The Wall Street Journal reports this afternoon on an extraordinary order issued today by the New York State Department of Financial Services, which regulates banks operating in New York. The state alleges:
For almost ten years, [Standard Chartered Bank] SCB schemed with the Government of Iran and hid from regulators roughly 60,000 secret transactions, involving at least $250 billion, and reaping SCB hundreds of millions of dollars in fees. SCB’s actions left the U.S. financial system vulnerable to terrorists, weapons dealers, drug kingpins and corrupt regimes, and deprived law enforcement investigators of crucial information used to track all manner of criminal activity.
The Journal article (subscription) indicates that Standard Chartered could lose its license to operate in New York, among other costs.
The Order makes interesting reading from a regulatory perspective. It alleges an astounding degree of regulatory noncompliance and a willful effort to evade detection. Its accounting firm, Deloitte & Touche, also is implicated.
Regulations that are not enforced, whether because of agency indifference, technical difficulty, or willful evasion, do not achieve the social benefits that were claimed when they were promulgated. Obviously, they raise the costs of regulated entities that do comply and put them at a competitive disadvantage. More subtly, however, they may result in a net increase in the very behavior regulation was promulgated to deter or prohibit. This can occur if the social costs of regulatory noncompliance are very large and only a small number of regulated entities are incentivized to violate.
Separate from whatever actions tNew York State regulators may take, violations of the federal Iranian Financial Sanctions Regulations issued by the Treasury Department’s Office of Foreign Assets Control (OFAC) have their own penalties. Generally, these penalties are set by law and thus lie outside the discretion of the regulatory agency. Civil penalties may not exceed $250,000 per violation or “twice the amount of the transaction that is the basis of the violation with respect to which the penalty is imposed” (50 U.S.C. 1705(b)). The Order alleges “at least $250 billion” (GB160 billion) in illegal transactions, which implies at least $500 million (GB 320 million) in potential civil liability. Standard Chartered market capitalization is about GB35 billion, meaning that worst-case civil penalties might amount to 0.9% of market cap. So it is conceivable that systematic violation of the US Iranian sanctions regulations was a rational decision for this UK bank.
However, Standard Chartered executives also may be subject to criminal penalties, which are seth forth in 30 U.S.C. 1705(c):
A person who willfully commits, willfully attempts to commit, or willfully conspires to commit, or aids or abets in the commission of, an unlawful act described in subsection (a) shall, upon conviction, be fined not more than $1,000,000, or if a natural person, may be imprisoned for not more than 20 years, or both.
Rational bank executives would not consider criminally violating the Iranian sanctions regulations unless they believed that detection was highly unlikely and the penalties if detected would be small. Perhaps bank executives underestimated the likelihood that violations would be criminally prosecuted. It is premature to attempt to analyze this because none have been charged, much less prosecuted.
As an aside, it’s useful to consider what markets think about all this. Standard Chartered’s stock price immediately declined from £1603 to £1470 per share. Trading in London is over for the day. We will see what happens tomorrow.