How to Shake Down a Bank for Fun and Profit: Street Whispers

NEW YORK ( TheStreet) -- The harsh order handed down by New York state bank regulators against Standard Chartered Bank may not only set up a battle between government watchdogs, but also fill the state's coffers.

The New York State Department of Financial Services (DFS) on Monday said Standard Chartered's New York branch had "schemed" with Iran to hide 60,000 transactions, "evading federal sanctions" and operating "as a rogue institution."

On Tuesday, Standard Chartered said it was "surprised to receive the order," since the bank "had previously reported that it is conducting a review of its historical compliance and is discussing that review with U.S. agencies, including the DFS, the Department of Justice, the Office of Foreign Assets Control, the Federal Reserve Group of New York and the District Attorney of New York."

It is unusual for a bank to be truly "surprised" by this type of order, since the bank would be in close contact with examiners investigating any serious problem. Standard Chartered said "resolution of such matters normally proceeds through a co-ordinated approach" by the regulatory agencies.

Standard Chartered was ordered to appear on Aug. 15 before New York Superintendent of Financial Services Benjamin Lawsky to "demonstrate why SCB's license to operate in the state of New York should not be revoked." Standard Chartered said it planned to "discuss these matters with the DFS and to contest their position," and that its review of the Iranian transactions "demonstrates that throughout the period, the group acted to comply, and overwhelmingly did comply, with U.S. sanctions and the regulations relating to U-turn payments."

The New York Times reported on Monday that officials at the Federal Reserve and the Justice Department were "stunned" by New York's move against Standard Chartered Bank, and that Treasury officials suspected that Lawsky had "taken too broad a view," according to unnamed sources.

Bank fines as budget gravy

The New York Department of Financial Services (DFS) was created in October 2011 to consolidate the New York State Insurance Department and the New York State Banking Department. The DFS and its predecessor bank regulatory agency have seen their influence over U.S. banking decline over the past three decades, as numerous large state-chartered institutions have merged or converted to federal charters.

The bulk of the DFS's budget for its bank regulatory activities comes from examination fees charged to state-chartered banks and other financial entities, and to state-licensed New York branches of foreign banks, including Standard Chartered of London.

According to a 2006 study by the Federal Deposit Insurance Corp., the New York State Banking Department lost "approximately 30%" of its assessment revenue in 2004, when JPMorgan Chase Bank -- the main banking subsidiary of JPMorgan Chase ( JPM) -- switched to a national charter to become JPMorgan Chase Bank NA, and HSBC ( HBC) unit HSBC Bank USA also switched to a national charter.

The state could well be overstepping its bounds in handing down its own order, without first seeking a settlement that also includes the FDIC, the Federal Reserve and the legal authorities.

Annemarie McAvoy, adjunct professor of law at Fordham University School of Law and a former federal prosecutor, says "the point of these charges is to set the bank on its heels, making it very difficult to fight back," and with Standard Chartered's share price falling 16% on Tuesday, "customers are asking if you are trustworthy and if you will be able to survive, and they begin to flee."

The bad publicity and market disruption "puts you in a much better position to impose a big fine," according to McAvoy. "States have very few ways to raise money right now, other than hefty fines," she said, adding that "this could be a billion-dollar fine ... It's a real money maker."

While a $1 billion fine seems astronomical, the DFS says that Standard Chartered funneled "at least $250 billion" in illegal transactions through the New York Office, "reaping SCB hundreds of millions of dollars in fees," and huge fines have been paid to the state before.

Way back in 1996, Daiwa Bank pleaded guilty to criminal charges of covering up $1.1 billion in trading losses, agreeing to pay the state a $340 million fine.

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-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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