Robert M. Axelrod

Disputes between bank regulators and banks rarely get to court. The grudges of a challenged regulator, winner or loser, may be too daunting.  They almost inevitably settle. Indeed, the last time a major bank indicated it would fight the disciplinary agenda of the New York State Department of Financial Services, DFS announced in 2012 it would up the ante by putting the license of the bank (Standard Chartered) on the line.  Shortly thereafter that bank folded and settled.

The pending federal action in Manhattan between BTMU and DFS is the rare exception. The bank and the regulator are exposed to significant risks.  Bank of Tokyo Mitsubishi UFJ (BTMU) v. Maria Vullo (as head of the Department of Financial Services), No. 1:17-cv-08691-SHS.  The Office of Comptroller of the Currency (OCC) (as amicus) finds itself facing accusations of lack of independence, lack of regulatory rigor and of being the vehicle for the political gerrymandering of a bank license, even though it is not a party.  Judicial involvement may clarify ordinarily elusive issues.

Can a branch of a foreign bank under a state consent order switch from state to OCC (federal) licensure without the state’s consent? BTMU has attempted just such a switch. If it cannot, BTMU will have one really angry state regulator. DFS, on the other hand, gambles that its aggressive role in seeking to enforce paradigmatically federal obligations, like Office of Financial Assets Control (OFAC) sanctions requirements, may come under federal preemption scrutiny.  It could also lose more of the banks it has fined so heavily over the years.

For more streamlined supervision, BTMU applied to have its state-regulated branches licensed by the OCC. Of New York, California, Illinois and Texas, only New York has complained.  DFS counters the switch was instead made because the OCC has a “lighter touch” for discipline.  It could be partly right.  DFS fines bigger and more often than its federal regulatory counterparts over federal issues. For example, in 2012 DFS fined Standard Chartered Bank $340 Million over AML and OFAC matters for which the Federal Reserve levied a fine of $100 million and OFAC $132 million.  Further penalties of $227 million came from state and federal prosecutors.  In 2014, DFS again fined Standard Chartered over the same (unresolved) issues, in the amount of $300 million, with no analogous federal fines.  In 2015, BNP Paribas OFAC violations were met with a $2.24 billion fine from DFS, along with penalties of $508 million from the Federal Reserve, $963 million from OFAC and the balance (with crediting) of $8.8 billion jointly to federal and state prosecutors.

Under the National Bank Act, the OCC argues it can license banks and regulate them.  The NBA provides that at the point of federal licensure, the “visitorial powers” (roughly, supervision) of states over national banks are federally preempted.  Do (preempted) visitorial powers include regulatory enforcement actions?    DFS argues no valid licensure has yet occurred because it has not made a statement of non-objection.  DFS also argues that preemption won’t apply to its claims for pre-conversion conduct.  Because state law enforcement by an attorney general is defined as outside visitorial powers, DFS also argues that it can pursue its counterclaims against BTMU in this action regardless of visitorial preemption.

Factual Backdrop

The factual backdrop illustrates the high stakes nature of the case.  BTMU/its predecessor had a series of state enforcement actions around historic OFAC compliance issues, including inadequate surveillance practices and intentionally misleading SWIFT wire fields that contributed to lax OFAC compliance if not violations. It entered into a 2013 consent order with DFS that included a $250 million fine.  OFAC itself only fined BTMU $8 million in 2012.  DFS then imposed a second, $315 million consent order in 2014 around OFAC issues and candor, finding that BTMU had caused a consultant who carried out an earlier OFAC transaction review to omit an important limitation on its findings.

The OCC handled this application on an expedited basis.  It contacted DFS and asked for information and documents about BTMU in eight days.  DFS asked for an additional week to respond, until Nov. 14.  The OCC granted the license to BTMU on Nov. 7, 2017.  As a condition of the license, BTMU entered into a consent order with the OCC  replicating the substantive obligations of the DFS orders.

DFS reacted quickly.  It issued an order to BTMU on Nov. 8 providing that DFS supervision of BTMU must “continue uninterrupted.” DFS then wrote a Nov. 13 letter to the OCC. The letter detailed various OFAC compliance failures and failures of candor by BTMU around OFAC issues.  The letter contained a confidentiality waiver, thus sanitizing the public airing of this laundry.  There was no request that the OCC keep the document confidential.  DFS suggests that the OCC was ill-informed when it made its decision because, without a waiver, BTMU was barred by state law from discussing state-confidential matters with the OCC. DFS thus posits that the OCC can’t be well informed without the knowledge and consent of DFS.

BTMU went to federal court to enjoin and invalidate the DFS order.  DFS counterclaimed to declare the OCC’s license invalid and recover damages for BTMU’s OFAC related activity before the license conversion.  BTMU moved to dismiss the counterclaims, the OCC filed an amicus brief and DFS filed its memorandum in opposition.  The DFS counterclaims largely went through the arguments in the Nov. 13 letter to paint BTMU as a resiliently dishonest lawbreaker. DFS also suggested in its briefs that the OCC license was sought by BTMU because the OCC is less rigorous than DFS in its enforcement of laws.  DFS further suggested that the license decision reflected a deal involving Vice President Mike Pence in the course of talks with Japan trade groups and President Trump’s meetings with the Japanese prime minister and Japanese business executives days before the license was issued. It accused the executives of the OCC as being conflicted regarding BTMU because of prior work roles and described the then acting OCC comptroller (Noreika) as in the “final days” of his “controversial tenure.” The BTMU license grant was raised with a U.S. Senate committee in April of this year.

