From Regulatory Confusion to Fear of Regulators


Daniel Tannebaum, CFE
Head of Compliance - Americas, Travelex and Chief Compliance Officer, Travelex Currency Services Inc.
New York, NY

In June, I wrote an ACFE Insights piece, “Why Won’t Regulators Just Tell Us What They Want?” in advance of my presentation at the ACFE Annual Fraud Conference in Orlando. That article seems like ages ago in relation to this summer’s events.

I can’t recall a time when a money laundering investigation made it to the whip-around on the Daily Show, but HSBC did just that.

I can’t remember a time when one of the largest correspondent banks in the U.S. was threatened with the termination or suspension of its banking license, but Standard Chartered filled that void.

I wrote in my last piece that it seems as if regulators have shifted from a culture of guidance and clarification to one of enforcement. It seems now that regulators are following through with the threats made over the past several years.

It has been known for some time that HSBC was in the midst of what will ultimately result in the largest civil monetary penalty in global history for AML and sanctions deficiencies, and potentially may result in criminal charges (although that has been threatened in the past). On July 17, 2012, the Senate Permanent Subcommittee on Investigations (PSI) held a public hearing in which HSBC business and compliance leadership testified on a lengthy report relating to programmatic issues dating back nearly a decade. This event was the equivalent to a Super Bowl for compliance professionals. A Group Head of Compliance stepped down in front of the U.S. Senate, and the former architect of the U.S. counterterrorist financing regime, now Chief Legal Officer at HSBC, was lambasted by various senators. Never before have AML and sanctions issues been brought into the mainstream like this hearing had done.

In the end, the Office of the Comptroller of the Currency (OCC) publicly stated that they will be increasing the stringency of their AML examinations, something that they stated in the wake of the Wachovia penalty nearly three years ago.

And that was just July…

August brought with it a threat from the New York State Department of Financial Services (DFS) to Standard Chartered claiming that transactions conducted over the past 10 years through their New York branch violated Iranian transaction regulations. The order called for a public hearing to speak to the charges with the potential penalty of having its license terminated.

This is where the fun begins. The DFS claimed that Standard Chartered was stripping Iranian references from payments, as in other cases such as Credit Suisse, Lloyds and ABN, to evade sanctions. This case is slightly different than those. Standard Chartered was using an exemption in OFAC regulations called a “u-turn,” where commercial transactions to Iran could clear through U.S. financial institutions so long as the transaction originated at a non-U.S. bank going through a U.S. bank and destined for a non-U.S. bank. While this exception was terminated by OFAC in November 2008, the transactions listed in the DFS report pre-dated the change in OFAC policy.

In the end, rather than face a public hearing, Standard Chartered paid a $340 million settlement to DFS. A letter sent by OFAC Director Adam Szubin to the UK Financial Services Authority highlighted the legitimacy and due diligence requirements of u-turn payments while not directly commenting on the pending Standard Chartered vs. DFS case. You be the judge.

Whereas before we were concerned that regulators were focusing more on enforcement than guidance, those worries continue to be upheld. The scary part now is what do you do when a regulator threatens your license using laws they aren’t the subject matter expert on?

They’re the regulator, what they say goes and you must pay to stay in the game. Even scarier.