Everyone seems to agree that corruption is bad, yet no one seems to agree on the best way to fight it. This is especially true in polarized Washington, D.C., where most new anticorruption proposals die on the vine.
But 200 miles north of Washington, the New York Department of Financial Services (NYDFS) is taking a new approach to fighting corruption: requiring senior bank executives to personally attest to the adequacy of their systems guarding against money laundering. And if money laundering scams still happen, holding those executives accountable.
This new approach is the legacy of Benjamin Lawsky, who led NYDFS for the last four years until his recent transition back to the private sector. Lawsky was appointed as the first superintendent of NYDFS when the agency was founded in 2011. Lawsky immediately got aggressive in prosecuting wrongdoing for the agency, which regulates state-licensed banks and other financial institutions.
In a speech earlier this year, Lawsky methodically laid out his case for the new approach. His remarks were indicative of a current trend in fighting corruption. With the public still riled over the lack of accountability for the architects of the 2007-2008 financial crisis, officials are looking toward more anticorruption measures that hold executives’ feet to the fire. “Real deterrence, in our opinion, means a focus not just on corporate accountability, but on individual accountability,” Lawsky said in his speech.
Before the financial crisis, 60 years of relative financial stability and economic prosperity bred a false sense of security, which made regulators slow to respond to emerging risks. It also helped propel a gradual move to dismantle key regulatory protections, Lawsky said.
As a result, the U.S. financial regulation system became unmoored from the key principles that had guided it since the Great Depression. Thus, a course correction is necessary, Lawsky argued.
Some say that any course correction should be undertaken on the federal level, so that any new regulations will be consistent nationwide. But Lawsky argued that such pleas for “consistency” are sometimes merely a tactic used by some on Wall Street to weaken key financial reforms, by either playing one regulator off another or trying to get regulators to settle for watered-down rules, in the interest of “consensus.”
“They poke and they prod until they succeed in producing Swiss cheese regulations riddled with loopholes,” Lawsky said.
But “financial federalism” offers a possible alternative. It operates under the idea that individual states can act as democracy laboratories. “State governments can often serve as incubators for new approaches to vexing policy problems. States can experiment, try new things,” Lawsky said. “And if their ideas prove effective—and rise to the top of the crowded marketplace of ideas—those policy proposals may be adopted beyond their borders.”
Moreover, states should speak up “if we believe that certain regulatory protections are not sufficiently robust to root out reckless behavior that threatens the health of our economy, [and] if we think that current approaches to enforcement and prosecution are not effectively deterring wrongdoing on Wall Street,” Lawsky said.
New York is speaking up and offering its approach as a potential template for future federal action. Lawsky’s proposals are divided in three parts: seeing to Wall Street’s accountability in the wake of the financial crisis, preventing money laundering in the financial sector, and strengthening cybersecurity in the financial markets.
In terms of Wall Street’s accountability, Lawsky noted that there was no shortage of corruption during the last financial crisis. He referred to comments made by former Treasury Secretary Timothy F. Geithner, who wrote that “there was an appalling amount of mortgage fraud during the credit boom,” adding that the American people “deserved a more forceful enforcement response than the government delivered.”
And corruption continues, Lawsky argued, in large part because corporations collectively are penalized, but individuals are not. “We almost always see bank settlements where a corporation writes a big check to the government without any individual Wall Street executives held to account,” he said.
However, Lawsky highlighted how NYDFS, in contrast, has held executives accountable. For example, he cited how his agency required the chief operating officer of France’s largest bank, BNP Paribas, to step down as part of enforcement actions brought against that company.
“While NYDFS does not have authority to bring criminal prosecutions, it has taken a number of actions to expose and penalize misconduct by individual senior executives—including all the way up to the C-suite, when appropriate,” Lawsky said.
As for fighting money laundering, Lawsky said it is a key component to the war on terrorism. “Money is the oxygen feeding the fire that is terrorism,” he said. “Without moving massive amounts of money around the globe, international terrorism cannot thrive.”
Given this, NYDFS is proposing measures such as random audits of the transaction monitoring and filtering systems that companies use to detect money laundering. In addition, since NYDFS cannot simultaneously audit every institution, the agency is considering requiring senior executives to personally attest to the adequacy and robustness of those systems designed to fight money laundering. If the vouched-for systems turn out to be faulty, executives could be held responsible.
“We expect to move quickly on these ideas and—to the extent they are effective—we hope that other regulators will take similar steps,” Lawsky said.
However, the likelihood that these proposals will see wider implementation depends on a few factors, says Stephanie Quinones, an attorney at Gunster law firm who specializes in banking, financial services, and corporate governance.
One factor is whether they will be tenable legally. There are some federal regulations that hold boards of directors accountable in the cases of company wrongdoing. But those are usually only applicable in “very egregious circumstances,” such as when actual knowledge of violations by the board member can be shown, she says.
In contrast, it would be legally more challenging to prosecute an executive who in good faith believed his or her company’s safeguards to be adequate, even if they later turned out to be insufficient. Some sort of flexible “reasonable reliance” standard would be needed, she explains.
And as to Lawsky’s idea that his state’s proposals could serve as a template for new federal regulation, Quinones notes that they would have to get past some well-funded industry groups who would fight them on Capitol Hill, and this would be no small task. “The lobbying groups on the federal level are pretty strong, so I am not sure what the chances are,” Quinones says.
Now that he is back in the private sector, Lawsky plans to focus on cybersecurity in his own consulting firm. The former superintendent also plans to serve as a visiting scholar at Stanford as part of the university’s digital initiative.
And true to his aggressive tenure, Lawsky went out with a bang. On the same day he announced his resignation, Lawsky revealed that Barclays agreed to pay $2.4 billion and terminate eight of its employees who allegedly engaged in misconduct in connection with a scheme to manipulate spot trading in the foreign exchange market.
“Put simply, Barclays employees helped rig the foreign exchange market. They engaged in a brazen ‘heads I win, tails you lose’ scheme to rip off their clients,” Lawsky said.