* $700 mln provision for U.S. anti-money laundering failures
* Cost of U.S. fine, charges may be "significantly higher" -CEO
* $1.3 billion set aside to compensate UK customers for mis-selling
* Shares up 0.7 percent
By Steve Slater and Matt Scuffham
LONDON, July 30 (Reuters) - HSBC's boss said on Monday revelations of lax anti-money laundering controls had been "shameful and embarrassing" for Europe's biggest bank, and may force it to pay out well over $2 billion for those flaws and in compensation for UK mis-selling.
HSBC set aside $700 million to cover fines and other costs for an anti-money laundering scandal, after a U.S. Senate report criticised it this month for letting clients shift funds from dangerous and secretive countries, notably Mexico.
The ultimate cost could be "significantly higher", the bank's Chief Executive Stuart Gulliver said.
"What happened in Mexico and the U.S. is shameful, it's embarrassing, it's very painful for all of us in the firm," Gulliver told reporters on a conference call.
"We need to execute on the compliance changes and then prove ourselves worthy and rebuild this over a number of years. There are no quick and easy fixes," he said.
The Senate report criticised a "pervasively polluted" culture at the bank and said HSBC's Mexican operations had moved $7 billion into its U.S. operations between 2007 and 2008.
The provision ate into first-half underlying profits, which fell 3 percent from a year earlier to $10.6 billion, excluding gains from assets sales and losses on the value of its own debt.
HSBC also set aside another $1.3 billion to compensate British customers for mis-selling loan insurance to individuals and interest rate hedging products to small businesses.
It is also one of more than a dozen banks under scrutiny in a global interest rate-rigging scandal that has rocked the sector and further damaged the reputation of bankers following criticism of their culture and standards.
"It's very unfortunate and deeply concerning that even the banks considered more secure such as HSBC are so seriously at risk," said a top 30 investor in HSBC.
"And the news is still coming out - we have yet to see the impact, if any, of the Libor investigation and HSBC's role in that. It's hard to see how much more bad news the markets can take," said the investor, who asked not to be named.
Shares in HSBC were up 0.9 percent to 535.8 pence at 1230 GMT, lagging a 2 percent rise in Europe's bank index.
"LOST ITS WAY"
U.S. and British authorities fined fellow UK-based bank Barclays $453 million for manipulating Libor, a benchmark interest rate based on how much banks charge to lend to each other. More banks are expected to be drawn into the investigation into banks submitting false rates from which Libor is calculated daily.
Thomson Reuters Corp is the British Bankers' Association's official agent for the daily calculation and publishing of Libor.
Gulliver said that as a contributor to Libor and its euro zone equivalent Euribor, HSBC was cooperating with regulators with their investigation. However, it was far too early to say what the outcome would be or to estimate the potential cost for the bank.
HSBC said it was in talks to settle the investigation into its U.S. anti-money laundering compliance with the U.S. Department of Justice and other regulators. "It may take several more months to come to fruition," Gulliver said.
He is mid-way through a deep overhaul to cut costs, sell or shrink unprofitable businesses, and to direct investment to faster growing Asian markets. That has seen the bank cut 27,000 jobs since the start of 2011.
It also includes centralising control functions over a bank that was unwieldy. Gulliver said he was aware of the investigation into its U.S. compliance problems in 2010, before he took over, and that shaped some of his restructuring.
"The firm clearly lost its way in this regard and it's right that we apologise," he said. "Colleagues internally have been aware that this is the backdrop of why we had to change the firm."
HSBC said it had increased its spending on compliance to more than $400 million last year, more than double its $200 million in 2010.
Behind the problems the bank had shown "a pretty good set of numbers" and quick execution on his strategy, said Gulliver.
The bank reported a statutory pretax profit of $12.7 billion for the six months to the end of June, up 11 percent on the year and above an average analyst forecast of $12.5 billion, according to a poll by the company.
Its investment bank's profit rose 5 percent on the year to $5 billion, faring better than rivals in a tough market where activity has been hit by the euro zone crisis.
