This has caused a great deal of angst in the UK’s regulatory community because cross-border financial regulatory enforcement has a long culture of cooperation between the national regulatory authorities. Both the Financial Services Authority and the US Securities and Exchange Commission have been at pains to stress that, as there is no truly global financial regulator, US and UK regulators need to take a global outlook – which entails cooperation, coordination and the sharing of responsibilities.
Against this background, the order issued by the DFS, requiring Standard Chartered to attend a hearing on 15 August, is a regulatory sidewinder missile. To understand why that missile was launched, you have to look at the labyrinthine financial regulation within the US, which is populated by competing state and federal regulators.
Ordinarily, when a multinational bank is under investigation, competing regulators try to rub along together, so that they can drive the institution into a cross-border negotiated settlement. This requires the subject of a US led investigation to be alive to the interests of a number of competing state and federal regulators. Normally, a state regulator would not take the lead in a case involving a multinational institution and would defer to the federal regulators and prosecutors, although this is not always the case. The DFS, as one of the more proactive state based regulators, has shown itself unwilling to play a deferential role.
So how does Standard Chartered find itself in this regulatory morass? Although many of the central allegations involve breaches of federal laws, such as the alleged breach of the U-turn exemption (which is hotly contested), the bank is licensed by New York state, so falls under the jurisdiction of the DFS. This lets the DFS take the sting out of the bank’s argument that many of the claims are based on contested interpretations of federal regulations administered and enforced by federal authorities.
Under New York law, the superintendent of the DFS has very broad powers that require any bank operating in the state to provide an explanation at a hearing if it appears that “it has violated any law or regulation”. That wording does not seem to limit the violations to state based law, so there is the potential for the DFS to engage in regulatory creep.
In addition, the DFS has focused on the alleged “cover up” activity by the bank so that it can avail itself of breaches of state law. These include alleged failures to keep accurate records and obstructing proper scrutiny by “stripping” information that would have assisted examiners to identify transactions involving sanctioned clients. The DFS is trying to run “a cover up is as bad as the crime” strategy, by alleging that breaches of state based record keeping legislation have exposed the bank. This leaves Standard Chartered with little wriggle room because, in addition to being able to compel the bank to explain itself on an expedited timetable, the DFS has broad authority to revoke a bank’s licence if any violation is found.
Although such a draconian sanction is unlikely, the mere threat of de-authorisation, coupled with the ongoing negative media and market speculation, places intense pressure on Standard Chartered to agree to a significant financial penalty. This is compounded by the fact that, whatever may be the merits of the unilateral approach, the DFS tactics have placed a similar amount of pressure on the federal regulators, which have been made to look dilatory and ineffective.
Federal regulators now face some difficult choices. Do they allow the New York process to play itself out, try to rescue the cooperative process, or perhaps even try to run a parallel process? All of this combines to pressure Standard Chartered to settle quickly (and expensively); and, perhaps, reflect upon the regulatory implications of doing business in New York.
Shane Gleghorn is head of commercial disputes at law firm Taylor Wessing.