Money Laundering

What Benjamin Lawsky's tough stance on Standard Chartered over Iran means for other banks

New York watchdog Benjamin Lawsky bit hard on Standard Chartered over its dealings with Iran, and his success will have far-reaching implications

PUBLISHED : Saturday, 18 August, 2012, 12:00am
UPDATED : Saturday, 18 August, 2012, 5:16am

Benjamin Lawsky played hardball with Standard Chartered and a gantlet of federal and New York regulators and prosecutors right up until the last hours of a US$340 million settlement on Tuesday with the British bank over improper and concealed transactions tied to Iran.

Based on a dozen interviews, Reuters has learned that Lawsky, head of New York's recently created financial services regulator, which operates out of the state attorney general's office, ignored the entreaties of federal regulators on Monday to drop his own action in favour of a single, global settlement.

He also insisted that the bank agree that the settlement specify it had engaged in US$250 billion of transactions, a figure the bank had disputed vigorously.

Despite criticism of his aggressive approach, both from Standard Chartered and US government officials, Lawsky's tactics carried the day, and the repercussions for Standard Chartered and other banks he regulates are far-reaching.

Until now, banks accused of money laundering or other illegal activity have typically reached settlements with federal and local regulators and prosecutors that revealed few details of their alleged activities.

In contrast, Lawsky released embarrassing communications that exposed internal discussions, painted Standard Chartered as what he termed a "rogue institution" and threatened to pull its New York banking licence. He won a settlement far larger than many experts thought was possible.

Stephen Miller, a former federal prosecutor who worked with Lawsky at the US Attorney's office in Manhattan, said: "It announces to the regulatory community that this agency is going to demand a seat at the table in pretty much every major financial investigation in the future."

But others say Lawsky's brash move has alienated federal officials and will make it tougher for him to partner with them on future cases.

Lawsky began his gambit with what federal regulators and Standard Chartered considered an ambush on August 6 when he filed a scathing order against the bank that revealed its failure to halt money laundering for Iranian entities.

The order included the now infamous, incendiary quote from Standard Chartered's chief financial officer, Richard Meddings: "You f***ing Americans. Who are you to tell us, the rest of the world, that we're not going to deal with Iranians?" The bank has vehemently disputed the accuracy of the quote.

In the subsequent eight days, a shaken Standard Chartered management came under intense pressure from shareholders to reach a settlement rather than face the threat of losing its New York licence, which could have crippled its ability to process US dollar transactions.

In public, bank officials disputed Lawsky's allegations, especially his contention that US$250 billion of transactions were involved. The bank's tally: less than US$14 million.

Standard Chartered's chief executive, Peter Sands, also defended the bank, telling reporters that Lawsky's threat to yank its licence was "disproportionate" to how other banks had settled sanction cases. By late last week, the bank's stance had appeared to soften. Bank officials feared that Lawsky would leak more documents that would embarrass Standard Chartered.

From the start, the settlement talks focused largely on just one thing: the financial penalty Standard Chartered would pay. The two sides also discussed Standard Chartered installing a monitor for two years who would report to Lawsky's office on the bank's efforts to strengthen anti-money-laundering systems, terms that were eventually accepted.

Lawsky believed the federal investigation, which dates to 2010, was growing stale. But in fact federal investigators were trying to conclude a settlement with the bank by Labour Day, September 3, according to people familiar with the matter.

The Justice Department and the Manhattan district attorney were also juggling numerous cases, according to these people, and had wrapped up only in June a US$619 million settlement with ING, a Dutch bank that allegedly violated sanctions against Cuba and Iran.

As a deal was finalised, Lawsky delivered a final blow. About an hour before he publicly announced the settlement, Lawsky's office told bank officials that it would specifically include the whopping US$250 billion transaction figure that the bank had so strongly disputed.

Lawsky's initial order alleged the bank had "schemed" with Iran and hidden from regulators transactions totalling US$250 billion.

By the time a settlement was struck, less inflammatory language was used, but the dollar figure remained: "The parties have agreed that the conduct at issue involved transactions of at least US$250 billion."

For federal regulators, Lawsky's unilateral actions also changed the rules of the game: he issued the order against Standard Chartered after giving other regulators and prosecutors involved in the investigation only short notice.

His move drew the ire of US and British regulators, prompting Bank of England Governor Mervyn King to suggest that the United States was unfairly targeting British banks.