Big Bank Money Clients: Drug Dealers and Terrorists?

Posted on by Phil Querin

Federal Reserve: “Bank Secrecy Act and Money Laundering – Money Laundering involves transactions intended to disguise the true source of funds; disguise the ultimate disposition of the funds; eliminate any audit trail and make it appear as though the funds came through legitimate sources; and evade income taxes. Money laundering erodes the integrity of a nation’s financial system by reducing tax revenues through underground economies, restricting fair competition with legitimate businesses, and disrupting economic development.  Ultimately, laundered money flows into global financial systems where it could undermine national economies and currencies.  Thus, money laundering is not only a law enforcement problem, but poses a serious national and international security threat as well.”

Financial Crimes Enforcement Network, Treasury Department: “The purpose of the USA PATRIOT Act is to deter and punish terrorist acts in the United States and around the world, to enhance law enforcement investigatory tools, and other purposes, some of which include:

  • To strengthen U.S. measures to prevent, detect and prosecute international money laundering and financing of terrorism;
  • To subject to special scrutiny foreign jurisdictions, foreign financial institutions, and classes of international transactions or types of accounts that are susceptible to criminal abuse;
  • To require all appropriate elements of the financial services industry to report potential money laundering;
  • To strengthen measures to prevent use of the U.S. financial system for personal gain by corrupt foreign officials and facilitate repatriation of stolen assets to the citizens of countries to whom such assets belong.”

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In a highly competitive race to the bottom of the Big Banking Cesspool, British banking behemoth, Standard Chartered, has managed to push HSBC off of the “Money Laundering” section of the major financial papers.

The HSBC Scandal.  In July of this year, we learned that HSBC, also a British bank, was laundering billions of dollars for Mexican drug cartels, Iranian terrorists, and even had two accounts under the name “Taliban.”  According to  Senator Levin’s report on HSBC, some $300,000 in transfers identified for “Persia” were made through HSBC’s U.S. operation, and ignored by HSBC’s crack U.S compliance officer, because he didn’t know that “Persia” is another, more historical, name for “Iran.”  They are one and the same.[1]  Lest anyone say that this is a forgivable oversight, here’s another compliance gem: Two HSBC U.S. transfers involved a shipping vessel identified as “NITC.”  These transactions were also overlooked by the bank’s compliance officers.  If they had taken the time to find out what “NITC” stands for, they would have learned that it was “National Iranian Tanker Company.” According to the Levin report, even though the chief U.S. banking regulator, the Office of Comptroller of the Currency [“OCC”], found hundreds of compliance violations that they had brought to HSBC’s attention, the OCC never issued a single formal – or informal – enforcement action against HSBC. So Riddle Me This, Batman: Who’s regulating the regulators? And we wonder why American Iranian sanctions don’t seem to work?  Perhaps after Iran develops a nuclear bomb, the Big Banks will begin to take these regulations more seriously.  But I digress….

Another British Bank to the Woodshed.  Now we learn that Standard Chartered was up to the same shenanigans as HSBC.  According to a recent Washington Post article, New York banking Superintendent, Benjamin M. Lawsky, head of the state’s Department of Financial Services, entered into an agreement with Standard Chartered to pay New York a $340 million fine – the largest ever levied in the U.S. for money laundering.  Here are some snippets on the story from an online WSJ article:

  • Lawsky’s order last week caught the bank’s management team by surprise. Lawsky alleged that Standard Chartered was a “rogue bank” that had executed 60,000 dollar-based wire transactions for Iranian clients from 2001 to 2007.
  • Standard Chartered’s apparent effort to conceal the identity of its Iranian counterparties violated the terms of a 2004 settlement between it and the state of New York, in which the U.K. bank pledged “to ensure compliance with all record-keeping and reporting requirements,” according to the order.
  • Even before 2001, the order stated the bank’s general counsel “embraced a framework for regulatory evasion” by keeping its New York branch in the dark about Iran transactions.
  • The bank allegedly accomplished this goal by stripping out the name of Iranian clients so as not to slow down transfers that might have to be reviewed for compliance with U.S. economic sanctions. Those restrictions allowed some transactions but not others as long as non-Iranian banks were involved on both ends.

