Wednesday, August 15, 2012

Standard Chartered money laundering scandal shows degree global regulators captured by banks

As the dust settles on Standard Chartered's settlement with the New York's Department of Financial Services, a bright light remains on the global financial regulators and the degree to which they are captured by the banks.

Neil Barofsky summarized for Bloomberg exactly what transpired.
I can’t think of another case where there has been such uniformity among federal regulators undercutting an enforcement case.
Included in the list of global financial regulators undercutting the enforcement case was the Bank of England and the UK's Chancellor as well as the Federal Reserve and the Treasury.

The two who are most troubling that are on the list are the BoE and the Fed.  Their involvement raises the simple question of "why should anyone believe they are going to enforce bank regulations and the law?"

The answer to this question is important because as a result of the financial crisis both the BoE and the Fed have been given extensive new powers in the area of enforcing bank regulations and the law.

Unfortunately, between their past history leading up to the financial crisis and their recent conduct, there is no reason to believe that the BoE or the Fed is capable of actually taking action and meaningfully enforcing bank regulations and the law.

I used the term meaningfully on purpose.

Money laundering by a bank is optional.  There is no mystery what banks have to do to avoid money laundering.  Since there is no mystery, it should never occur (yes, I will accept that on an extremely rare occasion a mistake will be made).

In the case of Standard Chartered, we are not talking extremely rare as there were at least 300 transactions out of 60,000 that it acknowledges were problematic.  In addition, senior management went to great lengths to hide what was going on from regulators.

The fines that Standard Chartered is paying for laundering up to $250 billion for Iran are not meaningful.  Stripping Standard Chartered of its New York banking license would have been meaningful.

However, could you imagine a state regulator having the courage to take such a step while they are being systematically undercut by the Washington-based regulatory complex - the Treasury and the Federal Reserve - who don't want a big bank meaningfully punished.

In effect, we have a race to the bottom among regulators.  A race that effectively destroys confidence in the capital markets and the capital markets themselves.

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