The one good reason George Osborne shouldn’t be put in charge of HSBC

The former chancellor understands the big questions needed to become chair of HSBC. But his history with the bank – including arguing against prosecutions linked to laundering drug money – should ring alarm bells, writes Chris Blackhurst

George Osborne is in many ways supremely qualified to chair HSBC – a role he is widely reported to be in the running for.

True, he has never been a frontline banker, nor worked at the highest level in a large financial multinational, nor served as a director, let alone head, of a commercial organisation approaching HSBC’s size.

But he has been chancellor, knows all about how to cut costs, edited a major newspaper, can read accounts, chairs the British Museum and has run plenty of high-powered meetings. So that’s pretty good. That ought to put him up there.

His knowledge of the world, of what makes Asia and China, especially, where HSBC is strongest, tick is another big plus point. He’s also familiar with the machinations of regulators and lawmakers, and is able to deal comfortably with leading politicians and country rulers. Another tick.

What perhaps should be the clincher – at least from the bank’s point of view – is that he has form with the organisation. In 2012, when he was chancellor, the Americans were determined to bring criminal prosecutions against HSBC and some of its senior personnel. Investigations by the Drug Enforcement Administration, CIA, police in New York and attorneys in West Virginia had uncovered a shocking truth – that the great British Bank with a proud history, famed for presenting itself as disciplined and properly managed, had enabled the laundering of billions of dollars by the Mexican drugs baron El Chapo and his Sinaloa cartel. This was later the subject of my book, Too Big To Jail – HSBC and the Banking Scandal of the Century, published by Macmillan.

Warnings to the bank from the Mexican and US authorities as to what was occurring were ignored. It was not as if what the mobsters were up to was difficult to spot. The resourceful Chapo even had pouches specially to fit under tellers’ windows so deposits of dollar bills gleaned from selling narcotics across the US could be made easily and quickly. This trade was captured on camera. The banking supervisors saw it happen with their own eyes.

Under Mexican law, bank accounts had to be held in pesos – so even though dollars were being paid in, they were switched automatically into the local currency. This was no good to Chapo and his organisation. They wished to bank in dollars, to be able to move seamlessly through the international financing and credit system, using the drug proceeds to buy houses, cars, weapons, even aircraft, mini-submarines and boats so they could transport even more drugs into the US. Theirs was a substantial corporation, illegal, of course, that employed thousands around the globe. They desired internationally recognised American dollars.

HSBC made that possible. The peso amounts were transferred instantly, by pressing computer keys in HSBC offices in Mexico to the bank’s Cayman Islands branch, where they could be kept in dollar accounts. From there, the money could travel anywhere and be used to purchase anything.

The Mexicans and US investigators uncovered this. They discovered there never was a physical branch of HSBC Mexico (Cayman); it existed only on paper, on electronic screens. It was a scam, perpetrated by HSBC employees. But HSBC bosses paid little attention to what was occurring in the bank’s name. They were busy growing their corporation, intent on turning their company into the world’s biggest bank.

The HSBC department that should have spotted what was going on, compliance, was treated as an afterthought – managers came and went with alarming speed, to the frustration of the law enforcers.

Finally, the Americans, in the shape of the Department of Justice, said enough. They prepared the paperwork for criminal indictments. No bank was ever charged over the 2008 crash; no banker had gone to prison. This was different – this was a bank that had profited from the sale of drugs to America’s most vulnerable adults and children, that had facilitated the expansion of Chapo’s network, which was responsible for 25 per cent of all drugs that entered the United States.

The Department of Justice was ready to go when George Osborne intervened. The British government had been kept abreast of what was unfolding, and the day before the Department of Justice was due to take the final decision, Osborne, as chancellor, sent a private two-page letter to US Federal Reserve chair Ben Bernanke (cc US Treasury secretary Timothy Geithner).

In it, Osborne pointed out to the two men that a lawsuit of this magnitude would provoke a fall in the HSBC share price. He was concerned about the “unintended consequences” of the American action. He cautioned that prosecuting “such a systemically important institution” as HSBC “could lead to [financial] contagion”.

He added that prosecution would “risk destabilising the bank globally, with very serious implications for financial and economic stability, particularly in Europe and Asia.” HSBC and its bankers, in other words, were too big to jail.

The Americans relented. Instead of seeking prison terms, they fined HSBC a record $1.9bn. The bank agreed to accept a deferred prosecution agreement, under which it promised to reform its behaviour in return for not being pursued in the criminal courts.

There was no evidence for Osborne’s assertion. Indeed, the then governor of the Bank of England, Mervyn King, made his view plain when he said at his retirement dinner, with Osborne sitting alongside him: “Governments, regulators, prosecutors and non-executive directors have all struggled to come to terms with firms that pose a risk to taxpayers, that cannot be prosecuted because of their systemic importance, and are difficult to manage because of their size and complexity. It is not in our national interest to have banks that are too big to fail, too big to jail, or simply too big.”

Osborne should apply for the HSBC job. He might get it and will doubtless say how thrilled and qualified he is. As Mandy Rice-Davies famously said: “Well he would, wouldn’t he?”

Chris Blackhurst is author of ‘Too Big To Jail – HSBC and the Banking Scandal of the Century’ (Macmillan)