Over 200 million dollars confiscated to Mexican-Chinese businessman Zhenli Ye Gon are displayed in Mexico City

In March 2007, authorities raided the home of Zhenli Ye Gon, a pharmaceuticals magnate based in Mexico City. At his house in the plush suburb of Lomas de Chapultepec, they found $205.6m in hundred dollar bills. The piles of notes were so large they spilled out of the lounge, down the corridors and into the kitchen.

While the raid was going on, Mr Ye Gon was reportedly spotted in Las Vegas indulging in his favourite hobby: high-stakes poker. Now in a US prison awaiting extradition to Mexico, he stands accused of buying from China and then selling to drug gangs the precursor chemicals used to make methamphetamine, a stimulant known in north America as “crystal meth”. As it happens, Mr Ye Gon was also a long-time client of banking giant HSBC.

The episode, contained in a report this week from the US Senate, shows what American lawmakers have called a systemic failure by the UK’s largest bank to control money laundering in its global operations and stop such funds from entering the US.

The multi-year investigation uncovered that HSBC was a conduit for drug money, had clients with alleged ties to terrorism, and stripped details from transactions that would have identified Iranian entities– which may have put the bank in breach of US sanctions against that country. HSBC’s internal culture has been “pervasively polluted for a long time”, said Senator Carl Levin, who led the investigation.

The probe has shaken HSBC; prompted the resignation of David Bagley, the bank’s head of compliance; and – in the wake of the Libor rate-rigging scandal – further battered London’s reputation as a global financial centre.

More than anything, it has shown the reach and depth of the world’s drug-trafficking and money-laundering businesses. From China to Mexico, the names of the locales and participants may seem exotic. Yet the business is often parochial, as Mr Ye Gon’s story shows.

Shortly after his arrest, Mr Ye Gon explained his fondness for gambling. Born in Shanghai in 1963, naturalised in Mexico in 2002, and with no previous criminal record, Mr Ye Gon said he had lost $126m in Las Vegas’ casinos, but as a valued customer, had been given back 40 per cent of his losses, plus gifts of luxury cars.

Although Mr Ye Gon denies all charges, the story of his casino trips offers some insight into one way in which suitcases of money can be laundered. A gambler with dirty money can buy millions of dollars of casino chips and then recoup some of the losses in legitimate cheques and cars.

In the rinse and spin of money cleaning, HSBC was simply one washing machine among many. As Antonio Maria Costa, the former head of the UN Office of Drugs and Crime (UNODC), says: “Today I cannot think of one bank in the world that has not been penetrated by mafia money.”

The global trade in illicit drugs is huge. The UNODC estimates it is worth $380bn in 2008 dollars, about 10 times the annual sales of online retailer Amazon. Indeed, it was because of international drug trafficking that money laundering first vaulted on to the agenda of international crime fighters.

The creation of the Financial Action Task Force in 1989 pooled the G7 group of industrial nations’ money-laundering expertise. The initiative gained real urgency after the 9/11 terrorist attacks in 2001. “Like it or not,” a US justice official then told a gathering of US bankers, “you are going to be on the front line of the coming war on terrorism.”

Yet the impact of this financial war appears limited – so far. Given that the illicit drugs business is blurred and all its numbers are prone to exaggeration, any assessment is difficult. What is clear, though, is that the vast majority of its profits are earned in drug-consuming nations, where the money trail begins.

Take the $35bn a year US cocaine market. Only 1.5 per cent of its proceeds accrue to coca-leaf producing peasants in the Andes. International traffickers get about 13 per cent. The vast bulk, about 85 per cent, is earned by distributors in the US. (European figures are similar.) It is the inadvertent washing of these dirty dollars that HSBC was accused of.

Money laundering is a three step process: drugs are sold, the money “cleaned” of its illegal origins, and then deposited somewhere in the global financial system. From the testimonies of convicted drug kingpins, Mexican authorities believe it has typically worked something like this.

Cocaine cargoes are dispatched from Latin America, say, to Atlanta, where they are sold wholesale to US-based retailers. The wholesalers are paid in cash, typically $10 and $20 bills, which they truck south to border towns, such as El Paso. Drivers charge between 6 and 8 per cent, depending on the distance and load.

