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Benjamin Lawsky, we’re banking on you

August 11th, 2012

According to a Reuters report earlier, Standard Chartered is this weekend in talks with US regulators with a view to reaching a carefully choreographed settlement along similar lines to the “sweetheart” deal that Barclays reached with the US department of justice for similar Iran-related criminality in August 2010. Reuters says the settlement may be reached as early as next week.

“Standard Chartered is in talks with multiple law-enforcement officials, including New York’s banking regulator, to resolve a probe into improper Iranian money transactions by the British bank, according to people familiar with the situation. The settlement negotiations are expected to last through the weekend and could result in a resolution by next week, these people said. The negotiations are at a delicate stage and could collapse, these people said.

Standard Chartered’s attempts to reach a settlement follow a disastrous week for the Asia-focused, but London-headquartered bank.

US regulator the New York State department of financial services dropped a bombshell on Monday when it accused the “whiter than white” Standard Chartered of laundering $250bn for Iran and Iran-based clients over a 10-year period. The regulator said this “left the US 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.” The 27-page, August 6th order, signed by Benjamin Lawsky, superintendent of the state’s department of financial services, was fairly unequivocal. It said:

“For almost ten years, SCB [Standard Chartered Bank] schemed with the government of Iran and hid from regulators roughly 60,000 secret transactions, involving at least $250 billion, and reaping SCB hundreds of millions of dollars in fees”

Richard Meddings SCB’s executive director, was quoted using expletives to disparage America’s insistence on an economic blockade of Iran. He reportedly told an official in SCB’s New York branch: “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 order caused the bank’s shares to tank early last week, though the shares have since recovered some of these losses. This followed attempts from its cheif executive Sands to downplay the quantum of the illicit transactions. The NYSDFS’s order, combined with the possible loss of Standard Chartered’s New York operating license, are “incredibly damaging and is ruining all the good work that the current management has done in recent years,” said Nic Clarke, banks analyst at brokers Charles Stanley. Lawsky has demanded that Standard Chartered officials appear at his office next Wednesday (August 15th) to explain why the bank should allowed retain its license.

If Standard Chartered is allowed to settle with the US regulators it will perpetuates a long-running charade that does nothing to alter the behaviour of criminal or miscreant bankers and other market participants. Out of court settlements – when financial firms that have been accused of criminal activity settle out of court with regulators/prosecutors whilst usually admitting no wrongdoing – do nothing to alter behaviour.

Here are some examples of some recent out-of-court settlements in the US:-

• On April 28th, 2003, New York attorney general Elliott Spitzer agreed to a £1.4bn mass settlement with 10 banks for “fraudulent research reports”, “supervisory deficiencies” and subjecting analysts to “inappropriate pressures” relating to the placing of false valuations on dotcom stocks some of which were known internally to be p.o.s. (= “piece of shit”). The banks concerned were Bear Stearns, Credit Suisse, Goldman Sachs, Lehman Brothers, JP Morgan, Merrill Lynch, Morgan Stanley, Citigroup, UBS and US Bancorp. A small number of analysts including Business Insider founder Henry Blodget (formerly of Merrill Lynch) and Jack Grubman (formerly of Citi) were individually prosecuted.

• Most of the banks, including RBS, that aided and abetted the numerous frauds and sham transactions by which Enron created the mirage of financial success, were permitted to settle out of court rather than face prosecution. RBS is understood to have settled out of court for $200m – but even this wasn’t properly disclosed to shareholders. The only people who were jailed were the ‘NatWest Three’, who some believe were used as a scapegoat by RBS to keep its own alleged role in aiding and abetting the Enron frauds out of the limelight, and three executives from Merrill Lynch who were involved in the “Nigeran Barges” sham transaction.

• On August 29th, 2005, KPMG admitted to criminal wrongdoing over a multi-billion dollar tax fraud in the US and agreed to pay $456m in fines and settlements as part of an agreement with the US Justice Department and the Internal Revenue Service This settlement was reached because, the US authorities recognised that pursuing it for criminal trial would probably have destroyed the firm and the belief it was not in investors interests for the ‘Big Four’ to be reduced to the ‘Big Three’.

• On July 15th, 2010 Goldman Sachs paid $550 million to settle the Abacus 2007-AC1 securities fraud complaint brought by the SEC. Goldman had misrepresented the mortgage bond portfolio in the synthetic CDO and, specifically, who had selected it.

• On August 16th, 2010, in the “sweetheart deal” mentioned above, Barclays paid a $298m fine to settle criminal charges of flouting international sanctions. The bank admitted to surreptitiously processing $500m of transactions with financial institutions in Cuba, Iran, Libya, Myanmar and Sudan in violation of US trade sanctions. Barclays accepted that staff at a Dorset payment processing centre had changed the wording in international money transfers between 1995 and 2006 to disguise the fact the transactions involved countries barred from accessing the US financial system.

• On November 28th, 2011 RBS agreed to a $52m settlement over the selling, financing, packaging and securitization of subprime mortgages in the Massachusetts — activities which he bank’s former chief executive Sir Fred Goodwin consistently denied that the bank was involved in.

• On June 27th 2012, Barclays paid $453m to settle Libor manipulation charges with the CFTC, Department of Justice and Financial Services Authority.

The trouble is that such settlements let the perpetrators of financial crimes off scot free, while their shareholders and insurers pick up the tab for their crimes. They are a travesty of justice and must be stopped. After the Barclays settlement Judge Emmet Sullivan told the federal court in Washington:

“The perception is that no one is treating white collar crime seriously.” He complained that bank executives “come into court, plead guilty, go back on the subway, go home and watch soap operas and life goes on”.

Given the scale of most banks’ profits compared to the no-fault deals, it’s little surprise they are so popular. In fact banks tend to regard out of court settlements as though they were parking or speeding tickets — while mildly inconvenient, a public relations blip, they are viewed as just another cost of business.

The fact that the fines are not met by guilty corporate executives but ultimately born by shareholders and sometimes insurers, mean they do nothing to prompt soul searching or alter behaviour. This is why I and many others believe they must be stopped. They are not available to anyone else who commits a crime, so why are they still available for banks and bankers??

This is why I hope Lawsky is not cajoled into entering a settlement along similar lines to the some of the ones outlined above. As the Bloomberg columnist Jonathan Weil makes clear, much is hanging on whether he has sufficient cajones to resist such pressure.

Federal regulators and prosecutors are the ones who created the power vacuum here, by going so soft on the banking industry for so long. Lawsky is filling it in, and evoking memories of how Eliot Spitzer challenged the securities industry a decade ago when he was New York attorney general. We’re about to find out whether Lawsky has the chops or the stomach for the role.

By the way Weil also produced an excellent riposte to the whining of  Sands, who is disappointed that his bank was not permitted by the NYSDFS to review the order before it was published. I know that financial regulators were so captured by the industry they were supposed to be regulating over the past decade they allowed such “Maxwellisation” to happen as a matter of course. But that does mean it should be allowed to continue. Finance’s Augean stables will never be cleaned out, unless bank executives and their banks are finally made to face the consequences of their actions.

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