No wonder the US Regulators don't trust our banks

There has been a lot of wailing and gnashing of teeth on the part of UK commentators over the actions of Ben Lawsky, the Superintendant of the New York Department of Financial Services, and the way he has dealt with Standard Chartered Bank. (SCB)

However, an article in the Huffington Post of 20th August reveals that Lawsky has made more friends than enemies by his actions.

"...Banks are upset with Lawsky because he's clearly put down a marker that he's going to be an aggressive regulator who defends the interests of New York state in a manner that goes beyond the enablement of the federal regulators in recent years," said Neil Barofsky, former inspector general of the federal Troubled Asset Relief Program that followed 2007's market collapse..."

As the recent settlement in the SCB case has demonstrated, it is the vital element of 'trust' in international banking that has been dangerously eroded. As a result the New York Department of Financial Services has insisted on its own officers being 'embedded' at SCB for the next two years to report back to the regulator on the level of compliance being maintained within the bank.

Such a requirement is a humiliating riposte to SCB because it demonstrates only too clearly that the NYDFS does not believe their word and doesn't trust them to maintain a compliance profile which the regulator can rely on.

When a regulator states publicly that it cannot trust the word of one of its regulated members, then we have reached a nadir in banking relationships, because once trust has gone, then the institution is no more than an empty shell.

On July 4th 2012, Lord (Adair) Turner, chairman of the FSA, gave a clear and blunt message to the banks in a speech entitled ‘Banking at the Crossroads: Where do we go from here?’

He made significant reference to ‘banksters’ and said that when banking is riddled with malpractice, its “credibility shot”,  and trust evaporated, they have a major problem. Their excesses and failures are issues to which competitors of the UK banking sector abroad are only too happy to draw attention.

Maintaining the vital element of 'trust' is the crucial component of all banking systems. If 'Trust' is eroded, then not only will the public be less likely to want to use the services on offer, but global regulators will start to question the integrity of the institution, and may impose higher standards or greater controls, and in the most egregious cases, remove the vital banking licence completely.

Since 9-11, the 'trust' component in global banking has gone through a paradigm shift in focus. In these days of increasing vulnerability from terrorist and criminal intervention, it is now necessary to be able to be assured of the regulatory integrity of the financial institution which seeks to do correspondent business with you. Hence the problems faced by Standard Chartered Bank. They had already given prior undertakings to the NYDFS to conform and comply with compliance requirements. They failed to perform this agreement properly and as part of their regulatory settlement, they were required to accept NYDFS officers being embedded into their organisation for up to two years, to make sure that they fulfil all relevant compliance provisions, and to agree to permanently imposed oversight officers who will report back to NYDFS. They are paying the price of not being believed or trusted by the New York regulator and it must be hugely humiliating for the bank!

This humiliation could have been easily avoided if SCB had taken their regulatory responsibilities more seriously. It is not as if they could have been unaware of the attitude of the British lead regulator towards the paucity of banking standards of compliance, and particularly within correspondent banking relationships.

In 2011, the British lead regulator, the Financial Services Authority, had published a very hard-hitting report entitled  '...Banks’ management of high money-laundering risk situations - How banks deal with high-risk customers (including politically exposed persons), correspondent banking relationships and wire transfers...' In the document, which did not receive anything like to publicity it deserved, the FSA identified a series of risk elements which British-regulated banks seemed unwilling to remedy or rectify. These activities are key to these banks being acceptable to the US market, and their failure to demonstrate any willingness to take the necessary steps to alleviate  such risks, place the individual banks in direct conflict with the demands of global regulators, and in particular, the demands of the US vis-a-vis correspondent banking relationships.

The FSA report demonstrated most clearly how British-regulated banks were willing to ignore and flout US requirements for gaining access to the US dollar-clearing system, and posed a major area of conflict for British banking institutions with their US counterparts in the future.

Among the findings were;

·        Some banks appeared unwilling to turn away, or exit, very profitable business relationships even when there appeared to be an unacceptable risk of handling the proceeds of crime. Around a third of banks, including the private banking arms of some major banking groups, appeared willing to accept very high levels of money-laundering risk if the immediate reputational and regulatory risk was acceptable.

·        Over half the banks failed to apply meaningful enhanced due diligence (EDD) measures in higher risk situations and therefore failed to identify or record adverse information about the customer or the customer’s beneficial owner. Around a third of them dismissed serious allegations about their customers without adequate review.

·        More than a third of banks visited failed to put in place effective measures to identify customers as PEPs. Some banks exclusively relied on commercial PEPs databases, even when there were doubts about their effectiveness or coverage.

·        Some small banks unrealistically claimed their relationship managers (RMs) or overseas offices knew all PEPs in the countries they dealt with. And, in some cases, banks failed to identify customers as PEPs even when it was obvious from the information they held that individuals were holding or had held senior public positions.

·        Three quarters of the banks in our sample failed to take adequate measures to establish the legitimacy of the source of wealth and source of funds to be used in the business relationship. This was of concern in particular where the bank was aware of significant adverse information about the customer’s or beneficial owner’s integrity.

·        Some banks’ AML risk-assessment frameworks were not robust. For example,  we found evidence of risk matrices allocating inappropriate low-risk scores to high-risk jurisdictions where the bank maintained significant business relationships. This could have led to them not having to apply EDD and monitoring measures.

·        Some banks had inadequate safeguards in place to mitigate RMs’ conflicts of interest. At more than a quarter of banks visited, RMs appeared to be too close to the customer to take an objective view of the business relationship and many were primarily rewarded on the basis of profit and new business, regardless of their AML performance.

·        At a third of banks visited, the management of customer due diligence records was inadequate and some banks were unable to give us an overview of their high-risk or PEP relationships easily. This seriously impeded these banks’ ability to assess money laundering risk on a continuing basis. Banks’ management of high money laundering risk situations How banks deal with high-risk customers (including PEPs), correspondent banking relationships and wire transfers.

·        Nearly half the banks in our sample failed to review high-risk or PEP relationships regularly. Relevant review forms often contained recycled information year after year, indicating that these banks may not have been taking their obligation to conduct enhanced monitoring of PEP relationships seriously enough.

