StanChart faces extension of U.S. money-laundering vigilance

By Lawrence White and Suzanne Barlyn

LONDON/NEW YORK (Reuters) - Standard Chartered expects it will remain under U.S. supervision for several more years over lapses in Iran-related anti-money laundering efforts because it needs more time to improve its internal standards, sources with knowledge of the matter said.

Under a deferred prosecution agreement it reached with U.S. authorities in 2012, the bank is due to remain under supervision by an independent monitor until the end of 2017. The sources said the bank now expects that date to be extended, possibly by several years.

The agreement has already been extended once, in 2014, and a decision on whether it will be extended again is expected by the end of this year, the sources said.

As part of the agreement with the U.S. Department of Justice (DoJ), StanChart established in 2013 a financial crime risk mitigation programme to improve its money laundering prevention and sanctions compliance worldwide.

Upgrading the bank's technology so that all of its systems meet tough U.S. standards, however, is proving a daunting task and it could face years more of investment, two of the sources said.

Standard Chartered, the DoJ and the New York County District Attorney's office involved in the settlement declined to comment.

StanChart rival HSBC also has a deferred prosecution agreement with the DoJ set to expire next year, after it reached a $1.92 billion (1.44 billion pounds) settlement in December 2012 on charges tied to money laundering.

U.S. authorities have since 2004 imposed more than $16 billion in fines on banks worldwide for breaching sanctions related to Cuba, Iran, Libya, Myanmar, Sudan and terrorism.

StanChart and HSBC agreed as part of their settlements to oversight from external monitors and began investing hundreds of millions of dollars in overhauling technology and hiring staff.

The monitor appointed to oversee StanChart's settlement, Ellen Zimiles, global head of investigations at Navigant Consulting Inc and a former prosecutor, has tested the software used by the bank and found that the bank's processes missed millions of possible violations.

Standard Chartered said in its annual report that it increased compliance spending to over a billion dollars in 2015, up 40 percent on the previous year.

The bank is not thought to have breached any of the terms of its agreement with the DoJ.

It also faces the possibility of fresh penalties from current investigations.

StanChart's settlements with U.S. authorities cover the period between 2001 and 2007 when it improperly handled transactions with customers from Iran, in breach of sanctions.

The bank also faces an ongoing investigation by U.S. authorities into whether conduct and control failures related to Iranian clients persisted after the bank in 2007 stopped doing business with known Iranian customers.

StanChart has another settlement with the New York State Department of Financial Services (NYDFS), after the head of that body Benjamin Lawsky called the bank a "rogue institution" for its lapses in surveillance of transactions at its New York branch.

The bank in 2012 paid a $340 million fine and agreed to a two-year monitoring deal over transactions linked to Iran, a deal that was extended for a further two years in 2014.

The NYDFS declined to comment.

HSBC CASE

Sources at HSBC said there were still internal concerns about the pace of efforts to improve controls, after a U.S. attorney in April made public sections of the bank's monitor's report, which was critical of HSBC's progress.

There is no indication however that HSBC has breached any of the stipulations laid out in its deferred prosecution agreement, meaning the bank could avoid an extension being imposed.

HSBC, the DoJ and the U.S. Attorneys' offices involved in the bank's settlement all declined to comment.

Prosecutors in 2012 said HSBC had failed to spot suspicious activity related to Mexican and Colombian drug cartels, and handled transactions for customers in countries subject to U.S. sanctions, such as Myanmar, Cuba and Iran.

U.S. Attorney Robert Capers said in a letter filed in federal court in Brooklyn, New York in April that HSBC has since not done enough to thwart laundering despite making significant progress under the monitor.

Citing a sealed report by Michael Cherkasky, the former prosecutor tasked with monitoring HSBC's compliance improvement under the agreement, Capers said the bank still faced significant challenges in upgrading its compliance program.

HSBC in 2015 spent more than $680 million and added 2, 584 compliance staff while making 'commendable progress' but still has more to do to improve oversight, Capers said.

(Reporting By Lawrence White and Suzanne Barlyn, Editing by Rachel Armstrong and Susan Fenton)