In early April, when The New York Times reported that the Justice Department would grant Credit Suisse a deferred prosecution agreement for actively aiding tax evasion, it seemed yet another bank would pay a paltry penalty for major misconduct. Credit Suisse would owe only a fine for helping rich Americans hide their wealth from taxes in Switzerland. And those wealthy clients would get off scot-free, with their Swiss bank accounts still secret.
But a funny thing happened on Credit Suisse’s way to legal impunity: a new inquiry from the relatively obscure New York Department of Financial Services (DFS). Under the direction of former federal prosecutor Benjamin Lawsky, DFS has reportedly requested documents from Credit Suisse and a Senate subcommittee investigation, seeking to learn whether Credit Suisse executives based in New York lied to state regulators about their role in creating offshore tax havens. In the current climate of financial regulation, where investigations rarely impact the individual employees who design and perpetrate misdeeds, this was a bold step—one that could force the Justice Department to toughen up. Imposing a less stringent penalty than a state regulator would humiliate the feds.
A few years ago, Lawsky’s agency didn’t even exist. Now it’s a player in virtually every major bank scandal, investigating money laundering, market manipulation, accounting fraud, and faulty mortgage servicing, to name just a few. While DFS cannot indict individuals or convene a grand jury, its unorthodox and uncompromising methods can inform other regulators, or even embarrass them into stronger action. Given the persistent and deserved criticism over the lack of consequences for the architects of the financial crisis and its aftermath, such competition fills a glaring gap. By actually enforcing the rules, Ben Lawsky could save the financial regulatory apparatus from itself.
“When a corporation does wrong, it has to be that individuals who work at the corporation have done wrong,” Lawsky said in an interview. “The corporation itself doesn't sit around and say, ‘should we as a corporation engage in this conduct?’ It's just people. We've come to believe, if you're finding serious wrongdoing, but can't find individuals who committed that wrongdoing, you’ve just stopped looking.”
Lawsky’s efficacy has been surprising, given that his office originated not as a high-minded alternative to Wall Street’s failed regulators, but rather as a power play by New York Governor Andrew Cuomo. Cuomo, the former state attorney general, famously doesn’t get along with his successor, Eric Schneiderman. One of Cuomo’s first acts as governor was to combine the state Banking and Insurance Departments, both dating back to the 19th century, into a new agency with expanded powers, many of which overlapped with Schneiderman’s. While DFS and Schneiderman’s office have worked together on occasion, many believed Cuomo was creating a parallel cop on the beat to undermine his rival.
Cuomo chose Lawsky, who had worked for him in the attorney general’s office and, before that, pursued white-collar crime at the U.S. Attorney’s office in Manhattan. From the start, Lawsky took a prosecutor’s mentality, immediately scaling up the criminal division and building an agency of 1,400 employees. In a recent speech, Lawsky discussed the “accountability gap” on Wall Street, noting that no senior executive has faced serious prosecution for the financial crisis, and also that Wall Street scandals have continued to proliferate. Lawsky sees these two data points as related, and blames regulators for failing to address them.
“Say someone is working with a financial product,” he said in our interview, “and they think, my company can make a lot of money, it's wrong, but if I get caught, what will the consequences be? Looking around, it’s likely nothing.” Lawsky referred to financial settlements where the firm pays a small penalty that ultimately gets passed on to shareholders, while the employees within the company who perpetrated the wrongdoing face no repercussions. “I don't know that corporate penalties alter that individual calculus,” he said.
“Lawsky brings what’s so glaringly missing from other bank law enforcers: zeal,” said Bartlett Naylor, former chief of investigations for the Senate Banking Committee, now a financial policy advocate at Public Citizen. “Where federal enforcers appear to want a volunteered confession of fraud before bringing a case, Lawsky confronts the problem with innovation.”
For example, in 2012, Lawsky broke with federal colleagues on an investigation into Standard Chartered Bank, which was accused of laundering money for countries banned from the financial system, such as Iran. Lawsky threatened Standard Chartered’s New York banking license, without which it wouldn’t be able to work in one of the world financial centers. “That sent a tremor through the financial industry,” Naylor said. “It’s something that would never have been done or even contemplated before.”
Standard Chartered, which previously wanted to fight the allegations, backed down and settled for $350 million, the largest fine ever for a state regulator in a money laundering case, and a bigger payday than federal regulators secured. Along the way, Lawsky sanctioned the consulting firm Deloitte, which whitewashed reports about Standard Chartered’s money laundering activities. In addition to a fine, Lawsky banned Deloitte from consulting for any business regulated by DFS for one year. Lawsky is considering this type of ban as a model for sanctioning other middlemen who facilitate illegality.
Lawsky’s ongoing probe into mortgage servicing company Ocwen showed even more mettle. Lawsky initiated a surprise examination of Ocwen in June 2012, a highly unusual event. “Rather than the usual bank exam, where you call three months in advance and get a bunch of files that have been scrubbed, we thought it would be interesting to go back in unannounced and see how they were doing,” Lawsky said. “It wasn't a raid, we just didn't plan it ahead of time. And we saw they were not doing what they said would do.” DFS found Ocwen was violating a prior agreement regarding its purchase of Litton Loan Services, with evidence of mishandling of loan modifications and unnecessary foreclosures.
“We don't want to be the regulator who settles, finds the other side not abiding, tells them to really abide, they don’t, then say we’re putting you on double secret probation,” Lawsky said. “That’s not how we're wired. There need to be consequences.”
As a result of the inspection, Lawsky blocked Ocwen’s purchase of $39 billion in mortgage servicing rights from Wells Fargo. This is far tougher than the Consumer Financial Protection Bureau, which settled with Ocwen late last year. Lawsky’s penalty hit directly at Ocwen’s business model: Since Ocwen does not originate its own loans, it must purchase servicing rights in order to thrive. “All the things they were doing wrong, it’s often because they can't handle the volume of the loans they're servicing,” he said. “That’s key to doing what's fair and appropriate to people on the other side of those loans. They're not just a number, they're real people with real problems who need help in real time, right now.”
Lawsky’s work has had a material impact at the margins. For example, since the Standard Chartered enforcement, federal regulators have subsequently ramped up their penalties against banks for money laundering, including a record $1.9 billion fine against HSBC for similar conduct. The feds announced the HSBC penalty just one day after wrapping up their own Standard Chartered investigation, which paled by comparison to Lawsky's—leading some to suspect the HSBC settlement was intended to make them look as tough as the DFS.
In recent months, Lawsky has begun to stress the need to pair higher corporate penalties with individual accountability. The Department of Financial Services lacks the power to indict bankers directly, though Lawsky is looking into alternative tools within his power, like banning individuals from the financial industry and even clawing back compensation. He has also referred several bank employees to prosecutors for criminal violations. In one recent money-laundering case where prosecutors dragged their feet, Lawsky threatened to publicly name individuals who violated the law, putting pressure on law enforcement to indict them.
Having a regulator who can rattle the financial industry helps not only to police markets but also to stiffen the spines of normally malleable regulators. Lawsky has been vocal about the need for his colleagues to halt deregulatory schemes and pursue justice against individual perpetrators.
For his part, Lawsky doesn’t see other regulators as rivals. He likens the role of DFS as that of a good basketball player who finds open spots on the floor. “If there are places in the regulatory ecosystem, where there are systemic problems and solutions are not being found, we’re often more nimble and can get to them,” he said. “If that has collateral impacts on other agencies, I hope those impacts are a good thing.”