Watchdog's Iran ambush leaves StanChart reeling

Aug 07, 2012, 9:50 AM EDT

* NY regulator says more than $250 bln transactions hidden

* Standard Chartered shocked by regulator's move

* Regulator's order not "full and accurate" -StanChart

* London shares fall 17 pct to 3-year low

By Lawrence White and Steve Slater

HONG KONG/LONDON, Aug 7 (Reuters) - A New York bank regulator's broadside against Standard Chartered Plc for allegedly hiding $250 billion in transactions tied to Iran left investors and the bank questioning the motive for the ambush, which wiped $17 billion off its value.

London-based Standard Chartered hit back at the New York State Department of Financial Services (DFS) threat to tear up its state banking licence on Tuesday, dismissing the charge that it was a "rogue institution" that "schemed" with the Iranian government as a distortion of the facts.

Bank insiders were as shocked as investors by the ferocity of the DFS accusations over its involvement with Iran, which is subject to U.S. sanctions over its nuclear programme.

Chief Executive Peter Sands scrambled back from his vacation as the bank held hastily convened conference calls to plan its defence and try to limit the damage caused to its reputation.

The U.S. agency said Standard Chartered hid 60,000 secret transactions to generate hundreds of millions of dollars in fees over nearly 10 years.

Shares in Standard Chartered closed down 16.4 percent at 12.28 pounds, taking their losses to 24 percent since the news surfaced just before Monday's close. They had earlier slumped as low as 10.92, their lowest for three years.

"Even the so-called 'safe' banks like StanChart and HSBC seem to be crumbling, with their reputation in tatters. No one, it seems, is immune," said one institutional investor, who asked not to be named.

"Some of the language used is very disturbing. Of course, it could be that the Americans are exaggerating, but somehow that doesn't seem to be the case here," the investor said.

A fund manager for a major institutional shareholder in the bank, however, commented that "sensational language" used by the regulator "diminished" its allegations.

The bank, which has been in talks with U.S. authorities since early 2010 over the matter, had exposed the U.S. banking system to terrorists, drug traffickers and corrupt states, the DFS said.

The New York regulator described how officials at Standard Chartered, one of the banks least tarnished during the financial crisis thanks to its focus on emerging markets and a conservative approach to capital and liquidity, had debated whether to continue Iranian dealings.

In October 2006, the top official for business in the Americas, whom the regulator did not name, warned in a "panicked message" that the Iranian dealings could cause "catastrophic reputational damage" and "serious criminal liability".

A group executive director in London shot back, according to a New York branch officer quoted in a document published by the regulator: "You f---ing Americans. Who are you to tell us, the rest of the world, that we're not going to deal with Iranians."

The reply showed "obvious contempt for U.S. banking regulations", the regulator said.

At that time the bank had five executive directors: Peter Sands, now chief executive; Richard Meddings, now finance director; Mervyn Davies, a UK Labour Party peer; Kai Nargolwala, who was poached by Credit Suisse and left the Swiss bank last year; and Mike DeNoma, who resigned as CEO of Chinatrust Financial in August.

Standard Chartered's Americas CEO was Ray Ferguson, who is now its Singapore CEO.

None of the people could be reached for comment or else declined to comment.


Standard Chartered said the bank "does not believe the order issued by the DFS presents a full and accurate picture of the facts".

The loss of a New York banking licence would be a devastating blow for a foreign bank, effectively cutting off direct access to the U.S. bank market. Standard Chartered processes $190 billion every day for global clients, the New York bank regulator said.

David Proctor, who worked for Standard Chartered from 1999 until 2006 and was CEO in the United Arab Emirates from March to June 2006 when he had the Iran business briefly report to him, said the rules on dealing with Iran were unclear.

"At the time (in May 2006), many international banks active in Iran were trying to adjust to increased attention from the U.S. There was a lack of clarity over what was and wasn't allowed. The key question was to try and understand exactly what counted as a U-turn transaction," he said.

The United States imposed economic sanctions on Iran in 1979, but until November 2008 U.S. banks could process some transactions for Iranian banks or individuals provided they were initiated offshore by non-Iranian foreign banks and were on the way to other non-Iranian foreign banks, known as "U-turns".

Proctor, who now provides advice for banks with BAS Consulting in Singapore, added: "I don't think it's a matter of fighting this case; Standard Chartered just has to get to the bottom of what happened. Banks these days don't have a choice. You have to be transparent."

Standard Chartered is the third British bank to be ensnared in U.S. law enforcement probes this summer. Barclays Plc agreed to pay $453 million to settle U.S. and British probes that it rigged a global lending benchmark in June.

A month later, a U.S. Senate panel issued a scathing report that criticised HSBC Holding Plc's efforts to police suspect transactions, including Mexican drug traffickers.


Standard Chartered said it shared with U.S. agencies an analysis that demonstrated it "acted to comply, and overwhelmingly did comply" with U.S. regulations.

Standard Chartered put the total value of Iran-related transactions which did not follow regulations at less than $14 million, based on its review of the issue, in stark contrast to the DFS's $250 billion estimate.

Standard Chartered said the DFS's interpretation of the U-turn exemption "is incorrect as a matter of law". It said 99.9 percent of its transactions relating to Iran had complied with a U.S. framework.

The figure alleged by the New York regulator would cover the equivalent of 71 percent of the $350 billion total Iranian oil export revenues for the seven years of 2001-2007, according to OPEC data.

"The group was ... surprised to receive the order from the DFS, given that discussions with the agencies were ongoing," Standard Chartered said. "We intend to discuss these matters with the DFS and to contest their position."

The bank has to appear before the DFS on Aug. 15.

"Some people were walking around under the illusion that Standard Chartered was the world's first riskless bank, and it's not. We've discovered that Standard Chartered is a mortal bank - as they all are," said Gareth Hunt, financials analyst at Canaccord Genuity, who rates the stock a "sell".

Hugh Young, managing director in Singapore at Aberdeen Asset Management Asia, the third biggest shareholder in the bank said: "It's something to worry about, although I noticed a lot of emotive and sensational language which slightly diminishes the allegation.

"The StanChart we recognise is not the rogue bank portrayed in the allegation," he added.

Standard Chartered is the sixth foreign bank since 2008 to be implicated in dealings with sanctioned countries such as Iran in investigations led by federal and New York law enforcement officials.

Four banks - Barclays, Lloyds, Credit Suisse and ING - have agreed to fines and settlements totalling $1.8 billion. HSBC currently is under investigation by U.S. law enforcement, according to bank regulatory filings.

The New York regulator, headed by former prosecutor Benjamin Lawsky, ordered Standard Chartered to explain why the bank should not lose its state licence and the ability to process dollar transactions. Lawsky also ordered the bank to bring in an outside consultant to monitor its transactions.

"Standard Chartered Bank operated as a rogue institution," Lawsky said in the order.

Lawsky's investigation is unusual because probes into banks' transactions tied to Iran have been primarily led by the district attorney's office in Manhattan and the U.S. Justice Department.

The cost to buy protection for five years against Standard Chartered defaulting on its debts rose to 166,000 euros for 10 million euros' worth, up from 140,000 euros on Monday, according to Markit.