International Issues

Standard Chartered Fined Again For AML Violations, Not Screening Against Restricted Party Lists

News from the banking side of export ethics and compliance:

Standard Chartered Bank (SCB) has agreed to pay a $300Million fine to the New York State Department of Financial Services (DFS) for anti-money laundering (AML) violations. According to the DFS, Standard Chartered’s internal AML compliance system, the SCB Rulebook, which was developed in-house at its New York branch following a previous settlement with the DFS, failed to catch potentially high-risk transactions from Standard Chartered’s subsidiaries in Hong Kong and the UAE.

The fine is part of an ongoing crackdown by both New York State and Federal Authorities on foreign banks using New York based branches to handle money transfers from countries and individuals blacklisted by Washington for political reasons, or for their involvement in criminal activities. In addition to the fine, the bank has also agreed to end its high-risk relationships with small- and medium-sized business clients in the UAE, and suspend its US dollar-denominated payments for some of its Hong Kong clients. This is in addition to the settlement between Standard Chartered and the DFS for AML violations in 2012, where the bank paid $667Million to settle a dispute over its handling of thousands of transactions involving Iran, Sudan, Myanmar, and Libya in violation of US sanctions.

The fines have been interpreted in a number of ways. Some reports declare that it is wrong to fine a bank over a software malfunction where there is no evidence of any actual money laundering. Some reports criticize the very idea of entrusting banks to police their counterparties and clients for money laundering activities.

What’s important in this story is the slow and steady advancement of the role ethics and compliance operations play in safeguarding companies from this sort of exposure. If there were no fines, there would be no news, and the corruption that led to the initial 1977 Foreign Corrupt Practices Act would continue unaddressed and with the public largely unaware.

As part of the 2012 settlement, the DFS appointed an independent monitor to keep an eye on the bank and its transaction monitoring system, the SCB Rulebook. Soon after, in attempts to gather information and test the compliance system, the appointed monitor discovered numerous errors and other problems, which resulted in the SCB failing to detect such potentially high-risk transactions. Furthermore, there was no audit record of the transaction monitoring system’s efforts.

In a statement, the bank said that it “accepts responsibility for and regrets the deficiencies in the anti-money laundering transaction surveillance system at its New York branch. The group has already begun extensive remediation efforts and is committed to completing these with utmost urgency.” According to Standard Chartered Asia CEO Jaspal Bindra, the bank has addressed its compliance problems by hiring more staff and embarking on a multi-year program to make all 89,000 of its employees more aware of the importance of compliance and anti-money laundering.

Embedding a culture of ethics and compliance into a company like Standard Chartered, which has been in business for over 150 years, cannot be easily accomplished through means of a software solution developed in-house. The fines themselves are meant to encourage the uptake of an ethical and compliant corporate culture. If there were no fines, what incentive would the bank have to embark on a multi-year program to spread the importance of compliance and anti-money laundering to all of its employees?

The hope is that this bureaucratic system of fines will entice corporate entities, such as the huge and ancient Standard Chartered Bank, to move from using non-functioning software solutions for managing their entire compliance and AML efforts, to actually instilling a culture of corporate ethics and compliance into their employees. At least that’s what everyone is saying here. A software solution can support this effort, but it cannot create it. Good luck, Standard Chartered.