Personal and banking reputations are on the line as tension mounts on both sides of the Atlantic over Standard Chartered Bank
IF YOU ever thought banking was dull, think again. This week London-based Standard Chartered Bank stood accused of enabling “terrorists, weapons dealers, drug kingpins and corrupt regimes”, in the latest scandal to hit Britain’s beleaguered financial institutions.
The charge – made by New York state’s Department of Financial Services – came as a bolt out of the blue and left Standard Chartered (SCB) scrambling to defend itself.
At the heart of the matter is an accusation that, for almost 10 years, SCB “schemed with the government of Iran and hid from regulators roughly 60,000 secret transactions, involving at least $250 billion and reaping SCB hundreds of millions of dollars in fees”.
The 27-page report, released on Monday by the newly established New York regulator, accused SCB of operating as a “rogue institution” with “obvious contempt for US banking regulations”. Not happy to stop there, to illustrate this “obvious contempt”, the report included a quote attributed to one of the bank’s directors: “You f***ing Americans. Who are you to tell us, the rest of the world, that we’re not going to deal with Iranians?”
Ouch.
The US has had sanctions in place against Iran since 1979. These were beefed up under president Clinton in 1995 when strict requirements were set for banks clearing US dollar transactions with Iranian clients.
Essentially, SCB is accused of having bypassed these requirements by “stripping” wire transfer documentation of certain information that would have automatically flagged suspect transactions for further scrutiny to see if they complied with US law.
In doing this, the bank could ensure the so-called “U-turn” transactions would fly under the radar of US authorities, allowing them to be processed without delay.
The transactions were dubbed U-Turns because funds (for example, from the sale of Iranian oil) were routed to a bank in the US and immediately transferred to another foreign institution in US dollars, essentially “cleaning” the money. In 2008, the US Treasury Department decided to ban all U-Turns because it suspected Iran was using its banks – including the Central Bank of Iran, Bank Saderat and Bank Melli – to finance nuclear weapons and missile programmes.
Monday’s report from the DFS identified those banks as clients of SCB. SCB has rejected the claim that the illegal transactions involved sums amounting to $250 billion. Rather, it claims that figure is closer to a mere $14 million, which it puts down to “small clerical errors”. In a statement released on Tuesday, the bank also called into question the DFS’s interpretation of the U-Turn regulation, claiming it was “incorrect as a matter of law”. A spokeswoman for SCB this week told The Irish Times this difference in interpretation boiled down to whether “sufficient information” was provided with each transaction. SCB believes the information it supplied was sufficient to meet the letter of the law. The DFS disagrees, and has ordered top management from the bank to explain themselves at a hearing in New York next week. At stake is the bank’s licence to conduct business in New York, where it clears almost $200 billion worth of dollar transactions for its international clients every day. The DFS has the power to revoke it, and has threatened to do so.
As soon as all of this kicked off, however, all eyes turned to the man in charge of the DFS.
Benjamin Lawsky, a former federal prosecutor and Democratic Party lawyer for high-profile politicians like New York’s Governor Andrew Cuomo and Senator Charles Schumer, was suddenly being likened to another former governor, Eliot Spitzer.
In 2001, as New York’s attorney general, Spitzer went on an unexpected pursuit of Wall Street’s biggest banks, accusing them of widespread corruption in lawsuits that led to financial settlements worth over $120 billion.
Having made a name for himself as a defender of the public interest, Spitzer went on to be elected governor. He was succeeded as attorney general by Andrew Cuomo who was also subsequently elected governor of New York in similar circumstances.
“This is now a political pathway that was refined by Spitzer and utilised by Cuomo,” says Roy Smith, a professor of management practice and finance at NYU’s Stern School Business and a former partner at Goldman Sachs. “Now we have a new guy who has leapt into the fray from a somewhat unexpected direction … I would say Mr Lawsky is betting his career on this thing working out,” he added.
But while he may have the weight of public opinion behind him, Lawsky has reportedly ruffled feathers among the other US financial regulators with his surprise attack on SCB. His regulatory unit was just one of several US authorities investigating SCB’s Iranian dealings, including the Federal Reserve, the Treasury Department, the FBI and the Department of Justice.
