New York's financial-services regulator has grounds to shut Standard Chartered in the state even if he accepts the firm's argument that it illegally laundered only a fraction of the $250 billion he claims.
As the state's top banking regulator, Benjamin Lawsky has power to act in his discretion against any financial institution he deems untrustworthy, according to the charter of his year-old department.
Penalties he could impose include fines and the revocation of the bank's license to operate in the state. Lawsky is said to be considering a settlement figure as high as $700 million, according to person familiar with the case. That would match the amount HSBC Holdings Plc set aside last month to resolve allegations of similar behavior.
Since the Aug. 6 issuance of an order from Lawsky's Department of Financial Services threatened to revoke Standard Chartered's license, the bank has focused its defense on the amount it laundered, saying it involved less than 1 percent of the 60,000 Iranian wire transfers asserted by Lawsky.
Even if Standard Chartered's position is legally sound, the order's disclosure of internal e-mails suggesting a conspiracy to hide the identity of Iranian clients from regulators has given Lawsky grounds to act when the two sides face off at an administrative hearing Aug. 15, according to experts on both sides of the Atlantic.
"I don't care whether it is a half of 1 percent that weren't right," said Arthur Levitt, former chairman of the Securities and Exchange Commission, in an interview yesterday on Bloomberg Radio.
"There are going to be more that weren't right," said Levitt, a board member of Bloomberg LP, parent of Bloomberg News. "The e-mails are really outrageous. I think Lawsky has uncovered something that probably has a much deeper depth."
Standard Chartered's e-mails, cited by Lawsky in the Aug. 6 order, provide suitable grounds for his action, said Owen Watkins, a partner with the London law firm Lewis Silkin.
"Making and publicizing the order was within the power conferred on Mr. Lawsky by section 39 of the New York Banking Law," he said. "On the basis of the order, you can see that the superintendent has an arguable case, with the e-mails and the comments made by certain Standard Chartered staff internally."
Standard Chartered's Chief Executive Officer Peter Sands said Aug. 8 that the normal practice in resolving such allegations is a "coordinated approach by the different agencies."
Bank of England Governor Mervyn King criticized the regulator for failing to coordinate with its counterparts, while London Mayor Boris Johnson accused New York of seeking to damage its biggest competitor as a financial center.
Neil Barofsky, who oversaw the U.S. Troubled Asset Relief Program and criticized the U.S. Treasury Department in his book, "Bailout," objected to the criticism heaped on Lawsky.
"This is not Lawsky getting ahead of other regulators," said Barofsky. "This is Lawsky doing his job."
As of Aug. 8, the U.S. Treasury Department, which has ultimate jurisdiction over whether Standard Chartered's wire transfers complied with the law, said it was coordinating its efforts with other regulators in the case, which include the Federal Reserve, the Justice Department, the New York District Attorney and Lawsky's department.
Even if the coordination leads nowhere and Lawsky ends up taking action against Standard Chartered alone, the arguments presented in his Aug. 6 order, and Standard Chartered's history with the New York banking supervisor, suggest he would be on firm ground.
"Willful non-compliance is very serious," said Tariq Mirza, a former Federal Deposit Insurance Corp. official now with Grant Thornton. "If those allegations can be substantiated, regulators throw the book at institutions."
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 London bank pledged "to ensure compliance with all record keeping and reporting requirements," according to the order.
For almost a decade starting in 2001, Standard Chartered operated under what Lawsky's order called a "deceptive business plan" designed to conceal from regulators that it was processing money transfers for Iranian clients, including the central bank's U.S. dollar transactions related to oil sales. The order cites bank e-mails and other internal documents to support its accusations.
Even before 2001, the order states, the bank's general counsel "embraced a framework for regulatory evasion" by keeping its New York branch in the dark about Iranian 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.
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 to the department, maintaining inaccurate books, obstructing department oversight and failing to report misconduct promptly, according to the order.
The bank stripped out references to Iranian clients in directions for Society of Worldwide Interbank Financial Telecommunications (SWIFT) wire payments made in U.S. dollars through its New York branch, according to the order.
The bank's outside legal counsel advised that this system was not in compliance with U.S. economic sanctions and that the New York branch needed to be able to verify that transfers were permissible, according to the order.
Between 2004 and 2007, Standard Chartered was subject to formal departmental 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 the department and the Federal Reserve Bank of New York, 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 that made no mention of the doctored SWIFT directions, the order said. Bank statements "misled" the department into lifting the restrictions of the 2004 agreement, according to the order.
All this alleged misconduct by "a rogue institution" had an effect on the "safety and soundness" of its New York branch and on the department's confidence in the unit's "character, credibility and fitness as a financial institution licensed to conduct business under the laws of this state," according to the order.
Accusing the bank of "being motivated by greed," the department's order concludes that Standard Chartered's "most senior management designed and implemented an elaborate scheme by which to use its New York branch as a front for prohibited dealngs with Iran — dealings that indisputably help sustain a global threat to peace and stability. By definition, any banking institution that engages in such conduct is unsafe and unsound."
Based on this evidence, the bank will be asked at the Aug. 15 hearing to explain its "apparent violations" and demonstrate why its state license shouldn't be revoked. The department also wants an on-site monitor, paid for by the bank and selected by the state, to ensure future compliance. The bank must also show why its dollar-clearing operations in New York shouldn't be suspended as formal license-revocation hearings take place.
Shaun Gamble, a Standard Chartered spokesman, declined to comment. The stock fell 1 percent to 1,349.00 pence as of 9:00 a.m. in London trading today. The shares have fallen about 14 percent this week, following Lawsky's order. The bank, which had $17.6 billion in income and $5 billion in profit last year, has $40.8 billion in assets associated with its New York branch, according to Lawksy's order.
The loss of its New York license would significantly damage Standard Chartered's corporate banking model and could result in a 40 percent drop in earnings, said Chirantan Barua, an analyst at Sanford Bernstein Research in London. Barua has had an underperform rating on the stock since at least March, according to data compiled by Bloomberg.
U.K. Chancellor of the Exchequer George Osborne spoke with U.S. Treasury Secretary Timothy Geithner on three occasions over two days this week concerning the investigation of Standard Chartered Plc, according to a British government official.
Osborne told Geithner in a conversation on Aug. 7 and twice Aug. 8 that he was concerned about how allegations against the British bank came without warning and said he wanted fair treatment for British companies operating in the U.S., said the official, who declined to be named to comply with policy.