The department of financial services in the State of New York has drawn blood. In a rather sharply-worded publicly-issued show cause notice, the agency declared that Standard Chartered Bank had left the United States “vulnerable to terrorists, weapons dealers, drug kingpins and corrupt regimes” by adopting “willful and egregious violations of law”. In less than a week, the agency pocketed a sum of $340 million as a “settlement”.
Laymen may cheer that an arm of the Republic brought a large global bank to its knees. Commentators in the Indian media would extol the virtues of how the United States manages to shame the ‘bad boys’ while India purportedly lags behind. However, worldwide, those who care for the rule of law are seriously worried. These worries are relevant for India too – for much of what the United States has done here bears striking resemblance to what Indian regulators routinely do.
First, the department is not even a federal agency – it is not like the Reserve Bank of India (RBI) or the US Federal Reserve, or the Justice department, which would look at the interests of the entire nation and means of inter-state trade. The State of New York asserted its jurisdiction to regulate financial services in the State of New York (the US Constitution apparently supports such intervention) – somewhat like the state of Andhra Pradesh seeking to regulate micro-finance institutions, ignoring the RBI’s regulatory role.
The New York agency alleged circumvention of US sanctions against Iran – an issue involving international relations between the United States and a foreign nation. It was not about regulation of banking activity with any specific relevance to the territory of New York. By invoking the imagery of a financier of terrorism, drugs and weapons, the New York agency took a grand public stand. This is quite similar to how sections of the Indian media sought action in the 1990s against the Tatas for allegedly helping office-bearers of the dreaded United Liberation Front of Assam, and thereby waging war against India.
Second, the order passed by the state agency was nothing but a show cause notice. However, the show cause notice was publicly issued. It did not matter to the state agency that one is innocent until proven guilty – it seemed so sure. According to agency, the bank operated as a “rogue institution” and for ten years “schemed” and “conspired” and “hid” about 60,000 “secret transactions” involving at least $250 billion, with the number only growing – the agency had said it was also looking at similar violations relating to Libya, Myanmar and Sudan. Shares of the bank crashed the next day – those who had pledged them as collateral would have been asked to post additional margin by their lenders.
Such conduct is quite similar to what Indian regulators do. Many an order under Section 11B of the SEBI Act gets issued on an “ex parte” (without hearing the party involved) and “ad interim” basis (based purely as an intermediate measure to urgently step in, leaving it open for the merits of the case to be determined in future). Once an order is passed, the regulator can sit back and not bother about resolving the merits for months on end – cases of not even taking the next logical steps that one would expect in an emergency, abound. The courts would normally give a rather long rope and be circumspect in interfering with such action, when a state agency uses the kind of language the New York agency used. Of late, courts in India have started questioning abject inaction for months on end after such an order is passed.
Third, very quickly and rather shockingly, the bank, fighting with one arm tied behind its back, had to buy expensive although affordable peace. The price tag: $340 million. If even a fraction of what the New York state department said about the bank was accurate, one would wonder if it would at all be possible for a self-respecting nation to permit such an institution to continue to function. Obviously, the odds are in favour of saying that the United States does not seem to be a self-respecting nation – of course, on the assumption that the New York department was not exaggerating. It is such an assumption that seems ridiculous at this stage.
This is yet another dimension relevant for India. India’s securities regulator has announced guidelines on settlement of disputes through “consent terms” under which it has declared that it would generally not settle disputes relating to “serious violations”, and yet, has reserved the right to do so. This column has commented earlier on why such an approach is worthy of ridicule. India’s central bank settles regulatory disputes over exchange controls but in the absence of a statutory appellate oversight, one is left with little option but to settle disputes even when there is a strong case against the central bank. The Economist, in British under-statement, had this to say: “But this odd episode is disturbing for bigger reasons, too. The bank’s initial reaction to the charges was one of indignant denial. If that was merely bluster, the… settlement leaves much to be desired… it extracts money from… shareholders but imposes no consequences on the people in charge. If the bank’s initial response was justified… this settlement is … even worse… that would suggest that…faced with incendiary charges…and the potential loss of its licence… it had no choice but to pay up…extracting payments through threats is usually seen as extortion. That a government agency might be the one playing this role is rightly a concern to the whole industry.”
(The author is a partner of JSA, Advocates & Solicitors. The views expressed here are his own.) Email: firstname.lastname@example.org