The New York State Department of Financial Services said on Tuesday that it had identified deficiencies in the surveillance system of Standard Chartered's New York branch that failed to flag high-risk transactions relating to clients based in the UAE and Hong Kong.

Standard Chartered has agreed to pay a $300 million penalty and will suspend the processing of dollar-denominated payments for high-risk business clients at its Hong Kong unit, the New York State Department of Financial Services said.

The U.S. watchdog's allegations come at a critical time for Hong Kong as authorities look to clean up the city's image and clamp down on money laundering ahead of a make-or-break review by international anti-money laundering regulators in six months.

In an unusually punchy statement, the Hong Kong Monetary Authority said its anti-money laundering rules are in line with international standards, and that it could not be responsible for enforcing such rules in other jurisdictions. The U.S. anti-money laundering rules are widely regarded as the toughest in the world.

"This is disappointing for the regulators, given it's such a prominent bank in the territory," said Philippa Allen, chief executive of Hong Kong consultancy ComplianceAsia. "The regulators have been raising standards, they have introduced new powers to rectify some of the problems...I think we will see prosecutions as a result of this, they are going to be under pressure now."

The Hong Kong authorities have been working hard to restore the city's reputation after a 2008 review by international anti-money laundering watchdog Financial Action Task Force (FATF) found several major weaknesses in the city's overall anti-money laundering oversight.

The next FATF inspection, scheduled for March and April, is seen as a crucial test for Hong Kong since a bad mark could undermine its status as a financial center.

    "This doesn't look good for Hong Kong," said Keith Pogson, senior partner, financial services, Asia Pacific at EY. "Anti-money laundering is a very big focus of the government, and the regulators and banks have done a huge amount of work on this."

The HKMA said it takes anti-money laundering and counter-terrorist financing work "very seriously", and has doubled its supervisory resources in this area in the last two years.

    "The HKMA conducts frequent risk based examinations on banks to ensure their compliance with these requirements," it added.

The Hong Kong government introduced new anti-money laundering legislation in 2012. Since then, the HKMA and the Securities and Futures Commission have stepped up scrutiny of banks' anti-money laundering controls, according to bankers and regulatory experts.

The FATF noted these improvements, but regulatory experts said the city still has some way to go.    

"The last FATF review wasn't favorable for Hong Kong, and there are other issues on the table this time, including issues around tax information. Hong Kong has to make sure it is not on any blacklist, as this could be an economic disaster," Pogson said.

(Reporting by Michelle Price; Editing by Denny Thomas and Ryan Woo)

By Michelle Price