January 20, 2009
On January 9, 2009, the U.S. Department of Justice (see press release) and the New York County District Attorney’s Office ("NYDA") (see press release) announced that Lloyds TSB Bank plc ("Lloyds") agreed to forfeit $350 million and take other actions to resolve its liability for violating the International Emergency Economic Powers Act ("IEEPA") and U.S. economic sanctions regulations administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control ("OFAC") and for causing New York financial institutions to falsify records. According to the Factual Statement accompanying the Deferred Prosecution Agreements (DOJ and NYDA) ("DPAs"), from 1995 until January 2007, Lloyds in the United Kingdom and Dubai removed or "stripped" information from outgoing U.S. dollar ("USD") wire transfer payment messages that would have disclosed that the transactions involved countries, banks or persons that were sanctioned parties under Iranian or, to a much lesser extent, Sudanese and (former) Libyan sanctions.
Lloyds’ penalty for its UK Iranian Bank correspondent customers appears to be limited to those transactions that were intended for the United States or for U.S. banks located outside the United States, i.e., Lloyds does not appear to have been penalized for so-called U-turn transactions which were permitted at the time.
Interestingly, none of Lloyds’ USD transactions was processed by Lloyds’ branches in the United States; rather, they were processed through other U.S. correspondent banks whose automated OFAC-filtering systems were unable to detect the OFAC-sanctioned parties because of the removal of the information. Consequently, Lloyds’ U.S. correspondent banks could not comply with OFAC requirements to reject or block the transactions, as appropriate.
Lloyds does not appear to be the only bank that may have removed customer or bank information from payment messages. According to the NYDA’s press release, joint investigations into stripping by other banks are continuing. Press reports have referred to possible criminal investigations involving as many as eight other banks, including ABN AMRO Bank N.V. and other European banks. In December 2005, ABN AMRO paid a total of $80 million in civil money penalties to settle similar allegations by OFAC, the Federal Reserve, and state banking regulators in Illinois and New York. In that case, one of ABN AMRO’s overseas branches had developed "special procedures" for certain funds transfers, check clearing operations, and letter of credit transactions that prevented ABN AMRO’s New York and Chicago branches from complying with OFAC regulations.
Under the DPAs, Lloyds agreed (1) to the filing of a one-count Criminal Information charging it with violating the Iranian Transactions Regulations, 31 CFR 560.203 and 560.204, issued under IEEPA; (2) to accept and acknowledge responsibility for its conduct; (3) to cooperate with the Justice Department and NYDA in their investigations; (4) to pay $175 million to the United States and $175 million to the NYDA; and (5) while not required to do so by applicable law or regulation, to comply with international Anti-Money Laundering and Combating Financing of Terrorism best practices and the Wolfsberg Anti-Money Laundering Principles for Correspondent Banking ("Wolfsberg Principles"). The Bank also agreed to conduct, within 270 days, an historical transaction review or a "lookback" with the assistance of an outside consultant of all available incoming and outgoing SWIFT MT 100 and MT 200 series USD payment messages from April 2002 through December 2007 that were processed through its UK processing centers and Dubai branch, something that could be viewed as an additional penalty because of the substantial cost generally involved.
In consideration of Lloyds’ willingness to acknowledge its responsibility, voluntary termination of its conduct with its Iranian Bank clients in 2004 and the Sudanese banks in 2007 prior to being contacted by the government, commitment of substantial resources to its prompt and thorough internal investigation and cooperation, demonstration of future good faith and compliance with the Wolfsberg Principles, and willingness to settle all civil and criminal claims for any act within the scope or related to the Factual Statement, the Justice Department and NYDA agreed to defer prosecution for 24 months or less, at their discretion. and DOJ agreed that, if Lloyds is in full compliance with the DPAs at that time, it will move to dismiss with prejudice the Criminal Information.
Use of DPAs and Other Criminal Dispositions Against Financial Institutions in OFAC Cases Possible
In recent years, the Justice Department has increasingly used DPAs to resolve federal criminal investigations against corporations. See Gibson, Dunn & Crutcher LLP 2008 Year-End Update on Corporate Deferred Prosecution and Non-Prosecution Agreements. This appears to be the first time, however, that a DPA has been used to resolve criminally a bank’s potential OFAC liability. According to Acting Assistant Attorney General Matthew Friedrich, "The Department will continue to use criminal enforcement measures against the knowing and intentional evasion of U.S. sanctions laws, particularly where such conduct has the potential to finance terrorist activities."
Possible Civil Money Penalties?
In addition to potential criminal penalties, banks and other persons that violate OFAC sanctions can be subject to significant civil money penalties. Maximum civil penalties under IEEPA recently were raised to $250,000 per violation. It is unclear whether OFAC will or can take further action in this matter. Unlike in the ABN AMRO case, it is unlikely that U.S. bank regulators would bring an enforcement action against Lloyds given the absence of any transactions involving OFAC-sanctioned parties that were processed by Lloyds’ U.S. branches.
How to Protect Your Institution
Given the ongoing OFAC investigations by the Justice Department and the NYDA and the very substantial criminal and civil penalties that can be exacted for OFAC violations, foreign banks and U.S. banks with foreign branches and affiliates may want to consider reviewing carefully their practices, procedures and operations to ensure that they comply with OFAC regulations and that there are not isolated pockets of compliance problems that could put the institution at risk.
To reduce the likelihood of running afoul of U.S. law, financial institutions should review the adequacy of their written policies and procedures, internal controls to prevent unauthorized stripping, transaction monitoring and filtering systems, and employee training programs. To ensure compliance with and the effectiveness of these measures, financial institutions also should consider conducting periodic risk-based independent testing of USD transactions.
Finally, as part of a U.S. bank’s risk-based due diligence of its foreign correspondent bank clients, U.S. banks may want to consider risk-based measures to reduce the likelihood that a foreign bank client could be stripping payment messages, including requiring a foreign bank to agree not to remove information from payment messages.
 A U-turn transaction is a transaction where a U.S. depository institution acts only as an intermediary bank in clearing USD payments between non-U.S., non-Iranian banks. On November 10, 2008, OFAC amended Section 560.516 of the Iranian Transaction Regulations, to prohibit specifically U-turn transactions. See Final Rule, 73 Fed. Reg. 66541 (Nov. 10, 2008)
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