On August 14, 2012, Standard Chartered Bank (SCB), a wholly owned subsidiary of Standard Chartered plc, a British Bank, announced that it had reached a $340 million settlement with the New York State Department of Financial Services (NYDFS).  The settlement stems from allegations regarding, among other things, the failure to maintain accurate books and records regarding certain dealings with Iran.

As discussed in an earlier Steptoe advisory, on August 6, 2012 NYDFS asserted in an order pursuant to New York banking law that SCB hid the involvement of Iranian entities in approximately 60,000 transactions over the course of almost a decade.  The New York regulator claimed that the bank knowingly violated US law in processing transactions worth over $250 billion.  As a result of those assertions, SCB faced the possible loss of its New York banking license.  Prior to the settlement, SCB publicly contested the severity of the allegations, stating that the vast majority of its transactions were in accordance with US law.

Benjamin M. Lawsky, New York Superintendent of Financial Services, issued a statement outlining the terms of the settlement.  Although SCB has publicly stated that the total value of transactions that did not follow US law was under $14 million, the parties agreed in the settlement that the conduct at issue involved transactions of “at least $250 billion.”  In addition to the payment of $340 million, Standard Chartered agreed to install a monitor who will report directly to NYDFS and who will evaluate the money-laundering risk controls and appropriate corrective measures in the bank’s New York branch.  NYDFS will also place examiners on site at the bank.  Finally, SCB agreed to the permanent installation of personnel within its New York branch to oversee and audit any offshore money-laundering due diligence and monitoring undertaken by the bank.

Although this settlement follows a series of high profile sanctions investigations of US and non-US financial institutions involving allegations of intentional obfuscation of sanctioned country activity, this case is unusual in that NYDFS acted alone in charging SCB while other regulators continue to consider the nature of SCB’s wrongdoing.  Not only did NYDFS act alone in charging and subsequently settling with SCB, it did so as a state agency imposing a significant monetary penalty apparently without coordination with the key federal agencies primarily responsible for implementing the relevant economic sanctions rules.  It is not yet clear what effect, if any, the settlement between SCB and NYDFS will have on pending federal investigations and on future investigations involving other financial institutions operating in the New York market.

The $340 million settlement with a single state agency is unprecedented, exceeding the settlement between the Department of Justice and Barclays bank in 2010.  While the value of SCB’s settlement with NYDFS is less than the amount forfeited by other banks in recent settlement actions, including ING Bank, Credit Suisse, and Lloyds TSB, those foreign bank settlements represented joint efforts between various federal and state agencies.

The basis for the NYDFS fine was allegations that SCB violated the following New York laws:

  • Failure to Maintain Accurate Books and Records (NYBL §200-c ).  NYDFS claimed that SCB failed to maintain or make available at its New York branch office true and accurate books, accounts and records reflecting all transactions and actions, including but not limited to,  true and accurate books, accounts and records to reflect Iranian “U-turn” transactions (i.e, where a non-US company was making a payment to another non-US company, but the funds transfer passed through an intermediate US bank in the United States), effected by or on behalf of SCB and its New York branch. 
  • Obstructing Governmental Administration (P.L. § 195.05).  NYDFS alleged that SCB obstructed governmental administration at its New York branch by intentionally obstructing, impairing and compromising the NYDFS’s administration of law, regulation and supervisory authority and prevented examiners of NYDFS and of other US regulatory agencies from performing their official functions by means of withholding, stripping and distorting information to identify numerous transactions of its OFAC-sanctioned clients to evade OFAC regulations.
  • Failure to Report Crimes and Misconduct (3 N.Y.C.R.R.§ 300.1).  NYDFS claimed that SCB failed to submit a report to the NYDFS Superintendent immediately upon the discovery of fraud, dishonesty, making of false entries and omission of true entries, and other misconduct, whether or not a criminal offense, in which an SCB director, trustee, partner, officer, employee or agent was involved.
  • Falsification of Books and Reports (N.Y.B.L. § 672.1).  The NYDFS asserted that SCB’s officers, directors, employees and agents made false entries in SCB’s books, reports and statements and willfully omitted to make true entries of material particularly pertaining to the U.S. dollar clearing business of SCB at its New York branch with the intent to deceive the NYDFS Superintendent and examiners, supervisors and lawyers of NYDFS and representatives of other US regulatory agencies who were lawfully appointed to examine SCB’s New York branch.
  • Offering False Instrument for Filing (P.L. § 175.35).  NYDFS alleged that SCB offered written documentation to NYDFS examiners and examiners of other US regulatory agencies, with the knowledge that such documentation contained false information, and with the intent to defraud NYDFS and with the knowledge that it would be filed with, registered or recorded in or otherwise become part of the records of NYDFS.
  • Falsifying Business Records (P.L. § 175.10).  NYDFS also asserted that SCB falsified business records with the intent to defraud examiners and the intent to aid and assist sanctioned countries to engage in US dollar clearing transactions in violation of US sanctions law.  

While NYDFS has no jurisdiction to enforce substantive violations of US federal economic sanctions restrictions, NYDFS also asserted that SCB failed to comply with the requirements of 31 C.F.R. § 560.516 in that SCB prevented its New York branch from determining whether the  underlying transactions were permissible under 31 C.F.R. 560.516 before effecting them.

SCB claimed that the actual financial transactions were lawful under the Iranian Transactions Regulations because they involved so-called “U-turn” transactions.  Until November 2008, US banks could participate in such transactions if the transactions met certain regulatory requirements, including that the financial institution determine whether the underlying transaction was not prohibited and freezing the transaction where wire transfer instructions did not contain sufficient information to make this determination.

In sum, NYDFS alleged that SCB had violated state law relating to the integrity of documentation or information associated with these transactions, in that SCB took deliberate action to hide the fact that the funds related to Iranian entities by stripping this information from the wire transfer instructions.  How federal authorities will proceed is unclear.  There may be a basis for liability due to improper record keeping or documentation, even if the transfers themselves were permissible U-turn transactions.  Under Executive Order 13608, this type of “stripping” activity, or other practices that hide or disguise the source of funds or parties to a financial transfer involving Iran, might be penalized as a “deceptive transaction”.  But that Executive Order post-dated the actions of SCB.  This case also highlights the risks to a financial institution (or any regulated entity) that does not identify (and address, either from a compliance or enforcement perspective) applicable state (and perhaps local), as well as federal, regulatory requirements.