How many U-turns can a bank fit inside a loophole?

By Felix Salmon
August 9, 2012
affair today. Read this one first, about the law which may or may not have been broken; and then move on to this one, about the reaction to the case in London.

" data-share-img="" data-share="twitter,facebook,linkedin,reddit,google" data-share-count="true">

The NYT has two excellent articles about the Standard Chartered affair today. Read this one first, about the law which may or may not have been broken; and then move on to this one, about the reaction to the case in London.

Up until 2008, the US law governing banking transactions with Iran fell short, shall we say, from what you might expect from a perfect model piece of legislation. Banks in New York couldn’t do such business — unless the money just came in to the US and then immediately left again — but even then there were lots of rules surrounding disclosures and the like which tended to slow such business down. The big argument in this case is not whether the transactions took place, but rather whether Standard Chartered illegally circumvented the disclosure rules, by stripping lots of information from the transactions before they reached New York.

In other words, this whole thing is a fight over the size of a loophole. Standard Chartered defends its actions on the grounds, in the NYT’s words, that they “fell squarely within that loophole” — while Benjamin Lawsky sees the loophole as being much smaller, and the StanChart transactions as falling outside it.

Viewed from across the pond, all of this seems a little bit silly. London has always been a more freewheeling and international banking center than New York; moving money around the world is what London banks do. And so the English are seeing a war on London here:

John Mann, perhaps the most strident critic of Britain’s banking culture in Parliament, said in an interview on Wednesday that the Standard Chartered allegations reflected an anti-Britain bias by American regulators, who he said were trying to bolster Wall Street at the expense of the City of London.

This is silly; I’m quite sure that Lawksy doesn’t have some kind of hidden agenda to boost the fortunes of Goldman Sachs or BofA. But the US rules are definitely written in a world where the US can and will advance its own geopolitical agenda by imposing regulations on domestic institutions, as well as foreign institutions with a US presence. And since it’s impossible to be an international bank without having a US presence, the US geopolitical agenda ends up being imposed on every major bank in the world.

The London view of things is different: it sees itself more a global financial center, rather than a UK city, and historically has tried to be as welcoming as it can be to foreign institutions and capital flows. Hence the now-famous quote from an English StanChart executive, complaining about where the “fucking Americans” get off telling the rest of world what they can and can’t do when it comes to Iran.

What’s more, while London regulation is principles-based, US regulations are rules-based — which means that if Standard Chartered could find a way of moving money around the world while remaining within the four corners of the law, it would happily do so. There’s very little doubt that StanChart’s actions violated the spirit of the law; Lawsky’s assertion is that they violated the letter of the law, as well. But that remains to be seen. In London, and in general, StanChart would generally avoid taking refuge in loopholes like this. But New York is different, and in New York, StanChart played by different rules.

So while Lawsky’s suit isn’t a matter of bolstering Wall Street at the expense of the City, it is a matter of trying to impose the US (and, indeed, NY) vision of finance on every global financial institution. When it comes to things like capital adequacy, regulators around the world have interminable meetings in boring cities to try and build a global framework they can all agree on. When it comes to things like money transfers, however, every country has different rules, and the US has no compunction in declaring that, say, all flows in and out of Iran are money laundering and/or terrorist finance unless proven otherwise.

Up until now, US bank regulators have taken a relatively sanguine view of such matters. They understand that New York is an international financial center, and so long as banks are making a good-faith effort to stay within the letter of the law, they’re often given the benefit of the doubt. Some might call that regulatory capture; others might simply see New York regulators triangulating towards international norms.

Lawsky, on the other hand, clearly doesn’t care a whit for international norms or the global nature of finance. He sees behavior which on its face involves trading with Iranians and making hundreds of millions of dollars in profit from activities no US bank would want to touch. He has every right to go after StanChart, which has a major New York presence. And he also — crucially — has the right to take away StanChart’s banking license here, which would basically kill the bank entirely. What he sees as the moral high ground looks to Londoners very much like judicial bullying.

The US tightened up its loophole in 2008, and when it did so, StanChart’s U-turns came to an end: they thought they were within the loophole, and when that loophole went away, they stopped what they were doing. In other words, we’ve already had the US action which put an end to StanChart’s behavior: in fact, we had it four years ago. What extra purpose is served in going so aggressively after StanChart now? That’s the question that London is asking; I’d be interested to hear Lawsky’s answer.


We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see

What does this mean?

“London regulation is principles-based, US regulations are rules-based”

Surely, English law does not differ so sharply from American law that prosecutors can bring charges based on the violation of principles!

Posted by MB-11 | Report as abusive


It is more the historical approach to regulating banks that differs. In the US, most banking supervision is directed by strict rules – your leverage limit must be X, you must have Y amount of money on hand for intraday transactions, etc. In the UK, up until recently much of the supervision was based on principles, i.e. “banks should have in place policies and systems to ensure they are not overleveraged” or “banks should calculate their required daily intraday cash needs in a stressed scenario”.

However, Felix probably has not spoken with UK bankers in the last couple of years – the UK FSA has become relentlessly focused on rules-based supervision and is one of the jurisdictions most stringently implementing Basel III, which prioritizes rules over principles in key areas like liquidity.

Posted by Suncaked | Report as abusive

John Mann’s complaint is silly in so many respects. Usually banks complain about stringent regulators and darkly warn that strict enforcement will chase them out of the jurisdiction to a more bank-friendly place. And yet in this case Mann is arguing that strict regulators in New York will hurt London as a banking center and help New York? On the face of it it makes no sense.

