The New York Superintendent of Financial Services dropped a bombshell today, filing an order against Britain’s Standard Chartered Bank. It charges the bank with having engaged in at least $250 billion of illegal transactions with Iranian banks, including its central bank, from 2001 to 2010, and of engaging in similar schemes with Libya, Myanmar and Sudan (those investigations are in progress). It threatens SCB with the loss of its New York banking license and termination of access to dollar clearing services. The latter alone is as huge deal. You are not a real international bank unless you have dollar clearing. Sumitomo Bank looked at giving up its US banking license in 1985 when it was examining deal structures for making an investment in Goldman, and ascertained that giving up access to Fedwire would cost it over $100 million a year and considerably weaken its position in Japan. SCB is certain to be a much more active dollar player than Sumitomo was and the volume of international transactions has grown hugely since then.
SCB squealed like a stuck pig, claiming that only $14 million of transactions were out of compliance. But the bank has nowhere to go. The NY Superintendent, Benjamin Lawsky, has made his determination. The only thing open for discussion is what sort of punishment he is going to impose. The bank must
…submit to and pay for an independent, on-premises monitor of the Department’s selection to ensure compliance with rules governing the international transfer of funds.
SCB is also up for a license revocation hearing and needs to “demonstrate” why it should not be suspended from clearing dollar transactions in the interim. Having poised a sword of Damocles over the bank’s head, I would expect Lawsky to demand a lot to make this go away, ideally including some executives’ heads as proof the bank was turning over a new leaf (the filing notes that any money damages are to be determined). The flip side is Lawsky may come under pressure precisely because he has shown up the Treasury, Fed, and DoJ. This is a Spitzer-level move from an unexpected source.
Bear in mind, the facts presented are far worse than the Libor price fixing that led to the departure of Barclays’ chairman, CEO, and president. Lawsky has evidence that this scheme was devised at the senior levels of the bank, while the Barclays Libor actions took place at comparatively low levels (although it is hard to believe there was not knowledge at executive levels prior to the October 2008 conversations between the Bank of England’s Paul Tucker and Bob Diamond).
The filing is riveting reading. In very simple terms, SCB altered (“repaired”) wire transfer information so as to omit the fact that Iranian banks were involved. By way of background, “U-turns” were a permitted transaction with Iranian banks and individuals, when the recipient and sender of the wire were both non-US, non-Iranian banks (although they might represent an Iranian party). The compliance requirements were stringent; funds were to be frozen if a transfer request did not have enough information to determine whether or not it was with a sanctioned party. But that was no deterrent to SCB:
20. As early as 1995, soon after President Clinton issued two Executive Orders announcing U.S. economic sanctions against Iran, SCB’s General Counsel embraced a framework for regulatory evasion. He strategized with SCB’s regulatory compliance staff by advising that “if SCB London were to ignore OFACs regulations AND SCB NY were not involved in any way & (2) had no knowledge of SCB Londons [sic] activities & (3) could not be said to be in a position to control SCB London, then IF OFAC discovered SCBLondons [sic] breach, there is nothing they could do against SCB London, or more importantly against SCBNY.” He also instructed that a memorandum containing this plan was “highly confidential & MUST NOT be sent to the US.” (emphasis in original)
21. Years later, another SCB executive closely weighed the costs and benefits of concealing the identities of Iranian Clients. He observed that “the current process under which some SWIFT messages are manually ‘repaired’ to remove reference to Iran could (despite accepted SWIFT protocols) be perceived by OFAC [U.S. Office of Foreign Assets Control] as a measure to conceal the Iranian connection from SCB NY, and therefore evade their controls for filtering Iran-related payments. Unless transactions are repaired they face delays caused by investigations in the U.S. banking system, subjecting SCB to interest claims. He described SCB‟s repair procedures as a “process to check that a payment is, prima facie, an acceptable U-turn transaction (i.e. offshore to offshore),” and fully acknowledged that “they do not provide assurance that it does not relate to a prohibited transaction, and therefore SCB NY is exposed to the risk of a breach of sanctions.” (emphasis added).”
A footnote to this section quotes an e-mail from the general counsel to the compliance manager on precisely how the wire instructions are to be doctored.
And Deloitte Touche is depicted of being critical to this scheme:
SCB carefully planned its deception and was apparently aided by its consultant Deloitte & Touche, LLP (“D&T”), which intentionally omitted critical information in its “independent report” to regulators. This ongoing misconduct was especially egregious because – during a key period between 2004 and 2007 – SCB‟s New York branch was subject to a formal supervisory action by the Department and the Federal Reserve Bank of New York (“FRBNY”) for other regulatory compliance failures involving the Bank Secrecy Act (BSA”), anti-money laundering policies and procedures (“AML”), and OFAC regulations.
If Lawsky indeed has the goods on Deloitte, this is the sort of thing which ought to put it out of business, except all of the Big Four accounting firms have “too big” or more accurately, “too few” to fail status.
