New York regulator Lawsky flexes muscle again and Bank of Tokyo Mitsubishi pays steep price

Benjamin M. Lawsky, the assertive New York financial regulator who serves as the first Superintendent of the state’s relatively new Department of Financial Services (DFS), has once again taught a lesson to the global financial institutions operating in the Empire State.

They were shown once again that it is not only the federal regulatory agencies that they must eye. They must also be mindful of state financial regulators who have equally strong muscles that can be applied to improper or unlawful conduct – even if it is principally a federal violation.

Since becoming Superintendent in May 2011, Lawsky has increased the state’ s enforcement actions and turned DFS into a major Wall Street watchdog. On June 20, the DFS obtained the agreement of the Bank of Tokyo-Mitsubishi UFJ (BTMU) to pay $250 million to settle charges of violating New York banking laws.

Lawsky’s department charged BTMU, in effect, of hiding and disguising about 28,000 wire transfers between 2002 and 2007 that transmitted about $100 billion to nations that were subject to US sanctions.

DFS enforces US sanctions law obliquely with NY ‘recordkeeping’ charge

DFS charged BTMU with facilitating funds transfers with Iran, Sudan and Myanmar, as well as with entities on the Specially Designated Nationals (SDN) lists issued by the US Treasury Department’s Office of Foreign Assets Control (OFAC). SDNs are individuals and companies with whom US persons and organizations are prohibited from conducting trade and financial transactions, due to their connections with sanctioned countries, terrorist cells, drug trafficking organizations or organized crime.

DFS said in its “Consent Order Under New York Law § 44” that BTMU employees systematically removed, or “stripped,” information from wire transfer messages that would identify the involvement of countries and persons subject to sanctions. BTMU is said to have gone so far as to establish written operational instructions for its employees on how to “avoid freezing of funds” by omitting information in transaction descriptions that described involvement with an “enemy country.”

BTMU said in a public statement that the bank self-identified the issues cited by DFS in 2007 and “voluntarily and promptly ceased the practices, reported them to all of its regulators, and has been cooperating fully with its regulators” on the violations. The bank also stated that it has “significantly improved its compliance policies and procedures” since 2007 and “is committed to conducting business with the highest levels of integrity and regulatory compliance.”

DFS penalty 30 times larger than federal penalty

BTMU’s $250 million New York settlement is exponentially larger than the $8.6 million penalty it paid to federal regulators in December in connection with similar allegations. In the federal case, OFAC cited BTMU for conducting only 97 unlawful funds transfers with blacklisted countries, totaling about $5.9 million. OFAC also charged BTMU with violating a presidential Executive Order banning transactions with nations that proliferate weapons of mass destruction.

The huge discrepancy between the two settlements points to the “u-turn” transactions that factored heavily – and controversially – in the DFS case against Standard Chartered last year. In that case, DFS imposed a $340 million penalty on the British institution.

Many of BTMU’s transactions with Iran are believed to have been technically legal under the u-turn exemption, which was repealed in 2008. U-turn transactions allowed US institutions to process payments that were ultimately destined for a sanctioned country or entity, so long as they were sent from one non-sanctioned bank and received by another.

While OFAC considered the vast majority of BTMU’s transactions to have fallen under the u-turn exemption, DFS pursued the bank not for the underlying transactions but for related recordkeeping violations under New York law and regulations. The New York regulator determined the bank had improperly documented its wire transfers by stripping information related to sanctioned countries and entities, which are violations of New York banking law.

DFS imposes independent consultant to watch over BTMU

It is possible that DFS will take on other banks for similar violations in coming months. New York has more than a passing interest in banking violations that may be linked to fostering terrorism.

“We have and will continue to take a hard line in rooting out misconduct at banks that threatens our national security,” said Lawsky in a statement. “Whenever and wherever we uncover serious wrongdoing, we will take strong enforcement action to protect our country from money laundering, terrorism, and other dangerous misdeeds.”

The settlement with BTMU requires the institution to engage an independent consultant, approved by Lawsky’s department, for one year and to report periodically on the status of required compliance improvements.

The June 20 BTMU settlement comes on the heels of another major DFS case two days earlier. On June 18, DFS announced a $10 million penalty and one-year ban on accepting engagements from DFS-regulated financial institutions against Deloitte Financial Advisory Services for its work at Standard Chartered. Read related story here.

Read the Bank of Tokyo-Mitsubishi UFJ agreement with DFS here