Standard Chartered and Breaking Sanctions: The US Legal Perspective

Standard Chartered hit back at US regulators by saying it "rejects the position or the portrayal of faces as set out in the order issued by the New York State Department of Financial Services (DFS), after the lawmakers accused the bank of acting as a "rogue institution" that hid a least quarter of a trillion US dollars worth of transactions tied to Iran. The DFS also threatened to take away its US banking licence.

In an official statement, the DFS said it conducted an "extensive investigation," which included the review of more than 30,000 pages of documents, including internal (Standard Chartered bank) SCB e-mails that "describe wilful and egregious violations of law."

The DFS slammed the bank by adding that "for almost ten years, SCB schemed with the Government of Iran and hid from regulators roughly 60,000 secret transactions, involving at least $250bn, 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."

The damning report repeatedly used language associated with legal deception, with such examples as "SCB utilized such schemes to cloak the dollar clearing activities of Iranian Clients and thereby shield those transactions from regulatory scrutiny" and that the bank acted as a "rogue institution."

However Standard Chartered hit back with a detailed statement on the history of events, from its voluntary internal and external investigation and said that it not only strongly rejects the position or the portrayal of facts as set out in the order issued by the DFS but also that it "does not believe the order issued by the DFS presents a full and accurate picture of the facts."

With a number of UK and European banks coming under fire from US regulators in the last few years, most notably HSBC which revealed that it had set aside $700m to settle rate-rigging and money-laundering charges and with a vast array of sanctions under different jurisdictions confusing the situation, IBTimes UK decided to take a look at what the points of contention are, referring to official statements, regulations and expert opinion.

"Sanction compliance is incredibly messy in practise, as there is wide range of international treaties imposing obligations on nation states, which in turn generates national and supra-national legislation such as EU and UK Treasury sanctions," says Stuart Miller, managing partner at law firm Miller Rosenfalck with experience in the United Nations money-laundering sanctions list and the UK & EU regulatory environment. "It's a lawyers' playground for those involved in international trade but it also makes a recipe for confusion and so it is a minefield for the unwary. It is difficult to monitor all situations in different places at different times and there would be no doubt that as a major financial institution, you would be in several conversations with several different regulators at any one time."

U-Turn Transfers

The DFS confirmed that its investigations found that from January 2001 through 2007, SCB conspired with its Iranian clients to route nearly 60,000 different US dollar payments through SCB's New York branch after first stripping information from wire transfer messages used to identify sanctioned countries, individuals and entities, also known as "wire stripping."

The activity also involves the foreign bank often pretending to be the originating party, hiding the identity the true originator.

During this period, the US Department of the Treasury's Office of Foreign Assets Council rules had permitted, under limited circumstances and with close regulatory supervision, US financial institutions to process certain transactions for Iranian banks, individuals, and other entities.

Pursuant to federal regulations, such transactions were permissible in some circumstances provided that they were initiated offshore by non-Iranian foreign banks and only passed through the US financial system on the way to other non-Iranian foreign banks.

Such transactions are commonly referred to as "U-Turns."

"Effective November 10, 2008, the authorization for "U-Turn" transfers involving Iran was revoked," says the US Department of the Treasury's Office of Foreign Assets Council official document. "As of that date, US depository institutions are no longer authorized to process such transfers, thereby precluding transfers designed to dollarize transactions through the US financial system for the direct or indirect benefit of Iranian banks or other persons in Iran or the Government of Iran."

"However, US depository institutions are permitted to handle funds transfers, through intermediary third-country banks, to or from Iran or a person in Iran, arising from several types of underlying transactions."

Standard Chartered hit back at regulators on this point and said that it believes that the interpretation reflected in the DFS' order, of the U-Turn exemption - a federal regulation administered and enforced by federal authorities - "is incorrect as a matter of law".

"The Group's review of its Iranian payments also did not identify a single payment on behalf of any party that was designated at the time by the US Government as a terrorist entity or organization. Standard Chartered ceased all new business with Iranian customers in any currency over five years ago," said the bank. "The Group has made presentations to the DFS and other US agencies concerning the strength of its global sanctions compliance programme during the period under review and through to the present day."

