Standard Chartered Plc conducted $250 billion of transactions with Iranian banks over seven years in violation of federal money laundering laws, a New York regulator said in an order warning that the firm’s U.S. unit may be suspended from doing business in the state.
Standard Chartered earned hundreds of millions of dollars in fees for handling transactions on behalf of Iranian institutions that are subject to U.S. economic sanctions, New York’s Department of Financial Services said yesterday. The London-based bank, which generates almost 90 percent of its profit and revenue in Asia, Africa and the Middle East, was ordered by the regulator to hire an independent, on-site monitor to oversee operations in the state.
When the head of the bank’s U.S. unit warned his superiors in London in 2006 that Standard Chartered’s actions could expose it to “catastrophic reputational damage,” he received a reply referring to U.S. employees with an obscenity, according to the order.
“Who are you to tell us, the rest of the world, that we’re not going to deal with Iranians?” a bank superior in London said, according to the New York regulatory order.
Standard Chartered fell as much as 14 percent in London trading and was down 13 percent at 1,273 pence as of 8:06 a.m. today, heading for the biggest decline in almost four years. The shares had risen 11 percent this year before yesterday, making it the third-best performing British bank stock after Lloyds Banking Group Plc and HSBC Holdings Plc. (HSBA)
The bank said in a statement that 99.9 percent of its transactions with Iran complied with U.S. Treasury regulations, and that the total value of transactions that weren’t in compliance was less than $14 million.
The lender said it “strongly rejects the position and portrayal of facts” made by the state regulator, run by Superintendent Benjamin Lawsky.
Standard Chartered “had previously reported that it is conducting a review of its historical compliance and is discussing that review with U.S. enforcement agencies,” the bank said in the statement, referring to the Department of Financial Services, the U.S. Justice Department, U.S. Treasury Department, Federal Reserve Bank of New York and New York District Attorney.
The lender said it “waived its attorney-client and work product privileges to ensure that all the U.S. agencies would receive all relevant information.”
The loss of its banking license in New York would have a big impact on Standard Chartered’s ability to process dollar payments, said Royal Bank of Canada analysts including Patrick Lee in London, who has an outperform rating on the stock.
“These are very serious penalties,” Lee said in a report to clients today. “Standard Chartered’s U.S. headquarters are in New York, so a revocation of its license would have potentially major implications on its ability to conduct business in the U.S. Similarly, its U.S. dollar clearing operations, the seventh-largest in the world, according to Standard Chartered, would potentially impact its core business trade finance business model.”
The accusations against Standard Chartered are the latest in a series of alleged regulatory transgressions by the New York offices of British banks.
In August 2010, Barclays Plc agreed to pay $298 million to settle claims it violated trade laws by facilitating transactions involving banks from countries under U.S. sanctions including Cuba, Iran, Libya and Sudan.
In 2009, a unit of London-based Lloyds accused of allowing Iran illegal access to the U.S. financial system agreed to pay $350 million to settle an investigation by Manhattan District Attorney Robert Morgenthau.
HSBC, also based on London, last month made a $700 million provision for U.S. fines after a Senate committee found the bank gave terrorists, drug cartels and criminals access to the U.S. financial system. That sum may increase, according to Chief Executive Officer Stuart Gulliver.
Senate investigators said HSBC concealed transactions that bypassed U.S. sanctions against Iran.
“It really seems as if they are perfectly prepared to flout whatever sanctions, rules and laws anybody tries to impose on them,” said Sherrill Shaffer, a former senior economist for the New York Fed who’s now a banking professor at the University of Wyoming in Laramie. “It starts to convey a picture that London-based banks have decided that they’re not going to pay attention to U.S. sanctions with regard to their U.S. operations.”
Standard Chartered handled transactions involving Iranian entities such as the Central Bank of Iran, Bank Saderat and Bank Melli, according to the regulator’s order. Lawsky’s agency is also investigating similar transactions between Standard Chartered and entities in other U.S.-sanctioned countries, including Libya, Myanmar and Sudan, according to the filing.
The scandal may cost the bank as much as $5.5 billion in fines, lost revenue and reduction in share price, said Cormac Leech, an analyst at London-based Liberum Capital Ltd. who has a buy rating on the stock.
Standard Chartered opened its Iran office in 1993. Ten years later, the lender said “cross-border trade flows with markets like Turkey, Afghanistan, Iraq and Iran appear to be growing and offer potential to us.”
The bank stopped all new business in Iran in May 2007 and pulled out completely in May 2012.
Wire transfers involving Iranian banks are at the heart of Standard Chartered’s alleged misconduct. From 2001 to 2007, according to the order, the bank executed 60,000 wire transfers involving $250 billion through its New York branch.
During this time, the U.S. Office of Foreign Assets Control, or OFAC, required U.S. banks to identify and filter all dollar-clearing transactions involving financial institutions operating in nations facing U.S. sanctions, including Iran -- even if the transactions were handled by third-party banks.
The goal, according to the Treasury, was to prevent U.S. dollars from being used to finance terrorist organizations and the proliferation of weapons of mass destruction.
Standard Chartered flouted the OFAC rules by “repairing” wire-transfer orders involving its New York branch to remove any reference to the involvement of Iranian banks, according to the New York filing.
The alleged conduct occurred over seven years, until OFAC revoked authorization for such third-party transfers in 2008, the state said. The lender continued to hide its actions even after the transfers stopped, according to the regulator, leading to the allegation that it hid the conduct from bank supervisors for almost a decade.
The New York agency alleged that Standard Chartered operated as a “rogue institution” that intentionally withheld information from state and federal regulators regarding its dealings with Iranian clients.
“We remain in close contact with both federal and state authorities on this matter,” said John Sullivan, a Treasury spokesman.
The regulatory order poses a challenge to the bank’s senior executives, said Christopher Wheeler, a Mediobanca SpA analyst in London.
“This is going to prove rather tricky for the management team at Standard Chartered as they have been at the bank” for years, he said. “This has been happening while Peter Sands, Richard Meddings and Mike Rees have been in place.”
Sands was promoted to CEO in November 2006, after four years as finance director. Meddings, who replaced Sands as finance director, was previously director for governance for Africa, Middle East, Pakistan, Europe and the Americas. Mike Rees has been CEO of global banking and markets at Standard Chartered since 2003.
“It’s too early to say who will fall on his sword as it depends on what is found, but it really doesn’t look good,” Wheeler said.
The announcement by Lawsky’s agency came after the bank said last week it was conducting a review of its compliance with sanctions rules.
“The group is conducting a review of its historical U.S. sanctions compliance and is discussing that review with U.S. enforcement agencies and regulators,” Standard Chartered said on Aug. 1 as it reported first-half earnings. “The group cannot predict when this review and these discussions will be completed or what the outcome will be.”
“I am surprised we are already at this stage when the latest disclosure stated it was an internal review and discussion with authorities,” Gordon said in a telephone interview.
Sands, Standard Chartered’s CEO, praised his bank’s culture in comments to analysts last week.
“We build businesses that deliver a wider social and economic benefit,” Sands said Aug. 1. “As a source of competitive advantage, as the ultimate protection against risk, our culture and values are our first and last line of defense.”
Lawsky ordered representatives of Standard Chartered to appear before his agency Aug. 15 “to demonstrate why SCB’s license to operate in the state of New York should not be revoked.”
Standard Chartered’s New York operation had $40.8 billion of assets at the end of March, according to the New York regulator. By comparison, the bank had $624 billion in assets at the end of June.