Drugs, Elites and Impunity: The Paradoxes of Money Laundering and the “Too-Big-To-Fail” Concept

Drugs, Elites and Impunity: The Paradoxes of Money Laundering and the “Too-Big-To-Fail” Concept

Guadalupe Correa-Cabrera, Charles Lewis, and William Yaworsky

The concept of “impunity” is well known to social scientists and there is an extensive body of literature that focuses on this phenomenon in Mexico.[1] While there is a growing focus on US politicians and impunity,[2] lesser attention is currently paid towards applying this notion to US economic/financial elites. In the present work, we ask the reader to consider the concept of “Too-Big-To-Fail” (TBTF), and whether or not this concept promotes impunity and largely serves to provide cover for—and essentially benefit—US financial elites. Widely invoked during the 2008-2009 banking crisis, TBTF is the idea to protect, at any cost, those firms whose “size, complexity, interconnectedness, and critical functions are such that, should the firm go unexpectedly into liquidation, the rest of the financial community and the economy would face adverse consequences.”[3]

In the following paragraphs, we use the HSBC bank case as an example of how the use of a Deferred Prosecution Agreement (DPA) confers de facto impunity on the defendant bank, while at the same time fails to recognize or compensate the victims of drug cartel activity.[4] Families of US citizens murdered or assaulted by a Mexican cartel sued HSBC in 2016 in federal court in Brownsville, Texas, based on HSBC’S role in laundering vast sums of money for the cartel.[5]

Such criminal organizations are major drivers of suffering in Mexico, and massive numbers of deaths in both Mexico and the United States. The two neighboring countries share common security concerns,[6] but the US public is largely focused on border dynamics, and the supply side of the drug trade. Considering essential problems with the current perspective and lack of results, we argue that US banking and civil laws should be reformed, especially those penalties and liabilities that accrue to banks and bankers whose financial crimes serve to protect or promote these dangerous groups.

Impunity and Corruption in Mexico

Mexico’s problems with corruption are complicated by its history of having a relatively weak state and fragile institutions, combined with a robust informal economy and a low tax base.[7] High transportation costs, destructive wars, and weak economic growth have contributed to the fragility of the Mexican state. According to some sources, the size of Mexico’s informal economy is close to 30 percent,[8] and the share of employment in the informal sector is over 50 percent.[9] Informal economies are regulated through bribes and related practices; frequently, local police forces are part and parcel of illicit activities.[10]

Perhaps the best barometer of impunity in Mexico is the fact that so few crimes are punished. In 2021, Human Rights Watch reported that about 90 percent of crimes were never reported, a third of reported crimes were never investigated, and only 16 percent of the investigated crimes were “resolved.”[11] In its first decision on an individual complaint against Mexico, the UN Committee on Enforced Disappearances (CED) found “near total impunity” for such crimes.[12] According to the US Department of State’s “Country Report on Human Rights Practices,” Mexico is one of the most dangerous places in the world for journalists.[13]

When you combine the TBTF concept with money laundering, the illicit drugs market, and various manifestations of impunity, social problems—including the strengthening of criminal organizations—are the predictable result. It is thus time for US citizens to contemplate the hypothesis that TBTF is a homegrown manifestation of impunity. TBTF allows people in the banking industry to (1) evade accountability for their actions, and (2) benefit financially from failure. These are both hallmarks of impunity.

Large-scale drug traffickers find it difficult to deposit their billions of US generated cash directly into US banks, so they bulk ship the currency to Mexico where they can deposit it into Mexican banks, which have correspondent accounts in US banks. Such deposits are then wire transferred from the Mexican bank to a US bank. Through such transactions and transfers, traffickers can get their funds into the US banking system under front names. The overall amount is staggering. The State Department estimates that up to 39 billion dollars annually of drug trafficking funds are laundered between financial institutions in Mexico and the United States.[14]

Corrupt Mexican political money has a somewhat easier path as the money is already in Mexico from Mexico-based schemes involving bribery, fraud, and theft of government funds. Such corrupt politicians, through their political power and financial connections, have access to persons and businesses for use as fronts for deposits into banks for subsequent investment in the United States. They share the same goal with the traffickers: to preserve and utilize their ill-gotten wealth using the US financial system. By so doing, they enhance their standing in Mexico by showing that they are so influential that even the power of the United States cannot stop them.

