HK/SG Banks:From Russia,with love

Authorities in the UK and HK are reviewing the roles that banks in theirjurisdictions may have played in a Russian-originated global moneylaundering scheme of at least US$20.8bn between 2011-2014. Six banksin our coverage universe may have been involved, processing US$1bn or5% of the total scheme largely through their operations in HK/SG.

Potential financial penalties appear manageable and unlikely to exceedUS$10m. HSBC (SELL) appears most exposed while StanChart (SELL)appears least exposed.

The Organized Crime and Corruption Reporting Project (OCCRP) originallyexposed this complex global money laundering scheme back (also knownas Laundromat) in 2014.

However, further work conducted by the OCCRP and Novaya Gazeta inMoscow over the past three years, which provides a much fuller picture ofhow at least US$20.8bn was moved out of Russia and deposited aroundthe globe, was released this week.

On the back of this, authorities in the UK and HK indicated that they arereviewing the roles that banks in their jurisdictions may have played in thisscheme.

Of the 732 banks allegedly involved, six (HSBC, BOCHK, UOB, OCBC, HangSeng and StanChart) are within our coverage universe. Collectively, thebanks may have processed US$1bn or 5% of the total global scheme.HSBC appears most exposed with a potential US$545m while StanChartappears least exposed at US$29m.

We believe that 72% of the US$1bn was done through HK, 8% throughSingapore with the remaining 17% spread across the rest of the world.

Hong Kong and Singapore are active enforcers of AML/CFT compliance butthey do not tend to levy heavy fines for breaches (less than US$5m).

HK/SG authorities tend to require self-investigations and remediationalthough they may also revoke licences. The most recent applicable case inthe UK/US, in our view, was Deutsche’s US$630m earlier this year(US$205m in the UK plus US$425m) with respect to US$10bn of Russianmoney laundering over three years ending in 2015. The US also imposed amonitor for a period of two years.

We currently do not have any provisions in our 17-19CL forecasts inrelation to this issue. We estimate that any related financial penalties arelikely to be manageable at less than US$10m or 1% of 17CL PBT (seeFigure 4). The impact of remediation on ongoing costs should also belimited.

However, given that HSBC and StanChart have deferred prosecutionagreements (DPAs) expiring in 4Q17, i) any new/further evidence ofweakness in controls may complicate matters and/or risk a higher onetimepenalty/ongoing remediation cost than we estimate, and ii)Ukraine/Russia was added to the US’ list of sanctioned countries in mid-2014/before the supposed end of the Laundromat scheme so we cannotrule out the possibility of sanction violation penalties in addition to AMLfinancial penalties.

There is no change to our view. OCBC (O-PF) remains our top pick whileBEA (SELL) is least preferred among the SG/HK banks.