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Published: Wednesday August 8, 2012 MYT 8:08:00 AM
Updated: Wednesday August 8, 2012 MYT 9:20:05 AM

Standard Chartered questions NY action which wiped off US$17bil of it's value(Update)


NEW YORK/LONDON: A New York bank regulator's broadside against Standard Chartered Plc over transactions tied to Iran left investors and the bank questioning the action, which on Tuesday wiped US$17 billion off the bank's value.

The White House signaled its strong interest in the case, saying the U.S. government takes alleged violations of economic sanctions "extremely seriously."

London-based Standard Chartered said it has been in talks with U.S. authorities over its Iran transactions since early 2010 and said the public accusations by New York came as a shock.

The state's banking regulator, Benjamin Lawsky, called Standard Chartered a "rogue institution" and threatened to revoke its state banking license on Monday.

Lawsky, head of the state's Department of Financial Services, accused the bank of hiding 60,000 secret transactions worth $250 billion over nearly a decade. The transactions generated hundreds of millions of dollars in fees, Lawsky said.

Chief Executive Peter Sands scrambled back from vacation to help the bank plan a defense and limit damage to its reputation.

Shares in Standard Chartered closed down 16.4 percent at 12.28 pounds, taking their losses to 24 percent since the news surfaced just before Monday's close. They had earlier slumped as low as 10.92 pounds, their lowest for three years.

The White House said it took sanctions violations seriously but made no direct reference to Lawsky's action.

"Sanctions violations are something that this administration takes extremely seriously and has a strong record of action to this end," White House Press Secretary Jay Carney told reporters. "The Treasury Department remains in close contact with both federal and state authorities on this matter."

The inquiry into Standard Chartered is not the first time Lawsky has been involved in a state investigation of alleged conduct traditionally probed by federal investigators.

When he worked at the New York Attorney General's office, Lawsky helped spearhead a still unresolved 2010 lawsuit against Bank of America Corp over its acquisition of Merrill Lynch & Co, even while that bank was settling a similar case by the U.S. Securities and Exchange Commission.

Marc Greenwald, a former federal prosecutor who is now a partner at Quinn Emanuel Urquhart & Sullivan, said it is "not completely surprising" that Lawsky might press ahead now if he felt other regulators were moving too slowly.

Lawsky did not respond to several requests for comment.

The bank had been one of the least tarnished during the financial crisis because of its focus on emerging markets and conservative approach to capital and liquidity. It said Lawsky's order does not present "a full and accurate picture."

"Some people were walking around under the illusion that Standard Chartered was the world's first riskless bank, and it's not," said Gareth Hunt, financials analyst at Canaccord Genuity, who rates the stock a "sell." "We've discovered that Standard Chartered is a mortal bank -- as they all are."

Standard Chartered has hired two prominent law firms -- Sullivan & Cromwell in New York and Slaughter and May in London -- to represent it in its dealings with various U.S. authorities over transactions linked to Iran.

Among the Sullivan & Cromwell partners working for Standard Chartered is Rodgin Cohen, one of the best-known U.S. corporate lawyers, a person familiar with the matter said.

Sullivan & Cromwell has represented other non-U.S. banks probed for allegedly ignoring U.S. sanctions against countries.

Lawsky, in his order, described how officials at Standard Chartered had debated whether to continue its Iranian dealings, which he said exposed the U.S. banking system to terrorists, drug traffickers and corrupt states.

He said that on October 2006, the top official for business in the Americas warned in a "panicked message" that the Iranian dealings could cause "catastrophic reputational damage" and "serious criminal liability."

A group executive director in London shot back, according to a New York branch officer quoted in the order: "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 U.S. banking regulations," the order said.

At that time the bank had five executive directors: Sands, now chief executive; Richard Meddings, now finance director; Mervyn Davies, a British Labour Party peer; Kai Nargolwala, who later joined Credit Suisse Group AG and left the Swiss bank last year; and Mike DeNoma, who this month departed as CEO of Chinatrust Financial Holding Co. Standard Chartered's Americas CEO was Ray Ferguson, who is now its Singapore CEO.

These people either declined to comment or could not immediately be reached for comment.

U.S. RULES "UNCLEAR"

The loss of a New York banking license would be a devastating blow for a foreign bank, effectively cutting off direct access to the U.S. bank market.

Lawsky said Standard Chartered processes $190 billion every day for global clients.

The United States imposed economic sanctions on Iran in 1979. Until November 2008 U.S. banks could process some transactions for Iranian banks or individuals provided they were initiated offshore by non-Iranian foreign banks and were on the way to other non-Iranian foreign banks. Such transactions were known as "U-turns."

David Proctor, who worked for Standard Chartered from 1999 until 2006 and who oversaw the Iran business briefly in 2006 when he was CEO in the United Arab Emirates, said the rules on dealing with Iran were unclear.

"At the time (May 2006), ... the key question was to try and understand exactly what counted as a U-turn transaction," he said.