·        At a few banks, the general AML culture was a concern, with senior management and/or compliance challenging us about the whole point of the AML regime or the need to identify PEPs.

·        Some banks conducted good quality AML due diligence and monitoring of relationships, while others, particularly some smaller banks, conducted little and, in some cases, none. In several smaller banks, a tick-box approach to AML due diligence was noted. Many (especially smaller) banks’ due diligence procedures resembled a ‘paper gathering’ exercise with no obvious assessment of the information collected; there was also over-reliance on the Wolfsberg Group AML Questionnaire which gives only simple yes or no answers to basic AML questions without making use of the Wolfsberg Principles on correspondent banking. And when reviews of correspondent relationships were conducted, they were often clearly copied and pasted year after year with no apparent challenge.

·        Some banks did not carry out due diligence on their parent banks or banks in the same group, even when they were located in a higher risk jurisdiction or there were other factors which increased the risk of money laundering.

·        A more risk-based approach is required where PEPs own, direct or control respondent banks. We found there was a risk that some banks’ respondents could be influenced by allegedly corrupt PEPs, increasing the risk of these banks being used as vehicles for corruption and/or money laundering.

·        Transaction monitoring of correspondent relationships is a challenge for banks due to often erratic, yet legitimate, flows of funds. Banks ultimately need to rely on the explanations of unusual transactions given by respondents and this can be difficult to corroborate. However, there were some occasions where we felt banks did not take adequate steps to verify such explanations.

·        We found little evidence of assessment by internal audit of the money-laundering risk in correspondent banking relationships; this is unsatisfactory given the high money-laundering risk which is agreed internationally to be inherent in correspondent banking.

In light of the recent Standard Chartered Bank findings, and in particular their willingness to flout US regulatory requirements with reference to doing business with Iran, it is extremely doubtful whether SCB was an individual rogue element within the British banking environment. A much more likely interpretation is that such conduct was endemic among many banks. When viewed in context with the other recent findings against Barclays Bank and HSBC, it is obvious that there is a wholesale refusal to provide good compliance with US requirements.

Every single one of these FSA findings would bring British-regulated banks directly into conflict in a number of vital ways with the requirements of the US Patriot Act 2001, and in particular;

Section 311:    Special Measures for Jurisdictions, Financial Institutions, or International Transactions of Primary Money Laundering Concern

This Section allows for identifying customers using correspondent accounts, including obtaining information comparable to information obtained on domestic customers and prohibiting or imposing conditions on the opening or maintaining in the U.S. of correspondent or payable-through accounts for a foreign banking institution.

Section 312:    Special Due Diligence for Correspondent Accounts and Private Banking Accounts

This Section amends the Bank Secrecy Act by imposing due diligence & enhanced due diligence requirements on U.S. financial institutions that maintain correspondent accounts for foreign financial institutions or private banking accounts for non-U.S. persons.

Section 313:    Prohibition on U.S. Correspondent Accounts with Foreign Shell Banks

To prevent foreign shell banks, which are generally not subject to regulation and considered to present an unreasonable risk of involvement in money laundering or terrorist financing, from having access to the U.S. financial system. Banks and broker-dealers are prohibited from having correspondent accounts for any foreign bank that does not have a physical presence in any country. Additionally, they are required to take reasonable steps to ensure their correspondent accounts are not used to indirectly provide correspondent services to such banks.

Section 314:    Cooperative Efforts to Deter Money Laundering

Section 314 helps law enforcement identify, disrupt, and prevent terrorist acts and money laundering activities by encouraging further cooperation among law enforcement, regulators, and financial institutions to share information regarding those suspected of being involved in terrorism or money laundering.

Section 319(b):    Bank Records Related to Anti-Money Laundering Programs

To facilitate the government's ability to seize illicit funds of individuals and entities located in foreign countries by authorizing the Attorney General or the Secretary of the Treasury to issue a summons or subpoena to any foreign bank that maintains a correspondent account in the U.S. for records related to such accounts, including records outside the U.S. relating to the deposit of funds into the foreign bank. This Section also requires U.S. banks to maintain records identifying an agent for service of legal process for its correspondent accounts.

Section 325:    Concentration Accounts at Financial Institutions

Allows the Secretary of the Treasury to issue regulations governing maintenance of concentration accounts by financial institutions to ensure such accounts are not used to obscure the identity of the customer who is the direct or beneficial owner of the funds being moved through the account.

Section 326:    Verification of Identification

Prescribes regulations establishing minimum standards for financial institutions and their customers regarding the identity of a customer that shall apply with the opening of an account at the financial institution.

America has already demonstrated her willingness to use her powers under Section 311 of the Patriot Act to deny dollar-clearing facilities to foreign banks which contravene US requirements. Eighteen foreign banking institutions have already been subject to US intervention. What these actions demonstrate is an overriding need for a method of enabling a new form of compliance identification.

At present, every foreign bank which seeks to enter into a correspondent relationship with a US-based bank for the purposes of clearing US dollar transactions is required to self-certify their processes and procedures as providing compliance with US requirements.

The counterparty's acceptance of such self-certification is entirely dependent upon the honesty and the integrity of the bank providing the information, but in reality, there is very little if any independent corroborative proof that the information provided is indeed accurate or true. In the light of the FSA report, it should be doubted that much of the information is really accurate.

No wonder the US regulators don't trust our banks!

Treasury Select Committee Report on LIBOR scandal - Telling us what we already knew!

The report issued by the Treasury Select Committee entitled '... Fixing LIBOR: some preliminary findings...' contains very little that those of us who have long been concerned about the criminal state of the British banking sector did not already know.

One of the key findings of the report deals with the relationship between the various regulatory agencies of the State, and the way in which they dealt with the emergence of incriminating details about the LIBOR affair.

What this report demonstrates so clearly is the lack of willingness for the FSA to adopt its powers to prosecute financial crime, and the very narrow interpretation they placed upon their function. This reflects earlier findings concerning the attitude of the regulator towards its prosecutorial role uncovered in its earlier days.

The FSA does not emerge well from this report, indeed one of the early findings by the Committee demonstrates how slow they were to react to evidence of wrongdoing.

