Since 2008, the United States has imposed a total ban on financial institutions dealing with Iranian firms.
But between 2001 and 2008, it was legal to do banking with Iran as long as a bank made sure the transactions were not improper.
On Monday, the New York State Department of Financial Services (DFS) accused Standard Chartered Bank, a large British banking organization with major operations in New York City, of ignoring the 2001-08 regulations and trying to hide some $250 billion in transactions with Iranian companies.
The DFS also accused Standard Chartered of acting like a “rogue institution” and ordered it to appear on Aug. 15 before the state’s superintendent of banking to explain why it should not have its license to operate in New York revoked.
As if that isn't enough, the bank may have more trouble on its hands: Federal authorities are also reviewing the bank's transactions, and the Department of Justice could bring legal action.
What the DFS has done so far is part of a large-scale crackdown on financial institutions’ dealings with Iran due to its controversial nuclear program. Last month, a US Senate report accused another large British bank, HSBC, of violating the 2001-08 rules. A senior executive at the bank subsequently resigned. Also last month, Congress reached agreement on a bill that would restrict the dealings of energy, shipping, and insurance companies with Iran.
“Global banks want access to US dollars and the US wire-transfer systems,” said Sen. Carl Levin (D) of Michigan at a hearing on the HSBC violations on July 20. “They want the safety, efficiency, and reliability that are the hallmarks of US banking. But some banks abuse that privilege.”
The crackdown comes at time when financial institutions are under the microscope for transgressions. Federal bank regulators are still assessing what to do about the recent news that large banks, such as Barclays, had been involved in manipulating international interest rates in their favor. And regulators are closely monitoring JPMorgan Chase, which has reported that it lost billions of dollars in trades that went against it.
However, until the DFS action, Standard Chartered had largely stayed out of the headlines. The bank is best known for operating in emerging markets such as India and China. According to Financial Times bank rankings, the bank has about $800 billion in assets, making it the 21st largest in the world. The bank has 1,700 offices in 70 markets worldwide, the DFS says.
In 2011, the bank had income of $17.6 billion and a profit of $5 billion, the highest in its 150-year history. One major source of profits, according to the DFS, is clearing money for its foreign clients. It clears $190 billion per day in New York for major international companies involved in trade and finance.
The DFS, as part of its complaint, says it wants the bank to explain why it should not temporarily suspend its money-clearing operations pending a formal license revocation.
According to the papers filed by the DFS, Standard Chartered committed many wrongs: the falsification of business records, the failure to maintain accurate records, the obstruction of government regulations, and the evasion of federal sanctions. According to the DFS, the violations involved some 60,000 transactions with Iranian clients whose identity was removed from messages or replaced with false entries so authorities would not know where the money was coming from.
“Thus SCB [Standard Chartered Bank] 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,” said the DFS document.
Standard Chartered, in a statement issued from its London offices, says it “strongly rejects the position or the portrayal of facts” by the state regulators. The bank said it voluntarily told the authorities what it had discovered in its own review, and it even waived its attorney-client privileges to reveal thousands of pages of memos and e-mails.
Standard Chartered says it has discovered only $14 million in irregularities. It says it intends to fight the regulators.
“This is a real contrast to other banks who have flogged themselves and said, ‘mea culpa,’ ” says James Keneally, a partner at Kelley Drye & Warren, a law firm based in New York. “Standard Chartered is putting up the dukes here. You don’t see that very often.”
The bank, Mr. Keneally says, appears to be saying the allegations are taken out of proportion and context. “They seem to be saying, ‘If that’s your attitude, we’ll fight you on it,’ ” he says.
But it's not just the state regulators reviewing Standard Chartered's transactions. Federal authorities are also involved. In fact the bank, in its statement, says it is in discussions with US agencies: “Resolution of such matters normally proceeds through a co-ordinated approach by such agencies. The Group was therefore surprised to receive the order from the DFS, given that the discussions with the agencies were ongoing.”
If the federal government decides to bring legal action against Standard Chartered, the government may ask New York to hold off next Wednesday, when the hearing by the banking superintendent is scheduled. “This is something the US attorney normally jumps on,” says Anthony Michael Sabino, a law professor at St. John’s University in New York. “If the US is going to act, without a doubt the Feds will push the state regulators out of the way.”
If the Department of Justice does decide to take any action, Standard Chartered will want to react quickly. “To have the Justice Department bring charges against you is devastating to a financial institution,” Keneally explains. “From the standpoint of reputation, it is pretty awful.”
According to the DFS, the British bank was “apparently aided” by its consultant Deloitte & Touche, “which intentionally omitted critical information in its ‘independent report’ to regulators.”
In a statement, Deloitte Financial Advisory Services "categorically denies that it aided in any way any violation of the law by Standard Chartered Bank." The firm says it properly performed its role as an independent consultant and had no knowledge of any alleged misconduct by Standard Chartered employees.
Some Standard Chartered officials seemed to be aware of the potential danger of completing Iranian transactions. The bank’s CEO for the Americas sent off what the DFS described as a “panicked message” in October 2006: “We believe (the Iranian business) needs urgent reviewing at the Group level to evaluate if its returns and strategic benefits are ... still commensurate with the potential to cause very serious or even catastrophic reputational damage to the Group.”
The CEO added, “There is equally importantly potential of risk of subjecting management in the US and London (e.g. you and I) and elsewhere to personal reputational damages and/or serious criminal liability.”