* Executives central to StanChart crisis are identified
* Up to 100 people questioned by bank about transactions
* One key question is why bank delayed telling regulators
* Bank says only a few transactions were problematic
Aug 11 (Reuters) - It was in October 2006 that a senior
executive at Standard Chartered in New York pressed
the alarm bell over the bank's dealings with Iranian customers.
Realizing the bank was being too slow to react to
regulators' concerns that the transactions might break U.S.
sanctions against Iran, Ray Ferguson, then head of Standard
Chartered Americas, fired off an email warning of potentially
"catastrophic reputational damage".
While regulators have revealed some details of what led to
Ferguson's email and the shockwaves it caused, Reuters has now
identified executives central to the affair, how they responded,
and established that between 50 and 100 people at the bank have
been questioned in internal probes of the alleged
transgressions.
Ferguson, now the bank's Singapore CEO, sent his email to
Richard Meddings, at the time executive director for risk at the
Asia-focused bank's London headquarters and now chief financial
officer.
Days later, Meddings arrived in New York and a heated
conversation took place among senior Standard Chartered
executives. In the room were Meddings, Michael McVicker, head of
U.S. compliance, Ferguson, and another New York-based employee.
According to New York State Department of Financial Services
Superintendent Benjamin Lawsky, Meddings demonstrated Standard
Chartered's "obvious contempt" for U.S. banking regulations.
"WHO ARE YOU TO TELL US?"
In an order published on Monday, the New York regulator
quoted the bank's New York branch officer - identified to
Reuters as McVicker - as saying Meddings had replied to concerns
about Iran by saying: "You f---ing Americans. Who are you to
tell us, the rest of the world, that we're not going to deal
with Iranians."
Standard Chartered CEO Peter Sands said this week the bank
didn't think the quote was accurate.
Ferguson, who comes from Scotland and has also worked for
the bank in the Middle East and Asia, told Reuters earlier this
week that Meddings may have cursed Americans, though he added
that Meddings did not follow up with the complaint about U.S.
financial sanctions on Iran. "I do not recognize the quote that
has been attributed to Richard," said Ferguson, who was Americas
CEO between March 2006 and December 2007.
McVicker declined to talk. A Standard Chartered spokeswoman
said he is prohibited from speaking to the media as he is
assisting in multiple federal and state investigations.
Meddings did not respond to repeated requests for comment.
The meeting is highlighted in a scathing order in which
Lawsky describes Standard Chartered as "a rogue institution"
that had left the U.S. vulnerable to terrorists, weapons dealers
and corrupt regimes.
DEVASTATING
The regulator has threatened to take away Standard
Chartered's New York banking license, which would be devastating
for a bank with what the New York regulator said is a $190
billion per day business clearing U.S. dollar transactions.
The attack took Standard Chartered completely by surprise.
Most of its senior executives, including Sands, had just started
their summer holidays.
They were riding high and in good spirits after recently
reporting strong half-year profits, setting the bank up for its
10th successive year of record annual earnings. The bank seemed
to have avoided the pitfalls that had struck down most rivals.
But in less than 24 hours the New York regulator's
allegations had wiped more than $17 billion off the bank's value
as its shares crashed 30 percent to a 3-year low.
When Standard Chartered did respond, it strongly rejected
the portrayal of facts set out by the New York regulator.
The bank admitted it had made mistakes, but said only 300 of
150 million payment transactions between 2001 and 2007 were
questionable under the sanctions rules on Iran. Those
transactions, it said, were worth less than $14 million.
In stark contrast, Lawsky said the bank moved at least $250
billion through its New York branch on behalf of Iranian clients
through 60,000 transactions, reaping hundreds of millions of
dollars in fees in the process. That $250 billion could
represent all the Iran-related transactions Standard Chartered
did in the decade, sources have said.
"FLAGRANTLY DECEPTIVE"
"Motivated by greed, Standard Chartered acted for at least
10 years without any regard for the legal, reputational and
national security consequences of its flagrantly deceptive
actions," said the order.
The United States imposed economic sanctions on Iran in
1979, and banks in the United States, including branches of
foreign firms, were forbidden from dealing directly with the
country. However, certain transactions, known as "U-Turns",
remained lawful until November 2008.
These "U-Turn" transactions, which involve moving money for
Iranian clients among banks in Britain and the Middle East, are
at the center of the current dispute because they were cleared
through Standard Chartered's New York branch.
Though they involved Iranian clients, they could not go
directly from Iran to the United States, but had to go via
another country. The question is whether the way Standard
Chartered handled these transactions qualified them as "U-Turns"
or not.
It handled the bulk of such transactions using a process
which it called "repairing" documents, a senior person at the
bank told Reuters. A "repair" - also dubbed "wire stripping" -
involved manually removing references to Iran from wire
transfers to speed up the process.
Lawsky's order alleged Standard Chartered "conspired with
Iranian clients to transmit misinformation to the New York
branch by removing and otherwise misrepresenting wire transfer
data that could identify Iranian parties."
