Is the DFS case against StanChart half-baked?
I know nothing about the ins-and-outs of the New York State Department of Financial Services’ (DFS) complaint relating to Standard Chartered’s dollar clearing for Iranian clients. If the bank is guilty of breaching sanctions – which it vigorously denies – then it should face the penalties. I am, however, troubled by the document signed by Benjamin Lawsky, Superintendent of Financial Services.
I’m perplexed by the ultimate lack of finality or certainty contained in an aggressive document in which the tone is emotive and in places linguistically manipulative; where comments appear presumptuous and where guilt is implied. And I’m confused by what looks like a unilateral decision of the DFS to proceed with what may end up being a half-baked attempt to prove guilt at a time when the bank is already conducting a review and was already in touch with regulatory bodies about the matter anyway.
Take the following examples where I think the DFS may have exceeded its authority (italics and parenthetical insertions are mine):
“Motivated by greed” [the DFS surely has no idea what SCB’s motivations were; such comments are therefore judgemental and highly speculative] “SCB acted for at least ten years without any regard for the legal, reputational, and national security consequences of its flagrantly deceptive actions”. [Bearing in mind the legal violations are all unproven, this is presumptuous and misleading].
“…SCB successfully misled New York regulators to believe that it had corrected serious flaws in its BSA/AML program”. [Point of order here: you can’t unsuccessfully mislead someone; by definition if you’re not successful, you didn’t mislead them but the comment is geared to implying intent].
I’m perplexed by the ultimate lack of finality or certainty contained in a very aggressive document in which the tone is emotive and in places linguistically manipulative, where comments appear presumptuous and where guilt is inferred
More seriously perhaps, the document is peppered with “apparently”, which appears misplaced in such a document and certainly undermines the case. Check the following (my underlining, insertions and italics):
“SCB intentionally [presumption] withheld material information from New York and Federal regulators in its effort to service Iranian Clients. SCB carefully planned its deception and was apparently aided by its consultant Deloitte & Touche, LLP (“D&T”), which intentionally [presumption] omitted critical information in its “independent report” to regulators.
“SCB’s success in US dollar clearing for Iranian Clients stems from the documented willingness of its most senior management to deceive regulators and violate US law. Worse yet, SCB apparently adopted this strategy with full knowledge of the risks involved. “
“…Iranian Clients apparently pressured SCB by warning that disclosure of their identities to US banks would cause unacceptable delays in clearing funds. “
“SCB sought outside legal advice regarding its U-Turn policy and was apparently instructed that compliance with US law required a process by which its New York branch received “foreknowledge of such authorized [U-turn] payments” so as to “otherwise ascertain that the payments are authorized.”
“Consistent with its historical views, SCB apparently decided that regulatory compliance would impede any such business expansion.“
“… Benjamin M. Lawsky, Superintendent of the New York State Department of Financial Services caused an investigation to be made of Standard Chartered Bank … for apparent grave violations of law and regulation.”
“The Department’s initial focus is on SCB’s apparent systematic misconduct on behalf of Iranian Clients. However, the Department’s review has uncovered evidence with respect to what are apparently similar SCB schemes to conduct business with other U sanctioned countries, such as Libya, Myanmar and Sudan. “
The document’s emotional conclusion is clearly geared to generating a visceral populist response: “Led by its most senior management, SCB designed and implemented an elaborate scheme by which to use its New York branch as a front for prohibited dealings with Iran – dealings that indisputably” [evidence?] “helped sustain a global threat to peace and stability” [a bit of a stretch]. “By definition, any banking institution that engages in such conduct is unsafe and unsound” [is this a legal point?].
After the conclusion, there is a whole section entitled: “Apparent Violations of Law”:
“Whereas, having considered the foregoing evidence of SCB’s apparent fraudulent and deceptive conduct toward the Department and other industry regulators…”
“It is now hereby ordered that … SCB shall appear before the Superintendent … to explain these apparent violations of law …”
Standard Chartered said it “strongly rejects the position of the portrayal of facts as set out in the order issued by the DFS”. It added: “well over 99.9% of the transactions relating to Iran complied with the U-turn regulations. The total value of transactions which did not follow the U-turn was under US$14m”. The DFS, don’t forget, alleges 60,000 breaches worth US$250bn. Some discrepancy.
The group said it believed the interpretation reflected in the DFS order of the U-turn exemption … “is incorrect as a matter of law”. Given the huge differences here, I sense this issue will rumble on.
In the meantime, Ian Gordon, a bank analyst at Investec, reckons Standard Chartered shares are a buy at current levels.. The shares hit an intra-day low of 1098p at 10:54am today but had clawed back some ground by 3:05pm London time and traded at 1218p although they’re still some ways off the 1603.5p they were at 4.15pm on Monday.
I didn’t open my wallet yesterday to position ahead of a potential Itau Unibanco takeover in the US. Bearing in mind the odd nature of the DFS complaint, I’m tempted to put some cash on the table on StanChart.