Bank Of America
In July, a federal probe revealed claims that the drug cartel Los Zetas had used accounts at Bank of America <a href="http://www.huffingtonpost.com/2012/07/09/los-zetas-laundered-money-bank-america_n_1658943.html" target="_hplink">to launder drug money.</a> Drug traffickers allegedly used accounts at BofA to purchase aircraft to transport cocaine, <a href="http://www.bloomberg.com/news/2010-06-29/banks-financing-mexico-s-drug-cartels-admitted-in-wells-fargo-s-u-s-deal.html" target="_hplink">according to Bloomberg.</a>
Since it's founding in 1940, the Vatican Bank has reportedly been involved in transactions with criminals and shady politicians, the German paper <a href="http://www.spiegel.de/international/europe/a-growing-vatican-bank-scandal-threatens-catholic-church-image-a-842140.html" target="_hplink"><em>Spiegel</em> reports</a>. One such incident involved Roberto Calvi, known as "God's Banker" because of his extensive dealings with the Vatican, who was found hanged beneath London's Blackfriars Bridge in 1982, <a href="http://www.guardian.co.uk/uk/2012/may/12/roberto-calvi-blackfriars-bridge-mafia" target="_hplink"><em>The Guardian</em></a> reports. Renewed allegations of the Vatican Bank <a href="http://www.thedailybeast.com/articles/2012/03/21/jp-morgan-chase-closes-vatican-bank-account.html" target="_hplink">laundering money</a> may have contributed to the forced departure of former bank head Ettore Gotti Tedeschi, <a href="http://www.telegraph.co.uk/news/worldnews/europe/vaticancityandholysee/9319414/Ex-head-of-Vatican-bank-planned-to-give-dossier-to-Pope.html" target="_hplink"><em>The Telegraph</em> reports.</a>
In 2009, UBS claimed that U.S. government pressure was forcing it to close nearly 19,000 offshore accounts, according to <a href="http://www.nytimes.com/2009/01/09/business/09ubs.html" target="_hplink"><em>The New York Times</em></a>. Such accounts were regarded as a means of avoiding disclosures to the IRS and could be viewed "as criminal evidence, not just of tax evasion but also of money laundering," <a href="http://www.nytimes.com/2009/01/09/business/09ubs.html" target="_hplink"><em>NYT</em> reported at the time</a>.
In 2005, Riggs Bank plead guilty to laundering the money of former Chilean dictator Augusto Pinochet and the government of Equatorial Guinea, <a href="http://www.usatoday.com/money/industries/banking/2005-01-27-riggs_x.htm" target="_hplink"><em>USA Today</em> reported</a>. The laundering scandals led to the sale of Riggs to PNC Bank, according to <a href="http://www.bizjournals.com/washington/print-edition/2012/04/27/following-scandal-riggs-bank-sold-to.html" target="_hplink"><em>The Washington Business Journal</em></a>
In 2010, Wachovia was fined $150 million by U.S. authorities for allegedly laundering millions of dollars for Mexican drug cartels, <a href="http://www.nytimes.com/2010/03/18/business/18launder.html" target="_hplink"><em>The New York Times</em></a> reports.
In 2010, Mario Ernesto Villanueva Madrid, the former governor of the state of Quintana Roo, was indicted for conspiring to smuggle "hundreds of tons" of illegal drugs into the U.S. as well as laundering $19 million through a Lehman Brothers account, <a href="http://www.bloomberg.com/news/2010-05-10/former-mexican-governor-used-lehman-to-launder-drug-funds-u-s-says.html" target="_hplink">Bloomberg reports</a>. Five years earlier, former Lehman Brothers broker Consuelo Marquez admitted she funneled about $11 million in drug proceeds through a Lehman account.
In 2009, Credit Suisse was fined $536 million by U.S. authorities for allegedly hiding the identities of Iranian clients in order to move millions of dollars into the U.S. banking system against U.S. sanctions, the <a href="http://news.bbc.co.uk/2/hi/8417239.stm" target="_hplink">BBC reports</a>. It was also accused of similar activity for Libyan, Burmese and Sudanese clients.
In 2007, the U.S. Justice Department charged Lloyds Bank with helping its client Lycourgos Kyprianou, former chairman of Cypriot software maker AremisSoft, launder millions of dollars, <a href="http://www.forbes.com/2007/10/16/lloyds-tsb-cyprus-markets-equity-cx_vr_1016markets10.html" target="_hplink"><em>Forbes</em></a> reports. In 2009, the British-based bank was fined $350 million for disguising funds from Iran and Sudan so that they could be funneled into the U.S. banking system against national sanctions, <a href="http://www.guardian.co.uk/business/2009/jan/10/lloyds-forfeits-350m-to-us" target="_hplink"><em>The Guardian</em> reports</a>.
In July 2012, the Senate Permanent Subcommittee on Investigations announced that it would detail its findings on breakdowns of money laundering safeguards at HSBC, Reuters reports. According to Reuters, HSBC has been the subject of investigation by the Senate and two U.S. attorney offices since January. (h/t <a href="http://www.chicagotribune.com/business/sns-rt-us-hsbc-launderingbre8680x3-20120709,0,6711100.story" target="_hplink"><em>Chicago Tribune</em></a>)