Tags: Standard | Chartered | Probe | Inquiries

Standard Chartered’s NY Probe Ends as US Inquiries Loom

Wednesday, 15 August 2012 02:11 PM

Standard Chartered Plc, having settled a New York money laundering probe for $340 million the day before it was to defend its right to operate in the state, still faces federal inquiries over claims it helped sanctioned nations including Iran illegally funnel money through the U.S.

Regulators including the U.S. Treasury, Federal Reserve, Justice Department and Manhattan District Attorney declined immediate attempts at a global settlement, said two people familiar with the matter. A coordinated effort was already in progress before New York’s unilateral deal, announced yesterday by financial regulator Benjamin Lawsky, one of the people said.

The agreement doesn’t take into account all of the bank’s alleged violations, including those involving nations such as Sudan, said one of the people, who added that September is the earliest a universal deal may be reached. Shares of the bank rose as much as 5.1 percent in London today as the New York settlement removed one pressing risk to the bank.

“From the bank’s perspective, they needed to get this behind them,” Ann Graham, director of the Business Law Institute at Hamline University School of Law in St. Paul, Minnesota, said of the New York agreement. “Had this action gone forward, the potential was that they could lose their license to operate in New York, and that would have been devastating to their operations.”

One analyst estimated that the bank’s loss of its New York license could have resulted in a 40 percent drop in earnings.

Lawsky’s Order

On Aug. 6, Lawsky issued an order accusing Standard Chartered of helping Iran launder about $250 billion in violation of federal laws. He accused the bank of a decade of deception, including keeping false records, in handling lucrative wire transfers for Iranian clients. The bank sent them through its New York unit in so-called U-Turn transactions with client names omitted to hide their provenance, Lawsky said.

The New York regulator said yesterday in a statement that “the parties have agreed that the conduct at issue involved transactions of at least $250 billion.” The $340 million fine will go to Lawsky’s agency, New York’s Department of Financial Services, or DFS, and the state.

As part of the settlement, New York said the bank agreed to install an independent on-site monitor for at least two years who will report directly to regulators. Examiners from the DFS will also be placed at the bank.

Individual Regulator

The accord may be the largest ever paid to an individual regulator as part of a money laundering accord. In June, ING Bank NV agreed to pay $619 million to settle similar allegations. That sum was split evenly between a $309.5 million payment to the federal government and an equal sum to the Manhattan District Attorney. A person familiar with the New York probe of Standard Chartered said that Lawsky had sought as much as $700 million to settle his investigation.

Standard Chartered said in a statement yesterday that “a formal agreement containing the detailed terms of the settlement is expected to be concluded shortly.” It “continues to engage constructively with the other relevant U.S. authorities,” the bank said.

London-based Standard Chartered generates almost 90 percent of its profit and revenue in Asia, Africa and the Middle East. The bank’s shares climbed 4.1 percent to 1,426.50 pence in London.

The settlement brings to an end a week-long showdown between Lawsky, 42, New York’s top banking regulator, and Standard Chartered Chief Executive Officer Peter Sands, 50.

‘Rogue Bank’

Lawsky’s order last week caught the bank’s management team by surprise. Lawsky alleged that Standard Chartered was a “rogue bank” that had executed 60,000 dollar-based wire transactions for Iranian clients from 2001 to 2007.

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.

Even before 2001, the order stated, the bank’s general counsel “embraced a framework for regulatory evasion” by keeping its New York branch in the dark about Iran 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.

Federal Controls

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, maintaining inaccurate books, obstructing oversight and failing to report misconduct promptly, according to Lawsky’s order.

From 2004 through 2007, Standard Chartered was subject to formal 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 regulators, 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, according to Lawsky’s order. Bank statements “misled” the department into lifting the restrictions of the 2004 agreement, the order stated.

The order cited bank e-mails and other internal documents to support its accusations.

Bank Obscenity

In one such message, the head of 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 Sands mounted an aggressive defense against Lawsky, telling investors last week that more than 99 percent of the Iranian transactions were in compliance with existing U.S. laws.

Lawsky’s order angered U.K. officials, who viewed it as an attack on London’s status as a financial center. In the U.S., regulators including the Treasury Department, the Federal Reserve and the Manhattan District Attorney complained privately in published reports that Lawsky’s order was a publicity stunt that disrupted their own probes of the matter.

