March 29, 2023

DealBook: Iran Inquiry Is Abrupt Reversal for Standard Chartered

Jf/Bloomberg NewsPeter Sands, chief executive of Standard Chartered.

6:07 p.m. | Updated

LONDON — Long a golden child among global banks, the British bank Standard Chartered now wears a somewhat tarnished crown.

The bank’s investors were rattled by accusations that it had schemed with the Iranian government to hide $250 billion in money transfers over nearly a decade. On Tuesday, shares of Standard Chartered fell as much as 25 percent — their sharpest one-day decline in more than two decades — before recovering to end London trading down 16 percent.

The accusations upset a widely held view of Standard Chartered as a banking success story, thanks to its large operations in emerging markets in Asia and elsewhere.

Unlike other European financial institutions hit by the Continent’s debt crisis, Standard Chartered, a London-based bank with roots that date to 1853, continued to report rising profits. Last week, the bank said its net profit for the first half of the year rose 11.3 percent, to $2.86 billion. Around 90 percent of the profit came from developing economies.

Central to Standard Chartered’s business is its ability to facilitate trade between emerging economies and developed countries by clearing transactions in New York City. That ability came under threat on Monday when New York State’s top banking regulator, the Department of Financial Services, said it had grounds to revoke the bank’s license in the state. The bank must appear before the state’s banking superintendent on Aug. 15 to explain why that should not happen.

Standard Chartered’s New York office, which has been licensed since 1976, primarily operates a dollar-clearing business, moving roughly $190 billion a day. It also does corporate lending, trade finance, foreign exchange trading and wire transfer services, among other business.

The regulator has accused the bank of masking more than 60,000 transactions for Iranian banks and corporations, pocketing millions of dollars in fees.

Senior management at the bank used the New York branch “as a front for prohibited dealings with Iran — dealings that indisputably helped sustain a global threat to peace and stability,” the regulator said.

The accusations cast a shadow over Peter Sands, the bank’s chief executive, who was the company’s financial director from 2002 to 2006. Mr. Sands had been mentioned as a potential future head of the rival British bank Barclays.

Standard Chartered has gone on the defensive, rejecting the New York regulator’s portrayal of the facts. The bank said that 99.9 percent of the transactions related to Iran complied with regulations.

The bank’s “review of its Iranian payments also did not identify a single payment on behalf of any party that was designated at the time by the U.S. government as a terrorist entity or organization,” it said in a statement.

Penalties connected to the money laundering case may cost Standard Chartered around $1.5 billion, according to Cormac Leech, a banking analyst with Liberum Capital in London.

Mr. Leech said the firm also could lose an additional $1 billion from a cutback in business operations connected to Iran, as well as $3 billion in market value if some of the bank’s senior executives, including Mr. Sands, are forced to resign.

However, analysts said on Tuesday that loss of the bank’s ability to operate in the United States was unlikely because authorities had focused their attention on monetary fines.

Still, the damage to Standard Chartered’s reputation and the continuing investigations into the bank’s activities with Libya, Myanmar and Sudan may weigh on earnings in the short term, according to Chintan Joshi, a banking analyst with Nomura in London.

The money laundering accusations come at a broadly difficult time for British banks.

Barclays agreed to a $450 million settlement with American and British officials in June after some of its traders and senior executives were found to have altered the London interbank offered rate, or Libor, for financial gain.

HSBC apologized last month for not cracking down soon enough on money laundering activities in the United States. David Bagley, the head of compliance for HSBC since 2002, resigned last month because of the scandal.

Analysts said Standard Chartered’s emphasis on emerging markets would help to limit the long-term effects of the allegations.

Last week, the bank said it planned to open more branches in countries with fast-growing economies, like China and India, as it exploits a decline in its competitors’ trading activity. Standard Chartered also reported double-digit growth in its wholesale and consumer banking divisions during the first six months of the year.

Before the money laundering accusations were made public, shares of the bank outperformed other financial institutions. Over the last 12 months, Standard Chartered’s stock rose 10.4 percent, compared with a 12.8 percent drop in the Stoxx Europe 600 Banks index.

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DealBook: Accusations Against Bank on Iran Deals Surprised U.S. Regulators, Too

Benjamin Lawsky, superintendent of the New York State Department of Financial Services.Jin Lee/Bloomberg NewsBenjamin Lawsky, superintendent of the New York State Department of Financial Services.

Top executives at Standard Chartered said they were surprised when New York’s banking regulator accused them on Monday of scheming with the Iranian government to launder billions of dollars to potentially support terrorist activities.

They were not the only ones caught off guard.

The regulatory order also stunned other authorities investigating the bank, namely officials at the Federal Reserve and the Justice Department, according to several people close to the case.

