International Law Advisory - U.K. Bank to Pay $350 Million Fine in Largest Ever U.S. Sanctions Penalty

January 21, 2009

On January 9, 2009, Lloyds TSB Bank plc, a financial institution organized under the laws of England and Wales, agreed to pay $350 million in penalties to the United States and the State of New York, for violations of federal and New York State law arising from Lloyds TSB’s transactions with countries subject to U.S. economic sanctions.  The fine was split evenly between the U.S. Government and the State of New York.  The federal portion of this fine marks the largest penalty ever imposed against a company for violating U.S. sanctions restrictions.

Lloyds TSB waived indictment and entered into separate deferred prosecution agreements with the DoJ and New York County District Attorney’s Office.  The federal and state authorities have agreed to dismiss the respective charges within two years, provided Lloyds TSB complies with a variety of conditions set forth in the deferred prosecution agreements.

According to factual recitations in the agreements, Lloyds TSB offices in the United Kingdom and United Arab Emirates processed payments originating from U.S.-sanctioned countries or persons through U.S. financial institutions.  In doing so, those offices deliberately removed information from payment messages to U.S. correspondent banks that would have disclosed the source of the funds to the U.S. banks (including customer names, bank names, and addresses).  As a result, the payments in question were not caught under the U.S. banks’ economic sanctions screening and blocking procedures.  The U.S. deferred prosecution agreement notes that this conduct “caused U.S. banks to provide services to those sanctioned countries, and falsified business records of banks primarily located in New York . . . .” 

Lloyds TSB admitted to one count of violating the International Emergency Economic Powers Act (“IEEPA”), 50 U.S.C. §§ 1701-1706, and Sections 560.203 and 560.204 of the Iranian Transactions Regulations (“ITR,” 31 C.F.R. Part 560), which prohibit the export of goods or services by U.S. persons to Iran and acts within the United States that “evade or avoid” U.S. sanctions restrictions.  (Lloyds TSB was not formally charged by the DoJ with violations arising from the U.S. sanctions regulations pertaining to Sudan, although the settlement materials state that similar conduct as that giving rise to the Iran-related charge also occurred in connection with Lloyds TSB business with Sudan and other U.S. sanctioned countries.)  Lloyds TSB separately admitted to violations of New York State Penal Law Sections 175.05 and 175.10, which make it a crime to “with the intent to defraud . . . (i) make or cause a false entry in the business records of an enterprise . . . or (iv) prevent the making of a true entry or cause the omission thereof in the business records of an enterprise.”

The Lloyds TSB enforcement action is notable in several respects:

Magnitude of the Penalty

The Lloyds TSB penalty marks, by a very wide margin, the largest fine ever imposed for violations of the U.S. sanctions regulations.  The magnitude of the fine demonstrates the US Government’s ability to impose substantial penalties for sanctions violations.  In this case, the US Government based its penalty for the single count against Lloyds TSB on the total value of the transactions giving rise to violations ($350 million).

Increased Effort at Enforcing U.S. Sanctions Against Non-U.S. Entities 

The Lloyds matter represents the latest in a series of efforts by the U.S. Government to enforce the U.S. economic sanctions laws and regulations against non-U.S. companies, including in particular foreign banks and other financial institutions that have conducted business with sanctioned countries while also maintaining ties to the United States.   Notably, the largest penalty imposed for a U.S. economic sanctions violation prior to the Lloyds TSB penalty was also against a non-U.S. financial institution – Dutch bank ABN-Amro – which was subject to a combined $40 million fine in 2006 for violating the U.S. sanctions regulations and provisions of the Bank Secrecy Act and the Federal Deposit Insurance Act. 

