StanChart attack

Less than a week ago, Standard Chartered was happy to be characterised as a 'boring' bank that has avoided the wilder excesses of others in its sector; now it finds itself at the centre of a money-laundering scheme, and accused of being a friend to terrorists.

"It may seem boring in contrast to what is going on elsewhere, but we see some virtue in being boring," said Chief Executive Officer Peter Sands at the time of the group's interim results on August 1st.

Now the group seems anything but boring, with almost £8bn wiped off the value of the company by lunchtime Tuesday after the New York State Department of Financial Services (DFS) made some serious accusations about the behaviour of Standard Chartered Bank (SCB), a wholly-owned subsidiary of Standard Chartered.

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DFS lets fly with both barrelsSpecifically, the DFS claims that, after conducting an investigation into SCB's business, the evidence indicates that for nearly a decade, SCB engaged in deceptive and fraudulent misconduct in order to move at least $250bn through its New York branch on behalf of client Iranian financial institutions that were subject to US economic sanctions, and then covered up its transgressions.

Adopting a dramatic tone, the FDS accuses SCB of an "evident zeal to make hundreds of millions of dollars at almost any cost". Among the transgressions of which the bank is accused are: falsification of business records; offering false instruments for filing; failing to maintain accurate books and records of all transactions; obstructing US governmental administration; failing to report misconduct to the DFS in a timely manner; evading Federal sanctions.

SWIFT retributionStandard Chartered's New York branch stands charge of ensuring the anonymity of Iranian US dollar clearing activities by falsifying SWIFT (Society for Worldwide Interbank Financial Telecommunication wire payment directions).

"When SCB employees determined that it was necessary to 'repair' unadulterated payment directives, they did so by stripping the message of unwanted data, replacing it with false entries or by returning the payment message to the Iranian Client for wire stripping and resubmission. Thus, SCB developed various ploys that were all designed to generate a new payment message for the New York branch that was devoid of any reference to Iranian Clients," the FDS document claims.

"SCB's actions left 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 FDS claimed.

The FDS said it has also uncovered evidence that Standard Chartered might also have been involved in dodgy dealings with other countries in the USA's bad books, such as Libya, Myanmar and Sudan.

City's reputation takes another hitThat was the last thing the British banking sector's reputation needed after HSBC, another Asia-focused bank head-quartered in London, was fined $27.5m last month by the National Banking and Securities Commission (CNBV) in relation to the bank's non-compliance with anti-money laundering systems and controls. The US Senate found HSBC had ignored clear signs its Mexican division was being used as a conduit for billions of dollars of drug money to be transferred to America.

While HSBC has owned up to its transgressions, Standard Chartered claims the New York FDS's claims are wildly over the top.

The banking group has made no secret of the fact it has been cooperating with various US agencies, including the DFS, the Department of Justice, the Office of Foreign Assets Control, the Federal Reserve Group of New York and the District Attorney of New York, on investigations into historical compliance issues. The disclosure was made in the group's annual results for 2010 and 2011 and again in the recent interim results.

"The timing of this release appears to come as a surprise to the company, given the wording and the confident management tone at the results presentation last week," noted Credit Suisse.

Standard Chartered added that resolution of compliance matters of this nature are normally handled through a co-ordinated approach by the regulatory agencies, and it seems to have been caught on the hop by the DFS breaking ranks in this way.

Standard Chartered refutes allegationsStandard Chartered's analysis of its transactions with Iran between 2001 and 2007 is that throughout the period the group acted to comply, and overwhelmingly did comply, with US sanctions and the regulations relating to so-called U-turn payments (designed to enable some level of business to continue with Iran). Standard Chartered ceased all new business with Iranian customers in any currency more than five years ago.

"As we have disclosed to the authorities, well over 99.9% of the transactions relating to Iran complied with the U-turn regulations. The total value of transactions which did not follow the U-turn was under $14m," Standard Chartered said.

The size of the transactions which fell foul of the regulations - less than $14m if you believe the UK bank's view; at least $250bn if you subscribe to the view of the New York State Department of Financial Services - could be germane to the size of the fine the bank will be hit with and, perhaps more importantly, the future of its banking licence in the US.

As for the emotive allegation that Standard Chartered has been helping the cause of terrorists, the bank said its review of its Iranian payments "did not identify a single payment on behalf of any party that was designated at the time by the US Government as a terrorist entity or organisation."

Nomura Securities responded to the latest development by downgrading the stock from "buy" to "neutral", as it sees "material headline risk".

"STAN's [Standard Chartered's] fighting reply gives us some comfort on the stock and the amounts involved according to them are much smaller than the DFS order alleges. This is better than what we feared last evening," the broker said.