The agencies involved, including the Treasury Department, are debating just how expansive the suspected wrongdoing was at Standard Chartered. Benjamin M. Lawsky, a former prosecutor who now leads the state banking regulator, claimed the bank had processed $250 billion in tainted money while cloaking the identities of its Iranian clients by stripping their names from paperwork. Some federal authorities, though, believe that the amount is much smaller, perhaps in the millions. Standard Chartered, for its part, said that only $14 million did not comply with regulations.

The wide disparity stems from different interpretations of how many Standard Chartered transactions violated a federal rule that governs the way money from abroad moves through the American financial system.

Before 2008, the rule did not require foreign banks to disclose much detail to their American subsidiaries as long as the banks overseas thoroughly vetted the transactions to detect suspicious activity. Since 2008, though, all transactions with Iran and other sanctioned countries, are banned.

Standard Chartered maintains that “99.9 percent” of the transactions under scrutiny complied with that rule and involved legitimate Iranian banks and corporations. Further, the bank argued that it had examined the transactions and found that they had nothing to do with terrorist activities.

Some Treasury Department officials, while still reviewing the transactions, suspect that Mr. Lawsky has taken too broad a view, according to people briefed on the matter. The officials think that some of the transactions, though perhaps questionable, were not necessarily illegal.

However, Mr. Lawsky said that Standard Chartered’s deliberate effort to mask the identity of its clients points to wrongdoing and further suggests that the bank had not fully scrutinized the transactions. One Iranian client, for example, was told to use “NO NAME GIVEN” in paperwork to transfer money, according to an order Mr. Lawsky sent to the bank on Monday outlining the apparent violations of law. That way, the money transfer could escape scrutiny and “not appear to N.Y. to have come from an Iranian bank,” said a 2003 e-mail from a Standard Chartered official cited in the order.

The Fed, which has been investigating the bank since 2010, still is not sure how vast the scheme was. For that reason, it has not yet pursued an action, according to people briefed on the matter who spoke anonymously because the investigation was not public. Similarly, the Justice Department is still determining whether to bring a criminal case.

Before Monday, these authorities were not expecting Mr. Lawsky to act. In money laundering cases, authorities almost always move in concert. Mr. Lawsky’s order against Standard Chartered irked many of the other regulators, who questioned whether he had moved too quickly.

Some people close to the case note that Fed officials had been investigating Standard Chartered since 2010 — a year before Mr. Lawsky’s Department of Financial Services was created by merging the existing state banking and insurance departments.

Standard Chartered, in a statement rejecting Mr. Lawsky’s claims, said that it “voluntarily approached” agencies in 2010 including the Department of Financial Services, the Justice Department, the Federal Reserve Bank of New York and the New York district attorney, and that it is engaged in discussions with them.

“Resolution of such matters normally proceeds through a co-ordinated approach by such agencies,” the bank said, adding that it “was therefore surprised to receive the order from the DFS, given that discussions with the agencies were ongoing.”

“It seems like it’s grandstanding,” said Richard L. Scheff, a white-collar lawyer and the chairman of the law firm Montgomery, McCracken, Walker Rhoads. “There’s little benefit of approaching things in that way,” and “you’d want the enforcement community to be working cooperatively.”

Some, however, have praised Mr. Lawsky’s aggressiveness in this case and others as a refreshing change from the days when cozy regulators had a soft touch with Wall Street. He has drawn comparisons to other hard-charging New York prosecutors, notably Eliot Spitzer and Andrew M. Cuomo.

“Ben Lawsky wouldn’t take a job where it wasn’t expected of him to move quickly, make changes and be a force,” said Steven Cohen, a lawyer with Zuckerman Spaeder, who worked with Mr. Lawsky at the attorney general’s office under Mr. Cuomo, now the governor of New York. Neil M. Barofsky, the former inspector general for the Treasury’s bank bailout fund, lauded Mr. Lawsky’s speed in contrast to what he called the “passivity of federal regulators.”

Mr. Lawsky, who vowed to shake up the banking establishment when Mr. Cuomo appointed him in 2011, is unapologetic.

“The very serious and indisputable conduct described in the order speaks for itself,” David Neustadt, a spokesman for Mr. Lawsky said. “We have and will continue to work with our state, local and federal partners.”

As main deputy to Mr. Cuomo, Mr. Lawsky helped bring many headline-grabbing cases against big names like Bank of America and Ernst Young.

In 2011, shortly after taking the reins of the newly minted banking regulator, Mr. Lawsky set his sights on Standard Chartered.

The bank turned over a battery of e-mails and other internal bank documents that detailed the scheme, according to people briefed on the matter. The documents outlined projects with code names like “Project Gazelle,” money flowing to Iran’s central bank, United States executives warning of “criminal liability,” and a manual that told employees how to hide the wave of questionable transactions.

Senior executives at the bank, the order said, also quashed internal complaints. In 2006, according to the order, the bank’s chief executive for the Americas warned his superiors that the illicit activity with some Iranian companies had “the potential to cause very serious or even catastrophic reputational damage to the group.”

