U.S. regulators irate at NY action against StanChart

Aug 08, 2012, 8:07 AM EDT
REUTERS/Olivia Harris

* U.S. Treasury, Federal Reserve officials angered by NYaction

* Move disrupted ongoing settlement talks with federalofficials

* Federal officials surprised by New York action

* $17 bln wiped off StanChart market value

By Carrick Mollenkamp and Emily Flitter and Karen Freifeld

NEW YORK/LONDON, Aug 8 (Reuters) - The U.S. TreasuryDepartment and Federal Reserve were blindsided and angered byNew York's banking regulator's decision to launch an explosiveattack on Standard Chartered Plc over $250 billion inalleged money laundering transactions tied to Iran, sourcesfamiliar with the situation said.

By going it alone through the order he issued on Monday,Benjamin Lawsky, head of the recently created New York StateDepartment of Financial Services, also complicates talks betweenthe Treasury and London-based Standard Chartered to settleclaims over the transactions, several of the sources said.

Lawsky's stunning move, which included releasingembarrassing communications and details of the bank's allegeddefiance of U.S. sanctions against Iran, is rewriting theplaybook on how foreign banks settle cases involving theprocessing of shadowy funds tied to sanctioned countries. In thepast, such cases have usually been settled through negotiation -with public shaming kept to a minimum.

In his order, Lawsky said Standard Chartered's dealingsexposed the U.S. banking system to terrorists, drug traffickersand corrupt states.

But the upset expressed by some federal officials, who weregiven virtually no notice of the New York move, may provideammunition for Standard Chartered to portray the allegations ascoming from a relatively new and over-zealous regulator.

But, given the content of the order - which describedStandard Chartered as a "rogue institution" that "schemed" withthe Iranian government and hid from law enforcement officialssome 60,000 secret transactions over nearly 10 years - the bankmay need to come up with a strong defense.

Lawsky did not respond to several requests for comment onTuesday.

A spokesperson for the Federal Reserve said it had beenworking closely with various prosecutorial offices on mattersinvolving Iran and other sanctioned entities, but could notcomment on ongoing investigations.

White House Press Secretary Jay Carney said the governmenttakes alleged violations of sanctions "extremely seriously" andthe Treasury remains in close contact with federal and stateauthorities on the matter. The Treasury declined to add to thatcomment.


New York's attack on Standard Chartered's integrity, and athreat to revoke its state banking license, wiped $17 billionoff the bank's market value on Tuesday.

Shares in Standard Chartered slumped to a 3-year low of 10.92pounds in London on Tuesday before closing down 16.4 percent at12.28 pounds. The stock has fallen by a quarter since news ofthe New York action on Monday.



The loss of a New York banking license - effectively apermit to conduct transactions worth hundreds of billions ofU.S. dollars - could be a death knell for a global bank likeStandard Chartered. The 160-year-old bank said it has been intalks with U.S. authorities over its Iran transactions sinceearly 2010 and the sudden accusations by New York were a shock.

In a statement on Monday, the bank said it was "engaged inongoing discussions with the relevant U.S. agencies. Resolutionof such matters normally proceeds through a coordinated approachby such agencies. The Group was therefore surprised to receivethe order from (the New York bank regulator) given thatdiscussions with the agencies were ongoing."

Lawsky's move also undercut the Treasury's Office of ForeignAssets Control (OFAC), which has made a priority of enforcingeconomic sanctions against Iran. The surprise left the office'sleader, David Cohen, the undersecretary for terrorism andfinancial intelligence, scrambling to come up with a response,sources said.



Standard Chartered, which sought the advice of one of NewYork's top law firms, had hoped that coming clean and turningover internal records to federal regulators would yield asettlement, sources said.

Those records also were turned over to New York's bankregulator, which last year was combined with an insurance agencyto create the new financial watchdog headed by Lawsky, a formerprosecutor and aide to New York Governor Andrew Cuomo.

Lawsky's aim, according to the sources, was to cast morelight on a bank's alleged transgressions. His agency, thesepeople said, wasn't interested in a quiet pact of the sortreached by federal authorities in recent years.

In 2010, for example, Barclays Plc paid $298million in a settlement with regulators including the TreasuryDepartment's sanctions regulator and the Manhattan districtattorney's office. The bank, in settlement documents, said itcooperated in the probe.

Barclays, like Standard Chartered, was advised by Sullivan &Cromwell, known as the go-to New York law firm for banks facingregulatory scrutiny. The Barclays settlement, while receivingnews coverage, was a fairly bland document that listed thebank's transactions but few insider details, such asemails. Other banks, including Credit Suisse and ING, have settled in much the same way with U.S.regulators.



One area of sharp disagreement between Lawsky and StandardChartered is just how much in illicit funds is involved. Thebank put the value of Iran-related transactions that did notcomply with regulations at less than $14 million. Lawskyestimated them at $250 billion.

