Standard Chartered Makes Empty Threat to Sue New York Regulator Over Iran Money Laundering

I have to confess I’m really enjoying the dust up between the New York Superintendent of Financial Services, Benjamin Lawsky, and his opponents, namely, his target, Standard Chartered, and the flummoxed Federal regulators that he is showing up as so deeply captured that they genuinely can’t tell regulatory theater from the real thing.

The amount of consternation directed at Lawsky is telling. It’s as if he brought a heavily tattooed and body pierced trannie to a country club. He’s flouted the rules in a way that offends his detractors deeply, and yet he also can’t be brought to heel. The complaints in the media are a sign of powerlessness. As long as Lawsky has Governor Cuomo’s backing, the Feds and the unhappy Brits can’t get at him.

The lead story in the Financial Times on SCB is so obviously barmy that I’m astonished that the pink paper would give it prominent play. The headline: StanChart seeks advice over countersuit. Even floating this as an course of action reeks either of desperation to create positive news hooks or delusion:

The bank’s legal advisers believe “there is a case” for claiming reputational damage, according to two people close to the situation, although StanChart is conscious of the delicacy of taking an aggressive stance towards its regulators.

The whole “delicacy” part is code for this having odds of close to zero of happening, so this looks like yet more spin.

The damage was done by the threat to yank the license and access to dollar clearing services, not the “rogue institution” label in the order. And as we’ve written in earlier posts, despite the spinmeister’s efforts to contend otherwise, Lawsky has cited violations of New York law that appear to let him get there, in addition to the charge under the Federal laws on transfers to Iran.

And this sort of suit would put any other damaging evidence that Lawsky has in the public domain for the media to pour over it.

In addition, any suit against Lawsky would be a state law matter, and my sources thought it would be subject to the abuse of discretion standard, which is a very high bar. One reaction via e-mail: “No chance they risk their ticket on a NY state court finding that Lawsky abused his discretion. None. Zero.”

The astonishing thing is that SCB genuinely seems to not understand that the way its legal and compliance department operated are just damning. Frank Partnoy, former derivatives salesman, now law professor, provides a good discussion in an FT comment today (emphasis ours):

Indeed, the order puts the bank’s senior attorneys and compliance officers at the heart of the wire stripping scheme, even when outside counsel advised otherwise. As early as 1995, soon after President Bill Clinton announced economic sanctions against Iran, the bank’s general counsel allegedly “embraced a framework for regulatory evasion”. He allegedly strategised about how to avoid scrutiny by the US Office of Foreign Assets Control, known as OFAC, and instructed employees that a memorandum describing the plan to avoid regulatory compliance was “highly confidential & MUST NOT be sent to the US”….

As recent debacles at Barclays, HSBC and now Standard Chartered demonstrate, employees of big global banks increasingly lack a moral compass. Some general counsels and compliance officers do provide ethical guidance. But many are facilitators or loophole instructors, there to show employees the best way to avoid the law. Not even mafia lawyers go that far; unlike many bankers, mobsters understand the value of an impartial consigliere who will tell them when to stop.

Bear in mind that Lawksy set a hearing date of next Wednesday. An informed source wrote:

No way there is even a hearing next week. They’ll settle and each side will spin the settlement is my guess. But no way do they risk a hearing.

Or put it another way: if there is a hearing, this is a sign of a complete breakdown in negotiations, a belief of at least one side that they can’t negotiate in good faith. And it might also be a sign that SCB can’t get its mind around how the facts simply aren’t on its side. But either way, this refusal by Lawsky to act like a proper regulatory lapdog is exposing all sorts of fault lines, which should prove salutary in the long run.

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  1. Conscience of a Conservative

    Re the Frank Portnoy piece. Unfortunately sometimes the lawyers are not providing the adult supervision they should, but instructing on how to get away with things they shouldn’t be doing. Are the lawyers legal counsel or consigliere in these cases? Five years after the bubble broke, I’m not sure.

  2. Tiresias

    “As recent debacles at Barclays, HSBC and now Standard Chartered demonstrate, employees of big global banks increasingly lack a moral compass.”

    While I wouldn’t disagree with that statement in general I wonder if as far as Standard Chartered are concerned in this particular matter whether you all are viewing this through a Stars-and-Stripes tinted glass.

    If British employees of a British Bank take a view that financial sanctions against Iran have more to do with US politics, posturing, inept foreign policy and sheer Captain American fantasy than they do any real physical threat – indeed come to the conclusion that not only is the US lying about weapons of mass destruction or whatever it is Iran has/is building/has sketched on the back of an envelope, but that waving a big stick at them is the one thing guaranteed to pursuade Iran that it needs them by hook or by crook from any source however unwelcome the ribbons that come with them, what does that have to do with their business?

    Yes, if Standard Chartered want to do business in the US it has to obey the rules set out by the US however jingoistic, politically inane or even self-damaging, and if it has been caught out breaking those rules it must suffer accordingly – but to regard this as showing a lack of moral compass rather than just a bad business decision smacks somewhat of the condemnation thrown by too many in the US at those individuals and nations who refused to support the invasion of Iraq in 2003.