The HSBC Case

In the relevant time period, HSBC was one of the largest banking networks in the world, with assets in excess of 2.5 trillion dollars through operations in over 80 countries.[15] HSBC was not (and is not) a single entity, but rather a network of individual financial entities operating under a single umbrella British entity informally referred to as HSBC Group. Subordinate to HSBC Group are multiple levels or layers of corporate entities, which control directly or indirectly actual banks.

For simplicity, we will refer to the US bank indirectly owned by the parent entity as HSBC-US, which circa 2012 operated approximately 470 branches throughout the United States. In the relevant time period, HSBC-US managed assets in the range of $200 billion.[16] Linked to HSBC-US were “affiliate” banks in many other countries that are also indirectly owned by HSBC Group through this multi-tiered structure. The banking business then and now provides for affiliates to have accounts at HSBC-US to ease the transfers of funds internationally. Such accounts are called “correspondent accounts.”

During the approximate time period of 2002-2011—as detailed in court records and the report from the Senate hearing before the Permanent Subcommittee on Investigations of the Committee on Homeland Security and Governmental Affairs on the HSBC case—large-scale Mexican and Colombian drug traffickers moved at least $881,000,000 dollars into the US banking system via the HSBC network.[17] This figure may in fact be on the low side.

In just a two-year period of 2007-2008, the HSBC network transferred in excess of 7 billion dollars in bulk currency back to the United States from its affiliates in Mexico, which we will refer to as HSBC-MX.[18] The amount was so excessively high that both Mexican and US regulatory and law enforcement authorities expressed concern that HSBC-MX bulk cash shipments could only reach that level if they included illegal drug proceeds.[19] The report went on to note that there was “overwhelming” information available to HSBC-US about money laundering risks in Mexico.[20]

HSBC Group and HSBC-US graded country risk assessments for money laundering at 4 levels, with the lowest being “standard” and the highest being “high.” Banking transactions with and transfers from countries rated “standard” received very little scrutiny for money laundering. Despite, and contrary to widely available information and warnings, HSBC-US graded Mexico as “standard,” which was the lowest risk category for money laundering as earlier mentioned. The consequence within HSBC-US was that since the money was coming from Mexico, and was graded by HSBC-US in the lowest risk category, enhanced monitoring of the “clients” providing the money was not required.[21]

In other words, HSBC-US appears to have engineered its monitoring system in a way to ensure that the incoming funds were not examined. As a result of this process engineering, a staggering amount of wire transfers of funds from Mexico to HSBC-US occurred during the time period of 2006-2010 without proper or appropriate anti-money laundering monitoring as required by federal law. The amount exceeded 670 billion dollars.[22]

The Senate report on this case goes on to detail other shortcomings in HSBC’s banking practices regarding the movement of funds involving North Korea, Cuba, and Iran. These practices included the systematic generation of deliberately altered details that accompany wire transfers to HSBC-US from overseas affiliates so that the transfers would not be blocked as linked to prohibited states, entities, or persons. Per the report, such transfers exceeded $19 billion dollars.[23] The Office of Foreign Assets Control (OFAC), part of the US Treasury Department, seeks to prohibit doing business with certain persons and entities engaged in nuclear proliferation, large scale drug trafficking and rogue countries. By this scheme HSBC neutered the OFAC prohibitions.

