Benjamin Lawsky Forcing Other Regulators to Man Up and Charge BIG Fines

It’s both amusing and telling to see the Financial Times bury the lede on how New York State Superintendent of Financial Services Benjamin Lawsky is giving Federal regulators and prosecutors fits.

The article in question, US agencies in rift over bank penalties, discusses how “US officials” have changed their posture in how to charge fines for violating economic sanctions laws. The Treasury’s Office of Foreign Asset Control used to be the lead negotiator and all the other regulators followed. But suddenly “other agencies” now want more so the fines which makes figuring out “how much is enough” hard. This matters because four foreign banks, Commerzbank, Deutsche Bank, Crédit Agricole and Société Générale, are still in pow-wows with the authorities on what sort of fines and other penalties they are facing.

It isn’t until the ninth paragraph of an eleven paragraph story that the pink paper explains why this is happening:

Sanctions settlements have become hard for banks and their lawyers to predict since the New York Department of Financial Services started to become involved in this area. The 2012 Standard Chartered case marked the first time that the DFS sought its own fines and put pressure on federal agencies to be tougher.

That’s a pretty sanitized account of the row over Standard Chartered, in which the British business press went full bore after Lawsky for as a mere punk state regulator, seeking heavy duty fines from a large international bank. As we wrote:

Yet Lawsky, who was a Southern District of New York prosecutor before he became a regulator (as in he didn’t have a background in banking or insurance) has run rings around Federal banking regulators (not that that is all that hard). He became notorious in his initial salvo during the negotiation of the money laundering settlement for recidivist rule-breaker Standard Chartered, which persisted in dealing with Iran and scrubbing bank wires against the stern warnings of its outside counsel. Lawsky informed the Fed (one of the parties to the settlement, although the bank toady Treasury was the lead actor) that he’d like to pursue his own investigation and got the nod. Big mistake.

Lawsky filed a blistering order detailing the bank’s appalling conduct (it eventually admitted $250 billion of transactions were out of compliance) and threatened yanking Standard Chartered’s New York license. That was a huge threat, since that would also mean Standard Chartered would lose direct access to dollar clearing services. It could in theory go through correspondents, but that would signal its end as an international player. Both the Treasury and British regulators went to war against Lawsky, but there was nothing they could do, since he was operating within his authority. Well, take that back, they did get their revenge by excluding him from the negotiations (and hence key information) in the next big foreign bank money laundering settlement (foreign banks typically set up branches in New York, which also put them under New York’s purview), that of HSBC. Needless to say, there was a huge uproar at the failure to get indictments or meaningful punishment of individuals when the scale of its misconduct was made public.

Lawsky’s order to Standard Chartered was a thing of beauty. It outlined the misconduct in gory detail, and basically said, “Show up and explain in a public hearing why you shouldn’t lose your license.” And New York State fined Standard Chartered $340 million when the Feds got $330 million in their own deal. State regulators are not supposed to upstage their DC counterparts.

HSBC was then fined $1.9 billion for money laundering, mainly with Mexican drug cartels and that deal was widely criticized, since $1.3 billion came in the form of a deferred prosecution agreement (see
for details). But with more and more public ire over the lack of prosecutions and the lack of punishment of individuals and the Dems looking to be at serious risk in the 2014 Congressional midterms, the need to furnish Obama Administration’s “tough on banks” talking point converged nicely with US policy objectives of making sure its putative partners toed the line on economic sanctions. So Lawsky’s bloodymindedeness became more acceptable. From the Financial Times:

However, in the BNP case, Ofac stuck to its usual formula while other agencies ratcheted up their penalty in unprecedented ways, according to people familiar with the case. The DoJ decided the French bank deserved a “dollar for dollar” penalty for the more than $8.9bn in illegal transactions that the government believed could be proved, the first time such a standard has been imposed.

Shorter: when the DoJ was being upstaged by a former Federal prosecutor, suddenly they manned up and got more creative and aggressive. Oh, and Lawsky got $2.2 billion for New York out of the $8.9 billion total.

It’s important to acknowledge Lawksy’s impact, particularly from a post that would seem to be very disadvantaged in exercising that sort of clout. Imagine what might have happened if New York had an attorney general that had been willing to file criminal charges against individuals based on Lawsky’s work. But Schneiderman has been notably loath to pull the trigger, plus Lawsky’s boss, Andrew Cuomo, and Schneiderman are fierce rivals.

And Lawsky is not alone in demonstrating that individuals in regulatory positions who want to go after misconduct can make a real difference. We’ve written about SEC commissioner Kara Stein, who has declared war on SEC chairman Mary Jo White. This is a remarkably gutsy move because commissioners of the same party as the as the chairman pretty much never offer more than tame, occasional differences of opinion with the SEC chief. And Stein, from a post generally seen as having little power, is similarly making a difference. She’s widely credited with the final version of the Volcker Rule coming out tougher than anticipated, and she’s embarrassed FINRA into reviewing its embarrassingly low fines. As important, a vocal commissioner also emboldens staff to take tougher stances on misconduct.