    1. Milton Arbogast

      I am impressed, very impressed. Do you not protest just a tiny bit too much? Just a wee smidgeon?

      Could it be possible that certain members of the British elite, who wisely abandoned shares of Barclays and HSBC long ago, still hold shares in Standard Chartered?

      I daresay that you do not give a damn about Standard Chartered’s moral compass, but their stock value (down 16% is it?) might interest you very much.

    2. burnside

      Insofar as they are willing to eschew clearing operations through New York, it has nothing whatever to do with sanctions or UK approval of sanctions. The choices may offend them, but are perfectly clear. By electing to indulge in wire-stripping, they abandon any claim to probity, and are rightly seen to have lost moral compass.

      You are equating disagreement with sanction policies in the US with fraud practiced in the UK. They are related, no doubt, but are separate and distinct issues.

    3. Thomas E

      At the time of these allegations the united kingdom had introduced trade sanctions that were broadly similar to the US trade sanctions.

      The British position is that USA banks broke the law in exactly the same way as SC, but have only been mildly punished. If the USA imposed its law equally on both foreign and domestic banks Britain would have no complaints.

      1. Yves Smith Post author

        Please read the order. The UK bank PR does not comport with its charges.

        1. SCB was handling the dollar payments for Iran’s foreign oil sales. That is pretty sure to be its biggest recurring daily funds flow.

        2. The US tightened its sanctions in 2003. Other banks exited (or severely cut back) their dealings with Iran. SCB took up their business.

        SCB looks to be both a bigger participant and have far more deliberate, institutionalized efforts to evade the regs than other banks.

    4. Up the Ante

      Captain Brittania, that would be Standard Chartered’s counsel and his motto ‘Just Let Us’ described in the Order ?

      What does Captain Brittania and his Union Jack-tinted glass suggest the Americans do with Deloitte ?

      And the Israelis, what is their view on these events ?

  3. Richard


    Excellent post. We can only hope that UK regulators will respond to Lawsky by enforcing UK rules on US banks. The idea of a regulatory free-for-all in which the regulators try to one up each other by enforcing the rules on the banking system is simply too good.

    1. monday1929

      Our only hope now is that the Rats turning on each other will result in some embarrassment, if Justice is too far a stretch.

      1. monday1929

        If it’s going to be a money laundering food-fight, Vikram Pandit must be sweating bullets.

    1. Up the Ante

      I agree with you that Standard Chartered’s choice to play within the confines of the Martin Act was best.

      They’ve exercised their right to counsel, self-incriminated, and given the DFS the right to make it public. Oh, the generosity of the London bank !


    2. Yves Smith Post author

      PLEASE READ THE ORDER! It drives me nuts that people make all kinds of assertions when you can find out what the charges are from the order.

      Martin Act is securities law charges. None of the charges are Martin Act. Scroll to the end of the order.

      1. Up the Ante

        In all honesty, I have read the Order and noted as soon as aeolius offered up the link that the Martin Act had not been mentioned in it.

        There is some value in his link in that Lawsky is certainly working in an historical context in making his decision, perhaps aeolius meant to say Lawsky’s disclosure to the public is not that out of line. aeolius should say that, though.

        The Order is good reading, read it and you will see bank managers, general counsels, and auditor/consultants embarassed absolutely.

  4. Milton Arbogast

    I confess that I am powerfully, powerfully struck by the fact that all that is at stake here is whether Lawsky has a case. “Fair play”? “Moral compass”? When I get a parking ticket, I don’t remember being asked about fair play and my moral compass.

    Seeing that every big wig in Washington and New York is threatening Lawsky with being broken on the wheel if he proceeds, it will be interesting to see if his relationship with Cuomo is sufficient to keep him on his feet. Which is as much as to say, I will be interested in Cuomo’s response to all this. He’s Governor of New York. How much, really, can these bozos help him going forward? Obama has assumed a position of the most extreme lordosis before banking interests and all that it has gotten him is about a cajillion dollars contributed to… the envelope please… the Romney campaign.

    1. CaitlinO

      Exactly. I’m bored out of my gourd with the whole discussion of ‘moral compass’ with regards to Standard, Barclay and anyone else. You can’t regulate or enforce moral values, only behavior. The obviousness of that fact is what makes me suspect that all the focus on morals is merely a diversionary tactic designed to draw attention from truly egregious behavior.

    1. Up the Ante

      Sir Peter Sands

      Sir Richard Meddings–300×300.jpg

      “The bank was caught on the back foot by the regulator, [ after having given itself away by preemptive media zeal in the British media hacking scandal of recent weeks and having had years to prepare for .. the 6th day of August, 2012 ]. ”

      fixed it for them

      Bad Day Brits, Tepid Trolls

      “Let us make our position crystal clear: We are against this weather,” the Thunderer stated on Saturday. “It must stop raining, and soon.”