Throughout the Senate report, there are various instances where the HSBC network did not perform the due diligence required of banks to establish/maintain/operate accounts, or engaged in banking with other banks that had known terrorist connections. For example, from 2006-2009, HSBC-US accepted bulk cash shipments in excess of $15 billion in bulk cash from its affiliates, but did not conduct any anti-money laundering surveillance or monitoring of such shipments. In excess of $7 billion came from Mexico in just two of those years, as noted above. This occurred in an information environment where there were specific and repeated warnings of bulk cash shipments being used by traffickers and others to launder illegal money.[24] HSBC was specifically warned by its own network that a “massive money laundering scheme” was being executed by HSBC-MX using multiple branches in the state of Sinaloa, the home turf of the Sinaloa Cartel. From 2006 to 2008 HSBC-MX physically transferred over a billion dollars from Sinaloa to HSBC-US.[25]

Another example can be found in HSBC-US engagement with specific banks in Saudi Arabia and Bangladesh despite warnings that those banks had identifiable links to terrorists.[26] As a result, large-scale traffickers, as well as prohibited countries, persons, entities, and financial criminals had easy access to HSBC overseas affiliates. Such affiliates utilized the HSBC network as a gateway to the US banking system through HSBC-US. Concerning prohibited transactions from abroad, HSBC admitted and the court found that “HSBC knowingly and willfully engaged” in practices to ensure that such transactions “went undetected in the US.”[27]

The United States charged the parent entity HSBC Group and HSBC-US with multiple felony violations in 2012 in federal court in New York as part of a DPA, whereby HSBC Group and HSBC-US would concede to illegal conduct and agreed to specific rehabilitative reforms over a five-year period. Under a DPA, a defendant admits to illegal conduct but does not plead guilty, and the charges can be ultimately dismissed, which is what happened in this case.

Seemingly significant fines and penalties were also assessed, along with the defendants’ agreement to fund and undertake approximately 26 specific rehabilitative measures to enhance their required anti-money laundering programs. The measures include increased personnel, revised procedures, termination of certain correspondent bank relationships, new leadership and assignments, a revised bonus system, and revamped risk assessment.[28] No one went to jail. In fact, no one and no entity even pled guilty in the United States, as far as we can determine.

A monitor was appointed to report to the court on HSBC’s progress to meet its commitments to reform. On 1 April 2015, the US Attorney who approved the DPA, reported to the court—in a six-page summary of progress—that there had been progress, but it was “too slow,” noting a culture of resistance. Underlying the six-page report was a 1,000-page assessment that presented a more scathing assessment of progress. The New York Times noted in its reporting the political scenery of the era: the US Attorney who approved the DPA and signed the six-page summary report was facing a tough confirmation in Washington to be named as the next Attorney General of the United States.[29] She was later confirmed as such a few weeks later. Both HSBC and the Department of Justice successfully resisted efforts to make public the filed report (United States v. HSBC Bank USA, and HSBC Holdings PLC; Hubert Dean Moore, Jr., Appellee).

The Body Count

Drug cartels in Mexico are responsible for massive human rights violations, terrorism, and mass unmarked graves.  The US body count has increased considerably in recent times due to the cartels’ spiking its illegal drugs with fentanyl, leading to hundreds of thousands of fatal drug overdoses in the United States during the past few years.[30]

Between Mexico and the United States, the authors estimate that the tally of the dead since 2013 till today—consisting of the “disappeared” in Mexico,[31] organized crime deaths in Mexico,[32] ‘which combined numbers exceed 200,000’ and more than 800,000 drug overdose deaths in the United States driven primarily by fentanyl[33]—now exceeds one million. This number largely surpasses the approximate 619,000 US military war deaths from all the wars the United States was involved in from 1898 until today (see Table 1).

Table 1. Number of military fatalities in major wars involving the United States (1898-2023)

Source: Statista[34] with data from US Department of Defense, American Battlefield Trust.

Why was the HSBC network let off the hook? Its US monetary penalty was slightly less than $2 billion dollars for protecting the money of drug traffickers, said sum being about 10 percent of its HSBC’s $22 billion in profits in just one year, 2011.[35] Was HSBC really Too Big to Fail?

