The recent allegations levelled against Standard Chartered – that it schemed to hide billions of dollars of transactions, leaving the US financial system “vulnerable to terrorists, weapon dealers, drug kingpins and corrupt regimes” has shone the spotlight on a US regulatory loophole that for years allowed banks with US operations to maintain their activities with Iran, at the same time that the US maintained a tough sanction regime against the country.
Exemptions
US sanctions against Iran have grown over the years since 1987, strengthened through subsequent executive orders issued by President Bill Clinton that prohibited US involvement in practically all trade and investment activity.
At the same time, a number of exemptions remained, including for so-called U-turn payments that involved Iran but did not originate or terminate in an account in Iran itself — thereby allowing Iranian institutions with foreign accounts (say, in Switzerland) to transmit funds through New York to an account in another country, say, Germany. As with all US economic sanctions, those relating to Iran were administered and enforced by the Office of Foreign Assets Control.
U-turn payments were finally banned in November 2008, but even before that it was clear that US authorities had concerns about the use such payments could be put to.
In 2006, US authorities brought in a ban on any dealings with the Bank of Saderat, thereby denying it “direct and indirect access to the US financial system” and any attempt to “dollarise” its funds.
Disclosure requirements
Over the next two years bans were brought against individual banks linked to the Iranian government, until the US concluded that US foreign and national security could be compromised by the deals, and instituted the blanket ban.
In its strongly-worded order against Standard Chartered, the New York State Department of Financial Services argues that the bank did not comply with the disclosure requirements on any bank involved in U-turn transactions, and instead “concealed” some 60,000 U-turns, cleared through its New York branch, for Iranian clients.
Under pressure from Iranian clients fearful of delays in clearing funds, the bank chose to “transmit misinformation” to the New York branch by removing or misrepresenting wire transfer data that would have identified Iranian entities.
And when other European competitors began to exit the U-turn business, the bank positioned itself to fill the gap, the DFS contends. It suggests that the U-turn transactions continued even after the ban was introduced, and up to 2010.
Standard Chartered has been vigorous in its rebuttal, insisting that its review conducted by external and internal consultants revealed that only around 0.1 per cent of the U-turn transactions relating to Iran didn’t meet the regulations, representing just under $14 million, and that not a single payment had been for an entity the US at the time had deemed a terrorist one.
More details of exactly how there could be such a large discrepancy between the two accounts are likely to emerge next week, when Standard Chartered is due to appear before the DFS to respond to the order.