UK banks face cruel US summer

BARCLAYS, HSBC AND NOW STANDARD CHARTERED ON REGULATORY RADAR

T o m B r a i t h wa i t e , K a r a S c a n n e l l a n d S h a r l e n e G o f f

This is a summer to forget for British banks in the US. One after another, Barclays, HSBC, and now Standard Chartered have had excruciating internal emails and conversations revealed by US investigators.

Standard Chartered is accused by New York state’s Department of Financial Services of concealing transactions on behalf of Iranian banks and breaching US sanctions on the country in the process.

The regulator’s 27-page report quotes from an email sent in 2006 from Standard Charter’s chief executive for the Americas to the group executive director for risk, warning of potentially “catastrophic reputational damage” and potential “serious criminal liability” for executives over work for Iranian clients.

The order on Monday, which threatened to revoke Standard Chartered’s banking licence, came as a bolt from the blue for the bank, according to people familiar with the matter, even though it has been in talks with US authorities over the issue for months.

Distancing from scandal

Only last week, the bank, which makes almost 90 per cent of its pre-tax profit in Asia, the Middle East, and Africa, distanced itself from the recent Libor rigging scandal that has engulfed many of its rivals and trumpeted the bank’s superior “culture”.

Standard Charter reiterated its earlier disclosure that it was conducting a review of its historical US sanctions compliance with US enforcement agencies and regulators. While it said it could not predict what the outcome would be, it said the breaches were not of the same scale as those facing rival HSBC, which was heavily criticised last month for failing to prevent money laundering by Mexican drug gangs.

Standard Chartered said it was confident it had “very robust controls and processes” in place to deal with these kinds of issues.

It is not the first bank to run into trouble for allegedly “wire stripping” — removing codes that identify Iranian institutions for money passing through the US. Two years ago, Barclays agreed to pay $298 million (Dh1.09 billion) for transactions on behalf of customers from Cuba, Iran, and Sudan that were under sanctions from the Treasury’s Office of Foreign Assets Control.

U-turn transfers

For much of the period in question, the transactions themselves did not necessarily flout US law. Until 2008, so-called “U-turn” transfers, which involved Iranian clients but only passed through the US financial system, were permitted.

But to make use of the exemption, banks were required to comply with strenuous disclosure, which Standard Charter is alleged to have evaded.

Standard Chartered is required to appear at a meeting next week and explain why it should be allowed to retain its New York banking licence.

The US is not a big centre of operations for Standard Chartered, whose focus is Asia. But analysts at Bernstein warned that the loss of the banking licence could lead to “significant loss of earnings... as a bank like Standard Charter servicing clients in emerging markets could book trades in different jurisdictions that actually result from structuring transactions in the US.”

The analysts also warned of the risk that the incident could spark “management change”.