Benjamin Lawsky Shows Other Bank Regulators How to Do Their Jobs

It’s really easy to default to cynicism these days, since you are almost always certain to be right. And that goes double as far as bank regulators are concerned.

So that makes it even more important to call attention to exceptions to that sorry rule. One big one is the New York Superintendent of Financial Services, Benjamin Lawsky. As we’ll discuss later in this post, he’s again the subject of a top story in the Financial Times for doing what the banks treat as horrifically unwarranted behavior: punishing them for failing to live up to agreements to reform their conduct. Didn’t he get the memo that that was all theater for the rubes, and no one takes those commitments seriously?

Heretofore, New York state banking regulators have dutifully followed the lead of national regulators whenever they’ve been called in on investigations of major players. Lawsky broke with that tradition in a dramatic way in a money laundering probe of Standard Chartered two years ago, which included the Treasury, the Fed, and DoJ. Lawsky actually did ask the Fed if he could take his review further, and the central bank, not expecting much of a newbie state regulator, said yes.


Lawsky created an international firestorm when he issued a tough order, threatening to yank the bank’s US license (something within his authority) unless they showed up and explained themselves in a public hearing. As we wrote then:

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….

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.

Despite enormous pressure from the end-run Feds, Lawsky held his ground and got an admission from Standard Chartered that it had indeed engaged in over $250 billion of verboten transactions, $340 million in fines (a stunning number for a state regulator then) and the installation of an independent monitor to oversee changes to the bank’s procedures. Lawsky also fined Deloitte Touche, who aided and abetted Standard Chartered in its wire doctoring.

In the “imitation is the most sincere form of flattery” category, Federal regulators took a lesson from Lawsky’s playbook, using a power we’ve long pointed out that they could have used against miscreants, that of revoking licenses or restricting access to payment systems, the life blood of major financial firms. But the national authorities are willing to use those tools only to punish banks that refuse to act as enforcers of America’s geopolitical policies, at it did against BNP Paribas. But even here, Lawsky forced the Federal regulators to up their game by insisting that the bank force out officers directly involved in money laundering, including its chief operating officer.

Money laundering isn’t the only area where Lawsky’s involvement has led to far more serious sanctions against banks. The New York Superintendent also played an critical part in investigating criminal violations at Credit Suisse, when they helped US customers evade taxes through illegal offshore accounts.

And Lawsky is taking a very serious interest in an area near and dear to our hearts, namely, mortgage servicing. As a result of various settlements, some banks have taken to moving their mortgage servicing over to stand-alone, non-bank mortgage servicers. The only problem with that notion is that higher-touch mortgage servicing (which could be a partial answer to the problem) is more expensive, when compensation for servicing is already fixed in pooling and servicing agreements with investors. But as we’ve pointed out, the problems with mortgage servicing are deep-seated, and reflect among other things, deep seated problems with the underlying systems.

That means the only way these transfers to new hands could lead to better servicing would be if the sellers heavily subsidized the purchases and regulators kept their boots on the buyers’ necks to make sure they made major improvements. Instead, many of the buyers appear to be seeking to scale up, meaning that they’ll at best replicate all the bad practices of the old servicers. And there was every reason to expect things to get worse, since whistleblowers from Bank of America reported to us of major systems and records issues resulting from Bank of America acquiring servicing rights from other servicers and not being able to integrate the systems and records successfully.

Lawsky opened up a probe into non-bank servicers Ocwen, Nationstar, and four others based on hundreds of complaints from New York consumers. Mind you, this comes after Ocwen agreed to a $2+ billion settlement with the CFPB for foreclosure and loan modification abuses and charging inflated fees. Lawsky escalated his probe of Ocwen in April to include possible self-dealing on property auctions and in August added forced-placed insurance to the list.

On August 12, Ocwen held off issuing its 10-Q filing, stating that its 2013 and first quarte 2014 financials “can no longer be relied upon as being in compliance with [GAAP].” As reader MBS Guy wrote:

I have a feeling this is going to be a big deal.

Presumably, Lawsky’s investigation triggered the auditor concern- so what would that be? I don’t think force placed insurance would be an accounting issue. Bad fees on affiliated services? Ocwen has a complicated off shore structure and a bunch of split off affiliates. Many other non bank servicers were moving to similar structures.

Earning restatements could trigger Ocwen’s advancing facilities, which would be a disaster for the company. What would happen to the deals Ocwen services if Ocwen defaults? There may be no other buyers for the servicing!

The other non bank servicers will likely be facing the same issues. The big banks failed badly at this type of servicing and were forced to sell the stuff. Who’s left?

