- By Region
One of the key questions to emerge from the revelations about Standard Chartered in recent days is if the bank believed transactions with Iranian entities were legitimate, why did it conceal their identities.
The New York state’s Department of Financial Services accused the UK bank of violating federal sanctions by “wire-stripping” – essentially removing identity codes from payments that would have linked the transactions to Iranian clients.
It said this practice was used for transactions made under an exemption known as a U-Turn, which allowed US banks to process payments from Iranian entities as long as they did not remain in the US.
Stripping the codes was done before the payments flowed through New York, so staff clearing the payments were unaware of their origin.
Critics have raised questions over whether the procedure was a sign that StanChart was attempting to conceal illicit transactions, either from its own staff or from US regulators.
Peter Sands, the bank’s chief executive, on Wednesday said the wire-stripping – or “cover payments” as the process is also known – was a “perfectly normal procedure, well understood by regulators”.
He said that due diligence had already been done on these transactions elsewhere and removing the identity codes was a way to avoid duplicating the checks.
“This is high volume business – we were clearing a couple of hundred billion dollars a day,” he said. “There was a huge focus on making sure things were straight through processed.”
He pointed out that 25-30 per cent of payments were typically done in this way and said regulators were happy with the practice as long as underlying due diligence was “robust”.
Other bankers have confirmed that wire-stripping was a legitimate activity, at least until 2008, when the rules were tightened.
“If transactions transparently said they were for Iranian customers they would be stopped and scrutinised. It was decided that valid U-Turns did not need to be looked at again in the US,” said one. “It was not intended to hide violations – but to facilitate compliant transactions.”
The U-Turn exemption only applied to transactions with Iran and did not include other sanctioned regimes. One banker said it reflected a desire by the US government during the 1990s to allow largely oil-related Iranian transactions to be conducted in dollars.
The system was changed in 2008, when the US Treasury amended the rules to prevent banks from using cover payments in an attempt to improve the transparency around Iranian transactions.