The controversial $340 million settlement between Standard Chartered Bank and the New York State Department of Financial Services should be a “wake-up call” for national and international financial institutions licensed to operate in New York, experts say.
Federal regulators and banking veterans reacted with surprise when DFS Supt. Benjamin M. Lawsky announced Aug. 14 that despite ongoing federal investigations, the 10-month-old department had unilaterally negotiated a settlement with Standard Chartered.
The London-based bank, according to the DFS complaint, “programmatically engaged in deceptive and fraudulent misconduct” as it moved at least $250 billion through its New York City branch for Iranian clients that were subject to U.S. economic sanctions.
Several financial and legal experts said the settlement could have a far-reaching effect on Hudson Valley institutions and Fairfield County, Conn.-based banks that operate in New York, perhaps causing them to bolster their compliance departments.
Matthew Carey, director of the Center for Financial Market Studies at Iona College in New Rochelle, called the settlement “an unprecedented situation in that it raises a whole new set of regulatory issues” for foreign banks and U.S. banks with branches in New York state.
While multinational financial institutions typically have entire divisions devoted to compliance, Carey said the settlement might prompt more companies to create new positions to navigate New York state”™s regulatory system.
“It”™s really a question of whether or not these other banks are going to go out and hire a new subset of the chief compliance officer to oversee these regulations, said Carey. “I think if you have a chance to appease the state regulator by creating that role and having an interface with them, then that”™s one step in the battle that these guys can take.”
Standard Chartered, a subsidiary of Standard Chartered PLC, also agreed to install a DFS monitor for at least two years and to permanently install personnel within its New York branch to oversee and audit any offshore activities undertaken by the bank.
In a statement released Aug. 6, Standard Chartered said it “strongly rejects the position or the portrayal of facts as set out in the order issued by the DFS,” and questioned why DFS was acting independently of the joint federal investigation.
As for the issue of whether Lawsky overstepped his authority, several legal and financial experts contend he did not, noting that multiple court rulings during Eliot Spitzer and Andrew Cuomo”™s respective tenures as New York attorney general supported the state”™s right to preempt a federal decision in similar cases.
Financial expert Neil Barofsky, who oversaw the U.S. Troubled Asset Relief Program (TARP) and who worked with Lawsky when the two were assistant U.S. attorneys in Manhattan, defended his former colleague in an interview with Bloomberg Businessweek.
“This is not Lawsky getting ahead of other regulators,” Barofsky told Businessweek. “This is Lawsky doing his job.”
DFS lacks the enforcement authority of the U.S. Justice Department, but it does wield a powerful weapon: Since the merger of the New York State Banking and Insurance departments last October, DFS is responsible for licensing financial institutions to operate in the nation”™s financial capital.
Standard Chartered has a small footprint in the U.S., with offices in New York, California, Florida and Texas. “But they have to operate in New York,” Carey said. “There are very few international financial centers ”¦ and if you lose your license to operate in New York that”™s a huge problem.”
The prospect of Standard Chartered losing its license would have meant “a material hit to their earnings,” Carey said.
In that respect, the $340 million fine “is not nearly what it could have been, so there seems to be a sense of relief in the markets from this,” Carey said.
At Iona, Carey manages the college”™s new real-time trading floor in addition to teaching courses.
His career spans more than 15 years in the securities and capital markets businesses, including a tenure with ABN Amro Bank at the time the Dutch bank was fined by the Justice Department for illegally helping clients from Iran, Cuba, Libya and Sudan move hundreds of millions of dollars through the U.S. financial system.
When the U.S. prohibited its banks from engaging with clients in the latter countries, foreign banks viewed the opening as a business opportunity, Carey said.
After the ABN Amro settlement, however, “the whole internal compliance environment became much more stringent,” he said.
