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Money Laundering: Are Banks a Law Unto Themselves?

It is time to answer two questions:

  • Do the large international banks consider themselves above the law?
  • Do the principal bank regulators in the U.S. -- Treasury, the Fed, the Office of the Comptroller of the Currency and the Justice Department really care?

Earlier this week, Standard Chartered Bank of the UK paid a $340 million fine to settle a money laundering investigation by the hitherto little known New York State Department of Financial Services, focusing international attention on the Department’s Superintendent, Benjamin Lawsky. It seems as if the bank routed funds through its U.S. operation so that customers in Iran could clear transactions in the United States, an important advantage.

This settlements came on the heels of an alarming expose of similar operations by HSBC by the Senate Permanent Subcommittee on Investigations. HSBC not only allowed Iran and other pariah states to have access to the U.S. financial system, but also turned a blind eye as Mexican drug cartels used the bank to launder billions of dollars. HSBC has set aside $700 million to pay potential fines. In March, the Treasury Department settled a similar investigation of the Dutch bank ING for $619 million. Credit Suisse, Lloyds and Barclays have also recently paid fines in the hundreds of millions of dollars to settle accusations that they facilitated prohibited financial transactions.

Adding these figures to the $250 million fine of Barclays for rigging LOBOR rates, the haul so far could be $1.25 billion. Perhaps a solution to the deficit problem is at hand.

Prior to 2008, there was a loophole in U.S. law that emboldened these international banks to skirt the spirit of U.S. sanctions against rogue states. Regulators in the UK claimed that these inquiries were unfairly designed to aid U.S. competitors by over-zealous application of vague rules.

The facts are less generous to the banks. Aside from HSBC’s accommodation of drug cartels, it is clear that banks actively altered incriminating information in reporting documents and disguised transactions so as to avoid detection by U.S. authorities. This is morally corrupt activity that was encouraged by the management of the institutions. HSBC even circulated memos touting the practice and providing pointers on how to disguise illegal transactions.

These banks knew that they were flaunting the law. They did not care. We are entering a new era in the relationship between banks and their regulators. It is, as yet, unknown how this relationship will work. Clearly, the UK, whose economy is so very dependent on financial services industry, will be accommodating to the banks regardless of the rules. Its regulators came to the defense of Standard Chartered rather than wait for the investigation to play out. Surely they were aware of the pervasive effort to cover up the truth at the bank.

But the U.S. regulators were not much better. Press reports prior to the settlement were rife with unattributed innuendo demeaning Lawsky’s office and the New York State agency that he heads. It seems that he did not follow unwritten protocol and jumped the regulatory queue.

Perhaps this was, at least in part, a grab for fame and glory by Lawsky. But, what about the HSBC investigation and hearing? Senator Levin’s subcommittee published a 350-page report on HSBC, styled as a case study of widespread laundering activities. This information was known throughout the government for years. The report castigates regulatory indifference to the activities of HSBC, particularly the Office of the Comptroller of the Currency. It seems that the OCC decided that unmistakable evidence of money laundering was outside the scope of its responsibility -- bank safety and soundness. The OCC sent letters repeatedly to the bank but never followed up. This begs the question whether the loss of a bank charter or the potential criminal conviction of the bank might affect safety and soundness. Common sense says yes. But even if laundering was outside the specific purview of the OCC, a call to report that the bank might just be assisting Mexican drug lords and the development of nukes by rogue states is hardly too much to ask.

This all suggests that the banks and their regulators view the rules with disdain and indifference. The financial system is a global law unto itself, above the will of the people expressed by Congress. If you doubt this, I recommend that you reflect on the arrogance of Jamie Dimon and the incredulity of Lloyd Blankfein that Senator Levin considered it morally repugnant that Goldman touted new issue securities for sale to clients in a market that the firm believed was on the precipice of collapse.