Standard Chartered Plc might be asked to pay as much as $700 million to resolve money laundering allegations filed by New York’s banking superintendant after his department grew impatient with inaction by federal regulators, a person familiar with the case said.
Benjamin Lawsky, who heads up New York’s Department of Financial Services, tried unsuccessfully a few months ago to get U.S. regulators to punish the London-based bank for conduct involving disguised Iranian money transfers, said the person, who asked not to be identified because the matter is confidential. The transfers have been under investigation by federal agencies for more than two years, according to Lawsky’s Aug. 6 order.
A settlement of $700 million would match the amount that HSBC Holdings Plc set aside last month after a Senate committee found the bank gave terrorists, drug cartels and criminals access to the U.S. financial system. A payment of that sum by HSBC would be the largest paid by any bank so far.
Other foreign banks that have resolved allegations of executing wire transfers on behalf of sanctioned nations or groups include Barclays Plc, Credit Suisse Group AG, Lloyd’s of London and ABN AMRO Group NV. In each of these cases, the settlements involved joint investigations by regulators.
Lawsky’s decision to move forward alone is unusual, said Jimmy Gurule, a former Treasury Department undersecretary for enforcement who now teaches at the University of Notre Dame in South Bend, Indiana.
“In the past six to seven cases involving institutions violating U.S. sanctions, this is the only one where a regulator acted unilaterally,” he said.
David Neustadt, spokesman for New York’s Department of Financial Services, declined to comment on the reasons for Lawsky’s actions. Julie Gibson, a spokeswoman for Standard Chartered’s U.S. operations, also declined to comment on the state’s investigation.
In response to Lawsky’s order, Standard Chartered said that, while it was cooperating with all U.S. investigations, it would contest the New York regulator’s claims. A hearing over whether Standard Charter’s license to operate in New York should be revoked has been scheduled for Aug. 15.
Lawsky was willing to break ranks with national regulators on the Standard Chartered probe, including the U.S. Treasury Department’s Office of Foreign Assets Control, because of e- mails that surfaced in the investigation, said the person familiar with the case.
According to the order filed by Lawsky on Aug. 6, executives at Standard Chartered’s London headquarters adopted a policy to strip out the names of Iranian entities that needed to clear U.S. dollar payments from 2001 to 2007, so that U.S. bank overseers wouldn’t be aware of the Iranian connection.
Lawsky alleges in the order that Standard Chartered executed 60,000 wire transfers, amounting to $250 billion, on behalf of Iranian financial institutions during that period.
In its response to Lawsky’s order, the bank said its own review of those transactions, conducted by Promontory Financial Group, showed that 99.9 percent of those transfers complied with existing rules regarding so-called “U-turn” transactions involving sanctioned nations.
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.
When the head of the Standard Chartered’s U.S. unit warned his superiors in London in 2006 that the bank’s actions could expose it to “catastrophic reputational damage,” he received a reply referring to U.S. employees with an obscenity, according to Lawsky’s 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 order.
Standard Chartered’s position appears to be consistent with the view of the U.S. Treasury Department’s OFAC department.
Standard Chartered received some support from the U.S. Treasury Department’s OFAC department.
“The New York intermediary through which the transaction went through did not have to be notified by the British bank that it was carrying out this transaction on behalf of an Iranian entity in order to meet the requirements of this regulation,” said John Sullivan, the Treasury Department spokesman responsible for terrorism and financial intelligence.
Sullivan declined to discuss any further details about the probe of Standard Chartered.
Standard Chartered is also being investigated by the Federal Reserve Bank of New York, the Justice Department and the New York District Attorney, the bank said in a statement.
The Federal Bureau of Investigation is also reviewing the wire transfers, said a person familiar with the investigation who asked not to be identified because it’s ongoing.
The Treasury Department’s defense of Standard Chartered’s conduct puzzled Gurule.
“You’d think the federal government would be defending national security interests first,” he said. “It appears to be the state that’s taking the lead to protect the nation’s broader interests.”
Gurule also questioned the bank’s defense of its conduct as being in technical compliance with the law, given that e-mails show an apparent effort to disguise the parties involved in the wire transfers.
“There’s clearly intent to conceal here, which is inconsistent with the bank’s defense that these transactions were lawful,” he said.
The allegations against Standard Chartered are the latest in a series of apparent regulatory transgressions by the New York offices of British banks.
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.
In August 2010, Barclays 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.
HSBC, also based on London, last month made its $700 million provision for U.S. fines after a Senate committee hearing. That sum may increase, CEO Stuart Gulliver has said.
Standard Chartered’s financial exposure might also increase. Lawsky’s agency, according to the Aug. 6 order, is investigating wire transfers executed by Standard Chartered’s New York branch on behalf of other U.S.-sanctioned countries, including Myanmar and Sudan and Libya, before the ouster of Muammar Qaddafi.
The agency was created in 2011 when New York’s Banking Department and Insurance Department were abolished, with their functions and authority transferred to the new regulator, under Lawsky. The agency has the power to issue regulations, investigate and fine financial services companies. It may also probe alleged criminal activity and refer its findings to the state’s attorney general for prosecution.
The bank may be fined $1.5 billion by U.S. regulators, lose about $1 billion of revenue from its Iranian operation and a further $3 billion in market value if senior managers quit, Cormac Leech, an analyst at London-based Liberum Capital Ltd. who rates the stock a buy, wrote in a note to investors yesterday.
“It’s unclear whether senior management will resign for the alleged shortcomings given that they have been in their current roles for much of the relevant period, raising the risk of kitchen-sinking on arrival of new management,” Leech said.
The stock had risen 11 percent this year before Aug. 6, making it the third-best performing British bank stock after Lloyds Banking Group Plc and HSBC.
Standard Chartered shares were little changed at HK$160.30 at 11:32 a.m. in Hong Kong trading after falling 15 percent yesterday.
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 totally in May 2012.
© Copyright 2014 Bloomberg News. All rights reserved.