How Bad Was This?  You decide. According to an August 15, 2012 WSJ online article, Standard Chartered had engaged in 60,000 financial transactions for Iranian clients.  The total amount?  $250 billion.  And this wasn’t the first time Standard Chartered had been taken to the woodshed for money laundering activity.  According to the Washington Post article:

  • From 2004 through 2007, Standard Chartered was subject to formal action over other regulatory compliance failures related to the Bank Secrecy Act, anti-money laundering policies and procedures and regulations of the U.S. Office of Foreign Assets Control, the main overseer of Iran transactions.
  • In a 2004 agreement with regulators, the bank promised to monitor and improve money-laundering controls. The restrictions of the agreement were lifted in 2007 because the bank provided a “watered-down” report of compliance, according to Lawsky’s order.  Bank statements “misled” the department into lifting the restrictions of the 2004 agreement, the order stated.

Deloitte’s Complicity.  Hmmm.   “Watered down.”  Is this true, or a bit of prosecutorial hyperbole?  Here’s what Lawsky’s Order says about the compliance report prepared by Deloitte & Touche LLP, one of the Big Four accounting services firms that wrote it:

“Having improperly gleaned insights into the regulators’ concerns and strategies for investigating U-Turn-related misconduct, [2] SCB[3] asked D&T to delete from its draft “independent” report any reference to certain types of payments that could ultimately reveal SCB’s Iranian U-Turn practices.  In an email discussing D&T’s draft, a D&T partner admitted that ‘we agreed” to SCB‟s [sic] request because “this is too much and too politically sensitive for both SCB and Deloitte.  That is why I drafted the watered-down version.’” [Underscore mine.  PCQ][4]

According to Lawsky’s  published Order, Deloitte’s “watered down” report was singularly responsible for New York lifting its 2004 restrictions on Standard Chartered, who, like every criminal leaving the Big House, had promised to “go straight.”[5]

Feds Out of the Loop. The  Standard Chartered fine is remarkable from another perspective – it didn’t involve the Feds. It was the New York State Department of Financial Services (“DFS”).  So were the Feds happy about some young upstart regulator announcing on August 6 that he was going to hold hearings with Standard Chartered over whether its banking charter should be revoked?  Of course not.  According to a CNBC article here, the Federal Reserve and Treasury were “blindsided” and “irate.”  They too had been negotiating with the bank, but it seems someone else – the New York DFS – stole its thunder.

Kudos. My take?  Kudos to Mr. Lawsky!  Between the announcement of the hearing to revoke their license and the settlement, it was eight days!  No muss, no fuss. It’s amazing how the threat to revoke one’s license brings a Big Bank to its knees. Plus, his August 6, 2012 Order against the bank, didn’t pull any punches.  According to a Reuters article covering the story, he quoted Standard Chartered’s Chief Financial Officer Richard Meddings statement to his U.S. counterpart who had misgivings about the bank’s flaunting of the federal regulations: “You f—ing Americans. Who are you to tell us, the rest of the world, that we’re not going to deal with Iranians?” 

The online blog Neutral Source quoted the Wall Street Journal on the quick Standard Chartered settlement:

“For a bank whose actions left the U.S. financial system vulnerable to terrorists, weapons dealers, drug kingpins and corrupt regimes, and deprived law enforcement investigators of crucial information used to track all manner of criminal activity, a $340 million fine looks remarkably lenient.”