The filing recounts how eager SBC was to get the business in 2001 for acting as recipient bank for the proceeds of Iran’s dollar based oil sales, roughly $500 million a day. This required SBC to deal directly with a sanctioned bank and was seen as attractive in its own right and as providing an entre to other Iranian, as in sanctioned, banks. The Iranians emphasized they wanted the transcations processed quickly (code for they did not want to run the risk of having funds seized) and asked for SCB to pay funds in advance of receipts, up to $200 million a day! To put it mildly, this level of financial exposure would motivate SCB to make sure the arrangement was not uncovered. Even though SCB ascertained that its New York branch would have to be fully appraised of transaction/customer information to be in compliance with the law, it instead provided false details in the SWIFT data fields. And this procedure, and the fact that it was done on behalf of Iranian banks, was commemorated in SCB operating manuals. .
By 2003, SCB’s outside counsel for the US was hectoring the bank for failing to comply with the law and the spirit of OFAC; London staff shrugged it off, regarding the secrecy as necessary since they wanted to keep the business. And as SCB’s competitors heeded warnings like this and exited the Iran business, SCB happily filled the void. I strongly suggest you read the actual filing; it details the additional ruses the bank engaged in over the years, all with the supervision and approval of senior legal and business officers.
And the piece de resistance is the role played by Deloitte. In 2003, SCB was sanctioned by the New York Fed and the New York banking superintendent for serious lapses in filing suspicious activity reports and customer due diligence. As part of the settlement, SCB had to hire an independent monitor. That monitor, Deloitte, instead decided it was much better off aiding SCB in figuring out how to evade the rules:
44…In August and September 2005, D&T unlawfully gave SCB confidential historical transaction review reports that it had prepared for two other major foreign banking clients that were under investigation for OFAC violations and money laundering activities. These reports contained detailed and highly confidential information concerning foreign banks involved in illegal U.S. dollar clearing activities.
45. Having improperly gleaned insights into the regulators‟ concerns and strategies for investigating U-Turn-related misconduct, SCB asked D&T to delete from its draft “independent” report any reference to certain types of payments that could ultimately reveal SCB‟s Iranian U-Turn practices. In an email discussing D&T‟s draft, a D&T partner admitted that “we agreed” to SCB‟s request because “this is too much and too politically sensitive for both SCB and Deloitte. That is why I drafted the watered-down version.”
The filing contains even more salacious detail on the extent of the flouting of the law and the misrepresentations to regulators.
But it also appears that Lawsky has end run, as in embarrassed, the Treasury and the New York Fed. As part of its defense, SCB contends it was already cooperating with Federal regulators:
In January 2010, the Group voluntarily approached all relevant US agencies, including the DFS, and informed them that we had initiated a review of historical US dollar transactions and their compliance with US sanctions…The Group waived its attorney-client and work product privileges to ensure that all the US agencies would receive all relevant information.
The agencies in question are “DFS, the Department of Justice, the Office of Foreign Assets Control, the Federal Reserve Group of New York and the District Attorney of New York.”
Bloomberg points out that the current management team has long tenures in the bank, meaning they will deservedly be in the cross hairs. And Peter Rudegeair at Reuters tells us they’ve been horribly sanctimonious too.
The lack of action by everyone ex the lowly New York banking supervisor is mighty troubling. The evidence presented in Lawsky’s filing is compelling; he clearly has not gone off half cocked. Why has he pressed forward and announced this on his own? The Treasury Department’s Office of Terrorism and Financial Intelligence has supposedly been all over terrorist finance; the consultants to that effort typically have very high level security clearances and top level access (one colleague who worked on this effort in the Paulson Treasury could get the former ECB chief Trichet on the phone). For them not to have pursued it anywhere as aggressively as a vastly less well resourced state banking regulator, particularly when Iran is now the designated Foreign Enemy #1, does not pass the smell test.
At a minimum, this lack of sufficient inquisitiveness on behalf of the Feds would the bank snookered them by being terribly forthcoming (as in it was responding only to specific inquiries, and then as narrowly as possible). But it raises the more troubling specter that Federal regulators (oh, and the US Department of Justice) wanted to keep this all quiet so as not to lead to embarrassing headlines. Although there is nothing in the filing to point to failure to act by the New York Fed, which was presumably the lead party in the 2003 sanctions against SCB (indeed, it says specifically that SCB deceived Federal regulators), the flip side is there would be only downside to Lawsky in doing anything that would make Fed or Treasury think he was trying to make then look bad.
There was a huge furor in the UK over who among the banking regulators knew what when on the Libor scandal. If our Congresscritters are at all worth their salt, they ought to be putting Geithner and the relevant folks at the New York Fed under the hot lights. We’ll see soon enough how the Fed and Treasury play this. If they don’t launch parallel actions pronto, it will be a damning sign as to where they think their, and perhaps most importantly, Geithner’s, interests lie.