNP Paribas SA and Frankfurt-based Commerzbank AG in 2002 managed the Iranian government's first foreign bond offerings since the 1979 Islamic revolution, raising 875 million euros ($1.1 billion), according to Commerzbank's Web site.

Rice Quizzed

Members of Congress quizzed Secretary of State Condoleezza Rice at a Feb. 17 hearing of the House International Relations Committee about such dealings. "Our unwillingness to use our economic power as a stick, because of our unwillingness to inconvenience international corporations," is worrying, Representative Bradley Sherman, a Democrat from California, said of the U.S. HSBC, Europe's biggest bank by market value, says it isn't breaking the law and is merely trying to make money. "The job of HSBC Bank Middle East is to take advantage of business opportunities in the region," says Steve Martin, a spokesman in Dubai for HSBC's Middle Eastern unit.