- By Region
“Standard Chartered is the world’s worst bank.”
Anyone walking past StanChart’s gleaming London headquarters in the past few months would have been confronted with a disgruntled Canadian in an A-board denouncing the bank that proclaims itself “Here for good”. George Burrow, a customer of a StanChart offshoot, had been complaining for four years that he was duped into a Lehman Brothers-linked investment – losing £100,000 of retirement savings in the process. By June, he had taken to spending weeks on end making his protest in person.
Mr Burrow has made little progress – he admits he did not read the small print of the investment, made via the lightly regulated tax haven of Jersey. The bank itself insists it did nothing wrong.
StanChart has largely dodged the spotlight of scandal in the UK. Until this week, that is. In light of the 27-page regulatory order filed against the bank on Monday by New York state’s Department of Financial Services, Mr Burrow’s slogan might sound rather less melodramatic. Benjamin Lawsky, head of the DFS, describes “wilful and egregious violations of law” at a “rogue institution” that “schemed with the government of Iran and hid from regulators roughly 60,000 secret transactions, involving at least $250bn”. “Motivated by greed”, he said, it “forg[ed] business records” in a “staggering cover-up” and should lose its US licence.
Even in a world where regulators have been galvanised by the financial crisis into tough talk and tough action, the aggression of the order is widely seen as unprecedented. Officials at the UK’s Financial Services Authority and the US Treasury and Federal Reserve, who have also been investigating potential Iranian sanctions breaches by the bank, are peeved by Mr Lawsky’s go-it-alone strategy. Sir Mervyn King, Bank of England governor, on Wednesday urged US regulators “to work together and refrain from making too many public statements until the investigation is completed”. George Osborne, UK chancellor of the exchequer, has raised the issue repeatedly with Tim Geithner, US Treasury secretary.
StanChart – whose shares plunged more than 20 per cent the morning after the order was published but have recovered to end the week down 10 per cent – has been equally feisty in its response. It “strongly rejects” the regulator’s accusations and is consulting lawyers on whether it can countersue for reputational damage.
Many see the DFS action as part of a sweep of attacks by US authorities on UK banks. Last month Barclays was routed over its rigging of the London interbank offered rate and HSBC was left reeling by a Mexican money-laundering scandal. “It’s unbelievable, outrageous, absolutely incredible,” blurted one former executive soon after the order was published.
For StanChart, which had emerged from the financial crisis with its business and reputation less scathed than that of any other global bank, it was a big comedown. The group has thrived thanks largely to its tiny exposure to regions that have borne the brunt of five years of crisis, last week reporting a 10th successive half-year of increasing profits. “But,” says one London-based analyst who knows StanChart well, “everyone forgot that they operate instead in a lot of high-risk countries.”
The Standard Chartered of 30 years ago was used to bad press. It narrowly avoided being subsumed into UK bank Lloyds in 1986 after recessions in key Asian markets, loan problems in Latin America and sharp declines in the value of the South African rand took their toll on profits – and the share price. Analysts were also highly critical of slack control from London headquarters.
One long-time adviser of the bank recalls a change in culture under the decade-long leadership of Sir Patrick Gillam, chairman until 2003. “Before then,” he says, “they weren’t professionals. They were adventurers. But when you’re operating in areas of the world where risks are completely different from the UK, you need professionals.”
Some analysts are not surprised StanChart has now been attacked. “They’ve been seen by some as a smug institution,” says one. “Sceptics question the sustainability of their rate of growth. And US banks in particular have been badmouthing the bank and its credit underwriting standards.”
To StanChart’s fans, though, the humiliation is particularly unjust given the work senior management – led by Peter Sands, chief executive, and finance director Richard Meddings – have put into the way the bank does business. “StanChart is great at the soft stuff,” says one employee who has recently moved from a UK rival and is convinced that, unlike many of its counterparts, the bank genuinely believes in the values it preaches. “Sustainability stretches all the way from small business lending to charitable initiatives like feeding 36,000 Dubai workers at a labour camp throughout Ramadan,” he says.
The bank has also sought to raise standards in its core operations. Executives insist tight risk-management controls are one reason why blow-ups across operations, often in unstable parts of the Middle East and Asia, have been kept to a minimum. “There’s no institution that’s as obsessed with compliance as StanChart,” says a former board member.
Unlike the “federal” grouping of businesses of previous decades, Mr Sands operates a “one bank” approach, imposing a centralised risk management culture on local managers. Dismissing suggestions that London management is too distant from the dominant operations in Singapore, Hong Kong and the Middle East, one StanChart insider says: “We try to ignore borders and collaborate across different businesses.”
The set-up contrasts with that of Asia-focused rival HSBC, which for more than 100 years operated an unwieldy federated structure with the country head as king. HSBC is now dismantling this network after Stuart Gulliver, chief executive, admitted it made it harder to run the bank, and to spot where problems were brewing.
For all StanChart’s controls, there have been blips in the good news even in recent times: consumer mis-selling accusations in South Korea and Taiwan; expensive loan losses in the Indian division; and damaging exposure to the US subprime crisis via Whistlejacket, a structured investment vehicle. “To be fair, though,” says one analyst who knows the bank well, “the risk management has worked. All the potential issues have been contained.”
How much more damaging the sanctions affair will prove to be is an open question. The DFS assesses that $250bn of business breached US laws, and is privately pushing for a settlement of more than $500m; StanChart has admitted only to “inadvertently” breaching sanctions on $14m of business and offered to settle for $5m. The bank insists 99.9 per cent of the Iran-related transactions castigated by the DFS were legitimate operations under America’s “U-turn” exemption rules.
“The U-turn mechanism was one set up by the US authorities to allow non-US entities to trade in US dollars with Iran,” Mr Sands says. “[To justify the DFS action] you basically have to assume the whole U-turn mechanism was somehow invalid.”
Even rivals say StanChart, which itself volunteered the evidence used in the DFS case, has been ill treated. “Banks were entirely right to presume the U-turn exemption was there to be used,” says one executive at a big global bank. “The US decided it wanted Iranian transactions to be able to be conducted in dollars Banks now feel burnt that they are being held out as the world’s crooks.”
As recently as last week, StanChart, which disclosed in 2011 that it was under investigation by US authorities over its Iranian operations, was playing down the likely impact of the affair. With no warning of imminent DFS action, chairman Sir John Peace and Mr Sands both went on holiday after presenting the bank’s record half-year results 10 days ago.
Within a couple of days, though, Sir John was flying from Florida to consult the bank’s New York lawyers and Mr Sands was heading home from Canada to London. A meeting with Mr Lawsky is scheduled for next Wednesday, at which the bank will challenge DFS settlement demands and, more crucially, make its case against being stripped of its US licence. It would be keen to resolve the issue before then, although insiders say that might not be realistic in such a tight timeframe.
It is clear that Mr Sands, who frequently extols StanChart’s culture and values – qualities he described just a week ago as “the ultimate protection against risk” – has been caught off guard. But he insists that, however rotten the values of troubled rivals might be, StanChart is true to its “here for good” slogan. “I don’t think there’s anything wrong with the culture at StanChart,” he said following this week’s allegations. “The facts show that we take our responsibilities very seriously. Yes, sometimes we make mistakes, but fundamentally we are trying to do the right thing and run a good bank well.”
Whether Mr Lawsky can be persuaded of that, any more than the A-board-wearing Mr Burrow, is moot.