I think part of the issue and the surprise here — and what drives Felix’s question at the end — is that banks have, for the first time in a very long time, run into a regulator who seems focused on the fact that they might have broken the law, and interested in holding them accountable for that. Banks have gotten used to breaking laws and then paying trivial fines, coming to secret agreements with regulators, and neither admitting nor denying guilt. So now everyone seems shocked at the notion that they might actually be penalized for breaking the law.

If they didn’t break the law, more power to them. They’ll be vindicated. But Felix: I don’t think Lawsky has anything to answer for to you or to anyone else for trying to hold a company accountable for its actions.

Posted by f.fursty | Report as abusive

If in fact the now-infamous quote was placed in an email by Standard Chartered’s CFO in response to a concern from it’s NY office, that was an enormously and dangerously stupid thing to do. Stupidity may not be a crime, but it this case it is prima facie evidence of one.

Posted by Curmudgeon | Report as abusive

I suggest you read the Bloomberg article as well:  /standard-chartered-probe-deal-said-to- require-up-to-700-million.html

To quote from that article:
“Lawsky alleged in the order that Standard Chartered executed 60,000 wire transfers, amounting to $250 billion, on behalf of Iranian financial institutions during that period.

In its response to Lawsky’s order, the bank said its own review of those transactions, conducted by Promontory Financial Group, showed that 99.9 percent of those transfers complied with existing rules regarding so-called “U-turn” transactions involving sanctioned nations. Sands said today that none of the transactions reviewed by the bank were linked to terrorist organizations.”

Assuming Gene Ludwig’s people (Promontory) did a thorough job, a bit of math would reveal that something on the order transfer amounting to $250 million were in violation of law and regulation.

Isn’t $250 million a startling large amount of money for a sanctioned nation to receive? (Stanchart now claims it is only $14 million, but Promontory’s review didn’t seem to find that.)

So isn’t StanChart’s first public rebuttal to Lawsky a clear admission of guilt?

And so why again is Lawsky on trial here?

Posted by AABender1 | Report as abusive

“Isn’t $250 million a startling large amount of money for a sanctioned nation to receive?”

No, in the context of trade flows for a nation of 75 million people that exports $80 billion of oil per year, $250 million is chickens**t, particularly when the transactions in question occurred over a period of several years.

Posted by realist50 | Report as abusive

People have been screaming for bankers to be hung from lampposts for a while since the financial system came crashing down and destroyed a few trillions of money. The assumption was that there must have been plenty of fraudulent activity for this to happen. Now, we are starting to see some real accusations, and for the most part, they seem relatively minor in comparison with the size of the holes that have appeared everywhere. I have the nasty suspicion that the problem here is that the vast majority of the money disappeared by performing perfectly legal financial activities, some of which probably should have been forbidden in the first place. But regulators are too afraid to admit that they know too little of what’s been going on to work out which activities they should regulate much more tightly. So instead, they’re going after people that have broken some regulation or other, and with that they hope to appease those that want to see some blood.

Posted by Doly | Report as abusive

@Doly Agree with that totally. The amazing thing is that it was perfectly legal to lend money to people whom it was abundantly clear could not afford to repay loans at standard rates. It was also completely legal to securitise those mortgages, bundle them into “safe” products and oversell them around the world. There definitely was a common sense bypass in operation at the time, but which regulator or politician is going to admit to having no common sense? So, they grasp at a straw far removed from the real deal, and attack that hoping everyone will forget the real story happened closer to home.

Posted by FifthDecade | Report as abusive

I tend to agree with Doly and FifthDecade about the regulations not containing “common sense” provisions.
The market would supposedly prevent a loan being made to someone who couldn’t afford it. Due diligence. But it didn’t (ninja loans – yet I must have supplied hundreds of documents back in 1993 when I got a loan for a house, and supplied them several times – apparently mortgagers do not know how to file documents, and still don’t).
Due diligence, prudence, conservative – supposed financial attibutes. Yet nothing could be further from the truth. And we bail out such people – if we must print money, how about not giving it to the people who got us into this mess? Maybe instead of laws that never seem to be appropriate (and yes, I know that the banks are defacto writing the rules themselves – which just argues even more that to depend on laws is hopeless)we should go back to this….oh what was it???? Hmmmmm, oh yeah – profit and LOSS. FAILURE. ACCOUNTABILITY. Of course, we might even be so radical as to fire someone who says “subprime is contained…”
But what is most astounding is that people still use these banks, and still use Moody’s, S&P, and Fitch.

Posted by fresnodan | Report as abusive

Felix…Isnt this an excellent example of the perils of the regulatory capture strategy? No matter how many of the King’s men a company hires to write the rules and make the regulations and accounting as opaque as possible — there will always be a new kid on the block ready to go back ten years and raise serious reputational risks. The strategy may cause irreversable harm…think of UBS whose transparency efforts were swamped by the tsunami of the Libor headlines.

Posted by kurtkendis | Report as abusive

@FS – you might care to re-examine the wisdom of your ascribing benign intentions to StanChart’s management after you closely consider this - 0/us-standardchartered-iran-privilege-id USBRE8791AT20120810?feedType=RSS&feedNam e=topNews

IMO the documents cited in the article establish a strong ‘prima facie’ case of the bank knowingly engaging in transactions which it understood to be highly likely to be in violation of US law. Equally gag-inducing is the apparent blatant complicity of the bank’s attorneys in the planning and execution and concealment of the improper activity. This is unambiguously out-of-bounds – and every lawyer knows it. The traditional attorney-client privilege has no application to such a matter – just ‘cause your partner in crime is a lawyer doesn’t get your conspiratorial conversations any special legal status.

Posted by MrRFox | Report as abusive