New York - A New York state case against Standard Chartered is more about whether the British bank carried out an old-fashioned cover-up using allegedly false records and less about the role the bank played in the alleged money-laundering of funds tied to Iran, according to people familiar with the situation and court documents.
The New York Department of Financial Services on Monday ordered the bank to send representatives to a meeting next Wednesday to explain why its alleged breaches of records laws should not mean the loss of its state banking license. A source close to the case said on Thursday it was possible the meeting will be postponed to allow time for discussions about the case between regulators - both state and federal - and the bank.
By using the run-of-the-mill laws, the New York regulator has been able to put more immediate pressure on Standard Chartered and given backbone to its threat to revoke the London-based bank's New York license - a potentially devastating blow to a global bank.
There are fewer gray areas in a records case than there would be in a case involving more complicated, and harder to prove, federal laws that have restricted or prohibited dollar transactions with sanctioned countries such as Iran.
Experts say they eventually expect a settlement to be agreed between federal and state authorities and Standard Chartered that would allow it to keep its license as that would avoid a protracted and potentially damaging legal battle for both sides and remove a cloud hanging over the bank.
The state inquiry is not only expected to increase scrutiny of records the bank gave to state examiners but also the work of top consulting firm Deloitte LLP, which analysed Standard Chartered's transactions for the bank.
The New York regulator and the federal agencies concerned all declined to comment, as did Standard Chartered.
The bank had been in discussions with federal authorities - the US Department of Justice, the Federal Reserve Bank of New York and the Manhattan District Attorney - to settle the case until the New York regulator published its explosive order, which included the release of embarrassing communications and its description of Standard Chartered as a "rogue institution".
The head of the New York regulator, Benjamin Lawsky, alleged Standard Chartered hid from regulators some 60 000 "secret transactions, involving at least $250bn" tied to Iran. A lot of attention has been focused on the gulf between that number and the $14m of transactions that the bank says flouted US regulations.
But a review of Lawsky's order shows that the state regulator is more intent on showing the bank violated the so-called "books and records" laws.
The order cites seven alleged violations of state law. Five of them effectively allege that Standard Chartered didn't maintain proper records, failed to alert examiners to false records, and provided false information. The first violation, for example, cites the bank for "failure to maintain accurate books and records".
Lawsky "is taking the path of least resistance", said John Coffee, a securities law professor at Columbia University, noting that a books and records allegation is an easier charge to bring and the tactics "may well produce a settlement".
Anti-money laundering lapses
Standard Chartered's problems date back to 2004, when New York regulators and the Federal Reserve Bank of New York issued an enforcement action against the bank because of anti-money laundering lapses.
Deloitte was hired to review transactions and report the findings to regulators. Standard Chartered (SCB) subsequently asked Deloitte to "delete references to certain kinds of payments that might reveal ties to Iranian dealings", the New York regulator alleged this week.
A Deloitte partner "agreed" to the request, saying in an email to a bank compliance official, "This is too much and too politically sensitive for both SCB and Deloitte. That is why I drafted the watered-down version."
According to a person familiar with the report, the Deloitte partner was Michael Zeldin, a top anti-money laundering compliance consultant.
In a statement on Thursday, Deloitte said "contrary to the allegation in the Order", it "absolutely did not delete any reference to certain types of payments" from a final report. Deloitte said the report didn't include a recommendation that had been included in a prior draft.
Deloitte "did so in favour of in-person discussions" with regulators regarding the issue and it included the facts relating to this issue in the final written report.
It declined to say what the recommendation was.
Deloitte said that Zeldin was unavailable for comment.
In 2006, New York regulators asked Standard Chartered for data on Iranian transactions, including the number and dollar amount. An initial review conducted internally by the bank uncovered 2 626 transactions totaling $16bn in 2005-06, according to the New York regulator's order this week.
As the internal report wound its way up Standard Chartered's executive ranks - from a CEO for the Americas to a group executive director in London - concern grew that the bank would become a major focus for a review of Iranian transactions by regulators.
The bank opted to turn over only four days of data, the New York bank regulator said in his order this week.
"This evidence shows that members of SCB's top management was involved in yet another staggering cover-up," the New York regulator alleged.
The Deloitte report and "fraudulent data" helped the bank convince regulators to lift the enforcement action, Lawsky's order said.