Standard Chartered in deep water on Iran deals

[Sapphire Capital]

Standard Chartered Plc (STAN) conducted $250 billion worth 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, run by Superintendent Benjamin Lawsky, said today. The London-based bank, which generates almost 90 percent of its profit and revenue in Asia, Africa and the Middle East, was ordered by Lawsky to hire an independent, on-site monitor to oversee operations in the state.

According to the order, 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.

“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 6.2 percent to 1,470 pence in London trading, its biggest drop in almost 12 months. The shares had risen 11.2 percent this year before today, making it the third-best performing British bank stock after Lloyds Banking Group Plc and HSBC Holdings Plc. (HSBA)
Aug. 1 Statement

Tim Baxter, a spokesman for Standard Chartered in London, declined to comment on the New York order. The bank said Aug. 1 that it’s “conducting a review of its historical U.S. sanctions compliance and is discussing that review with U.S. enforcement agencies and regulators.”

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.

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.”
Wire Transfers

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 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 U.S. Treasury Department, was to prevent U.S. dollars from being used to finance terrorist organizations and the proliferation of weapons of mass destruction.

According to the New York filing, 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.
Seven Years

The alleged conduct occurred over a seven-year period, until OFAC revoked authorization for such third-party transfers in 2008, the state said. The bank 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 10 years.

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.

“This is going to prove rather tricky for the management team at Standard Chartered as they have been at the bank” for years, said Christopher Wheeler, a Mediobanca SpA analyst in London. “This has been happening while Peter Sands, Richard Meddings and Mike Rees have been in place.”
Finance Director

Sands was promoted to chief executive officer 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.

“As reported previously, the group is conducting a review of its historical U.S. sanctions compliance and is discussing that review with US 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.”

Ian Gordon, an analyst at Investec Plc in London, said he was surprised by the order. He has a buy rating on the stock.
Surprised Analyst

“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.”

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 such as 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.

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.

www.dfs.ny.gov/banking/ea120806.pdf

[Sapphire Capital]

here is the text of the proceedings

Attachments:

[niseag]

Standard Chartered NY is the biggest branch they have in the US and they handle about 250B US$ a day in transfers, so 250B$ over 7 years is not that much money for them, but I guess the US Government planned to have an example to keep everybody in line. This one however seems to plan to gve them a fight, they have one of the best lawyers in NYC on this, so I guess the last word is not spoken yet. However all compliance will tighten down and US banks will go down even lower on the list of acceptable banks for a transaction

[MMM]

Top executives at Standard Chartered said they were surprised when New York’s banking regulator accused them on Monday of scheming with the Iranian government to launder billions of dollars to potentially support terrorist activities.

They were not the only ones caught off guard.

The regulatory order also stunned other authorities investigating the bank, namely officials at the Federal Reserve and the Justice Department, according to several people close to the case.

Iran Inquiry Is Abrupt Reversal for Standard Chartered

The agencies involved, including the Treasury Department, are debating just how expansive the suspected wrongdoing was at Standard Chartered. Benjamin M. Lawsky, a former prosecutor who now leads the state banking regulator, claimed the bank had processed $250 billion in tainted money while cloaking the identities of its Iranian clients by stripping their names from paperwork. Some federal authorities, though, believe that the amount is much smaller, perhaps in the millions. Standard Chartered, for its part, said that only $14 million did not comply with regulations.

The wide disparity stems from different interpretations of how many Standard Chartered transactions violated a federal rule that governs the way money from abroad moves through the American financial system.

Before 2008, the rule did not require foreign banks to disclose much detail to their American subsidiaries as long as the banks overseas thoroughly vetted the transactions to detect suspicious activity. Since 2008, though, all transactions with Iran and other sanctioned countries, are banned.

Standard Chartered maintains that “99.9 percent” of the transactions under scrutiny complied with that rule and involved legitimate Iranian banks and corporations. Further, the bank argued that it had examined the transactions and found that they had nothing to do with terrorist activities.

Some Treasury Department officials, while still reviewing the transactions, suspect that Mr. Lawsky has taken too broad a view, according to people briefed on the matter. The officials think that some of the transactions, though perhaps questionable, were not necessarily illegal.

However, Mr. Lawsky said that Standard Chartered’s deliberate efforts to mask the identity of its clients points to wrongdoing and further suggests that the bank had not fully scrutinized the transactions. One Iranian client, for example, was told to use “NO NAME GIVEN” in paperwork to transfer money, according to an order Mr. Lawsky sent to the bank on Monday outlining the apparent violations of law. That way, the money transfer could escape scrutiny and “not appear to N.Y. to have come from an Iranian bank,” said a 2003 e-mail from a Standard Chartered official cited in the order.