Lawsky’s instincts were correct – these servicers had grown too fast, in big part due to the foreclosure settlement. It is really important to note that this Ocwen issue and the potential problems that follow are a direct result of the Admin and regulators refusing to properly address the issue three years ago (as we all noted at the time).

Servicing hasn’t been fixed. So mortgages won’t really recover until servicing’s real failures are finally addressed.

In other words, Lawsky is pulling the band-aid back on a huge wound and is exposing the gangrene underneath. This has the potential to force large-scale changes that the industry and the Administration have labored mightily to avoid, presumably in the hope that they could kick the can down the road far enough so that they would not be blamed when the inevitable failure occurred.

But today’s Lawsky sighting is particularly rich. Remember Standard Chartered? Lawsky threw the book at them two years ago. Among other things, the bank was required to improve its reporting of questionable transactions. It didn’t, and in a really big way too. From the Financial Times:

The UK-based bank first disclosed the new investigation earlier this month. At the time, Peter Sands, StanChart’s chief executive, said the potential violation related to a 2007 update of the group’s post-transaction surveillance systems, which had been “poorly implemented”. As a result, its anti-money laundering checks had failed to flag suspicious or potentially illegal payments, Mr Sands said. StanChart and the DFS declined to comment on Monday.

The DFS, led by Benjamin Lawsky, believes millions of suspicious transactions were not reported, although it is not clear whether any of them were illegal.

Lawsky is rumored to be seeking $300 million in fines. Remember, the New York state settlement for the original abuses was $340 million, so this sanction is meant to send an unambiguous message that compliance is not optional. But look at the whining from the bank:

StanChart has had a rocky history with US authorities since the 2012 sanctions settlement. Sir John [Peace, the chairman] irked regulators when he dismissed the bank’s actions as “clerical errors” rather than a “wilful” intention to break the rules, even though the group had accepted responsibility for breaching sanctions.

His comments earned Sir John, Mr [Peter] Sands and then finance director Richard Meddings a summons to Washington, where all three were personally reprimanded by US authorities. Sir John was forced to apologise to investors and the bank’s staff, and admitted his remarks had been “both legally and factually incorrect”.

Jaspal Bindra, head of StanChart’s Asia operations, last week complained that regulators were treating banks like criminals for lapses. Mr Bindra told the Reuters news agency that “banks have been asked to play the role of policing anti-money laundering . . . [but when] we have a lapse we don’t get treated like a policeman, we are treated like a criminal”.

Bindra’s remarks show Standard Chartered still has a serious attitude problem. Banks are not “policing anti-money laundering.” They are not supposed to aid and abet customers in criminal conduct, which is what money laundering amounts to. That’s tantamount to saying “We are treated like criminals for driving the getaway car.” The good news is that shareholders are starting to lose faith in Peace and Sands. So if the CEO and chairman continue to be too deeply invested in their delusions to alter their course, shareholders may force management changes on the company.

Even if Lawsky is a lone example at this point, he shows both other regulators and the media that banks really do not and more important, should not hold the whip hand. The longer he continues to find and punish misconduct, the more opportunity there is for that lesson to sink in.

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  1. John

    We will be hearing more about the likes of BNP for some time. France is still seething from the fine Washington imposed on BNP Paribas and is gathering bank friendly minister heads to challenge the US position during an upcoming G20 meeting. How dare the US attack their banks since it is perfectly legal what they did within their own country? In this case, France is obsessing over nonsense. By any standard, BNP broke several laws. What French leaders seem to have forgotten the US and France have an excellent extradition program. Commit a crime in either country and the other can request extradition of the perpetrator to face justice for domestic crimes. French banks commit crimes and the rules change all of a sudden.

    1. Tim

      Actually, no France and the US do NOT have an excellent extradition relationship. In general France will NOT extradite its nationals to the US or most other countries.

  2. Jim Haygood

    ‘Banks are not “policing anti-money laundering.” They are not supposed to aid and abet customers in criminal conduct.’

    In fact, they are policing on gov’s behalf. Google ‘AML compliance’ and you’ll see exactly what I mean — $5.8 billion in costs (according to WorldCompliance, one vendor of ‘customer and vendor screening content’) to police victimless offenses under a criminal law (an adjunct of the War on Drugs) which didn’t even exist until 1986.

    Ultimately, AML and the NSA panopticon are two different prongs of the drive for Total Information Awareness. One surveys what you spend; the other, what you say. Destruction of financial privacy is an essential goal of the police state.

