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HSBC and the Ponzi Scheme Play

Yesterday, HSBC shares plunged to their lowest level since 1995 after an investigative report alleged that the bank facilitated a money-laundering scheme.

And obviously we need to talk about it.

The Story

Sometime during 2013, a gentleman by the name “Phil” Ming Xu (in the US) began recruiting potential investors promising to double their money in 100 days. The proposition was simple — “You join the scheme by making a deposit and your money will then be used to —

a) Build and sell third-party cloud computing services including website hosting, data storage, and software support

b) Fund and incubate high tech startups”

And considering the nature of the investments, doubling money in 100 days should be no problem, he said. Investors were also offered extra points for roping in new participants and the business managed to grow organically by virtue of its design.

The only problem — It was a scam. They never made any revenue. They didn’t invest money in tech businesses. There were no cloud computing services. And the project was a Ponzi scheme at best. He paid out early investors using money coming in from new investors. And then used the rest to purchase golf courses and make unauthorized payments ultimately duping many late investors. As an article in the BBC notes —

Thousands of people from the Asian and Latino communities were taken in. The fraudsters used Christian imagery and targeted poor communities in the US, Colombia and Peru…

But the impact was not just financial. The scheme led to the death of investor Reynaldo Pacheco, who was found underwater on a wine estate in Napa, California, in April 2014. Police say he had been bludgeoned with rocks. He signed up to the scheme and was expected to recruit other investors. The promise was everyone would get rich. A woman he introduced lost about $3,000. That led to the killing by men hired to kidnap him.

Eventually, the authorities scuttled the scheme after finding out Phil and his associated had raked in close to $65 Million. He was arrested in China and was imprisoned for 3 years.

But what if the whole fiasco could have been averted?

Back in October 2013, HSBC suspected a scam when they noticed large amounts of money was being diverted from the US to an account in Hong Kong for no good reason. At this point, they were lawfully required to fill out a Suspicious Activity Report (SAR). It’s sort of a small note outlining the nature of the suspected fraud and why they think it might be unlawful.

For instance, imagine you have an account with HSBC that sees very little activity. Until one day suddenly millions of dollars start moving in and out of your account thick and fast. That’s suspicious stuff. And so banks are mandated to fill out a report stating this much and forward it to the US Financial Crimes Enforcement Network who might eventually investigate the matter. In its report, HSBC explicitly stated that the transactions might have been facilitated by participants involved in a pyramid scheme leaving very little room for interpretation. In fact, they went on to file two more SARs in 2014 alleging pretty much the same things.

But the interesting bit here is that they never did anything about it. They simply filed the reports and refused to intervene. They could have frozen the accounts. They could have declined the transfer request. They could have scuttled the scheme. But they didn’t. More importantly, HSBC was moving money for people it couldn’t identify. We know this because their report leaves out details including “key facts about customers, the ultimate beneficial owners of accounts and the source of the funds.” And this brings us to an interesting crossroad.

If a bank executes an order knowing fully well it was facilitating a Ponzi scheme, shutting its eyes to the obvious fact of dishonesty or it acted recklessly in failing to make the appropriate enquires that any reasonable institution would, then the bank can be held liable. But the mere act of filing a SAR doesn’t imply that a bank knows for sure a Ponzi scheme is at play. It’s just suspicious you know. Not necessarily a crime. In fact, HSBC recently added that it “met all of its obligations under the [agreement struck with US prosecutors]”.

So what do you think?

Is HSBC part of the syndicate? Or is it not?

Also, this matter came into light during an investigation of leaked documents that included 2,100 Suspicious Activity Reports (SARs) filed by the likes of JPMorgan, HSBC, Standard Chartered Bank, Deutsche Bank and Bank of New York Mellon. The investigation alleges that these big banks kept profiting from powerful players despite being aware that there might be some foul play involved.