Karela Fry

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On Standard Chartered and Iran

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Is StanChart collateral damage in the economic war between US and Iran? Perhaps that is the immediate cause, but there seem to be long-standing regulatory problems, if reports are correct. WSJ writes that the scandals surrounding British banks are similar to those which have hit other banks during the finance implosion, namely inadequate regulation:

In the past six weeks, the three big British banks that had survived the financial crisis relatively unscathed have been immersed in scandal—further soiling the British banking industry’s already marred reputation and undercutting the sector’s efforts to fend off tougher regulations.

First, in June, Barclays PLC was busted for trying to rig a benchmark interest rate, ultimately claiming the jobs of its chairman and chief executive. Then a U.S. Senate committee attacked HSBC Holdings PLC for allegedly handling money for drug gangs and terrorist groups.

The latest blow came Monday, when New York’s bank regulator threatened to revoke Standard Chartered PLC’s U.S. license for alleged money-laundering violations involving Iran.

After the financial crisis erupted, U.K. regulators cracked down, getting tough on white-collar crime with a number of cases against insider trading and fines for product mis-selling.

But the light-touch legacy still reverberates. Most of the alleged wrongdoing that U.S. and other authorities are investigating took place between 2005 and 2009, when that hands-off approach was in use.

To be sure, banks in the U.S., Switzerland and elsewhere have been caught up in similar probes. But the scandals involving U.K. banks have hit in rapid succession lately, leaving British bankers scrambling to stanch the reputational bleeding.

In its signature style, Reuters summarizes the story:

A New York bank regulator’s broadside against Standard Chartered Plc over transactions tied to Iran left investors and the bank questioning the action, which on Tuesday wiped $17 billion off the bank’s value.

The White House signaled its strong interest in the case, saying the U.S. government takes alleged violations of economic sanctions “extremely seriously.”

London-based Standard Chartered said it has been in talks with U.S. authorities over its Iran transactions since early 2010 and said the public accusations by New York came as a shock.

The state’s banking regulator, Benjamin Lawsky, called Standard Chartered a “rogue institution” and threatened to revoke its state banking license on Monday.

Lawsky, head of the state’s Department of Financial Services, accused the bank of hiding 60,000 secret transactions worth $250 billion over nearly a decade. The transactions generated hundreds of millions of dollars in fees, Lawsky said.

Chief Executive Peter Sands scrambled back from vacation to help the bank plan a defense and limit damage to its reputation.

Shares in Standard Chartered closed down 16.4 percent at 12.28 pounds, taking their losses to 24 percent since the news surfaced just before Monday’s close. They had earlier slumped as low as 10.92 pounds, their lowest for three years.

The inquiry into Standard Chartered is not the first time Lawsky has been involved in a state investigation of alleged conduct traditionally probed by federal investigators.

When he worked at the New York Attorney General’s office, Lawsky helped spearhead a still unresolved 2010 lawsuit against Bank of America Corp over its acquisition of Merrill Lynch & Co, even while that bank was settling a similar case by the U.S. Securities and Exchange Commission.

Marc Greenwald, a former federal prosecutor who is now a partner at Quinn Emanuel Urquhart & Sullivan, said it is “not completely surprising” that Lawsky might press ahead now if he felt other regulators were moving too slowly.

NYT carries a story that seems to pit the bank and federal regulators against the New York regulator:

Top executives at Standard Chartered said they were surprised when New York’s banking regulator accused them on Monday of scheming with the Iranian government to launder billions of dollars to potentially support terrorist activities.

The regulatory order also stunned other authorities investigating the bank, namely officials at the Federal Reserve and the Justice Department, according to several people close to the case.

The agencies involved, including the Treasury Department, are debating just how expansive the suspected wrongdoing was at Standard Chartered. Benjamin M. Lawsky, a former prosecutor who now leads the state banking regulator, claimed the bank had processed $250 billion in tainted money while cloaking the identities of its Iranian clients by stripping their names from paperwork. Some federal authorities, though, believe that the amount is much smaller, perhaps in the millions. Standard Chartered, for its part, said that only $14 million did not comply with regulations.

The wide disparity stems from different interpretations of how many Standard Chartered transactions violated a federal rule that governs the way money from abroad moves through the American financial system.

Some Treasury Department officials, while still reviewing the transactions, suspect that Mr. Lawsky has taken too broad a view, according to people briefed on the matter. The officials think that some of the transactions, though perhaps questionable, were not necessarily illegal.

Some people close to the case note that Fed officials had been investigating Standard Chartered since 2010 — a year before Mr. Lawsky’s Department of Financial Services was created by merging the existing state banking and insurance departments.

Standard Chartered, in a statement rejecting Mr. Lawsky’s claims, said that it “voluntarily approached” agencies in 2010 including the Department of Financial Services, the Justice Department, the Federal Reserve Bank of New York and the New York district attorney, and that it is engaged in discussions with them.

Some, however, have praised Mr. Lawsky’s aggressiveness in this case and others as a refreshing change from the days when cozy regulators had a soft touch with Wall Street. He has drawn comparisons to other hard-charging New York prosecutors, notably Eliot Spitzer and Andrew M. Cuomo.

“Ben Lawsky wouldn’t take a job where it wasn’t expected of him to move quickly, make changes and be a force,” said Steven Cohen, a lawyer with Zuckerman Spaeder, who worked with Mr. Lawsky at the attorney general’s office under Mr. Cuomo, now the governor of New York. Neil M. Barofsky, the former inspector general for the Treasury’s bank bailout fund, lauded Mr. Lawsky’s speed in contrast to what he called the “passivity of federal regulators.”

A correspondent for Slate explains why New York state has jurisdiction over this case:

The U.S. government has, of course, dinged plenty of foreign banks before. The Federal Reserve effectively booted Japan’s Daiwa from the country, the Senate slammed HSBC over money laundering and the DoJ and the Commodity Futures Trading Commission extracted hefty fines from Barclays for manipulating Libor.

Yet state regulators almost never take the lead against global lenders. In this sense, Lawsky has broken the mold. A former federal prosecutor and henchman for both the senior senator and governor of New York, he pounced immediately as head of the state’s new financial services agency. In less than a year, he has brought dozens of insurers and banks to heel over unpaid death benefits, abusive foreclosures and other high-profile issues.

His hook for pursuing StanChart is the prosaic power to license foreign banks’ Wall Street branches. That’s enough to ensure lenders report fraud, keep accurate books, cooperate with examiners and operate in a generally sound manner. The bank, Lawsky claims, violated all those duties by covering up transactions that breached U.S. financial sanctions against Iran.

The London Telegraph profiles Lawsky:

Ben Lawsky has been a financial regulator for less than a year but he is no stranger to Wall Street.

The 41-year-old graduate of Columbia University built his career and reputation prosecuting financial crime under Andrew Cuomo, now governor of New York state.

His legal career has also been heavily bound up in politics. He started as chief counsel to Charles Schumer, one of New York’s two senators. After Mr Cuomo was elected governor of New York in late 2010, he made Mr Lawsky his chief of staff. Having created the Department of Financial Services last year by merging two older regulators, Mr Cuomo again turned to Mr Lawsky to run it last October.

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