Benjamin Lawsky’s Standard Chartered
By Steve Viuker
Benjamin Lawsky has developed a reputation for taking on compliance problems that have festered for years. The low-key superintendent of the Department of Financial Services, an agency created in October 2011, took on Standard Chartered Plc last year regarding its handling of dollar-clearing services to Iran, a country under U.S. economic sanctions.
Lawsky’s office charged that the bank’s New York office had made more than $250 billion in transactions with Iranian banks, in which information about the payee and was deleted from wire-transfer messages, in clear violation of both federal and state money-laundering law.
Last year, a 2006 quote attributed to Standard Chartered Plc’s Group Finance Director Richard Meddings resurfaced on the Internet. It goes thusly: “You f---ing Americans. Who are you to tell us, the rest of the world, that we’re not going to deal with Iranians?” The bank subsequently confirmed the expletive sentence but not the far more interesting one that followed.
State and federal regulators had known of the situation since 2004, when Standard Chartered had struck an agreement with the former New York State Banking Department and the Federal Reserve, promising to correct deficiencies in its anti-money-laundering controls. Lawsky contended that the bank hadn’t lived up to the agreement. In August of last year, the DFS wrested a $340 million settlement from Standard Chartered over the Iran situation.
Lawsky’s case against the bank stole the thunder from federal agencies investigating the matter, correctly citing violations of New York state law.
Fast-forward to July 30 of this year. That day, at a Crain’s Business Breakfast Forum in New York, Lawsky said, “People want to classify, especially in political debates, is someone pro-Wall Street or anti-Wall Street? Tough-on-business or pro-business? I think taking real, appropriate, and sometimes tough action is not anti-business, it’s pro-business, because it protects our system, keeps up consumer confidence and ultimately helps prevent another meltdown.
“But by the same token, a regulator who takes actions, who acts unreasonably and beats up on industry for the sake of getting attention, as opposed to real needed reforms, can be very detrimental for the system, undermine consumer confidence, undermine the wellbeing of our industries and ultimately wreak havoc on our system.”
Violations of State and Federal Law
Mark Gongloff, chief financial writer of Huffington Post Business, told Banking New York: “If I’m [Attorney General Eric] Schneiderman or [New York Governor Andrew] Cuomo, I’m going to want my fingerprints on this [Standard Chartered case] as much as possible. But I have no idea who is pushing Lawsky. And this could have been his initiative. Maybe he got a talking-to, because that hasn’t happened again.” (Cuomo, like Spitzer, was attorney general before he was governor.)
Notre Dame law Professor Jimmy Gurulé, a former undersecretary for enforcement, U.S. Department of the Treasury from 2001 to 2003 who was instrumental in developing and implementing the U.S. Treasury Department’s global strategy to combat terrorism financing, said that with respect to the Standard Chartered case, “I applaud his political courage. Standard Chartered had violated federal law and New York state law. And there was no question. It wasn’t even a close call. The violations were repeated and they were numerous and they were over an extended period of time. Lawsky was criticized for pre-empting the Treasury Department. My criticism is of the Treasury for dragging their feet. They should have intervened earlier. I think it was embarrassing for Treasury that it was a state official who took action and did the right thing. The question of whether Treasury and Justice were given sufficient notice by Lawsky is a minor point. I don’t believe state officials need to give the federal government notice or get their approval to move forward and take action when there has been a clear violation of state law. But I would think the push back he got would cause him to keep the Feds appraised of significant actions that overlap jurisdictions. I’ve worked in government and political turf battles are about agency power. And battles over who will get credit are counter-productive and impede action.”
Writing in the Financial Times last August, Kishore Mahbubani ripped Lawsky.
“Lawsky’s decision to go after Standard Chartered was flawed for three reasons. First, his decision to expose StanChart appears to have been driven by domestic political considerations, not by the merits of the case. In the strange political climate of the U.S., anyone who stands up to Iran is a hero. Lawsky has enhanced his reputation.”
“Second, Lawsky’s decision undermined the move to create global co-operation among financial regulators. Finance is not a domestic industry. Billions of dollars cross borders with a mouse click. The only way to regulate this industry is through global norms and processes. That is why the Basel and other international regulations were created. Mervyn King, governor of the Bank of England, observed that while American and British regulators had co-operated on the Barclays case, in the StanChart case one regulator, but not the others, has gone public while the investigation is still going on.”
“Third: Would another regulatory authority someday similarly retaliate against an American bank? It is obvious why this question did not occur to him: American power appears, to him at least, to be unassailable.”
Making No Friends
In The Telegraph, John Mann MP called for a formal inquiry. “We don’t want to whitewash any potential problems with U.K. banks, but money laundering is not a British problem,” said Mann. “American banks are doing the same and worse and there are numerous U.S. banks involved in drugs cases in U.S. courts. So, what we have here is a clear political agenda that has merged with a domestic American agenda to shift financial markets from London to New York.” Boris Johnson, the mayor of London, warned that regulation in New York should not become “a self-interested attack on London’s status as the pre-eminent financial centre.”
At the July 30 Crain’s breakfast, Lawsky said his office will soon release audits of the state and various city pension systems. A subsequent report in The Wall Street Journal targets the New York State Common Retirement Fund and the New York State Teachers’ Retirement System. “Our predecessor agency did somewhat limited reviews and published them rarely,” Lawsky said. “We’re going to change that and significantly step up the scrutiny.”
And The New York Times reported that “government authorities are homing in on a lucrative loophole that allows online lenders to offer short-term loans at interest rates that often exceed 500 percent annually, the latest front in a crackdown on the payday lending industry.”
Lawsky has sent letters to 35 of the online lenders, instructing them to “cease and desist” offering loans that violate local usury laws, according to documents reviewed by The New York Times. He ordered the lenders to halt the “illegal” loans within two weeks of sending the letters.
The Times also reported that Lawsky is preparing to crack down on the consulting firms that banks hire to navigate legal problems like money laundering and wrongful foreclosures, according to people briefed on the plans. His office is also considering a new code of conduct for consultants. And Lawsky also has begun an investigation into pension advance firms. These are lenders that entice retirees to sign over their monthly pension checks in return for a lump sum. In May of this year, the Department of Financial Services sent subpoenas to 10 companies in the business.
Aaron Elstein writes a blog called “In The Markets” for Crain’s New York Business and covers all aspects of Wall Street. “I think he’s picked really smart cases that demonstrate a good understanding of the financial system’s complexities,” he said. “A good way to gauge how effective he’s been is by the amount of outrage he’s stirred among the folks he regulates. You might recall that after he brought his case against Standard Chartered at this time a year ago, the bank’s response was to complain that he was some kind of rogue regulator. A week later, it settled for $340 million and a few months later settled with the feds for about the same amount.”
“Another case that Lawsky’s working on involving insurance companies setting up sham companies where they can lay off their risks looks extremely important,” Elstein said. “One of the ways the financial system has protected itself from those wish to change it is by not only making banks and insurers extremely large, but extremely complex as corporate structures and one of the residues of this design is lawmakers and regulators sort of throw up their hands and say, it’s all terribly complex, isn’t it? Lawsky is a rare regulator who has the patience to wade through the murk. Is Lawsky seeking higher office? Maybe! Then again, he’s never been elected to anything and I have no idea if campaigning for attorney general or something else is something he wants to do.”■