Standard Chartered Makes Empty Threat to Sue New York Regulator Over Iran Money Laundering

I have to confess I’m really enjoying the dust up between the New York Superintendent of Financial Services, Benjamin Lawsky, and his opponents, namely, his target, Standard Chartered, and the flummoxed Federal regulators that he is showing up as so deeply captured that they genuinely can’t tell regulatory theater from the real thing.

The amount of consternation directed at Lawsky is telling. It’s as if he brought a heavily tattooed and body pierced trannie to a country club. He’s flouted the rules in a way that offends his detractors deeply, and yet he also can’t be brought to heel. The complaints in the media are a sign of powerlessness. As long as Lawsky has Governor Cuomo’s backing, the Feds and the unhappy Brits can’t get at him.

The lead story in the Financial Times on SCB is so obviously barmy that I’m astonished that the pink paper would give it prominent play. The headline: StanChart seeks advice over countersuit. Even floating this as an course of action reeks either of desperation to create positive news hooks or delusion:

The bank’s legal advisers believe “there is a case” for claiming reputational damage, according to two people close to the situation, although StanChart is conscious of the delicacy of taking an aggressive stance towards its regulators.

The whole “delicacy” part is code for this having odds of close to zero of happening, so this looks like yet more spin.

The damage was done by the threat to yank the license and access to dollar clearing services, not the “rogue institution” label in the order. And as we’ve written in earlier posts, despite the spinmeister’s efforts to contend otherwise, Lawsky has cited violations of New York law that appear to let him get there, in addition to the charge under the Federal laws on transfers to Iran.

And this sort of suit would put any other damaging evidence that Lawsky has in the public domain for the media to pour over it.

In addition, any suit against Lawsky would be a state law matter, and my sources thought it would be subject to the abuse of discretion standard, which is a very high bar. One reaction via e-mail: “No chance they risk their ticket on a NY state court finding that Lawsky abused his discretion. None. Zero.”

The astonishing thing is that SCB genuinely seems to not understand that the way its legal and compliance department operated are just damning. Frank Partnoy, former derivatives salesman, now law professor, provides a good discussion in an FT comment today (emphasis ours):

Indeed, the order puts the bank’s senior attorneys and compliance officers at the heart of the wire stripping scheme, even when outside counsel advised otherwise. As early as 1995, soon after President Bill Clinton announced economic sanctions against Iran, the bank’s general counsel allegedly “embraced a framework for regulatory evasion”. He allegedly strategised about how to avoid scrutiny by the US Office of Foreign Assets Control, known as OFAC, and instructed employees that a memorandum describing the plan to avoid regulatory compliance was “highly confidential & MUST NOT be sent to the US”….

As recent debacles at Barclays, HSBC and now Standard Chartered demonstrate, employees of big global banks increasingly lack a moral compass. Some general counsels and compliance officers do provide ethical guidance. But many are facilitators or loophole instructors, there to show employees the best way to avoid the law. Not even mafia lawyers go that far; unlike many bankers, mobsters understand the value of an impartial consigliere who will tell them when to stop.

Bear in mind that Lawksy set a hearing date of next Wednesday. An informed source wrote:

No way there is even a hearing next week. They’ll settle and each side will spin the settlement is my guess. But no way do they risk a hearing.

Or put it another way: if there is a hearing, this is a sign of a complete breakdown in negotiations, a belief of at least one side that they can’t negotiate in good faith. And it might also be a sign that SCB can’t get its mind around how the facts simply aren’t on its side. But either way, this refusal by Lawsky to act like a proper regulatory lapdog is exposing all sorts of fault lines, which should prove salutary in the long run.

This post originally appeared at naked capitalism and is posted with permission.

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