True villains of the StanChart tragedy

FT.com

Yet another Shakespearean banking tragedy opened this week, with Standard Chartered starring this time as the villainous rogue. The day of reckoning will be Wednesday, when the New York Department of Financial Services will hear the bank's defence against charges of hiding the involvement of Iranian government clients in 60,000 wire transactions, worth at least $250 billion. Call it the Ides of August.

That hearing will focus on 'wire stripping'. Standard Chartered employees allegedly hid the fact that wire transfers to New York were coming from Iranian government-owned institutions by stripping out references to Iran from wire instructions. Standard Chartered called this a "repair procedure,” and insists it was permitted.

Media commentators and bank analysts have suggested that the evil actors in this drama were the employees who did the 'repairs' and the managers who supervised them. Others have absolved Standard Chartered, accepting the bank's argument that the scope of wrongdoing was minimal and had nothing to do with terrorism. But the New York regulators' order centres on the bank's general counsel and compliance offices. This focus on lawyers is important.

Among the most incriminating documents cited in the order are memoranda and emails from the bank's attorneys, who allegedly advised that wire instructions should not identify the names of Iranian clients because that would trigger scrutiny in New York. Legal and compliance officers were allegedly involved in a plan called Project Gazelle, which sought to build the bank's business with Iranian clients without exposing the New York branch "to the risk of a breach of sanctions”. Given these allegations, the opening line at next week's hearing might be: "The first thing we do, let's kill all the lawyers.”

Indeed, the order puts the bank's senior attorneys and compliance officers at the heart of the wire stripping scheme, even when outside counsel advised otherwise. As early as 1995, soon after President Bill Clinton announced economic sanctions against Iran, the bank's general counsel allegedly "embraced a framework for regulatory evasion”. He allegedly strategised about how to avoid scrutiny by the US Office of Foreign Assets Control, known as OFAC, and instructed employees that a memorandum describing the plan to avoid regulatory compliance was "highly confidential & MUST NOT be sent to the US”.

We know bankers can be ruthless when pursuing profits. But bank lawyers are not supposed to think like bankers. Decades ago, the general counsel of a bank thought more about ethics than efficiency. But today's in-house counsel are often profit centres, fonts of wisdom on how to avoid accounting rules, cut taxes and maintain the secrecy of dubious practices. One reason for the recent wave of abuses at big banks is that their in-house lawyers have been more focused on speed and profit than on right and wrong.

It is now apparent that speed was a concern of Standard Chartered's lawyers: if the wire instructions had contained references to Iran, they probably would have been investigated and so delayed. The bank's chief legal and compliance officer for its wholesale banking business apparently called the risk of such delays a "deal-breaker” in efforts to develop new business.

Standard Chartered's lawyers also allegedly "outsource[ed] the entire OFAC compliance process for the New York branch to Chennai, India, with no evidence of any oversight or communication between the Chennai and the New York offices”. Inadequately trained due diligence staff allegedly had simultaneous responsibility for both "repair procedures" and "compliance". The regulators called this dual role "a paradoxical task to say the least”. Allegedly, when staff in India found questionable disclosures, they contacted clients, who then sent "repaired” wires stripped of any references to Iran. Even if that process proves to have been legal, it was due diligence in name only.

As recent debacles at Barclays, HSBC and now Standard Chartered demonstrate, employees of big global banks increasingly lack a moral compass. Some general counsels and compliance officers do provide ethical guidance. But many are facilitators or loophole instructors, there to show employees the best way to avoid the law. Not even mafia lawyers go that far; unlike many bankers, mobsters understand the value of an impartial consigliere who will tell them when to stop.

Bank executives have recently been criticised and even replaced, and more heads will roll. The Standard Chartered saga is not over: the bank allegedly orchestrated similar schemes in Sudan, Myanmar and Libya. But as the drama unfolds, many in the audience will ask: who were the true villains? The bankers? Or 'yes men' lawyers who may have enabled and emboldened them?

Lawyers are supposed to be the grown-ups at the party, professionals who guide their colleagues and tell them what they can and cannot do. They should be ombudsmen, not enablers. One lesson from recent scandals is that banks need reliably independent in-house counsel, with a strong moral backbone.

Frank Partnoy is professor of law and finance at the University of San Diego and the author of ‘Wait: the Art and Science of Delay' .

Copyright The Financial Times Limited 2012.