In response, another executive asked: “Who are you to tell us, the rest of the world, that we’re not going to deal with Iranians.”

After reviewing some of the documents, Mr. Lawsky’s office regularly checked in with the New York Fed as the regulator further examined the extent of potential wrongdoing at Standard Chartered.

In a meeting this April, some of Mr. Lawsky’s deputies told New York Fed officials that they were going to move forward, according to a person who attended the meeting. Another person familiar with the meeting, however, said that the scope and timing of his actions were not clearly communicated.

On Sunday, Mr. Lawsky informed Cyrus R. Vance Jr., the Manhattan district attorney who is also investigating the bank, that he was filing the order, according to a person with knowledge of the matter.

It was not until Monday morning that Mr. Lawsky’s office informed federal officials, some of whom were disappointed with the late notice, according to people briefed on the matter.

The order outlined nearly a decade of wrongdoing that, Mr. Lawsky said Monday, “left the U.S. financial system vulnerable to terrorists, weapons dealers, drug kingpins and corrupt regimes, and deprived law enforcement investigators of crucial information used to track all manner of criminal activity.“

This post has been revised to reflect the following correction:

Correction: August 8, 2012

An earlier version of this article incorrectly stated that Federal Reserve officials had turned over a battery of e-mails and other internal bank documents to New York’s banking regulator, Benjamin Lawsky. Those documents were provided by Standard Chartered.

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European Union Planning Tough Sanctions on Iran

Officials hope to announce a final plan at a meeting of foreign ministers in Brussels on Monday.

But senior French officials are concerned that these measures, even in combination with sanctions on financial transactions with Iran announced by Washington, will not be strong enough to push the Iranian government into serious, substantive negotiations on its nuclear program, which the West says is aimed at producing weapons.

French officials say that the effort to increase pressure on Tehran is a crucial element in a “dual track” strategy — inflicting pain through sanctions in order to prompt substantive negotiations to halt Iran’s enrichment of uranium, as the United Nations Security Council has demanded. But even accelerated sanctions are hard to put into effect and slow to work, while Iran is changing the game by moving more of its enrichment centrifuges into deep tunnels inside mountains, where they will be much harder to attack militarily.

France is eager to avoid military action against Iran. French officials do not doubt that Israel will do all it can to prevent Iran from developing nuclear weapons, but they consider that an Israeli attack on Tehran would be counterproductive, only delaying the Iranian program and strengthening a weakened Islamic leadership.

“We must do everything possible to avoid an Israeli attack on Iran,” said a senior French official, “even if it means a rise in the price of oil and gasoline.” If the sanctions on Iran “are massive, they can have a big impact, with high unemployment and a fall in the rial,” Iran’s currency. In fact, the rial has hit historic lows against the dollar this week.

But with Iran moving its centrifuges deep underground, the official said, “this changes the landscape.”

“This time it really is a race. It’s why we are pushing so hard. We want to act fast.” Still, the official said, France recognizes that the possibility of military action represents another form of pressure on Iran to negotiate.

In his annual speech on French diplomacy on Friday, President Nicolas Sarkozy accused Iran of lying, and he denounced what he called its “senseless race for a nuclear bomb.” He called for “much stronger, much more decisive” sanctions, saying that “time is running out” and “everything must be done to avoid” international military intervention.

Iran says that it is enriching uranium solely for peaceful uses and denies a military intent. But few in the West believe Tehran, which has not cooperated fully with inspectors of the International Atomic Energy Agency and has been pursuing some technologies that have only a military use.

As existing sanctions bite, Tehran is talking both tough and soft, promising to shut the Strait of Hormuz in the case of an oil embargo and at the same time saying that it is ready to resume negotiations with the six-nation group, led by the European Union, which includes the five permanent members of the Security Council — the United States, France, Britain, Russia and China — plus Germany.

Russia and Turkey are already heralding Tehran’s willingness to return to the table. On Thursday, alongside the Iranian foreign minister in Istanbul, Turkey’s foreign minister, Ahmet Davutoglu, said that Iran was ready for talks. “The sides have confirmed their willingness,” he said. “Today is the day for negotiations and a solution.”

But French officials say that Tehran has not responded to an October letter from the European Union’s foreign policy chief, Catherine Ashton, offering a resumption of talks, so long as there are no preconditions and Iran is willing to discuss the main issue, which is its nuclear enrichment program.

During the last talks a year ago, Iran refused to discuss its nuclear program and said that before any negotiations, the Security Council must first lift all sanctions already in place and recognize Iran’s “right” to enrich uranium under the Nuclear Nonproliferation Treaty. Iran also said it was no longer interested in swapping a large part of its enriched uranium in return for fuel rods for a research medical reactor in Tehran.

Stephen Castle contributed reporting from Brussels, and Steven Lee Myers from Washington.

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