My dollar, my rules
American regulators threaten an emerging-markets bank

Aug 11th 2012 | NEW YORK | from the print edition The Economist http://www.economist.com/node/21560317

IN RECENT years Standard Chartered’s shares have traded at a premium to its peers in large part because its businesses are focused on Africa, Asia and the Middle East. Although headquartered in London, only 5% of group pre-tax profit in 2011 directly stemmed from the Americas, Britain and Europe. The bank has been able to sell itself as a play on the bounciest parts of the world economy, and the ones least exposed to the Western regulatory minefield.


No longer. The bank’s shares swooned this week (see chart) after the New York State Department of Financial Services (DFS) issued an inflammatory 27-page order, labelling Standard Chartered a “rogue” institution and accusing it of “grave violations of law” for allegedly hiding 60,000 transactions, totalling $250 billion, to enable Iran to evade American sanctions. That, the DFS said, exposed America’s financial system to “terrorists, weapons dealers, drug kingpins and corrupt regimes”. A footnote in the order said that in the course of investigating Iranian transactions, evidence was uncovered of similar “schemes” on behalf of other countries sanctioned by America, such as Libya and Myanmar.

The sensationalist language describes some sensational charges. The DFS says Standard Chartered’s actions were the result of a “documented willingness of its most senior management to deceive regulators and violate US law”. The suspect transactions took place between 2001 and 2007, a period when sanctions against Iran were largely imposed only by America and even then could be avoided by using a “U-turn” transaction whereby dollar-based payments could pass through America on condition they did not end there, were not rerouted directly to Iran, and were tightly documented.

According to the DFS, from 2001 Standard Chartered began doing business with the central bank of Iran on behalf of the National Iranian Oil Company, which received $500m a day in dollar payments. The order alleges that Standard Chartered’s legal counsel said the client and the purpose of these payments should not be identified. As a result, any reference to Iranian clients in wire transfers was masked. Over time the masking process became so large that it was automated.

The DFS says this did not sit well with everyone. In 2006, according to the order, Standard Chartered’s (unnamed) chief executive for the Americas sent a message to an (also unnamed) group executive director in London warning that the Iranian business had the “potential to cause very serious or even catastrophic reputational damage to the group” as well as “serious criminal liability” to management “e.g. you and I”. According to a branch officer interviewed by regulators, the unnamed director replied: “You f---ing Americans. Who are you to tell us, the rest of the world, that we’re not going to deal with Iranians?”

As if all that were not enough, the order alleges that Standard Chartered’s deception was aided by Deloitte & Touche, which had been hired by the bank in 2004 as a result of a prior settlement with regulators to provide an independent report on its compliance failures. Instead, the DFS alleges that Deloitte provided Standard Chartered with confidential reports on other banks that gave it insights into how regulators were investigating Iranian transfers; and then, at the bank’s request, drafted a “watered-down” version of a report that deleted references to sensitive payments.

Standard Chartered must now appear before the DFS on August 15th to explain, among other things, why it should not be stripped of its licence to operate in New York. That sanction is extremely rare but it is not to be taken lightly. Although its purely American operations are negligible, Standard Chartered’s wholesale franchise rests on providing a financial bridge between the 70 countries in which it does operate, much of it denominated in dollars that must pass through America’s financial system. The bank also has strong ties with American institutions, providing, for example, “sub-custodian” services in African and Asian countries for JPMorgan Chase, Northern Trust and State Street.

Rather than the contrite blather that typically follows any criticism from a politician or government agency, the bank’s response was almost as scathing as the report. Standard Chartered said it “strongly rejects the position and portrayal of facts” presented by the regulator, and that over 99.9% of the Iranian transactions complied with the U-turn rules and only $14m of them were in breach of those rules. Deloitte was equally emphatic in its denials, saying it “had no knowledge of any alleged misconduct…and categorically denies that it aided in any way any violation of law by the Bank.”

British politicians are also getting in on the act, with some accusing US regulators of pursuing an anti-London agenda following recent investigations into HSBC and Barclays. There are reports of disquiet among other American agencies about the DFS’s aggressive stance. The DFS is newly created: some suspect it of grandstanding.

The bank’s shares recovered a bit on August 8th as investors reassessed the likelihood of the worst outcomes. The last time New York authorities revoked the licence of a major bank was in the 1990s. That was the notorious BCCI; Standard Chartered is an unlikely addition to this club. But it still faces a tough task to restore its advantage over other banks. A stand-off with the regulators sets the stage for prolonged uncertainty. A big fine may be unavoidable. Above all, investors have been reminded that Standard Chartered’s vaunted emerging-market franchise is vulnerable to the conflicting values of those markets and the country that prints the world’s reserve currency.