Some of the world's largest global custodians could be hurt by Standard Chartered Bank's money-laundering scandal in the U.S, according to a top banking analyst.

In a recent research note, analyst Brad Hintz at Bernstein Research in New York warns that if a subcustodian, such as Standard Chartered, is found guilty of an internal conspiracy to hide prohibited transactions from US regulators, global custodian banks which use it in foreign markets could face some serious scrutiny from their clients. Bernstein Research is a subsidiary of fund management giant AllianceBernstein.

"Among the more severe consequences, exposure to Standard Chartered could be met in reputation damage and potentially negatively impact the ability of US global custodians to win new mandates from public funds and other fiduciary clients," writes Hintz who cites JP Morgan Chase; State Street; and Bank of New York Mellon.

JP Morgan and State Street use Standard Chartered as their subcustodian in India, Hong Kong, Thailand, Ghana and Zambia. BNY Mellon uses Standard Chartered in Bangladesh and Taiwan. Subcustodians are used by global custodians to safekeep the assets of their clients in overseas markets and to serve as connections to local securities depositories to process securities transactions.

Should global custodians decide to replace Standard Chartered as their subcustodian HSBC Bank; Deutsche Bank and Citigroup could reap the benefit in Asia-Pacific. In Africa, standard Bank, which split from Standard Chartered in 1987, could pick up business.

The New York State Department of Financial Services has threatened to take away Standard Chartered's New York banking license for allegedly "scheming" with the government of Iran over about a decade to hide 60,000 transactions which generated millions of dollars in fees for the bank. The process -- which took place over nearly ten years-- involved "stripping away” information in messages sent over the network operated by SWIFT to conceal the origin of the messages. The Iranian government is subject to US sanctions over its nuclear program. The transactions were allegedly worth $250 billion and the bank could be asked to pay $700 million in fines. 

Standard Chartered admits that it has been conducting a review of its historic compliance with US sanctions, but denies any collusion with the Iranian government. It also says that 99.9 percent of its transactions with Iran have been compliant with US rules and disputes a key allegation. That allegation is that it abused an exemption to US sanctions against Iran, known as U-turns, which allow US banks to process payments from Iranian entities as long as the transactions were initiated offshore and passed through the US for US dollar clearing before they were routed back to banks offshore. That exemption was ended in 2008.

Written by Chris Kentouris, Editor-in-chief (Chris can be contacted through Chris.Kentouris@hotmail.com).

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