Will Lawsky require Standard Chartered to provide ultra transparency as part of money-laundering settlement?

Given that New York banking regulator Benjamin Lawsky holds all of the leverage in the negotiation with Standard Chartered over money-laundering, the question is will he require it to provide ultra transparency as a settlement condition?

As reported by Bloomberg, Standard Chartered has already agreed to have a monitor.

The problem is finding a monitor that can be trusted?

The logical solution is the market as it is the only truly trustworthy monitor.

By requiring Standard Chartered to provide ultra transparency including disclosing on an ongoing basis its current global asset, liability and off-balance sheet exposure details, Mr. Lawsky ensures that the market has the information that it needs to monitor Standard Chartered.

Standard Chartered shouldn't object as it claims to have a culture that is so upstanding that it has nothing to hide.

In fact, Standard Chartered should embrace the requirement to provide ultra transparency as it offers the opportunity for Standard Chartered to show that it is a banking organization that can be trusted.

Standard Chartered shows that banks shrouded in opacity develop cultures that make them 'unfit' to hold banking license

One of the main themes of this blog is the opacity that surrounds modern banks contributes directly to their culture.  A culture where bad behavior (think manipulating Libor and money-laundering for starters) is embraced.  Behavior that makes them unfit to hold their banking licenses.

Standard Chartered is the latest example of opacity driving out good behavior.

I ask readers to imagine that a decade ago Standard Chartered and other banks were required to provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.

Imagine the culture that would exist when there is this level of sunshine and everyone knows that any bad behavior today ends up on the front page of the Financial Times, the Telegraph and the Wall Street Journal tomorrow.

How do you think that a bank with this culture would approach clearing funds for Iran?

I think that a bank with this culture would take steps to ensure that it clears funds in as transparent a manner as possible (no stripping off who sent the money and where it went).  It would also take steps to  prevent clearing transactions that are money laundering.

Of course, Standard Chartered wasn't required to provide ultra transparency and Bloomberg reported on the resulting culture that is 'unfit' for holding a New York banking license.

New York’s financial-services regulator has grounds to shut Standard Chartered Plc (STAN) in the state even if he accepts the firm’s argument that it illegally laundered only a fraction of the $250 billion he claims. 

As the state’s top banking regulator, Benjamin Lawsky has power to act in his discretion against any financial institution he deems untrustworthy, according to the charter of his year-old department. 

Penalties he could impose include fines and the revocation of the bank’s license to operate in the state.... 

Since the Aug. 6 issuance of an order from Lawsky’s Department of Financial Services threatened to revoke Standard Chartered’s license, the bank has focused its defense on the amount it laundered, saying it involved less than 1 percent of the 60,000 Iranian wire transfers asserted by Lawsky. 

Even if Standard Chartered’s position is legally sound, the order’s disclosure of internal e-mails suggesting a conspiracy to hide the identity of Iranian clients from regulators has given Lawsky grounds to act ... 

“I don’t care whether it is a half of 1 percent that weren’t right,” said Arthur Levitt, former chairman of the Securities and Exchange Commission, in an interview yesterday on Bloomberg Radio.

“There are going to be more that weren’t right,” said Levitt, a board member of Bloomberg LP, parent of Bloomberg News. “The e-mails are really outrageous. I think Lawsky has uncovered something that probably has a much deeper depth.” 

Standard Chartered’s e-mails, cited by Lawsky in the Aug. 6 order, provide suitable grounds for his action, said Owen Watkins, a partner with the London law firm Lewis Silkin. 

“Making and publicizing the order was within the power conferred on Mr. Lawsky by section 39 of the New York Banking Law,” he said. “On the basis of the order, you can see that the superintendent has an arguable case, with the e-mails and the comments made by certain Standard Chartered staff internally.”...

“Willful non-compliance is very serious,” said Tariq Mirza, a former Federal Deposit Insurance Corp. official now with Grant Thornton. “If those allegations can be substantiated, regulators throw the book at institutions.”

Standard Chartered’s apparent effort to conceal the identity of its Iranian counterparties violated the terms of a 2004 settlement between it and the state of New York, in which the London bank pledged “to ensure compliance with all record keeping and reporting requirements,” according to the order. 

For almost a decade starting in 2001, Standard Chartered operated under what Lawsky’s order called a “deceptive business plan” designed to conceal from regulators that it was processing money transfers for Iranian clients, including the central bank’s U.S. dollar transactions related to oil sales. The order cites bank e-mails and other internal documents to support its accusations.

Even before 2001, the order states, the bank’s general counsel “embraced a framework for regulatory evasion” by keeping its New York branch in the dark about Iranian transactions. 

The bank allegedly accomplished this goal by stripping out the name of Iranian clients so as not to slow down transfers that might have to be reviewed for compliance with U.S. economic sanctions. Those restrictions allowed some transactions but not others as long as non-Iranian banks were involved on both ends.... 

All this alleged misconduct by “a rogue institution” had an effect on the “safety and soundness” of its New York branch and on the department’s confidence in the unit’s “character, credibility and fitness as a financial institution licensed to conduct business under the laws of this state,” according to the order. 

Accusing the bank of “being motivated by greed,” the department’s order concludes that Standard Chartered’s “most senior management designed and implemented an elaborate scheme by which to use its New York branch as a front for prohibited dealngs with Iran -- dealings that indisputably help sustain a global threat to peace and stability. By definition, any banking institution that engages in such conduct is unsafe and unsound.”