'...The Committee is concerned that the FSA was two years behind the US regulatory authorities in initiating its formal LIBOR investigations and that this delay has contributed to the perceived weakness of London in regulating financial markets...'

This failure to respond effectively to the early information about Barclays is reflected upon critically by the Committee, as it identifies the likelihood that this evidence may have led to evidence of other wrongdoing elsewhere in the wider market.

'...Barclays may well not be alone. Nor is it likely to be a London-based phenomenon. The FSA is continuing to investigate the conduct of seven other banks in relation to LIBOR— some of them non-UK based banks. The FSA’s regulatory counterparts in several other countries are also conducting their own investigations. Barclays is just one of many international banks under investigation for possible market manipulation. It is important that Barclays’ serious shortcomings should not be seen in isolation from the possible actions of other banks and we await the results of ongoing investigations...'

This is a classic scenario which identifies the sheer amateurism of most British regulatory actions. It is manifested by the failure to be able to read the signs of crime and appreciate the fuller ramifications of their implications. Thus it is that the regulators tend to focus on simply that evidence which is immediately in front of them, and without seeking to extrapolate from the initial facts what else might be happening in the wider market context.

The Committee do not lay the blame entirely on the shoulders of the FSA, they also contribute serious criticism on the actions of Barclays and their Compliance function.

'...It is important to state that Barclays’ internal compliance department was told three times about concerns over LIBOR fixing during the period under consideration and it appears that these warnings were not passed to senior management within the bank. Statements that everything possible was done after the information came to light must be considered against a background of serious failures of the compliance function within the bank.  In other words, the senior management should have known earlier and acted earlier...'

This is a damning indictment of the compliance function within Barclays, but it comes as no surprise to anyone who has any experience of this criminal enterprise. Compliance Officers were not encouraged to develop pro-active lines of disclosure, nor were they encouraged to think out of the box. They were largely an army of box tickers, but it is even more concerning to note that there did not appear to be any form of channel of communication to esxcalate these concerns.

Every compliance and money laundering 'best practice' manual will talk glibly of the need for a direct channel of communication between the head of compliance and the Chief Executive. They talk of the need for unfettered communication in a discreet and secure manner. How was it therefore that the news of these criminal manipulations were not brought to Bob Diamond's attention at the earliest possible opportunity. What was standing in the way of the desired state of direct communication?

Clearly, there was a culture inside Barclays of 'No bad news please', or 'No surprises'. The compliance department clearly knew what every compliance officer who stays in post for more than a few months knows, they knew what questions to ask and what questions not to ask, and when to go deaf, dumb and blind!

A major part of the report deals with the FSA's failings to take strong executive action when financial criminality is discovered. It is as if the FSA has taken a deliberately blinkered view of their powers and has refused to look beyond and outside their most immediate remit. This is very disappointing because it has been hoped that the FSA would begin to take a more robust approach towards its powers to prosecute financial crime, after the introduction of the FSMA in 2000.

This is an issue which has been a critical element of the longer-term failures of the FSA to bring a robust approach to the regulation of the UK financial market. Ultimately, it is prosecution for crime which the financial practitioner truly fears, but if the market knows that the regulator is deliberately avoiding adopting its prosecutorial role, then this will lead to a realisation that the regulator has no real teeth!

This was one of the major problems about the predecessor of the FSA, the Securities and Investments Board, who absolutely refused to contemplate prosecuting any financial practitioner for crime.

In 1999, I was invited to conduct a review of financial services regulation for the UK Treasury. Among other people I interviewed was a senior staffer from the SIB who would be moving into the new FSA. I asked him about the powers to prosecute possessed by the new regulatory agency.

'... the official concerned was more forthcoming. He agreed that the FSA would become responsible for a far greater degree of responsibility for prosecution in a number of areas, including money laundering issues, but felt that this predicated the need for a further regulatory interface. He said;

“…There is an anxiety about the new criminal functions which we are being tasked to accept…various elements such as insider dealing, market manipulation, etc, all tend to colour our internal philosophy towards the question of conducting prosecutions…you really should understand, because of the difficulties associated with obtaining convictions in the criminal courts, there is no unswerving acceptance of the need for wholesale prosecution powers…”

This answer was given in such an open way, in contrast to so many other answers which he gave, that he was invited to state why he was so sure that this was the case. His answer was studiously revealing, and must be considered to contain a huge degree of truth. He said;

“…Because, frankly, Howard Davies has no intention of ending up with the sort of reputation which so bedevilled the SFO in its early days. He refuses to be tarred with the same brush as Barbara Mills or George Staple…”

The Treasury Select Committee has clearly identified that this mentality still exists within the regulatory environment. They state;

'...The FSA apparently believes that its fees are not raised for the purpose of prosecuting offences other than those set out in FSMA. The Committee is concerned by this. The FSA has responsibility for regulating the key participants in financial markets. The FSA’s decision whether to initiate a criminal prosecution should not be influenced by the fact that its income is derived from firms which it regulates. The FSA has an obligation under section 2(1)(b) of FSMA to discharge its functions in the way in which it considers most appropriate for the purpose of meeting its regulatory objectives.

Under section 2(2)(d) the reduction of financial crime  is one of these objectives. Financial crime is defined in section 6(3) as including not only misconduct in relation to a financial market but also any criminal offence of fraud or dishonesty. The FSA took a narrow view of its power to initiate criminal proceedings for fraudulent conduct in this case. The Committee recommends that the Government, following the Wheatley review, should consider clarifying the scope of the FSA’s, and its successors’, power to initiate criminal proceedings where there is serious fraudulent conduct in the context of the financial markets.

That this state of affairs still exists after all these years is a matter of deep concern and the Committee rightly urges direct reforms of this state of affairs.

'...The Committee urges the Wheatley review to consider the case for amending the present law by widening the meaning of market abuse to include the manipulation, or attempted manipulation, of the LIBOR rate and other survey rates. They should also consider the case for widening the definition of the criminal offence in section 397 of FSMA to include a course of conduct which involves the intention or reckless manipulation of LIBOR and other survey rates...'

Again, the Committee saw fit to criticise the length of time taken by the SFO to open an investigation and demands that a new relationship be forged between the two agencies. There is no reason why that FSA and the SFO could not and should not operate in tandem when conducting investigations, so that if, as it seems, the FSA is unhappy to mount prosecutions, then the SFO can adopt this mantle.

