New York's top bank regulator threatened to strip Standard Chartered Plc of its state banking licence, saying the British bank was a "rogue institution" that hid $250 billion in transactions tied to Iran, in violation of US law.
The New York State Department of Financial Services (DFS) said Standard Chartered "schemed" with the Iranian government and hid from law enforcement officials some 60,000 secret transactions to generate hundreds of millions of dollars in fees over nearly 10 years, also exposing the US banking system to terrorists, drug traffickers and corrupt states.
The loss of a New York banking licence would be a devastating blow for a foreign bank, effectively cutting off direct access to the US bank market. Standard Chartered processes $190 billion every day for global clients, the New York bank regulator said.
In an unusual look inside a bank, the regulator described how Standard Chartered officials debated whether to continue Iranian dealings.
In October 2006, the top official for business in the Americas, whom the regulator did not name, warned in a "panicked message" that the Iranian dealings could cause "catastrophic reputational damage" and "serious criminal liability."
A top executive in London shot back: "You f---ing Americans. Who are you to tell us, the rest of the world, that we're not going to deal with Iranians." The reply showed "obvious contempt for US banking regulations," the regulator said.
Standard Chartered is the third British bank to be ensnared in US law enforcement probes this summer. Barclays Plc agreed to pay $453 million to settle US and UK probes that it rigged a global lending benchmark in June.
A month later, a US Senate panel issued a scathing report that criticized HSBC Holding Plc's efforts to police suspect transactions, including Mexican drug traffickers.
In a statement, Standard Chartered said the bank "does not believe the order issued by the DFS presents a full and accurate picture of the facts."
It said it shared with US agencies an analysis that demonstrated it "acted to comply, and overwhelmingly did comply" with US regulations. Standard Chartered put the total value of Iran-related transactions that did not follow regulations at less than $14 million.
"The group was therefore surprised to receive the order from the DFS, given that discussions with the agencies were ongoing," Standard Chartered said.
"We intend to discuss these matters with the DFS and to contest their position."
The DFS declined further comment. The Representative Office of Iran in Washington was not immediately available to comment. The Treasury Office of Foreign Assets Control, which enforces US economic and trade sanctions against targeted countries, declined to comment.
Standard Chartered, a financier in emerging markets, is the sixth foreign bank since 2008 to be implicated in dealings with sanctioned countries such as Iran in investigations led by federal and New York law enforcement officials.
Four banks -- Barclays, Lloyds, Credit Suisse Group and ING Bank -- have agreed to fines and settlements totaling $1.8 billion. HSBC currently is under investigation by US law enforcement, according to bank regulatory filings.
The New York regulator, headed by former prosecutor Benjamin Lawsky, ordered Standard Chartered to explain why the bank should not lose its state licence and the ability to process dollar transactions. Lawsky also ordered the bank to bring in an outside consultant to monitor its transactions.
"Standard Chartered Bank operated as a rogue institution," Lawsky said in the order.
In an unusual move, the regulator also found fault with an outside consultant -- Deloitte LLP -- because the firm "apparently aided" the bank in its deception.
A report by Deloitte "intentionally omitted critical information" when submitted to regulators, it said.
Deloitte was hired to conduct a review after Standard Chartered in 2004 was ordered by New York and federal regulators to correct anti-money laundering lapses.
The so-called "look back" review was supposed to identify suspicious transactions between 2002 and 2004. But at one point, Standard Chartered asked Deloitte to "delete" references to certain improper Iranian transactions, according to the New York order.
In a subsequent email, a Deloitte partner said the firm had "agreed" to the request because it was "too politically sensitive for both (Standard Chartered) and Deloitte. That is why I drafted the watered-down version."
In 2007, that report enabled Standard Chartered to show regulators it had corrected flaws in its anti-money laundering systems.
In a statement on Monday, Deloitte said its financial advisory service division "performed its role as independent consultant properly and had no knowledge of any alleged misconduct by bank employees. Allegations otherwise are unsupported by the facts."
Lawsky's investigation is extraordinary because probes into how banks carried out transactions tied to Iran primarily have been led by the district attorney's office in Manhattan and the US Justice Department.
His probe is another sign that the regulator intends to join the New York attorney general and Manhattan district attorney in being a top financial watchdog. The DFS was created last October, effectively assuming oversight of two former banking and insurance regulatory agencies that were abolished.
Probes by the Manhattan district attorney and US Justice Department date to 2006 and have targeted some nine banks. Barclays agreed to pay $298 million in 2010 after admitting it processed payments for clients tied to Cuba, Sudan and other countries. Lloyds and Credit Suisse agreed to pay settlements of $350 million and $536 million.
In June, ING agreed to pay $619 million to settle allegations that it, too, violated US sanctions against Cuba, Iran and other countries. It was the biggest fine levied against a bank for sanctions violations.
The Justice Department, working with the FBI in New York, is also investigating Standard Chartered's activities for violations of US sanctions.
Standard Chartered, founded in 1853, is headquartered in London, but specialises in financing in Asia, Africa and the Middle East.
Lawsky said Standard Chartered moved money through its New York branch on behalf of Iranian financial clients, including the Central Bank of Iran and state-owned Bank Saderat and Bank Melli, that were subject to US sanctions.
Monday's order alleged that Standard Chartered removed codes on money transfers and altered message fields, inserting phrases such as "NO NAME GIVEN" to hide the nature of the transactions.
At the center of concern were alleged "U-Turn" transactions, involving money moved for Iranian clients among banks in Britain and the Middle East and cleared through Standard Chartered's New York branch, but which neither started nor ended in Iran.
Such transactions were permissible until November 2008, when the Treasury Department prohibited them on concerns that they were being used to evade sanctions, and that Iran was using banks to fund nuclear and missile development programs.
The New York order also alleged that even as some banks exited the U-Turn transactions, Standard Chartered hustled to "take the abandoned market share." In a December 2006 memo titled, "Project Gazelle, Report on Iranian Business," bankers discussed how to increase "wallet share" with Iranian clients.
Standard Chartered's stock fell 8 percent in late Monday trading in London amid reports of the US probe. The stock closed down 6.2 percent at 14.70 pounds.
In Hong Kong on Tuesday, Standard Chartered shares traded 7 percent lower at HK$175 -- set for their biggest one-day fall since late-November 2009.
Nomura Holdings cut its rating on the bank to 'neutral' from 'buy', saying there was "material headline risk" from the DFS allegations.
Chairman John Peace, CEO Peter Sands and Finance Director Richard Meddings could not be reached for comment, and the bank declined to comment beyond its brief statement.