Note that HSBC was not the victim of adverse economic forces. Neither was HSBC teetering on insolvency, as far as we can tell. Rather, it had, in the view of the authors, deliberately set upon a course to increase profits by moving funds generated by drug traffickers. The issue here is that HSBC did not mind the mayhem as long as HSBC could make money off of it. HSBC did not claim that its conduct as regards foreign transfers was accidental but was done “knowingly” to reduce surveillance or monitoring of them.[36]

The Senate report, despite its 334-page single spaced length, does not focus on the role of corporate power/influence in the soft regulation of HSBC-US by banking authorities. To be sure, it provides a wealth of examples of lenient, “soft” regulation by the Office of the Comptroller of the Currency (“OCC”), the entity within the Department of Treasury primarily responsible for the regulation of HSBC from 2004 onward. The Senate report also details HSBC-US’ responses to OCC’s many critiques of the AML programs over the years. The response was to basically ignore them. The Senate report consequently does not provide a basis for assessing if the hand of corporate power played a role in the OCC’s ineffective regulation of HSBC-US. One conclusion that can be drawn is that HSBC appears to have considered itself to be a power unto itself. This view is buttressed by the US Attorney Office report of the progress of reform after HSBC-US was put on “probation” as part of the DPA.

Also missing from the Senate report, as well as from the lengthy Statement of Facts filed in the criminal case, is any focus on or attribution as to who created or designed the various schemes within the HSBC empire that were used for years to evade effective AML controls. The most that was stated is that HSBC-US “officers and executives” knew about “money laundering risks inherent to Mexican Financial institutions.”[37]

Too Big to Fail?

Imagine if requiring HSBC-US to pay more serious fines would have put the bank in financial jeopardy and caused it to fail. Would that failure collapse the US financial system? We examined several of the largest bank failures in the recent past. The top three had assets that were approximately equal to, or in one case, significantly larger than the reported amount of assets managed by HSBC-US. The list of the top 3, with assets adjusted to 2022 equivalent amounts, is as follows:

Sources: Federal Deposit Insurance Corporation (FDIC).[38]

Yet, the US economy did not fail, and the bank system did not falter. Also on the “Top-Ten” list are older bank failures from the 1988/1989 time period. These were smaller banks with smaller asset profiles. They include:

Source: Federal Deposit Insurance Corporation (FDIC).[39]

Together, when sized to 2022 dollars, these three failures together approximated the size of HSBC-US. Yet the sun still rose on New Year’s Day, 1990, following the collapse of MCorp in 1989. All of which suggests that TBTF did not and does not stand as a reason to not fully punish HSBC. In fact, the authors believe that TBTF is more of a myth trotted out as needed in aid of scaring the citizenry with financial collapse. As social scientists, we instead recommend calling it what it is: impunity.

The Eurasia Group maintains an “Atlas of Impunity” scoring nations on a host of variables.[40] While such studies have their limitations, it’s important to note that the United States is graded worse than Austria, Estonia, Finland, Germany, Japan, Iceland, Norway, Slovenia, Sweden, Switzerland, and the United Kingdom when dealing with impunity. Mexico fares even worse, with close to three dozen countries ranked in categories assessed to be more effective in handling the problem. And while it’s common to highlight the rampant impunity in Mexico, we should remember that we have a similar situation in the United States in the banking industry.  

Impunity can be defined as “the impossibility, de jure or de facto, of bringing the perpetrators of human rights violations to account—whether in criminal, civil, administrative or disciplinary proceedings—since they are not subject to inquiry that might lead them to being accused, arrested, tried and, if found guilty, convicted.”[41] While this definition may be imperfect, it’s a starting point for understanding factors that lead to the delegitimization of a political system.

Some observers[42] believe that impunity granted to bankers, especially in the wake of the 2008 financial crisis, has contributed to a decline in the perceived legitimacy of the broader US political and economic systems, at least in the eyes of working-class Americans.[43] We authors have to agree. Indeed, just after the DPA became public in the HSBC case, the New York Times, in an editorial, led off with a terse condemnation of the HSBC resolution: “It is a dark day for the rule of law.”[44] The HSBC resolution has parallels to an old-fashioned patronage system in which the higher one’s standing in society, the more numerous the “rights” at one’s disposal. As the Times editorial quipped, Too-Big-To-Fail equates to Too-Big-To-Jail. Enter impunity.