'...The Serious Fraud Office (SFO) is now conducting a criminal investigation into LIBOR. The Committee was surprised that neither the FSA nor the SFO saw fit to initiate a criminal investigation until after the FSA had imposed a financial penalty on Barclays.

The evidence in this case suggests that a formal and comprehensive framework needs to be put in place by the two authorities to ensure effective relations in the investigation of serious fraud in financial markets. The lead authority must be clearly identified for the purposes  of an investigation, and formal minutes of meetings between the authorities must be maintained. We recommend that the Wheatley review examine whether there is a legislative gap between the responsibility of the FSA and the SFO to initiate a criminal investigation in a case of serious fraud committed in relation to the financial markets...'

Quite rightly, the Committee's report makes reference to the issue of public anger against that banks in the UK. They are right so to do. The British public is sick and tired of watching their financial affairs being raped and pillaged by the criminal banking sector. They have lost any sense of trust in the banking sector, trust which is vital for the effective running of the market. A report today by Currencies.co.uk discloses that 62% of British citizens have lost trust in the banks. The Committee knows that this state of affairs is very dangerous for uk plc, and they call for some focused thinking on behalf of the banking sector.

'...The findings have focussed pre-existing public anger with banks. Barclays is one of many instititutions that have contributed to the state of banking’s reputation. LIBOR has followed the vast public bailouts of banks during the financial crisis, the liquidity support and guarantees given  to all banks and the apparent lack of penalties for those who contributed to that crisis, most of whom retained very high levels of remuneration even after 2008. More recently there has been the scandal of payment protection insurance (PPI) mis-selling, criticism of banks’ perceived reluctance to lend, complaints about the sale of unsuitable and complex interest rate swap  products to businesses (which are under investigation by the FSA), and serious IT failures at RBS Group. The economy needs well functioning banks. They will have a crucial role in any economic recovery through their lending to businesses and households. An end to crude ‘banker bashing’ would be highly desirable, but bankers must recognise that they have brought much of this upon themselves through actions which have seriously damaged public confidence.  While banks continue to provide evidence that wrongdoing persists the popular mood is likely to remain hostile...'

For myself, I believe that the issue has gone too far, and the genie is out of the bottle. The only way these organised criminal enterprises can be dismantled is for a root and branch reform of the banking sector, breaking up the big conglomerates, jailing a lot of 'too big to jail' bankers, and reintroducing an environment where banks become the servants of the community and the economy, and not high-rollers in the most unregulated casino on the planet.

When you do business in New York, play by their rules. The message Standard Chartered failed to learn!

There has been a long and dishonourable tradition in this country that every time a financial sector player engages in one of those periodic episodes of gross criminality which so identify the City of London, there is always someone from Parliament or the financial establishment to step forward and demand a cessation of public comment for fear of damaging the 'good name of the City of London'!

The Standard Chartered affair has been no different.

The Sunday Times of 12th August in an article entitled 'America Attacks', quotes a series of anonymous shareholders in Standard Chartered indulging in an excess of outrage against the actions of Ben Lawsky, the Superintendent of the New York Department of Financial Services.

The financial establishment, or so we are told, has 'rallied behind Standard Chartered...' Mark Hoban the City Minister has reportedly been '...bombarded with phone calls from the British business community...' George Osborne, we are reliably informed, '...has been forced to intervene, holding three calls with Tim Geithner, the US Treasury Secretary to complain about Lawsky's actions...'

John Mann MP has even called for a formal inquiry based in the UK that would be “unbiased and fair” in the aftermath of US allegations against Standard Chartered.  

'...We don't want to whitewash any potential problems with UK banks but money laundering is not a British problem..,” said Mr Mann.

In a superb exhibition of downright ignorance in which he proves that he knows nothing about the laws he helps to oversee and was probably instrumental in introducing, Mann feels able to make statements of such crass stupidity.

What does he think he means when he says '...money laundering is not a British problem...' Wake up man and smell the coffee! You are clearly unaware that London is the money laundering capital of the world! He then goes on to prove even more ignorance, by saying;

'...American banks are doing the same and worse and there are numerous US banks involved in drugs cases in US courts...'

Oh, that's alright then, so that makes it all ok, right ? He still sticks to the drug nexus for money laundering. He clearly hasn't heard that it involves the proceeds of all crimes, including LIBOR manipulation, and sanctions busting!

He then proceeds to drift off into a conspiracist fantasy land which involves the perfidious Yanks trying to snatch back financial market share! He says;

'...So, what we have here is a clear political agenda that has merged with a domestic American agenda to shift financial markets from London to New York...'

Boris Johnson, the mayor of London, another man who is not unnecessarily overburdened with concern for the use of hard facts, also warned that regulation in New York should not become '...a self-interested attack on London's status as the pre-eminent financial centre...'

Mr Mann ends by making a statement which is really very sensible, except he did not mean his words to contain the logic that they do. He said the UK Government needed to '...respond” to the growing international problem of money laundering by taking the lead internationally and investigating the problem with a balanced political view...'

Now wouldn't that be a good thing? Except that the British Government has absolutely no intention of doing any such thing, because it would mean washing our dirty linen in public for all the rest of the world to see!

You would think that a British Parliamentarian on a Treasury Select Committee might be a bit more clued up about the issues, but why expect something that has never been a leitmotif of such committees in the past?

So, let us just review what it is these rent-a-quote apologists think they are protecting.

A global bank which has been under investigation for funny money dealing for a number of years.

Page 1 of the NYDFS report states openly;

'...The Department's initial focus is on SCB's apparent systematic misconduct on behalf of Iranian Clients.  However, the Department's review has uncovered evidence with respect to what are apparently similar SCB schemes to conduct business with other U.S. sanctioned countries, such as Libya, Myanmar and Sudan.  Investigation of these additional matters is ongoing...'

Much of the uninformed public commentary which seeks to mitigate the SCB activities, purports to suggest that SCB was engaged in legitimate transactions with Iran, recognised by the Americans and referred to as 'U Turn' transactions.

The New York Report is quite clear why they state that SCB have behaved dishonestly and deceptively over this facility.

