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Standard Chartered Dinged $327 Million for Lack of Candor with Regulators


December 10, 2012

By Brian Monroe


A nearly $330 million deferred prosecution agreement with a London-based bank reinforces the peril financial institutions face when engaging in look-backs for possible sanctions or anti-money laundering violations.



The $327 million penalty Standard Chartered PLC (SCB) agreed to pay on Monday speaks to the greater issue of how transparent banks should be when they are the subject of a targeted examination, said Adam Kaufmann, executive assistant district attorney and chief of the investigation division in the Manhattan District Attorney’s Office.



“You can’t be too cute” when investigators ask for all data related to transactions with sanctioned countries “because that runs contrary to the spirit of disclosure,” said Kaufmann, adding that “during the targeted look-back, the bank was not forthcoming about the scope of its conduct.”



The penalty, which will settle charges that SCB violated U.S. sanctions by concealing information on hundreds of millions of dollars in transactions tied to Iran and other countries, will be divvied up to settle investigations by the Manhattan D.A., U.S. Department of Justice, the U.S. Treasury’s Office of Foreign Assets Control (OFAC) and the Federal Reserve (Fed). The transactions took place between 2001 and 2007 and involved Iran, Sudan, Burma, Libya and an unnamed designated narcotics trafficker.



The authorities “want the bank to disclose it all,” Kaufmann said, adding that was the likely reason that $100 million of the penalty is earmarked to go to the Fed, a “rare” move in such coordinated settlements.



Under the settlement, the Justice Department receives $227 million, which also satisfies OFAC’s penalty of $132 million, some share of which will go to the Manhattan D.A.’s office. That sum is on top of the $340 million SCB agreed in August to pay the New York Department of Financial Services (NYDFS) i as part of a controversial settlement that occurred under the threat of the institution losing its banking license.



In the NYDFS order, the regulator accused the bank of conspiring with the Iranian government to hide 60,000 “u-turn” transactions between 2001 and 2010 worth at least $250 billion.



In a statement issued with Monday’s DPA, SCB said that the U.S. Treasury Department allowed banks to process such transactions until November 2008 and that the bank only processed $24 million of transactions barred by the U.S. sanctions regime. The bank also conceded that it had processed $109 million on behalf of other sanctioned entities, a fraction of the $139 trillion in U.S. dollar payments processed by its New York branch.



Standard Chartered also displayed a “lack of candor” in its submissions to the Fed and New York State Banking Department, now NYDFS, during a targeted AML review between 2004 and 2007, said Manhattan District Attorney Cyrus R. Vance, Jr. in a statement.



In the work plan submitted to the Fed and New York state in November 2004, the bank discussed screening its New York wire payment data against all OFAC entities, but despite a “detailed risk-ranking methodology…billions of dollars were not disclosed” and the bank also failed to mention to regulators it was “processing non-transparent payments for customers in sanctioned countries during the look-back period,” according to the Justice Department deferred prosecution agreement (DPA).



One Fed examiner linked to the case said that because of the "lack of candor" he was “misled, and the look-back did not meet its objective because SCB may have eliminated some of the suspicious transactions” related to Iran, although the bank did report alerts related to Libya, Burma and Syria.



The total remediation costs for SCB could easily add as much as $500 million to $600 million to the penalty, said a sanctions attorney who has worked on such cases.



The bank has “invested significantly” in sanctions screening systems, staff, and training, a bank spokeswoman said, adding that the bank has also improved its customer due diligence and AML and OFAC auditing and quality assurance procedures. The bank will pay the penalty in the second half of the year.



That the $667 million in total U.S. penalties levied were partially based on SCB’s failure to disclose the full results of a look-back review demonstrates the “unavoidable” dilemma that international banks face when settling their charges with U.S. officials, said Mark Outhwaite, a former financial crime risk advisor for SCB.



“Look-backs are very risky because they can lead to more investigations and bigger fines, which is what the bank is trying to avoid in the first place, but they’re often a central feature of these agreements,” he said.



In the case of SCB, the bank “was faced with the choice of fighting the charges and ultimately losing its ability to clear dollars and process payments for international commodities, or dropping the question of whether or not some of what they were being fined for was legal,” said Outhwaite, citing penalties levied against the bank for processing u-turn transactions before the November 2008 prohibition.



In a separate 15-page cease-and-desist order, the Fed devoted nearly half of the order to needed improvements in AML and sanctions compliance.



The order requires the bank to ensure proper oversight of outsourced AML functions to other in-house entities or third-party vendors; improve customer due diligence, customer risk rating and suspicious activity reporting and training; and implement AML procedures at the branch level to ensure branches are collecting, analyzing and retaining complete and accurate customer information.



The bank must also verify that the OFAC compliance function is adequately staffed and funded, that tailored OFAC training is given to individuals in those job capacities, and that the training is periodically updated and that the OFAC audit program conducts “an appropriate risk-focused sampling of U.S. dollar payments.”



The $667 million combined penalty is the highest paid to date for sanctions violations, exceeding the $619 million paid by Dutch bank ING for similar violations. Royal Bank of Scotland paid $500 million to settle anti-money laundering and sanctions violations related to ABN Amro Bank’s U.S. dollar clearing with clients in Iran, Libya, Sudan and Cuba, while HSBC stated in a recent regulatory filing that it would pay at least $1.5 billion to settle criminal and civil violations linked to sanctioned transactions.



Standard Chartered, formed in 1969, has more than 1,700 branches, offices and outlets in 70 countries, including regions in Asia, Africa and the Middle East. The bank has more than $500 billion in assets and its New York operation is the seventh largest dollar clearing operation in the world with nearly $200 billion in U.S. dollar payments per day.



Colby Adams contributed to this story.