Benjamin Lawsky's surprise move against Standard Chartered in an Iran sanctions case may have stunned the banking world, but it is unlikely to expand the scope of a series of similar U.S. cases against European banks that are still in the pipeline.
Lawsky, the New York state bank regulator, stunned the British bank, its shareholders and other U.S. authorities when he moved ahead last month with his own case against Standard Chartered (STAN.L), accused of hiding transactions involving Iran, which is under U.S. trade and economic sanctions.
By threatening to yank the bank's New York license and basing the core of his allegations on a much broader universe of transactions than usually covered in such cases, Lawsky initially signaled there was a new playbook on how to bring actions against banks for violating laws against doing business with certain sanctioned countries.
It is, though, far from clear that history is going to repeat itself.
For one, Lawsky does not have authority over some of the European institutions still under investigation.
HSBC (HSBA.L), for example, has a national charter rather than a New York state charter. So it is not subject to supervision by Lawsky's New York State Department of Financial Services (DFS), which has only been in existence since October.
Other banks under investigation, including Royal Bank of Scotland and Deutsche Bank, do fall under Lawsky's purview.
Federal authorities still working their own cases against Standard Chartered believe "nothing has really changed" with their efforts involving the British bank, a source familiar with the probe said. This suggests Lawsky's aggressive approach has not prompted other regulators and prosecutors to follow suit.
In reaching a $340 million settlement with Standard Chartered, Lawsky based his case on accusations that the bank systematically stripped information from $250 billion worth of wire transfers linked to Iran.
Traditionally, federal authorities have only based their settlements on the amount of transfers that directly breached sanctions, not necessarily on transfers that just involved the doctoring of information to disguise the parties.
Federal officials have said the volume of actual sanctions-busting transactions in the Standard Chartered case is closer to $20 million, potentially signaling a much smaller case.
Standard Chartered also presented something of a unique case for Lawsky, who said in his August 6 order that the bank "intentionally withheld material information" from regulators to get an earlier action against the bank related to weak money laundering controls lifted.
"There should be no confusion. Banks shouldn't provide false documents, engage in cover-ups or lie to their regulator. The banks know that," a source familiar with Lawsky's probe said.
Still, Lawsky's move has sent chills as the other banks wait to hear their fate. Banks can only "sit and hope" that the state regulator does not hit them with a large financial penalty, said Clif Burns, an economic sanctions lawyer at the Washington office of law firm Bryan Cave LLP.
"Everyone who is subject to those whims and caprices (of DFS) just has to sit back and wait for their turn to come," Burns said. "Proactively there is zip, zero they can do."
IN THE PIPELINE
Many of the sanctions-related inquiries date back to the mid- to late-2000s when the Manhattan district attorney's office and the Justice Department opened inquiries into nine banks for potential violations of sanctions laws.
Five of them - Barclays (BARC.L), Lloyds Banking Group(LLOY.L), Credit Suisse CSGN.VX, ING Bank NV ING.AS and ABN Amro ABNNV.UL - have settled over the past three years and agreed to penalties totaling $2.3 billion.
Two more banks, Standard Chartered and HSBC, are expected to settle related cases in the coming weeks, according to the source familiar with those probes.
Royal Bank of Scotland (RBS.L) has said it is in talks with U.S. authorities on whether it complied with economic sanctions laws, indicating it may also be nearing a settlement.
Several other banks - including Deutsche Bank (DBKGn.DE), Germany's second biggest lender Commerzbank (CBKG.DE), UniCredit's (CRDI.MI) German unit HVB, and French banks BNP Paribas (BNPP.PA) and Credit Agricole (CAGR.PA) - have said they have received inquiries from U.S. authorities or are reviewing transactions to check whether they are potentially in breach of U.S. sanctions, suggesting any investigations are at an early stage.
STRIPPING VS. SANCTIONS
Government lawyers and other legal experts say Lawsky's move has spurred some talk about whether he set a precedent in banks being on the hook for transfers that may have been stripped of information but were otherwise legal.
"This is the first case you don't have an exact overlap. That is what makes this an interesting case," said Ed Wilson, a former Treasury official who works on sanctions issues as a partner at Venable LLP in Washington, referring to the overlap of transactions that were stripped and those that violated sanctions laws.
But they also say that Lawsky relied on state books and records laws to go after the disguised transactions, and it is far from clear that this was in breach of the federal laws generally used in sanctions cases.
"It's not historically what OFAC has focused on," said Meredith Rathbone, a partner with Steptoe & Johnson LLP in Washington who specializes in sanctions law, referring to the Treasury Department unit - the Office of Foreign Assets Control - that focuses on sanctions violations.
"They focus on the substance, and if the law hasn't been violated, they tend not to go after people for simply having inaccurate records," she said.
For example, when Barclays Bank agreed to forfeit $298 million in 2010, for example, to resolve allegations that it violated federal sanctions laws and a criminal New York records law, the Treasury Department identified as the basis for its portion of the penalty about $106 million in specifically unlawful transfers, the vast majority linked to Sudan.
In 2010 when the former ABN Amro Bank, now part of Royal Bank of Scotland, agreed to pay $500 million to resolve similar allegations, U.S. authorities specifically described the conduct at issue as at least $500 million in financial transactions which "involved violations" of sanctions or money-laundering laws.
Also, stripping in and of itself was not clearly in violation of federal laws during the period of time being examined, sources said.
Before a May 2009 change in a rule under the international payments system SWIFT, information about the parties sending and receiving international wire transfers were not shared with intermediary banks that facilitated the transactions - such as clearing banks in New York - when the transfers were made as so-called "cover payments," a source involved in a number of previous sanctions enforcement probes said.
"As a result, banks were able to, and often did, clear wire transfers through New York without identifying the parties involved, and without violating any rules," the source said. "Those were legal payments."
(Reporting by Aruna Viswanatha in Washington and Brett Wolf in St. Louis; Editing by Kevin Drawbaugh and Tim Dobbyn)