Standard Chartered and Why We Must Change the Way We Police Banks

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Matthew Lloyd / Getty Images

People enter the Standard Chartered bank's offices in London, Aug. 7, 2012.

MF Global, JP Morgan’s Whale Fail, LIBOR rate-rigging: The financial services industry has been cranking out scandal like it’s going out of style. The incidence of financial scandal has become so frequent, in fact, that each successive scandal has some media outlet or another asking the question: Is our financial system incorrigibly corrupt?

But a funny thing happened this week. A large multinational bank settled with a banking regulator over charges of falsifying documents and obstruction of justice and the financial press wasn’t unanimous in its scorn of that bank. In fact, many were accusing the regulators of overreaching and overreacting.On August 6, the New York State Department of Financial Services (DFS) formally accused Standard Chartered, a British-based bank of laundering money from Iranian clients, and then covering up its tracks by falsifying documents and obstructing an investigation by the Department of Financial Services and federal regulators. Sounds like pretty dastardly stuff, so why were many in the media and the financial industry coming to the bank’s defense after the DFS announced a $340 million settlement on Tuesday?

(MORE: The Accounting Trick Behind Thirty Years of Scandal)

The first line of attack against DFS is that they didn’t cooperate enthusiastically enough with the other regulators working on the case. Several other regulators and law enforcement agencies, including the Manhattan District Attorney, the Federal Reserve, the U.S. Treasury Department, and the U.S. Justice Department were also looking into this case, and these organizations were obviously not happy with the DFS going it alone. And many commentators thought that this act set a dangerous precedent for future regulatory actions. As Tim Worstall of Forbes wrote:

“We really don’t want to have multiple overlapping jurisdictions that will compete with each other to see how hard they can be on suspected criminals. We know very well that that way justice itself will be slowly strangled. And yet this is what we do appear to be getting with financial regulation and oversight.”

Without understanding the internal dynamics of the joint investigation, it is really impossible for an observer to judge the validity of this argument. It is entirely possible that the other regulators were dragging their feet on the investigation, or weren’t interested in pursuing Standard Chartered with the appropriate vigor. It is also possible that DFS head Benjamin Lawsky announced the action to steal headlines and raise his own profile. We simply don’t know — and probably never will.

The other argument against the DFS is that it is an example of a too-powerful regulator penalizing a bank in a manner disproportionate to the crime it committed. Because the regulator has the power to unilaterally revoke the financial company’s New York State banking license – the loss of which, by one estimate, would have cost Standard Charter’s 40% of its yearly earnings – it’s leverage in any negotiation is very high. That’s why one cannot assume that just because Standard Chartered settled, it is necessarily guilty of all that the DFS alleged: It’s not hard to imagine a scenario in which Standard Chartered would rather pay the fine than risk such a large piece of its business. Following this logic, The Wall Street Journal alleged that the true nature of the crime is much less egregious, and that the $340 million penalty is therefore too high:

“[Lawsky’s] grandstanding on Standard Chartered may also do more harm than good. For one thing, his declaration of allegations includes some exaggerated facts. Of the $250 billion of transactions at issue, it now appears that $249 billion and change were legal at the time they occurred.

We’re told by other law enforcers that roughly $300 million in transactions over the course of a decade were illegal. This is higher than the bank’s public claim of only $14 million, but a tiny fraction of the amount in Mr. Lawsky’s initial accusation.”

In other words, the crime Standard Chartered committed could have been a matter of a minor carelessness with regards to a complex set of regulations, like the bank claims; or the crime could have been a decade-long pattern of willful flouting of U.S. law and subsequent cover up, like the DFS claims.

(MORE: How Dangerous Is America’s Debt?)

The problem now is that the public will never know the truth. Banks like to settle because they don’t want to air their dirty laundry; because litigation distracts from day-to-day business; and because a loss in court, even if unlikely, could potentially destroy the entire operation. Regulators like to settle because it conserves scarce time and resources that would be expended in a public trial, and eliminates the risk that such a trial would end with an embarrassing not-guilty verdict. But the practice of financial regulators settling with large financial institutions is corrosive to the public’s trust in the system because it’s necessarily such an opaque process.

This is a broader issue that’s arisen many times since the financial crisis set regulators into high gear in search of guilty parties — and many times before as well. But the case of Standard Chartered in particular emphasizes what’s wrong with this approach to regulation. The lack of an open inquiry into illegal behavior merely fuels the paranoia of both the right and the left that either regulators are capriciously shaking down banks or that large banks are merely making small payoffs to get away with illicit acts that are far more profitable than the punishments are costly.

For instance, Ian Gordon, an analyst at Investec told the Wall Street Journal on Wednesday that the settlement was “grossly unjust” towards Standard Chartered, and that the bank

“did this deal to dispose of a fairly unprecedented regulatory assault that could have had a material disruption to their business. When you are a high quality, high growth bank like Standard Chartered, the scope for value destruction was more than $340 million.”

From the other side of the debate, you hear celebratory statements from the likes of Michigan Senator Carl Levin who said in a statement Tuesday that, “The agency also showed that holding a bank accountable for past misconduct doesn’t need to take years of negotiation over the size of the penalty; it simply requires a regulator with backbone to act.”

As far as we know, neither party has any real facts to back up these categorical statements. They’ve simply filled the vacuum left by a lack of a transparent discovery process with their pre-conceived notions of our banking and financial regulatory systems.

