August 16, 2012 / 9:08 AM / 8 years ago

Insight: Standard Chartered's New York nemesis wins deal but makes enemies

(Please note strong language in paragraph 10)

Employees of Standard Chartered leave a branch of the bank in central Seoul August 9, 2012. REUTERS/Lee Jae-Won

By Carrick Mollenkamp and Brett Wolf and Karen Freifeld

(Reuters) - Benjamin Lawsky played hardball with Standard Chartered Plc and a gauntlet of federal and New York regulators and prosecutors right up until the last hours of the $340 million settlement on Tuesday with the British bank over improper and concealed transactions tied to Iran.

Based on a dozen interviews, Reuters has learned that Lawsky, New York’s top banking regulator, ignored on Monday the entreaties of federal regulators to drop his own action in favor of a single, global settlement. He also insisted on Monday that the bank agree that the settlement specify that it had engaged in $250 billion of transactions, a figure the bank had vigorously disputed.

Spokespersons for the bank and Lawsky declined to comment.

Despite criticism of his aggressive approach — both from Standard Chartered and government officials — Lawsky’s tactics carried the day, and the repercussions for Standard Chartered and other banks he regulates are far-reaching.

Until now, banks accused of money laundering or other illegal activity typically have reached settlements with federal and local regulators and prosecutors that revealed few details of their alleged activities.

In contrast, Lawsky released embarrassing communications that exposed internal discussions, painted Standard Chartered as what he termed a “rogue institution” and threatened to pull its New York banking license. He won a settlement far larger than many experts thought was possible.

“It announces to the regulatory community that this agency is going to demand a seat at the table in pretty much every major financial investigation in the future,” said Stephen Miller, a former federal prosecutor who worked with Lawsky at the U.S. Attorney’s office in Manhattan.

But others say Lawsky’s brash move alienated federal officials and will make it tougher for him to partner with them on future cases.

Lawsky began his gambit with what federal regulators and the bank considered an ambush on August 6 when he filed a scathing order against the bank that revealed its failure to halt money laundering for Iranian entities.

The order included the now infamous, incendiary quote from Standard Chartered’s Chief Financial Officer Richard Meddings: “You f—-ing Americans. Who are you to tell us, the rest of the world, that we’re not going to deal with Iranians?” Standard Chartered has vehemently disputed the accuracy of the quote.

In the subsequent eight days, a shaken Standard Chartered management came under intense pressure from shareholders to reach a settlement rather than face the threat of losing its New York license, which could have crippled its ability to process U.S. dollar transactions.

In public, bank officials disputed Lawsky’s allegations, especially Lawsky’s contention that $250 billion of transactions were involved. The bank’s tally: Less than $14 million.

Standard Chartered Chief Executive Peter Sands also defended the bank, telling reporters that Lawsky’s threat to yank Standard Chartered’s license was “disproportionate” to how other banks had settled sanction cases.

Bank officials set up a war room at the lower Manhattan law office of Sullivan & Cromwell, which offers sweeping views of the Statue of Liberty. Among those on the team: Rodgin Cohen, the New York lawyer often quietly at the center of these types of cases.

By late last week, the bank’s stance appeared to soften. Bank officials feared that Lawsky would leak more documents or emails that would embarrass the bank. On August 9, Sands was scheduled to appear on CNBC. At the last minute, the network announced that Sands wouldn’t appear because of “logistical reasons”.

A few blocks from the bank war room, in a gray tower near the Staten Island ferry terminal, Lawsky worked with a team of New York lawyers with ties to federal prosecutors or politicians such as New York State Gov. Andrew Cuomo.

Lawsky’s brain trust included Daniel Alter, a former federal prosecutor who specialized in terrorism cases. Others involved included Anthony Albanese, Gaurav Vasisht and Kathryn Diaz.

From the start, the settlement talks largely focused on just one thing: The financial penalty Standard Chartered would pay. The two sides also discussed the fact that Standard Chartered would install a monitor for two years who would report to Lawsky’s office the bank’s efforts to strengthen anti-money laundering systems, terms that were eventually accepted.

Lawsky believed the federal investigation, which dates to 2010, was growing stale. But in fact federal investigators were trying to conclude a settlement with Standard Chartered by Labor Day, according to people familiar with the matter.

The Justice Department and Manhattan district attorney also were juggling numerous cases, according to these people, and had only in June wrapped up a $619 million settlement with ING Bank NV, a Dutch bank that allegedly violated sanctions against Cuba and Iran.

Sands, who cut short a vacation when Lawsky filed his order, flew in to New York from London as the deal neared a conclusion.

As a deal was finalized, Lawsky delivered a final blow. About an hour before he publicly announced the settlement, Lawsky’s office told bank officials that it specifically would include the whopping $250 billion figure that the bank had so strongly disputed.

Lawsky’s initial order alleged the bank had “schemed” with Iran and hid from regulators transactions totaling $250 billion.

By the time a settlement was struck, less inflammatory language was used, but the dollar figure remained: “The parties have agreed that the conduct at issue involved transactions of at least $250 billion.”

“What were they (Standard Chartered) supposed to do?” said a person familiar with the bank’s dilemma.

For federal regulators, Lawsky’s unilateral actions also changed the rules of the game. First, Lawsky issued the order against Standard Chartered after giving other regulators and prosecutors involved in the investigation only short notice.

Lawsky’s move drew the ire of U.S. and British regulators, prompting Bank of England Governor Mervyn King to suggest that the United States was unfairly targeting British banks.

Lawsky didn’t back down.

Then, as Lawsky’s office neared a deal, he yet again went his own way. He rejected an eleventh-hour request from a task force of federal and local law-enforcement agencies that he join the pack and stand down.

The upshot: Standard Chartered’s $340 million settlement is only with Lawsky’s office. Federal regulators now have to strike their own separate deals with the bank.

The friction between Lawsky and the other regulators exposes a growing rift among law-enforcement agencies about how quickly to act against banks suspected of lax controls to prevent money laundering or illicit transactions.

In July, a U.S. Senate investigative panel led by Sen. Carl Levin released a damning report of money-laundering lapses inside another British bank, HSBC Holdings Plc. The bank has apologized for the problems. That report said the Office of the Comptroller of the Currency had allowed compliance problems to “fester” at HSBC and the agency failed to take strong action until it learned that two U.S. law-enforcement agencies were investigating HSBC.

In a statement Tuesday, Levin lauded Lawsky’s quick action, saying his department “showed that holding a bank accountable for past misconduct doesn’t need to take years of negotiation over the size of the penalty; it simply requires a regulator with backbone to act.”

Superintendent of the Department of Financial Services Benjamin Lawsky listens to New York Governor Andrew M. Cuomo speak during a cabinet meeting in Albany, New York in this October 12, 2011 file photograph. REUTERS/Hans Pennink/Files

But Lawsky has risked alienating other regulators. A source close to the federal probe of Standard Chartered said it’s unlikely Lawsky’s office will be included in future investigations of sanctions violations.

This person said that while Lawsky’s department has the authority to demand documents from banks, other agencies aren’t likely to share tips nor are they likely to partner with it.

Lawsky’s department “had great potential. This was just a short-sighted move that is going to end up really backfiring,” the source said.

Additional reporting by Aruna Viswanatha; Editing by Alwyn Scott, Alix Freedman, Martin Howell and Jean Yoon

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