Global custodians J.P. Morgan and State Street could face reputational damage through their relationships with Standard Chartered, according to a report by research firm Alliance Bernstein.
The New York State Department of Financial Services (DFS), which regulates Standard Chartered’s branch in the state of New York, yesterday alleged that Standard Chartered systematically sought to evade regulatory requirements relating to US dollar clearing transactions for Iranian clients from 2001-07. It has required Standard Chartered to explain its conduct at a meeting on Aug. 15 2012. The regulator accused the bank of colluding with Iranian government to hide about 60,000 transactions worth at least $250 billion over 10 years.
The DFS has threatened to curtail Standard Chartered’s US dollar clearing activities and potentially withdraw its New York branch license. It has given no indication of the scale of potential fines, if any, in this case
Standard Chartered has over 1,700 offices in seventy markets globally, with a strong focus on Asia and Africa. Given this presence, says Brad Hintz, senior analyst at Alliance Bernstein, if a sub-custodian were to be found guilty of an internal conspiracy to hide prohibited transactions from U.S. regulators, U.S. global custodian banks exposed to that sub-custodian may fall under increased scrutiny from their fiduciary clients.
Hintz presented a regulatory filing from Fidelity Investments showing that J.P. Morgan and State Street have the most extensive operating reliance on Standard Chartered by number of countries. The filing also shows that Standard Chartered is sub-custodian for J.P. Morgan and State Street in 10 different countries, including in the case of both institutions Bangladesh, Botswana, Kenya, Ghana, Thailand, Uganda and Zambia. Bernstein estimates that the bank controls approximately 30% of the African sub-custodial market following its acquisition of the Barclays sub-custodial activities in that region.
Indeed, Hintz notes that because the disclosure is from a single fund company, it is likely not exhaustive. He points out that the disclosure does not quantify by other important criteria, such as the absolute amount or percentages of global custody assets.” He also notes that global custodians typically use more than one agent bank in a particular market.
Responding to the DFSs allegations, Standard Chartered said it strongly rejects the regulators presentation of events. It has also pointed out that other regulatory bodies with oversight of Standard Chartered have not made any public comment together with the DFS.
In January 2010, the Group voluntarily approached all relevant US agencies, including the DFS, and informed them that we had initiated a review of historical US dollar transactions and their compliance with US sanctions, Standard Chartered said in a statement. This review focused primarily on transactions relating to Iran in the period 2001-2007, and in particular, their compliance with the U-turn framework established by the US authorities to enable ongoing US dollar trade with Iran by other countries.
Standard Chartered ceased all new business with Iranian customers in any currency over five years ago. The Group has made presentations to the DFS and other US agencies concerning the strength of its global sanctions compliance programme during the period under review and through to the present day.
The Group is engaged in ongoing discussions with the relevant US agencies. Resolution of such matters normally proceeds through a co-ordinated approach by such agencies. The Group was therefore surprised to receive the order from the DFS, given that discussions with the agencies were ongoing. We intend to discuss these matters with the DFS and to contest their position.
In a statement on the matter, State Street said: We are closely monitoring the developments related to allegations made against Standard Chartered and are maintaining our focus on ensuring we provide best-of-breed custody services to our clients.
State Street utilizes a diversified network of sub custodians globally and we maintain a rigorous, ongoing monitoring process.
J.P. Morgan was unavailable for comment.
Meanwhile, ratings agency Moodys said it has not changed the ratings of Standard Chartered Bank or Standard Chartered plc following the allegations.
It noted that while the DFS has given no indication of the scale of the potential fines, from a ratings perspective, they are likely to be less significant than the franchise and control considerations.
In terms of any potential impact on funding, Moody’s noted that Standard Chartered has a strong liquidity profile. It is substantially deposit funded and its branches and subsidiaries globally must all meet internal stress tests. However, the group does have large deposit relationships in its wholesale bank, which may be more confidence sensitive, said Moodys.
Standard Chartered is not the only bank to suffer from alleged weak controls and a number of large banks have previously been subject to fines or prosecution in relation to OFAC violations over 2009-2012, (including HSBC Holdings, ING, Barclays ABN AMRO, Credit Suisse and ANZ). Moody’s views as a credit negative the difficulty of banks in assuring tight controls within their wholesale banking operations.
(JDC)