15 comments
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Staff Iran-Conoco
Staff Iran-Conoco

The Standard Chartered case should reveal to Congress that the continuing problems with the financial services industry can not be solved by more regulatory legislation because the lawyer-lobbyers (lawbyers) employed at the DoJ and SEC do not enforce federal criminal statutes already enacted.

Congress needs to widen the scope of its investigations into DoJ and SEC operations beyond "Fast and Furious" and the Stanford International Bank to include willful honest services frauds by government employed lawbyers who use selective non-prosecution of banks and insurers that have engaged in regulatory capture of the DoJ and the SEC by being the most

generous customers of the giant law firms to these lawbyers aspire to join after servicing the public.

Financial regulation and financial crime statutes should be amended to deter the ongoing honest services of frauds by DoJ and SEC lawbyers through the selective non-prosecution of banks and insurers as quid pro quo for tacit promises of partnership shares of the exorbitant fees that the banks and insurers pay to keep these horribly inefficient lawbyers' firms afloat.

Cjones1
Cjones1

Failure to prosecute John Corzine only proves that the game is rigged and that government regulation is used for political showmanship. Too big to fail legislation such as Dodd/Frank made it harder for smaller, less politically connected entities to compete and survive apparently. Let's not use taxpayer money to refund bad business practices when the polticians friends in the financial industry make risky decisions. Let the market devour those who fail to make market savvy decisions based on good and time honored practices. Running around like crazed OWS protesters leads to worse interference by insider politicians.

bojimbo26
bojimbo26

Banks will never be accountable ( this is where government officials get their pensions from ) .

Firozali A.Mulla
Firozali A.Mulla

We had heard we will conquer

the skies, land, waters all we see. The skies too have gone after the tragedies

we have . All look gloomy and sad. Is there any good news? An emergency layover

in Syria's capital was bad enough. Then passengers on Air France Flight 562

were asked to open their wallets to check if they had enough cash to pay for more

fuel. The plane, heading from Paris to Lebanon's capital, diverted amid

tensions near the Beirut airport on Wednesday. Low on fuel, it instead landed

in Damascus, the capital of neighbouring Syria, where a civil war is raging. An

Air France spokesman explained Friday that the crew inquired about passenger

cash only as a ``precautionary measure'' because of the ``very unusual

circumstances.'' Sanctions against Syria complicated payment for extra fuel. He

said Air France found a way to pay for the fill-up without tapping customer

pockets, and apologized for the inconvenience. He wouldn't say how the airline

paid, or how much. One woman aboard said the passengers had rounded up 17,000

euros. ``The pilot asked the passengers in first class to get their cash

together. Everyone started to collect money, and they managed to collect

17,000, but the pilot in the end didn't take anything. They resolved the

problems with the Damascus airport,'' said a passenger speaking on France-Info

radio identified as May Bsat. The Boeing 777, carrying 185 people, took off for

an overnight layover in Cyprus then landed safely in Beirut on Thursday.

Lebanon is a volatile mix of pro- and anti-Syrian factions, and a series of

hostage-takings has raised worries about Lebanon being dragged deeper into

Syria's unrest. Mobs supporting Syrian President Bashar Assad blocked the main

airport highway in Beirut on Wednesday, before Lebanese military units moved

in. The layover was awkward for Air France, the flagship carrier for a country

whose government toes a hard line against Syrian President Bashar Assad and

warns all its citizens to avoid or leave Syrian soil. France, which once ruled

Syria and Lebanon, championed European Union-wide economic sanctions on Syria

including its national airline, Syria Air. Air France operated regular flights

to Damascus until suspending them amid violence earlier this year. While it was

the first time Air France said it had resorted to a request for passenger cash,

it wasn't the first airline to do so. Hundreds of passengers traveling from

India to Britain were stranded for six hours in Vienna last year when their

Comtel Air flight stopped for fuel, and the charter service asked them to kick

in more than 20,000 pounds($31,000) to fund the rest of the flight to

Birmingham, England. Thank you Firozali A.Mulla DBA WE ARE ALWAYS RIGHT

Jfante1452
Jfante1452

Maybe there shouldn't be settlements in cases like this, only trials where the truth hopefully comes to light.

CrystalgfrZidan
CrystalgfrZidan

Emma answered I am shocked that a mom can make $7393 in a few weeks on the network. have you seen this(Click on menu Home)

Abraham Goldstein
Abraham Goldstein

More crookedness on Wall Street is not news - honesty on Wall Street - that would be news!

Jamie Wong
Jamie Wong

The public has a right to know if anytihng illegal's going on inside a bank. I strongly oppose this pay-and-settle way to deal with accusations from the regulators.

MarkPash
MarkPash

More regulation of banks is not the answer-better maybe. Elimination of fractional reserve banking is! See www.monetary.org and/or www.cpe.us.com.

Mark Pash, CFP

Center for Progressive Economics

Jfante1452
Jfante1452

Maybe, but there's certainly not enough enforcement.

MarkPash
MarkPash

The banking industry has the most regulations and regulator inspections than any industry even my highly regulated financial industry. The smart ones always try and many times succeed in getting around them. Of course, this leads to lobbying and massive campaign contributions. This is the reason to eliminate their power to create money!

Thanks for your response, Mark