'... For nearly a decade, SCB programmatically engaged in deceptive and fraudulent misconduct in order to  move  at least $250 billion  through  its New York branch  on behalf of client  Iranian  financial institutions (“Iranian Clients”) that were  subject to U.S. economic sanctions, and then covered up its transgressions...' 

The New York finding demonstrates that SCB did not provide the truthful and correct information to US authorities, information which was required to prove the legitimacy of the transaction and this obtain the benefit of the 'U Turn' exemption.

'... From January 2001 through 2007, SCB conspired with its Iranian Clients to route nearly  60,000  different  U.S. dollar  payments through  SCB's New York branch after first stripping information  from wire transfer messages  used to identify  sanctioned  countries, individuals and entities (“wire stripping”).

Specifically, SCB ensured the anonymity of Iranian U.S. dollar clearing activities through SCB's New York branch  by falsifying SWIFT wire payment directions. When SCB  employees determined that it was necessary to “repair” unadulterated payment directives, they did so by stripping the message of unwanted data, replacing it with false entries or by returning the payment message  to  the  Iranian Client  for  wire stripping and resubmission.   Thus, SCB developed various ploys that were all designed to generate a new payment message for the New York branch that was devoid of any reference to Iranian Clients...'

What is clear is that the NYDFS have found that SCB provided false and misleading information to the US Authorities. Later in the report it becomes clear that SCB conspired with Deloitte and Touche to continue to mislead the US Authorities.

'... By 2003, New York regulators had discovered  other  significant BSA/AML violations at  SCB's New York branch, including  deficiencies in  its suspicious activity monitoring and customer due diligence policies and procedures.   In  October 2004, SCB consented to a formal enforcement action and executed a written agreement with the Department and FRBNY, which required SCB to adopt sound BSA/AML practices with respect to foreign bank correspondent accounts (the “Written Agreement”).  The Written Agreement also required SCB to hire an independent consultant to conduct a retrospective transaction review  for the period of July 2002 through October 2004.  The review was intended to identify  suspicious activity involving accounts or transactions at, by, or through SCB‟s New York branch. 

Besides imposing  specific  operational  reforms, the Written Agreement  created negative “implications for [SCB's] growth ambition and strategic  freedom that [went] way beyond just the US.”  In consequence, SCB had every incentive “to exit the Written Agreement in a timely fashion.”  It stood as a significant obstacle to SCB's growth and evolving business strategies.

SCB vowed to the regulators that it would comply with the Written Agreement.  To that end, SCB retained D&T to conduct the required independent review and to report its findings to the regulators.  In August and September 2005, D&T unlawfully gave SCB confidential historical transaction review reports that it had prepared for two other major foreign banking clients that were under investigation for OFAC violations and money laundering activities.  These reports contained detailed and highly confidential information concerning foreign banks involved in illegal U.S. dollar clearing activities.

Having  improperly  gleaned insights into the regulators' concerns and strategies for investigating U-Turn-related misconduct, SCB asked D&T to  delete from its draft “independent”  report any reference to certain types of payments that could ultimately reveal SCB's Iranian U-Turn practices.  In an email discussing D&T's draft, a D&T partner admitted that “we agreed” to SCB's request because “this is too much and too politically sensitive for both SCB and Deloitte.  That is why I drafted the watered-down version.”

I could go on quoting from the report but it must be clear that the findings enunciated by Ben Lawsky have painted a very different picture from that identified by SCB. In summary the findings include the following;

'...Falsifying business records; offering false instruments for filing; failing to maintain accurate books and records of all transactions effected and all actions taken on behalf of SCB; obstructing governmental administration; failing to report misconduct to the Department in a timely manner; evading Federal sanctions; and numerous other violations of  law that,  as with the above,  have an impact upon the safety and soundness of  SCB‟s  New York branch and the Department's confidence in SCB's character, credibility and fitness as a financial institution licensed to conduct business under the laws of this State...'

This is the institution which British officials are seeking to protect! This demonstrates how bad things have become, that certain people will seek to protect a banking institution no matter how dishonestly or criminally it behaves.

SCB itself admits it engaged in about 300 unlawful transactions, worth about $14 million dollars, any one of which would be enough to get its licence revoked. Yet according to the Sunday Times Business Section, '...Standard Chartered is understood to believe it should pay a fine of just $5 million dollars..!' This so farcical you couldn't make it up!

I wonder how SCB would react if they were robbed of $14 million dollars by a gang of criminals, and who when caught said; 'It was only $14 million dollars guvnor, so we only expect to pay a small fine..!'

This anomic state of affairs has arisen because this is how the British regulators deal with the 'too big to jail' bankers! They negotiate settlements behind closed doors, they negotiate what and how the news of the findings will be released, and they allow the banksters to negotiate the wordings of the notices. There is no effective naming and shaming in the UK, and no regulator ever seems to threaten to remove a banking licence. No wonder UK banks consider themselves to be a 'protected species'!

Well, don't try this stunt in New York, seems to be the message from Ben Lawsky! There is little doubt that there is some friction between different agencies, but the balance of probabilities is that US citizens want and expect their financial regulators to get the handcuffs on and make the banksters do the 'perp' walk! If only we had prosecutors in this country with this man's sense of destiny and purpose!

When ships used to sail into New York harbour carrying goods to trade, they had to pay New York custom's duties. If bankers do business in dollars, then they must expect to have to comply with New York's banking rules. The most important message to global bankers is to learn what New York bank regulators expect. It's no good whinging about New York's rules, if you don't like them, then don't do business there.

It is as simple as that!

Why Standard Chartered Bank might be feeling rather pissed off at the NYDFS

I owe a debt of gratitude to Roger Moore of the Executive Intelligence Review for permission to quote widely from his blog.

The timing of the announcement by the NYDFS of their findings against Standard Chartered Bank is an unusual aspect of the case. As the Guardian of 7th August 2012 points out; '...scandals in banking-land or, rather, their revelation, tend to be choreographed when regulators become involved. The existence of an investigation is often known (and it was at Standard Chartered) but the details of the wrong-doing, the admission of fault and the nature of the punishment tend to be published simultaneously.

