On Dec. 22, 2009, the U.S. Department of Treasury’s Office of Foreign Assets Control (“OFAC”) issued a release advising that Lloyds TSB Bank, PLC (“Lloyds Bank”), headquartered in London, entered into a $217 million settlement with OFAC to resolve apparent violations of the OFAC sanctions programs.1 The apparent violations involved “stripping” material information from financial transactions processed through U.S. financial institutions in order to conceal the involvement of countries, banks or persons targeted by the OFAC sanctions. This settlement indicates that OFAC is continuing to focus its enforcement efforts on financial institutions that have engaged in “stripping” activity in order to utilize the U.S. financial system in ways that violate the U.S. sanctions programs.
Earlier, in January 2009, Lloyds Bank also entered into Deferred Prosecution Agreements (“DPAs”) with the Department of Justice (“DOJ”) and the New York County District Attorney’s Office (“DANY”) to resolve allegations related to its “stripping” activity. A summary of the DPAs that Lloyds Bank entered into with the DOJ and the DANY is available in our Alert, dated Feb. 4, 2009, available here. Pursuant to the DPAs, Lloyds Bank agreed to forfeit $175 million to the DOJ, and an additional $175 million to DANY (for a total forfeiture of $350 million). OFAC deemed the $217 million settlement amount satisfied by Lloyds Bank’s payment of $350 million to the DOJ and DANY for the same pattern of conduct.
Specifically, OFAC alleged that Lloyds Bank violated the Iranian, Sudanese, and the now-repealed Libyan sanctions programs from June 2003 through August 2006, by sending approximately 4,200 electronic funds transfers involving sanctions targets, valued at approximately $37 million, through third-party banks located in the United States. By manipulating and deleting material information in the wire transfers routed through the United States, Lloyds Bank prevented U.S. banks from detecting the involvement of sanctions targets, which resulted in the exportation of services from the United States to U.S. sanctions targets. This systemic pattern of conduct began in the mid-1990s when Lloyds Bank began stripping information from U.S. dollar wire transfer instructions at the request of its Iranian bank clients. To ensure that any references to the Iranian banks or Iran were removed from payment instructions sent through the United States, Lloyds Bank began handling U.S. dollar payments from the Iranian banks manually to ensure that the names of the sanctioned banks were removed from any payment instructions sent to or through the United States. In order to conceal the involvement of the Iranian banks, Lloyds Bank omitted or abbreviated any references to Iran to make it appear as though the Iranian banks’ payment instructions originated with Lloyds Bank.
Lloyds Bank provided similar services to its customers that were sanctioned under the Libya and Sudan sanctions programs. After the U.S. imposed sanctions against Sudan in 1997, Lloyds Bank attracted Sudanese bank customers by advising the banks that it was used to handling transactions involving U.S.-sanctioned banks through its dealings with the Iranian banks.
This policy of stripping material information from payment instructions was written and approved by Lloyds Bank’s senior managers. For example, an internal memorandum at Lloyds Bank instructed employees to delete references to Iran, Sudan, Libya, or other OFAC-sanctioned countries from customer payments routed to the United States. By utilizing such procedures, Lloyds Bank hid the identity of its sanctioned clients and provided such clients with access to U.S. dollars.
In early 2002, employees in Lloyds Bank’s International Payment Processing Unit (“IPPU”) realized that increased scrutiny of international wire transfers was creating conflict for the bank. Such concerns were raised by senior IPPU staff and the Director of Lloyds Bank’s Group Financial Crime Unit to the Financial Institutions Unit (“FI”), which was responsible for generating Lloyds Bank’s international business with other banks. After discussing the concerns over the stripping of information referencing Iran, Lloyds Bank’s IPPU stopped stripping information referencing Iran from the payment instructions. However, the unit began advising its Iranian bank clients to “cleanse” payment instructions of such references before sending them through Lloyds Bank.
According to the OFAC settlement agreement, senior IPPU staff questioned this practice and the Lloyds Group Financial Crime Director advised the Group Executive Committee (“GEC”) that there was a risk of a U.S. investigation characterizing Lloyds Bank as having been “knowingly and directly complicit in frustrating [the United States’] sanctions policy.” The GEC decided that Lloyds Bank would cease to conduct transactions involving the active manipulation of wire transfer instructions to conceal information related to Iran. Lloyds Bank later went to the U.K. authorities to discuss its handling of the wire transfers involving Iran.
Even after Lloyds Bank’s senior management determined to stop these practices, between May 2003 and November 2003, some of Lloyds Bank’s personnel continued to be unclear about the instruction to cease all “stripping” activity relating to Iran. Only after November 2003 did Lloyds Bank completely stop providing the U.S. dollar clearing services to Iranian banks in London. However, it was not until about April 2004 that Lloyds Bank ceased providing similar services with respect to Libya, and until about August 2006 with respect to Sudan.
Lloyds Bank did not voluntarily self-disclose the apparent violations of the Iranian, Sudanese and Libyan sanctions programs. However, OFAC imposed a reduced penalty in consideration of the following mitigating factors:
- Lloyds Bank provided OFAC with substantial cooperation;
- Lloyds Bank’s remedial response was prompt and thorough;
- Lloyds Bank had not been subject to an OFAC enforcement action in the five years prior to the transactions at issue.
As part of its remediation efforts, Lloyds Bank hired an independent consulting firm to review all payment messages and existing periodic or monthly account statements for any U.S. dollar accounts maintained for certain Iranian and Sudanese financial institutions for the period between 2002 and 2007. Lloyds Bank provided OFAC with this information. Lloyds Bank also agreed, pursuant to its settlement with OFAC, that its Internal Audit Department would review, on an annual basis for two years, the bank’s policies, procedures, and a sampling of U.S. dollar payments to determine whether any payments subject to the OFAC sanctions and involving a U.S. person have been processed.
As noted above, the Lloyds Bank settlement is indicative of OFAC’s continued efforts to prevent financial institutions from circumventing U.S. sanctions and utilizing the U.S. financial system to engage in activity involving U.S. sanctions targets. Other similar cases have been brought by OFAC and other law enforcement authorities. For example, on Aug. 24, 2009, the Australia and New Zealand Bank Group, Ltd. (“ANZ Bank”) entered into a settlement with OFAC to resolve allegations that it violated U.S. sanctions by stripping information from financial transactions.2 Specifically, ANZ Bank paid $5.75 million for stripping references to Sudan and the names of entities subject to the Sudanese and Cuban sanctions programs from SWIFT messages that it forwarded to U.S. correspondent banks. A summary of the settlement between ANZ Bank and OFAC is in our Alert, dated Oct. 1, 2009, available here.
OFAC’s release regarding Lloyds Bank’s settlement is available here.