The Fed, which has been investigating the bank since 2010, still is not sure how vast the scheme was. For that reason, it has not yet pursued an action, according to people briefed on the matter who spoke anonymously because the investigation was not public. Similarly, the Justice Department is still determining whether to bring a criminal case.

Before Monday, these authorities were not expecting Mr. Lawsky to act. In money laundering cases, authorities almost always move in concert. Mr. Lawsky’s order against Standard Chartered irked many of the other regulators, who questioned whether he had moved too quickly.

Some people close to the case note that Fed officials had been investigating Standard Chartered since 2010 — a year before Mr. Lawsky’s Department of Financial Services was created by merging the existing state banking and insurance departments.

Standard Chartered, in a statement rejecting Mr. Lawsky’s claims, said that it “voluntarily approached” agencies in 2010 including the Department of Financial Services, the Justice Department, the Federal Reserve Bank of New York and the New York district attorney, and that it is engaged in discussions with them.

“Resolution of such matters normally proceeds through a co-ordinated approach by such agencies,” the bank said, adding that it “was therefore surprised to receive the order from the DFS, given that discussions with the agencies were ongoing.”

“It seems like it’s grandstanding,” said Richard L. Scheff, a white-collar lawyer and the chairman of the law firm Montgomery, McCracken, Walker & Rhoads. “There’s little benefit of approaching things in that way,” and “you’d want the enforcement community to be working cooperatively.”

Some, however, have praised Mr. Lawsky’s aggressiveness in this case and others as a refreshing change from the days when cozy regulators had a soft touch with Wall Street. He has drawn comparisons to other hard-charging New York prosecutors, notably Eliot Spitzer and Andrew M. Cuomo.

“Ben Lawsky wouldn’t take a job where it wasn’t expected of him to move quickly, make changes and be a force,” said Steven Cohen, a lawyer with Zuckerman Spaeder, who worked with Mr. Lawsky at the attorney general’s office under Mr. Cuomo, now the governor of New York. Neil M. Barofsky, the former inspector general for the Treasury’s bank bailout fund, lauded Mr. Lawsky’s speed in contrast to what he called the “passivity of federal regulators.”

Mr. Lawsky, who vowed to shake up the banking establishment when Mr. Cuomo appointed him in 2011, is unapologetic.

“The very serious and indisputable conduct described in the order speaks for itself,” David Neustadt, a spokesman for Mr. Lawsky said. “We have and will continue to work with our state, local and federal partners.”

As main deputy to Mr. Cuomo, Mr. Lawsky helped bring many headline-grabbing cases against big names like Bank of America and Ernst & Young.

In 2011, shortly after taking the reins of the newly minted banking regulator, Mr. Lawsky set his sights on Standard Chartered.

He met with New York Fed officials. Standard Chartered turned over a battery of e-mails and other internal bank documents that detailed the scheme, according to people briefed on the matter. The documents outlined projects with code names like “Project Gazelle,” money flowing to Iran’s central bank, United States executives warning of “criminal liability,” and a manual that told employees how to hide the wave of questionable transactions.

Senior executives at the bank, the order said, also quashed internal complaints. In 2006, according to the order, the bank’s chief executive for the Americas warned his superiors that the illicit activity with some Iranian companies had “the potential to cause very serious or even catastrophic reputational damage to the group.”

In response, another executive asked: “Who are you to tell us, the rest of the world, that we’re not going to deal with Iranians.”

After reviewing some of the documents, Mr. Lawsky’s office regularly checked in with the New York Fed as the regulator further examined the extent of potential wrongdoing at Standard Chartered.

In a meeting this April, some of Mr. Lawsky’s deputies told New York Fed officials that they were going to move forward, according to a person who attended the meeting. Another person familiar with the meeting, however, said that the scope and timing of his actions were not clearly communicated.

On Sunday, Mr. Lawsky informed Cyrus R. Vance Jr., the Manhattan district attorney who is also investigating the bank, according to a person with knowledge of the matter.

It was not until Monday morning that Mr. Lawsky’s office informed federal officials, some of whom were disappointed with the late notice, according to people briefed on the matter.

The order outlined nearly a decade of wrongdoing that, Mr. Lawsky said Monday, “left the U.S. financial system vulnerable to terrorists, weapons dealers, drug kingpins and corrupt regimes, and deprived law enforcement investigators of crucial information used to track all manner of criminal activity.“

[Liz Rappaport]

Standard Chartered PLC agreed to pay New York's top banking regulator $340 million, averting a public showdown and ending a weeklong, trans-Atlantic regulatory drama.

After a harried week of debate, the U.K.'s fifth-largest bank by assets reached a settlement with New York's Department of Financial Services. The agreement came eight days after Benjamin M. Lawsky, the superintendent of the New York regulator, accused the bank of illegally scheming over a decade to hide more than 60,000 financial transactions totaling $250 billion for Iranian clients.

