Standard Charter Bank Still In Trouble Over Iranian Money Laundering Fraud

|||Standard Charter Bank Still In Trouble Over Iranian Money Laundering Fraud

Standard Charter Bank Still In Trouble Over Iranian Money Laundering Fraud

August 2012

In a quick settlement over Iranian-related illegal conduct, Standard Chartered Bank (SCB) agreed on August 14 to pay $340 million in a settlement with the New York State Department of Financial Services (DFS). The DFS settlement allows SCB to continue operating in New York, but requires an on-site monitor who will report directly to DFS and will oversee SCB’s money laundering controls for at least two years.

Importantly, the settlement is only with the DFS, and not all regulators that have an interest in the SCB misconduct. Given the seriousness of the DFS allegations, SCB will likely face additional sanctions, fines or penalties.

SCB is the U.S. wholly-owned subsidiary of Standard Chartered plc. Standard Chartered is a multinational banking company headquartered in London, United Kingdom. It operates a network of over 1700 branches in more than 70 countries, and employs around 87,000 people. Although headquartered in the UK, the vast majority of its profits pertain to the Middle East, Africa, and Asia.

The settlement pertains to an August 6, 2012 DFS Order that reported:

“For almost ten years, SCB schemed with the Government of Iran and hid from regulators roughly 60,000 secret transactions, involving at least $250 billion, and reaping SCB hundreds of millions of dollars in fees. 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 its evident zeal to make hundreds of millions of dollars at almost any cost, SCB undertook a course of conduct that included:

    • falsifying business records;

    • offering false instruments for filing;

    • failing to maintain accurate books and records of all transactions
      effected and all actions taken on behalf of SCB;

    • obstructing governmental administration;

    • failing to report misconduct to the Department in a timely manner;

    • evading Federal sanctions; and

    • numerous other violations of law …”

The DFS Order provides the following additional details of how the fraud occurred:

“SCB ensured the anonymity of Iranian U.S. dollar clearing activities through SCB’s New York branch by falsifying SWIFT

[The Society of Worldwide Interbank Financial Telecommunications] wire payment directions. When SCB employees determined that it was necessary to “repair” unadulterated payment directives, they did so by stripping the message of unwanted data, replacing it with false entries or by returning the payment message to the Iranian Client for wire stripping and resubmission. Thus, SCB developed various ploys that were all designed to generate a new payment message for the New York branch that was devoid of any reference to Iranian Clients. …

SCB understood that simply omitting Iranian Client information on SWIFT MT 202 payment messages going to New York was insufficient because the electronic payment system would automatically fill in blank data fields, identifying the Iranian Client. Consequently, in order to disguise the transactions effectively and thereby avoid regulatory scrutiny, SCB made false and misleading entries in SWIFT “field 52,” a data field that would identify the Iranian party. …

These masking procedures evolved to meet SCB’s growing volume demands. When SCB anticipated that its business with Iranian Clients would grow too large for SCB employees to “repair” manually the instructions for New York bound wire transfers, SCB automated the process by building an electronic repair system with “specific repair queues,” for each Iranian Client.”

The U.S. SCB executives were concerned about this illegality, and sought guidance from its parent company. The DFS Order explains this as follows:

“By 2006, even the New York branch was acutely concerned about the bank’s Iran dollar-clearing program. In October 2006, SCB’s CEO for the Americas sent a panicked message to the Group Executive Director in London. … Lest there be any doubt, SCB’s obvious contempt for U.S. banking regulations was succinctly and unambiguously communicated by SCB’s Group Executive Director in response. As quoted by an SCB New York branch officer, the Group Director caustically replied: “You f—ing Americans. Who are you to tell us, the rest of the world, that we’re not going to deal with Iranians.”

The DFS Order culminates in the following “Conclusion”:

“Motivated by greed, SCB acted for at least ten years without any regard for the legal, reputational, and national security consequences of its flagrantly deceptive actions. Led by its most senior management, SCB designed and implemented an elaborate scheme by which to use its New York branch as a front for prohibited dealings with Iran – dealings that indisputably helped sustain a global threat to peace and stability. By definition, any banking institution that engages in such conduct is unsafe and unsound. The evidence uncovered by the Department indicates that SCB has committed regulatory transgressions of the highest order.”

But perhaps the most interesting (at least to our firm, who is licensed as Certified Public Accountants) is the involvement of Deloitte and Touche (D&T), one of the “Big Four” accounting and auditing firms. According to the DFS Order, D&T directly aided and abetted the fraud by submitting a false report to DFS that was required by a prior written agreement between DFS and SCB. The DFS Order describes the requirement for the D&T report as follows:

“By 2003, New York regulators had discovered other significant BSA [Bank Secrecy Act] and AML [anti-money laundering policies and procedures] violations at SCB’s New York branch, including deficiencies in its suspicious activity monitoring and customer due diligence policies and procedures. In October 2004, SCB consented to a formal enforcement action and executed a written agreement … To that end, SCB retained D&T to conduct the required independent review and to report its findings to the regulators.”

When D&T identified the wrongful SCB activity, D&T agreed to assist with the cover-up. The DFS Order states:

“SCB asked D&T to delete from its draft “independent” report any reference to certain types of payments that could ultimately reveal SCB’s Iranian U-Turn practices. In an email discussing D&T’s draft, a D&T partner admitted that ‘we agreed’ to SCB’s request because ‘this is too much and too politically sensitive for both SCB and Deloitte. That is why I drafted the watered-down version.’”

The D&T report was a significant component of SCB avoiding further DFS regulatory scrutiny. According to the Order:

“Using D&T’s “watered-down” report and the fraudulent data, SCB convinced the Department and FRBNY [the Federal Reserve Bank of New York] to lift the Written Agreement in 2007. In other words, SCB successfully misled New York regulators to believe that it had corrected serious flaws in its BSA/AML program.

But the opposite was true. By forging business records over many years to circumvent OFAC [U.S. Office of Foreign Assets Control] restrictions, SCB undermined all aspects of its BSA/AML program.”

Deloitte is denying the DFS charges, but has yet to provide any substantive explanation beyond the denial.

Fulcrum Inquiry performs  forensic accounting and fraud audits.

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