British Bank Fined by New York Regulator $340 million for OFAC Violation

On Tuesday, New York’s Department of Financial Services announced that British bank Standard Chartered agreed to settle allegations that it violated the Iran Transaction Regulations, enforced by the Treasury Department’s Office of Foreign Assets Control (OFAC), for $340 million, according to the Los Angeles Times and Reuters.  The New York State regulator treats violations of federal law as matters affecting a bank’s fitness to operate in New York, and the process of violating OFAC regulations allegedly involved failing to keep adequate records and even deliberate obfuscation of records.  By settling, the bank avoided having to show cause why its license to operate in New York, where it clears its U.S. dollar transactions for its operations worldwide, should not be revoked.

The Superintendent of Financial Services claimed in an August 6, 2012, order that Standard Chartered “repaired” or “wire stripped” its international wire transfers into New York to make sure they did not contain information about Iranian parties, thus avoiding flagging for OFAC scrutiny.  At the time U.S. banks were allowed to clear so-called “U-Turn transactions” originating with and destined for foreign banks if they had analyzed them to determine whether the end-user was subject to sanctions.  As a result of the “repairing,” the required end-user checks were never conducted.  Worst of all, Standard Chartered executives were apparently aware that their Iran transactions were risky, and covering up the transactions was the subject of secretive internal “compliance” discussions.

The New York regulator’s quick threat to revoke the bank’s operating license and quick settlement were not coordinated with and reportedly angered federal authorities.  OFAC, the Federal Reserve, and the Justice Department are still investigating Standard Chartered for OFAC violations and other money laundering-related offenses, and the federal government may impose its own penalty.

There are two lessons to be learned from this.  One is that the consequences of OFAC violations continue to become more grave, as state authorities get in on the action, adding another level of fines and, worse, the threat of shutdown, which could have devastated Standard Chartered’s profitability and ability to operate.

The other lesson is about the legal and compliance functions.  Compliance officers need to disassociate from their companies’ concerns about quarterly profit and focus on the long-term goal of corporate compliance.  Without this focus, compliance can be derailed.  Compliance officers must act like front line internal whistleblowers instead of cover-up engineers.  Moreover, Standard Chartered employees were not hearing the right mantra from management—that integrity and reputation matter even when they conflict with short-term profitability.