Standard Chartered money-laundering deal: Did New York jump the gun?

Normally, there is a pecking order when it comes to prosecuting crimes of international finance: local officials defer to state law enforcement, who defer to the feds, who are usually the big bird on the perch.

But that’s not how it’s worked in the case of Standard Chartered Bank. The bank is paying a $340 million penalty to the state of New York, which threatened to revoke its license over charges that the bank laundered money to Iran over a seven-year period.

New York's actions prompt questions about why federal officials, who have been looking at the same information for the past five years, did not act sooner – and whether New York has damaged its relationship with the federal government by going first. Indeed, the agreement could force the federal government's hand, and the US Treasury may not want to accept less money than the state of New York.

“I think they will take action, but they won’t do it with a smile on their faces,” says Jimmy Gurulé, a former undersecretary for enforcement at the US Treasury, now a professor of law at Notre Dame University in South Bend, Ind. “The optics of this will look very bad if the state takes action and the Feds do not.”

As far as the potential penalty federal officials might want, “the settlement by the state establishes a floor,” says Anthony Michael Sabino, a professor at St. John’s University in New York. “They will probably want an amount north of that.”

Mr. Gurulé says he has heard one estimate of a potential fine as large as $360 million. If true, it would make the combined state and federal fines the largest sanction ever imposed for not complying with anti-money laundering regulations. Currently, the largest amount paid by a bank is $619 million paid by Dutch bank ING in June for laundering money for Iranian and Cuban clients.

In almost all such cases examined by the government, banks try to hide their clients’ identities. They do this by stripping the name of their clients from their electronic communications when they move money through their US subsidiary. While that is not illegal, it means the US subsidiary can not determine if the transaction is illegal, as is required by US law. And, it means that US regulators also can not tell if the transaction is legal. 

There are several potential reason why the US government has not yet acted. 

A July US Senate report looking at money-laundering violations by HSBC found that the investigation process was convoluted and cumbersome. Federal regulators did not treat the violations as serious breaches, and regulators were too differential and willing to give banks more time to correct their deficiencies, says Gurulé, whose oversight included the Office of Foreign Assets Control, responsible for enforcing US economic sanctions. 

But the documents in the New York case also included a footnote indicating the bank may have laundered money for other countries under sanctions. “That might be another reason the feds were slower – they might have wanted to sweep those violations in as well,” says Gurulé.

A third possibility is that Benjamin Lawsky, head of New York's Department of Financial Services – which has been up and running for less than a year – doesn't play by the traditional rules. He is a former federal prosecutor, not a former banker.

“He takes a different view, he is less deferential,” says Gurulé. After five years of investigation, he says, “I think he reached the conclusion, enough is enough, I’m tired of waiting.”

While that may be beneficial for New York in the short run, Professor Sabino of St. John's wonders if Mr. Lawsky may have burned some bridges.

“Lawsky has ruffled some feathers,” he says. “The feds may not want to cooperate with him in the future, and when it comes to financial regulation, cooperation is paramount.”

Although the violations are also being investigated by both the Manhattan District Attorney and Department of Justice, it would be unusual for either of them to bring a criminal case.

So far, the federal government has found five banks that have illegally laundered money. “Not one bank official has been criminally prosecuted,” says Gurulé. “It makes me wonder if the banks have gone from too big to fail to too big to prosecute.”