DFS Feared Conferring An Advantage to Certain Banks

Further, DFS maintained that its consent was required because otherwise, a license switch would confer an advantage to state-regulated branches of foreign banks vis-a-vis state banks, contrary to Dodd-Frank policy. It read 12 USC 35  (Dodd Frank) and 12 USC 3102 (International Banking Act) together to imply a state regulator consent requirement so as to even out the limitation on the OCC licensing state banks but not foreign branches under a state consent order. The OCC argued that BTMU had gained no advantage over state banks because of the OCC’s new consent order. It is unlikely the court will effect the DFS view of Dodd Frank policy by rewriting 12 USC 3102.

The position of the DFS is that to allow a bank to jump to another regulator when the state is poised to continue discipline punctuated with prior consent orders is like letting a thief find sanctuary by crossing state lines.  The OCC indicates it has the authority to punish pre-conversion misconduct under state law, and that the whole point of federal preemption here is to relieve a bank from dual (and dueling) administrative oversight burdens.  The DFS counterclaims are in the hundreds of millions of dollars, are very aggressive for claims deferred over the prior three years (2014-2017) and might be viewed as retaliatory for the license switch, as the OCC argues.  Given all these circumstances, the sensibility of preemption relieving a bank from dealing with dueling regulators seems patent.

DFS has a challenging position.  A licensing switch is untenable if it means the old regulator can maintain its role until it has discovered and exhausted its concerns over prior conduct. Ongoing consent orders terminable only with the accession of the state regulator pose a similar issue.  If switching licenses is to be realistically available, it is impractical to require a bank to be pristine at the time of switching.  Given the never-ending surge of substantial AML and OFAC enforcement actions against major banks, it appears that no bank is pristine. As well, it is asking the court to change what Congress did in treating state banks and foreign branch banks differently.

The DFS posture that regulatory enforcement actions are beyond visitorial powers and not preempted is also weak.  The leading case, Cuomo v. The Clearing House Association, 557 U.S. 517 (2009) held actions by a state attorney general to investigate banks were visitorial and preempted by the NBA, but those enforcing state laws were not preempted.  Those enforcing state laws, however, are qualified by occurring in a court of competent jurisdiction that can suppress abuse.  A case on point (there are very few) all parties cite, Capital One v. McGraw, 563 F.Supp. 613 (WD Va.  2008)(amended 2010) held that visitorial powers (there, another attorney general investigating a bank) for pre-conversion events were also preempted, because otherwise, the bank would have dual regulation.  It also qualified those attorney general actions outside preemption as involving “substantive” state law.

The New York attorney general (or DFS) might be cautious about initiating a judicial action over what are essentially federal claims. That might test whether such enforcement powers are within applicable state laws in this context.  The OFAC related counterclaims cite state laws (3 NYCRR parts 115, 116 and 417, and New York Banking Law section 44,) but these are limited to the state’s role in supporting compliance with federal AML and OFAC law, as well as setting out the general mission and penalty violation schedules for the DFS. OFAC has a uniquely federal quality, premised on relations with foreign countries and nationals.  Tiffs over such issues raise the prospect of states setting higher enforcement consequences than federal authorities deem sufficient, and effectively setting a conflicting (different from federal) balance for deterrence and remediation.  If BTMU had ten state branches that were like New York, the ratio of federal to state OFAC related fines might be $8 million to $5.65 billion, instead of $8 million to $565 million (the two consent orders).  New York State could invite attention to an area heretofore untrodden for many of its large fines of banks.  Citation of these “state” laws might not solve preemption, given their federal orientation.

The DFS concerns fall in two categories: (1) pre-conversion activities by BTMU that implicate OFAC compliance issues; (2) an ongoing lack of candor by BTMU with DFS.  The OCC can clearly address the first issue. The second category drove BTMU’s $315 million fine, and perhaps the OCC is not as sensitive as the DFS for past such events.  Nonetheless, to take candor as a stopper for switching to a federal license would swallow up the point of preemption because virtually every bank enforcement action involves a failure of the bank to more timely disclose to its regulator what has been going amiss. If the candor issues here are truly egregious, let the New York attorney general entertain whether to bring court actions for misleading statements to the DFS against BTMU or its agents and employees if there are sufficiently supportive non-OFAC related state laws. If BTMU has to litigate such candor claims with New York, at least it won’t have the yanking of its banking license or the specter of other disciplinary actions from DFS on the line.  One may note here that DFS has as yet brought no such third party claims against individuals.


Each of the parties has taken on significant litigation risk.  Whether or not they have been wise remains to be seen, but judicial review of the DFS posture on continuing its supervision of pre-license events, the kinds of factors that may disable the OCC’s licensing discretion, and, for preemption, the disentangling of state action between administrative judgment and actual legal violations that are proven in a court of law would comprise a bumper harvest for the rest of us.  We can only hope this litigation will continue with well-articulated judicial resolution, regardless of the outcome.

Robert Axelrod, a graduate of the University of Chicago Law School, is a financial services consultant in the New York City area.