That's how the plot worked with Barclays and Libor-rigging – the Financial Services Authority issued its final notice, imposed a £290m fine and the directors made a grovelling apology. Similarly, HSBC said sorry immediately when a US senate committee said the bank's lax systems had allowed drug cartels to launder money.

In the Standard Chartered case, the choreography has collapsed. The bank complains that it was in discussions with five US agencies, including the US Department of Justice, and was surprised to receive the New York DFS's order. It grumbles that "resolution of such matters normally proceeds through a co-ordinated approach by such agencies".

That may well be the case, but this is all too redolent of the pussy-footing that tends to mark out the UK style of financial regulatory handling of big cases involving the crimes of the powerful. Such a softly-softly kind of approach has an important qualifier!

One of the problems facing UK regulators is the threat of judicial review. This is not a problem faced by US regulators. In the UK, when a regulator makes a series of administrative findings against a regulated entity, before any report or finding is published, copies of the findings are sent to all parties concerned so that they can comment upon the findings and make representations if they think that the findings are not fair or do not properly represent the facts. Sometimes these representations can take months before the parties can agree on a form of words which are acceptable to all concerned.The failure to do this can lead to threats of judicial review whereby the whole matter is aired before a High Court Judge, prior to any publication. JR is hugely expensive, but then no bank is concerned with the issue of cost because at the end of the day it is shareholder's money being spent. However, no regulator could possibly justify being forced to spend such money defending a JR, for fear that any finding might go against them, and they would be criticised by politicians for having wasted money in the whole process. This is among the reasons why UK regulators are so wary of taking on really big cases against the 'too big to jail' banks.

So why did the DFS go public?

Well one reason is the growing dissatisfaction by a number of leading US regulators and prosecutors at the seemingly 'light touch' manner in which those who break US law are seemingly being treated by the present regime at the Department of Justice in the US. A number of US Federal Judges have been very critical of plea-deals entered into in similar cases.

An EIR News Feed report on the Standard Chartered case reported;

"...In all these cases, including Wachovia, LIBOR and HSBC, there is strong sentiment among regulators and investigators, agents, etc. throughout many government agencies, that the full force of the law (is not being and) should be applied. That it hasn't happened, is testimony to the political decisions of two successive administrations (both Bush and Obama) to go with the bailout policies, including what one has to describe as sabotage of good investigatory work, the kind of work, a good prosecutor would have no trouble taking to criminal court..."

While "regulators" at the Fed, and at the Treasury and Justice Departments, were slowly putting together the grounds for another sweetheart deal with StanChart, which likely would have resulted in a non-prosecution or deferred-prosecution agreement, as they are reportedly working on with HSBC and have already done with so many other outlaw bankers, Lawsky swooped down on StanChart on Monday, charging it with tens of thousands of illegal transactions, and threatening to pull their banking license within ten days.

In his show-cause order, issued without advance notice on Aug. 6, Lawsky charged that StanChart's conduct "left the U.S. 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." While the charges center on StanChart's knowingly illegal dollar-clearing operations carried out on behalf of Iranian banks, the references to arms dealers and drug kingpins and "other" money-laundering violations, suggest that the scope of Lawsky's investigation is much broader. The
potential breadth of StanCharts crimes, is indicated by the fact that its New York dollar-clearing business "clears approximately $190 {billion} per day for its international clients"

Quoting from a blog written by EIR News Feed in which the whole question of how the pussyfooting with the global banksters was being perceived in the US;

"...former U.S Attorney and TARP Inspecteur General Neil Barofsky warned in an August 1, Bloomberg TV interview that the same Department of Justice was preparing a "global settlement" on the multi-billion LIBOR rate fixing conspiracy, such that the banks involved could avoid prosecution as well as case-for-case investigations, fines, and arrests.

Barofsky stated, "I for one personally hope they don't do a global settlement. I prefer they go institution by institution down the line. That is the best way if this a criminal investigation, which is what we're hearing, in order to scare others, other institutions, to get them in early to cooperate and flip, and hopefully as you go institution by institution, and go higher and higher up the line and really have individual accountability. The bottom line is that if we're going to continue to have these types of scandals, this type of manipulation of the system, then we need executives at the top to start being held accountable and pay the price, and that includes handcuffs..."

Whatever the situation, there is clearly a major power struggle taking place in the US between the DoJ and other regulatory agencies regarding the criminal actions of the banksters, and how they should best be dealt with, and other global reports have alluded to these conflicts.

The British wire service Reuters is circulating a story labelled "EXCLUSIVE -- U.S. regulators irate at NY action against StanChart," which reports that the U.S. Treasury Department and the Federal Reserve "were blindsided and angered by New York's banking regulator's decision to launch an explosive attack on Standard Chartered Plc over $250 billion in alleged money laundering transactions tied to Iran... By going it alone through the order he issued on Monday, Benjamin Lawsky, head of the recently created New York State Department of Financial Services, also complicates talks between the Treasury and London-based Standard Chartered to settle claims over the transactions."

Reuters went on to state that "Lawsky's stunning move ... is rewriting the playbook on how foreign banks settle cases involving the processing of shadowy funds tied to sanctioned countries," noting that such cases "have usually been settled through negotiation -- with public shaming kept to a minimum."

But Laskey, Reuters complains, "wasn't interested in a quiet pact of the sort reached by federal authorities in recent years."

Likewise, the New York Times "Dealbook" reports that Lawsky's actions "stunned" officials at the Federal Reserve and the Justice Department who are also supposedly investigating Standard Chartered. "In money-laundering cases, authorities almost always move in concert," the Times says, which is why Lawsky's action "irked many of the other regulators, who questioned whether he had moved too quickly."

So, who is Benjamin Lawsky, and why has he decided to move in this way? Those who have known and worked with him for years, such as Neil Barofsky, the former TARP Inspector General, are not surprised by his actions.

In 2011, when New York Governor Andrew Cuomo merged the New York State Department of Banking and Insurance, into the new Department of Financial Services, he appointed Lawsky, his former Chief of Staff, to head the new agency. Earlier, when Cuomo was New York State Attorney General (having succeeded that "rogue prosecutor" Elliot Spitzer), Lawsky was his "Special Assistant." Lawsky had joined Cuomo's office in 2006, and handled such high-profile cases as Bank of America and Merrill Lynch.

