It was in October 2006 that a senior executive at Standard Chartered in New York pressed the alarm bell over the bank's dealings with Iranian customers.

 

Realizing the bank was being too slow to react to regulators' concerns that the transactions might break US sanctions against Iran, Ray Ferguson, then head of Standard Chartered Americas, fired off an email warning of potentially "catastrophic reputational damage".

 

While regulators have revealed some details of what led to Ferguson's email and the shockwaves it caused, Reuters has now identified executives central to the affair, how they responded, and established that between 50 and 100 people at the bank have been questioned in internal probes of the alleged transgressions.

 

Ferguson, now the bank's Singapore CEO, sent his email to Richard Meddings, at the time executive director for risk at the Asia-focused bank's London headquarters and now chief financial officer.

 

Days later, Meddings arrived in New York and a heated conversation took place among senior Standard Chartered executives. In the room were Meddings, Michael McVicker, head of US compliance, Ferguson, and another New York-based employee.

 

According to New York State Department of Financial Services Superintendent Benjamin Lawsky, Meddings demonstrated Standard Chartered's "obvious contempt" for US banking regulations.

 

In an order published on Monday, the New York regulator quoted the bank's New York branch officer - identified to Reuters as McVicker - as saying Meddings had replied to concerns about Iran by saying: "You f---ing Americans. Who are you to tell us, the rest of the world, that we're not going to deal with Iranians."

 

Standard Chartered CEO Peter Sands said this week the bank didn't think the quote was accurate.

 

Ferguson, who comes from Scotland and has also worked for the bank in the Middle East and Asia, told Reuters earlier this week that Meddings may have cursed Americans, though he added that Meddings did not follow up with the complaint about US financial sanctions on Iran. "I do not recognize the quote that has been attributed to Richard," said Ferguson, who was Americas CEO between March 2006 and December 2007.

 

McVicker declined to talk. A Standard Chartered spokeswoman said he is prohibited from speaking to the media as he is assisting in multiple federal and state investigations.

 

Meddings did not respond to repeated requests for comment.

 

The meeting is highlighted in a scathing order in which Lawsky describes Standard Chartered as "a rogue institution" that had left the U.S. vulnerable to terrorists, weapons dealers and corrupt regimes.

 

DEVASTATING

 

The regulator has threatened to take away Standard Chartered's New York banking license, which would be devastating for a bank with what the New York regulator said is a $190 billion per day business clearing US dollar transactions.

 

The attack took Standard Chartered completely by surprise. Most of its senior executives, including Sands, had just started their summer holidays.

 

They were riding high and in good spirits after recently reporting strong half-year profits, setting the bank up for its 10th successive year of record annual earnings. The bank seemed to have avoided the pitfalls that had struck down most rivals.

 

But in less than 24 hours the New York regulator's allegations had wiped more than $17 billion off the bank's value as its shares crashed 30 percent to a 3-year low.

 

When Standard Chartered did respond, it strongly rejected the portrayal of facts set out by the New York regulator.

 

The bank admitted it had made mistakes, but said only 300 of 150 million payment transactions between 2001 and 2007 were questionable under the sanctions rules on Iran. Those transactions, it said, were worth less than $14 million.

 

In stark contrast, Lawsky said the bank moved at least $250 billion through its New York branch on behalf of Iranian clients through 60,000 transactions, reaping hundreds of millions of dollars in fees in the process. That $250 billion could represent all the Iran-related transactions Standard Chartered did in the decade, sources have said.

 

"Motivated by greed, Standard Chartered acted for at least 10 years without any regard for the legal, reputational and national security consequences of its flagrantly deceptive actions," said the order.

 

The US imposed economic sanctions on Iran in 1979, and banks in the US, including branches of foreign firms, were forbidden from dealing directly with the country. However, certain transactions, known as "U-Turns", remained lawful until November 2008.

 

These "U-Turn" transactions, which involve moving money for Iranian clients among banks in Britain and the Middle East, are at the center of the current dispute because they were cleared through Standard Chartered's New York branch.

 

Though they involved Iranian clients, they could not go directly from Iran to the US, but had to go via another country. The question is whether the way Standard Chartered handled these transactions qualified them as "U-Turns" or not.

 

It handled the bulk of such transactions using a process which it called "repairing" documents, a senior person at the bank told Reuters. A "repair" - also dubbed "wire stripping" - involved manually removing references to Iran from wire transfers to speed up the process.

 

Lawsky's order alleged Standard Chartered "conspired with Iranian clients to transmit misinformation to the New York branch by removing and otherwise misrepresenting wire transfer data that could identify Iranian parties."

 

But the bank said 99.9 percent of the transactions it has scrutinized were lawful under the "U-Turn" exemption. It said Lawsky's interpretation "is incorrect as a matter of law".

