More On Legal & Compliancefrom The Advisor's Professional Library
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
- Anti-Fraud Provisions of the Investment Advisers Act RIAs and IARs should view themselves as fiduciaries at all times, whether they meet the legal definition or not. Deviating from the fiduciary standard of full disclosure while courting clients may cause the advisor significant problems.
Benjamin Lawsky, head of the New York State Department of Financial Services, threw a double curve when he ordered London-based Standard Chartered to appear on Aug. 15 to explain why its charter to operate in the state should not be revoked. Not only was Standard Chartered apparently blindsided by the move, so were federal regulators; negotiations had been ongoing for some time for what the bank hoped would be a quiet settlement without embarrassing details made public.
Not anymore. Reuters reported Wednesday that Lawsky was not interested in a quiet settlement typical of those negotiated by federal regulators. His order to Standard Chartered cited e-mails and other documentation that will make it tougher for the bank to defend its policy, which it has said amounted to less than $14 million in transactions that violated anti-money -laundering regulations from among 60,000 wire transfers. Lawsky’s agency puts the figure at $250 billion instead.
Bloomberg quoted an unnamed source familiar with the New York investigation crediting those e-mails with making Lawsky take unilateral action, instead of waiting for other agencies investigating the bank. They include the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC), the Federal Reserve Bank of New York, the Justice Department, the New York District Attorney and the FBI.
The bank had turned over documents from an internal investigation to federal agencies and to Lawsky’s agency as well.
On Monday the bank issued a statement that said in part that it was "engaged in ongoing discussions with the relevant U.S. agencies. Resolution of such matters normally proceeds through a coordinated approach by such agencies. The Group was therefore surprised to receive the order from [the New York bank regulator] given that discussions with the agencies were ongoing."
OFAC was likewise surprised, and David Cohen, under secretary for terrorism and financial intelligence, was taken off guard by the DFS action, according to unnamed sources. Jay Carney, White House press secretary, said that sanction violations were taken “extremely seriously” and that the Treasury Department was in close touch with federal and state authorities over the case.
DFS was formed in 2011 when the now-defunct Banking Department and Insurance Department transferred their functions and authority to Lawsky’s bailiwick. His agency can issue regulations, investigate and fine financial services companies, investigate alleged criminal activities and send its findings to the New York attorney general so that wrongdoers can be prosecuted.
Under this broad scope, the tone of the e-mails—which seem to open a window into efforts to hide the bank’s behavior—was cited as the main factor in the action. One e-mail from the U.S. head of Standard Chartered’s business in New York in 2006 carried a warning that the bank’s actions on so-called U-turn transactions involving countries under U.S. sanctions could result in “catastrophic reputational damage.”
Lawsky’s office is also investigating transactions that involve Myanmar, Libya under Moammar Gadhafi, and the Sudan.
While in London conspiracy theorists see a U.S. government-led attack on London banks, on the other side of the pond the puzzlement is more about Treasury’s apparent defense of Standard Chartered.
A British executive at one of Standard Chartered’s 25 largest shareholder companies was quoted saying, “Are we starting to see an anti-London bias in U.S. regulatory activities. Oh yes. Is there any subtle form of banking sector protectionism going on? Yes."
Even John Mann, a member of Parliament's finance committee who has called for a parliamentary inquiry into the matter, went on the attack. He was quoted saying, "I think it's a concerted effort that's been organized at the top of the U.S. government. This is Washington trying to win a commercial battle to have trading from London shifted to New York."
However, Jimmy Gurule, a former Treasury Department undersecretary for enforcement, expressed concern over the response by his former agency to the move by Lawsky’s agency.
John Sullivan, the Treasury Department spokesman who is responsible for terrorism and financial intelligence, said that, to satisfy compliance requirements of the anti-money-laundering regulation, it wasn’t necessary for Standard Chartered to notify its New York intermediary that processed the transaction that it was doing so on behalf of an Iranian entity. Sullivan gave no further details about Treasury’s own investigation.
But Gurule, now teaching at the University of Notre Dame in South Bend, Ind., said in the report, “You’d think the federal government would be defending national security interests first. It appears to be the state that’s taking the lead to protect the nation’s broader interests.”
He also said the bank’s attempt to claim technical compliance with the law is iffy, since the e-mails released in the order display apparent efforts to hide the entities involved in the wire transfers. He was quoted saying, “There’s clearly intent to conceal here, which is inconsistent with the bank’s defense that these transactions were lawful.”
While Lawsky’s decision to go it alone rather than wait for other agencies is unusual, according to Gurule, the regulator’s order said federal agencies have been investigating the wire transfers for more than two years. A person familiar with the matter said Lawsky pressed federal regulators several months ago to take action against the bank, but when that was unsuccessful DFS took its own action because of the e-mails.