What does impunity look like? Can we try and quantify the degree to which bankers have achieved impunity over the last 40 years? In USA Today, Darrell Delamaide notes that during the 1980s savings and loans scandal, over a thousand bankers went to prison in the US for financial crimes.[45] Fast forward to the wake of the 2008 financial crisis, where only one banker went to prison, and while some 49 institutions paid out $190 billion in fines, restitutions, and lawsuits, the money came from the banks’ shareholders, not the bankers. Executives at some bailed-out institutions received bonuses that year that cumulatively, exceeded five billion dollars.[46] And now, in our recently concluded HSBC example, no one went to prison nor was convicted of any crimes.

We hence put forward the thesis that current laws and regulations grant a large measure of impunity that is increasingly effective in serving large banks. While some[47] have suggested that the larger banking structures need to be broken up, we believe that opening up the banks and bankers to civil liability to those persons harmed by the criminal enterprises whose funds are moved by the banks would be equally effective in stemming the flow of corrupt funds through banks. Such private lawsuits would be a force multiplier of resources to attack the problem by dramatically increasing the costs to banks of engaging in the business of moving, holding, hiding, or protecting corrupt funds.

Importantly, federal sentencing law specifies that among various enumerated considerations for sentencing is the need “to afford adequate deterrence to criminal conduct.”[48] It is beyond axiomatic that impunity does not deter criminal conduct. Impunity undermines legitimacy, emboldens criminals, and shreds the notion of a shared social contract.

Recommendations

Taking this context into account and the futility of the TBTF concept in this case, the authors of this work pose some recommendation to effectively combat money laundering and impunity within banks, with the ultimate goal of fighting the perverse effects of drug trafficking and related forms of organized crime. Specifically, we state the following:

1. Call it what it is. In the context of an HSBC-type banking crime, be honest with the citizenry. Don’t hide behind or dilute outcomes of investigations with platitudes such as “Too-Big-To-Fail.” Call it what it is—impunity—and allow the citizenry’s input via jury verdicts in civil lawsuits against banks who have aided criminal endeavors known to use violence in their operations.
2. Recognize the existence of criminal conduct and be prepared to punish it. As an example, even the US Senate Permanent Subcommittee, in its Senate Report on HSBC, fails to highlight the need for enhanced prosecutorial efforts to identify, convict, and imprison bank employees who design and carry out such crimes. Instead, the Senate Report recommended structural and procedural improvements.[49]
3. Hold hearings to enhance the better understanding of public [which includes bankers] of the direct linkage between money laundering and related banking crimes and the underlying crimes, especially those accompanied by violence. For example, in the view of the authors, banks and bankers who facilitated the disguised movement of cartel funds of this volume share in the legal responsibility for harms resulting from the underlying crimes. The principle is encapsuled in Title 18, US Code, Section 2, the law of aiding and abetting and Section 3, accessory after the fact. Banks and bankers should share in the criminal and civil liability for harms they abetted or accessorized.
4. Reform federal laws and regulations so that:

1. Victims of cartel crimes that are citizens or residents in the United States, who have been harmed by cartel crimes, have a clear, direct cause of action [meaning they can sue] against bankers and banks who have possessed, moved, or transmitted cartel funds for damages caused by such cartels. The authors note that in the Statement of Facts of United States v. HSBC Bank USA, N.A., et al. (pp. 26-30), numerous remedial measures undertaken or promised to be undertaken by the HSBC defendants are outlined in significant detail, yet none of the measures address the victims of the cartels whose funds HSBC hid from federal scrutiny. To the contrary, HSBC in several court actions in Texas and New York took pains to ensure that the estate of Jaime Zapata, the federal agent murdered while on duty in Mexico by Los Zetas on February 15, 2011, received not even a penny of the nearly 2 billion dollars HSBC paid out to avoid federal indictment and conviction.[50]
2. Reform federal evidentiary laws and banking regulations such that banks that receive, hold, or transmit cartel funds on this scale are:

