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Standard Chartered allegations are potentially the tip of a "very big iceberg", expert warns

Allegations that Standard Chartered hid over $250 billion worth of illegal transactions with Iran from regulators in the US are "potentially the tip of a very big iceberg for companies operating internationally, particularly those in the financial service sector", an expert has warned.09 Aug 2012

Corporate crime expert Tom Stocker of Pinsent Masons, the law firm behind Out-Law.com, said that the allegations against Standard Chartered were extremely serious. He was surprised by the intemperate and aggressive language of the order issued by the US authorities and thought that it had "overstepped the mark".

"It is important to remember that these are only allegations," he said. "Regulators should put allegations in more measured and restrained language, but increasingly they feel the need to be aggressive. Politics and showboating is undoubtedly coming into play."

The London-headquartered multinational bank has "strongly rejected" accusations by the New York State Department of Financial Services (DFS) that it "schemed with the Government of Iran" to hide an estimated 60,000 secret transactions, involving at least $250bn, from regulators over a 10-year period.

"The Group had previously reported that it is conducting a review of its historical compliance and is discussing that review with US agencies," it said in a statement. "The analysis, that the Group shared with all the US agencies, demonstrates that throughout the period the Group acted to comply, and overwhelmingly did comply, with US sanctions."

The bank had, it said, voluntarily told the authorities in 2010 that it had begun a review of its transactions involving Iran. The Middle Eastern state is subject to US economic sanctions; however banks in the US were allowed some leeway in processing 'u-turn' payments for Iranian clients providing that these did not use Iranian banks until the loophole was closed in 2008. According to Standard Chartered's statement, 99.9% of its transactions relating to Iran complied with the regulations while those that did not amounted to less than $14 million in value.

An order (27-page / 281KB PDF) served on the bank by the DFS alleged that Standard Chartered had "programmatically engaged in deceptive and fraudulent misconduct" on behalf of Iranian financial institutions which included 'wire stripping', or hiding the identity of the client.

"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," the order said. "SCB's actions left the US 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."

It is clear from as string of cases coming out of the US and the UK that a period of tougher enforcement has commenced, Stocker warned, adding that "there is now a really risk of a company's historic behaviour catching up with them".

"Companies need to be examining their historic conduct and should be considering mitigation strategies which may include self-reporting, disciplining personnel, and enhanced compliance," he said. "The key areas of risk are sanctions, export controls, bribery and money laundering. Those laws are extremely onerous and far-reaching, and breaches can lead to corporate criminal liability, although civil penalties are achievable if cases are properly handled."

Stocker said that authorities in the US had "extremely wide jurisdiction" over European companies. A number of "significant enforcement actions" were ongoing against banks and financial service companies for breaching US money laundering and trade sanctions laws, as well as against European manufacturers and energy companies for breaching the Foreign Corrupt Practices Act - banning the bribery of overseas public officials - he said.

"It is often enough that money, emails or telecommunications go through the US for their prosecutors to have jurisdiction," he explained. "As most international business is conducted in US dollars (USD), and all USD transactions must be cleared through the New York banking system, the US authorities nearly always have grounds for claiming jurisdiction."

However the focus on corporate crime, particularly on money laundering and sanctions violations, was not limited to the US, he added.

"The FSA, the SFO and in Scotland the Crown Office and Procurator Fiscal Service have re-focussed their respective and collective efforts on economic and corporate crime by encouraging companies to self-report criminal behaviour in return for an opportunity to avoid criminal prosecution and instead paying some form of civil penalty," he said. "These penalties tend to be several millions of pounds and they often follow a corporate investigation into the offending behaviour and guarantees being given about future compliance. The FSA and other regulators are reminding professional advisers and banks that they have duties to report suspicious transactions to the Serious Organised Crime Agency. These initiatives have led to a significant increase in corporate criminality being uncovered and enforced."

The Ministry of Justice is currently consulting on the introduction of US-style 'deferred prosecution agreements' (DPAs) as an additional tool to tackle corporate crime. DPAs would allow companies to admit their part in economic crime without necessarily opening themselves up to criminal prosecution. Prosecutors can currently negotiate a form of plea agreement with companies accused of fraud or financial crime, however those companies can still face prosecutions.

"DPAs will undoubtedly lead to more companies self-reporting criminal offences in return for the opportunity to avoid open-ended criminal investigations and the uncertainty of a criminal prosecution," Stocker said. "In turn, the information provided by self-reporting companies will be valuable intelligence for probing and investigating other companies involved in a transaction or supply chain."

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