Big Compliance Implications in StanChart Settlement

In a new wrinkle for compliance, Britain's Standard Chartered Bank will pay $340 million to settle claims that it laundered hundreds of billions of dollars in illegal foreign transactions for Iran and other parties. The twist here revolves around who brought the case. Treasury? Nope. Fed? Uh-uh. DOJ? Try again. This settlement is with New York State Department of Financial Services, a relatively new regulator who is using what we will call "licensing-leverage" to get results from SC.

The NYDFS and its Superintendent, Benjamin Lawsky, accused Standard Chartered of scheming with Iran to launder as much as $250B. Without getting too deep into the details of U-Turns and wire stripping which you can find here, let's focus on what this means going forward and what the fallout will be.

The settlement is important in a number of ways. First, it is an example of a state regulator, using its power of oversight in the licensing area, to bypass its more powerful Federal brethren and strike its own deal with a large foreign bank. Federal regulators were incensed that Lawsky and Co. would dare to "jump the line" and forge its own settlement with SC, and the subsequent rhetoric painted the NY agency as a "rogue regulator", a "non-team player" and the reincarnation of the headline-grabbing Eliot Spitzer. Detractors also claim that despite the settlement being the largest amount ever paid to a single regulator, SC could have been separated from an even bigger amount if forced to settle with multiple regulators simultaneously.

In this case, Lawsky and NYDFS have shaken up the old order. SC offered him $5 million to settle initially, which likely was the final impetus for the state to push forward on its own, threatening to revoke the NY State banking license. SC ultimately caved, and the fine is only one of the things they agreed to do to remedy the situation.

In addition to the fine, SC agreed to give the DFS significant access to its operations to monitor for compliance. The bank will install a monitor for at least two years who will report directly to DFS, and DFS examiners will be placed directly at the bank. The bank also agreed to permanently install personnel within its NY branch to oversee and audit any offshore money-laundering due diligence and monitoring undertaken by the big bank. That, to me, is the big one. Does this lead to a whole new, high-profile AML compliance role cropping up at banks that do business in New York? Perhaps.

As Meredith Rathbone, a partner at the law firm of Steptoe & Johnson stated, the threat to pull SC's license may be viewed as much more ominous than even the biggest fines. If this licensing-leverage becomes the "new normal" in banking, then most firms would be well-served to get out in front of this by following SC's lead and hiring their own money-laundering chiefs. It just makes sense.

Warren Buffett on Risk

"A CEO must not delegate risk control. It’s simply too important. At Berkshire, I both initiate and monitor every derivatives contract on our books, with the exception of operations-related contracts at a few of our subsidiaries… If Berkshire ever gets in trouble, it will be my fault. It will not be because of misjudgments made by a Risk Committee or Chief Risk Officer."

--Warren Buffett, 2010 Berkshire Hathaway Letter to Shareholders

One of the investor rites of spring (as I look out my window at piles of snow....) is the Berkshire Hathaway Letter to Shareholders which showcases Buffett's folksy wisdom on things financial. Forbes has some good excerpts from the latest.

Can a Financial Meltdown Happen Again?

Happy New Year. Most people in the financial industry are likely happy to see the 2009 calendar go in the trash and have high hopes that 2010 brings a continued recovery for the battered sector. The American Economic Association is currently gathered in Atlanta, and while most agree that the worst is behind us, they are skeptical about real progress being made to avoid a similar crisis in the future. In fact, count Tom Sargent, an economist from NYU, among those who think the response so far has actually made us more vulnerable to a deeper crisis! The logic goes that the bailout has created an expectation of future bailouts for big banks, and as a result management will feel emboldened to take even more risk, knowing that the government safety net will be there. Some wonder, like we have at GlobalRiskJobs, that the window for real meaningful reform may be closing. One of the current problems is that bank lending, especially in light of the collapse of the shadow banking system, is crucial to sustaining this fragile recovery. Hence, any Draconian measures the regulators might enact must not forestall banks' willingness to lend. Other economists worry that central banks' interventions have exposed them to greater financial and political risk which could hinder their effectiveness in future crises.