The regulator said Standard Chartered moved money throughits New York branch on behalf of Iranian financial clients,including the Central Bank of Iran and state-owned Bank Saderatand Bank Melli, that were subject to U.S. sanctions - generatinghundreds of millions of dollars in fees.

At the center of concern were alleged "U-Turn" transactions,involving money moved for Iranian clients among banks in Britainand the Middle East and cleared through Standard Chartered's NewYork branch, but which neither started nor ended in Iran.

While the United States imposed economic sanctions on Iranin 1979, these so-called "U-Turn" transactions were outlawedonly in November 2008 amid Treasury Department concerns theywere being used to evade sanctions, and that Iran was usingbanks to fund nuclear and missile development programs.

Lawsky's order alleged that even as some banks exited theU-Turn transactions, Standard Chartered hustled to "take theabandoned market share."

David Proctor, who worked for Standard Chartered from 1999until 2006 and who oversaw the Iran business briefly in 2006when he was CEO in the United Arab Emirates, said the rules ondealing with Iran were unclear.

"At the time (May 2006), ... the key question was to try andunderstand exactly what counted as a U-turn transaction," hesaid. Proctor, who now provides advice for banks with BASConsulting in Singapore, said Standard Chartered now has to helpclear up what actually happened. "Banks these days don't have achoice," he said. "You have to be transparent."



As part of a review the bank sought to give to regulators,Standard Chartered hired Promontory Financial Group, aWashington D.C. consulting firm run by Eugene Ludwig, who servedas U.S. Comptroller of the Currency from 1993-98. Promontory washired to review Standard Chartered's transactions tied to Iran.The bank's review ultimately settled on the figure of less than$14 million for improper transactions.

Lawsky's agency also received the Standard Charteredinternal review, according to people familiar with thesituation. But the new regulator had little interest in asettlement that didn't yield embarrassing details about StandardChartered's activities, these people said.

Earlier this year, Standard Chartered representatives metwith Lawsky's office to argue that the illicit transactions werea technical violation, according to one source. Lawsky'sinvestigators weren't convinced, this person said.

The bank, which must appear before the New York regulator onAug. 15, has said Lawsky's interpretation of the U-turnexemption is "incorrect as a matter of law."

Standard Chartered Chief Executive Peter Sands scrambledback from vacation to help the bank plan a defense and limitdamage to its reputation.

The bank has hired two prominent law firms - Sullivan &Cromwell in New York and Slaughter and May in London - torepresent it in its dealings with various U.S. authorities overtransactions linked to Iran. Among the Sullivan & Cromwellpartners working for Standard Chartered is Rodgin Cohen, one ofthe best-known U.S. corporate lawyers, a person familiar withthe matter said. Sullivan & Cromwell has represented othernon-U.S. banks probed for allegedly ignoring U.S. sanctionsagainst countries.



The broadside against Standard Chartered has touched a nervein Britain, where some investors, and at least one lawmaker,have alleged it might be part of a plot by U.S. authorities toundermine London as a banking center.

Standard Chartered is the third British bank to be ensnaredin U.S. law enforcement probes in recent weeks. Barclays in Juneagreed to pay $453 million to settle U.S. and British probesthat it rigged the Libor benchmark, and, a month later, a U.S.Senate panel issued a scathing report criticising HSBC's efforts to police suspect transactions, includingMexican drug traffickers.

"I think it's a concerted effort that's been organised atthe top of the U.S. government. This is Washington trying to wina commercial battle to have trading from London shifted to NewYork," said John Mann, a member of parliament's financecommittee who also called for a parliamentary inquiry.

Mann, from the centre-left Labour party, has become a publicscourge of London bankers' greed during the financial crisis.But he told Reuters he saw "anti-British bias" behind"disproportionate publicity that's given to British bankingproblems as opposed to American banking problems".

A British executive at an institution which ranks amongStandard Chartered's top 25 shareholders also saw a politicallymotivated move by U.S. officials irked by the major role Londonplays in the global financial industry, attracting biginvestments from major U.S. banks like JPMorgan Chase,Goldman Sachs and Morgan Stanley.

"Are we starting to see an anti-London bias in U.S.regulatory activities?" the executive asked. "Oh yes. Is thereany subtle form of banking sector protectionism going on? Yes." (Writing by Jonathan Stempel, Alwyn Scott, Martin Howell;Reporting by Emily Flitter, Carrick Mollenkamp, Karen Freifeld,Aruna Viswanatha, Nate Raymond and Steve Slater; Additionalreporting by Margaret Chadbourn, Karen Freifeld and NoeleenWalder in the United States; Sinead Cruise, Raji Menon, AdamParry, Martin de Sa'Pinto, Matt Scuffham and Sarah White inEurope; and Rachel Armstrong, Saeed Azhar, Kevin Lim, Kelvin Sohand Denny Thomas in Asia; Editing by Leslie Gevirtz and IanGeoghegan)