The New York State Department of Financial Services (DFS) issued orders on August 6 for an investigation to be initiated of Standard Chartered PLC (LON:STAN) (LON:STAC), which was suspected of money laundering for Iran.

Money Laundering, Iran, U-Turn Exemption: A Look At Standard Chartered

According to the orders, ‘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.’

Following the news, shares of the Standard Chartered PLC (LON:STAN) (LON:STAC) dropped 6.2% in London on the first day, and hit a low of GBP 1092 pence during the week. The end of the week saw a closing price of GBP 1326.5 pence.

The case against Standard Chartered PLC (LON:STAN) (LON:STAC) is primarily based on the issue of the U-turn exemption which was used by SCB to process the payments from Iran. In general, the US law prohibits US banks from processing payments from Iran, North Korea, and the Sudan. This law, imposed on Iranian transactions since 1995, aims to prevent the use of US dollars to finance terrorist organizations and activities.

The U-turn exemption allows banks to sidestep this law, by making sure that transactions were only processed by US banks, but the source and destinations of the payments were both offshore. The Office of Foreign Assets Control (OFAC) imposed stringent regulations on foreign banks, requiring the clearing bank to determine the compliance of all transactions with US law, even if the transaction was only routed through the US bank. This exemption was revoked in November 2008.

The official statement by Standard Chartered Group asserted that over 99.9% of the transactions conducted by the bank for Iran complied with the U-turn regulations. The company also stated that the Group’s review of its Iranian payments 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.

The New York DFS has claimed that the bank was willingly and knowingly violating the law, by manually wire-stripping transactions to remove the identities of Iranian clients. This process was later automated to alter the SWIFT codes of clients in order to conceal Iranian transactions.

Many are now blaming the culture of disconnect between the legal and compliance departments in corporations, as the root of a bigger issue in corporate culture. The ability of the compliance department to interpret implications of the applicable law is crucial. However, the weak corporate governance at SCB has meant that the DFS presented evidence of employee emails plotting to violate the law.

In the case of SCB, the legal counsel advised the bank on the procedures of compliance that are the subject of scrutiny. DFS alleges that legal and compliance colluded and created elaborate procedures to abuse the foreign transaction restrictions of the US Government. Good governance should require that for major policy decisions, the counsel from legal department should have to go through a second layer of review.

SCB has been licensed by the State of New York to operate as a foreign bank since 1976, and clears approximately USD 190 billion per day for its international clients today. In the worst case scenario, the bank’s license to operate in New York will be revoked, which could cost the banking group 15% of its profits. . In any case, it is facing fines, which could be up to $1 billion. Standard Chartered PLC also obtained approval this week, from Turkey’s antitrust board, to buy Credit Agricole SA’s Turkish unit.

SCB has been ordered to appear before the court on Wednesday to defend its position, and explain why the bank’s license should not be revoked. Peter Sands, the CEO, has flown in to New York to try for a settlement.