Standard Chartered may lose NY banking license due to Iran scandal

“You f*cking Americans. Who are you to tell us, the rest of the world, that we’re not going to deal with Iranians.”

That obscene statement was how a London executive of Standard Chartered bank allegedly replied to a warning issued by the head of its U.S. unit that the bank’s dealings with Iran could cause “catastrophic reputational damage” and “serious criminal liability.”

True enough, UK-based bank Standard Chartered is now reeling from serious reputational risk and possible criminal liability after New York’s Department of Financial Services claimed that the bank dealt with Iranian banks and hid $250 billion worth of illegal transactions in violation of U.S. regulations. Such violations have led the New York regulator to threaten to suspend Standard Chartered’s license in New York.

The bank does not provide extensive banking services in the U.S. but the license suspension would hinder its ability to process dollar payments for clients with businesses in the U.S.  The scandal could also impact the bank’s net profit since it stands to lose clients in the emerging markets. Standard Chartered operates in over 70 countries and, despite being based in the United Kingdom, more than 90% of its profits come from emerging markets in Asia, Africa, and the Middle East.

“U-Turn” violation

New York’s Department of Financial Services alleged that Standard Chartered skirted U.S. rules by scheming with the Iranian government in processing and hiding more than 60,000 illegal transactions worth $250 billion between 2001 and 2007.

In 1979, the United States imposed economic sanctions on Iran and until 2008, U.S. banks are not allowed to process transactions originating from Iran unless these were initiated by non-Iranian banks and the money would also end up in non-Iranian foreign banks. These transactions are called “u-turn”.

The restriction was placed to monitor and prevent money from being used to finance terrorist organizations.

“Wire-stripping”

Standard Chartered allegedly changed bank codes in an attempt to hide the source of transactions in a process called “wire-stripping”. In this process, bank codes are “stripped” or “repaired” in order to remove any reference to the involvement of Iranian banks.

An example cited in the Department of Financial Services report was a 2001 transaction wherein Standard Chartered supposedly helped CBI/Markazi, Iran’s central bank, to act as recipient for daily oil sales from the National Iranian Oil Company. Standard Chartered “conspired with Iranian clients to transmit misinformation to the New York branch by removing and otherwise misrepresenting wire transfer data that could identify Iranian parties”, the report alleged.

The same report claimed that Standard Chartered’s rogue activity was even contained in the bank’s manual detailing how “wire-stripping” will be done. The manual directed employees to remove, during the “repair stage”, any Iranian bank’s Swift Codes so as to hide the fact that the wire transfer beneficiary is an Iranian bank.

“You f*cking Americans…”

In its report, the New York banking regulator accused Standard Chartered of leaving “the US 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.”

The report also stated that in 2006, the head of Standard Chartered U.S. banking unit warned the bank’s top executives in London that the actions could expose the bank to “catastrophic reputational damage” and “serious criminal liability.”

The reply to him by London was an expletive-filled “You f*cking Americans. Who are you to tell us, the rest of the world, that we’re not going to deal with Iranians.”

Responding to the allegations, Standard Chartered said it “strongly rejects the position and portrayal of facts” made by the Department of Financial Services. The bank said 99.9% of its transactions with Iran complied with U.S. regulations and that the total value of transactions that may be not in compliance was only less than $14 million and not $250 billion as alleged.

The scandal has caused the Standard Chartered (STAN) stock in London to plummet more than 24% in the past two days, wiping out more than $12.5 billion in value (see photo below). The stock closed at 1,228.50 pence, down 16% in one day.