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UK 'rogue' bank faces off with angry N.Y. regulator

New York regulators are accusing British banking giant Standard Chartered of hiding at least $250 billion in illegal transactions with Iran, reports CNBC's Courtney Reagan. Steven Feldman, Herrick, Feinstein LLP partner, weighs in.

For Standard Chartered Bank, the loss of its New York banking license could be the least of its worries.

If a New York bank regulator can make his case that the UK-based bank laundered money for Iranian bank clients, criminal charges could soon follow, and bank executives could go to jail, according to Steven Feldman, a white-collar defense attorney at Herrick, Feinstein.

"There are other law enforcement folks out there, and those people are well within their power to look for individuals to go after,” he told CNBC. “The company can’t go to jail, but the people who do these crimes if proven, those people can go to jail. Money laundering is a serious offense if the government can prove it.”

The case pits a little-known regulator against a little-known bank -- although the bank is a global powerhouse and the regulator holds potentially enormous power over it.

The New York State Department of Financial Services, created less than a year ago in the merger of two state departments, accused Standard Chartered Monday of being a "rogue institution" that "schemed" with the Iranian government to hide 60,000 secret transactions to generate hundreds of millions of dollars in fees over nearly 10 years.

The bank's actions "left the U.S. financial system vulnerable to terrorists, weapons dealers, drug kingpins and corrupt regimes," Benjamin Lawsky, superintendent of the department, said in an order calling on the British bank to show up at his office next Wednesday to explain why it’s state banking license shouldn’t be revoked.

Alothough Standard Chartered has no retail operations in the United States, the company is among the largest in Britain with a market capitalization of some $46 billion, even after shedding 20 percent of its value on the news. The bank generates 90 percent of its business in Asia, Africa and the Middle East whilse serving mainly as a wholesale bank in the United States.

The bank is under fire over allegations of a practice known as wire "stripping" that involves altering payment messages sent through a global interbank network to remove references to Iran or other entities under U.S. sanctions. To circumvent efforts to freeze or block international transfers, a foreign bank pretends to be the originating party, hiding the identity the true originator. A Manhattan-based bank handling such a transfer may unwittingly process a prohibited payment in violation of U.S. regulations.  

Standard Chartered is apparently preparing a strong legal response. On Tuesday, the bank fired back in a public statement that it “strongly rejects the position or the portrayal of facts” and does "not believe the order issued by the (New York state regulator) presents a full and accurate picture of the facts."

Related: 'Rogue' bank hid billions in Iran dealings, NY says

Standard Chartered may yet face complaints from other U.S. agencies. The bank said Tuesday that the probe, begun in 2010, also involves the Department of Justice, the Office of Foreign Assets Control, and the District Attorney of New York. Since 2009, those agencies have targeted several major British and European banks over similar allegations, penalizing them to the tune of more than $2.3 billion.

The White House said  Tuesday that the Treasury Department is in close contact with New York authorities.

"Sanctions violations are something that this administration takes extremely seriously and has a strong record of action to this end. The Treasury Department remains in close contact with both federal and state authorities on this matter," White House Press Secretary Jay Carney told reporters when asked the London-based bank. Carney said that he would not comment further on what is considered an ongoing investigation.

Lawsky’s New York state order may prompt other foreign banks to take notice of a newly energized bank regulator that may not have been on their radar.

Established 10 months ago to crack down on financial malfeasance, the new Department of Financial Services combined the state's former banking and insurance departments. New York Gov. Andrew Cuomo tapped Lawsky, then his chief of staff, to run the agency.

Lawsky’s resume includes more than five years as a federal prosecutor in New York and  a stint as in the New York state attorney general's office, where he played a key role in its probe of kickbacks and deceptive marketing in the $85 billion student loan industry.

"Ben Lawsky didn't take this job to be a quiet, unnoticed back-office regulator," said Steve Cohen, a partner at the law firm Zuckerman Spaeder who was chief of staff for Cuomo when Cuomo was state attorney general. "And Gov. Cuomo didn't give him the job so that he could have a quiet, unnoticed existence."

Beyond its legal headaches, Standard Charted and its shareholders face a big financial hit. The company’s stock price has already lost nearly a quarter of its value.

The loss of its New York banking license would take a big bite out of its profits, effectively cutting off direct access to the U.S. banking market. Standard Chartered processes $190 billion every day for global clients, according to Lawsky’s order.

And if the New York state regulator can make his charges stick, the bank faces the prospect of paying hundreds of millions of dollars to settle the case.

Other recent settlements include:

  • Lloyds Bank of Britain agreed in January 2009 to forfeit $350 million for payments tied to Iran, Libya and Sudan between 2002 and 2007.
  • Switzerland's Credit Suisse agreed in December 2009 to pay a $536 million fine to settle allegations it disguised activity that involved customers from Iran, Sudan and other U.S.-sanctioned countries.
  • Britain’s Barclays agreed in August 2010 to forfeit $298 million to settle charges that it allowed banks in Cuba, Iran, Libya, Sudan and Burma to engage in U.S. dollar transactions.
  • Dutch bank ABN AMRO, now part of Royal Bank of Scotland, agreed in 2010 to pay $500 million to settle claims concerning transactions linked to sanctioned countries between 1995 and 2007.
  • Netherlands-based ING Bank agreed in June to pay a record-setting $619 million to settle allegations that it violated U.S. sanctions against Cuba, Iran and other countries.

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