From 2001 to 2006, Lawsky was an Assistant U.S. Attorney in the Southern District of New York, where he prosecuted organized crime, insider trading, and terrorism cases. In the securities fraud unit, he worked with Barofsky, who has had nothing but praise for Lawsky. 

After Lawsky's filing of charges against Standard Chartered, and the barrage of attacks on him that followed, Barofsky told {Business Insider} that he knows Lawsky well, and that even though Lawsky has never faced opposition like this before, he will stay strong in the face of this pressure from Washington (and London, he might have added). And Barofsky, speaking to the New York Times yesterday, lauded Lawsky's speed in pursuing Standard Chartered, in contrast to what he called the "passivity of federal regulators."

Standard Chartered Bank might have had good reason to suppose that their criminal actions were going to be dealt with in the same cosy, chummy-chummy manner that was being planned for HSBC and the LIBOR scams. They probably thought that they had reason to believe that they would be able to negotiate some kind of quiet sweetheart deal which would result in a fine, not a lot of bad publicity, which could be stage managed, and a deferred prosecution at the very worst.

This is the bitter lesson that we all have to learn about the pathetic state of affairs which now exists in the administration of criminal justice when it comes to dealing with the crimes of the powerful. The banksters have come to expect that they will be treated with kid gloves, that they can expect their lawyers to be allowed to negotiate the level of penalty that they will consider accepting, and that they can dictate the terms of the settlement statements. This has come about because we have allowed our regulatory agencies to be staffed by men and women who don't know how to deal with criminals, how to go head-to-head with them and browbeat them down, and we are reaping the whirlwind because London has become one of the leading Pariah cities in the global financial sector.

Standard Chartered may have hoped that things would be worked out in the gentlemanly way they would have expected at home in London with the Fantastically Supine Authority sweetly enquiring whether they were happy with the press statement which was about to be published. They were not to know that they were dealing with a strong and experienced criminal prosecutor, a man who was lead some very important criminal cases and wants to win, and who is not prepared to become part of the cosy cartel of regulators playing a form of transatlantic 'kiss in the ring', dishing out soft penalties to banksters who didn't give a damn about US foreign policy initiatives. In hindsight, the alleged quote from the SCB senior executive asking who these 'fucking Americans were to say with whom the bank could do business' has the ineluctable ring of truth about it!

No wonder Standard Chartered feel a tad miffed!

Why Standard Chartered Bank and its supporters need to think very carefully before continuing to publicly contradict the published findings of the US Regulators.

Standard Chartered Bank are in very deep water indeed. They and their supporters are beginning to make things even more difficult for (SCB) the bank. by adopting a very high-profiled series of misplaced complaints and allegations.

British politicians are already talking about an increasing 'Anti-British bias'. John Mann, Labour member of the Treasury Select Committee has said that the US Regulatory move may be motivated by a desire to shift business from the City to Wall Street. He says '...This is a real power grab and the stakes are very high...'

Such an uninformed statement demonstrates how little Mann understands about global banking, but then when did a politician ever let the facts get in the way of his rhetoric?

Other public commentators are moaning about a concerted US focus on the City and calling for political intervention to back the City of London. They don't seem to understand that the American authorities are growing very concerned with the way that just about every major financial scandal seems to emanate from London or has a London element. Barclays bank and the LIBOR scams, HSBC and the money laundering evidence, the billion dollar derivative losses caused to J.P.Morgan Chase were orchestrated from London, there are further US investigations into RBS, it all adds up to an orchestrated level of regulatory failure, and the Americans are rightly concerned.

There are suggestions, carefully floated, that the NYDFS is somehow operating as a lone wolf in all this, that they have annoyed their co-agencies, and that SCB are going to play hardball when it comes to the hearing next week!

Well, if SCB want to lose their licence completely, I would think the best way to do this will be to go in and start throwing their weight around and taking on the DFS at playing hardball!

I doubt this will happen frankly, because I am certain that SCB's lawyers will read the DFS document carefully and observe the findings that have been made against the bank, and then they will start to tread very carefully!

The findings are all pure regulatory issues, every one of which could render SCB to be found to be 'not fit and proper' to hold a banking licence in the State of New York. They are entirely within the remit of the DFS and the Superintendent is merely doing his job and following all the precedents which he is required so to do.

Section 39 of the New York State Banking Act requires that the powers of the   superintendent include;

To order any licensee to appear and explain an apparent violation.

"...Whenever it shall  appear to  the  superintendent that any  banking  organization... or foreign banking corporation licensed by the superintendent to do business or maintain a representative  office in this state has violated any law or regulation, he or she may, in his or her discretion, issue an order describing  such apparent violation and requiring such banking organization,   to  appear  before him or her, at a time and place fixed in said order, to present an explanation of such apparent violation..."

And that is all the good Superintendent has done. He has set out his findings describing the apparent violations as he is required to do and has invited SCB to come in and explain their conduct. This is not as described by Sam Gyimah, MP, another UK apologist leading with his mouth before engaging his brain, "...a highly inflammatory report that is effectively the case for the prosecution..."

This is the regulator's case, there is no prosecution in this instance, and it is couched in strict US legal language and it is a formal legal document. What it contains are the regulatory findings arising out of a routine regulatory examination, in which SCB have been given every opportunity to come clean and cooperate with the US Authorities, and which they have failed so to do.

You see, although the thrust of the public story is focused on the issues surrounding the degree of Iranian dollar clearing that went on, that is not really what the regulator is primarily concerned about, that is just a good bit of padding to stand an otherwise very technical case up for newspapers and their readers with their 2 nano-second attention spans. Let us examine the findings which I am quoting from the DFS report against SCB, which will be incredibly difficult if not impossible to deny or refute.

APPARENT VIOLATIONS OF LAW

FIRST VIOLATION OF LAW

(Failure to Maintain Accurate Books and Records NYBL §200-c )

SCB failed to maintain or make available at its New York branch office true and accurate books, accounts and records reflecting all transactions and actions, including but not limited to, true and accurate books, accounts and records to reflect Iranian U-turn transactions, effected by or on behalf of SCB and its New York branch.

