* Connections to Iran, Mexico under the spotlight
* HSBC crackdown on money laundering riddled with lapses
* Senate investigation expected to guide Treasury, Justice
By Carrick Mollenkamp
July 16 Current and former bank regulators are likely to face tough questions by a U.S. Senate panel Tuesday about their agency's oversight of HSBC Holdings Plc's efforts to stop illegal money flows between its U.S. and international offices, according to people familiar with the situation.
The Senate investigation is expected to be a roadmap for other investigations being conducted by the Treasury and Justice departments, according to people familiar with those inquiries. Those investigations are likely to lead to fines or settlements totaling between hundreds of millions of dollars to $1 billion, they said.
Comptroller of the Currency Thomas Curry, as well as an Office of the Comptroller of the Currency (OCC) lawyer and a former OCC official are scheduled to testify Tuesday before the U.S. Senate Permanent Subcommittee on Investigations, which is releasing a 450-page report Tuesday exposing how money from high-risk corners of the world, including the Middle East and Mexico, moved through the British bank.
The current and former OCC officials are expected to face questions about how the office, a principal regulator of HSBC's U.S. operations, monitored the bank's anti-money laundering compliance, according to these people. A Reuters investigation has found persistent and troubling lapses in the bank's anti-money laundering compliance since 2010.
Executives from HSBC and its U.S. unit also are scheduled to testify about how the bank, after years of run-ins with U.S. authorities over alleged anti-money laundering lapses, has cleaned up its act since the OCC issued HSBC a consent order on money laundering in 2010.
The hearing on Tuesday marks another chapter in the decade-long effort by regulators to rein in illegal money flows at HSBC. The Senate probe is one of a number of investigations HSBC is confronting. Two U.S. Attorney's offices have probed multiple lapses inside the bank, including the movements of bulk cash in transactions tied to Mexican foreign-exchange dealers, which are widely suspected of laundering drug-trafficking proceeds, according to documents reviewed by Reuters.
An investigation by the Office of Foreign Assets Control (OFAC) is also examining how HSBC handled funds tied to Iran, according to an HSBC regulatory filing in May. OFAC's inquiry extends beyond HSBC. Other banks that have agreed to fines as part of probes conducted by OFAC and the district attorney in Manhattan include Lloyds Banking Group, Credit Suisse Group and Barclays Plc.
The hearing on Tuesday also could yield new details on how well the Comptroller of the Currency regulated HSBC's U.S. operations. Curry took over as comptroller of the currency in April.
Because Curry is new to the job, a second OCC witness may provide more clarity about the agency's oversight. That witness, Grace Dailey, is the former deputy comptroller for large bank supervision.
Dailey, Curry and an OCC spokesman could not be reached for comment.
In an emailed statement, an HSBC spokesman said, "We will be discussing a number of compliance issues with members of the subcommittee, including past (anti-money laundering) practices and in particular, HSBC's remediation and resolution of compliance matters. The board and leadership of HSBC are fully committed to implementing the highest standards and have already made significant changes to our organization's structure to bring this about."
Dailey is the OCC official listed as a signatory on the 2010 consent order where the OCC cited HSBC for a number of failings in its anti-money laundering compliance program. The order came seven years after HSBC was cited for similar problems by the Federal Reserve Bank of New York and state regulators in New York.
Documents reviewed by Reuters show that the OCC investigation leading up to the 2010 order raised a number of red flags about the way the bank attempted to monitor suspect transactions. At one point, the OCC said it considered one anti-money laundering official at HSBC to be "incompetent," according to one document.
HSBC is not the only bank to draw scrutiny from the OCC. In April, the agency said Citigroup Inc fell short of establishing strong systems to identify money laundering. At the time, Citigroup said that problems identified by the OCC had been fixed.
Among the HSBC officials will be Stuart Levey, former undersecretary for terrorism and financial intelligence at the Treasury department. He joined HSBC as chief legal officer in January.
Officials from the U.S. Treasury and Department of Homeland Security also are scheduled to testify. (Reporting by Carrick Mollenkamp; Editing By Alwyn Scott and Matt Driskill)