The reason it’s important to recognize the work of effective regulators isn’t simply to encourage them. It’s also to counter the Manichean thinking that seems to be more and more widespread. It’s altogether too easy to see the depth of corruption of the system and conclude that its is beyond redemption. But that attitude is profoundly disempowering. Giving up the fight guarantees that the bad guys win. The more we look to cases where regulators and activists have taken ground, the more we can build on those successes. Reformers need to train to be winners, even if their muscles are weak now, rather than perfect their excuses for losing.

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  1. BigRed

    Could we maybe avoid the gender-stereotyping involved in “man up”?

    And do I understand this correctly that Lawsky got Standard Charter fined roughly 1.5 cents on the dollar, while BNP got hit dollar-for-dollar? And that money laundering for criminals cost HSBC less than money laundering for sanctioned governments cost BNP?

    Is it possible that smth is a bit out of whack here? :)

    1. Yves Smith Post author

      I suggest you go read the coverage at the time of the Standard Chartered case. The other regulators and all of the British press were outraged that Lawsky threatened to revoke Standard Chartered’s banks license and was seeking the magnitude of fines that he got. He was breaking with precedent in a major way. And at that point, Standard Chartered was insisting they had engaged in only $14 million of impermissible trades. The Treasury and Federal regulators were prepared to accept that figure since it had been provided by the oh so reliable independent consulting firm Promontory (Lawsky also fined the accounting firm, Deloitte, and is investigating Promontory for its role in covering up Standard Chartered’s misconduct). So using that measure, Lawsky got $24 for every dollar. And I guess you also missed that a dollar for dollar punishment would have put Standard Chartered out of business, so that was never an option.

      And did you not read the post? Lawsky was excluded from the HSBC negotiations. He was cut out of information, which made it hard for him to operate unilaterally.

      And all of the regulators have said that BNP Paribas’ conduct was far and away the worst of all the banks, hence they deserved the biggest fines. The senior most level of the bank was involved in the bad conduct, and they continued to engage in the verboten trades even as they were under investigation (which because they dragged their feet took years) and obstructed justice.

      It might help if you do your homework before casting aspersions.

      1. Adam S.

        Yves said: “And I guess you also missed that a dollar for dollar punishment would have put Standard Chartered out of business, so that was never an option.”

        Why is that not an option? I thought the half of the disgust with Lanny Breuer’s interview with 60 minutes was that the risk of “going out of business” was part of his reasoning not to prosecute banks?

        Corporation charters, nor bank charters, were never intended to shield organizations from liability. Why is it that if company/bank has done harm to the extent that is greater than the value of their company they should be shielded from going out of business?

        1. Carla

          I agree, Adam S. For context and a sense of proportion, please consider the following:

          The Plain Dealer story of 7/9/14 begins:
          “AKRON, Ohio – A federal judge today sentenced a South Euclid woman to 14 years in prison for her role in a variety of schemes that resulted in a loss of more than $73,000. U.S. District Judge David Dowd Jr. also ordered Angelique Bankston to pay $73,554 in restitution.”

          Bankston (interesting name) is an African American female.

          One P.D. reader commenting on the above story noted, regarding another local low-life:
          “Frank Gruttadaria received 7 yrs. for stealing $50 million and never made any restitution. I don’t condone what Bankston did, but her crimes pale in comparison. Maybe Frank had a few mill.stashed for the judges.” Probably not. But Gruttadaria is white.

          Many of us (maybe most?) are sick and tired of bankster corporations paying fines, no matter how hefty, when criminal prosecution of the principals is the only appropriate remedy and deterrent. Good for Lawsky for threatening to pull Standard Charter’s license. But of course it didn’t happen.

          Angelique Bankston steals $73,000; she gets 14 years and has to pay full restitution. Corporate executives and board members crash the economy and destroy tens of millions of lives; they get multi-million dollar bonuses. It’s way past time to prosecute, convict and punish them as the psychopathic criminals they are, and revoke the charters of their corporations.

        2. Yves Smith Post author

          Did you miss that Standard Chartered is a systemically important bank? Shooting it would kill other financial institutions, or lead to forced mergers, creating even bigger behemoths. What is the point of that?

          And why kill an institution when the problem is the leadership? As with Salomon Brothers, force out the top 3 execs and require that all current board members resign, and force out everyone directly involved in the misconduct (including everyone in the reporting line all the way up).

          We also need ruled to claw back compensation received during the periods when misconduct was under way. And of course PROSECUTIONS!

          That’s a lot more effective than blowing up institutions when 90+ percent of the bank had nothing to do with the conduct at issue. Why should branch staff and people involved in normal corporate lending lose their jobs?

  2. Abigail Caplovitz Field


    I agree that the brave and determined few such as Lawsky and Stein need celebrating, and that deciding the system is too corrupt to save guarantees defeat.

    Nonetheless, while skirmishes and even battles over the basic American social contract and democracy can be won by those using the existing system as effectively as possible, the Supreme Court and law enforcers’ anthropomorhisizing of corporations has produced a core sovereignty crisis and organizers must focus on a constitutional amendment; no other reform can do anything more than temporarily stem the tide.