SECOND VIOLATION OF LAW(Obstructing Governmental Administration P.L. § 195.05)

SCB obstructed governmental administration at its New York branch by intentionally obstructing, impairing and compromising the Department's administration of law, regulation and supervisory authority and prevented examiners of the Department and of other US regulatory agencies from performing their official functions by means of withholding, stripping and distorting information to identify numerous transactions of its OFAC-sanctioned clients to evade OFAC regulations.

THIRD VIOLATION OF LAW

(Failure to Report Crimes and Misconduct 3 N.Y.C.R.R.§ 300.1)

SCB failed to submit a report to the Superintendent immediately upon the discovery of fraud, dishonesty, making of false entries and omission of true entries, and other misconduct, whether or not a criminal offense, in which an SCB director, trustee, partner, officer, employee or agent was involved.

FOURTH VIOLATION OF LAW

(Falsification of Books and Reports N.Y.B.L. § 672.1)

SCB‟s officers, directors, employees and agents made false entries in SCB‟s books, reports and statements and wilfully omitted to make true entries of material particularly pertaining to the US dollar clearing business of SCB at its New York branch with the intent to deceive the Superintendent and examiners, supervisors and lawyers of the Department and representatives of other US regulatory agencies who were lawfully appointed to examine SCB‟s condition and affairs at its New York branch.

FIFTH VIOLATION OF LAW

(Offering False Instrument for Filing P.L. § 175.35)

SCB offered written instruments to examiners of the Department and of other US regulatory agencies, with the knowledge that such instruments contained false information, and with the intent to defraud the Department and with the knowledge that it would be filed with, registered or recorded in or otherwise become part of the records of the Department

SIXTH VIOLATION OF LAW

(Falsifying Business Records P.L. § 175.10)

SCB falsified business records with the intent to defraud examiners and the intent to aid and assist sanctioned countries to engage in US dollar clearing transactions in violation of 31 CFR 560.516.25

SEVENTH VIOLATION OF LAW

(Unauthorized Iranian Transactions 31 C.F.R. 560.516)

SCB engaged in transactions within the United States without complying with the requirements of 31 C.F.R. 560.516 in that SCB prevented its New York branch from determining whether the  underlying transactions were permissible under by 31 C.F.R. 560.516 before effecting them.

OK, so those are the findings. What all those people who are now whining and moaning about how unfair it is that these decisions have been made public fail to realise is that these statements of legal violations are not allegations, which are yet to be proven, they are real findings of fact, based on a series of earlier investigations. These are the regulatory decisions that the DFS has made, and the case is now proven. These are the findings that the regulators have made. There will be no trial to assess the truth or otherwise, with witnesses being called, these are the findings, and all that remains now is for the DFS to assess the suitable outcome for SCB. That is why SCB have been invited to attend a hearing so that they can be heard before judgement is levied, and that is why the document uses the language it does.

"...NOW THEREFORE, the Superintendent directs that:

WHEREAS, having considered the foregoing evidence of SCB's apparent fraudulent and deceptive conduct toward the Department and other industry regulators; and

WHEREAS, having considered additional and substantial evidence presently before the Department of this egregious misconduct; and

WHEREAS, apparent violations of law enabled SCB to evade strict regulatory obligations established to ensure the safety and soundness of foreign banking institutions licensed to operate in the State of New York, as well as to support the national security of the United States; and

WHEREAS, the Superintendent has determined that grounds exist for revocation of SCB's license to operate in the State of New York and that interim measures must be taken to protect the public interest,  26

IT IS NOW HEREBY ORDERED that, pursuant to Banking Law § 39(1), SCB shall appear before the Superintendent or his designee on Wednesday, August 15, 2012, at 10:00 a.m., at the Department's offices located at One State Street Plaza, New York, NY 10004, to explain these apparent violations of law and to demonstrate why SCB‟s license to operate in the State of New York should not be revoked; and

IT IS HEREBY FURTHER ORDERED that, on August 15, 2012, SCB shall also

demonstrate why, pursuant to Banking Law § 40(2), SCB‟s U.S. dollar clearing operations should not be suspended pending a formal license revocation hearing;

So that's that!

The only thing to be decided now is whether SCB's licence will be revoked, and whether pending a full revocation hearing, the ability of SCB to clear dollars in New York should be suspended.

It doesn't really matter, because if the ability to clear dollars is suspended, SCB is effectively finished as a banking entity.

The British Government has already been in contact with the Americans about this case, and the U.S. Treasury have told the British government on Wednesday 8th August that it takes financial sanctions violations "extremely seriously" and is coordinating with federal and state agencies in an investigation of Standard Chartered bank.

In a Reuters' report, Adam Szubin, director of Treasury's Office of Foreign Assets Control, told the British Treasury in a letter that his office is investigating the bank for "potential Iran-related violations as well as a broader set of potential sanctions violations."

The letter, dated Aug. 8, was in response to a British request for clarification of U.S. sanctions laws and comes after New York State authorities alleged that Standard Chartered hid $250 billion of Iranian banking transactions, in violation of U.S. law.

Szubin told British authorities that in 2008 the Treasury Department outlawed the so-called U-turn transaction license - licenses the New York banking regulator accused Standard Chartered of using to evade sanctions.

The New York State Department of Financial Services order alleged that even as some banks exited the U-turn transactions, Standard Chartered hustled to "take the abandoned market share."

When you add to this the fact that SCB's consultants, Deloitte and Touche have admitted wilfully deleting important but damaging elements from the report that they were required to carry out on behalf of the US Government into SCB's conduct, thus misleading the NYDFS, and you can begin to appreciate the level of US concerns.

I have repeatedly said for some years now that if the British financial market space was not subjected to more strenuous financial regulatory control, then the Americans would not stand idly by, but that they would use the awesome powers they possess by dint of their powers to exclude perceived wrong-doers from the US dollar-clearing mechanism, which would spell out the kiss of death for such players.

The problem for SCB is that they probably didn't take the Americans seriously enough - they might have thought that the NYDFS was just as supine as the FSA in dealing with regulatory discipline, and that they could drag their heels and mislead the regulator in the same way as banks in the UK treat the FSA.

Looks like they got that wrong!