Maybe the “lenient” fine is because the story isn’t over just yet for Standard Chartered; they’re still being investigated by several federal agencies.  Can’t break the bank just yet – the bones haven’t been picked clean.  My guess is that what rankles the Feds most is that they weren’t given a heads-up. Professional prosecutorial protocol apparently wasn’t followed.  If anyone was going to grab headlines, it should have been the Feds.  Right?  You can bet that the Fed’s outrage is nothing more than a jurisdictional turf war with an upstart young state regulator – sorta like various police departments vying to be the first to arrest the same perp. Well…there may be another reason:  Keeping in mind that all of these activities were thoroughly documented in the April 2011 Levin Report, I suspect the Fed is smarting from the fact that they just didn’t finish reading the expose’ before Mr. Lawsky did.[6]

So are HSBC and Standard Chartered isolated examples of Big Banks flaunting U.S. laws in order to do business with terrorist nations and drug cartels?  Unfortunately, they are not alone.  According to the Wall Street Journal there are “(o)ther banks that have settled similar allegations that they broke U.S. sanctions laws in recent years.”  They include: ABN Amro Bank, now part of Royal Bank of Scotland Group PLC; Credit Suisse Group AG; Barclays PCC; and ING. The have all acknowledged violating federal laws including the 1917 Trading With the Enemy Act.

Conclusion. If I were an executive at one of the Big Banks today witnessing the daily drumbeat of Big Bank misdeeds, I’d be thinking how to respond to some tipsy guest at the next cocktail party who unexpectedly blurts out: “So, tell me, Phil, why is it that your industry has so many unrepentant crooks and thieves, all of whom seem to have no moral compass, human compassion, or sense of remorse?  In order to make it up the executive ladder at your bank, does everyone have to be a complete sociopath?”


[1]OK, I can understand why the layperson might not know this. But a banking regulator who is looking for illegal funds transferred by outlaw countries so they can illegally exchange their crappy currency and illegal activities, for U.S. dollars?  Here’s the imaginary cross-examination of the HSBC compliance officer:  Q – “So, Mr. Smith, as a compliance officer for HSBUS, the American branch of HSBC, what is your job responsibility?” A –“My chief responsibility is to review all bank transfers coming to us from abroad to make sure the money wasn’t being funneled in by rogue nations, in violation of federal banking laws.”  Q – “And the reason you overlooked the $300,000 transfer on behalf of “Persia” was because you didn’t realize that it was the historic name for ‘Iran’”? A – “Yeh, they didn’t teach us Middle East history in regulatory compliance school.”  Q – Well, what did you think when you saw the word “Persia”?  You must have believed it was an existing country, right?”  A – “Yeh, I guess so.”  Q – “Hmmm.  So did you believe it was a friendly country, like, say Japan, or an unfriendly country, like one that might refer to us as “The Great Satan”?  A – “I guess I don’t know.” Q – Well, if you didn’t know, why didn’t you check with someone who did? After all, you are the compliance officer – this is your job isn’t it?”  A – [mumbling – unable to transcribe]

[2] Here’s a New York Times article explaining the U-Turn ruse, which is designed to trade foreign currency for U.S. dollars:  “Such a transaction permits, for example, Iran to sell oil to a German customer, who in turn directs a European bank to deposit dollars obtained from an U.S. bank into an Iranian bank account located in Europe. The phrase “U-turn” applies because the funds are transferred to a U.S. bank and instantly turned back as dollars to a European bank.”

[3] Standard Chartered Bank

[4] Here’s Deloitte’s website statement extolling their ethics and independence: “At Deloitte LLP and its subsidiaries, the responsibility for ethical behavior is taken seriously — by everyone, at every level. Conducting business honorably, ethically and with the utmost professionalism is top of mind for the people of the Deloitte U.S. Entities.”

[5] For a similar example of empty promises, see H.I.’s conversation with the parole board in the film Raising Arizona, here.

[6] The entire Levin Report is a compelling must read.  It makes one wonder why we are finding out about these illegal activities in a Congressional report, rather than a series of criminal indictments.  And even now, with all of the evidence from the Report served up to them on a silver platter, why haven’t the Feds – even now – done anything?  It’s no wonder the New York banking Superintendent got tired of waiting.  Maybe the federal regulators are just slow readers.  After all, the Report is 639 pages.  Or perhaps they were waiting for the “Dummies” edition.

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