New York isn't going to let Bank of Tokyo-Mitsubishi slip out of its regulatory oversight without fighting back.
The state's banking regulator, Maria Vullo, said in a legal filing late Wednesday that the Tokyo lender's request last year to shift regulators — trading its state license for a federal one — was granted arbitrarily and unlawfully. Accusing the bank of trying to avoid the consequences of its misconduct in New York, she asked a federal judge in Manhattan to allow the agency to fine the Tokyo lender for recent compliance violations.
The judge's response will be watched closely by leaders of global banks, not least those that have smarted at the billions of dollars of fines issued in recent years by the New York State Department of Financial Services, which Vullo now runs. At least one chief executive officer of a European bank overseen by the DFS has talked with his executive team about switching to federal oversight given the harsh penalties imposed by the New York regulator, according a person with knowledge of the discussions.
"The financial industry has generally deemed the settlements demanded by DFS in recent years to be arbitrary and larger than warranted," said Kathryn Wylde, president of the Partnership for New York City, which represents the city's business interests. "It is understandable that institutions might want to see if they fare better with a federal regulator."
Bank of Tokyo-Mitsubishi UFJ made its shift last year, applying to come under the OCC's oversight and receiving its approval eight days later. The Tokyo lender then sued DFS in an attempt to halt the New York regulator's oversight activities.
In her filing in that matter on Wednesday, Vullo challenged the legality of the conversion, which she said was sealed before DFS had weighed in on the matter. The OCC licenses are "contrary to law, invalid and not effective, as they were issued pursuant to federal agency action that was arbitrary and capricious, an abuse of discretion, and not in accordance with law," she argued.
While Vullo doesn't have the scope within the current legal battle to seek to reverse the bank's regulatory switch, a favorable decision by the judge could lend legitimacy to her position and send a warning to banks hoping to secure a similarly swift approval.
Compliance efforts
"No bank or financial institution should be permitted to avoid responsibility for its prior illegal conduct by blithely trading enforcement regimes through a conversion from a state-licensed entity to a federally licensed entity," Vullo wrote. "Even were this kind of regulatory arbitrage acceptable going forward (and it is not), it cannot and does not erase the misdeeds of the past indisputably committed under a New York license."
Vullo described Bank of Tokyo-Mitsubishi UFJ as negligent in its compliance efforts and said the bank lied to the independent consultant that DFS assigned to monitor its compliance programs. The bank also impeded the consultant's work by firing the chief compliance officer of its New York office, who was cooperating fully with the consultant, she wrote. She asked for permission to impose a monetary penalty on the bank, without specifying an amount.
Kazunobu Takahara, a spokesman for Mitsubishi UFJ Financial Group Inc., the bank's parent, declined to comment.
Dollar-clearing
Many global banks that operate in the U.S. perform dollar-clearing operations through offices in New York, and have that branch office licensed by the state. In 2011, a new law combined the state's banking and insurance departments to form DFS. Vullo's predecessor, Benjamin Lawsky, established a reputation as an aggressive enforcer, collecting about $6 billion from global banks during his four years in the job, mostly for violations of U.S. sanctions laws against rogue regimes. Among those levied hefty DFS fines were Standard Chartered, BNP Paribas SA and Deutsche Bank AG.
Those stiff fines, and Lawsky's energetic approach to enforcement, led to predictions during his tenure that at some point many global banks would flee the state's regulatory regime.
Bank of Tokyo-Mitsubishi UFJ filed an application to convert its state license to a federal license on Oct. 30. It noted, in its application, that it had four different state regulators overseeing its foreign branches in New York, California, Texas and Illinois. In addition, the lender owns and operates Union Bank in California, which is supervised by the OCC.
The OCC approved the conversion on Nov. 7, before DFS responded to the OCC's notice that Bank of Tokyo-Mitsubishi UFJ was planning the move. The regulator switch became official the following day. The OCC's acting chief was Keith Noreika, a Simpson Thacher & Bartlett lawyer who had done work in the past for Bank of Tokyo and other global banks. Joseph Otting was sworn in as OCC chief in late November.
Noreika and a spokesman for OCC didn't respond to emailed requests for comment.
Another, similar OCC approval took not days but months. In November 2016, UBS AG applied with the OCC for a similar conversion from its state branches in Connecticut and Illinois. The OCC approved the request on March 30, 2017.
In its letter approving Bank of Tokyo-Mitsubishi UFJ's conversion, the OCC said it would continue to review the bank's compliance with Bank Secrecy Act rules and other areas cited by DFS in previous actions against the bank.
DFS's on-site examiners were expelled from Bank of Tokyo-Mitsubishi UFJ's New York office on the day of the conversion, the regulator previously wrote in a letter to the OCC. Also, the regulator said, Kroll — an independent consultant hired by DFS to oversee the bank's efforts to improve its compliance program — was asked to leave the bank's headquarters in Tokyo on Nov. 8.
The bank then filed a complaint against Vullo, seeking an injunction to prevent DFS from conducting further supervisory activity. In Wednesday's response, Vullo urged the court not to allow the bank's conversion to a federal license to result in a "clean slate."
The case is Bank of Tokyo-Mitsubishi UFJ v. Vullo, 1:17-cv-08691, U.S. District Court, Southern District of New York (Manhattan).
