x Abu Dhabi, UAEFriday 28 July 2017

Iran costs banks more than money

HSBC and Standard Chartered built substantial profits from the Middle East during the past decade as the Arabian Gulf oil trade boomed and countries embarked on multibillion-dollar diversification plans.

For HSBC and Standard Chartered,the cost of their dealings are ultimately likely to be more troublesome for their reputations than their finances. Silvia Razgova / The National
For HSBC and Standard Chartered,the cost of their dealings are ultimately likely to be more troublesome for their reputations than their finances. Silvia Razgova / The National

HSBC and Standard Chartered built substantial profits from the Middle East during the past decade as the Arabian Gulf oil trade boomed and countries embarked on multibillion-dollar diversification plans.

It is also the region where their reputations arguably have been most tarnished over the past two months.

Both banks have admitted to different degrees they were engaged in sanctions busting on behalf of Iranian clients - even if they differ on the finer points. Both banks' Dubai-based units were said to be important conduits for funds.

The New York department of financial services pointed to 30,000 transactions out of a total of 60,000 processed through Standard Chartered's Dubai office, an allegation the bank has not commented on. The US Senate said HSBC Middle East's Dubai operations also played a key role.

HSBC has admitted to all the charges made by the Senate and made a full public apology, while Standard Chartered has agreed with regulators on the US$250 billion (Dh918.25bn) of trades "at issue" as part of a $340 million settlement - although it previously strongly disputed many of the allegations presented against it.

Dubai has served as a hub for both banks' Middle East units for decades and the emirate has attracted many more lenders since the establishment of the Dubai International Financial Centre.

Overseas regulatory actions present a difficult line to walk for the UAE's own regulators, who must balance regulation that attracts banks to do business with enhancing the country's reputation as a financial hub, said Ali Al Nuaimi, the head of the Federal National Council's finance committee.

"For us, the UAE market has always been open, welcoming to foreign banks," Mr Al Nuaimi said.

"We have more than 40 banks and all of them are in a fair competition and a competitive market. They're working and we're not restricting any banks to deal with anybody - it all depends on their strategy."

Any disciplinary action would fall to the regulators to administer as they saw fit, he said.

The Dubai Financial Services Authority has been in discussion with Standard Chartered since news of the US regulatory action against the bank broke last week, although it has not launched a formal investigation into the bank.

The Central Bank has repeatedly declined requests for comment during that time.

The UAE is bound by United Nations sanctions but is not forced to adhere to unilateral US sanctions that have become increasingly onerous to financial firms that do business with the US financial system. These effectively grant US authorities the ability to cut off banks from dollar-denominated trade if they are found to have dealt with Iran's central bank.

For HSBC and Standard Chartered,the cost of their dealings are ultimately likely to be more troublesome for their reputations than their finances.

While Standard Chartered has reached a settlement of $340m, which analysts say could yet rise, HSBC has set aside $700m to cover potential fines arising from its Iranian transactions.

These sums are a fraction of the value of the transactions the banks and regulators agree were at fault - allegedly totalling $19.4bn for HSBC and $250bn for Standard Chartered.

Despite the relief among analysts that Standard Chartered did not face a bigger fine, worries remain that the case may trigger greater caution among bankers as they increase focus on compliance issues, said Thomas Stoegner, a financial analyst at Macquarie Securities in London.

"It would be very surprising to us if the US regulatory issues [did] not have any negative business implications [on Standard Chartered] and the bank's appetite to accept certain risks may change," he wrote in a research note.

ghunter@thenational.ae

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