SCB's $340MM Penalty Signals ChangeLondon Bank Settles with N.Y. for Loose Bookkeeping
A $340 million settlement reached last week between a New York regulator and London-based Standard Chartered Bank should serve as a wake-up call to all financial institutions. The settlement illustrates how state regulators can impose hefty penalties for failure to comply with state-mandated bookkeeping practices tied to foreign transactions in cases that also involve alleged violations of the Bank Secrecy Act (see Money Laundering Controls Scrutinized).
See Also: What is next-generation AML?
The claims made by the New York regulator against SCB mark the first time a state agency has reached a settlement with a federally regulated institution for alleged violations tethered to BSA compliance.
While some observers say state regulators acted appropriately in enforcing their requirements, others say they overstepped their authority in an investigation that largely involved alleged violations of federal law.
One expert with a legal background that touches on Office of Foreign Assets Control programs and BSA compliance, who asked not to be named, says demanding that a bank pay $340 million to a state agency is unprecedented.
"That's certainly not a small amount, considering that this is an action by a state regulatory body," when other enforcement agencies also are involved, the expert says.
In an Aug. 6 order, the New York State Department of Financial Services asked SCB to answer a number of questions about alleged violations to its state charter, including failure to maintain accurate books and records, falsifying books and reports, obstructing governmental administration and failure to report crimes and misconduct. The order, which asked the bank to appear before the department on Aug. 15, also accused SCB of conducting about $250 billion worth of unauthorized transactions with Iran, in violation of BSA.
On Aug. 14, the bank opted to enter the settlement agreement. In addition to paying a hefty civil penalty, the bank agreed to hire an independent monitor who will report directly to the state for the next two years about SCB's money-laundering risk controls and corrective measures. State examiners also will be placed onsite at the bank. And SCB agreed to hire permanent personnel at its New York branch to oversee and audit offshore money-laundering due diligence and monitoring.
In its order, the department accused SCB of moving at least 60,000 secret transactions worth about $250 billion through its New York branch for Iranian financial institutions - institutions that were subject to U.S. economic sanctions. The department claims the bank covered up its transgressions by falsifying records, and that the external auditing firm, Deloitte LLP brought in to review SCB's BSA practices, assisted with the cover-up.
SCB has denied the allegations, and in a response said it does not believe the order presents a full and accurate picture of the facts.
Deloitte also has denied the conspiracy allegations, according to a statement provided earlier this month to Reuters.
Was the State's Action Fair?
Some financial-fraud experts have suggested Benjamin Lawsky, who's heading up New York's newly created State Department of Financial Services, overstepped his bounds.
For example, the legal expert who asked to remain anonymous contends the state was failing to coordinate with other agencies when it filed its order against SCB, especially considering federal regulators have not yet completed their investigation into the alleged sanctions violations related to financial transactions with Iranian banks.
"Let's remember, this is for violations to New York state laws, based on incomplete books and records," the expert says. "This has nothing to do with the payments from Iran, which are subject to federal regulation, not state regulation. And there is no evidence so far from the federal regulator or the Treasury Department that there was a violation in that area."
But Charles Intriago, the president and founder of the Association of Certified Financial Crime Specialists, disagrees.
"Nothing says Lawsky has to be subservient to federal regulators when state interests are at risk," says Intriago, a former federal prosecutor who in 2001 also founded the Association of Certified Anti-Money Laundering Specialists. "Personally, I say more power to him."
Sign of the Times?
Intriago says the state had every right to issue an order against SCB for questionable transactions, and he believes the bank got off easy.
"There were a number of items that the state cited in its order, and the amount the bank paid is chump change, especially for a bank like SCB," he says. "Banks need to know, when they try to hide information or make false statements, criminal actions could be brought against them."
The bottom line, Intriago says: Banking institutions going forward will have to honor obligations to federal regulators as well as regulators who oversee financial transactions in the states where they are chartered.
"Especially for banks that come to the U.S. to operate from overseas, when they get a federal charter, they have to realize that the state charter carries just as much importance," Intriago says.
Similar claims against other foreign-based institutions, such as HSBC Holdings, which since 2003 has faced a number of compliance violations for lax BSA practices, illustrate the breadth of the problem, experts say (see HSBC's BSA Violations Set Example).
One AML expert closely involved with the HSBC case, who would not speak for attribution, says more enforcement is going to have to come from governmental agencies before banks' make serious strides to comply with federal sanctions and AML requirements.
"Ultimately, it's a problem with the culture of compliance," the expert says. "International banks' culture of compliance is typically very poor. It just comes right down from the top, and it goes back a long time. And the fines handed out by the Feds aren't enough."
This expert says international institutions can expect to see more scrutiny from all regulators. "The money of the world still runs through the U.S., and that's why we have to take this seriously," the expert says. "And if you are not going to follow the rules of this country, then don't do business here. It's that simple."