Rogue Bank or Regulator in Standard Chartered Case?

Aug. 9 (Bloomberg) -- New York’s top financial regulator, Benjamin Lawsky, wiped more than $9 billion, or about 16 percent, off the market value of the U.K.’s Standard Chartered Plc this week. We have some questions.

First, what makes the money-laundering case so different from those of Barclays Plc, Lloyds Banking Group Plc, ABN Amro Group NV and ING Bank NV, each of which paid hundreds of millions of dollars to settle the same accusations that Standard Chartered now faces? In his Aug. 6 complaint, Lawsky says Standard Chartered sought to hide Iranian government transactions by stripping information from U.S. wire transfers that would have identified Iran as the source of the money. Such “books and records” deceptions, illegal under New York and U.S. law, provoked Lawsky to call Standard Chartered a “rogue institution” that could lose its license to operate in the state.

The U.S. has settled many other cases against European banks without threatening their ability to operate in the country, despite finding similar evidence that bank employees conspired to deceive regulators. The U.S. also didn’t accuse the other banks of being rogue institutions, or of making the financial system “vulnerable to terrorists, weapons dealers, drug kingpins and corrupt regimes,” accusations Lawsky lodged against Standard Chartered.

Second, why did Lawsky go after Standard Chartered alone, blindsiding the U.S. Treasury Department, which was handling the case as it had the others? Bank of England Governor Mervyn King is asking the same question.


U.K. Treasury officials separately asked their U.S. counterparts to clarify just what rules were allegedly broken, clearly implying that New York was overreaching. Standard Chartered was apparently cooperating in the federal investigation by providing e-mails and other documents, presumably with a view to settling.

Finally, why is a New York state regulator taking the lead in a case that involves a breach of federal regulations that were imposed as a matter of foreign policy and are normally policed by the Treasury? Lawsky has a duty to ensure that banking licenses are properly granted in New York. That gives him significant power. But this case surely seems a federal one.

We don’t know the answers to these questions. If there aren’t good ones to be had, Lawsky’s judgment should come under scrutiny as much as Standard Chartered’s.

If the bank broke the law, it should be punished. Still, let’s be clear about the fundamentals. The reason a case arose at all is that, from 2001 to 2007, Standard Chartered was clearing Iran’s U.S. dollar transactions in New York. At the time, the U.S. had imposed tough sanctions on Iran, while Europe’s were weaker. European businesses continued trading with Iran, often encouraged by their governments, with European banks clearing the transactions.

The Standard Chartered transactions implicated U.S. regulations because oil is traded in dollars, the world’s reserve currency. As Lawsky points out in his order, Standard Chartered was clearing $500 million a day for the Iranian central bank, the conduit for the country’s oil revenue. As Lawsky also said, that wouldn’t have been feasible if Standard Chartered informed U.S. regulators that the money was Iranian, triggering background checks and delays at the very least. Lawsky says $250 billion of illegal transactions were involved. The bank says the figure is more like $14 million, or 0.1 percent of its Iran-related transfers.

At the time, to some Europeans, the U.S. was abusing its reserve currency status to impose its sanctions laws on other countries. Hence the inflammatory e-mail from a senior Standard Chartered executive, referring to U.S. policy with an obscenity. Lawsky quotes it as saying: “Who are you to tell us, the rest of the world, that we’re not going to deal with the Iranians.”

Extraterritorial Law

The European Union, Canada and Mexico said much the same, if in more measured terms, in 1996, shortly after the U.S. first sought to extend its sanctions by punishing foreign companies that do business with Iran. Each passed regulations to counter what they considered an illegal extraterritorial application of U.S. law. The EU, for example, forbade its citizens from complying with the U.S.’s Iran and Libya Sanctions Act.

Those regulations don’t cover transactions cleared in New York. But the controversy over U.S. extraterritoriality won’t go away. It’s one reason that the U.S. Department of State granted waivers to China, India, South Korea and 17 others from a new law that bars oil-related transactions with Iran’s central bank. Enforcing the U.S. sanctions on these countries, which depend heavily on Iranian oil, would be diplomatic dynamite.

Come December, however, the U.S. will have to review those waivers, which can be granted only if the country in question has reduced its oil imports from Iran. China, in particular, has painful memories of humiliating extraterritorial laws imposed by Europeans in the 1800s, and might retaliate if penalized.

Making the Iran sanctions stick has only become more urgent for Barack Obama’s administration. It has pledged, rightly in our view, to do what it takes to prevent Iran from acquiring a nuclear bomb. If sanctions don’t bite, that will sharply increase pressure to go to war.

It’s partly in recognition of that choice that the E.U. has, as of July, joined the U.S. in tightening the sanctions noose on Iran by embargoing its oil shipments. Standard Chartered says it stopped all new business in Iran five years ago. That doesn’t give it a free pass on previous wrongdoing. But if Lawsky’s accusations don’t hold up, his sturm und drang over transactions that a U.K. bank cleared back when the E.U. opposed the sanctions seems unlikely to help what has now become a common U.S.-European cause.

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