Tuesday was a disaster for anyone holding shares in Standard Chartered Bank (LSE: STAN).
After news that New York's bank regulator the New York State Department of Financial Services (DFS) had accused the bank of helping firms in Iran launder money, the price plunged. At one point shares were nearly a quarter lower than Monday's closing price, although they have since recovered a little.
As Charles Stanley analyst Nic Clarke put it: "this has been incredibly damaging to Standard Chartered it is ruining all the good work that [the] current management have done in recent years".
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But what exactly is going on? And is this a buying opportunity, or should you steer well clear?
Sanctions against Iran are a key element of US policy
US relations with Iran have been prickly ever since the Iran embassy crisis in 1979. There have always been restrictions on US banks doing business with the country.
But in the past decade things have got worse, due to Iran's support for terrorist groups and efforts to develop nuclear capabilities. Sanctions have been tightened, making it illegal for US banks to do almost any business with Iran.
The New York State DFS claims that for the past ten years Standard Chartered has been working with Tehran to bypass these regulations. One of the main ways they are alleged to have done this was by disguising transactions involving Iranian cash by altering the transaction codes ('wire stripping'). Had the codes been properly entered, the regulator says, all the transactions would have been delayed while they were checked.
According to an official report from the regulator, this was a deliberate strategy agreed at the highest levels. The transactions 60,000-odd of them - were worth $250bn and made the firm "hundreds of millions in fees". Overall, these actions "left the US financial system vulnerable to terrorists, weapons dealers, drug kingpins and corrupt regimes".
As a result, the New York regulator has threatened to revoke the bank's state banking licence. The bank has to appear before the DFS on August 15, reports Reuters.
What happens next?
Standard Chartered has fought back hard, saying that it "does not believe the order issued by the DFS presents a full and accurate picture of the facts". It claims that its own investigations show that all but $14m of the Iran-related transactions complied with the regulations. The bank adds that it has not accepted any new Iranian clients for five years. Finally, it contends that none of the transactions involved entities that were designated as terrorist groups at the time.
There are certainly reasons to think Standard Chartered will get away with a relatively small penalty. Firstly, the DFS is a relatively minor regulator, founded recently. No doubt it wants to establish a hawkish reputation in this case, but it's still odd that other regulators have not jumped in too.
Others point out that the US has a plea-bargaining system. This results in prosecutors frequently blustering by threatening serious charges, only to quietly cut a deal later involving much smaller penalties.
However, we wouldn't want to bet our life savings on this happening (and nor would many of the banks' investors by the looks of it). Standard Chartered's status as an Asia-focused bank headquartered in London means it won't get any special treatment, particularly not in the light of other London-focused scandals such as Libor.
So while the financial costs may be less than the market is predicting, we don't think you should buy the shares. This is partly because of the uncertainty, and partly because of the potential longer-term damage to the bank's reputation.
Standard Chartered has done well in Asia in recent years, partly because it appears safer than its local rivals. Take that reputation away, and many emerging market firms and business will think that they might as well bank with a domestic institution, especially since most of these enjoy an implicit degree of government support.
As it stands, the main lesson for investors from the Standard Chartered saga is that every time you think the banking sector has sprung its last nasty surprise, another one appears. For that reason we'd keep steering well clear of the banks for now.
