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.