This made for dramatic headlines, not only because of the size of the fine, but also because of the juicy international political flavor of the allegations.
The bank allegedly cooperated with the Iranian government to hide $250 billion in transactions from regulators in violation of U.S. sanctions against Iran. Yet if we look beyond the spy thriller nature of the main story, there is a very interesting “backstory” to this event, revealing the changing composition and mode of action of players in the U.S. financial regulatory sphere.
Not many people had heard of the New York Department of Financial Services (NYDFS) before the headlines – because this regulator had only come into existence 9 months previously, due to the merger of New York State’s Banking Department and its Insurance Department, a merger which New York Governor Andrew Cuomo said would “better regulate modern financial services organizations”. However, in the increasing push for greater financial regulation in recent years, particularly due to the ongoing fall out from the financial crisis, there are now a whole variety of U.S. regulators that may potentially exercise their investigatory muscle over a bank’s activities. Paradoxically, in some cases, such as the present case, it may seem that this multitude of regulators in fact compete against one another instead of working together. Which also may make it challenging for banks and financial services organizations to balance compliance policies and reactions to potential investigations.
“A new kid on the block”
In the case, the NYDFS was not the only regulator examining the bank’s activities – other regulatory agencies already investigating the Iranian aspects of the bank’s activities included the FBI, the Federal Reserve, the Department of Justice, the Treasury Department and the Manhattan district attorney’s office. Yet it was the NYDFS, the “new kid on the block”, that acted unilaterally against , threatening to revoke the bank’s New York operating license at a public hearing. According to news reports and commentators, the other regulatory agencies were said to be displeased, if not angry, that the NYDFS acted alone. This raises the question of whether the regulatory agencies have a common or separate agendas, in the case of the NYDFS, as a newcomer, it may well have been attempting to make a name for itself. But it definitely makes the environment less certain for banks and financial institutions when they may face a series of unrelated investigations.
The response by to the action by the NYDFS was also dramatic. After the bank’s share price had significantly dropped following the allegations, the bank’s chief executive noted that “our reputation has been damaged”. According to the Financial Times, the bank’s legal teams also considered, prior to the final settlement, filing a law suit for reputational damage against the NYDFS, due to the adverse nature of the allegations and the threat of license revocation in New York. Definitely a creative legal response to a tense situation!