Academic journal article Fordham Journal of Corporate & Financial Law

Regulation of Foreign Banks Operating in the United States: A State Regulator's Controversial Pursuit of a London-Based Bank

Academic journal article Fordham Journal of Corporate & Financial Law

Regulation of Foreign Banks Operating in the United States: A State Regulator's Controversial Pursuit of a London-Based Bank

Article excerpt

Abstract

Benjamin M. Lawsky and the New York State Department of Financial Services upended the regulatory dynamics of the international banking world in August of 2012 when the New York agency reached a staggering settlement with Standard Chartered Bank. The Department of Financial Services accused the bank, which is headquartered in London, but maintains a profitable branch in New York, of violating laws related to United States sanctions imposed upon certain financial transactions with Iran. Although allegations of this sort are not unprecedented, Lawsky's actions and the $340 million settlement were alarming because, in this case, the state regulator acted without any involvement from federal regulators, who were "on the verge of concluding" that the majority of Standard Chartered's transactions with Iran were legal.

The settlement illustrates the tension between state and federal regulators when confronted with alleged violations of law committed by a foreign bank. Specifically, the settlement raises the question of whether a state regulator should be involved in the regulation of a foreign bank operating in the United States, particularly when the bank is primarily violating federal laws that implicate issues of foreign policy. This Comment examines these issues, starting with an introduction of the statutory framework regarding the regulation of foreign banks, followed by a discussion of the various reactions to the Standard Chartered settlement, both positive and negative. This Comment then provides recommendations for resolving the issues raised by the settlement, ultimately concluding that the principle of comity paves the way for proper coordination and deference to the appropriate authority-whether state or federal-in the case of overlapping regulatory jurisdiction.

Introduction

On August 6, 2012, the New York State Department of Financial Services ("DFS") issued an order pursuant to New York Banking Law Section 39, accusing Standard Chartered Bank ("Standard Chartered") of engaging in illicit dollar-clearing transactions with Iran.1 The order directed Standard Chartered, a London-based bank, to appear and explain apparent violations of law; demonstrate why Standard Chartered's license to operate in the State of New York should not be revoked; demonstrate why Standard Chartered's United States dollar clearing operations should not be suspended pending a formal license revocation hearing, and submit to and pay for an independent, onpremises monitor of the DFS's choosing to ensure compliance with rules governing the international transfer of funds.2 On August 14, 2012, one day before Standard Chartered was to appear before the DFS, the parties agreed to settle the matters in the DFS order from August 6, 2012.3 The settlement required Standard Chartered to pay a civil penalty of $340 million to the DFS.4 Notably, the order and the ensuing settlement took place without any intervention from or coordination with federal regulators.5

While some commentators lauded the DFS and its superintendent Benjamin M. Lawsky for their aggressive stance against violations of federal and state banking laws, others criticized the settlement as a rogue undertaking that failed to allow federal regulators an adequate opportunity to intervene in the matter.6 Whether Mr. Lawsky and the DFS deserve praise or criticism, the settlement between the DFS and Standard Chartered raises some serious regulatory issues regarding the extent to which a state regulator should be involved in the regulation of a foreign bank operating in the United States, particularly when the bank is primarily violating federal laws that implicate issues of foreign policy.7

Part I of this Comment will describe the role of foreign banks in the United States banking system and the statutory framework regarding the regulation of those banks. Part II will parse out the issues arising from the DFS settlement with Standard Chartered and will discuss the positive and negative responses to the settlement. …

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