Standard Chartered claims there are 'no grounds' for revoking NY license

The Telegraph reports that Peter Sands, the head of Standard Chartered, acknowledges that 'mistakes were made' and he is 'very sorry', but that doesn't mean there are 'grounds' for revoking the NY license.

With the bank tonight reported to have sought advice as to whether it can take legal action against the regulator, Mr Sands insisted that there were “no grounds” to withdraw its New York licence and that such a ruling would be “disproportionate and wholly inappropriate.”

Clearly, it is a matter of opinion as to whether withdrawing its license is an appropriate response. 

In his first public comments since Benjamin Lawsky, superintendent of the New York State Department of Financial Services (DFS), published his explosive order alleging Standard Chartered laundered $250bn (£160bn) for Iranian clients, Mr Sands said: “There are lots of matters in that order that we don’t recognise or we don’t understand or are fundamentally inaccurate.” 

He said that the DFS assessment “contradicts information we have given them”.

Fascinating statement by Mr. Sands.  The statement indicates that regulators are suppose to believe anything that the banks tell them.

Mr Sands confirmed that Standard Chartered’s executive director of risk mentioned in the order was Richard Meddings, now finance director, but denied that he had described US regulators as “f------ Americans.”

No harm in defending Mr. Meddings since both of them are losing their jobs if money-laundering on a systemic basis occurred.

Mr Sands said it had processed some transactions that had not complied with US anti-money laundering rules but that the total value was in the “tens of millions” not $250bn as alleged by Mr Lawsky.

Wait a minute.  Earlier today the number was not in the tens of millions, but was rather a very precise figure of $14 million from Standard Chartered's state of the art information systems.

Hmmm.

At a minimum, this confirms that in the same way that Barclays was willing to lie in its Libor submissions to portray itself as being in better financial shape during the credit crisis, Standard Chartered is willing to lie about how much money it laundered.

At $14 million, it could have been a mistake on a transaction or two.  At tens of millions, we are talking a systemic problem.

How much credibility should be attached to Mr. Sands current statement about the amount of money-laundering that occurred?  Does it matter?


While I am not a lawyer, I would assume that breaking the law is grounds for Standard Chartered to lose its New York license.

We know that Standard Chartered laundered money to what Mr. Sands now claims is the tune of tens of millions.  We also know that money laundering is against the law.

Revoking their NY license seems imminently reasonable because at tens of million we are talking a systemic problem.  By definition, a systemic problem needs to be addressed so that it cannot re-occur and revoking the NY license is the only way for the regulator to guarantee it never happens again.

Standard Chartered was given an important boost by Sir Mervyn King, the Governor of the Bank of England, who criticised the US regulator’s handling of its announcement.
“UK authorities would ask that the various regulatory bodies ... try to work together and refrain from making too many public statements until the investigation is completed,” he said.

It is actually quite distressing that Sir Mervyn King offered his opinion and that his opinion was that taking action on money laundering should wait until the most comatose regulator rouses itself to do something.

Finally, I noticed that UK politicians and regulators have offered up the idea that pursuing money laundering against Standard Chartered is part of a plan by US regulators to weaken London as a financial center for the benefit of New York.

Perhaps UK regulators might pick up the baton and vigorously pursue the US banks involved in manipulating Libor.

There is absolutely nothing better for the financial system than regulators trying to one up each other by enforcing the law.

Standard Chartered: Rogue bank or victim of renegade regulator

In his Guardian column, Nils Pratley frames the issue of money laundering at Standard Chartered as either a rogue bank or rogue regulator.

Actually, Standard Chartered has already confessed to a minimum of $14 million in money laundering for Iran.  So we know it is a rogue bank.

Remember, nobody forced Standard Chartered to handle these transactions.  The bank did so voluntarily in the pursuit of profit knowing that any money laundering could cost it is license to operate in the US.

Remember, it was obvious that extra vigilance would be needed to ensure that the bank did not engage in money laundering.  What has emerged so far doesn't appear to be extra vigilance to insure that money laundering didn't take place, but rather extra vigilance in reading the US law not for its intent, but rather for any ambiguity that could be exploited.

Given its confession, the only issue is what is the right level of punishment.

Standard Chartered, don't forget, is an institution that likes to think of itself as a cut above the rest. The reason it hasn't got into scrapes, management likes to proclaim loudly and often, is because it conducts itself properly.

Consider this self-congratulatory statement by the chairman, Sir John Pease, only last week: "In recent weeks, issues have surfaced around governance and behaviour in banking. At Standard Chartered, we believe it is not just about what we do, but how we do it. Our culture and values continue to be a source of strength and a competitive advantage. Strong corporate governance and an obsession with the basics of banking remain key areas of focus for our board."

It is worth re-reading the highlighted text and remembering that Standard Chartered engages in the same level of opaque disclosure as does that other UK bank, Barclays.

Every bank can claim that its culture and values continue to be a source of strength and a competitive advantage.  Particularly the banks that were manipulating Libor to increase their profitability.

History has shown that banks that can 'talk the talk' and 'walk the walk' fully disclose all of their exposures.  These banks understand that ultra transparency is a sign of a bank that can stand on its own two feet and has nothing to hide.

If Standard Chartered had a culture based on ultra transparency where everything is disclosed the next day, would it have engaged in $250 billion worth of transactions with Iran?

If Standard Chartered really is a cut above the rest, I would expect it to a) take full responsibility for $250 billion of questionable transactions, b) voluntarily disgorge 100% of any profits associated with these transactions and c) begin providing ultra transparency.

Instead, I expect that Standard Chartered will run to Washington DC and hope that the regulators there can craft a bank friendly bailout settlement that will get it out from under the line of fire by the NY State regulator.