As a result of Tuesday's deal, a hearing that was scheduled for Wednesday at the New York regulator's office in Manhattan was called off.

Even after Mr. Lawsky's office announced the settlement, the bank and regulator were still discussing some terms, according to a person close to the bank. The bank, whose actions regarding Iran are under criminal investigation by the Federal Bureau of Investigation and the Justice Department, wants to avoid admitting wrongdoing, according to the person.

A Standard Chartered spokesman said a formal agreement "is expected to be concluded shortly." He added that the bank "continues to engage constructively with the other relevant U.S. authorities."

A document that spells out the main terms of the agreement was initialed by officials of the bank, said another person close to the bank, who added that "nothing of substance is left on the table."

Standard Chartered agreed to pay New York's top banking regulator $340 million, averting a public showdown and ending a weeklong, trans-Atlantic regulatory drama. Liz Rappaport has details on The News Hub. Photo: AP.

Four other U.S. regulators that have been probing the bank's actions weren't part of the settlement. The U.S. Treasury Department, the Federal Reserve, the U.S. Department of Justice and the Manhattan District Attorney's Office have been negotiating with Standard Chartered since 2011 to reach a settlement over its Iran-related transactions.

Standard Chartered wanted to settle with all U.S. authorities as a group to assuage investors' concerns about its exposure to future penalties, but the other regulators didn't move quickly enough, said one of the people close to the bank.

"Our investigation continues. Treasury will continue working with our regulatory and law enforcement partners to hold Standard Chartered accountable for any sanctionable activity that occurred," a Treasury representative said.

Justice Department spokesman Dean Boyd said the agency "continues to work closely with our regulatory and other partners to determine what actions might be appropriate in this matter.'' Mr. Boyd said the department's past enforcement action against banks, including Credit Suisse Group AG and Barclays PLC, among others, "has had a significant impact on banking industry practices involving sanctions.''

"The Federal Reserve continues to work with the other agencies on a comprehensive resolution," said a Fed spokeswoman.

As part of the settlement, Standard Chartered agreed to install a monitor chosen by Mr. Lawsky's office to oversee its international transactions. The bank also agreed to appoint its own auditors in its New York office to oversee compliance with U.S. money-laundering laws.

"This result demonstrates the effectiveness and leadership of the new Department of Financial Services, and I commend the state legislature for creating a modern regulator for today's financial marketplace," New York Gov. Andrew Cuomo said in a statement.

Mr. Lawsky last Monday threatened to revoke the license of Standard Chartered Bank, the New York based unit of the international bank. In an unusual public counterattack, some U.K. political figures accused the regulator of seeking to undermine London as a financial center, and Bank of England Gov. Mervyn King urged against a rush to judgment.

The Story of Standard Chartered

The bank said last week the regulators' allegations were factually incorrect. Instead of $250 billion in masked transactions alleged by the regulator, Standard Chartered said it found in an internal review that only $14 million were improper during the decade under review. The bank said in the settlement released by the New York regulator Tuesday that "the conduct at issue involved transactions of at least $250 billion."

Earlier this year, the bank had offered just $5 million to settle Mr. Lawsky's allegations, said people familiar with the matter. It's unclear if the bank made the same offer to other regulators. Standard Chartered Chief Executive Peter Sands traveled to New York this week to deal with the dustup, said people familiar with the matter.

The settlement comes after the bank and other regulators spent the past week digesting Mr. Lawsky's action, which was announced Aug. 6 after the stock market was closed in London. Standard Chartered, whose shares dropped as much as 26% the following day when trading resumed, had been in discussions with all of the regulators investigating its Iranian transactions and said it was surprised by Mr. Lawsky's order. The stock has since recovered much of its early losses, leaving it 7% below its Aug. 6 level.

Some analysts have said the bank can easily shoulder a fine in line with previous U.S. money-laundering settlements without needing to raise capital.

Investec analyst Ian Gordon said that Standard Chartered would be able to withstand even a $500 million fine because it has a strong balance sheet.

In June, ING Groep agreed to pay $619 million to U.S. and New York authorities for allegedly moving billions of dollars through the U.S. financial system on behalf of Cuban and Iranian entities. That was split 50-50 between the Justice Department and the Manhattan District Attorney's Office.

Barclays paid $298 million in 2010 to avoid prosecution on charges that it violated U.S. economic sanctions over funds transfers into the U.S. from Iran, Cuba and other countries. The deal included an agreement that allowed the U.K. bank to escape prosecution for two years if it cooperated with government investigators and implemented new training and compliance programs.

Since early 2009, ABN Amro Bank NV, Credit Suisse and Lloyds Banking Group PLC have reached money-laundering-related settlements in the U.S. totaling $1.39 billion.