Outsourcing of key oversight jobs by global banks to India has come under the scanner for the second time in less than a month for exposing the US financial system to terrorists and money laundering risks.
On the heels of a probe by the US Senate's Permanent Committee on Investigations pointing out major lapses in the work of HSBC's India staff, another UK-based banking giant Standard Chartered's outsourcing of key banking jobs to Indian shores have come under the scanner in the US.
A probe by the New York State's key banking regulator, the Department of Financial Services (DFS), has found deficient money laundering controls in outsourcing of work by StanChart to India, thus exposing the US financial system to terror financing and other risks.
The findings in these two separate probes have come at a time when the voices against outsourcing of jobs to India and other locations are gaining momentum in the US, ahead of the Presidential elections in November.
In an order last night, the DFS accused StanChart of hiding secret transactions involving USD 250 billion with Iran -- leaving the US financial system vulnerable to terrorists, weapons dealers, drug kingpins and corrupt regimes.
The DFS probe found that SCB had assured the New York state in May 2010 that it would take immediate steps to comply with the US Office of Foreign Assets Control (OFAC) sanctions.
However, another regulatory examination in 2011 found continuing and significant Anti Money Laundering failures.
Among these, the bank was outsourcing its "entire OFAC 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."
The OFAC is the designated US government agency for preparing list of entities with whom US citizens and entities are barred from doing any business.
As per the DFS probe, Standard Chartered Bank (SCB) saw compliance with the US regulations related to Iran sanctions as impeding its business expansion.
"... SCB's Chief Legal and Compliance Officer for its wholesale banking business explained that SCB wire stripped because 'there would be a delay in the OFAC que if an Iranian name was spotted by the OFAC filter in New York and the payment would get held up," the order said.
The term 'wire stripping' is used for removal of information from wire transfer messages used to identify sanctioned countries, individuals and entities.
The order further quoted the same SCB official as saying that any such delay would be "a deal-breaker" in the bank's efforts to develop new business.
"To avoid such deal-breakers, SCB instituted a system of so-called 'offshore OFAC due diligence'. The entire concept was a sham. Any off-shore substitute for OFAC compliance would have necessarily caused the exact delay threatened by OFAC compliance at the New York branch.
"Under the law governing at the time, any legitimate due diligence was premised on investigative delay. SCB undertook its off shore due diligence program, however, specifically to escape OFAC's watchful eye, not to be examined by it," DFS said.
It further said that SCB's overseas due diligence staff members were responsible for the bank's compliance to regulations related to Iran sanctions and compliance to the OFAC rules.
But these staff members did not know the elements of a lawful transaction and they were not trained to determine whether the underlying transactions were valid as per the Iranian Trade Regulations.
"SCB's chief legal counsel strategised, much as he had in 1995, that 'it is reasonable to undertake due diligence on behalf of New York outside the US' even though "we are potentially placing our SCB New York office and the Bank at risk if our due diligence procedures are not fully effective," the DFS said, while detailing its probe findings.
Earlier on July 17, HSBC's staff in India had come under the scanner for deficiencies in their role as "offshore reviewers" of the global banking giant's compliance to safety mechanism against money laundering and terrorist financing.
The probe found that HSBC's Anti-Money Laundering (AML) Compliance Department, which included employees in India, was highly inadequately staffed.
Besides, deficiencies were found in the quality of the work done by HSBC's "offshore reviewers in India", who were used for clearing a major backlog of suspected transaction alerts at the bank.
More than one-third of the alerts already resolved by the Indian reviewers and others "had to be re-done" after an independent assessment by the OCC (the US Office of the Comptroller of the Currency, which is the bank's primary federal regulator in the country).The probe further found that an OCC visit to India in 2007 had revealed "Weak Monitoring Procedures" in the bank's internal control systems.
Later, HSBC apologised for its mistakes and gave its "absolute commitment" to fix the problems.