    1. Yves Smith Post author

      You seem to forget that banks offer these services to their clients for a fee. Banks are required to do all sorts of other reporting on behalf of their clients, for instance, to capture tax information data and report interest income to the IRS. That’s a cost of “policing” if you choose to call it that. It’s more normally called a cost of doing business, like paying real estate taxes (which banks do, even if indirectly through rental charges on their branches).

      If this business is not profitable, banks should exit it. No one is holding a gun to their heads to offer theses services. The onus is on them as businessmen to price it adequately to cover their costs.

  3. down2long

    Thank you Yves for keeping up on this. Mr. Lawsky really is my hero – he is the only bank authority in this country demanding accountability. Miraculous.

  4. Deloss

    So write him a thank-you note:

    Mr. Benjamin Lawsky, Superintendent
    New York State Department of Financial Services
    One State Street
    New York, NY 10004-1511

  5. mossmoon

    So Benjamin Lawsky is fighting money laundering? What a joke. Lawsky just proposed extremely onerous regulations for anyone who wants to do business with bitcoin in New York. You know who’s exempt from his so-called “bitlicense”? Any entity with a NY banking license. If that’s not cronyinsm, what is? Money laundering is only for those who’ve been approved by the state, and it’s Ben Lawsky’s job to protect them.

    1. OpenThePodBayDoorsHAL

      I’m happy to praise the man for doing his job, gee, what a concept. But in the Bitcoin arena he is making sure Bitcoin will not happen in New York and not with New York residents. He went on Reddit to get some street cred with the Bitcoin community, then proposed a rules regime that is much stricter than any other form of money. The regime is not possible to comply with, and resembles FATCA for Bitcoin: a company in the EU selling a Bitcoin to a French citizen must report the name and physical address of that customer to New York.every quarter (if they also want to sell them to NY residents).
      Let’s contrast this with Korea, where the banks got together to fund Bitcoin startups and it is taxed and treated just like any other currency. So I guess America can buy the future of money from the Koreans, hey it worked for computers and cars and phones, no problem. Maybe people can all find jobs as policemen instead.

      1. mossmoon

        “Maybe people can all find jobs as policemen instead.”

        Exactly. Wait until bitcoin combines with Open Transactions and Ethereum. We ain’t seen nothin’ yet. It will be a new kind of commerce, completely voluntary, peer to peer, encrypted and well-enough outside of the reach of these dog-and-pony-show regulators.

        Lex mercatoria meets cryptography—he government will have no choice but to settle for their modest vig:

        1. Binky Bear

          Bitcoin was invented by NSA contractors for the sole purpose of making a trackable, followable unit of exchange that could be manufactured out of less than thin air, monitored, tracked and follo through the ecosystem. It is hard to believe that there are people who would think this was not the case.

  6. Jim Haygood

    Perfect example of how the ‘money laundering’ shakedown works:

    Allegations of conspiring to launder money were added Aug. 15 to July conspiracy and drug-trafficking charges [against FedEx]. The U.S. alleges that FedEx delivered drugs for online pharmacies supplying pills to customers who were never examined by doctors, while knowing the actions violated federal and state drug laws.

    “We will continue to defend against this attack on the integrity of FedEx,” Patrick Fitzgerald, FedEx senior vice president for marketing and communications, said in the statement. The company has said privacy rights of customers who ship 10 million packages a day are essential for its business.

    FedEx has said government officials have declined to provide a requested list of illegal online pharmacies so it can stop doing business with them.


    Privacy rights? That ain’t in the constitution! So you don’t have any.

    In 1986 when a law was passed against it, ‘money laundering’ meant running cash raised from drug sales through legitimate businesses to disguise its origin.

    After a quarter century of prosecutorial overreach, FedEx gets prosecuted simply for depositing ordinary credit card and check receivables for package shipments.

    As with the banks, the burden of policing falls on the package shipment companies, since the government won’t tell them whom to stop doing business with.

    Every one of us pays the cost of this extortion by thugs with badges. Meanwhile, USPS delivers for online pharmacies every day. Oops, here’s the mailman with my pills right now!

  7. bob

    Yanno, I gotta wonder why he’s getting such high marks from you. He’s declared himself head of everything money, and still lets New Yorkers be raped by health insurance monopolies. He’s in charge of them too. His King granted him a very wide fiefdom.

    Also, how about some public utility banking accountability? NY has some of the highest power costs in the US, and no public utility commission. (technically, yes they do, but they have to consider “investors” by statute)

    I think your opening nailed it- He’s not great, he’s just great in comparison to nothing. In the money laundering instance– Take ALL OF THE ILL GOTTEN GAINS, otherwise it’s just a cost of doing business, and will continue.

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