HSBC may need to make further provisions in the future after setting aside $2 billion to cover US law enforcement and regulatory costs and to compensate British customers for mis-selling.

The lender said on Monday it was setting aside $700 million to cover "certain law enforcement and regulatory matters".

The move came after a US Senate report earlier this month criticized HSBC for letting clients shift funds from dangerous and secretive countries. The report found that lax controls at Europe's biggest bank had left it vulnerable to being used to launder dirty money from around the world.

HSBC said in a statement accompanying its interim results that the $700 million provision it had made was a "best estimate of the aggregate amount of fines and penalties that are likely to be imposed in connection with these matters."

However, Chief Executive Officer Stuart Gulliver later told reporters during a conference call: "The number could be significantly higher ... it's entirely at the discretion of the Department of Justice".

Analysts have said the issue could result in a fine of about $1 billion.

The Senate report criticized a "pervasively polluted" culture at the bank and said, between 2007 and 2008, HSBC's Mexican operations moved $7 billion into the bank's US operations.

Chief Executive Stuart Gulliver on Monday apologized for the affair.

"We apologize for our past mistakes in relation to anti-money laundering controls, and it is a priority for senior management to build on steps already taken to manage risk and ensure compliance more effectively," he said.

Europe's biggest bank also set aside $1.3 billion to compensate UK customers for mis-selling loan insurance and interest rate hedging products to small businesses, bringing the total provision to $2 billion for the first half.

"HSBC has made mistakes in the past, and for them I am very sorry," said group chairman Douglas Flint.

"We cannot undo the mistakes but I can assure you that Stuart Gulliver and I are determined, and have made it our most important priority, to strengthen HSBC and reinforce our values."

Reuters - Bloomberg

(HK Edition 07/31/2012 page2)