New York state today accused global banking giant Standard Chartered of hiding about 60,000 secret transactions with the Iranian government, involving a whopping $250 billion, and exposing the US financial system to terrorists, weapon dealers and drug kingpins.

The UK-based bank, which has significant presence across the world, has also been found to have deficient money laundering controls in its outsourcing of work to India, found a probe by New York State Department of Financial Services.

“For almost 10 years, SCB (Standard Chartered Bank) schemed with the Government of Iran and hid from regulators roughly 60,000 secret transactions, involving at least $250 billion, and reaping SCB hundreds of millions of dollars in fees,” the New York state department said in a 27-page order.

“SCB’s actions left the US 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,” it added.

The order further said SCB had assured the Department in May 2010 that it would take immediate corrective actions on issues previously raised by the US Office of Foreign Assets Control (OFAC).

Notwithstanding that promise, the state department’s last regulatory examination of the banks’ New York branch in 2011 identified continuing and significant BSA/AML (Banking Secrecy Act/Anti Money Laundering) failures.

OFAC compliance process outsourced

Among these, the bank was outsourcing its “entire OFAC compliance process for the New York branch to Chennai, India, with no evidence of any oversight or communication between the Chennai and the New York offices.”

Part of the US Department of Treasury, the OFAC is the designated government agency for preparing list of entities with whom US citizens and entities are barred from doing any business.

The other failures included an OFAC compliance system that lacked the ability to identify misspellings and variations of names on the OFAC sanctioned list.

Also, there was no documented evidence of investigation before release of funds for transactions with parties whose names matched the OFAC-sanctioned list.

HSBC case

The order against StanChart by New York state comes close on the heels of the US Senate’s Permanent Committee on Investigations report on July 17 charging another UK-based global bank HSBC of exposing the US financial system to terrorist financing and money laundering risks.

In that probe also, HSBC’s staff in India had come under the scanner for deficiencies in their role as “offshore reviewers” of the global banking giant’s compliance to safety mechanism against money laundering and terrorist financing.

The Senate sub-committee probe found that HSBC’s Anti-Money Laundering (AML) Compliance Department, which included employees in India, was highly inadequately staffed and deficiencies were found in the quality of the work done by HSBC’s “offshore reviewers in India”, who were used for clearing a major backlog of suspected transaction alerts at the bank.

Extensive investigation

The New York State Financial Services Department said its order against StanChart follows an “extensive investigation (that) included the review of more than 30,000 pages of documents, including internal SCB e-mails that describe willful and egregious violations of law.”

The New York Department said that its initial focus was on SCB’s apparent systematic misconduct on behalf of Iranian clients. However, its review uncovered evidence with respect to what are apparently similar SCB schemes to conduct business with other US sanctioned countries, such as Libya, Myanmar and Sudan.

Investigation of these additional matters is ongoing, it added.

StanChart licence may be revoked

In its order, the State has directed SCB to appear and explain apparent violations of law, demonstrate why its licence to operate in New York should not be revoked, and “pay for an independent, on-premises monitor of the Department’s selection to ensure compliance with rules governing the international transfer of funds“.

The order said for nearly a decade, SCB “programmatically engaged in deceptive and fraudulent misconduct in order to move at least $250 billion through its New York branch on behalf of Iranian clients that were subject to US economic sanctions, and then covered up its transgressions.

These clients included Central Bank of Iran/Markazi, as well as Bank Saderat and Bank Melli, both of which are Iranian state-owned institutions.

The order said that “in its evident zeal to make hundreds of millions of dollars at almost any cost”, SCB falsified business records, failed to maintain accurate books and records, obstructed governmental administration, failed to report misconduct to the Department in a timely manner and evaded Federal sanctions, among other violations.

From January 2001 through 2007, SCB conspired with its Iranian clients to route nearly 60,000 different US dollar payments through SCB’s New York branch after first stripping information from wire transfer messages used to identify sanctioned countries, individuals and entities.

SCB also “developed various ploys that were all designed to generate a new payment message for the New York branch that was devoid of any reference to Iranian Clients.”

According to SCB’s independent consultant, there were about 30,000 messages that were sent to SCB’s New York branch by its London office, mainly on behalf of state—owned Iranian banks, and approximately 30,000 messages from SCB’s branch in Dubai, United Arab Emirates, to New York branch on behalf of Iranian—owned banks, corporations and other unknown entities.

'Rogue institution'

Accusing SCB of operating as “a rogue institution”, the order said that the bank “intentionally withheld material information from New York and Federal regulators in its effort to service Iranian Clients.

“SCB carefully planned its deception and was apparently aided by its consultant Deloitte & Touche, LLP, which intentionally omitted critical information in its “independent report” to regulators.

2004-2007 supervisory action

The misconduct was “especially egregious” because during a key period between 2004 and 2007 SCB’s New York branch was subject to a formal supervisory action by the Department and the Federal Reserve Bank of New York for other regulatory compliance failures involving the Bank Secrecy Act, anti-money laundering policies and procedures, and OFAC regulations.

The probe found that by 2006, even New York branch was concerned about bank’s Iran dealings, as its CEO for the Americas in October 2006 sent a panicked message to the Group Executive Director in London, seeking an urgent review.

However, the group director gave him caustic reply, saying: “You —————— Americans. Who are you to tell us, the rest of the world, that we’re not going to deal with Iranians,” the order quoted a bank executive as saying.

Headquartered in London and with over 1,700 offices in 70 markets globally, SCB is a leading international banking institution and its clients include some of the largest corporations and financial institutions in the world.

In 2011, it generated USD 17.6 billion in income and roughly USD 5 billion in profits — greater than at any other time in the bank’s 150—year history.

Sanctions and terror outfits

Through OFAC, the US Government administers and enforces sanctions against regimes that fund terror outfits, weapon dealers, drug traffickers and other hostile enterprises.

Foreign governments currently subject to OFAC sanctions include Iran, North Korea and the Sudan.

In early 2009, after being contacted by certain law enforcement authorities, SCB had conducted an internal investigation into its OFAC procedures.

“Motivated by greed, SCB acted for at least 10 years without any regard for the legal, reputational, and national security consequences of its flagrantly deceptive actions.

“Led by its most senior management, SCB 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 helped sustain a global threat to peace and stability. By definition, any banking institution that engages in such conduct is unsafe and unsound,” the order said.

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