    I mean–there’s plenty of useful battles to fight on other topics, but the amendment is the most crucial to win.

    thanks for all you do

    1. Doug Terpstra

      Hear! Hear! Thank you, Yves. It’s rare to find praiseworthy regulators, thus it’s important to applaud them and celebrate their courage, especially post-Obama, a time of epic deceit, greed, and violence. That’s not to say the system is not beyond redemption, it is, but I believe that will take care if itself soon. The black-swan song of supply-side cronyism is coming soon.

    2. timbers

      “organizers must focus on a constitutional amendment; no other reform can do anything more than temporarily stem the tide.

      I mean–there’s plenty of useful battles to fight on other topics, but the amendment is the most crucial to win.”

      That may be correct. IMO there is a better approach: Impeach/remove any judge who says corporations are people. This is better than adding words to constitution because it gets quicker results and pushes the conversation to the left, and our current corrupt judges will twist or select any and all words to their biased agenda – maybe defeating any amendment. Also, we need push back on SCOTUS application of “corrupt.” Plato or someone said something like, corruption is the absence of good habits, so it should be applied broadly not insanely narrowly as SCOTUS does now. Any judge saying self evidently untrue things like corporations are people, is proof that he is corrupt because he is advancing his agenda or other’s agenda at the expense of his oath to be impartial and examine the facts.

    3. Carla

      Thank you, Ms. Caplovitz Field, for this comment. The only proposed Constitutional amendment that addresses corporate personhood is House Joint Resolution 29, the “We the People” amendment. Here is the text in its entirety:

      House Joint Resolution 29 introduced February 14, 2013 by Rep. Nolan, co-sponsored by Rep. Pocan

      “Section 1. [Artificial Entities Such as Corporations Do Not Have Constitutional Rights]

      The rights protected by the Constitution of the United States are the rights of natural persons only.

      Artificial entities established by the laws of any State, the United States, or any foreign state shall have no rights under this Constitution and are subject to regulation by the People, through Federal, State, or local law.

      The privileges of artificial entities shall be determined by the People, through Federal, State, or local law, and shall not be construed to be inherent or inalienable.

      Section 2. [Money is Not Free Speech]

      Federal, State, and local government shall regulate, limit, or prohibit contributions and expenditures, including a candidate’s own contributions and expenditures, to ensure that all citizens, regardless of their economic status, have access to the political process, and that no person gains, as a result of their money, substantially more access or ability to influence in any way the election of any candidate for public office or any ballot measure.

      Federal, State, and local government shall require that any permissible contributions and expenditures be publicly disclosed.

      The judiciary shall not construe the spending of money to influence elections to be speech under the First Amendment.”

      Since then, the joint resolution has gained the endorsement of one other Congressperson. I am trying to find out who that is, and will report back here when I get the information.

      Citizen initiatives that are consistent with HJR 29 are being put on the ballot at the municipal level all over the country. Everywhere this has been placed on the ballot, it has won passage. In my suburb of Cleveland, Ohio, it passed with 77.6 percent voting “yes.” The local initiatives “instruct Congress” to engage in the process of enacting HJR 29.

      1. Doug Terpstra

        Thank you, Carla! So stunningly elementary, these resolutions embody self-evident truth of a level Abraham Lincoln declared. I am unreservedly convinced that these will be the law of the land in time and that one day we will look back on this present violent fascist corporatocracy with the same incredulity that (almost) all of us today view slavery. Such change is unavoidable, inevitable.

  3. Jim Haygood

    ‘It’s altogether too easy to see the depth of corruption of the system and conclude that its is beyond redemption.’

    Arbitrary fines for extraterritorially-applied laws are corruption.

    1. M. Blake

      You make a good point but only as respects the Cuba trade sanctions which are ridiculous at this point.

    2. Yves Smith Post author

      These aren’t extraterratorial. All the transactions cleared through the New York branch. Please get familiar with the details rather than make spurious accusations.

  4. larry

    As for Lawsky not having any banking experience or training, neither did Pecora. And he did good, as it were. For an account, see The Hellhound of Wall street. Pecora, a trained lawyer, would probably have endorsed HJR29.

  5. larry

    We should not forget the role Bill Black, as an S&L regulator, played in putting a very large number of people in jail. I possibly ought to have mentioned that Pecora was not a regulator – he was parachuted in ex cathedra, so to speak, to deal with the mess. What was shocking to certain parties was how well he cut through the bankers’ bullshit to the core of whatever problem he was dealing with. Lawsky appears to be similarly minded. It is so easy to be suborned.

  6. Vatch

    As far as I now, Deloitte is a U.S. company, so Mr. Lawsky has punished a U.S. company for financial wrongdoing. But both Credit Suisse and Standard Chartered are foreign banks. Has he punished any large U.S. banks? I realize that his actions against mortgage servicers affect U.S. corporations, but has he been able to penalize any of the U.S. based TBTF banks?

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