Standard Chartered Bank, a part of United Kingdom-based Standard Chartered PLC, last summer quickly settled a complaint brought by the New York State Department of Financial Services (DFS) to the tune of $340 million over allegations that it had violated anti-money laundering laws. The bank still faces wide-ranging investigations from various state and federal regulators, pursuant to their respective anti-money laundering (AML) authority.
The Standard Chartered case is only the latest of several such regulatory matters demonstrating the aggressive enforcement environment imposed upon banks today by multiple regulators, often with very different agendas. The case also highlights the significant power and leverage held by U.S. regulators, and how difficult it can be to effectively challenge regulatory allegations of wrongdoing once those investigations gather momentum.
The Standard Chartered enforcement case relates to the U.S. branch of the bank handling transactions for Iranian account holders and banks. Since the 1979 Iranian hostage crisis, the United States has imposed strict limitations on the manner in which financial institutions are allowed to transact business with Iran and its citizens. In recent years, the scope of the sanctions has increased, as have related enforcement matters.
The underlying conduct in the Standard Chartered case involved so-called “U-turn” transactions. Prior to November 2008, U.S. financial institutions were permitted to process certain transactions that, although conducted on behalf of Iranian account-holders, did not pass through Iranian banking institutions. Federal regulations accordingly required that transactions involving Iranian entities were only permitted to pass through the U.S. financial system on their way from one non-U.S., non-Iranian financial institution to another. Such Iranian-related transactions were required to be reported to federal regulators, and transactions with some individuals and organs of the Iranian government were still prohibited. In 2008, U.S. regulators flatly prohibited any further U-turn transactions, after becoming suspicious that they were being used to finance Iran’s nuclear weapons program and support for terrorist organizations.
The New York DFS filed its complaint against Standard Chartered on August 6, 2012, with a substantial amount of publicity. The New York regulator alleged that in addition to completing U-turn transactions, some of which may have been permissible, Standard Chartered systematically stripped or masked information about the Iranian account holders from its transaction documents, making it impossible for the bank’s U.S. branch to evaluate the legitimacy of approximately 60,000 transactions over several years. Through citation to numerous inflammatory emails and interview snippets, the regulator’s complaint depicted an organization that engaged in conscious activities to hide wrongful transactions from U.S. and state regulators. The complaint claims that the violations were all the more troubling because the bank was under a formal supervisory action from 2004 to 2007 by state and federal regulators related to money laundering compliance failures. Although the bank’s senior management denied any wrongdoing, a notion that U.K. regulators affirmatively supported, the New York regulator threatened to revoke the firm’s state banking license. Facing a sanction that would have closed its New York operations, Standard Chartered had little option but to settle.
As it turns out, however, settling with New York over the Iranian allegations will likely be just the first step in a regulatory settlement process for the bank. The U.S. Department of Justice, the Treasury Department’s Office of Foreign Assets Control and various U.K. regulators are also investigating money laundering violations at the bank. Additionally, the New York DFS complaint makes clear that the state regulator is still investigating similar issues involving Libya, Myanmar and Sudan.
The Standard Chartered case is the just the most recent of many AML enforcement matters that multiple regulators in the United States have been pursuing, with several expected to be announced in the near future.
In June of this year, ING Bank paid the largest money laundering settlement on record, $619 million, to address claims by the U.S. Department of Justice and the Manhattan District Attorney’s office that it hid billions of dollars in transactions in its U.S. branches involving Cuban and Iranian account holders.
In August 2010, Barclays paid $298 million to the U.S. Department of Justice and Manhattan prosecutors associated with account transactions for individuals from Cuba, Sudan and other countries subject to U.S. sanctions.
In December 2009, ABN AMRO settled money laundering claims with the U.S. Department of Justice and Manhattan prosecutors, paying $500 million to address allegedly improper transactions with Iran and Sudan, having paid $80 million to settle similar allegations in 2005.
In 2009, Lloyds TSP Group PLC paid a combined $567 million in two settlements, one with the Department of Justice and Manhattan prosecutors and the second with the U.S. Treasury because of alleged prohibited transactions with Iran and Sudan.
In 2009, Credit Suisse Group paid the U.S. Department of Justice and Manhattan prosecutors $536 million related to transactions with clients in Libya, Sudan, Myanmar and Cuba.
Finally, HSBC has announced a $700 million reserve to deal with expected fines and penalties arising out of its own money laundering allegations by U.S. and U.K. regulators.
The common theme that emerges from all of these cases is that regulators are aggressively pursuing AML cases against banks—and demanding large settlements—with increased frequency. Regulators that in the past may have worked on a more cooperative basis with banks are increasingly referring matters to criminal authorities, and new regulators are seeking to establish their relevance with brash actions. The aggressive pursuit of these cases and the multiple regulators involved at both the state and federal level will make it that much more difficult for companies to navigate regulatory processes once investigations begin. Additionally, as shown by the Standard Chartered case, U.S. regulators have substantial powers to shut down an organization’s operations and are often willing to use this authority without regard to the broader harm.
Facing such sanctions, it is often impossible for a legitimate bank to force a regulator to actually prove its case at trial. As frustrating as it may be, often the most practical approach to an AML investigation is to make your case in a forceful manner during negotiations, but to then find the path to an acceptable settlement. Such an approach often starts well before negotiations begin by establishing credibility with regulators throughout the investigation process by taking their concerns seriously, responding quickly and candidly to requests for information, and acknowledging any compliance issues where appropriate, but remaining firm on key points of contention.