Standard Chartered Plc has agreed to a New York Department of Financial Services demand that the bank hire an outside monitor to ensure compliance with U.S. anti-money laundering laws, according to a person familiar with the matter.
The agreement on the monitor, mandated by the regulator in an Aug. 6 order, stems from negotiations between the bank and state officials ahead of an Aug. 15 hearing at which Standard Chartered will be asked to explain why its license to do business in New York shouldn’t be revoked.
New York banking Superintendant Benjamin Lawsky alleged London-based Standard Chartered flouted U.S. banking laws as part of a decade-long deception, helping launder about $250 billion in Iranian funds in contravention of U.S. statutes and without proper disclosure. Lawsky is said to seek as much as $700 million to settle the investigation, another person familiar with the case said.
The regulator’s threat panicked the bank’s investors, sent its share price down about 16 percent the day after and provoked a defiant response from Standard Chartered Chief Executive Officer Peter Sands, who said the vast majority of wire transfers identified by Lawsky complied with federal law. The bank’s stock fell about 10 percent last week.
According to the terms of the order, the state regulator will select the monitor, and the bank will pay for it and provide access to all compliance and transaction records.
Lawsky hasn’t yet decided which outside monitor should be hired, said the person familiar with the requirement, who declined to be identified because the talks are confidential.
The loss of Standard Chartered’s New York license would significantly damage the bank’s corporate banking model and could result in a 40 percent drop in earnings, said Chirantan Barua, an analyst at Sanford Bernstein Research in London. Barua has had an underperform rating on the stock since at least March, according to data compiled by Bloomberg.
Standard Chartered fell 2.7 percent on Aug. 10 to 1,326.50 pence in London trading. The bank, which had $17.6 billion in income and $5 billion in profit last year, has $40.8 billion in assets associated with its New York branch, according to Lawsky’s order.
Lawsky said in the order that Deloitte & Touche, hired by Standard Chartered to provide regulators with an independent report on bank practices, complied with a bank request to remove from a draft “any reference to certain types of payments that could ultimately reveal SCB’s Iranian U-Turn practices.” Lawsky said Deloitte’s actions “apparently aided” the bank with its effort to hide dealings with Iran during the “key period” of 2004 to 2007.
Jonathan Gandal, a spokesman for Deloitte, said in an e-mailed statement that “Deloitte FAS had no knowledge of any alleged misconduct by any Standard Chartered Bank employees and categorically denies that it aided in any way any violation of law by the bank.”
“Deloitte FAS absolutely did not delete ‘any reference to certain types of payments’ from its final written report,” Gandal said in his statement. “Deloitte FAS did not include in its final written report a particular recommendation which was included in an earlier draft.”
Lawsky and Julie Gibson, a spokeswoman for Standard Chartered, didn’t respond to calls or e-mails seeking comment on the monitor agreement after regular business hours.
Grounds to Shut
The New York regulator has grounds to shut Standard Chartered in the state even if he accepts the firm’s argument that it illegally laundered only a fraction of the $250 billion he claims. As the state’s top banking regulator, Lawsky has power to act in his discretion against any financial institution he deems untrustworthy, according to the charter of his year-old department.
The potential settlement figure he is said to be considering would match the amount HSBC Holdings Plc set aside last month to resolve allegations of similar behavior.
Since Lawsky’s order, Standard Chartered has focused its defense on the amount it laundered, saying it involved less than 1 percent of the 60,000 Iranian wire transfers asserted by Lawsky.
Even if Standard Chartered’s position is legally sound, the order’s disclosure of internal e-mails suggesting a conspiracy to hide the identity of Iranian clients from regulators has given Lawsky grounds to act, according to legal experts.
Standard Chartered’s e-mails, cited by Lawsky, provide suitable grounds for his action, said Owen Watkins, a partner with the London law firm Lewis Silkin.
“Making and publicizing the order was within the power conferred on Mr. Lawsky by section 39 of the New York Banking Law,” Silkin said. “On the basis of the order, you can see that the superintendent has an arguable case, with the e-mails and the comments made by certain Standard Chartered staff internally.”
Standard Chartered CEO Sands said Aug. 8 that the normal practice in resolving such allegations is a “coordinated approach by the different agencies.”
As of Aug. 8, the U.S. Treasury Department, which has ultimate jurisdiction over whether Standard Chartered’s wire transfers complied with the law, said it was coordinating its efforts with other regulators in the case, which include the Federal Reserve, the Justice Department, the New York District Attorney and Lawsky’s department.
Even if the coordination leads nowhere and Lawsky ends up taking action against Standard Chartered alone, the arguments presented in his order, and Standard Chartered’s history with the New York banking supervisor, suggest he would be on firm ground.
“Willful non-compliance is very serious,” said Tariq Mirza, a former Federal Deposit Insurance Corp. official now with Grant Thornton. “If those allegations can be substantiated, regulators throw the book at institutions.”
Standard Chartered’s apparent effort to conceal the identity of its Iranian counterparties violated the terms of a 2004 settlement between it and the state of New York, in which the U.K. bank pledged “to ensure compliance with all record keeping and reporting requirements,” according to the order.
For almost a decade starting in 2001, Standard Chartered operated under what Lawsky’s order called a “deceptive business plan” designed to conceal from regulators that it was processing money transfers for Iranian clients, including the central bank’s U.S. dollar transactions related to oil sales.
The order cites bank e-mails and other internal documents to support its accusations.
Even before 2001, the order states, the bank’s general counsel “embraced a framework for regulatory evasion” by keeping its New York branch in the dark about Iranian transactions.
The bank allegedly accomplished this goal by stripping out the name of Iranian clients so as not to slow down transfers that might have to be reviewed for compliance with U.S. economic sanctions. Those restrictions allowed some transactions but not others as long as non-Iranian banks were involved on both ends.
In addition to evading federal controls, Standard Chartered covered up its plan to grab market share in the Iranian funds market by falsifying business records, making false statements to the department, maintaining inaccurate books, obstructing department oversight and failing to report misconduct promptly, according to the order.
The bank stripped out references to Iranian clients in directions for Society of Worldwide Interbank Financial Telecommunications (SWIFT) wire payments made in U.S. dollars through its New York branch, according to the order.
The bank’s outside legal counsel advised that this system wasn’t in compliance with U.S. economic sanctions and that the New York branch needed to be able to verify that transfers were permissible, according to the order.
Between 2004 and 2007, Standard Chartered was subject to formal departmental action over other regulatory compliance failures related to the Bank Secrecy Act, anti-money laundering policies and procedures and regulations of the U.S. Office of Foreign Assets Control, the main overseer of Iran transactions.
In a 2004 agreement with the department and the Federal Reserve Bank of New York, the bank promised to monitor and improve money-laundering controls. The restrictions of the agreement were lifted in 2007 because the bank provided a “watered-down” report of compliance that made no mention of the doctored SWIFT directions, according to the order. Bank statements “misled” the department into lifting the restrictions of the 2004 agreement, the order stated.
All this alleged misconduct by “a rogue institution” had an effect on the “safety and soundness” of its New York branch and on the department’s confidence in the unit’s “character, credibility and fitness as a financial institution licensed to conduct business under the laws of this state,” according to the order.
Accusing the bank of “being motivated by greed,” the department’s order concludes that Standard Chartered’s “most senior management designed and implemented an elaborate scheme by which to use its New York branch as a front for prohibited dealings with Iran -- dealings that indisputably help sustain a global threat to peace and stability. By definition, any banking institution that engages in such conduct is unsafe and unsound.”