Standard Chartered Bank (SCB), a wholly owned subsidiary of Standard Chartered plc, a British bank, faces the possible loss of its New York banking license following accusations by the New York State Department of Financial Services (NYDFS) that the bank hid 60,000 transactions involving Iran over the course of almost a decade.  The NYDFS charged on August 6 that the bank knowingly violated US law in processing the transactions, allegedly worth over $250 billion, in order to secure hundreds of millions of dollars of fees.  SCB is contesting the severity of the allegations, stating that the vast majority of its transactions were in accordance with US law and that the value of transactions it processed involving Iran which did not follow US legal requirements was $14 million.  While following in the line of a series of high profile sanctions investigations of US and non-US financial institutions, this case is unusual in that NYDFS acted alone in charging SCB while other regulators continue to consider the nature of SCB’s wrongdoing.

The NYDFS accuses SCB of systematic misconduct involving wire transfers on behalf of Iranian financial institutions, including the Central Bank of Iran/Markazi, Bank Saderat and Bank Melli.  SCB allegedly sought to evade US sanctions and, in so doing, falsified business records, offered false instruments for filing, and failed to maintain accurate books and records.  From 2001 through 2007, according to the NYDFS Order, SCB stripped information from approximately 60,000 wire transfer messages used to identify sanctioned countries and replaced it with false information when routing US dollar payments for Iranian banks through SCB’s New York branch.  During this time period, US banks were required by the US Office of Foreign Assets Control (OFAC) to screen dollar clearing transactions and to hold transactions involving sanctioned entities pending investigation, a requirement that would have caused unwanted delays to SCB’s business.  OFAC rules in place prior to November 2008 allowed US banks to process certain transactions involving Iran (so-called “U-turn” transactions) that passed through the United States, but only if initiated outside the United States by non-Iranian foreign financial institutions and ending up with other non-Iranian foreign financial institutions.  31 C.F.R. 560.516.  (Certain designated Iranian banks, including Bank Saderat and Bank Melli were ineligible for such U-turn transactions beginning in 2007 due to their roles in providing support to terrorism and in Iran’s weapons proliferation activities.)  See E.O. 13224 and 13382.  By stripping information from the wire transfer messages, NYDFS alleges, SCB’s wire transfers violated the OFAC rules.

The earlier OFAC rules have been tightened substantially and currently disallow the type of U-turn transactions outlined above.  See Steptoe advisories issued previously for a discussion of some of the recent changes tightening US sanctions against Iran, particularly involving financial institutions.

Significant to the allegations are NYDFS claims that SCB officials colluded with the Iranian banks, deliberately providing the sanctioned entities with instructions as to how to evade detection under US sanctions rules.  The NYDFS states that SCB “conspired with Iranian Clients to transmit information to the New York branch by removing and otherwise misrepresenting wire transfer data that could identify Iranian parties.”

The NYDFS Order highlighted a 2006 internal email exchange in which SCB’s CEO for the Americas sounded the alarm about the Iran bank activity, stating that the business “needs urgent reviewing at the Group level to evaluate if its returns and strategic benefits are . . . still commensurate with the potential to cause very serious or even catastrophic reputational damage to the Group,” describing the possibility of “serious criminal liability.”   

According to the NYDFS Order, “SCB’s actions left the U.S. 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.”  In addition to the allegations regarding Iranian wire transfers, the NYDFS is also investigating SCB’s business with other sanctioned countries, including Libya, Myanmar and Sudan.  The NYDFS has ordered SCB to appear before the NYDFS on August 15 to demonstrate why its New York license should not be revoked and why its US dollar clearing operations should not be suspended pending a formal license revocation hearing.

The potential penalties facing SCB are significant.  SCB’s primary business in the United States is the clearing of US dollars, clearing approximately $190 billion per day for international clients.   Loss of its clearing operations and the revocation of its New York operating license would severely impact SCB’s US business.  In addition, like other banks accused of violating US sanctions against Iran, SCB likely faces substantial penalties from other US regulators.

While the NYDFS’s public accusations regarding the bank have preceded those of other regulators, federal and New York state enforcement authorities are reportedly also investigating the bank’s activities.  Standard Chartered has stated that it “had previously reported that it is conducting a review of its historical compliance and is discussing that review with US enforcement agencies,” specifically referring to the NYDFS, the U.S. Justice Department (DOJ), the US Treasury Department, Office of Foreign Assets Control (OFAC), the Federal Reserve Bank of New York and the New York District Attorney.   

As a relatively new department, NYDFS may be signaling an aggressive stance against banks operating in New York.  According to its website, the NYDFS was established in October 2011 when New York combined the functions of the New York State Banking Department and the New York State Insurance Department into the new department and “aims to modernize regulatory oversight of the financial services industry.”  The public accusations are likely to put pressure on other US regulators to come forward with additional charges in the near term.

The US Government has not been hesitant in the past to enforce US economic sanctions laws and regulations aggressively against foreign financial institutions.  The accusations against Standard Chartered follow a string of high profile cases involving sanctions against European banks by U.S. agencies and bank regulators for the banks’ dealings with Iran:

  • In June of this year, Netherlands-based ING Bank, agreed to forfeit $619 million to settle criminal charges brought by the United States and the State of New York and civil claims raised by OFAC.  Regulators charged ING Bank with conspiring to violate US economic sanctions and with violating New York state laws by illegally moving billions of dollars through the US financial system on behalf of Cuban and Iranian entities.  The $619 million fine, split evenly between the US Government and the State of New York, was the largest ever against a financial institution in connection with an investigation into US sanctions violations and related offenses.  See related Steptoe advisory issued June 18, 2012.
  • In 2010, ABN AMRO Bank N.V., now known as the Royal Bank of Scotland (RBS) agreed to a fine of $500 million in a Department of Justice (DOJ) settlement for alleged violations of US sanctions law.  OFAC had previously settled with RBS for $40 million in 2006.
  • Similarly, Barclays Bank, Credit Suisse, and Lloyds TSB Bank all settled with the Department of Justice, OFAC, and New York banking regulators for violations of U.S. sanctions and related banking regulations in recent years.  Barclays Bank settled with DOJ for a penalty of $298 million in 2010, while Credit Suisse settled with DOJ for $536 million in 2009.  (OFAC deemed its penalties satisfied with these two banks by the DOJ settlements.)  By contrast, Lloyds agreed in 2009 to a $350 million settlement with DOJ, and also paid a $217 million penalty to OFAC, resulting in a total penalty of $567 million. All of the settlements involved accusations that the banks intentionally disguised transactions by stripping out of the transfer documentation and routing instructions the identifying information of sanctioned entities before processing the transactions through US financial institutions.  The charges also included that the banks were providing advice to sanctioned entities about how to evade US sanctions, and were manipulating related messages.