“This has been one of the hazards of our regulatory system for some time, this overlap of federal and state authorities,” said Smith. “Every now and then they become competitive with one another to see who can wield the most visible power and get the most credit. But we also have our Congress which likes to wade in. And, needless to say, in a hotly-contested election year, none of this is entirely devoid of politics.”
But politicians on the other side of the pond couldn’t help getting involved either.
British Labour MP John Mann accused US regulators and politicians of “an increasing anti-British bias” which, he claimed, was designed to shift financial markets from London to New York. His thoughts have since been echoed by others.
Then the Governor of the Bank of England, Mervyn King, chipped in. “I think all that the UK authorities would ask is that various regulatory bodies that are investigating a particular case try to work together and refrain from making too many public statements until the investigation is completed,” he told reporters on Wednesday.
He stopped short of a US regulatory conspiracy theory, however.
NYU Stern’s Roy Smith also dismisses the notion of a “power grab”. “These guys probably don’t even understand what the issues involved in these power centres are. They’re just trying to bring to justice an offence which they believe occurred. And they may be misinformed, they may not be. We really don’t know what they have,” he said. “But it looks to me like it’s motivated by the interests of Mr Lawky to do his job as a New York civil servant – politically inspired or otherwise,” he added.
Whatever the reasons behind Mr Lawsky’s pursuit, SCB will have to come up with some plausible reasons as to why staff members were instructed to “repair” certain entries on wire transfer documents to obscure the identity of certain banks, as outlined in Monday’s damning report.
So far, it remains unclear exactly what Lawsky’s department is pinning all of this on. However, his contention that “SCB’s success in US dollar clearing for Iranian clients stems from the documented willingness of its most senior management to deceive regulators and violate US law” is a bold one.
Wednesday’s hearing in New York may shed some light on just how bold, or otherwise, it is.
US TRADE EMBARGOES AND SANCTIONS: WHERE THEY APPLY AND WHAT'S INVOLVED
THE US, THROUGH its Office of Foreign Assets Control (OFAC), applies sanctions and trade embargoes to a number of countries. It is possible however, to find a way around the prohibitions by applying for a license from the OFAC.
BALKANS REGION
Includes Yugoslav Republic of Macedonia, southern Serbia, the Federal Republic of Yugoslavia, and elsewhere in the western Balkans: sanctions against people who threaten international stabilisation efforts.
BELARUS
Sanctions against people undermining democratic processes or institutions.
BURMA
Importation of Burmese goods to the US is blocked, as is the export of US financial services to Burma.
IVORY COAST
The property of people contributing to the conflict in the Ivory Coast is blocked.
CUBA
A wide-ranging set of sanctions have been in place since 1960.
CONGO
Sanctions in place against people contributing to the conflict there.
IRAN
The US applies a series of embargoes on Iran, including the importation of Iranian-origin goods and services. Virtually all trade and investment activities with Iran are prohibited.
IRAQ
The US applies a complete trade embargo to Iraq, but financial transactions are allowed.
LEBANON
Sanctions against people undermining the sovereignty of Lebanon.
FORMER LIBERIAN REGIME UNDER CHARLES TAYLOR
Sanctions against those involved with this regime.
LIBYA
Blocking of property of those involved with Libyan government.
NORTH KOREA
A broad range of sanctions apply including a ban on imports.
SOMALIA AND SUDAN
Sanctions against people contributing to conflict.
SYRIA
Sanctions against people involved with human rights abuses.
YEMEN
Sanctions against people threatening peace or stability.
ZIMBABWE
US residents are prohibited from engaging in any transactions with any person, entity or organisation found to be undermining democratic institutions and processes in Zimbabwe.
ADDITIONAL SANCTIONS
In addition, sanctions also apply under broader headings, such as the prohibition on imports of rough diamonds; the prohibition from owning US property by foreign narcotics traffickers; and the blocking of property of those who commit or support terrorism.
The USA Patriot Act, which was signed into law in 2001, also applies.
It sets out guidance to prevent money laundering and the financing of terrorism.
– FIONA REDDAN