• presumed to know the illegal nature of such funds. This has to do with the concept of “Know Your Customer” or KYC.[51]
• presumed to aid and abet the illegal operations of such criminal organizations without the need or requirement to show direct causation between any specific deposit or transfer, and any specific harm caused by a criminal organization. The essence here is that money is the lifeblood of a criminal enterprise.[52]

3. Reform federal law to reflect that those who suffer harm from cartel crimes, including some addictions that end in overdose deaths (e.g., when drugs are laced with fentanyl), qualify as victims of related banking and money laundering crimes by banks that have handled cartel money. Extend victim compensation to include cases resolved by Deferred Prosecution Agreement and similar procedures, making it mandatory that any resolution of such investigation by conviction or a DPA must include victim restitution. Where in a related civil suit, a victim seeks restitution against the financial institution, all federal investigative and regulatory agencies shall to the maximum degree that is reasonable, cooperate with such victim by providing under subpoena information, documents, tangible items, and testimony reasonably related to the claim for compensation for cartel harm.
4. Assess if the financial penalties imposed on the banking industry by governmental entities are sufficient to deter the illegal conduct the government is punishing. Value Walk reports that in 2020 worldwide 14 billion dollars in fines were assessed by banking authorities, with US banks garnering the majority of the fines.[53] Most of the fined institutions were sanctioned for money laundering related violations. For 2021, Forbes reports that the 7 largest fines for money laundering related banking violations exceeded 1.8 billion dollars.[54] Clearly, the industry continues along its wayward path. Forbes warns that banks need to adopt more effective measures to stem the flow of illegal money into their banks or be prepared “to pay the price for it.” And therein lay the issue. The “price” has clearly not been high enough. Exposing banks and bankers who knowingly, recklessly, in willful disregard, or negligently move money of criminal enterprises to civil liability for harms caused by those entities would substantially increase the “price” for such conduct. Such civil liability to victims would be in addition to governmental fines, penalties, and forfeitures.

Concluding Remarks

This text lays out the paradoxes of the “Too-Big-To-Fail” concept as applied in a strategy to stem money laundering/related banking crime covering proceeds of criminal enterprises. There is a direct linkage between such financial crimes and the underlying crimes committed by the cartels and other actors participating in or protecting the drug trade. Drug money transmitted to, held, or protected through financial crimes at banks is both the product of protracted drug crimes and a sustaining force for ongoing drug crimes. The human toll in lost lives alone is measured in hundreds of thousands of deaths on both sides of the border.

We understand that policymakers must factor in economic stability when making decisions and it is difficult to estimate how many Lehman Brother-sized failures can occur without serious consequences. There was much to consider in 2008. Still, we have outlined the extremely negative health, human rights, and organized crime consequences of blatant impunity. Furthermore, it is no longer 2008, and impunity, if anything, appears to be increasingly prevalent. For example, no one in the Sackler family went to prison during the opioid crisis, which again looks like an evasion of responsibility.

Most of the money laundering crimes of the type described here go unpunished and have essentially benefited the cartels, as well as the financial or banking elites. The HSBC case is a clear demonstration of this fact. This is basically a story about drugs, elites and impunity. Impunity seems to be at the center of this drama, and “refers to situations in which there are no effective measures to penalize violations or when such measures are not enforced.”[55] With that in mind, we propose here a set of new measures based on victim-centered restorative practices and not on elite-centered approaches in which some already very privileged actors are Too Big to Fail.

Final note:

The authors do not assert that the decision to offer HSBC a DPA was made or enforced in bad faith. We also accept that prosecutorial discretion is an important part of the legal landscape of the United States. Rather, we urge those reading this article to consider the broader setting in which such decisions occur. Banks should not be allowed to illegally and irresponsibly hold funds of criminal enterprises without acknowledging that such practices, as carried out on a protracted basis, enable the criminal enterprise and foster harm on others. Similarly, any banker or decision maker at a similar financial institution should not see this article as inimical to the banking industry. Rather, the article seeks to promote better banking practices by significantly increasing the costs of irresponsible banking while compensating victims of irresponsible and illegal banking practices.

Endnotes