"In January 2010, the Group voluntarily approached all relevant US agencies, including the DFS, and informed them that we had initiated a review of historical US dollar transactions and their compliance with US sanctions. This review focused primarily on transactions relating to Iran in the period 2001-2007, and in particular, their compliance with the U-turn framework established by the US authorities to enable ongoing US dollar trade with Iran by other countries," it added.

Experts told IBTimes UK that the point of contention is not necessarily the transactions themselves but during that period, any transactions with Iran or Iranian individuals would need to be granted a licence and follow an appropriate level of disclosure and reporting over the transactions to authorities and of course, wire stripping would go against this.

"The main legal contention that I can see from the DFS' report and Standard Chartered's statement is not the transactions themselves during the period of 2001- 2007 but more to do with the alleged lack of required disclosure and related allegations of wire stripping, namely the alleged removal of the identity of whoever was behind each transaction," says Miller.

The US Crackdown on UK and EU Banks

US regulators have targeted UK and European banks for its dealings with countries with US sanctions against them since 2009. The US Justice Department, the OFAC and the Manhattan District Attorney's office have investigated a number of major UK and European banks for similar conduct, which has resulted in more than $2.3bn worth of fines.

Experts have remarked that the difference between sanction agreements in different jurisdictions, results is segmented investigations.

"The sanctions regime vary from country to country, individuals and companies, which are largely driven out of political concerns," says Miller. "There is a sort of hierarchy of sanctions, beginning with those sanctions that are UN driven, garnered out of UN Security Council resolutions, where political issues are the drivers - and in the case of Iran, in last 6 years, there have been half a dozen UN Security Council sanctions. There tends to be a step by step diplomatic and legal progression. In the case of Iran, one of the earliest these was UN Security Council resolution 1696 in 2006, banning supplies of nuclear related materials and then, when that didn't have the desired impact, in early 2007 the sanctions turned financial."

"When the UN publishes the details of a sanction, the UN member nations are expected to take steps to implement these in a practical sense and as an international treaty obligation. What you then get is an implementation at a national level and, for example, at an EU level. In the UK nowadays, we rarely impose national sanctions that aren't co-ordinated with our EU partners," adds Miller.

Notably, the US at a national level has been earmarked at having more stringent sanctions and blanket bans, which differ from the UN and EU laws.

"The US do a lot more at a national level and have imposed their own sanctions on Iran going further back, which by now includes arms bans, sanctions on practically every economic area and even blanket sanctions that restrict virtually any kind of financial or political activity with certain countries and even down to individuals and companies," says Miller. "Last year, the US even implemented a ban of US parties trading with Tidewater Middle East Co. and Iran Air, as well as Iran's Revolutionary Guard Corp (IRGC). In February 2012, the US went even further and banned activities with Iran's Central Bank."

Most recently, a US Senate subcommittee report accused HSBC of engaging in similar behaviour to those of Standard Chartered and has so far ruled that the bank had inadequate systems and controls in place that eventually allowed money laundering violations to place for clients that were linked to drug cartels and terrorism.

Barclays , which also has been embroiled with the London Interbank Offered Rate (Libor) fixing scandal also paid $298m in fines to the US, after being found guilty of "wire stripping" transfer messages of key information to allow banks in Cuba, Iran, Libya, Sudan and Burma to engage in U.S. dollar transactions.

Another UK bank, Lloyds also paid $350m in fines after US authorities found the group had wire stripped payments linked to Iran, Sudan and Libya based clients from 2002 and 2007.

Dutch banks have also settled with US regulators after ABN Amro, which is now part of RBS paid the US Justice Department $500m to settle claims of wire stripping transactions linked to sanctioned countries between 1995 and 2007, while ING Bank NV agreed to a record $619m fine for similar accusations.

Switzerland's Credit Suisse also settled with a $536m fine with US authorities in December 2009, following allegations of wire stripping between 1995 and 2006.