Case Study of Hong Kong Shanghai Banking Capital Essay

During the last decades, Hong-Kong Shanghai banking capital (HSBC) has experienced many challenges concerning its operational and investment activities. More specifically, there are three main challenges that HSBC has faced throughout the past 15 years. Firstly, the entry of more flexible ‘fintech’ companies provides a significant decrease of HSBC’s competitive advantage since the Internet-enabled people to become independent from physical presence while executing most of the operations in commercial banking. ATMs, branch offices, and small distribution points have become almost inutile in today’s world. Secondly, HSBC experienced significant risk management failures during the 2008 financial crisis, including overestimated purchases of risky or even ‘junk-rated’ obligations in terms of fair value for bank’s customers’ deposits. Moreover, numerous internal financial reporting frauds concerning the representation of long-term positions in mortgage-backed securities only enforced the negative consequences of a financial crisis. Thirdly, compliance management issues also play a pivotal role in today’s commercial banking competition, and HSBC has significant problems with the proper analysis of the bank’s operations flow. As a result, there was a large number of disputes concerning HSBC’s possibility to service their operations with appropriate compliance level, not even ‘world-class’ one. For instance, in 2012, HSBC was engaged in one of the biggest money-laundering schemes and was fined $ 1.256 billion in court. One of the main factors for giving rise to HSBC’s problems might be the poor operational management that cannot provide fast and successful operational flow. The large daily volume of funds transfers made the company responsible for the significant amount of uncontrolled money flows.

One of the most frequently used methods to organize effective operational controlling is a 3LOD model that is also used within HSBC. In fact, the 3LoD framework was introduced by one of the ‘big-four’ auditing companies, enabling a bank to constantly analyze non-financial risks and correct certain misalignments in the operational management system (Dey et al. 4). By introducing a three-stage system of analysis consisting of risk owners, risk control and compliance, and risk assurance entities, the company might increase the quality of operational management control due to the multi-faceted analysis of the same operations.

When it comes to money laundering, it usually means a specific activity aimed at presenting legal money flows with dishonestly obtained funds. More specifically, there are clients that gained cash from illegal activities, such as corruption or drug dealing, and that wants them to be legally represented in the economy so that fiscal and other institutions would consider them as available for usage. From HSBC’s perspective, money laundering represents one of the most significant internal risks due to the worldwide presence, especially in certain economic areas with facilitated financial regulation and considerable economic influence, such as Hong Kong or London. To avoid internal money laundering, HSBC tries the most cutting-edge methods used in the fintech industry. One of the new technologies named ‘RegTech’ software enables a company to analyze a large volume of data for compliance and money laundering issues without direct human assistance. In my opinion, this technology might be the last chance for HSBC to demonstrate its serious attitude to compliance and money laundering issues within their organization. Consequently, if the company saves the money for financing the RegTech in favor of any other type of investments, both customers and regulators will consider such fact as a refusal to enter the actual banking trend for transparent activity.

Work Cited

Dey, A., et al. “Regtech at HSBC – Case – Faculty and Research – Harvard Business School.” Harvard Business Review, Web.