Wall Street accountability: In a recent speech at Columbia Law School, Lawsky outlined a concept he calls “financial federalism”—a philosophy encouraging states to play a more active role in devising and implementing financial regulatory policy. Financial regulation, Lawsky points out, is primarily handled at the federal and international levels, and while there is good reason for this—today’s international business climate demands consistent policies that transcend borders—the 2008 financial crisis illustrates that more could be done to plug the gaps and loopholes in the national regulatory framework. Lawsky said states can serve as “incubators for new approaches to vexing policy problems,” and indeed, his time at the helm of DFS has reflected this logic: Investigations of big banks like Commerzbank and PNB Paribas have resulted in the termination of executives from both institutions, making him the first regulator to hold specific individuals accountable for their actions in the aftermath of the financial crisis.

Improving transaction monitoring

Lawsky has also detailed two broad challenges regulators face when it comes to criminal activity and terrorism. The first, money laundering via illicit bank transactions, is of vital importance for drug dealers and terrorists. Because hundreds of millions of transactions flood the global banking system daily, it would he impossible to analyze each one for suspect activity. Instead, automated filtering systems check for patterns in the transactions and flag any suspicious activity. But according to Lawsky, problems can arise when a bank’s filtration software is improperly designed, or when bank management is willfully blind or even purposefully engaged in facilitating criminal or illicit behavior. (The sensitivity of a filtering system could be turned down, for example.) Lawsky claims a more comprehensive approach is needed to make sure banks are adequately monitoring the daily flow of money around the globe, and has proposed two measures: conducting random audits of financial firms operating in New York, and requiring bank executives to personally report to DFS on the robustness of their systems.


Cybersecurity, according to Lawsky, poses one of the most significant threats to global financial markets, and as such, is one of the biggest issues DFS faces. The prospect of a malicious cyber attack on the financial system deliberately intended to create panic and widespread disruption in the markets could in turn cause turmoil in the broader economy, potentially leading to another meltdown and global recession. Such an event has at times been referred to as a “Cyber 9/11.”

While the prospect is a top priority for federal regulators, Lawsky has said DFS is also looking at incorporating new review measures into its regular inspections of banks and insurance companies, as well as beginning to assess the security systems used by third-party vendors. Lastly, the agency is considering requiring financial institutions to use multi-factor authentication in their daily operations, whereby the traditional username/password combination is strengthened by added login criteria such as a second, randomly generated password texted to the user’s phone.

Payday loans

One of the latest and most high-profile cases of DFS clamping down on companies that make small, short-term loans at exorbitant return rates—an illegal activity in New York State—was a $2.1 million fine slapped on MoneyMutual, a company that TV personality Montel Williams had previously endorsed. But the agency’s fight against these shady lenders, who have found increasingly innovative ways to bypass the legal ban, started in 2013 when 35 online companies operating out of state were given the order to cease and desist. “Every time it’s a little bit of whack-a-mole. Each time we cut off a way for those lenders to do business in New York over the Internet, they come back in a different form,” Lawsky said in an interview with City & State.

Since 2013, DFS has successfully shut down out-of-state payday lending via money wire and over the debit card network. The agency is now in talks with federal regulators to address further machinations from unscrupulous lenders.

Mortgage lending and foreclosures

While DFS provides everyday assistance for homeowners who are struggling or failing to pay their mortgages, it has also taken one major mortgage servicer to task for “serious conflict of interest issues” at the company. The agency’s investigation into Atlanta-based OCWEN Financial Corporation, the largest subprime mortgage servicer in the United States according to DFS, resulted in the termination of Executive Chairman William C. Erbay, “significant operational reforms” at the company and $150 million in penalties and restitution payments, a third of which will go directly to New Yorkers who had foreclosures filed against them by the company between 2009 and 2014.

Life insurance

A 2013 DFS investigation found that New York-based life insurance companies were engaging in financial transactions that enabled them to inflate their books by billions of dollars in order to appear stronger to customers, shareholders and regulators. Although insurance companies are expected to keep enough reserves on hand to pay off all future claims, some were diverting their money elsewhere—sometimes toward executive compensation—since they appeared more robust than they actually were, according to the report. Comparing this activity to that which led to the mortgage-backed securities crisis of 2008, Lawsky has since moved to limit the companies’ practice of moving tens of billions of dollars into affiliated shell companies—known as captives—that aren’t subject to the same stringent reserve requirements.

As of early 2015, DFS has said it will lower the amount insurers are required to keep on hand by up to 15 percent, an acquiescence to industry complaints that the current standards are too high and designed to encourage life insurers to discontinue the use of captives, which Lawsky has dubbed “shadow insurance.” But the industry has lobbied instead for an alternative, “principles-based” approach, which Lawsky fears would be too lenient.

In 2013 DFS also helped recover $1.1 billion in unclaimed life insurance payouts across the country. More recently, the agency has investigated life insurance companies for luring in potential buyers with overly optimistic predictions about gains over time, and has also raised the alarm about companies using math-driven formulas to predict how likely a customer is to shop around for different plans and then overcharging the ones who will stick around regardless of price.


So-called financial intermediaries dealing in virtual currency like bitcoin will soon have to comply with a new regulatory framework, which DFS will likely finalize this spring. The regulations would only apply to firms that “exchange, transmit, and hold virtual currency on behalf of customers,” according to a DFS spokesperson. This means that individuals using virtual currencies for personal use, merchants who accept such currency, software developers and even those who “mine” the currency will not have to obtain a license from DFS to keep operating.

In response to criticism from industry players that some of the proposed rules were too cumbersome or already existed at the federal level, DFS unveiled a revised draft in early 2015. But while Bitcoin Magazine said the updated proposal reflects “tremendous developments,” it also noted that many in the industry still feel there are “onerous components” that would inhibit new companies.

For his part, Lawsky has noted that while some regulations would indeed be stronger than they currently are for banks, DFS is looking into using the new rules as a model for stronger regulation of traditional financial institutions.