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
Taibbi 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.