Back in July the DOJ filed charges against two HSBC FX traders, Mark Johnson (global head of cash FX) and Stuart Scott, for "conspiring to rig currency benchmarks" and specifically for front-running customer orders (see "HSBC Global Head Of FX Cash Trading Arrested At JFK Airport"). Mark Johnson was the first person to be charged in the DOJ’s three-year investigation into foreign-exchange rigging at global banks. The DOJ complaint alleged that in 2011, Johnson and Scott purchased Pound Sterling for HSBC proprietary accounts in an effort to front-run a $3.5BN Pound Sterling purchase by an HSBC client. The front-running effort apparently netted HSBC an $8mm profit.

Now US prosecutors are threatening to take the unprecedented action of ripping up the "deferred-prosecution agreement" signed with HSBC back in 2012 over questions as to why the two FX traders were not disciplined. HSBC admitted in 2012 that it helped Mexican drug cartels launder money and did business with Iran and other sanctioned nations. To avoid charges, it signed the DPA, which required it to improve its internal controls and submit to an outside monitor. Any action to now void the DPA by the U.S. DOJ would allow for criminal charges against the HSBC and restrict the bank's access to certain financial activities in U.S. markets. According to Bloomberg,

U.S. prosecutors are considering a criminal charge against a unit of HSBC Holdings Plc related to conduct on its foreign-exchange desk, according to two people familiar with the matter, imperiling an earlier deal that let the bank avoid prosecution. The Justice Department has already charged two people who were on the bank’s foreign-exchange desk with improper trading and is asking whether the bank’s internal review of that trading this year should have resulted in disciplinary action, the people said. As part of the 2012 agreement, HSBC paid $1.9 billion, a record penalty at the time, and pledged to cooperate with Justice Department probes for five years. In doing so, the bank was spared the stigma of a criminal record in the U.S. -- and the threat that it might lose access to some of its most lucrative institutional banking activities in the world’s largest economy.

Back in 2013, HSBC hired a law firm to conduct an internal investigation of their FX trading practices after revelations that other banks had engaged in attempts to manipulate global exchange rates. Apparently Cleary Gottlieb, HSBC's lawyers hired to conduct the review, found that Johnson's "conduct wasn't illegal." As such, HSBC management had transferred him to a new position in the U.S. which is when he was nabbed by police at JFK airport back in July.

Johnson’s alleged infractions occurred in 2011, before the government struck its deal with HSBC. But the bank engaged a law firm to scrutinize its foreign-exchange trading practices after revelations that global banks had been distorting exchange rates in ways similar to the manipulation of interest rates. Cleary Gottlieb Steen & Hamilton LLP was hired to conduct the review. The law firm has been working with authorities, including the Justice Department, on HSBC’s behalf since late 2013, according to another person briefed on that matter. Early this year, the law firm provided information about the Johnson trades. In the law firm’s judgment, the conduct wasn’t illegal, the person said. HSBC management apparently agreed, since Johnson was being transferred to a new job in the U.S. at the time of his arrest. Prosecutors in the U.S., however, came to a different conclusion, leading to the charges against Johnson. A spokesman for Cleary Gottlieb didn’t immediately respond to a request for comment.

According to Bloomberg, HSBC’s DPA hasn’t been raised formally at the Department of Justice or the Brooklyn U.S. attorney’s office and any decision on a criminal charge against the bank would eventually have to flow through prosecutors in those units. That said, the chief of the DOJ's criminal division has publicly stated her openness to ripping up DPAs in the past.

In public appearances, Caldwell, chief of the Justice Department’s criminal division, has broadcast her willingness to walk away from deferred-prosecution agreements when the defendants violate the terms. In a speech to a law group at New York University in April 2015, she said, “Let me be clear: the criminal division will not hesitate to tear up a DPA or NPA and file criminal charges, where such action is appropriate and proportional to the breach.” If the prosecutors in the current case and those from the 2012 settlement agree to file a criminal charge against HSBC and abandon the DPA, they will have to notify the bank and give it a chance to respond, according to the terms of that settlement. As was the case with UBS, lawyers for HSBC are also likely to appeal any such decision to Caldwell, who had the final say in last year’s matter.

While rare, this wouldn't be the first time the DOJ had ripped up a DPA to file charges against a bank. Last year, the DOJ voided a similar agreement with UBS after the bank admitted to unlawful conduct on its FX desk.