By Carrick Mollenkamp and Emily Flitter and Karen Freifeld
NEW YORK/LONDON (Reuters) - The U.S. Treasury Department and Federal Reserve were blindsided and angered by the decision of a New York banking regulator to launch an explosive attack on Standard Chartered Plc over $250 billion in alleged money laundering transactions tied to Iran, sources familiar with the situation said.
By going it alone through the order he issued on Monday, the head of the recently created New York State Department of Financial Services, Benjamin Lawsky, also complicates talks between the Treasury and London-based Standard Chartered to settle claims over the transactions, several of the sources said.
His action, which included releasing embarrassing communications and details of the bank's alleged defiance of U.S. sanctions, is rewriting the playbook on how foreign banks settle cases involving the processing of shadowy funds tied to sanctioned countries. In the past, such cases have usually been settled through negotiated settlements with public shaming kept to a minimum.
In his order, Lawsky said the bank's dealings exposed the U.S. banking system to terrorists, drug traffickers and corrupt states.
But the upset expressed by some federal officials, who were given virtually no notice of the action, may provide ammunition for Standard Chartered to portray the allegations as coming from a relatively new and over-zealous regulator.
Given the content of the order, which described Standard Chartered as a "rogue institution" that "schemed" with the Iranian government and hid from law enforcement officials some 60,000 secret transactions over nearly 10 years, the bank may need to come up with a strong defense.
Lawsky did not respond to several requests for comment on Tuesday.
A Fed spokesperson said that it had been working closely with various prosecutorial offices on matters involving Iran and other sanctioned entities but could not comment on ongoing investigations.
White House Press Secretary Jay Carney said that the government takes alleged violations of sanctions "extremely seriously" and the Treasury remains in close contact with federal and state authorities on the matter. Treasury declined to add to that comment.
New York's attack on the bank's integrity and especially its threat to revoke its state banking license wiped $17 billion off the bank's market value on Tuesday.
Shares in Standard Chartered fell 16.4 percent to 12.28 pounds Tuesday, after earlier touching a three-year low of 10.92 pounds. The stock has fallen 24 percent since news emerged of the New York action on Monday.
The loss of a New York banking license - effectively a permit to conduct transactions worth hundreds of billions of U.S. dollars - could be a death knell for a global bank like Standard Chartered.
The 160-year-old bank said it has been in talks with U.S. authorities over its Iran transactions since early 2010 and stressed that the sudden accusations by New York came as a shock.
In a statement Monday, the bank said it was "engaged in ongoing discussions with the relevant U.S. agencies. Resolution of such matters normally proceeds through a coordinated approach by such agencies. The Group was therefore surprised to receive the order from (the New York bank regulator) given that discussions with the agencies were ongoing."
Lawsky's move also undercut the Treasury's Office of Foreign Assets Control, which has held enforcing economic sanctions against Iran as its top goal. The surprise left the office's leader, David Cohen, the undersecretary for terrorism and financial intelligence, scrambling to come up with a response, sources said.
The New York regulator's action may also cause problems for Treasury Secretary Timothy Geithner. The Federal Reserve Bank of New York overseas branches of foreign-owned banks located in New York, and as president of the New York Fed from 2003 to 2009, Geithner would have had ultimate responsibility for regulating Standard Chartered during the period when much of the alleged money laundering took place.
Geithner has come under fire from Congress for the New York Fed's failure to stop banks from manipulating a key benchmark interest rate, Libor.
Standard Chartered, which sought the advice of one of New York's top law firms, had hoped that coming clean and turning over internal records to federal regulators would yield a settlement, some other sources said.
Those records also were turned over to the New York's bank regulator which last year was combined with an insurance agency to create the new financial watchdog headed by Lawsky, a former prosecutor and aide to New York Gov. Andrew Cuomo.
Lawsky's aim, according to the sources, was to cast more sunlight on a bank's alleged transgressions. Lawsky's agency, these people said, wasn't interested in a quiet pact of the sort reached by federal authorities in recent years.
In 2010, for example, Barclays Plc paid $298 million in a settlement with regulators including the Treasury Department's sanctions regulator and the Manhattan district attorney's office. The bank, in settlement documents, said it cooperated in the probe.
Barclays, like Standard Chartered, was advised by Sullivan & Cromwell, known as the go-to New York law firm for banks facing regulatory scrutiny. The Barclays settlement, while receiving news coverage, was a fairly bland document that listed Barclays transactions but few insider details, such as emails.
Other banks, including Credit Suisse Group and ING Bank NV, have settled in much the same way with U.S. regulators.
One area of sharp disagreement between the bank and Lawsky is just how much in illicit funds is involved in the case.
Standard Chartered put the value of Iran-related transactions that did not comply with regulations at less than $14 million, against the New York regulator's estimate of $250 billion.
Lawsky said Standard Chartered moved money through its New York branch on behalf of Iranian financial clients, including the Central Bank of Iran and state-owned Bank Saderat and Bank Melli, that were subject to U.S. sanctions. The transactions generated hundreds of millions of dollars in fees, Lawsky said.
