The New York banking regulator's accusation that Standard Chartered Plc hid $250 billion in transactions tied to Iran may bring fresh scrutiny on the outsourcing of sensitive functions by global financial institutions, especially to India.
Standard Chartered lost $16 billion in market value on Tuesday as its shares plunged after the New York State Department of Financial Services (DFS) threatened to cancel the British bank's state banking licence.
As part of its report, the regulator said the bank's failures included "outsourcing of the 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." OFAC is the U.S. Office of Foreign Assets Control.
Standard Chartered said the bank "does not believe the order issued by the DFS presents a full and accurate picture of the facts".
Scope International, Standard Chartered's wholly-owned back office outsourcing centre, is based in the south Indian city of Chennai and employs more than 8,500 people who provide support for the bank's global operations.
The DFS accusation could negatively affect India's outsourcing industry, worth about $100 billion and growing at 14 per cent per year. It is one of the few bright spots in an economy blighted by policy stagnation and political instability.
"Perception-wise, people will stop sending larger-quantum and more sensitive works to India," said Rishi Sahai, director at Indian consultancy Cogence Advisors, an advisory firm that specializes in the technology sector.
"Any work related to regulatory compliance, internal audit and those kinds of things, they will close their arms around it and keep it closer to where they are," he said.
Standard Chartered's Indian global back office, known as a "captive" operation because it is a unit of the bank, handles functions including HR support, finance and accounting, IT services and helpdesk support for the group globally, according to the Scope International website.
A spokeswoman for the bank in Mumbai declined to comment.
The offshoring of jobs to lower-cost locations such as India can be a politically contentious issue in the United States, especially during a presidential election year, although Standard Chartered is not U.S.-based.
Worries about data security also occasionally crop up around shipping work to India by global firms.
India received 58 per cent of global outsourcing contracts last year, according to industry estimates.
Global banks and financial services companies are among the biggest outsourcers to Indian companies, including Infosys and Tata Consultancy, which provide services ranging from payroll management to maintaining IT networks.
"I think this will become a hot topic for the United States presidential election," Sahai said.
Many banks, including HSBC Plc, JPMorgan and Royal Bank of Scotland, have their own facilities in India with thousands of employees providing support services for global operations, taking advantage of lower costs.
Financial services firms can cut their costs by at least a third by shifting work to in-house operations in India, according to some technology sector estimates.
The issue will give more ammunition to groups in the West that oppose outsourcing because of fears of job losses, said Sudin Apte, chief executive of independent advisory and research firm Offshore Insights. But he did not see a long term-effect.
"Some more rigour in compliance, some more rigour in scrutiny and process adherence...but I think I would welcome that because that makes the system perfect or near perfect," he said.
Copyright: Thomson Reuters 2012