The money is then changed into handier $100 bills and filtered across the border, to be fed into classic front businesses – cash-intensive operations such as restaurants – or swapped at exchange houses for pesos. The rinsed dollars are then bought by banks, such as HSBC, from where they can be wired anywhere in the world.

HSBC Mexico was well-placed to hoover up those dollars. At one point after its $1.1bn acquisition of Grupo Financiero Bital in 2002, the bank had more branches in Mexico than in the UK. Yet all of the last stages of this process are legal, even if suspicious. Furthermore, they are camouflaged by larger legitimate money flows.

The Senate report found that HSBC transferred $7bn to its US holding through 2007 and 2008. It seems some of those transfers may even then have been illegal drug trade proceeds. Yet, by comparison, daily turnover in Mexico’s currency markets is $50bn.

Officials are often, therefore, looking for the proverbial needle in the haystack. Their search is further complicated by cunning new practices, such as cleaning dirty dollars via prepaid store cards, a business worth some $550bn a year; or the purchase of legal goods – such as tomatoes or bolts of fabric – which are then legitimately transported across borders.

Money laundering, like drug trafficking, is also something of a vicious circle: bulky dollar bills are often reconverted into handy packets of cocaine, the drugs thereby concealing money rather than the reverse. Another characteristic of the business: someone else is always to blame.

During the Washington hearing, there was some tacit finger-pointing at London – even though the scale of HSBC’s wrongdoing pales next to Wachovia’s. Like HSBC, the US bank did not have rigorous systems. As a result some $373bn in wire transfers, versus HSBC’s $7bn, were made from 2004 to 2007. More than $4bn in bulk cash was also transported from Mexican banks to Wachovia accounts. Bought in 2008 by Wells Fargo, Wachovia has since paid $160m to settle charges, and nobody in the US has gone to jail (versus 15 in Mexico).

HSBC passed the buck. At the hearing, Paul Thurston, head of retail and wealth management, blamed the bank’s lapses on Mexico’s “challenging” environment, including the kidnapping, extortion and bribery risks his staff faced. While that might have been true of a branch manager in a violent border city, it was surely not a threat faced by staff in Mexico City. Mr Thurston’s was “an easy escape attempt,” says one Mexican official.

But Mexicans also find scapegoats. There have been 50,000 deaths since the government began an offensive on organised crime six years ago. Many Mexicans say the offensive is one where “Mexico supplies the deaths, and the US keeps the dollars and supplies the guns”. Yet it is also true that Mexico provides the assassins.

The HSBC case has renewed hopes that the fight against organised crime can be won using “ninja accountants” who will drain its lifeblood with spreadsheets – as happened to Al Capone, who was imprisoned on tax evasion charges. Yet that is doubtful.

Dirty money will always find a weak spot to enter the global financial system – be that opaque countries such as Russia or others that use the US dollar, such as Ecuador. Even in supposedly sophisticated countries the record is poor. In 2010, Federal Asset Seizures totalled just $2.5bn, a fraction of the US’s estimated $65bn annual illegal drugs market. In the UK in 2009/2010, the Serious Organised Crime Agency seized criminal assets worth £318m.

Money-laundering investigations are also slow-moving. Even with HSBC’s full co-operation, the probe took five years. Also, tighter bank regulation and better compliance – HSBC for example says it has doubled spending on compliance and now has 3,500 people on the task – have pushed money-washing into non-financial companies. These are more numerous and harder to monitor.

Estimating the scale of money-laundering is almost impossible. The UN reckons global criminal proceeds total $870bn annually. That is a huge number but, seen in the context of annual global trade of $18tn, or daily foreign exchange turnover of $4tn, it can easily be overlooked. Like a sucker fish riding on a whale, criminal commerce, including money-laundering, is submerged, discreet, usually in cash and hard to capture as it can just swim off somewhere else.

Get alerts on Companies when a new story is published

Copyright The Financial Times Limited 2019. All rights reserved.
Reuse this content (opens in new window)

Follow the topics in this article