Time to clean up the banking sector in London, New York style

by Atul Hatwal

Ben Lawsky. Remember that name. This week he changed how banks and financial institutions across the world will be regulated.

While the UK relies on esteemed commissions like Vickers or waits for its parliamentarians to stroll through detail of the the Libor scandal, the state of New York has re-defined how to regulate.

Lawsky runs the department for financial services.  If a financial institution wants to do business in New York, they need a licence from Lawsky.

This week the superintendent – for that is Lawsky’s title – humbled Britain’s mighty Standard Chartered Bank (SCB).

Eleven days ago he issued an order against SCB on its failure to stop money laundering for Iranian organisations. The order was scathing, stating Standard Chartered was “rogue” and was engaged in “dealings that indisputably helped sustain a global threat to peace and stability.”

The bank pushed back strongly, other regulators briefed financial journalists that Lawsky was over playing his hand and even the governor of the Bank of England Mervyn King weighed in, rebuking Lawsky for his precipitate action.

The clue as to what would happen next was in Mervyn King’s intervention. Given his track record on effective banking sector regulation, there was only going to be one outcome.

Earlier this week Standard Chartered settled to the tune of $340m.

It is an enormous win for Lawsky and re-writes the rules for financial regulation in a way that will have major political ramifications in the UK.

Two key tenets of the way financial investigations have traditionally been conducted have been over-turned.

First, there’s the idea that all the regulators need to act in concert if they are to be effective.

Given the complex nature of financial services regulation there are normally a gaggle of overlapping regulators involved in most investigations.

In the case of Standard Chartered there were five – the US Treasury Department, the Federal Reserve, the US Department of Justice, the Manhattan District Attorney’s Office as well as the New York department of financial services.

Lawsky’s actions have shown that the need for unanimity is a myth.

Despite being, in some respects, the weakest of the regulators, the potential disruption to SCB’s business that could be caused by even the New York department of financial services, meant the bank was desperate for a quick settlement.

Second is the convention that the detail of what regulators are investigating remains confidential.

In this country, the FSA took over a year to release the full report into the failings at RBS in 2008 which nearly brought down British capitalism, on the grounds that RBS had not given its consent. Only an unprecedented public outcry forced the final publication.

In contrast, Lawsky put key facts in the public domain at the first possible opportunity. He used his order against SCB to release evidence such as the now infamous quote from a Standard Chartered executive: “You fucking Americans. Who are you to tell us, the rest of the world, that we’re not going to deal with Iranians?”

Lawsky used the court of public opinion to recast the terms his battle with Standard Chartered.

The bank’s initial robust rebuttal was that 99.9% of the $250bn of transactions under scrutiny were clean. The 0.1% which were bad constituted mere buttons. It was a persuasive argument for the vast majority financial professionals and other regulators.

But, for the public there was a different conclusion.

For the average man or woman on the street, the bank’s admission that it had laundered $14m of funds that had gone to finance illegal activities, potentially terrorism targeting US troops, was devastating. In a town that went through 9/11, there was no coming back from this position.

In Britain, the story has so far remained on the business pages, but it will soon make the transition into the political debate.

For political parties struggling to formulate an effective policy on city regulation that goes beyond a vague moral exhortation for bankers to be more principled, Lawsky and the department of financial services offers a new model.

For the Tories, it’s difficult to capitalise. The fleet footed responses of Cameron in opposition that saw him manoeuvre out of trouble and into the right position on issues such as expenses and the global crash are long gone.

The inertia of government, the tutting solemnities of Mervyn King and the shaking heads of millionaire banker donors mean the Conservatives will ultimately hew to the status quo.

For Labour, and indeed the Liberals, the opening is clear. A simple question:  If New York has a sheriff cleaning up Dodge, where is London’s?

The city was still reeling from the catastrophe of the crash when the scandal over Libor broke, then came news that HSBC was working for drug cartels in Mexico and now Standard Chartered has admitted it was aiding and abetting the Iranians.

If ever the Augean stables needed cleaning, now is the time.

The political opportunity is tantalising. Forcing the Tories to side with the bankers and a failed regulatory regime while Labour proposes the financial services equivalent of Elliot Ness would draw a powerful dividing line.

As Labour’s rolling policy review lumbers on, somewhere in between the meetings, seminars and debates, someone in the party should find the time to ring New York.

Perhaps the most incisive comment on Lawsky’s effectiveness came from Senator Carl Levin, head of the investigative panel into money laundering at HSBC.

Reacting to news of the Standard Chartered settlement, he said it, “showed that holding a bank accountable for past misconduct doesn’t need to take years of negotiation over the size of the penalty; it simply requires a regulator with backbone to act.”

Sounds so simple. Perhaps, because it is.

Atul Hatwal is editor at Uncut


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4 Responses to “Time to clean up the banking sector in London, New York style”

  1. Excellent piece. Just one comment: re the modest-sounding $14m of non-compliant trades mentioned, as part of the settlement, SCB admitted that the real figure was as the NY regulators asserted, $250bn dollars.

    In other words, SCB underestimated their non-compliant exposure by a factor of approximately 20,000. Some “mistake”.

    More in an update to my original Uncut piece here.

  2. Have a look at the Second Reading debate on the Financial Services Bill currently before Parliament: http://www.publications.parliament.uk/pa/cm201212/cmhansrd/cm120206/debtext/120206-0002.htm#12020616000001
    See who you think is sticking up for a “failed regulatory regime”, and who is proposing the Eliot Ness-style new broom.

  3. Atul Hatwal says:

    Cheers Rob – $250bn indeed!

    Mark – Take the point on ludicrous defence of the tri-partite system, though this doesn’t change the opportunity Lab has, just highlights Balls needs to stop fighting yesterday’s battles. Concede and move on as the phrase goes. The FCA could be the right organisation to put a bit of stick about but Martin Wheatley does not strike me as Eliot Ness, more another member of the financial regulatory establishment. The organisation without the leader is nothing.

  4. This is not a regulator with a backbone. This is a lone rouge regulator out to make a name for themselves. In the process annoying and fustrating the actions of all the other regulators. Ben Lawsky is a new regulator (less than a year into his new job in a new state agency) and saw an easy way to make his mark.

    All he had to do was aledge that the bank did something dodgy. The bank either has to let the law take it’s long course with a huge hit to the bank’s repuation all the while or broker an agreement to pay the fine (without admitting guilt) and get it over and done with. Either way the regulator wins.

    And whilst the bank did allow $14m to pass through it’s system it wasn’t so much as laundering as not ticking the right boxes. More a technical breech of a law that was in the process of changing.

    You have to understand that to have a US banking license S&C have to put any dollar transactions anywhere in the world through a US branch. That brings it into the remit of the US government so that they can check all transactions for terrorist related items. So it’s more like asking any airline who happens to use a US airport to produce passenger lists for every single one of their flights anywhere in the world, even if the flight is no where near the US.

    But like all security, it’s all theatre. If a rouge country really wanted to avoid the US’ inspections all it has to do is do some foreign currency transactions which aren’t covered by the laws that hit S&C.

    That $14m is only money that didn’t get properly inspected. It was not terrorist money and has nto been proved to be. It could easily have been money for equipment for a new factory producing pistachios.

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