The New York authorities noted that one of the mitigating factors in Lloyds TSB’s favor was the company’s decision to cease its Iran-related business voluntarily before being contacted by the authorities.  A range of other non-U.S. companies in a variety of sectors – including non-U.S. banks, insurers, and various oil and gas producers and service providers – have also voluntarily exited the Iran market (and other U.S.-sanctioned countries) in recent years, in some cases after coming under investigation by the Department of Treasury’s Office of Foreign Assets Control (“OFAC,” the principal federal agency responsible for administering and enforcing the U.S. economic sanctions regulations), the DoJ, and/or U.S. bank regulators.  The U.S. Government’s focus on employing the extraterritorial provisions of U.S. law against non-U.S. entities to restrict overseas business with sanctioned countries is a trend that is expected to continue.

Inter-Agency Coordination in Investigation

The Lloyds TSB enforcement action was a joint effort on the part of the DoJ Asset Forfeiture and Money Laundering Section and the New York County D.A., arising from separate investigations that those offices had initiated independently.  Personnel from the Internal Revenue Service, Federal Reserve Board, and New York State Banking Department also participated in the investigations.  The range of Federal and New York authorities that were involved in this enforcement action shows that U.S. economic sanctions issues can give rise to a range of legal risks (including under both federal and state laws), and that the U.S. Government’s capacity to investigate U.S. sanctions-related issues is very broad.  Whereas in the past the traditional U.S. sanctions investigation originated at OFAC, and proceeded to the DoJ only where criminal liability was apparent, the Lloyds TSB investigation involved the support and resources of a diverse range of federal and state agencies.

Cooperation From U.K. Authorities

Notably, it appears that assistance in the investigation was also obtained from the United Kingdom Financial Services Authority, although the details of the U.K. Government’s involvement are not clear.  The prospect that the U.K. authorities supported this effort could represent a significant enhancement in the U.S. Government’s ability to pursue U.S. sanctions investigations and enforcement actions against non-U.S. parties.

Use of Deferred Prosecution Agreement

The use of deferred prosecution agreements represents the continuation of a trend seen in U.S. regulatory enforcement matters both in economic sanctions / export controls and in other contexts.  The Lloyds TSB deferred prosecution agreements show that companies that offer cooperation to the investigating authorities may avail themselves of the benefits of such agreements (including, in particular, the potential to avoid formal criminal indictment for the underlying past conduct, and to mitigate any financial penalties), but that those agreements can involve a range of ongoing responsibilities and risks.  As part of its agreements with the DoJ and New York County D.A., Lloyds TSB will be required to implement a range of best practices compliance measures not just for economic sanctions compliance, but also the Anti-Money Laundering and Combating Financing of Terrorism best practices and the Wolfsberg Anti-Money Laundering Principles for Correspondent Banking (both of which recommend a range of internal anti-money laundering compliance procedures for financial institutions). 

Lloyds TSB must also conduct an investigation, with the assistance of an independent consultant, into U.S. dollar payments from 2002 to 2007, and provide to the DoJ and New York County D.A. any SWIFT payment messages relating to U.S. dollar payments through correspondent accounts held by Iranian banks.  Lloyds TSB must also investigate whether any of its SWIFT payment messages related to persons designated by OFAC under a variety of weapons of mass destruction and terrorist-related restricted parties lists, and provide information regarding those matches to the DoJ and New York authorities.  

Notably, the DoJ deferred prosecution agreement provides that the DoJ can prosecute Lloyds TSB in the event it is determined that Lloyds personnel or affiliates knowingly and willfully transmitted or approved the transmission of funds to or from OFAC-restricted parties, in violation of U.S. law.  Therefore, Lloyds TSB has committed to investigate and disclose information that could potentially result in further charges.

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Copies of the DoJ and New York County D.A. press releases are set forth in the attached link.  If you would like to discuss the implications of the Lloyds TSB enforcement action, please feel free to contact Ed Krauland (202-429-8083), Partner at Steptoe’s Washington, D.C. office and head of Steptoe’s economic sanctions practice; David Lorello (+44 20 7367 8007), Senior Associate in Steptoe’s London Office; or Jack Hayes (202-429-6491), Senior Associate in Steptoe’s Washington, D.C. office.