Proctor, who now provides advice for banks with BAS Consulting in Singapore, added that Standard Chartered now has to help clear up what actually happened. "Banks these days don't have a choice," he said. "You have to be transparent."

Standard Chartered put the value of Iran-related transactions that did not comply with regulations at less than $14 million, contrasting sharply with the New York regulator's estimate of $250 billion.

It also called Lawsky's interpretation of the U-turn exemption "incorrect as a matter of law." Standard Chartered must appear before the Department of Financial Services on August 15.

SIX BANKS

Standard Chartered is the sixth non-U.S. bank implicated since 2008 over alleged dealings with sanctioned countries.

Barclays Plc, Lloyds Banking Group Plc, Credit Suisse and ING Bank NV have agreed to fines and settlements totaling $1.8 billion, while regulatory filings show that HSBC Holdings Plc is under investigation.

Separately, Barclays agreed in June to pay $453 million to settle U.S. and British probes that it rigged Libor, a global lending benchmark, while a month later a U.S. Senate panel faulted HSBC efforts to police suspect transactions, including with Mexican drug traffickers.

The cost to protect 10 million euros of Standard Chartered debt against default for five years rose on Tuesday to 166,000 euros from 140,000 euros on Monday, according to Markit.

($1=0.6415 British pounds) - Reuters

Reuters meanwhile reported from India:

Standard Chartered sparks scrutiny of India offshoring

MUMBAI/NEW YORK (Reuters) - Offshoring of back-office work to India, a trend among banks and accounting firms, came under new scrutiny with allegations that Standard Chartered Plc moved compliance oversight work dealing with Iranian banking transactions to India to avoid U.S. regulators.

Cost savings, not escaping regulatory oversight, are generally assumed to be the primary goal of sending back-office work to India, where employees are paid far less than in the United States and much of Europe.

New York State's bank regulator accused Standard Chartered on Monday of setting up an offshore regulatory compliance system dealing with Iranian banking transactions that was "a sham" meant to escape U.S. Treasury Department oversight.

Regulator Benjamin Lawsky, head of the New York Department of Financial Services, issued an order accusing Standard Chartered of hiding 60,000 transactions tied to Iran worth $250 billion over a decade, resulting in substantial fees.

Standard Chartered Plc has said it "does not believe the order issued by the Department of Financial Services presents a full and accurate picture of the facts."

U.S. and European companies will move 750,000 jobs in information technology, finance and other business services to India and other low-cost nations by 2016, according to the Hackett Group Inc, a U.S. consultancy.

India, because of its English-speaking population and low wages, is an especially attractive offshoring destination, receiving 58 percent of global outsourcing contracts last year, according to industry estimates.

Offshoring to India has been a political issue in the United States, with the focus usually being on the jobs it takes away from Americans, suffering from a stubbornly high unemployment rate.

The issue will give more ammunition to groups that oppose outsourcing because of fears of job losses, said Sudin Apte, chief executive of independent advisory and research firm Offshore Insights. But he did not see a long-term effect.

"Some more rigor in compliance, some more rigor in scrutiny and process adherence ... but I think I would welcome that because that makes the system perfect or near perfect," he said.

IRAN TRANSACTIONS EYED

Global banks and financial services companies are among the biggest outsourcers to Indian companies, including Infosys Ltd and Tata Consultancy Services Ltd, which provide services ranging from payroll management to maintaining IT networks.

Indian outsourcing firms such as Wipro and Tata already are marketing compliance services for the 2010 Dodd-Frank Wall Street reform act, which will require U.S. banks to provide massive amounts of data on their risk exposure.

Many banks, including HSBC Plc, JPMorgan Chase & Co and Royal Bank of Scotland Group Plc, also have their own facilities in low-cost India with thousands of employees.

The Big Four accounting and consulting firms, Deloitte, Ernst & Young, KPMG and PwC, also are offshoring some audit work for U.S. companies to India, where salaries for accountants are a fraction of those in the United States.

In the case of Standard Chartered, compliance work was being done in India on financial transactions, including those tied to Iran. The United States imposed economic sanctions on Iran in 1979.

Lawsky has alleged that Standard Chartered's staff in India was not trained to determine whether the transactions were valid under U.S. rules on Iranian trade.

Those rules are overseen by Treasury's Office of Foreign Assets Control (OFAC), the state regulator said.

The New York regulator said the bank's failures included "outsourcing of the entire OFAC compliance process for the New York branch to Chennai, India, with no evidence of any oversight or communication between the Chennai and the New York offices."

Scope International, Standard Chartered's wholly owned back office outsourcing centre, is based in the south Indian city of Chennai and employs more than 8,500 people.

A spokeswoman for the bank in Mumbai declined to comment.

The bank has put the value of Iran-related transactions that did not comply with regulations at less than $14 million, much less than Lawsky's multibillion-dollar estimate. - Reuters

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