Money laundering settlements. Are fines from the U.S. just a cost of doing business?

My previous post described the settlement by Standard Chartered bank with the New York state Department of Financial Services for $340 million over allegations of money-laundering.

I also listed six other settlements I found in two Wall Street Journal articles here and here.

  • $567M – 12-09 – Lloyds TSB Bank
  • $536M – 12-09 – Credit Suise
  • $500M – 5-10 – Royal Bank of Scotland
  • $298M – 8-10 – Barclays
  • $619M – 6-12 – ING Bank
  • $340M – 8-12 – Standard Chartered – settlement with New York regulators
  • $700M announced reserve for settlement – HSBC Holdings PLC
  • $???M – Standard Chartered will have a separate settlement with US authorities

What is going on?

The cases leave me scratching my head wondering what’s going on in the big banks.

How can this be?

Standard Chartered was intentionally stripping info on wires going into Iran. 

Heres some brief background which I have summarized from the Wall Street Journal article Tallying Up U.S. Regulators’ Money-Laundering Fines

  • ING Bank NV was accused of stripping information off of billions of wires going into Cuba and Iran.
  • Barclays was using vague descriptions on payment instructions over 11 years to get money into Cuba and Sudan.
  • Credit Suisse helped clients get money into “..Iran, Libya, Sudan, Myanmar and Cuba…”  I’d have to check, but that may be the entire list of countries where the U.S. bans transactions.
  • HSBC Holdings was accused of helping money launderers and potential terrorists. Their staff in Mexico got billions of dollars of currency into the US by car or aircraft. Not wire transfers. Currency.

I realize all of the wires described above when combined are insignificant in relation to the volume of wires that take place every day. I can’t quickly find the comment again, but recall reading that the volume of wires settled in New York by Standard Chartered on every business day is roughly comparable to the volume in dispute ($250B). The stripped wires are a tiny fraction of the total processed by the bank.

On the other hand, these weren’t accidents. They weren’t oversights. These aren’t the ones that just slipped through the cracks.

These were deliberate.  In the Standard Chartered case, these wires were withdrawn and knowingly stripped of identifying information.

Red flag warning signs

My professional training encourages me to look for little tell-tale signs that are warnings about something much deeper that is yet hidden from view. So I get a little worried when I see things like this from the Wall Street Journal article Standard Chartered Examined Over Iran Dealings:

The illegal transactions were part of a strategy by the bank called “Project Gazelle,” according to an internal memo written in 2005 that was cited by Mr. Lawsky in Monday’s order.

The business chugged along even after the banking unit’s chief executive in the Americas warned in a 2006 memo that the company and its management might be vulnerable to “catastrophic reputational damage” and “serious criminal liability.”

According to the regulatory order, a bank official in London replied: “You f- Americans. Who are you to tell us, the rest of the world, that we’re not going to deal with Iranians.”

If the New York regulators are correct, the bank had a named program to launder money. (Can you imagine that in manufacturing? “Oh, the afternoon’s batch of product failed all the QC tests? Get it over to the ‘Good Stuff’ team in the other building – they know how to sell the junk.”)

They knowingly evaded U.S. law. That’s intent.

They knew they were running a major risk. That shows their risk assessment model.

All that suggests to me that some of their staff don’t really consider U.S. law an important constraint on their operations.

That leaves me scratching my head. What is the corporate culture that allows that world view?

How big is the fine?

Let’s look at the fine in relation to their income statement.

In 2011, Standard Chartered’s interest income was US$16.58 billion (B).  Income tax is US$1.84B.  Net income was US$4.93B.  The fine is US$0.34B.

Spread the US$0.34B over about ten years is US$.034B per year. The amortized fine would be 1.8% of tax expense, or 0.69% of net income.

In terms of earnings per share, the amortized fine drops basic EPS by 1.3 cents. Expressed that way, EPS goes from $2.008 to $1.994.

Where is my thinking?

I don’t know where these stories leave me today. I do not know where this is leading me in the future.  What little bit I do know is that it shows the internal controls and corporate culture and risk management at the huge banks aren’t what they should be.

The little question that is lurking somewhere in the far recesses of my brain is that maybe the underlying attitude is that the fines from getting caught are just the cost of doing business. Nah. That can’t be the case.

Update:  The Standard Chartered violation appears to be a repeat violation. See post on final settlement.

2 Responses to Money laundering settlements. Are fines from the U.S. just a cost of doing business?

  1. […] Money laundering settlements. Are fines from the U.S. just a cost of doing business? […]

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: