Standard Chartered Bank has been accused of running a rogue unit that schemed with Iran's government to hide more than US$250 billion (£160 billion) in illegal transactions for nearly a decade.
The New York State Department of Financial Services (DFS), which regulates the U.K.-based bank's branch in the state of New York has alleged that Standard Chartered systematically sought to evade regulatory requirements relating to US dollar clearing transactions for Iranian clients from 2001-07. It has required Standard Chartered to explain its conduct at a meeting on 15 August 2012.
The bank has strongly disputed the DFS' presentation of events. It has also pointed out that other regulatory bodies with oversight of Standard Chartered have not made any public comment together with the DFS.
The DFS has oversight of Standard Chartered's New York branch, whereas the Federal Reserve has oversight of Standard Chartered on a national level.
The DFS has threatened to curtail Standard Chartered's US dollar clearing activities and potentially withdraw its New York branch license.
A Bloomberg source says the bank might be asked to pay as much as $700 million to resolve money laundering allegations filed by the DFS. A settlement of $700 million would match the amount that HSBC Holdings Plc (HSBA) set aside last month after a Senate committee found
the bank gave terrorists, drug cartels and criminals access to the U.S. financial system.
No change in ratings
The allegations have not changed Moody's Investors Service's ratings of the bank (A1, B-/a1, stable).
However, Moody's will monitor (i) the actions of the regulators supervising the Standard Chartered group, and (ii) the extent of any related developments with regards to the group's liquidity or franchise.
Moody's would view as credit negative any limitation on Standard Chartered's US dollar clearing activities. This business directly supports its global commercial and trade-finance franchise and the group places a heavy strategic emphasis on transaction banking and cash-management services.
The DFS has given no indication of the scale of potential fines, if any, in this case. However, from a ratings perspective, they are likely to be less significant than the
franchise and control considerations.
In terms of any potential impact on funding, Moody's notes that Standard Chartered has a strong liquidity profile. It is substantially deposit funded and its branches and
subsidiaries globally must all meet internal stress tests. However, the group does have large deposit relationships in its wholesale bank, which may be more confidence sensitive.
Impact on reputation
The attack on the bank could severely damage the reputation of the bank which had been regarded as the most solid of any of the London-listed banks after the 2008 taxpayer bailouts, the more recent Libor-rigging scandal at Barclays and the money laundering offences at HSBC.
Standard Chartered is not the only bank to suffer from alleged weak controls and a number of large banks have previously been subject to fines or prosecution in relation to OFAC violations over 2009-2012, (including HSBC Holdings, ING, Barclays ABN AMRO, Credit Suisse and ANZ).
Standard Chartered's case highlights the difficulty of large banks in assuring tight controls within their wholesale banking operations, says Moody's.
The DFS's allegations has so far wiped $17 billion off the bank's value.
Standard Chartered is the sixth non-U.S. bank implicated since 2008 over alleged dealings with sanctioned countries.
Barclays Plc, Lloyds Banking Group Plc, Credit Suisse and ING Bank NV have agreed to fines and settlements totaling $1.8 billion, while regulatory filings show that HSBC Holdings Plc is under investigation.
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