A regulator gone rogue? Maybe, maybe not | FT Alphaville

A regulator gone rogue? Maybe, maybe not

At pixel time, shares in Standard Chartered were down 31 per cent from the point at which this was published — an “Order Pursuant to Banking Law No 39,” issued by the New York State Department of Financial Services.

In lurid detail, this sets out the claim that the London-based EM bank willfully evaded US sanctions against Iran over the course of a decade.

Now, quite a few people (including this correspondent) are owning up to not having heard of the New York State DFS previously. Jonathan Guthrie, in a lucid Lombard note, reckons this might partly explain the grandstanding tone of the order: the department was only created last year (by New York governor Andrew Cuomo) and needs to make a name for itself…

The mini watchdog’s language was as frothy as any politician’s stump re-election speech. It claimed that StanChart’s actions had “left the US financial system vulnerable to terrorists, weapons dealers, drug kingpins and corrupt regimes”. The substance of the accusation is that bank staff outside the US deliberately omitted or removed the names of Iranian clients from dollar payment orders that were routed via New York, but did not originate or terminate there. The aim was to avoid regulatory hold-ups to deals that might or might not have been permissible.

Was this illegal? Lawyers may grow fat, rich and old debating the point. The J Edgar Hooverish broadside of the NYDFS does not pack the same punch as a senate committee’s accusation of money laundering violations against HSBC. But StanChart has serious explaining to do if it is to retain its status as uniquely scrupulous.

StanChart, for its part, is acting all shocked and hurt. A hastily drafted statement, issued at about 1am London time, protests that what the DFS calls “wire-stripping” — changing docket details to disguise the parties involved — was actually accepted practice under the so-called “U-turn” arrangements that allowed Iran to sort of trade normally, internationally, in the years up until 2008.

In November that year (just as Wall Street was melting) the U-turn arrangements were revoked and sanctions against Iran were tightened up considerably. Over this period, StanChart appears to accept that it made some transgressions. These were being investigated and the matter has been under discussion with a whole battery of US regulators. But going on the bank’s figures, the suspect trades are in the region of $14m, rather than the $250bn flashed around by the DFS.

The clear implication is that the real story here is about a regulator gone rogue.

Indeed, John Mann, the Labour firebrand who gave Barclay’s Bob & Co such a rough ride in front of the Treasury Select Committee recently, tried to stir this up on Tuesday with a statement calling for a UK Parliamentary inquiry into money laundering…

Mann is concerned about the scale of money laundering, but also about an increasing anti-British bias by US regulators and politicians, aimed in his view in shifting financial markets from London to New York.

Mann is highlighting secret deals by US banks such as the Bank of America and Wachovia to close down investigations and ongoing investigations, including into, Nigerian fraud involving Wells Fargo and M&T, Mexican drug cartels such as the Los Zatos and Indonesia criminals in Jakarta using Citibank. In particular drug money from Colombia and Mexico is being routinely laundered through US banks, but the US authorities are choosing to highlight British banks rather than their own wrong doings.

Yet the StanChart share price is not saying this is about pots and kettles. The markets are actually pricing in the possibility that this bank might lose its New York banking license, along with its ability to clear US dollar transactions – something that would effectively cripple an institution whose business is largely based on international trade finance.

Why so? Sandy Chen of Cenkos sums it up nicely. It’s about trust. Investors feel they have been kept in the dark…

Standard Chartered (STAN LN, £35bn, 1470p, Buy to Sell) Whilst noting that the other UK banks have also admitted to breaching US money laundering operations, it’s the juxtaposition of STAN’s smug 1H12 results presentation only a week ago with the now-documented evidence of a long-standing pattern of senior management deceit that rankles most. Amidst the 124 pages with fine words about culture and values, there was one cursory paragraph mentioning a review of historic US sanctions compliance. Mr Market won’t forgive this breach of its trust for many years, we expect…

We have been Buyers of STAN for the vast bulk of the past decade; we downgrade to Sell, because we regard this as hugely damaging to its global franchise.

Related link:
Standard Chartered – not so smug now – Lex