Are UK banks being unfairly targeted?

European observers, and particularly those in Britain, might be forgiven for being somewhat wary of the deluge of investigations against some leading financial institutions taking place across the Atlantic over the past few weeks.

Barely had the news of Barclays’ attempts to manipulate the London Inter-bank Offered Rate (triggering steep penalties from the US, as well as British authorities) sunk in, when HSBC — a bank that had emerged from the financial crisis with a less tattered reputation than most and which had positioned itself as one of the few “responsible” ones out there — faced the wrath of the US Senate’s fearsome Permanent Sub-committee on Investigations; it was accused in a 330-page report of having a “pervasively polluted culture” and acting as a means for Mexican drug cartels to send illicit funds to the US and a host of other breaches.

And soon afterwards, out of nowhere, came the stinging attack on Standard Chartered.

“A rogue institution” was the way Benjamin Lawsky, the zealous superintendent of the newly created regulator, the New York State Department for Financial Services, branded the bank — a bank that had appeared so confident in its position that its CEO had labelled it “boring” just the week before.

Now Deutsche Bank appears to be the next one on the regulator’s radar (the bank is not commenting on the news as of yet), with reports that it is one of four European banks facing investigations for breaching the regulations governing so-called “U-turn payments” that enabled US banks and those with US operations to deal with transactions with Iran that neither originated nor terminated in that country.

And earlier this week, it emerged that the New York State Attorney has subpoenaed two US banks and five European banks over Libor manipulation claims.

Anti-British bias?

It’s fair to say that it’s the Standard Chartered case that’s most startled observers in the UK, coming out of the blue in the way it did, and without the usual coordination between investigation authorities.

Moreover, the order itself seemed to bring up the potential national tensions and resentment about the impact of US policy on a primarily non-US institution: “You… f****** Americans. Who are you to tell us, the rest of the world, that we’re not going to deal with the Iranians,” one senior executive was quoted as saying (Standard Chartered contends it’s an inaccurate representation of what was said). The level of distrust of the bank was clear, as the regulator revealed that it would be placing its own experts on site in the bank to monitor progress.

Overall, it has triggered alarm in Britain, which has already been under fire from US litigators over the large number of US financial institutions that have run into trouble in Britain, including JP Morgan, AIG and MF Global.

“It seems to be that every big trading disaster happens in London,” Caroline Maloney, a member of the House of Representatives Committee on Financial Services was recently quoted as saying by Reuters. The Chairman of the Commodity Futures Trading Commission Gary Gensler also recently hit out at the “London loophole” that some US banks had used.

In that context, even some of the harsher critics of Britain’s banking sector have raised questions about whether there’s a deeper reason for the sudden zeal.

John Mann, a member of the House of Commons Treasury committee, who has grilled the likes of Bob Diamond, the former Barclays CEO, and Fred Goodwin, the former head of Royal Bank of Scotland, warned of an “an increasing anti-British bias” by US regulators and politicians, suggesting that the intention was to move financial markets from London back to New York.

Rivalry among regulators

Certainly some of the comments about British regulation appear like an attempt to pass the buck and it shouldn’t be forgotten that Britain’s light-touch regulatory regime was once vaunted in the US as the way to go. However, the investigations themselves are a different matter altogether.

Lawrence Baxter, a professor of law at Duke Law School, argues that for regulators, it is largely local forces and pressures that are at work. “I understand the reaction in London particularly given the recent murmuring that it’s not been strict enough in the regulation of banks…but I’m sceptical that this would be concrete driver,” he says. “Lawsky is fairly new to this game so I think it’s much more the case of him seeing a ‘big worm’.”

He also points out that rivalries between local and federal regulators in the US, with one trying to outdo the other, have been a fairly regular occurrence over the years.

Far from being an outlier, Lawsky appears to follow in a tradition of other enforcers who’ve stepped into matters that federal regulators had attempted to own, such as Robert Morgenthau, the former district attorney of New York or Elliot Spitzer, the former state Attorney General. (Morgenthau, for example, made his name going after disgraced Bank of Credit and Commerce International, stepping well over what was perceived as his remit and authority to mount the toughest investigation undertaken against the London-headquartered bank, meeting stiff resistance in his bid to get hold of non-New York documentation).

Ross Delston, an attorney, anti-money laundering expert and former US banking regulator, points out that it’s far from just British or European banks that have been singled out over violations of OFAC.

Last year, JPMorgan Chase paid $88.3 million to settle claims regarding apparent violations of sanctions governing Cuba, Iran, Liberia, and Sudan.

He argues that the Standard Chartered case came at a particularly unfortunate time for the bank, with Iran becoming an ever more sensitive issue in the run-up to the Presidential elections.

More cooperation likely

Peter Henning, a professor of law at Wayne State University Law School, argues that the apparent focus on European banks could also be attributed to the fact that in some areas American banks had responded earlier than others because of clampdowns by regulators.

“Five or ten years ago they went after American banks, and some of the business shifted from US banks, so now it’s a matter of catching up,” he says.

It’s also worth remembering that despite Standard Chartered’s early rebuttals of the charges, it has agreed to pay $340 million — a fine many times the $14 million of transactions it said had violated the US Office of Foreign Asset Control regulations.

The bank was eager for a speedy resolution, particularly given that the threat of the withdrawal of its banking licence was hanging over it, but just what further damaging details emerge with the federal cases still pending remains to be seen.

Perhaps the biggest danger would be if these accusations of bias were to create an atmosphere of distrust among regulators from across the world, standing in the way of the much-needed regulatory reform at a global level that still clearly needs to be done.

Delston believes this scenario is unlikely: “I think it could have the opposite effect…it might drive greater cooperation in the future. It could have the effect of telling foreign regulators: you really want to cooperate with us or bad things may happen to your banks.”

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