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How Treasury Justified a $13 Million Smaller SCB Settlement than NYS

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Back in August, Standard Chartered Bank settled with New York’s Superintendent of Financial Services for laundering Iran and other sanctioned countries’ money; that settlement was for $340 million.

Today, Treasury announced its settlement for the same fraud. Today’s settlement–which includes “U.S. Attorney’s Office for the District of Columbia, the Department of Justice’s National Security Division, the Department of Justice’s Asset Forfeiture and Money Laundering Section and the New York County District Attorney’s Office; as well as orders involving the Board of Governors with the cooperation of the UK’s Financial Services Authority,”–is for $327 million, of which Treasury’s take is $132 million.

When SCB settled with SFS, it admitted that its fraud had covered $250 billion in transactions (thus refuting the dubious work done by Promotory Financial).

The New York State Department of Financial Services (“DFS”) and Standard Chartered Bank (“Bank”) have reached an agreement to settle the matters raised in the DFS Order dated August 6, 2012. The parties have agreed that the conduct at issue involved transactions of at least $250 billion. [my emphasis]

But today’s Treasury settlement shrinks that claim this way:

While SCB’s omission of information affected approximately 60,000 transactions related to Iran totaling $250 billion, the vast majority of these transactions do not appear to have been violations of the Iranian Transaction Regulations, 31 C.F.R. Part 560 due to authorizations and exemptions which were in place at the time.

Treasury would have us believe that SCB engaged in fraud to hide Iran’s involvement of money transfers even with legitimate transfers.

Maybe that’s right. Without a lot more transparency, we’ll just have to take Treasury’s word for the claim that the vast majority of money Iran was transferring up to 2008 didn’t fall under sanctions in place at the time, as dubious as that is.

Now, none of this addresses the scope of the violations involving other sanctioned countries, such as the $96 million transfered to Sudan described in the Treasury settlement but not the SFS one. Nor does it address the $243,500 it transfered for a designated drug kingpin, Connect Telecom, in 2011, after SCB had already started discussing these issues with “certain law enforcement agencies” and NYS.

It also relies on this claim:

OFAC had not issued a penalty notice of Finding of Violation against SCB in the five years preceding the apparent violations.

To make SCB look compliant, even though the Fed had been in discussions with SCB about these violations starting in 2004.

And of course, it includes this language:

Without this Agreement constituting an admission or denial by SCB of any allegation made or implied by OFAC in connection with this matter…

In spite of SCB’s earlier admissions to SFS.

Again, SCB has already admitted to some of this fraud. But Treasury has gone out of its way to not only not require an admission, but to retroactively label hundreds of billions of dollars in fraudulent transactions kosher.

It’s really time to start asking why that is.

Treasury’s Quaint Notion of “Voluntarily”

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As DDay noted earlier, Treasury will ignore that Standard Chartered signed a settlement confirming that it had hidden $250 billion worth of transfers by gaming its documentation so that it can sign a softball unified settlement with everyone else.

It’s more important that SCB get its softball settlement, I guess, than Treasury maintain even a shred of credibility.

But in addition to simply ignoring that earlier settlement, Treasury is also giving this excuse for its softball settlement.

Prosecutors and Treasury officials will also assess a smaller penalty because the bank came forward voluntarily with information about its transactions and compliance with United States sanctions, according to the law enforcement officials.

Remember this, from Benjamin Lawsky’s original settlement?

At a meeting in May 2010, SCB assured the Department that it would take immediate corrective action. Notwithstanding that promise, the Department‟s last regulatory examination of the New York branch in 2011 identified continuing and significant BSA/AML

failures, including:

  • An OFAC compliance system that lacked the ability to identify misspellings and variations of names on the OFAC sanctioned list.
  • No documented evidence of investigation before release of funds for transactions with parties whose names matched the OFAC-sanctioned list.
  • Outsourcing of the entire OFAC compliance process for the New York branch to Chennai, India, with no evidence of any oversight or communication between the Chennai and the New York offices. [my emphasis]

As of last year, SCB wasn’t even doing what they claimed they were doing to fix this problem. More troubling, they had replicated what they and other banks had done before, simply send the office engaging in this fraud so far away from the US so as to offer the US branch plausible deniability.

That’s what counts as “voluntary” cooperation in TurboTax Timmeh Geithner’s Treasury Department: ongoing efforts to continue engaging in the same kind of games.

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Promontory Financial Group Describes a New “Risk-Based” Approach to Anti-Money Laundering

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In light of the recent Standard Chartered Bank flap, Saturday’s report that Deutsche Bank is under investigation for similar behavior, and today’s report that RBS (as well as two other banks, one of which is Sumitomo Mitsui) is as well, I want to look at an article on Anti-Money Laundering enforcement a Promontory Financial Group exec, Michael Dawson, published in American Banker just one week before NY’s Superintendent of Financial Services, Benjamin Lawsky, filed an order against SCB alone.

