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StanChart sought swift end to NY dispute

FINANCIAL TIMES, August 16, 2012

StanChart sought swift end to NY dispute


While the ferocity of allegations made against Standard Chartered by a New York regulator last week shocked industry observers, many were just as taken aback by the force of the UK bank's response.

In a statement issued shortly after the publication of allegations that StanChart violated Iranian sanctions to the tune of $250bn, the bank hit back hard, dismissing any breaches as "small clerical errors".

Behind the scenes Peter Sands, chief executive, and Sir John Peace, chairman, even considered mounting a legal case against New York state's Department for Financial Services for reputational damage.

Less than a week later the bank backed down, agreeing to pay $340m to settle the claims it had strongly denied - a huge jump from the $5m settlement StanChart proposed several months ago.

What changed?

People close to the bank say that while it was adamant that 99.9 per cent of its Iranian transactions complied with the law, it quickly became clear that the matter needed to be resolved swiftly.

StanChart's share price was in free fall - it plummeted more than 20 per cent the morning after the DFS claims were published in spite of the bank's robust denial.

Investors were particularly agitated by a threat from the DFS to revoke the bank's New York licence - a move that would have been disastrous for its ability to do business around the world.

"The perceived threat of losing the dollar clearing licence was hugely damaging," says a person close to StanChart.

There was also considerable concern within the top ranks of the bank about the possibility of a public showdown with regulators - something Benjamin Lawsky, head of the DFS, had called for in his report.

The bank was acutely aware that this risked exposing more damaging claims and piling pressure on its management team.

Put simply, StanChart was nervous about the potential for further reputational damage, meaning Mr Lawsky had the upper hand in negotiating a deal.

"This is not a good settlement for Standard Chartered on any measurement," says Simon Morris a financial services partner with law firm CMS Cameron McKenna. "Last week there was a flat denial of wrongdoing, so this would make $340m an immense penalty for the 0.1% of transactions that supposedly slipped through the net."

Other commentators took a more measured view.

"It was a business decision," says Sarah Jane Hughes, a banking law and payment system expert who teaches at the University of Indiana. "If Standard Chartered is processing $190bn a day through New York, then $340m is not a particularly large sum to keep that volume in place.

Even the threat of a licence suspension would have caused their best and cleanest customers to be looking for a new clearing option in the US."

Analysts and investors also welcomed the settlement, even though many did not think the fine was justified.

"This ... takes the major tail risk off the table," the team at Credit Suisse wrote in a note to clients.


"We think that the most material issues are likely resolved," echoed analysts at Bank of America Merrill Lynch.

The bank's shares rebounded on Wednesday, rising 4 per cent, although they are still trading at about 9 per cent below the level they were at before the DFS published its report.

StanChart has acknowledged that for all its insistence that it did not deliberately break the rules, it did make mistakes.

While it was adamant that it needed to counter the claims from the DFS - which one insider described as "dangerous and damaging" for the bank and the sector as a whole - it had to be pragmatic about the consequences of fighting a US financial regulator head on.

There is no suggestion by the DFS or the bank that the $340m settlement is based on any formulaic calculation. Analysts point out that it looks disproportionate to both StanChart's assessment that only $14m of its transactions fell foul of sanctions rules and the DFS's claim that $250bn did.

The bank could be hit by further fines in the coming months as four other US regulators are still pursuing ongoing investigations. However people familiar with the matter say the DFS fine should not be taken as a read across for these other penalties.

Analysts expect other fines to be lower. One says further settlements with other US regulators could amount to about $100m.

These fines should be easily absorbed by StanChart - it made a pre-tax profit of almost $4bn in the first half of the year.

Nevertheless they are significant blow for the bank that has worked hard to build a close relationship with regulators around the world

"This is a hefty price to pay for a continuing licence to run a branch in New York," says Mr Morris at CMS Cameron McKenna.