Anti-money laundering controls, added as part of the earlier accord, were faulty and meant the London-based bank missed potentially high-risk transactions, many of which originated in its Hong Kong subsidiary and branches in the United Arab Emirates, the New York Department of Financial Services said.
“If a bank fails to live up to its commitments, there should be consequences,” Superintendent Benjamin Lawsky said in yesterday’s statement. “That is particularly true in an area as serious as anti-money-laundering compliance, which is vital to helping prevent terrorism and vile human rights abuses.”
Chief Executive Officer Peter Sands has toiled to revive Standard Chartered amid pressure from disgruntled investors. The bank has been under the scrutiny of an independent monitor imposed to ensure compliance with sanctions and money-laundering rules by Lawsky’s office two years ago, part of a wider $667 million settlement over breaches of U.S. bans concerning Iran.
“They need to stabilize the business and try and avoid these embarrassments,” said Chris Wheeler, a London-based analyst at Mediobanca SpA with a neutral rating on the stock. The bank has “gone from being one that really couldn’t put a foot wrong to being one where there’s a slew of bad news.”
The shares rose 0.3 percent to 1,221 pence in London. They have declined 10 percent this year, making the bank the second-worst performer among Britain’s five largest lenders after Barclays Plc, which has dropped about 19 percent.
Standard Chartered “accepts responsibility for and regrets the deficiencies in the anti-money laundering transaction surveillance system at its New York branch,” the bank said in a statement. It’s “begun extensive remediation efforts and is committed to completing these with utmost urgency.”
As part of the agreement with Lawsky, Standard Chartered will suspend dollar clearing work for high-risk clients in Hong Kong, and stop some services for high-risk customers through its U.A.E. branches. It will also need to get approval from Lawsky’s office before undertaking new dollar-clearing clients or accounts, the New York Department of Financial Services said.
“It’s embarrassing,” said Wheeler. “It feels as though the U.S. regulator is running your business.”
The bank “will individually notify and work closely with the small proportion of clients in Hong Kong and the United Arab Emirates who will be affected to minimize disruption,” the company said. Standard Chartered, which generates about three-quarters of its earnings in Asia, “remains fully committed to Hong Kong and the United Arab Emirates as key markets.”
The Hong Kong Monetary Authority said in a statement it has been monitoring Standard Chartered’s anti-money laundering and terrorism financing controls.
“Although we have identified some areas for improvement, they are not issues that cause significant supervisory concerns,” HKMA said.
The compliance failures were spotted by the independent monitor Lawsky installed as part of the 2012 settlement the bank reached with U.S. authorities. A rulebook listing how to spot high-risk transactions created in the wake of that accord had many errors and other problems due to inadequate testing before and after the monitoring system was implemented, the agency said. The monitor’s contract will be extended for another two years as part of the agreement.
“The concept of restricting dollar-clearing transactions in settlements with international financial institutions may become the new normal,” said Jacob Frenkel, a former federal prosecutor who is now a lawyer with Shulman Rogers Gandal Pordy & Ecker PA in Potomac, Maryland. BNP Paribas SA (BNP) was banned for a year from some dollar clearing as part of a nearly $9 billion penalty deal reached in June over the French bank’s dealings with entities blacklisted by the U.S.
Lawsky secured $340 million from Standard Chartered in August 2012 in an accord reached the day before the bank was due to defend itself to the regulator. The rest went to authorities including the Federal Reserve, the Manhattan District Attorney and the U.S. Department of Justice in a deal concluded in December of that year.
Standard Chartered had argued the latest lapse was down to a technical failure, and wasn’t a deliberate move to conceal problematic transactions, a person familiar with the matter said Aug. 6.
The scale of the penalty is “an outrage, utterly disproportionate,” said Ian Gordon, an analyst at Investec Ltd. in London with a buy rating on Standard Chartered shares. Still, the punishment is “manageable,” he said, estimating it will drag down earnings by 1 percent to 2 percent as corporate and investment bank clients don’t appear to be affected.
The bank reported this month that first half earnings fell 20 percent on losses in Asia. That adds to pressure on 52 year-old Sands, who after almost eight years atop Standard Chartered is the longest-serving CEO of any major European bank.
Pretax profit, excluding adjustments to the value of the company’s own debt, fell to $3.3 billion in the first half from $4.1 billion in the year-earlier period, matching the average of 11 analysts’ estimates in a Bloomberg survey. That made it the bank’s second straight drop in first-half profit, after more than a decade of growth.
Sands is under scrutiny after the Financial Times reported last month that some investors were urging the bank to begin a search for his successor. Standard Chartered’s board said it’s united in its support of Sands.
“No succession planning is taking place as a result of recent investor pressure,” the board said on July 23.
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