Fordham Law


Global Banks Rethink NY Bases After Standard Chartered Probe

Annemarie McAvoy in Law360, August 14, 2012

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International banks with New York branches are beginning to consider shifting to federal charters after the state’s banking regulator leveled extensive money-laundering allegations against Standard Chartered PLC, but experts say such a switch is costly and wouldn’t prevent the scrutiny of state regulators.

Even before the New York Department of Financial Services on Aug. 6 threatened the British bank's state banking license over allegations that it engaged in over $250 billion worth of illegal transactions with Iranian financial institutions for nearly a decade, foreign banks with New York branches had been thinking seriously about whether they should have operations in the state or even leave the U.S. entirely, attorneys say. One of the driving concerns for those banks has been anti-money-laundering laws.

Those discussions have since taken on more urgency.

But while the idea of changing charters from state to federal sounds relatively simple, it comes with extensive costs, said Mayra Rodriguez Valladares, managing principal of MRV Associates, a bank consultancy.

A bank would be faced with the prospect of changing lawyers, changing accountants and entering into relationships with new regulators that might not have a firm understanding of their business. The examination processes themselves are potentially vastly different, with a bank that's under review by the Office of the Comptroller of the Currency or the Federal Reserve Board facing six to eight weeks of probing, she said.

“You're going to have to make some serious adjustments,” Valladares said.

And even if a foreign bank were to switch from a New York state charter to a federal charter, it wouldn't be free from the scrutiny of New York regulators if they were to continue their aggressive enforcement of anti-money-laundering laws, McAvoy said.

Foreign banks with federal charters may not get state examinations, but they are subject to state law, she said.

“If they operate in New York, they're bound by New York law as well as these federal laws,” said Annemarie McAvoy, a Fordham University Law School professor and former federal prosecutor.

In recent months, several federally chartered, midsized banks, like Dime Savings Bank of Williamsburgh, have gone the other direction, switching from federal to state charter because of the elimination of their primary regulator, the Office of Thrift Supervision, by the Dodd-Frank Act.

Dime Chief Financial Officer Kenneth J. Mahon also emphasized that state examinations were less costly than those done by federal supervisors when the switch was announced in February, highlighting what any foreign bank would have to undergo if it were to make the switch.

And switching charters to evade an emboldened NYDFS implies that federal regulators would go easier on allegations of money laundering, particularly transactions with Iranian state-sponsored financial institutions.

That is highly unlikely, McAvoy said.

Anti-money-laundering efforts have been a major focus of the federal government for several years, and one of the only things that Republicans and Democrats in Washington have been able to agree on over the last several years is the necessity of measures further restricting trade with Iran.

Although some bank reform advocates cheered the NYDFS's aggressive actions, federal regulators have stepped in to negotiate a global settlement of their own probes and the NYDFS case. And that settlement, which is still being discussed, is likely to be costly.

“It's not that [Standard Chartered was] going to get a walk from the feds. It's just that this kind of speeds up the process a little bit,” McAvoy said.

The Financial Times reported over the weekend that the London-based bank has already agreed to supervision from a New York-state appointed monitor as part of those talks.

With a switch to a federal charter not likely to be a viable option, and the need for a multinational bank to have operations in the U.S., there is little that a foreign bank can do to avoid regulatory scrutiny, said Peter Vinella, a director at the Berkeley Research Group and a financial industry consultant.

Banks with a global footprint need access to the Fed's discount window and the ability to trade U.S. government securities, he said.

Those requirements were what allowed U.S. officials to get Swiss banks to turn over the names of tax evaders, despite Switzerland's strict bank secrecy laws, he said. And it is what will force banks to enter into settlements with federal, and now state, regulators in money laundering cases, he added.

“All these banks have to be in the U.S. You can't be a global business without being in the U.S.,” he said.