HSBC Reveals Problems With Internal Controls

8:58 p.m. | Updated

LONDON — HSBC, the largest financial institution in Europe, has become the latest British bank to reveal major internal-control problems, saying that senior officials would apologize to United States lawmakers next week for not cracking down soon enough on money-laundering activities in America.

The money laundering, which a United States Senate subcommittee indicates was linked to terrorism and drug deals, could result in HSBC paying fines of up to $1 billion, according to analysts.

“Our anti-money-laundering controls should have been stronger and more effective, and we failed to spot and deal with unacceptable behavior,” Stuart T. Gulliver, the chief executive of HSBC, wrote in a memo that became widely circulated after it was released to employees late Wednesday.

HSBC said Thursday that it would have no further comment before a hearing Tuesday in Washington.

The admission by HSBC, long seen as one of the more conservatively run and trustworthy of the financial giants based in London, came at an awkward time for the bank. It is under new management since the period when the money laundering occurred, from 2004 to 2010, and it has shifted corporate focus to fast-growing markets in Asia, which accounted for the bulk of its $16.8 billion in profit last year.

HSBC can distance itself from the money-laundering episode by chalking it up to the previous management. But the bank, along with more than a dozen financial institutions, also faces scrutiny by regulators on both sides of the Atlantic for any role the companies might have played in an the interest-rate manipulation scandal that has embroiled Barclays, a main HSBC competitor.

One big HSBC investor, who was not authorized to speak publicly, said that while it was a serious lapse not to have caught customer money laundering sooner, it did not necessarily indicate a deeper ethical problem within the bank.

That investor plans to closely follow developments to see what role — if any — the bank played in trying to manipulate key interest rates, including the London interbank offered rate, or Libor. If any issues arise, it could lead to more political pressure and damaging lawsuits, especially in London.

“We do not think there is a culture of money laundering at HSBC,” the investor said. “Management overlooked it but will fix it. But Libor is different.”

Adding another political wrinkle: HSBC’s former chairman, Stephen Green, who was in office from 2006 to 2010 when many of the money-laundering detection problems occurred, is currently the trade minister in Prime Minister David Cameron’s government. Mr. Green’s office did not reply to a request for comment on Thursday.

Shares of HSBC fell more than 2 percent Thursday in London.

British politicians and regulators are in the middle of an inquiry into the banking practices of Barclays in the Libor scandal, for which the company has already agreed to pay fines in Britain and the United States of $450 million.

A broader investigation into the conduct and practices of all banks operating in Britain is likely to follow, and regulators in the United States are conducting their own wider sweep.

In the case of the money laundering, the United States authorities have been examining HSBC for several years. On Tuesday, officials from the bank are set to testify in Washington before the Senate Permanent Subcommittee on Investigations.

A subcommittee spokesman declined on Thursday to discuss the investigation, but the panel’s Web site describes the agenda as “a hearing on the money laundering and terrorist financing vulnerabilities created when a global bank uses its U.S. affiliate to provide U.S. dollars, U.S. dollar services, and access to the U.S. financial system to high risk affiliates, high risk correspondent banks, and high risk clients, using HSBC as a case study.”

Mr. Gulliver, HSBC’s chief executive, is not expected to testify.

In his memo to employees, Mr. Gulliver said that since 2010, the bank has doubled its annual spending on regulatory compliance to $400 million, and now has about 3,500 people worldwide working on compliance — more than 1,000 of them in the United States. Over all, HSBC has about 295,000 employees.

Ian Gordon, a bank analyst at Investec in London, said Thursday that for HSBC, the money laundering “is an historic issue and I don’t think there will be any material repercussions in terms of civil liability.”

But Mr. Gordon is among those who note that HSBC’s bigger issue in the near future is the Libor investigation.

At HSBC, unlike Barclays, profits come mainly from a mix of consumer and corporate businesses in Asia. Investment banking, which makes up as much as 70 percent of Barclays’s profit, accounts for less than a third of HSBC’s bottom line.

Mr. Gulliver is a recent appointee to the top spot at the bank, taking over in early 2011, and he has been vocal in shifting focus toward Asia — where he spends a large amount of his time — and away from slower growth developed markets.

Although he has an investment banking background, Mr. Gulliver is a low-key British national who has spent much of his career out of the public eye in Asia. Consequently, he is a less controversial public figure than Robert E. Diamond Jr., the recently ousted Barclays chief, whom the former British business minister, Peter Mandelson, once referred to as the “unacceptable face” of London banking.

In a recent report, analysts at Morgan Stanley estimated that the possible litigation exposure for the industry at large from the Libor fallout could be as much as $6 billion. That figure, while involving significant guesswork, was calculated on the basis of the potential profits a bank could have made by benefiting from a lower interest rate.

According to Morgan Stanley’s calculations, HSBC’s potential penalty if found culpable in the Libor investigation would be $348 million, which translates into a 1 percent earnings per share hit for 2013. The bank that would suffer the most was Royal Bank of Scotland, the Morgan Stanley analysts said, with possible legal exposure of $1 billion.

Neil Gough contributed reporting from Hong Kong.