HSBC pays US settlement after 'front-running' forex fraud

The DoJ, after an investigation alongside the FBI, charged HSBC with engaging in a scheme to defraud two bank clients through a multi-million dollar scheme known as “front-running.”

The FTSE 100-listed bank will pay the DoJ a total of $101.5m, including a US$63.1m fine and US$38.4m in restitution, and has agreed to put further compliance procedures and controls in place.

“HSBC’s admissions in connection with this resolution confirm that the company misused confidential client information for its own profit on more than one occasion,” said acting assistant attorney general John P. Cronan.

“This sort of misconduct not only harmed their clients, costing the victims money, but it also ran a serious risk of undermining the public’s confidence in our financial markets."

DoJ general inspector Jay Lerner said HSBC Holdings had accepted that it is responsible for the conduct of its employees "and that it must not be permitted to benefit from the fraud committed by bank personnel".

“Such financial crimes violated the trusted relationships between HSBC and its clients, and therefore, we are pleased to join our law enforcement partners in combating this misconduct.”

The FBI said HSBC defrauded two bank clients in a front-running scheme that enabled them to acquire millions of dollars to benefit the bank and harm the clients.

On two separate occasions in 2010 and 2011, traders on HSBCs foreign exchange desk misused confidential information provided to them by clients that hired HSBC to execute multi-billion dollar foreign exchange transactions in the pound, HSBC admitted.

After executing confidentiality agreements with its clients that required the bank to keep the details of their planned transactions confidential, traders on HSBC’s foreign exchange desk transacted in sterling for the traders and HSBC’s own benefit in their HSBC proprietary accounts.

HSBC traders then caused the large transactions to be executed in a manner designed to drive the price of the pound in a direction that benefited HSBC, and harmed their clients, the DoJ said. HSBC also admitted the bank made misrepresentations to one of the clients, Cairn Energy, to conceal the self-serving nature of its actions.

In total, HSBC admitted to making profits of approximately $38.4m on the first transaction in March 2010, and approximately $8m on the Cairn Energy transaction in December 2011.

In connection with the government’s investigation, HSBC's former head of foreign exchange cash trading at HSBC, Mark Johnson, was charged in 2016 with one count of conspiracy to commit wire fraud as well as 10 counts of wire fraud stemming from the Cairn Energy transaction. Johnson was found guilty last October and his sentencing is scheduled for 15 February.

HSBC had better from the DoJ news in December, when the department said is would lift the deferred charges placed on HSBC for alleged money laundering in Mexico. HSBC had been under threat of prosecution in the US after it signed a deferred prosecution agreement in order to avoid criminal charges after it was accused of allowing Mexican traffickers to funnel money through the bank.

Five years ago, the DoJ imposed the order, as well as a $1.9bn fine, but HSBC said in December it has now expired.