Around the same time Dawson was writing this, remember, his company was involved in a review of SCB’s laundering of Iranian funds that would show a tiny fraction of the total exposure that SCB would ultimately admit to. That is, Dawson’s comments probably provide a glimpse into what PFG was seeing not just in Citibank and Commerzbank enforcement actions, which he discusses, but also in SCB. And it might help to explain why other regulators were so intent on crafting an SCB settlement based on just $14 million in violations rather than $250 billion.

Dawson reports seeing a change in recent AML/BSA enforcement actions, away from a “rules-based approach” toward a “risk-based approach.” He suggests that regulators are demanding not a broad-based examination of the scope of AML violations, but instead more targeted information about who posed the biggest risk laundering money and what they were doing.

Instead of requiring expensive reviews of extended periods of time for a broad range of potential suspicious activity, the latest enforcement actions emphasize a risk-based approach to AML compliance, with several of the actions requiring a risk assessment or enhancements to an existing assessment.

[snip]

The level of specificity required is noteworthy and includes, among other things, detail on the volumes and types of transactions and services by country or geographic location as well as detail on the numbers of customers that typically pose higher BSA/AML risk. The actions also require a more holistic approach, requiring the results of the bank’s Customer Identification Program and Customer Due Diligence program to be integrated in the risk assessment. [my emphasis]

This sounds like the regulators are interested not in discovering how banks are complicit in money laundering, but rather using the banks to get details on key people who money launder and the tactics just those key people (terrorists, cartel kingpins, mean Iranians) use. (Note, I think something similar, but even more significant, happened last year when JPMC got busted for trading with Iran, but no one seems to remember that happened.)

After making these broad statements about the general direction of AML enforcement, Dawson distinguishes between what the Office of the Comptroller of the Currency is requiring and what the Fed is. OCC has not only shortened the period which it requires banks to examine problematic behavior, but it has also permitted banks to conduct their own reviews (which seems to have Dawson worried about losing the business of providing such services for banks).

Where the OCC required lookbacks, it asked for risk-based, targeted reviews, rather than comprehensive look-backs that were sometimes found in earlier enforcement actions. The recent actions either specify a shorter look-back period than has been specified in the past or, in the case of the Citibank action, no explicitly specified period, subject to the ability of the regulator to expand the look-back depending on the results of the more limited period.

Also, the OCC actions allowed the institutions to conduct the review themselves and either do not explicitly mention an independent consultant or limit the role of the independent consultant to “supervising and certifying” the look-back.

The OCC, at least, doesn’t sound like it’s doing “smarter” enforcement, but rather doing lax enforcement. Remember, though, that OCC got a newly-confirmed Comptroller during this period, who talked aggressively at the recent Permanent Subcommittee on Investigations hearing on HSBC’s egregious AML problems–though that talk partly echoed what Dawson has to say about “flexibility” and a “holistic” approach.

Meanwhile, according to Dawson, the Fed doesn’t seem to be offering quite as much flexibility. Dawson describes the Fed employing this new risk-based approach, but it is still requiring longer reviews (though not all that long, at 16 months) and outside consultants to complete the reviews.

The Fed, in its action against Commerzbank requiring a lookback, also showed some flexibility. Read more →

DOJ Corporate Settlement Dealer Takes Over at FinCEN

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In February, here’s what Jennifer Shasky Calvery said in testimony before a House Subcommittee.

These staggering amounts of money in the hands of some of the worst criminal elements create a terrifyingly vicious cycle – money enables [the crooks] to corrupt the economic and political systems in which they operate, thereby allowing them to consolidate and expand their power and influence, which gives rise to more opportunity to commit crime and generate revenue.

Mind you, I’m cherry picking a quote from testimony about Transnational Crime Organizations. But it shows the blindness DOJ (and the Administration generally) have had as they try to repurpose their counter-terrorism tools to combat transnational crime: to some extent, what’s true of drug cartels is also true of the banks that have escaped prosecution even while doing as much damage as the drug cartels.

And yet we never get around to prosecuting our own transnational criminal organizations, the banks.

It’s worth keeping in mind, now that Shasky Calvery takes over at Treasury’s FinCEN, the part of the Agency that makes sure corporations are complying with reporting requirements of suspected financial crimes.

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By “Cooperative Investigations” Does WSJ Mean “Protection Money”?

