Standard Chartered not up to standard

LONDON BRIEFING:WHEN THE man who broke Barings Bank warns that the culture of the City of London has spun dangerously out of control, you know we're really in trouble.

As the latest banking scandal broke, Nick Leeson, who was sentenced to six years in prison for the fraudulent trading that brought down Britain’s oldest investment bank, was wheeled out for his take on events.

“Rogue trading is on the increase,” the original rogue trader told the London Independent. “The latest scandals are just a sign that the culture is running riot without any checks in place. Every day you wake up and see something different.”

He’s not wrong there. Three weeks ago HSBC was in the eye of the storm as the US authorities revealed that huge sums of Mexican drug cash had flowed through the bank’s books. HSBC apologised profusely and promised it would tighten up its controls.

HSBC’s shame left Standard Chartered as the only major British-based bank with something resembling a reputation still left to lose. It had come through the financial crisis in far better shape than its rivals – and with no need of a bailout – and did not become engulfed in the payment protection scam that has seen its rivals shell out £9 billion (€11.34 billion) in compensation to customers. Nor does it appear to have taken part in the Libor rate-rigging activities that have cost Barclays so dear.

Now, however, the Asia-focused but London-based bank is at the centre of a firestorm that could prove far more damaging to its reputation, and its business, than anything the financial sector has yet seen. As the scale of its problems became clear yesterday, shares in the bank crashed 24 per cent at one stage amid fears it could lose its banking licence in the US.

With a catastrophic collapse like that, Standard Chartered’s top management, led by chief executive Peter Sands, are in serious danger of losing their jobs in double-quick time.

The scandal surrounding the squeaky-clean bank (if there can be such a thing) emerged late on Monday. The first clue for many in London was a sudden and dramatic fall in the share price just as the market was closing.

Across the Atlantic, the US authorities had released an explosive document catapulting the bank into the murky world of money laundering. Accusing it of being “a rogue institution”, the New York state Department of Financial Services (DFS) said the bank’s activities had left the US financial system “vulnerable to terrorists, weapons dealers, drug kingpins and corrupt regimes”.

Standard Chartered stands accused of hiding a massive $250 billion (€200 billion) of illegal transactions with Iran between 2001 and 2010, transactions that flouted US sanctions against the country and reaped the bank millions in fees.

The case against Standard Chartered is strongly worded but – and here’s the difference between this case and the HSBC money-laundering scandal – the UK bank has issued a vigorous rebuttal of the US claims.

It “strongly rejects” the portrayal of the facts by the DFS and says its 30-page document does not present a full and accurate picture of the facts. While the US regulator claims $250 billion was involved, Standard Chartered says the amount is closer to $14 million.

Whether it is $14 million or $250 billion, the bank has a case to answer. But the amount involved will be crucial to the eventual fines or legal action Standard Chartered will face if the case against it is proved. Two years ago, Barclays had to pay fines of $298 million to the US authorities for clandestine transactions of a mere $500 million with banks in Cuba, Iran, Libya, Burma and Sudan. If penalties are levied against Standard Chartered on the same scale, its punishment could be crippling.

The focus now is on how Sands handles the crisis. His early efforts have not impressed – it took more than six hours for the bank to release any sort of response to the allegations, finally putting out a statement at midnight on Monday.

Last week, as Sands announced record first-half profits, he proudly paraded the bank’s reputation for being dull: “We see some virtue in being boring,” he told analysts.

Highly regarded in the global banking industry – until now, at least – Sands was one of the leading contenders to replace Sir Mervyn King as governor of the Bank of England. Now he faces a fight to hold on to his job as the boring bank squirms in the unaccustomed spotlight of scandal.

Fiona Walsh writes for the Guardian newspaper in London