The most aggressive enforcer of federal sanctions law may now be New York State, which on Thursday fined Bank of Tokyo Mitsubishi UFJ $250 million. The settlement allows the Japanese bank to put sanctions allegations behind it, but for other banks and regulators, the trouble may just be starting.
The state's deal with the company effectively trumps a much smaller 2012 settlement the bank cut with the Office of Foreign Assets Control, a Treasury Department wing that exists to enforce "sanctions based on US foreign policy and national security goals," according to its website.
By supplanting OFAC as the more aggressive enforcer in the BTMU case, Benjamin Lawsky, superintendent of the New York State Department of Financial Services, has again interjected his office into international diplomacy and financial regulatory issues normally left to sovereign nations. The move puts Washington regulators in an uncomfortable position, with their foreign counterparts upset that the feds can't centrally control policy and U.S. critics jeering that Lawsky's harsher penalties prove that other domestic regulators are too soft.
"Lawsky's action will certainly be viewed by some as rogue and others as heroic it's a tough time," says Karen Shaw Petrou, managing partner of Federal Financial Analytics.
Overseas, the former view will likely predominate. The foreign banks and international regulators Petrou works with "really do not understand how a New York regulator could do with authority what Lawsky does," she says.
Ross S. Delston, a former assistant general counsel at the Federal Deposit Insurance Corp. who now consults on anti-money laundering issues, also predicts possible regulatory conflict domestically.
Lawsky's "one of those truly dangerous people who actually believes in what he's doing," he says. In the U.S. regulatory system, "often violations aren't taken as seriously as he tends to be taking them."
On their own, both BTMU's alleged crime and punishment are routine by the recent standards of sanctions and money laundering enforcement. By allegedly "stripping" wire transfers of information identifying their location of origin, the bank prevented U.S. banks from flagging potentially illegal transactions from Iran, Sudan, and Myanmar. Credit Suisse, Lloyds, Barclays and HSBC have each paid hundreds of millions of dollars in fines as a result of similar alleged misdeeds. Nor is it Lawsky's first go at sanctions cases: he beat OFAC to the punch last year in a $340 million settlement with Standard Chartered.
What sets the BTMU case apart is that it follows the December 2012 deal between the bank and OFAC. In response to the same alleged misconduct noted by DFS Superintendent Lawsky, OFAC identified only $5.9 million in objectionable wire transfers and fined BTMU $8.6 million. New York identified $100 billion in obfuscated transactions.
The magnitude of the discrepancy likely arises from differing interpretations of what a prohibited transaction is. The United States' approach to sanctions and wire transfers evolved over the last decade, with the U.S. initially signing off on 'U-Turn transactions,' in which many entities in sanctioned countries could do business with the U.S. institutions so long as they used an international bank as an intermediary. Unfortunately for those international banks, many became too clever and removed identifying information from wire transfers in order to ease scrutiny of their processing.
Depending on how a regulator defines the banks' potential violations, the number of infractions varies immensely, a Treasury Department spokesman wrote in an email on Thursday.
"The number and value of transactions at issue in the OFAC settlement was smaller because the OFAC investigation and settlement focused on apparent violations of federal sanctions law i.e., processing transactions for sanctioned parties."
New York's settlement, on the other hand, "focuses principally on alleged violations of New York state record-keeping requirements, not alleged violations of federal sanctions law," the Treasury spokesman wrote, downplaying any sense of regulatory competition. "OFAC has a history of close cooperation with federal and state regulators, including the New York State Banking Department/DFS that goes back decades."
But from some angles, New York's action looked a lot more like a broadside than "close cooperation." Lawsky's actions could set a precedent for federal banking regulators or could at least intensify the political pressure on them to take more aggressive actions. Sen. Elizabeth Warren, D-Mass., has led that charge, publicly asking federal regulators why they have not done more to prosecute banks for wrongdoing.
Petrou predicts that Lawsky's latest volley will increase Hill pressure on banking regulators: "It puts them again under congressional and public scrutiny. Why are big banks too big to quote-unquote jail? It's an awkward set of questions that now face them again."
It is also noteworthy that Lawsky levied a sizable penalty despite what appears to be significant cooperation by BTMU after it discovered the extent of the wirestripping. OFAC cited that cooperation repeatedly in its settlement with the bank, and Lawsky noted that it had turned itself in.
"It is vital that companies continue to self-report violations and those that do not run the risk of even more severe consequences," DFS' announcement of the penalty states.
Penalties the size of those that New York has levied could affect how foreign banks and regulators view the U.S. Delston warns of "the perception of the U.S. as being a more dangerous place to do business," and Petrou says many countries won't be able to understand how a state-level financial services commissioner could bigfoot the U.S. Treasury.
"The rest of the world has only national-level authorities governing U.S. banks doing business in those nations," Petrou says. "It's not to say Lawsky is wrong. This is just such a different paradigm of bank regulation than any other nation has that it causes a lot of consternation."
New York regulators and attorney generals have always appeared on the national stage, but in recent months Lawsky has staked out an unprecedented amount of turf. Earlier this year, his office announced the most comprehensive reforms of the force-placed insurance industry taken by any regulator to date. Last week, he announced that his office had found sham captive reinsurance arrangements around the country and asked other regulators to stop them. On Tuesday, he fined Deloitte's financial advisory unit and temporarily banned it from working in the state for six months to a year.
"There's the embarrassment factor, and there's the potential, with Senator Warren in particular on the Hill, starting to pay attention to the fact that a state regulator is moving more quickly and more aggressively than the feds are," Delston says. "That's a problem for the feds that pre-existed Mr. Lawsky's recent actions, but is amped up by his recent actions in particular."