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The WSJ has a funny response to the Standard Chartered Bank settlement. Aside from the predictable claims that Benjamin Lawsky, the NY Superintendent of Financial Services, played hardball to advance his political career, it suggests Lawsky upset a system of “cooperative investigations” that NYC’s District Attorney has in place.

These columns have long supported tough enforcement of Iran sanctions, including efforts by the Manhattan District Attorney and U.S. Treasury against foreign banks. The D.A.’s office has sanctioned four banks in recent years, extracting $1.8 billion in settlements and defining new standards of behavior.

Other cooperative investigations have long been underway, and Mr. Lawsky’s main contribution seems to have been to jump the queue so he could get a big publicity score. He told the D.A.’s office he was going public the night before his announcement and he only told the feds on the same day.

This seems to be the central pique of the editorial. Lawsky “jumped the queue,” which sounds an awful like a queue of regulators in line to get payouts from banks so they can look the other way from money laundering. Is that the problem here? Lawsky violated the DA’s turf, and took what the DA believed was his office’s rightful payment, and oh by the way also exposed the underlying Get Out of Jail Free industry that seems to be the service for which the DA and other regulators have gotten these payments in the past?

Are all the attacks on Lawsky about him taking fines that other regulators had planned on receiving? About money going to NY state, rather than NYC?

Mind you, to paint this as a “cooperative investigation,” the WSJ has to ignore several facts.

  • SCB did not, as WSJ claims, rat itself out to regulators in 2010. On the contrary, in early 2009, law enforcement authorities came to it.
  • Much of the underlying fraud (which WSJ seems to believe is not illegal) happened at a time when SCB was operating under a Written Agreement mandating certain behaviors because of past money laundering violations. Indeed, SCB lied to regulators about its Iranian transactions to get the Written Agreement lifted in 2006.
  • SCB has moved all its Office of Foreign Asset Controls compliance to Chennai and–as with its past efforts to evade regulations–the Chennai office does not communicate on these issues with the NY office. Moreover, SCB’s process still seems to allow for the same methods to process transactions of sanctioned individuals.

Of course, had WSJ admitted to these facts, it would have had to acknowledge that the “new standards of behavior” the DA’s office has put in place includes ongoing efforts to evade money laundering laws.

Standard Chartered Bank Admits Promontory’s Estimates of Its Iran Business Were Wrong

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Standard Chartered just settled with NY’s Superintendent of Financial Services. The settlement–for $340 250 million and a monitor of SFS’ choosing–is less than some reports said the settlement might have been.

But here’s the detail I’m most interested in:

The New York State Department of Financial Services (“DFS”) and Standard Chartered Bank (“Bank”) have reached an agreement to settle the matters raised in the DFS Order dated August 6, 2012. The parties have agreed that the conduct at issue involved transactions of at least $250 billion. [my emphasis]

Just a .14% fine, so not that big. But an admission that the scope of the fraud and the Iran business really did amount to $250 billion.

I find that interesting for two reasons. First, because it’s going to cause all kinds of headaches for the folks at Treasury who would like to let SCB off easy but ordinarily base settlements on the amount of the underlying activity.

More importantly, for me, because it demonstrates what a sham the Get Out of Jail Free industry is. A former OCC head and his minions at Promontory Financial Group claimed to have added it all up and determined that SCB only hid $14 million of transactions from Iran. SCB now says that Promontory was wrong.

By orders of magnitude.

Granted, SCB–and most of the people who pay Promontory to soft-pedal their crimes and risk–tried not to admit it had gotten that estimate from Promontory. Going forward, I expect we’ll see Promontory’s clients hide their involvement even more.

Still, this is a useful demonstration of how corrupt the Get Out of Jail Free industry is.

Update: Once again, I got my numbers wrong. The settlement is for $340 million.

The Superintendent of Financial Services Draws the Curtain Back on the Get Out of Jail Free Industry

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As Yves and I suspected, NY Superintendent of Financial Services Benjamin Lawsky was breaking the unwritten rules that regulators should help banks avoid any consequences for violating sanctions and other violations when he released details of Standard Chartered Bank’s dealings with Iran.

The Treasury Department and Federal Reserve were blindsided and angered by New York’s banking regulator’s decision to launch an explosive attack on Standard Chartered Plc over $250 billion in alleged money laundering transactions tied to Iran, sources familiar with the situation said.

[snip]

Lawsky’s move also undercut the Treasury’s Office of Foreign Assets Control (OFAC), which has made a priority of enforcing economic sanctions against Iran. The surprise left the office’s leader, David Cohen, the undersecretary for terrorism and financial intelligence, scrambling to come up with a response, sources said.

