Showing posts with label money laundering. Show all posts
Showing posts with label money laundering. Show all posts

Thursday, 9 August 2012

Standard Chartered and the regulatory smorgasbord

So yet another UK bank is at the centre of a storm of corruption allegations. First Barclays, then HSBC....this time it's the "whiter-than-white" Standard Chartered Bank that is alleged to have soiled its trousers. The New York State Department of Financial Services claims that Standard Chartered has laundered $161bn of Iranian money to avoid US sanctions against Iran: the regulator describes it as a "rogue institution" and is calling for it to be stripped of its US banking licence and its authority to trade in dollars. The release of these allegations caused Standard Chartered's share price to drop by 18% and created a storm of glee in US media and anger in the UK press.

Standard Chartered Bank is an interesting institution. Although it is headquartered in the UK, it has no domestic business. Its main business is in Asian and African emerging markets, where it is a major provider of trade finance, much of it in dollars. So losing its US licence and being unable to trade in dollars would deal it a crippling blow (though maybe not.....more on this later).

Not surprisingly, therefore, Standard Chartered is hitting back. It claims that "99.9%" of its transactions complied with US money laundering laws, and its chief executive says he is considering a lawsuit (paywall) against the regulator for "reputational damage".

So far, so unclear. The regulator says they done it, Standard Chartered says they never did. There have been claims that this is deliberate aggression by a "rogue regulator" hoping to prove that it has real teeth. And there are dark suggestions of a wicked US plan to discredit the City of London to leave the field clear for New York as the premier global financial centre.

What is clear is that the release of these allegations by the New York State regulator appears to have caught the other US regulators on the hop. Yes, you did read that right. US regulators, plural. It seems that Standard Chartered is also being investigated for Iran sanctions breach by the (Federal) Department of Justice, the FBI, the Federal Reserve, the Treasury and the Manhattan District Attorney's office. Oh, and the UK's FSA was involved, too, since Standard Chartered is a British bank. And these august bodies were distinctly miffed about being pipped at the post by a recently-established State upstart.

Predictably, UK regulators were unimpressed by this display of American regulatory competitiveness. Mervyn King, Governor of the Bank of England, commented wearily: "I think all that the UK authorities would ask is that various regulatory bodies that are investigating a particular case try to work together and refrain from making too many public statements until the investigation is complete."

King's comments will strike a chord with a number of people. The recent investigation of Barclays by the FSA and subsequent grilling of the major players by the Treasury Select Committee displayed a distressing lack of consistency among UK regulators. Although no-one had much sympathy for the embattled Diamond, the fact was that the FSA's sanctions appeared to expose at the very least tacit collusion with LIBOR-fixing by the Bank of England. Diamond's subsequent forced resignation at the behest of the Governor and the Head of the FSA looked to me, at least, very much like the regulators closing ranks to prevent further damage to their own reputations. The FSA's investigations into other banks with regard to the LIBOR-fixing scandal continue, in parallel with actions in various European states with regard to EURIBOR-fixing and investigations into US dollar LIBOR-fixing by the Fed. There is still much more to emerge on this and I strongly suspect that in the end the regulators themselves will be shown to be very far from innocent.

The Standard Chartered offence is if anything more serious than LIBOR-fixing, since money laundering is actually a crime everywhere in the Western world. So the lack of common purpose among regulators is all the more worrying. The sheer cost and inefficiency of a system in which six US regulatory bodies investigate the same alleged crimes apparently independently of each other beggars belief. And the competitiveness demonstrated by the New York State regulator hardly makes for good, impartial application of regulations.

It is by no means the first time that the American regulatory smorgasbord has caused problems. The American insurance giant AIG, which was expensively bailed out in the financial crisis after nearly bleeding to death due to CDS margin calls, chose as its regulator the Office of Thrift Supervision (OTS), a tiny, poorly-funded outfit that was systematically kept in the dark by AIG and wouldn't have had a clue how to evaluate the risks of its its derivatives portfolio anyway. It took some time even for the OTS's responsibility to come to light, since there was a prevalent belief that no one regulator was responsible for AIG. The question is how a thrift supervisor (for UK readers, a "thrift" is the US equivalent of a building society) came to be the principal regulator of a giant insurance company. And this brings us to the fundamental difference between the UK and US approach to regulation of financial institutions.

US financial institutions can choose their regulators, and the regulators market themselves to attract financial institutions seeking regulation. Regulators compete for business from US financial institutions. Which causes a problem, doesn't it? Regulators have to be seen to be effective, in order to attract customers, but if they are too effective in regulating US financial institutions, those institutions will ditch them in favour of less invasive regulators. OTS became the regulator of choice not only for AIG but for other large financial institutions because it offered lighter-touch regulation than other bodies: yes, each of those institutions had to buy a "thrift" in order to qualify for OTS regulation, but the cost was peanuts compared to the potential gains from lighter-touch regulation. The result was that these institutions were effectively unregulated, since OTS either would not or could not interfere with their operations. The rest, as they say, is history. It was perhaps unfair to blame OTS for its regulatory failure, but since the alternative was for Congress to accept that the American regulatory system is fundamentally flawed, it has, of course, been closed down.

In the light of this, John Mann's accusation of US regulators' anti-British bias needs to be taken rather more seriously. Many people have commented that the US regulators do seem to focus more on foreign banks than they do on US ones, which if regulators are seen by US banks as a source of competitive advantage is hardly surprising. Regulators' jobs depend on their ability to be seen to regulate foreign banks effectively while not interfering too much with US banks.

If we are to have a properly-regulated global financial system in the future, it is unacceptable that any major player has a regulatory system which is fragmented, systemically biased towards its own financial institutions and tending to lean towards regulatory avoidance. It is also unacceptable that any major player has a regulatory system in which the two major regulatory bodies behave in conflicted ways but close ranks when their inconsistency is exposed. And it is unacceptable that any major player has a regulatory system in which regulatory requirements can be watered down at the behest of vested interests.

Regulators need to be genuinely independent of the institutions they regulate, not dependent on them: regulators must be seen to be trustworthy and incorruptible: and regulators should act impartially in the application of regulations. The regulatory bodies of the US, UK and EU all fail on at least one of these criteria. The Standard Chartered investigation has (again) exposed the flaws in the US regulatory system just as the Barclays fine exposed (again) the flaws in the UK regulatory system and the European banking stress tests exposed the flaws in the European regulatory system. We simply do not have an effective system of international financial regulation, and until we do, there will not be a healthy international financial system.

Amusingly, it seems that the lack of agreement among American regulators could offer Standard Chartered an escape route. Masa Serdarevic at FT Alphaville points out that the New York State regulator can only ban Standard Chartered from trading in, er, New York State. Admittedly this is quite a problem, since Wall Street is of course in New York, but it would in theory be possible to clear US dollar transactions by FEDWIRE in a different state. This would be subject to approval by the Fed and the Department of Justice. Which are, of course, conducting their own investigations into Standard Chartered Bank.....