But the bank said 99.9 percent of the transactions it has
scrutinized were lawful under the "U-Turn" exemption. It said
Lawsky's interpretation "is incorrect as a matter of law".
Some legal experts point out that the bank may be more
vulnerable on simple charges of failing to keep proper records
than on the more nuanced legalities over sanctions.
Either way concerns about bank transactions involving Iran
intensified long before U-Turns became illegal in late-2008.
From 2003, other banks had started to stop doing U-Turn
business.
And in September 2005, U.S. regulators alerted Standard
Chartered that other banks were being investigated in connection
with their Iranian transactions.
PULLED BACK BUT DIDN'T CLOSE
The bank launched an internal review called Project Gazelle,
which the New York regulator's order said was written by the CEO
for the United Arab Emirates and the group head of compliance
and regulatory risk. That suggests the co-authors were Ferguson
and Andrew Hunter, according to public documents from around
that time.
Many people worked on the report, including significant
numbers from the bank's legal and compliance departments, over a
three-month period, a person familiar with the matter told
Reuters. It was circulated among the bank's key executives,
legal and compliance officers and Iranian client business
managers.
The result was that the bank stopped covering up client
details and decided to pull back from its growing Iranian U.S.
dollar payments business. After the decision to stop "repairing"
documents, the practice was dropped in January 2006, the source
said.
But the Iranian business was far from being closed down at
that stage, according to an email that Ferguson fired off to
Meddings about nine months later - on Oct. 5, 2006.
"We believe (the Iranian business) needs urgent reviewing at
the Group level to evaluate if its returns and strategic
benefits are . . . still commensurate with the potential to
cause very serious or even catastrophic reputational damage to
the Group," the email said, according to the New York
regulator's order.
It added: "There is equally importantly potential of risk of
subjecting management in US and London (e.g. you and I) and
elsewhere to personal reputational damages and/or serious
criminal liability."
Standard Chartered has declined to confirm who received the
email which came soon after New York regulators asked the bank
for statistics on its U-Turn deals as the U.S. authorities
turned up the heat on Iranian transactions.
Several days after Ferguson's email, Meddings visited
Standard Chartered's New York office and, after the meeting in
which he allegedly uttered the expletive about Americans, the
bank accelerated the wind-down of its business with Iranian
customers.
But there were two big questions. Was Standard Chartered
going to come clean with the authorities on everything it had
discovered in the internal investigation, and when was it going
to do so?
This is one critical area of the case where there remain
many unanswered questions and a huge gulf in accounts given by
the bank and the New York regulator.
Lawsky contends that instead of telling regulators of the
2,626 Iranian U-Turn transactions, involving $16 billion, that
the bank had discovered for just the years 2005-2006, it handed
over just four days of U-Turn data.
This was described by the New York regulator as "yet another
staggering cover-up" - and it claims that this "watered-down"
approach convinced New York regulators in 2007 lift a written
enforcement agreement that the bank consented to in 2004 after
previous money laundering issues, including deficiencies in its
suspicious activity monitoring.
Indeed, Lawsky says that it took until Standard Chartered
was contacted by law enforcement authorities in early 2009 for
the bank to conduct a further internal probe into its past
procedures.
The bank, on the other hand, has been adamant that
"throughout the period the Group acted to comply, and
overwhelmingly did comply, with U.S. sanctions and the
regulations relating to U-turn payments."
It has not yet indicated why it took until 2009 to conduct
the second probe.
Standard Chartered says it ceased all new business with
Iranian customers in any currency over five years ago. And it
said it voluntarily approached U.S. regulators in January 2010
to tell them it had begun a review of transactions between
2001-2007.
$1 BILLION SETTLEMENT?
Standard Chartered is now scrambling to limit the damage.
Insiders at the bank are worried about the threat to remove
its banking license and concerned that more embarrassing memos
to senior executives may emerge. The New York regulator says it
has evidence beyond that already published in the order,
including evidence of similar schemes involving Standard
Chartered and other countries that have been subject to U.S.
sanctions, such as Libya, Myanmar and Sudan.
Standard Chartered is in talks with multiple law-enforcement
officials, including the New York regulator, to resolve the
matter, according to people familiar with the situation.
The settlement negotiations are expected to last through the
weekend and could result in a resolution by next week, these
people said. However, the negotiations are at a delicate stage
and could collapse, they added.
One set of talks is with federal officials while a separate
negotiation is taking place with the New York bank regulator,
underscoring a divide that exists between New York officials and
other regulators, the sources said.
Lawsky has demanded that Standard Chartered officials appear
at his office next Wednesday to explain why the bank should be
allowed to keep doing business in New York. The hearing remained
on the calendar as of Friday afternoon.
A settlement could lead to a fine of up to $1 billion,
divided among the regulators, according to Simon Maughan,
analyst at Olivetree Financial Group in London.
It needs to draw a line under the row, and if it proceeds to
the Aug. 15 hearing there is the risk of a damaging suspension
of its license. "This would be a serious impediment to the bank
and we would expect it to lead to a sharp share price fall and
possibly loss of independence," Maughan said.
