UniCredit Clears Up Legal Hangover With $1.3 Billion Payout

(Bloomberg) -- UniCredit SpA ended one its most of its most significant legal disputes by settling a U.S. probe over sanctions violations, clearing the path for the lender to focus on growing its business after years of cleaning up legacy issues.

The bank agreed to pay $1.3 billion to settle U.S. charges for violating sanctions against Iran that have been hanging over UniCredit since 2011. The amount is more than covered by provisions, resulting in a 300 million-euro ($340 million) boost to first-quarter earnings.

“Another key risk on UCG has been addressed by management, which has reiterated in the past it did not expect the settlement to trigger new provisions,” Fidentiis analyst Fabrizio Bernardi wrote in a note to clients.

The agreement takes another old problem off Chief Executive Officer Jean-Pierre Mustier’s desk as he prepares a growth plan following a costly restructuring. After exceeding plans for cost cutting and improving asset quality, the CEO is preparing to take his next set of targets to investors in which he envisions “reasonable” growth.

UniCredit rose as much as 2.7 percent in Milan trading. The stock was up 1.5 percent at 12.68 euros as of 11:56 a.m., boosting this year’s gain to 30 percent.

UniCredit Clears Up Legal Hangover With $1.3 Billion Payout

"The headline number may look high but was more than covered by provisions, which is positive news for shareholders” said Francesco Castelli, a portfolio manager at Banor Capital. “UCG’s priority is a re-rating, so anything reducing investors’ concerns goes in the right direction."

The agreement removes one of the biggest potential obstacles for Mustier should he decide to pursue acquisitions. While the CEO has emphasized he wants to grow without the help of deals, Italian bank is readying a rival bid for Commerzbank AG in case talks to merge the German lender with Deutsche Bank AG collapse, the Financial Times reported earlier this month. Both banks declined to comment on the report.

The German business, HypoVereinsbank, will enter a guilty plea in Manhattan to a state-level charge of violating books-and-records requirements. UniCredit’s Austrian unit will enter into a deferred-prosecution agreement.

Biggest Payout

The penalty is several hundred million dollars more than people familiar with the matter had expected. It’s also among the largest ever related to U.S. sanctions laws. On April 9, Standard Chartered Plc agreed to pay more than $1 billion to resolve a long-running investigation into its handling of transactions related to Iran.

Over a decade beginning in 2002, the German bank moved at least $393 million through the U.S. financial system on behalf of sanctioned entities, the U.S. Justice Department said. The Austrian unit of UniCredit also conspired to circumvent U.S. restrictions on Iranians, prosecutors said.

The bank handled billions of dollars in illegal and non-transparent transactions to clients in sanctioned countries including Cuba, Iran, Libya, Myanmar and Sudan, according to New York’s Department of Financial Services, which fined UniCredit $405 million as part of the settlement. The U.S. attorney’s office in Washington, the Treasury Department, the New York branch of the Federal Reserve Bank and the New York district attorney’s office also took part in the settlement.

Stronger Controls

UniCredit says it has implemented a “remediation and enhancement plan to strengthen its policies, procedures, supports and controls to ensure full compliance with applicable economic sanctions and internal control requirements,” it said. The bank said it would also further develop methods to prevent and detect illegal activity.

According to the New York regulator, UniCredit implemented automated transaction filtering software, known as the “embargo tool,” in 2004 as part of its efforts to flag transactions that might run afoul of the U.S. Treasury’s Office of Foreign Assets Control.

The bank’s core compliance team came up with an instructional guide designed to help the bank’s employees work around the embargo tool -- by submitting payment orders in an “OFAC-neutral” manner that wouldn’t trigger any red flags, according to the New York regulator.

‘Profit Over Compliance’

“UniCredit prioritized profit over compliance and security by deliberately engaging in billions of dollars of transactions with clients from sanctioned nations, including Iran, Libya and Cuba, and then working to cover their tracks to avoid detection,” said Linda Lacewell, the acting superintendent of the New York regulator.

Mustier inherited the case when he took the helm in July 2016. HypoVereinsbank was subpoenaed in March 2011 by the New York district attorney’s office over transactions with certain Iranian entities.

UniCredit is one of several European financial institutions settling similar cases. Fifteen European banks have together paid more than $19.5 billion for violating U.S. sanctions against various countries. BNP Paribas SA’s $8.97 billion penalty in 2014 was the largest individual fine.

The settlement is the second for an Italian bank. Intesa Sanpaolo SpA, the country’s second-biggest lender, agreed to pay $235 million in Dec. 2016 to resolve a New York regulator’s allegations that it flouted money-laundering controls for a decade.

(An earlier version of this article was corrected to remove a reference to the bank’s provisioning.)

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