Reuters lays out the steps that SCB took that normally should be enough to minimize any consequences for violating Iran sanctions. First, you hire Sullivan and Cromwell and act contrite. Then, you pay a consultant to conduct a review and claim the violations involved just $14 billion million in transactions as opposed to $250 billion shown in your bank records.

As part of a review the bank sought to give to regulators, Standard Chartered hired Promontory Financial Group, a Washington D.C. consulting firm run by Eugene Ludwig, who served as U.S. Comptroller of the Currency from 1993-98. Promontory was hired to review Standard Chartered’s transactions tied to Iran. The bank’s review ultimately settled on the figure of less than $14 million for improper transactions.

Then you bury all the embarrassing details showing willful flouting of the rules, so the proles don’t learn how craven banks really are.

I suspect, for the reasons laid out here, that OFAC will still find a way to give SCB a nice cushy settlement. But Lawsky has revealed what really goes on behind these settlements: the coziness, the misrepresentations, the complicity in hiding the true face of banking.

Update: Thanks to Jim–who is supposed to be on vacation–for noting I got the amount the consultant decided was tied to Iran wrong by an order of magnitude: million, not billion. Which means the consultant’s job was to minimize the exposure to a fraction of a percent of the true exposure.

Update: Barry Ritholtz’s take on this.

Why Is the Superintendent of Financial Services Policing our Iran Sanctions?

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NY’s Superintendent of Financial Services, Benjamin Lawsky, yesterday dropped the hammer on the UK’s Standard Chartered Bank, accusing it of doctoring financial documents to facilitate the laundering of Iranian money through its US banks.

Like Yves, I think one of the most striking details about this story is that SFS–and not Treasury’s Office of Foreign Assets Controls–is making the accusation.

But it also appears that Lawsky has end run, as in embarrassed, the Treasury and the New York Fed. As part of its defense, SCB contends it was already cooperating with Federal regulators:

In January 2010, the Group voluntarily approached all relevant US agencies, including the DFS, and informed them that we had initiated a review of historical US dollar transactions and their compliance with US sanctions…The Group waived its attorney-client and work product privileges to ensure that all the US agencies would receive all relevant information.

The agencies in question are “DFS, the Department of Justice, the Office of Foreign Assets Control, the Federal Reserve Group of New York and the District Attorney of New York.”

[snip]

The lack of action by everyone ex the lowly New York banking supervisor is mighty troubling. The evidence presented in Lawsky’s filing is compelling; he clearly has not gone off half cocked. Why has he pressed forward and announced this on his own? The Treasury Department’s Office of Terrorism and Financial Intelligence has supposedly been all over terrorist finance; the consultants to that effort typically have very high level security clearances and top level access (one colleague who worked on this effort in the Paulson Treasury could get the former ECB chief Trichet on the phone). For them not to have pursued it anywhere as aggressively as a vastly less well resourced state banking regulator, particularly when Iran is now the designated Foreign Enemy #1, does not pass the smell test.

Normally, we’d see accusations like SFS released today from Treasury’s OFAC, perhaps (for charges as scandalous as these) in conjunction with the NY DA and/or a US Attorney. And yet OFAC has had these materials in hand for 2 years, and has done nothing.

In fact, we have a pretty good idea what OFAC’s action would look like, because earlier this year it sanctioned ING for actions that were similar in type, albeit larger in number (20,000 versus 60,000) and far larger in dollar amount ($1.6 billion involving Cuba versus $250 billion involving Iran). Both banks were doctoring fields in SWIFT forms to hide the source or destination of their transfers.

ING:

Beginning in 2001, ING Curacao increasingly used MT 202 cover payments to send Cuba-related payments to unaffiliated U.S. banks, which would not have to include originator or beneficiary information related to Cuban parties. For serial payments, up until the beginning of 2003, NCB populated field 50 of the outgoing SWIFT MT 103 message with its own name or Bank Identifier Code, Beginning in the second quarter of 2003, NCB populated field 50 with its customer’s name, but omitted address information. ING Curacao also included its customer’s name, but no address information, in field 50 of outgoing SWIFT messages.

SCB:

Rather than institute  [a required to ensure the funds didn’t come from Iran], SCB instead conspired with Iranian Clients to transmit misinformation to the New York branch by removing and otherwise misrepresenting wire transfer data that could identify Iranian parties. For example, regarding necessary wire transfer documentation, SCB instructed CBI/Markazi to “send in their MT 202‟s with a [SCB London‟s business identifier code] as this is what we required them to do in the initial set up of the account. Therefore, the payments going to NY do not appear to NY to have come from an Iranian Bank.” (emphasis added). SCB also accomplished this subterfuge by: (a) inserting special characters (such as “.”) in electronic message fields used to identify transacting parties; Read more →