Standard Chartered's compliance unit had been outsourced to India in an effort to reduce costs, leaving the bank's New York operations in the dark about whether its transactions breached US sanctions, regulators say.
Standard Chartered's woes linked to India unit
Standard Chartered’s compliance unit had been outsourced to India in an effort to reduce costs, leaving the bank’s New York operations in the dark about whether its transactions breached US sanctions, regulators say.
On Monday, the New York department of financial services published a report accusing Standard Chartered of having concealed US$250 billion (Dh918.27bn) in transactions that violated US sanctions against Iran.
Standard Chartered, which strongly rejected the department’s report, is due to go before the New York superintendent of financial services on Wednesday to explain itself, with analysts fearing it could lose its US banking licence.
The report said an investigation in November had detected a vulnerability in Standard Chartered’s anti-money laundering processes through its Indian compliance subsidiary.
The report noted compliance failures including “outsourcing of the entire Ofac [the US office of foreign assets control] compliance process for the New York branch to Chennai, India, with no evidence of any oversight or communication between the Chennai and the New York offices.”
Ofac is the government agency that administers US sanctions.
The Indian subsidiary, Scope International, has been operational since 2002 and employs 8,500 staff providing back-office services for Standard Chartered and other companies.
These include human resources, payments servicing and IT software but regulators said the office was also given oversight of compliance functions to ensure Standard Chartered’s dealings abided by US trading restrictions on Iran.
Processes used by outsourced staff going awry was one of the major risks companies needed to look at when choosing to ship jobs to external firms or cheaper locations overseas, said Dino Wilkinson, a partner in the sourcing and technology team at the law firm Norton Rose.
“Whether you’re outsourcing to a third party or a subsidiary, generally you can’t outsource responsibility or obligations under the law,” he said. “While you want to hand over the day-to-day responsibility, you can not lose control of your business.”
Outsourcing has grown rapidly in the United States and Europe as a result of austerity measures imposed by governments and dwindling profits at corporations hit by the economic downturn.
But that growth has left the industry with more chances to get it wrong, said Mike Allen, a support services analyst at Panmure Gordon.
“Outsourcing works if it’s in areas where the companies understand or have been doing it for a long time and the resources are there.
“Where it doesn’t work is where it’s new for the provider and the goalposts change,” he said.
“When a contract goes badly, the whole market tends to focus on it.”
Standard Chartered’s shares recovered yesterday in London, rebounding 9.65 per cent to 1,328 pence each following a 16.6 per cent drop on Tuesday.
The shares are off 15.9 per cent since the New York department released its report, with the firm losing as much as $19.5bn in market capitalisation at its lowest point.
The ratings agencies Standard & Poor’s and Moody’s Investors Service said they were maintaining their credit ratings on the bank, despite the recent allegations.
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