Money & Banking

Iran deals: StanChart says investors’ interest prompted $340-m settlement with US regulator

Vidya Ram London | Updated on March 12, 2018

The settlement came after StanChart was accused by the New York regulator of hiding about 60,000 secret transactions with the Iranian government, involving a whopping $250 billion, and exposing the US financial system to terrorists, weapons dealers and drug kingpins.

OFAC compliance process outsourced to Chennai "with no evidence of any oversight or communication between the Chennai and the New York offices." — Department of Financial Services

Standard Chartered, which has agreed to pay $340 million (Rs 1,890 crore) as part of a settlement with the New York state regulator, said it had settled the issue speedily with investors in mind.

Shares of Standard Chartered rose sharply in London on Wednesday, up nearly 5 per cent in afternoon trading in London following news late the previous evening that the bank had reached the settlement with the New York State Department of Financial Services over claims that it had schemed to hide up to $250 million of transactions with Iran.

CEO Peter Sands had been due to appear before the DFS at a hearing on Wednesday, a meeting now adjourned.

“Investors have said they were looking for a speedy resolution; so the settlement itself is in the best interests of not only shareholders but everyone involved with the business,” Jon Tracey, the bank’s head of media, told Business Line. “Quite clearly there is reputational damage…we can’t get away from that but the business performance of the group is not impacted,” he said. “Our fundamentals remain intact…. We are in the growth markets of the world and that doesn’t change.” He added there would be no change to the bank’s investment plans.

Shares of Standard Chartered had dived following the allegations made public by the New York Department of Financial Services (DFS) last week, which dubbed the bank a “rogue” institution “motivated by greed,” and accused it of making the US “vulnerable to terrorists, weapon dealers, drug kingpins and corrupt regimes.”

It wasn’t just the strong wording of the order — which included damaging statements reportedly made by senior Standard Chartered executives appearing to suggest they valued business interests over adherence to compliance needs — or the size of the alleged amount involved that spooked investors, but the threat it posed to the bank’s US operations.

The order issued by Benjamin Lawsky, the superintendent of the DFS, suggested that the bank’s licence to operate in the State of New York could be revoked, while it could face losing its licence for its US dollar clearing operations.

In addition, the DFS developments appeared to catch the bank off guard. The bank had presented an extremely confident view during its half-yearly results presentation the week before, insisting it was on course to meet its annual targets, and would continue investing in its markets — including through more branches in India and China by the end of the year.

“This leaves other regulators to settle, but takes the major tail risk off the table,” wrote analysts at Credit Suisse in a note to investors.

“It has been impressive how rapidly they have been able to reach an initial resolution to the situation.”

Tracey said that that the bank continued to negotiate with the other regulators. “It was always our preferred solution to reach an agreement with all parties on this issue.”

Full details of the DFS settlement are yet to be finalised. In addition to the civil penalty, the bank will also have a monitor of money laundering risk control for at least two years, reporting directly to the DFS.

The regulator’s own examiners will be put on site at the bank, while the bank’s New York branch will have new compliance personnel.

While the regulator’s statement insists that both sides agreed that the conduct “at issue” involved transactions of at least $250 billion, Standard Chartered is standing by its own version of the amounts that actually violated US regulations.

“The vast majority of the value of the transactions were compliant transactions, “says Tracey.

Outsourcing to India

The bank’s outsourcing to India also came under the spotlight with the DFS asserting that the entire OFAC (Office of Foreign Assets Control) compliance process had been outsourced to Chennai “with no evidence of any oversight or communication between the Chennai and the New York offices.”

“Our compliance function is run as a global function,” said Tracey. “Standard Chartered always intended to comply with US sanctions on Iran and set up a rigorous offshore due diligence mechanism to ensure that its transactions were compliant.

“This accounts for the extremely low level of non-compliant transactions.”

U-turn payments

The Federal Reserve and the US Treasury Department have been investigating the bank’s compliance with Office of Foreign Assets Control (OFAC) regulations governing U-turn payments involving Iran between 2001 and 2007. U-turn payments were a type of transaction — which involved Iran but didn’t begin or terminate in that country — that US authorities allowed up until 2008, so long as certain disclosure requirements were met.

The regulator contended that the bank “conspired with Iranian clients to transmit misinformation” to the New York branch by removing and misrepresenting wire transfer data that would have identified entities as Iranian and held up the transaction process. It is understood that Standard Chartered, which has insisted that just $14 million (Rs 77 crore) or 0.1 per cent of its transactions relating to Iran didn’t meet the regulatory requirements, sees these violations quite differently, and rather as the result of clerical, human errors, during the manual checking process on potentially suspect transactions thrown up by automated filters.

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Published on August 15, 2012
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