We have a vested interest in what we call “sanctions technology.” Although we are skeptical about whether sanctions work in the way expected, there are multiple motives for deploying them, including making it more difficult to proliferate or launder cash earned from illicit activities.
Several weeks ago, we posted on the fascinating Senate HSBC report, which included some interesting details about how North Korea used offshore banks—including in Mexico—to manage its cash. We predicted that if HSBC was doing it, others were too. So we were particularly interested in reading the New York State Department of Financial Services Order Pursuant to Banking Law 39. For those not following the issue, this was the case brought by state regulator Benjamin Lawsky against Standard and Chartered that was ultimately settled for $340 million.
The order focuses entirely on Iran. There is no mention of North Korea, although we don’t now whether it was because North Korea was simply too small potatoes or whether Standard and Chartered did not have a North Korea book.
But the report is absolutely scathing. Because of its outrage, it provides a more compelling introduction to the issues than the longer and more sober HSBC document.
Just to give you a feel:
“In short, SCB operated as a rogue institution. By 2006, even the New York branch was acutely concerned about the bank’s Iran dollar-clearing program. In October 2006, SCB’s CEO for the Americas sent a panicked message to the Group Executive Director in London. “Firstly,” he wrote, “we believe [the Iranian business] needs urgent reviewing at the Group level to evaluate if its returns and strategic benefits are . . . still commensurate with the potential to cause very serious or even catastrophic reputational damage to the Group.” His plea to the home office continued: “[s]econdly, there is equally importantly potential of risk of subjecting management in US and London (e.g. you and I) and elsewhere to personal reputational damages and/or serious criminal liability.”
Lest there be any doubt, SCB‟s obvious contempt for U.S. banking regulations was succinctly and unambiguously communicated by SCB‟s Group Executive Director in response. As quoted by an SCB New York branch officer, the Group Director caustically replied: “You f—ing Americans. Who are you to tell us, the rest of the world, that we’re not going to deal with Iranians.”
As the New York Times summarizes, we are now seeing that HSBC and Standard and Chartered are just the tip of a very much larger iceberg. The Department of Justice has in fact quietly reached deferred prosecution agreements with no fewer than five banks on this issue—ING, Credit Suisse, ABN Amro, Lloyds and Barclays—with asset forfeitures totally over $2 billion; this is not small potatoes. In case anyone missed the pattern, all of the “dirty seven” are foreign-based, underlining the technical complexities of maintaining a sanctions regime in a highly-globalized financial system.
In future posts, we will look more closely at the Justice Department cases and report on any North Korea angle.