By Bob Duncan
Shares of British banking giant Standard Chartered fell more than 23% on the London Stock Exchange on Tuesday, one day after New York regulators accused the banking group of helping Iran avoid sanctions by concealing $250 billion in transactions over nearly 10 years.
On Monday, the New York State Department of Financial Services (NYSDFS) accused the London-based banking group of concealing 60,000 transactions with Iranian clients, including the Central Bank of Iran, from 2001 to 2010.
The department says there is also evidence of similar schemes to conduct business with other US-sanctioned countries such as Libya, Myanmar (Burma) and Sudan.
More than £8bn ($12.5bn) has wiped off the stock market value of the banking group since Monday, when a New York regulator issued a damning report alleging the bank had flouted US laws in its dealings with Iran. The bank’s shares lost another 16% of their value on Tuesday.
The U.S. and its allies have increased economic sanctions against Iran during the past few years in an effort to deter the Islamic Republic from developing its nuclear capabilities. Iran has argued that its goal is to produce energy and medical isotopes, but U.S. officials say the Iranians are developing weapons.
Standard Chartered allegedly falsified business and official records to mask transactions with Iranian customers that were subject to U.S. economic sanctions, the New York State Department of Financial Services said. In exchange, the global banking group reaped “hundreds of millions” of dollars in fees, according to an order issued by the New York authorities.
“Led by its most senior management, [Standard Chartered] 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,” the regulators said in the document.
A source with direct knowledge of the investigation said the report was now being considered by the justice department, which could pursue a criminal case against the bank and its executives. The justice department works in conjunction with the Office of Foreign Assets Control (OFAC), which monitors and enforces US trade sanctions against countries including Iran.
John Coffee, a law professor at Columbia University in New York, said even a single illegal transaction would be enough to spark a justice department investigation. “There are 20-year sentences for money laundering in the US,” he said.
The regulators say Standard Chartered had a well-established policy to “repair” documents in so-called U-Turn transactions, in which offshore money passes through the U.S. financial system on its way to other offshore accounts. The New York branch is mainly involved in clearing U.S. dollar transactions, on average $190 billion per day, for international clients. It was first granted a license to operate in New York as a foreign bank branch in 1976.
According to the order, an official in the bank’s U.S. division warned top bank managers in London in 2006 that the bank could face “serious criminal liability,” according to internal emails.
The warning was allegedly rejected by the recipient, who regulators say responded by writing in an email: “You f—ing Americans. Who are you to tell us, the rest of the world, that we are not going to deal with Iranians.”
Federal regulators and the U.S. Department of Justice could bring charges against Standard Chartered for violations of bank security laws and anti-money laundering regulations, among other things, according to John Alan James, an expert on corporate governance at Pace University in New York.
“I would forecast huge monetary fines, possible loss of license to do business in the United Sates, and finally, solid actions that give guilty culprits more than slaps on the hand, and jail,” said James.
Liberum Capital analyst Cormac Leech said Tuesday that Standard Chartered could face up to $5.5 billion in costs, including fines, lost revenue and damage to the bank’s staid reputation. Leech added that it’s unclear whether senior managers at Standard Chartered will resign over the accusations.
Standard Chartered has refuted the charges, saying “well over 99.9%” of the referenced transactions complied with U.S. regulations.
In a statement, the group said it “strongly rejects” the position and portrayal of facts made by the U.S. regulator, and that it had been conducting a review of its historic compliance which it was discussing with U.S. Agencies.
The report is particularly damaging to the bank’s top management, who only last week boasted the bank was too “boring” to be afflicted by the scandals sweeping the UK financial services industry.
Peter Sands, Standard Chartered’s chief executive, was recently tipped as a potential governor of the Bank of England and finance chief Richard Meddings had been linked to the top job at Barclays vacated by Bob Diamond, forced out following the Libor scandal. Both had strong links to the last Labour government.
Standard Chartered will fight to hold onto its U.S. banking licence and is likely to survive with bruises, according to analysts.
Daiwa Capital Markets credit analyst Michael Symonds said: “As we have seen most recently with Barclays and HSBC, it is the reputational hit and management distraction that results from these regulatory allegations that is likely to prove most costly.”
The U.S. banking licence is “very important” to Standard Chartered’s operations, Symonds said. “We would expect the bank to do everything possible to maintain the license.”
The timing of the allegations by NYSDFS – which claimed that the bank’s actions had left the US “vulnerable to terrorists, weapon dealers, drug kings and corrupt regimes” – has stunned the bank, which insists it is going to defend itself against the claims.
Even as it admitted that it had moved “under $14m” for Iranian clients – albeit considerably less than the $250bn outlined in the regulatory order – the bank was unrepentant as it made it clear it would refute the allegations at an appearance before the regulator on 15 August.
The allegations are the latest in a string of banking scandals that have erupted this year.
Barclay’s paid $453 million in June to settle charges brought by U.S. and U.K. regulators that it manipulated a key inter-bank lending rate. Deutsche Bank, Royal Bank of Scotland, Credit Suisse, Citigroup, JPMorgan Chase and UBS are among the banks that have acknowledged that they are also being investigated by regulators.
The rate fixing scandal has cast a pall over the banking industry and tarnished its reputation, particularly in the City of London.
James Cox, law professor at Duke University, said: “Frankly it looks like the bank turned more than a blind eye in its quest for profits. Once again we see a bank putting personal gain ahead of public interest.”