Aiding the Enemy? Dirty Money Charges Banks' Latest Black EyeAnnemarie McAvoy in Fox Business, August 07, 2012
As if evidence of wrongdoing tied to the financial crisis weren’t damaging enough, new allegations have emerged in recent weeks accusing some big banks of turning a blind eye to or even assisting money laundering that helps everyone from Mexican drug lords to the Ayatollahs in Iran.
New charges came on Monday as a New York regulator accused London-based Standard Chartered of flouting U.S. sanctions by allowing at least $250 billion in transactions with Iranian entities.
The latest bad news for the industry seem likely to further hurt the already-tarnished reputations of financial institutions, impair their businesses and increase the volume of a growing chorus of people who want to break up big banks.
“When it starts moving into aiding and abetting criminal activity, I think that’s a whole new spectrum of aggravation that is going to be reached,” said Michael Greenberger, a former director at the Commodities Futures Trading Commission. “We’re almost on the verge of going to war with Iran. To be helping Iran is just senseless.”
Standard Chartered pushed back against the allegations from the New York State Department of Financial Services, saying more than 99.9% of its dealings with Iran complied with regulations.
The New York regulator also found evidence of “similar schemes” tied to other sanctioned countries, including human-rights abusers Libya, Burma and the Sudan.
Still, the U.K. bank’s shares tumbled more than 16%, wiping out some $15 billion of its market value in just hours.
Growing List of Allegations
Standard Chartered is hardly alone. According to Reuters, since 2009 U.S. regulators have raked in more than $2.3 billion tied to settlements for breaking U.S. and international sanctions from a slew of European banks, including Credit Suisse (CS: 17.53, -0.13, -0.74%), Barclays (BCS: 11.12, +0.05, +0.48%) and Lloyds.
Last month HSBC (HBC: 43.91, +0.18, +0.41%) was forced to set aside some $700 million to help pay for an anti-money laundering scandal in the U.S. A Senate panel slammed the British bank for allegedly turning a blind eye to money laundering by clients, including possible Mexican drug cartel members and even terrorist financing.
HSBC CEO Stuart Gulliver didn’t deny the allegations, apologizing for the bank’s “past mistakes” and acknowledging “we failed to spot and deal with unacceptable behavior.”
In June Dutch banking giant ING (ING: 6.97, -0.05, -0.71%) paid a record-setting $619 million to put to bed charges it violated U.S. sanctions against Cuba, Iran and other countries.
More on the Horizon?
Industry insiders anticipate more of these types of charges to be brought in the coming months, in part because banks are in a better financial position to pay hefty fines.
“This is an incredibly easy way for the government to make money,” said Annemarie McAvoy, an ex-federal prosecutor and former in-house counsel at Citigroup (C: 29.01, +0.12, +0.42%) and Morgan Stanley (MS: 14.59, +0.09, +0.62%). “Where can the government go and just pick up $619 million? They don’t even have to go to trial for it.”
Greenberger, now a law professor at the University of Maryland, agrees that more cases are coming.
“There’s so much hunger for bringing in money into the banks. I think this is just the tip of the iceberg of the problems that are going to be revealed,” he said. “We thought the Mexican problem was a one-off and then Standard Chartered came along. I think these problems are systemic.”
Reputational, Economic Damage Mounts
While some Americans may not care or even grasp the complexity of obscure financial metrics like credit default obligations or Libor, everyone understands the danger of banks doing business -- knowingly or not -- with Iran, Mexican drug cartels or even terrorists.
“If you’re trying to exert pressure on a country like Iran and they can just go around and get some bank to backdoor transactions, it takes all the bite out of the sanctions. That’s a huge problem,” said McAvoy, a[n adjunct] professor at Fordham Law School.
For big banks, this could represent a new challenge to their crumbling brands.
“Even without criminal charges and before fines are levied there is so much damage done to the banks once it’s public,” she said. “Everything in the financial industry is based on trust.”
This reputational damage can quickly lead to economic pain. Last month HSBC disclosed a 9% decrease in first-half profits, due in part to setting aside $2 billion to resolve a growing list of financial scandals.
‘Who Are You to Tell Us?’
Regulators have threatened to effectively cut off Standard Chartered from the U.S. banking market by revoking its New York banking license, a disastrous outcome for an institution that processes $190 billion each day.
“This bank could be put out of business. They could revoke the license and then that’s it. They’d certainly be done in the U.S.” said McAvoy.
It’s clear some banks that are based overseas but operate in the U.S. care little for American sanctions.
For example, a U.S.-based executive at Standard Chartered warned in 2006 that the allegedly illegal transactions leave the company and its management subject to “catastrophic reputational damage” and “serious criminal liability.”
A London executive replied: “You f- Americans. Who are you to tell us, the rest of the world, that we’re not going to deal with Iranians,” according to the New York regulator.
“If that’s ever used at trial in the U.S., they’re dead. That’s all it takes is one crazy, stupid email like that,” said McAvoy.
Breakup Calls to Grow
If new allegations of money laundering are made in the coming months, they could further bolster the case for breaking up the biggest banks, an argument that has grown in intensity in recent weeks.
The latest charges are “definitely a corroboration of people’s concerns about these banks and the value they’re contributing,” said Greenberger. “I think people have long since reached the conclusion that these big banks are much more of a problem than a contributor to any social or economic value.”
Greenberger said there should be “bipartisan outrage” about the money-laundering allegations, but doubted there will be, in part because of the large role banks play in campaign contributions.
“I can’t say it’s reached the tipping point yet but it’s certainly building,” he said. “There is a slow, gathering storm with regards to banks.”