 

Some legal experts point out that the bank may be more vulnerable on simple charges of failing to keep proper records than on the more nuanced legalities over sanctions.

 

Either way concerns about bank transactions involving Iran intensified long before U-Turns became illegal in late-2008. From 2003, other banks had started to stop doing U-Turn business.

 

And in September 2005, US regulators alerted Standard Chartered that other banks were being investigated in connection with their Iranian transactions.

 

The bank launched an internal review called Project Gazelle, which the New York regulator's order said was written by the CEO for the United Arab Emirates and the group head of compliance and regulatory risk. That suggests the co-authors were Ferguson and Andrew Hunter, according to public documents from around that time.

 

Many people worked on the report, including significant numbers from the bank's legal and compliance departments, over a three-month period, a person familiar with the matter told Reuters. It was circulated among the bank's key executives, legal and compliance officers and Iranian client business managers.

 

The result was that the bank stopped covering up client details and decided to pull back from its growing Iranian US dollar payments business. After the decision to stop "repairing" documents, the practice was dropped in January 2006, the source said.

 

But the Iranian business was far from being closed down at that stage, according to an email that Ferguson fired off to Meddings about nine months later - on Oct. 5, 2006.

 

"We believe (the Iranian business) needs urgent reviewing at the Group level to evaluate if its returns and strategic benefits are . . . still commensurate with the potential to cause very serious or even catastrophic reputational damage to the Group," the email said, according to the New York regulator's order.

 

It added: "There is equally importantly potential of risk of subjecting management in US and London (e.g. you and I) and elsewhere to personal reputational damages and/or serious criminal liability."

 

Standard Chartered has declined to confirm who received the email which came soon after New York regulators asked the bank for statistics on its U-Turn deals as the US authorities turned up the heat on Iranian transactions.

 

Several days after Ferguson's email, Meddings visited Standard Chartered's New York office and, after the meeting in which he allegedly uttered the expletive about Americans, the bank accelerated the wind-down of its business with Iranian customers.

 

But there were two big questions. Was Standard Chartered going to come clean with the authorities on everything it had discovered in the internal investigation, and when was it going to do so?

 

This is one critical area of the case where there remain many unanswered questions and a huge gulf in accounts given by the bank and the New York regulator.

 

Lawsky contends that instead of telling regulators of the 2,626 Iranian U-Turn transactions, involving $16 billion, that the bank had discovered for just the years 2005-2006, it handed over just four days of U-Turn data.

 

This was described by the New York regulator as "yet another staggering cover-up" - and it claims that this "watered-down" approach convinced New York regulators in 2007 lift a written enforcement agreement that the bank consented to in 2004 after previous money laundering issues, including deficiencies in its suspicious activity monitoring.

 

Indeed, Lawsky says that it took until Standard Chartered was contacted by law enforcement authorities in early 2009 for the bank to conduct a further internal probe into its past procedures.

 

The bank, on the other hand, has been adamant that "throughout the period the Group acted to comply, and overwhelmingly did comply, with US sanctions and the regulations relating to U-turn payments."

 

It has not yet indicated why it took until 2009 to conduct the second probe.

 

Standard Chartered says it ceased all new business with Iranian customers in any currency over five years ago. And it said it voluntarily approached US regulators in January 2010 to tell them it had begun a review of transactions between 2001-2007.

 

$1 BILLION SETTLEMENT?

 

Standard Chartered is now scrambling to limit the damage.

 

Insiders at the bank are worried about the threat to remove its banking license and concerned that more embarrassing memos to senior executives may emerge. The New York regulator says it has evidence beyond that already published in the order, including evidence of similar schemes involving Standard Chartered and other countries that have been subject to US sanctions, such as Libya, Myanmar and Sudan.

 

Standard Chartered is in talks with multiple law-enforcement officials, including the New York regulator, to resolve the matter, according to people familiar with the situation.

 

The settlement negotiations are expected to last through the weekend and could result in a resolution by next week, these people said. However, the negotiations are at a delicate stage and could collapse, they added.

 

One set of talks is with federal officials while a separate negotiation is taking place with the New York bank regulator, underscoring a divide that exists between New York officials and other regulators, the sources said.

 

Lawsky has demanded that Standard Chartered officials appear at his office next Wednesday to explain why the bank should be allowed to keep doing business in New York. The hearing remained on the calendar as of Friday afternoon.

 

A settlement could lead to a fine of up to $1 billion, divided among the regulators, according to Simon Maughan, analyst at Olivetree Financial Group in London.

 

It needs to draw a line under the row, and if it proceeds to the Aug. 15 hearing there is the risk of a damaging suspension of its license. "This would be a serious impediment to the bank and we would expect it to lead to a sharp share price fall and possibly loss of independence," Maughan said. - Reuters