From Libor to Money Laundering: Time to Tidy up Fragmented US Legal System [ANALYSIS]

The recent spate of US government investigations into the manipulation of global interbank rates such as Libor and allegations over dealings with sanctioned countries, such as North Korea and Iran, have only highlighted the need for streamlining the US legal system.

Since the credit crisis, the markets have been inundated with regulatory changes across the globe and new oversight committees and regulatory bodies being set up to tackle the well-publicised fact that regulators were "asleep at the wheel" when major troubles first erupted in August 2007.

However, asking for a streamlined US regulatory system may seem like a pie-in-the-sky ideal that seems like a broad and oversimplified approach, but judging how the various legal encounters and fighting between regulatory bodies have panned out and how complex it has become to assign responsibility and appropriate oversight has become a minefield.

Dealings with US Sanctioned Countries

The case of Standard Chartered agreeing to pay $340m in civil penalties to the New York State Department of Financial Services (DFS) for hiding transactions linked to Iranian clients shows up a messy financial regulatory system.

In an unprecedented move, the DFS publicly slated Standard Chartered saying that it had hidden at least $250bn worth of transactions linked to Iranian clients and revealed the detailed filing of charges it made against the bank.

The DFS called Standard Chartered a "rogue institution," just as the bank itself, as well as other US regulators were said to be blindsided by the public announcement.

The DFS was working independently on its own investigation on Standard Chartered and has settled with the bank, while others, such as the Federal Reserve, were apparently still in the latter stages of their own probes.

Reams of reports detailing how the DFS head, Benjamin Lawsky, was an aggressive litigator and decided to go it alone and not coordinate with other regulators have since come out.

While news of the settlement may seem a triumph against wrongdoings by banks, the situation only highlighted the mess that the US regulatory system can create.

Standard Chartered will still have to face investigations and possibly more litigation charges from the Federal Reserve, the US Treasury, the Manhattan attorney general and various others - all the while implementing radical steps to monitor its New York subsidiary.

"The bank shall install a monitor for a term of at least two years, who will report directly to DFS and who will evaluate the money-laundering risk controls in the New York branch and implementation of appropriate corrective measures," said the DFS.

"In addition, DFS examiners shall be placed on site at the bank. The bank shall permanently install personnel within its New York branch to oversee and audit any offshore money-laundering due diligence and monitoring undertaken by the bank."

So will the DFS be now partly responsible for the regulatory oversight of Standard Chartered? Will it also have to face responsibility charges should the bank fall foul of the law again? Will the two-year probe by the other US regulatory authorities mean they will have also install their own people to work in the New York subsidiary?

Knotted red tape

The red tape surrounding the event is already knotted and there is a danger that other US regulatory bodies may try to weigh in on the same investigation.

Initially, regulators should have different responsibilities but in recent cases these lines have become blurred with state regulators and federal regulators tussling over the same territory. In the US, the national government has specific powers and the 50 states retain substantial autonomy and authority.

Both the national government and each state government is divided into executive, legislative and judicial branches with written constitutions. That allows checks and balances but which can mean that the number of investigations on a single matter can cross into multiple areas.

Libor Fixing

Since Barclays settled with the US Department of Justice, the US Commodity Futures Trading Commission and the UK's Financial Services Authority for a record £290m related to the manipulation of Libor, the number of investigations by various jurisdictions and regulators into a number of banks has become a farce.

Over the last week, we have had the Florida state regulator issuing subpoenas to Bank of America, Societe Generale, Credit Suisse Group, Credit Agricole, Royal Bank of Canada (RBC), Rabobank and Lloyds Banking Group.

Florida attorney general Pam Bondi's office claimed it was "actively reviewing the Libor matter" and had subpoenaed a total of 14 banks.

Meanwhile, Deutsche Bank, Barclays, JPMorgan Chase, RBS, HSBC, UBS and Citigroup received subpoenas from the New York Attorney General Eric Schneiderman and Connecticut Attorney General George Jepsen in relation to a similar investigation into the manipulation of Libor.

But this isn't the end. There are a number of other investigations being carried out across the globe, as well as within the US which means further confusion.

While regulators are meant to share information and coordinate with one another, lawyers have told the IBTimes UK how this is sometimes only seen as formality.

"In my experience US regulators would coordinate with other regulators in different jurisdictions but would retain autonomy to decide whether or not to bring charges based on the US regulators' discretion," said Marc Greenwald, partner at Quinn Emanuel who specialises in complex commercial litigation and defence of government investigations.

As the saying goes: "Too many cooks spoil the broth."