Aug. 7, 2012 at 8:25 AM ET
Shares in Standard Chartered Plc tumbled Tuesday after a New York bank regulator threatened to yank its state banking license for allegedly hiding $250 billion in transactions tied to Iran.
The New York State Department of Financial Services slammed the British-based bank as a "rogue institution" that "schemed" with the Iranian government, which is subject to U.S. sanctions over its nuclear program, saying it hid 60,000 secret transactions to generate hundreds of millions of dollars in fees over nearly 10 years.
Shares in the Asia-focused bank were down 17 percent.
The bank, which has been in talks with U.S. authorities since early 2010 over the matter, had exposed the U.S. banking system to terrorists, drug traffickers and corrupt states, the state regulator said.
The New York regulator described how officials at Standard Chartered, one of the banks least tarnished during the financial crisis thanks to its focus on emerging markets and a conservative approach to capital and liquidity, had debated whether to continue Iranian dealings.
In October 2006, the top official for business in the Americas, whom the regulator did not name, warned in a "panicked message" that the Iranian dealings could cause "catastrophic reputational damage" and "serious criminal liability."
A group executive director replied, with profanity, that Americans could not stop the rest of the world from dealing with Iran.
The reply showed "obvious contempt for U.S. banking regulations," the regulator said.
Standard Chartered said the bank "does not believe the order issued by the (New York regulator) presents a full and accurate picture of the facts."
The loss of a New York banking license would be a devastating blow for a foreign bank, effectively cutting off direct access to the U.S. bank market. Standard Chartered processes $190 billion daily for global clients, the New York bank regulator said.
Standard Chartered is the third British bank to be ensnared in U.S. law enforcement probes this summer. Barclays Plc agreed to pay $453 million to settle U.S. and UK probes that it rigged a global lending benchmark in June.
A month later, a U.S. Senate panel issued a scathing report that criticized HSBC Holding Plc's efforts to police suspect transactions, including Mexican drug traffickers.
Standard Chartered said it shared with U.S. agencies an analysis that demonstrated it "acted to comply, and overwhelmingly did comply" with U.S. regulations.
Standard Chartered put the total value of Iran-related transactions that did not follow regulations at less than $14 million, based on its review of the issue, in stark contrast to the $250 billion estimate offered by the state bank regulator..
The United States imposed economic sanctions on Iran in 1979, but until November 2008 U.S. banks could process some transactions for Iranian banks or individuals provided they were initiated offshore by non-Iranian foreign banks and are on the way to other non-Iranian foreign banks, known as "U-turns."
Standard Chartered said the New York interpretation of the U-turn exemption "is incorrect as a matter of law". It said 99.9 percent of its transactions relating to Iran had complied with a U.S. framework.
The figure alleged by the New York regulator would cover the equivalent of 71 percent of the $350 billion total Iranian oil export revenues for the seven years of 2001-2007, according to OPEC data.
Standard Chartered said it was “surprised to receive the order” from the regulator and intends to contest it. The bank has to appear before the regulator Aug. 15.
"Some people were walking around under the illusion that Standard Chartered was the world's first riskless bank, and it's not. We've discovered that Standard Chartered is a mortal bank - as they all are," said Gareth Hunt, financials analyst at Canaccord Genuity, who rates the stock a "sell".
Mike Trippitt, analyst at Oriel, cut his rating to "reduce" from "buy."
"The tone and language of the report is quite shocking, but it was equally a very firm rebuttal from Standard Chartered, to say it was acting lawfully and measuring what they think was outside the rules,” he said. “You can paint a range of scenarios, from storm in a teacup to catastrophe, but it's hard to work out right now.”
Standard Chartered is the sixth foreign bank since 2008 to be implicated in dealings with sanctioned countries such as Iran in investigations led by federal and New York law enforcement officials.
Four banks - Barclays, Lloyds, Credit Suisse and ING - have agreed to fines and settlements totaling $1.8 billion. HSBC currently is under investigation by U.S. law enforcement, according to bank regulatory filings.
The New York regulator, headed by former prosecutor Benjamin Lawsky, ordered Standard Chartered to explain why the bank should not lose its state license and the ability to process dollar transactions. Lawsky also ordered the bank to bring in an outside consultant to monitor its transactions.
"Standard Chartered Bank operated as a rogue institution," Lawsky said in the order.
Lawsky's investigation is unusual because probes into banks' transactions tied to Iran have been primarily led by federal officials including the district attorney's office in Manhattan and the U.S. Justice Department.
Reuters contributed to this report.
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