      “full-blown dystopian satire”

    2. Yves Smith Post author

      You still have this wrong. It’s about money, not some moral stance.

      And the Americans are 100% within their rights.

      SCB was doing dollar clearing. Even though it was using a private transfer system (Swift), all interbank payments systems depend on being backstopped by central bank facilities. Because they are dollar payments, this means Fedwire. The net dollar balances banks have with each other at the end of the day are settled over Fedwire.

      In addition, even though the large payments wee initiated on Swift, the biggest might have actually gone over Fedwire.

      You use a Fed facility, or depend on it, you play by our rules. The British press has acknowledged that losing access to dollar clearing would be tremendously damaging to SCB.

      1. Up the Ante

        You were right in saying you were enjoying it all, evidence of general counsels and control fraud auditor/consultants openly conspiring to evade regulation and detection.

        Now it’s time for Real corruption, errr, national security, to rear its head.

  5. Alex Morfesis

    robosigning british style…

    perfectly normal…

    perfectly normal was the qoute today in the FT…

    maybe the “olde chaps” at BCCI…I mean standard chartered forgot that little settlement of august 3, 2007, when they picked up the pieces of AMEX Bank…oh those S&M corporate types…wrist slapping each other…pray tell…killing trees to put ink to paper on settlements that are forgotten two hours “before” they are signed…

    some intersting reading on the back story of that case from an exec who sued for being involved with amex bank

    by the way everyone…it most certainly could be a simple issue of synchronicity or coincidence…

    but we all know what happened 24 hours after this agreement
    was stamped in the court record on august 6, 2007…

    AUGUST 7, 2007…in a move that has shaken up the financial system…BNP Paribas today has refused to…


  6. pros

    The starting point for NYS is a $12.5 billion fine, because anything less is for StanChart account.

  7. BondsOfSteel

    Trannie? Really? I guess if you put “heavily tattooed and body pierced” in front, it really isn’t a slur.

  8. chris m

    nothing will come of it. this guy will ultimately play ball with the crooks. everyone does.

    1. Milton Arbogast

      Well, perhaps. After all, if it just takes a call to Cuomo that he will get the cash he needs from Standard when the time comes, then you’re right.

      But can Cuomo conceivably run for President to the right of where Obama is now? Or even where Obama is now? What that would take would be a guarantee that the Republicans will *always* nominate unelectable crack-pot crooks with dressage horses for President.

      That’s the calculus that Cuomo faces. Who knows?

      1. john kissinger

        That, and tea partiers, are pretty much all that’s left.
        If Cuomo takes on the banks he could otherwise remain pretty central, i.e. to the left of Obama.

        1. Up the Ante

          Only a cloned politician wouldn’t.

          You know, that part about clones where successive generations lose a little more and more from the original ?

          Cloned fraud techniques are leaving them more and more depleted.

  9. timotheus

    From The Guardian: Standard Chartered denied the allegations saying that it “strongly rejects the position and portrayal of facts” made by the New York State Department of Financial Services, and claiming that “99.9%” of its transactions complied with regulations.

    HAHA, LOL, ROTFL. 99.9% of the time I go to a bank, I do not stick a gun in the teller’s face and demand a bag of cash. Why, thou art virtuous!

    1. Milton Arbogast

      Wonderful. The way I like to phrase it is what would you do if the stewardess said to you as you were boarding the plane, “We don’t crash on our way to New York 99.9% of the time.”

      Airlines are held to a higher standard than banks. What’s a little money between pigs?

      1. stevieb

        Hopefully your joking, I can’t imagine feeling to confident about that claim based on recent findings..

  10. Vincent Vecchione

    Seriously, I love this blog, and I’m sure you didn’t do this out of malice, but the term “trannie” is considered offensive.

  11. Scott

    Investmetnt banks can’t resist the legally gray and morally black.

    This mindset from senior managers and their ‘enabling’ rather than ‘gatekeeping’ legal counsel and audotors is endemic – whether it is sanction busting, tax arbitrage via deception or the sale of structured products by grossly mischaracterising the risks.

    I mean, it’s a problem!

  12. skippy

    Ah, we all know the claim offshore outsourcing is good for America. Seems offshore outsourcing is great for drug dealers and money launders too. Did you know offshore outsourcing enabled money laundering, flash crashes and failed projects?

    The latest banking scandal of Standard Chartered laundering Iranian money is all over the news. But did you know Standard Chartered Bank offshore outsourced to India their entire compliance operations?

    The DFS probe found that SCB had assured the New York state in May 2010 that it would take immediate steps to comply with the US Office of Foreign Assets Control (OFAC) sanctions. However, another regulatory examination in 2011 found continuing and significant Anti Money Laundering failures.

    Among these, the bank was outsourcing its “entire OFAC compliance process for the New York branch to Chennai, India, with no evidence of any oversight or communication between the Chennai and the New York offices.”

    Skippy… free markets…. num num taste good!

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