Monday's order alleged that Standard Chartered removed codes on money transfers and altered message fields, inserting phrases such as "NO NAME GIVEN" to hide the nature of the transactions.
At the center of concern were alleged "U-Turn" transactions, involving money moved for Iranian clients among banks in Britain and the Middle East and cleared through Standard Chartered's New York branch, but which neither started nor ended in Iran.
Such transactions were permissible until November 2008, when the Treasury Department prohibited them on concerns that they were being used to evade sanctions, and that Iran was using banks to fund nuclear and missile development programs.
The New York order also alleged that even as some banks exited the U-Turn transactions, Standard Chartered hustled to "take the abandoned market share."
As part of a review the bank sought to give to regulators, Standard Chartered hired Promontory Financial Group, a Washington, D.C., consulting firm run by Eugene Ludwig, who served as the U.S. Comptroller of the Currency from 1993 to 1998.
Promontory was hired to review Standard Chartered's transactions tied to Iran. Standard Chartered's internal review ultimately led to bank settling on the figure of less than $14 million for improper transactions.
BACK FROM VACATION
Lawsky's agency also received the Standard Chartered internal review, according to people familiar with the situation. But the new regulator had little interest in a settlement that didn't yield embarrassing details about Standard Chartered's activities, these people said.
Earlier this year, representatives of the bank met with Lawsky's office to argue that the illicit transactions were a technical violation, according to one source. Lawsky's investigators weren't convinced, this person said.
The bank, which must appear before the New York regulator on August 15, on Monday called Lawsky's interpretation of the U-turn exemption "incorrect as a matter of law."
Standard Chartered Chief Executive Peter Sands scrambled back from vacation to help the bank plan a defense and limit damage to its reputation.
The broadside against Standard Chartered has touched a nerve in the UK, where some investors and at least one lawmaker, have even alleged it might be part of a plot by U.S. authorities to undermine London as a banking center.
Standard Chartered is the third British bank to be ensnared in U.S. law enforcement probes in recent weeks. Barclays agreed to pay $453 million to settle U.S. and British probes that it rigged a global lending benchmark in June.
A month later, a U.S. Senate panel issued a scathing report that criticized HSBC's efforts to police suspect transactions, including Mexican drug traffickers.
"I think it's a concerted effort that's been organized at the top of the U.S. government. I think this is Washington trying to win a commercial battle to have trading from London shifted to New York," said John Mann, a member of parliament's finance committee who also called for a parliamentary inquiry.
Mann, from the center-left Labor party, has become a public scourge of London bankers' greed and immorality during the financial crisis. But he told Reuters he saw "anti-British bias" behind "disproportionate publicity that's given to British banking problems as opposed to American banking problems".
A British executive at an institution which ranks among the top 25 shareholders in Standard Chartered saw, like Mann, a politically motivated move by U.S. officials irked by the major role London plays in the global financial industry, attracted big investments from major U.S. banks like JPMorgan Chase, Goldman Sachs and Morgan Stanley.
"Are we starting to see an anti-London bias in U.S. regulatory activities?" the executive asked. "Oh yes. Is there any subtle form of banking sector protectionism going on? Yes."
TOP LAW FIRMS
Standard Chartered has hired two prominent law firms -- Sullivan & Cromwell in New York and Slaughter and May in London - to represent it in its dealings with various U.S. authorities over transactions linked to Iran.
Among the Sullivan & Cromwell partners working for Standard Chartered is Rodgin Cohen, one of the best-known U.S. corporate lawyers, a person familiar with the matter said.
Sullivan & Cromwell has represented other non-U.S. banks probed for allegedly ignoring U.S. sanctions against countries.
The United States imposed economic sanctions on Iran in 1979. Until November 2008 U.S. banks could process some transactions for Iranian banks or individuals provided they were initiated offshore by non-Iranian foreign banks and were on the way to other non-Iranian foreign banks. Such transactions were known as "U-turns."
David Proctor, who worked for Standard Chartered from 1999 until 2006 and who oversaw the Iran business briefly in 2006 when he was CEO in the United Arab Emirates, said the rules on dealing with Iran were unclear.
"At the time (May 2006), ... the key question was to try and understand exactly what counted as a U-turn transaction," he said.
Proctor, who now provides advice for banks with BAS Consulting in Singapore, added that Standard Chartered now has to help clear up what actually happened. "Banks these days don't have a choice," he said. "You have to be transparent."
(Writing by Jonathan Stempel, Alwyn Scott, Martin Howell; Reporting by Emily Flitter, Carrick Mollenkamp, Karen Freifeld, Aruna Viswanatha, Nate Raymond and Steve Slater; Additional reporting by Margaret Chadbourn, Karen Freifeld and Noeleen Walder in the United States; Sinead Cruise, Raji Menon, Adam Parry, Martin de Sa'Pinto, Matt Scuffham and Sarah White in Europe; and Rachel Armstrong, Saeed Azhar, Kevin Lim, Kelvin Soh and Denny Thomas in Asia; Editing by Margaret Chadbourn, Jonathan Stempel, Leslie Gevirtz,)
(Corrects to remove paragraph 18 that was based on inadequate sourcing. An earlier version of this article was mistakenly filed by an online editor.)