Also at the top of today's news is the decision by US Senator Chris Dodd (D-CT), the chairman of the Senate banking committee and a central figure in the government’s financial bailout of 2008 and the economic stimulus package adopted last year, not to seek reelection. What effect will his lame-duck status on pending financial reform legislation? Only time will tell. Will he ignore the demands of the special interests on the left? Will he go back to his roots and stand with the banks and financial firms who traditionally donated to his campaigns? Or, will he ignore partisanship altogether as he exits and push for simply the most effective reform that he can? Interesting questions as we start the new year and push toward the finish line on financial reform.

Pelosi to Wall Street: "Party's Over". House passes financial overhaul.

The U.S. House of Representatives today passed the Wall Street Reform and Consumer Protection Act, 223-202. The House tightened rules for derivatives and created powers to break up large financial firms that threaten the economy, despite opposition from Wall Street and Republicans. Also included was the creation of a Consumer Financial Protection Agency and stronger oversight of hedge funds. The bill also ends a ban that shielded the Federal Reserve from audits of its monetary policy decisions. The House failed to add language for mortgage "cram-downs". Passage of the House bill moves one step closer to achieving the White House objectives for financial reform. The focus now shifts to the Senate, where lawmakers lack a schedule for action on a bill.

House Could Vote Friday on Financial Overhaul

The bigger they come, they harder they.....get hit? The giant banks could be the biggest losers in Congress' efforts to overhaul financial regulation. A populist groundswell in the majority Democrat House of Representatives has led to the addition of amendments that are unfriendly to the largest financial institutions. The bill seems to be going way beyond what the White House envisioned when it sent its proposal to Congress last June. The House bill contains much of what the White Hose wanted: powers to take over/break up large companies, new consumer protection rules, tougher regulation of derivatives, executive pay limits. The Senate bill differs considerably, so real change may not be imminent.

Some of the highlights aimed at policing the Big Banks:

• Regulators would be able to block healthy banks from certain practices or mergers, and even order a bank to shrink if it posed systemic risk.
• Financial companies with more than $50B of assets wold have to pay into a $150B fund to deal with future collapses of large financial institutions.
• The government would be able to order certain large banks to split off their commercial bank from their investment bank if regulators are concerned.
• Large banks would have to submit to consumer compliance exams from a new Federal Agency, while many small banks would be exempt.
  

More regulation on tap for Munis?

Federal laws that exempt much of the $2.8 trillion municipal bond market from filing quarterly financial statements and U.S. Securities and Exchange Commission regulation should be repealed, Commissioner Elisse Walter said.

Walter is the third commissioner this year to call for municipal bond issuers to follow the same rules as sellers of corporate securities. SEC Chairman Mary Schapiro has hinted that the commission would seek expanded authority over the market sometime in 2010, and Commissioner Luis Aguilar called for greater oversight. All three have been appointed since 2008.

The Government Finance Officers Association, which represents state and local municipal officials, “strongly opposes any actions by the SEC or Congress” to give the commission “direct authority over municipal bond issuers or to directly or indirectly impose new disclosure or accounting standards,” according to a comment letter filed with the SEC in September.

Committee Approves Private Advisor Registration Bill

Could it be that the long awaited first step toward the anticipated increase in demand for compliance professionals has been taken? Yesterday, the House Financial Services Committee passed H.R. 3818, the Private Fund Investment Advisers Registration Act, introduced by Congressman Paul E. Kanjorski (D-PA), Chairman of the House Financial Services Subcommittee on Capital Markets, Insurance, and Government Sponsored Enterprises. The Committee passed H.R. 3818 with extensive bipartisan support by a vote of 67-1. Today, the Committee is expected to vote on Chairman Kanjorski’s H.R. 3817, the Investor Protection Act and H.R. 3890, the Accountability and Transparency in Rating Agencies Act.

But the bill fell short of a White House proposal to oversee private pools of capital. The committee exempted venture capital funds and funds with less than $150 million in assets.

Securities and Exchange Commission Chairman Mary Schapiro warned broadly at a Wall Street conference on Tuesday against too many exemptions, saying she would work with Congress to avoid creating new carve-outs that "could come back to haunt investors in later years."

Stay tuned to GlobalRiskJobs and GlobalComplianceJobs for opportunities as the regulatory story continues to unfold.