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Growing costs for HSBC's laundry list of problems

November 5, 2012: 5:32 AM ET

HSBC reported Monday that it turned a profit of $5 billion in the third quarter, a figure held down by the scandal-plagued bank's efforts to absorb a series of fines and penalties.

The London-based firm set aside $800 million to pay fines that may result from the bank's alleged links to drug cartels and terrorist groups. In the second quarter, the bank set aside an initial $700 million for the same purpose.

In July, a U.S. congressional committee issued a report detailing a lack of oversight at HSBC which resulted in thousands of suspicious transactions with clients of dubious repute.

Among other issues, the report noted that in 2007 and 2008, HSBC's Mexico unit shipped $7 billion in cash to the bank's U.S. affiliate, a volume of shipments that law enforcement officials said could reach that size "only if they included illegal drug proceeds."

HSBC Mexico had a number of high-profile clients linked to drug trafficking, the report said, as well as "a huge backlog of accounts marked for closure due to suspicious activity, but whose closures were delayed."

The report also found that HSBC worked extensively with Saudi Arabia's Al Rajhi Bank, some owners of which have been linked to terrorism financing, according to a CIA report quoted by the subcommittee. Some evidence suggests Al Rajhi's "key founder" was "an early financial benefactor of al Qaeda," the report said.

Even with $1.5 billion set aside to pay for its alleged indiscretions, more may be needed. In a statement released Monday, chief executive Stuart Gulliver said that U.S. authorities have "substantial discretion" on how to resolve the charges, and that no agreement has been reached.

"Indeed," Gulliver said, "the final amount of the financial penalties could be higher, possibly significantly higher, than the amount accrued." After the report's release, the bank issued a statement acknowledging it had "sometimes failed to meet the standards that regulators and customers expect."

HSBC also earmarked $353 million to compensate customers sold payment protection insurance, bringing the banks total hit for the quarter to $1.15 billion. The bank has been under fire for misleading clients regarding the purchase of certain kinds of insurance that prevented most policyholders from filing a claim.

In addition, the bank is being scrutinized for its alleged role in the Libor rate-rigging scandal. HSBC was subpoenaed in August by New York's attorney general.

Barclays, the first bank to settle with regulators, paid U.K. and U.S. regulators $453 million in penalties for rigging Libor. The bank's CEO resigned in the wake of that announcement.

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Charles Riley
Charles Riley
Reporter, CNNMoney

Charles Riley lives and works in Hong Kong, where he covers markets, economics and other high-impact stories across Asia. He previously worked for CNNMoney in New York and CNN in Washington. He tweets @CRrileyCNN

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