Standard Chartered starts market recovery after settlement – what would have surfaced if the trial had gone ahead?
Standard Chartered has reached an out-of-court settlement with the New York regulator $340m (£217m), after negotiations with the bank’s CEO Peter Sands. The British bank has averted a civil investigation, which some speculated could have resulted in a $500m fine.
Head of New York’s 10-month-old Department of Financial Services (DFS) Benjamin Lawsky published his accusations on August 6, 2012, while Sands was on holiday.
After the HSBC money-laundering scandal, some in British finance objected to what was seen as deliberate targeting of the industry, epitomised in the phrase “rogue institution.” US political policy towards Iran was portrayed as misleading. So-called “U-turn transactions,” by which foreign banks could use American banks to convert funds used to trade with countries under sanction, had been legal until 2008. Provided there was full reporting and disclosure.
Yet even in 2005, the bank’s outside legal counsel wrote a memo to a number of senior executives that their use of the U-turn system, used to carry out transactions with Iranian clients, did not “comport with the law or the spirit of OFAC rules, which lay out explicit details on how such transactions are to be conducted.”
Lawsky’s report identified a “panicked message” in October 2006, from an executive director based in London, concerned the nature of the transactions could lead to “very serious or even catastrophic reputational damage to the group”. It continued, “Secondly, there is equally importantly potential of risk of subjecting management in US and London (e.g., you and I) and elsewhere to personal reputational damages and/or serious criminal liability.”
British Chancellor George Osbourne let the federal authorities in Washington know that he was “very concerned about the way” Lawsky’s attack had been launched. The US Treasury department replied with a letter on August 8, conceding only that the Office of Foreign Assets Control (OFAC) would not publicly comment on the DFS investigation until the process had reached its conclusion.
Whatever the diplomatic consequences, Lawsky was determined to enforce the law. Financial blog NakedCapitalism.com points out that he had every right as DFS head to revoke the bank’s New York licence: under New York law, Standard Chartered were guilty of money laundering and institutional corruption, as well as evading federal sanctions.
Sands’ defense is that the DFS accusations are wildly inflated: he claims that rather than $250bn of suspect transactions, an internal review conducted by an independent expert, Promontory, found only 300 faulty ones worth a total of $14m. Under OFAC regulations he believes this merits just a $5m fine.
The New York regulators claim Standard Chartered routed 60,000 different US dollar payments through Standard Chartered’s New York branch “after first stripping information from wire transfer messages used to identify sanctioned countries, individuals and entities”. Between 2004 and 2007, about half the period covered by the order, the department claims Standard Chartered hid from and lied about its Iranian transactions to the Federal Reserve Bank of New York. The DFS order also accuses the bank of falsifying business records, obstructing governmental administration, and failing to report misconduct to the state quickly.
NakedCapitalism.com asserts Lawsky was pushing for a $500m fine. It quotes the former chairman of the SEC as saying: “I don’t care whether it is a half of one percent that weren’t right… The e-mails are really outrageous. I think Lawsky has uncovered something that probably has a much deeper depth.”
Some are treating the settlement as a victory for Standard Chartered, as it has avoided what would have been a disastrous court hearing. A short statement from the bank confirmed the $340m settlement had been reached. It did not comment on the DFS declaration that “The parties have agreed that the conduct at issue involved transactions of at least $250bn.”
The DFS will also install a monitor for a minimum of two years, who will evaluate money-laundering controls at the bank’s New York branch and keep the regulator directly informed. A permanent supervisor would have the right to audit money-laundering controls there, for the indefinite future.