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Tags: standard | charter | iran | sanctions

Standard Chartered Falls Most in 24 Years on N.Y. Iran Probe

Tuesday, 07 August 2012 07:08 AM EDT

Standard Chartered fell the most in almost 24 years as an analyst estimated it may face costs of $5.5 billion after being accused of violating U.S. money laundering laws over to its dealings with Iranian banks.

The shares fell 23 percent to 1,132 pence by 10:42 a.m. in London trading, their biggest decline since 1988, the earliest date for which data are available.

Standard Chartered may lose its license to operate in New York after the state’s Department of Financial Services found the bank conducted $250 billion of deals with Iranian banks over seven years and earned hundreds of millions of dollars in fees for handling transactions for institutions subject to U.S. economic sanctions. The London-based lender enied the allegations, saying it “strongly rejects the position and portrayal of facts” made by the regulator.

The bank may be fined $1.5 billion by U.S. regulators, lose about $1 billion of revenue from its Iranian operation and a further $3 billion in market value if senior managers quit, Cormac Leech, an analyst at London-based Liberum Capital Ltd. who rates the stock a buy, wrote in a note to investors.

“It’s unclear whether senior management will resign for the alleged shortcomings given that they have been in their current roles for much of the relevant period, raising the risk of kitchen-sinking on arrival of new management,” Leech said.

The stock had risen 11 percent this year before yesterday, making it the third-best performing British bank stock after Lloyds Banking Group Plc and HSBC Holdings Plc. The shares are now down almost 20 percent for 2012, paring the lender’s market value to about 27 billion pounds ($42 billion).

Dollar Payments

While Standard Chartered doesn’t have any domestic U.S. banking operations, the loss of the New York license would hinder its ability to process dollar payments for clients with businesses in the U.S. and in emerging markets, said Gary Greenwood, an analyst at Shore Capital in Liverpool, who rates the stock a buy. Pretax profit from Standard Chartered’s U.S., U.K. and European unit increased 90 percent in the first half to about $464 million, for about 12 percent of the bank’s total.

“A loss of its U.S. banking license would not only jeopardize part of this profit stream, but the associated reputational damage could also have a severely damaging impact to its operations within emerging markets,” Greenwood said. He added that it’s unlikely the bank will lose the license.

Standard Chartered’s New York operation had $40.8 billion of assets at the end of March, according to the New York regulator. By comparison, the bank had $624 billion in total assets at the end of June.

$14 Million

Standard Chartered said 99.9 percent of its transactions with Iran complied with U.S. Treasury regulations, and that the total value of transactions that weren’t in compliance was less than $14 million.

Standard Chartered “had previously reported that it is conducting a review of its historical compliance and is discussing that review with U.S. enforcement agencies,” the bank said in its statement, referring to New York’s Department of Financial Services, or DFS, the U.S. Justice Department, U.S. Treasury Department, Federal Reserve Bank of New York and Manhattan District Attorney.

The lender said it “waived its attorney-client and work product privileges to ensure that all the U.S. agencies would receive all relevant information.”

Standard Chartered handled transactions involving Iranian entities such as the Central Bank of Iran, Bank Saderat and Bank Melli, according to the regulator’s order.

DFS Superintendent Benjamin Lawsky’s agency is also investigating similar trades between Standard Chartered and entities in other U.S.-sanctioned countries, including Libya, Myanmar and Sudan, according to the filing.

The DFS was created in 2011 when New York’s Banking Department and Insurance Department were abolished, with their functions and authority transferred to the new regulator, under Lawsky. The agency has the power to issue regulations, investigate and fine financial services companies. It may also probe alleged criminal activity and refer its findings to the state’s attorney general for prosecution.

‘Offer Potential’

Standard Chartered opened its Iran office in 1993. Ten years later, the lender said “cross-border trade flows with markets like Turkey, Afghanistan, Iraq and Iran appear to be growing and offer potential to us.” The bank stopped all new business in Iran in May 2007 and pulled out totally in May 2012.

Wire transfers involving Iranian banks are at the heart of Standard Chartered’s alleged misconduct. From 2001 to 2007, according to the order, the bank executed 60,000 wire transfers involving $250 billion through its New York branch.

During this time, the U.S. Office of Foreign Assets Control, or OFAC, required U.S. banks to identify and filter all dollar- clearing transactions involving financial institutions operating in nations facing U.S. sanctions, including Iran — even if the transactions were handled by third-party banks.

The goal, according to the Treasury, was to prevent U.S. dollars from being used to finance terrorist organizations and the proliferation of weapons of mass destruction.

‘Reputational Damage’

Standard Chartered flouted the OFAC rules by “repairing” wire-transfer orders involving its New York branch to remove any reference to the involvement of Iranian banks, according to the New York filing.

The alleged conduct occurred until OFAC revoked authorization for such third-party transfers in 2008, the state said. The lender continued to hide its actions even after the transfers stopped, according to the regulator, leading to the allegation that it hid the conduct from bank supervisors for almost a decade.

When the head of the bank’s U.S. unit warned his superiors in London in 2006 that Standard Chartered’s actions could expose it to “catastrophic reputational damage,” he received a reply referring to U.S. employees with an obscenity, according to the order.

“Who are you to tell us, the rest of the world, that we’re not going to deal with Iranians?” a bank superior in London said, according to the New York regulatory order.

‘Rogue Institution’

The agency alleged that Standard Chartered operated as a “rogue institution” that intentionally withheld information from state and federal regulators regarding its dealings with Iranian clients.

The order poses a challenge to the bank’s senior executives, said Christopher Wheeler, a Mediobanca SpA analyst in London.

“This is going to prove rather tricky for the management team at Standard Chartered as they have been at the bank” for years, he said. “This has been happening while Peter Sands, Richard Meddings and Mike Rees have been in place.”

Sands, 50, was promoted to Chief Executive Officer in November 2006, after four years as finance director. Meddings, who replaced Sands as finance director, was previously director for governance for Africa, Middle East, Pakistan, Europe and the Americas. Mike Rees has been CEO of global banking and markets at Standard Chartered since 2003.

‘Doesn’t Look Good’

“It’s too early to say who will fall on his sword as it depends on what is found, but it really doesn’t look good,” Wheeler said.

The accusations against Standard Chartered are the latest in a series of alleged regulatory transgressions by the New York offices of British banks.

In August 2010, Barclays Plc agreed to pay $298 million to settle claims it violated trade laws by facilitating transactions involving banks from countries under U.S. sanctions including Cuba, Iran, Libya and Sudan.

In 2009, a unit of London-based Lloyds accused of allowing Iran illegal access to the U.S. financial system agreed to pay $350 million to settle an investigation by Manhattan District Attorney Robert Morgenthau.

HSBC, also based on London, last month made a $700 million provision for U.S. fines after a Senate committee found the bank gave terrorists, drug cartels and criminals access to the U.S. financial system. That sum may increase, CEO Stuart Gulliver has said.

John Sullivan, a U.S. Treasury Department spokesman, declined to comment on the New York order, saying that the agency is in contact with other federal entities and state authorities on the matter.

He said the Office of Foreign Assets Control in recent years “has taken a number of coordinated enforcement actions alongside federal and state law enforcement and regulatory agencies resulting in penalties and forfeitures of well over $1 billion.”

© Copyright 2024 Bloomberg News. All rights reserved.

Tuesday, 07 August 2012 07:08 AM
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