Lloyds TSB busted for 'Stripping'

The U.S. Government has asserted jurisdiction over a non U.S.person for the first time and levied the largest ever penalty for violations of U.S. sanctions.

On January 9th 2009 the British bank Lloyds TSB entered into a deferred prosecution agreement with the U.S. Department of Justice (DOJ) and the New York County District Attorney’s office (NYDA) concerning the bank’s admitted non-compliance with the OFAC sanctions regime pertaining to Iran and Sudan.

The agreed Factual Statement appended to the Motion for Approval of the Deferred Prosecution Agreement states as follows:

'Beginning in or about the mid 1990s and continuing until January 2007, Lloyds, in the United Kingdom, systematically violated both New York State and United States laws by falsifying outgoing United States Dollar ("USD") payment messages that involved countries, banks, or persons listed as sanctioned parties by the United States Department of the Treasury's Office of Foreign Assets Control ("OFAC"). In doing so, Lloyds removed material data from payment messages in order to avoid detection of the involvement of OFAC-sanctioned parties by filters used by U.S. depository institutions. This allowed transactions to be processed by Lloyds' U.S. correspondent banks that they otherwise could have blocked for investigation, or rejected pursuant to OFAC services to those sanctioned countries, and falsified business records of banks primarily located in New York, New York("New York").'

As a result of Lloyds' conduct, and in lieu of criminal prosecution that would result in mandatory forfeiture of such sum, Lloyds agreed to pay the sum of $175,000,000 million in respect of the DOJ action. Pursuant to a parallel Deferred Prosecution Agreement with the DANY entered into contemporaneously, Lloyds also agreed to pay separately $175,000,000 to the State of New York for violations of New York State Penal Law Sections.

One of the startling aspects of this case is that none of Lloyds US branches were involved in processing the transactions that were the subject of the deferred prosecution. All of the bank’s egregious conduct was committed outside of the U.S. in jurisdictions where the conduct was not unlawful. U.S. jurisdiction seems to have been premised on the fact that Lloyds’ actions caused the prohibited U.S. Dollar transactions to occur in the U.S. through U.S. banks. Thus even though Lloyds as a non-US person for OFAC purposes is strictly not required to ensure that its business outside of the U.S. complies with OFAC regulations, it has been found liable as if it were a U.S. person, for systematically causing its U.S. correspondent banks to breach OFAC.

The case marks the dawn of a new and even more aggressive approach by the U.S. to the extra territorial application of its sanctions regime and should be awake up call for all 'risk' professionals within the financial services sector.

BakerPlatt Briefing
http://portal.kyc360.com/article/get_file/27

US Department of Justice Press Release
http://www.usdoj.gov/opa/pr/2009/January/09-crm-023.html

Times Article http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article5488461.ece

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