'Rogue regulator' steps up
New York's financial enforcer has accused UK bank Standard Chartered of laundering $250bn on behalf of Iran
BEN Lawsky, the New York state financial regulator, has accused UK bank Standard Chartered of laundering $250bn (€203bn) on behalf of Iran. Having been branded a "rogue regulator", he must now prove his case or see hopes of a future political career vanish.
On Monday Mr Lawsky came out all guns blazing when he accused Standard Chartered of "scheming" with the Iranian government to conceal "roughly 60,000 secret transactions, involving at least $250bn, and reaping SCB (Standard Chartered Bank) hundreds of millions of dollars in fees".
And that wasn't all. Mr Lawsky went on to allege that: "SCB's actions left the US financial system vulnerable to terrorists, weapons dealers, drug kingpins and corrupt regimes, and deprived law enforcement investigators of crucial information used to track all manner of criminal activity."
According to Mr Lawsky, Standard Chartered falsified business records, failed to maintain accurate books and records, obstructed government administration, failed to report misconduct in a timely manner and evaded federal sanctions against Iran.
In order to circumvent US sanctions against Iran, many banks, including Standard Chartered, used a loophole known as the "U-Turn". Basically this meant that so long as a financial transaction originated with a non-Iranian bank outside of Iran and only passed through the American financial system on its way to another non-Iranian bank, it was probably not illegal.
It was left to US-based banks to decide if such U-Turns were legal. However, even before they were eventually outlawed in 2008, the American authorities had been gradually cracking down on U-Turns.
This caused serious concern in Standard Chartered's New York arm with the chief executive of its American business warning head office in London as far back as 2006 of the risk the bank was running by facilitating U-Turns on behalf of Iranian clients.
"We believe [the Iranian U-Turn] needs urgent reviewing at the group level to evaluate if its returns and strategic benefits are . . . still commensurate with the potential to cause very serious or even catastrophic reputational damage to the group," he wrote.
Wise words indeed.
Unfortunately the reply which he received from London was less than encouraging:
"You f****** Americans. Who are you to tell us, the rest of the world, that we're not going to deal with the Iranians?"
Given the extent of the alleged wrongdoing by Standard Chartered, Mr Lawsky questioned "SCB's character, credibility and fitness as a financial institution licensed to conduct business under the laws of this state".
For a major international bank to lose its New York banking licence, effectively blocking it from conducting US dollar transactions, would be the equivalent of a death sentence.
Not surprisingly the Standard Chartered share price nosedived after Mr Lawsky made his accusations public, losing over 20pc of its value at one point. Investors are right to be worried, even if Standard Chartered retains its New York banking licence it will at the very least face a hefty fine and expensive law suits from irate investors.
Normally when a bank is discovered to have misbehaved, events follow a set pattern. Regulator(s) and bank agree a statement in which the bank consents to pay a big fine, apologises for its past transgressions and pledges to mend its ways in the future. A few middle-ranking bank executives will be offered up as scapegoats and everybody quickly gets back to business-as-usual.
That's not what happened this time. Instead of accepting Mr Lawsky's allegations, Standard Chartered countered that all but $14m of the transactions were legal at the time when they occurred. The bank also stated it had brought the transactions in question to the attention of its regulators.
As well as going toe-to-toe with Mr Lawsky in public, Standard also played dirty behind the scenes.
Well-sourced stories appeared in the financial media questioning why Mr Lawsky and his office were acting alone in making such serious allegations against the bank. This was in contrast to what happened with Barclays, when regulators on both sides of the Atlantic co-operated to punish the bank in the wake of the recent LIBOR-rigging scandal.
Mr Lawsky was described as a "rogue regulator" who had jumped the gun in making his accusation against Standard. There were also dark mutterings of a "conspiracy" against British banks by US regulators.
"I think it's a concerted effort that's been organised at the top of the US government. I think this is Washington trying to win a commercial battle to have trading from London shifted to New York," said Labour MP and Finance Committee member John Mann, who was merely expressing publicly what many more in London, both at Westminster and in the City, were saying privately.
Standard Chartered, most of whose operations are in Africa and the Far East, is generally considered to be the "poshest" of the quoted UK banks.
The bank emerged unscathed from the 2008 financial crisis during which the British government was forced to effectively nationalise RBS and engineer a shotgun marriage between Lloyds and the stricken HBOS.
Indeed Standard chief executive Peter Sands is credited with playing a central role both in devising and then persuading his fellow bankers to accept the British government's bank bailout package.
This means that Standard is not short of friends in high places. And not just in the UK. Both the Federal Reserve and the US Treasury were reputedly furious that Mr Lawsky jumped the gun when making his accusations against Standard. This has made Mr Lawsky, who became New York's first superintendent of financial services in November 2011, powerful enemies.
Not that this will faze Mr Lawsky. During his six years with the US Attorney's office for the Southern District of New York and four years as assistant to then New York attorney-general Andrew Cuomo, he acquired a reputation as a ferocious prosecutor.
Among those who were on the receiving end of his ferocity were former Bank of America chief executive Ken Lewis and former Merrill Lynch boss John Thain when Mr Lawsky was investigating bonuses paid to bank bosses in the aftermath of the 2008 financial crisis.
He also knows how to play rough, publishing full details of the bonus paid to the heads of those Wall Street firms who had received bailout funds from the US government.
Never slow to criticise what they considered to be government "interference", these financial titans deeply resented Mr Lawsky's move.
When Mr Cuomo became governor of New York at the beginning of 2011, he first appointed Mr Lawsky as chief of staff and later in the year to the newly formed Department of Financial Services.
In the United States, state-level financial regulators generally tend to play second fiddle to federal regulators. By going after such a big, well-connected beast as Standard Chartered, Mr Lawsky is clearly hoping to raise the profile and increase the influence of his office.
It is a risky strategy. Having made so many powerful enemies, he is facing an uphill battle with Standard. If he succeeds in humbling his adversary, then Mr Lawsky will be well on his way to becoming the leading regulator in New York, the world's leading on-shore financial centre.
However, if he fails then the prestige of his office will suffer severe, possibly irreparable, damage and Mr Lawsky's ambitions to perhaps one day succeed his mentor Mr Cuomo will come to naught.