August 15, 2012

No Evidence That Standard Chartered Is Guilty As Charged

Hester Peirce

Former Senior Research Fellow
Summary

"An administrative proceeding before a state banking regulator—whether or not it yields a settlement—is not the right forum for assessing breaches of a regulatory scheme designed to protect our national security interests."

Contact us
To speak with a scholar or learn more on this topic, visit our contact page.

Yesterday, New York's top regulator of the state's financial services firms, Benjamin Lawsky, settled with Standard Chartered, the bank he denounced publicly last week for allegedly facilitating its clients' evasion of Iran sanctions. Standard Chartered challenged the New York regulator's version of the facts, but agreed to pay a penalty of $340 million and submit to on-site monitoring. The settlement was one of expedience, and the process that produced it doesn't give us any assurance that Standard Chartered is actually guilty as charged.

Mr. Lawsky's agency, the Department of Financial Services, issued an administrative order last Monday that directed Standard Chartered to appear before the agency to explain why its license to operate in the State of New York should not be revoked. If Standard Chartered had failed to overcome the presumption of guilt, the bank would have been forced to close its New York branch, which serves as the headquarters for the international bank's operations in North and South America. Agreeing to settle looked a lot more productive than showing up at the hearing to plead innocence before an agency that had already determined the bank's guilt.

An administrative proceeding before a state banking regulator -- whether or not it yields a settlement -- is not the right forum for assessing breaches of a regulatory scheme designed to protect our national security interests. Mr. Lawsky's order is grounded in his interpretations of the bank's compliance with sanctions prohibitions established by Treasury's Office of Foreign Assets Control. Matters of national security and foreign policy, particularly those of such complexity and importance as issues dealing with Iran, should be handled in the first instance by federal officials with the requisite experience and sensitivities.

Having state banking regulators enter the interpretive fray makes it more difficult for well-intentioned entities to figure out what the rules are and how to comply with them. OFAC - not a New York regulator - is best positioned to interpret its rules consistent with its mission. Of course, if OFAC were to find serious violations of its rules, New York's Department of Financial Services might well be justified in revoking Standard Chartered's state banking charter.

Although occasionally conceding that the conduct described is alleged and not proved, the order makes definitive declarations about the perfidy of Standard Chartered. The order charged Standard Chartered with having "operated as a rogue institution" and declared that the bank was "[m]otivated by greed." Not surprisingly, Mr. Lawsky's accusations had an immediate and dramatically negative effect on the bank's stock price.

Most significantly, the order concluded that "By definition, any banking institution that engages in such conduct is unsafe and unsound." That is a serious charge for a banking regulator to make on the basis of unproven accusations. A bank that has been deemed not to be safe and sound won't attract many customers and might lose the ones it has. The settlement announcement does not make clear how paying a $340 million penalty makes the bank any safer or more sound.

Mr. Lawsky did not stop at implicating Standard Chartered, but also leveled serious accusations of misconduct against Standard Chartered's consultant, Deloitte and Touche, LLP. Tarring a firm in a manner that deprives it of the ability to defend itself is not standard practice for regulators. Now that the matter with Standard Chartered is settled, the charges against Deloitte linger, and there does not appear to be any opportunity for the firm to attempt to clear its name in the official record. The effects of this blow to the firm's integrity, whether justified or not, could be felt in all of Deloitte's businesses, including its audit business.

Regulators do little to uphold the rule of law when, in their rush to appear tough, they do not even offer the entities accused of bad behavior a meaningful opportunity in an appropriate forum to explain themselves. Mr. Lawsky's regulatory zeal to search out and punish wrongdoing is commendable, but strong procedural protections are an important component of any credible regulatory system. Regulators who aim to punish the unjust must behave justly.