Undercutting Enforcement

“I can’t think of another case where there has been such uniformity among federal regulators undercutting an enforcement case,” said Neil Barofsky, a former federal prosecutor who oversaw the U.S. Troubled Asset Relief Program and wrote “Bailout,” a book that criticizes what he calls the U.S. government’s lax regulation of Wall Street banks.

By the end of the week, Sands had stopped defending the bank in public. Instead, its lawyers at Sullivan & Cromwell LLP had begun negotiating a settlement with Lawsky, according to two people with knowledge of the matter.

Sands arrived in New York this week to oversee the process. He signed off on the final agreement just after midday yesterday, said one of the people, all of whom declined to be identified because they weren’t authorized to speak publicly.

The agreement between Lawsky and the bank, while referring to “transactions of at least $250 billion,” doesn’t address the question of whether they were in compliance with U.S. law.

In a memo to employees today obtained by Bloomberg News, Sands said the bank’s earlier review identified mistakes, for which it apologized.

“We have sought to act in the best interests of our shareholders, clients, customers and staff,” the memo stated.

Other Shoe

Some observers said the bank’s investors are waiting for the other shoe to drop.

“Investors will be pleased they’ve settled, but it’s not known if they have to pay more to the other regulators,” said Christopher Wheeler of Mediobanca SpA in London.

The Department of Financial Services was created in 2011 when New York’s Banking Department and Insurance Department were abolished. 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 New York’s attorney general for prosecution. Its jurisdiction over Wall Street, however, puts it in the same regulatory world as many federal agencies.

“The Federal Reserve continues to work with the other agencies on a comprehensive resolution,” said Barbara Hagenbaugh, a spokeswoman for the agency, in response to news of the settlement.

‘Work Closely’

Dean Boyd, a spokesman for the Justice Department, said the agency “continues to work closely with our regulatory and other partners to determine what actions might be appropriate in this matter.”

And the Treasury Department said in a statement that it will work “with our regulatory and law enforcement partners to hold Standard Chartered accountable for any sanctionable activity that occurred.”

Erin Duggan, a spokeswoman for Manhattan District Attorney Cyrus Vance, said “banks that violate international sanctions are not just breaking the law, they are enabling the financing of terrorist regimes and undermining our collective safety and security.” She added that the office looks “forward to continuing to work with our partners on these cases.”

Insurance Costs

The cost of insuring Standard Chartered Bank debt from non- payment declined 12 basis point to 132.1 basis points at 9:11 a.m. in New York, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.

The contracts have ranged between 125 and 220 this year, according to the data. Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A basis point equals 1,000 euros a year on a contract protecting 10 million euros ($12.3 million) of debt from default for five years.

The cost of insuring Standard Chartered Bank debt from non- payment declined 1 basis point to 144 basis points yesterday, according to data provider CMA. The contracts have ranged between 122.7 and 195 this year, according to CMA data. Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A basis point on a credit-default swap protecting 10 million euros ($12.3 million) of debt from default for five years is equivalent to 1,000 euros a year.

‘Acting Quickly’

“It’s possible that by acting quickly and trying to put this behind them, the CEO could retain his position,” said David Kass, a professor at the University of Maryland’s Robert H. Smith School of Business, of Standard Chartered CEO Sands. “It puts the issue behind them for today and gets their name off of the front page, but I’m sure they’ll be under greater scrutiny by regulators for a while.”

Anthony Sabino, a professor of law at the Peter J. Tobin College of Business at St. John’s University in New York, said the decision to settle was “a business decision -- they want to put this in the rearview mirror.”

“The shoe that I am waiting to see drop is what will the feds do next?” Sabino said. Lawsky’s actions “might push the federal authorities to give Standard Chartered more than a perfunctory slap on the wrist.”

Beyond the Standard Chartered case, Lawsky’s go-it-alone gambit may complicate future bank investigations and settlements, said one former prosecutor.

“Ben Lawsky hijacked the feds’ case,” said Rita Glavin, now an attorney at Seward & Kissel LLP. “That kind of move causes a major headache for the Justice Department. Before, they may have been more willing to share with a state regulator. They may not be so willing in the future.”

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Wednesday, 15 August 2012 02:11 PM
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