In January 2009, the U.S. Department of Justice (DOJ) announced that Lloyds TSB Plc, a UK bank headquartered in London, agreed to forfeit $350 million to settle violations of the U.S. International Emergency Economic Powers Act (IEEPA). According to the DOJ, the violations related to transactions Lloyds conducted on behalf of customers in Iran, Sudan, and other countries subject to U.S. economic sanctions.
The United States maintains comprehensive economic sanctions against Iran and Sudan (as well as Cuba), and selective sanctions against a variety of other countries, entities, and individuals. The sanctions are promulgated under the IEEPA and administered by the U.S. Department of Treasury, Office of Foreign Assets Control (OFAC). Violations of the sanctions can be punished by civil or criminal penalties. The case was investigated jointly by the DOJ, the U.S. Department of Treasury, and the New York County District Attorney’s office. The UK Financial Services Authority (FSA) also reportedly assisted in the investigation.
To settle the matter, Lloyds agreed to forfeit $175 million to the United States and $175 million to New York County as part of separate deferred prosecution agreements with the DOJ and the Office of the New York County District Attorney (also known as the Manhattan DA). The agreements require Lloyds to take remedial actions to prevent and detect future violations, to implement best practices for international banking transparency, to cooperate with ongoing law enforcement investigations, and to conduct an internal review of past transactions. The Manhattan DA stated that Lloyds halted its Iranian business voluntarily before being contacted by prosecutors, and provided full cooperation with the investigation after being contacted.
Lloyds announced in a 2008 U.S. securities filing that it was making a provision to cover £180 million related to historical payments being investigated by U.S. authorities. Lloyds TSB shares are traded in the United States through American Depositary Receipts listed on the New York Stock Exchange under the symbol LYG. U.S. sanctions law provides jurisdiction over actions of all activities conducted in the United States, and actions of all U.S. companies, U.S. citizens and residents wherever located, and certain non-U.S. companies including, in some instances, companies whose shares are traded through U.S. ADRs.
Under the IEEPA, it is a crime to knowingly and willfully violate the Iranian Transactions Regulations and the Sudanese Sanctions Regulations. Both programs prohibit, among other things, the “exportation of services” to the sanctioned country, which is defined as the provision of services anywhere if the benefit of the services is received in the sanctioned country. Other IEEPA sanctions programs prohibit the export of services to any person or entity listed on OFAC’s “Specially Designated Nationals” or “SDN” List. The purpose of this prohibition is to prevent sanctioned entities from gaining access to the U.S. financial system.
According to the DOJ and the Manhattan DA, Lloyds personnel in the UK and Dubai falsified wire transfers involving SDN banks and other entities by deliberately deleting customer names, bank names, and addresses from payment messages. This made the transactions appear to originate at Lloyds in the UK rather than at the sanctioned country banks.
Most U.S. banks use software screening systems to monitor wire transfer activities to detect prohibited transactions. These automated systems rely, in part, on matching words in the wire instructions against the SDN List and other prohibited parties lists, and against countries on which the United States imposes economic sanctions. According to the DOJ, Lloyds deliberately deleted information from the wire transfers that would have triggered the automated screening software of other U.S. banks involved in the transactions. Lloyds reportedly referred to this process as “repairing” or “stripping” the wire instructions. According to the DOJ, this process allowed more than $350 million in transactions to pass undetected through the U.S. financial system that might have otherwise been flagged for further scrutiny or rejected by U.S. banks. The Manhattan DA's Office Stated that the transfers were made to buy goods and services from U.S. companies and to finance the purchase of goods and services from non-U.S. vendors that sought payment in dollars.
The U.S. authorities announced that the investigations are continuing, and press reports indicate that as many as nine other European banks are involved in the investigation. Both Credit Suisse Group and Barclays Plc have announced publicly that they have provided information to prosecutors in cooperation with the investigations. This is not the first time a non-U.S. bank has been penalized for violating U.S. sanctions on Iran – in late 2005, the Netherlands-based bank ABN AMRO was fined $44 million by OFAC for violations of U.S. sanctions on Iran and Libya.
Analysis
The Lloyds TSB settlement highlights several important developments in the enforcement of U.S. trade controls. First, the fact that a UK bank was penalized under U.S. sanctions for activities conducted in London and Dubai highlights the global reach of U.S. international trade jurisdiction. Acting Assistant U.S. Attorney General Matthew Friedrich stated that the U.S. authorities “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.”The April 2009 indictment of Chinese national Li Fang Wei by a New York county grand jury makes the same point. The indictment charged Mr. Wei with violations of U.S. sanctions through the falsification of names and accounts so that payments to and from Iran would be able to pass through U.S. financial institutions, in particular in New York, and to and from his company in China, LIMMT, which was designated as an SDN by OFAC in June 2006. The Lloyds case and the recent indictment of Mr. Wei suggest this pattern of global prosecution and enforcement will only continue.
Second, the simultaneous settlement with both the County of New York and the United States, along with the participation of the U.S. Department of Treasury and the FSA illustrates a strong and growing trend in international cooperation among authorities from different jurisdictions. Commenting on the investigation, U.S. Internal Revenue Service Commissioner Doug Shulman stated that “[t]oday’s global economy demands this type of high-level coordinated approach by multiple agencies and authorities.”
Finally, the need for strong corporate compliance measures has never been greater. With increasing scrutiny by regulators worldwide, all companies involved in international transactions are well advised to review their compliance programs to ensure they are properly designed and implemented to prevent and detect violations of international trade controls. Lloyds TSB’s decision to exit its Iran business prior to being contacted by prosecutors, which was cited as a factor in the company’s favor in settling with the government, is only one approach. Perhaps more important is to set the correct tone of compliance throughout the company, and to implement procedures that make compliance a part of daily life in the company. As a Lloyds spokesman commented the day the settlement in this matter was announced, “[w]e are committed to running our business with the highest levels of integrity and regulatory compliance across all of our operations and have undertaken a range of significant steps to further enhance our compliance programmes.”
This article was prepared by Scott Maberry This e-mail address is being protected from spambots. You need JavaScript enabled to view it or 202 662 4693 and Thad McBride \n This e-mail address is being protected from spambots. You need JavaScript enabled to view it "> This e-mail address is being protected from spambots. You need JavaScript enabled to view it or 202 662 0287 from Fulbright's International Trade practice.
Changes to Telecommunications Restrictions in Cuba and Travel and Payment related to Agricultural and Medical Exports to Cuba
The export of goods from the United States to Cuba is generally prohibited under the U.S. sanctions, which are codified in the Cuban Assets Control Regulations, 31 C.F.R. Part 515. However, two recent events will make it slightly easier for U.S. companies and individuals to conduct certain kinds of activities in or with Cuba. First, in provisions to the Omnibus Appropriations Act of 2009 (“Omnibus Appropriations Act”) (March 11, 2009), Congress made two changes to regulations related to licensed exports of agricultural and medical goods to Cuba. Second, on April 13, 2009, the White House announced steps to license U.S. telecommunications service providers to establish cable, satellite, and network links with the island and to provide certain services to Cuba and Cuban customers. These changes are outlined below.
Agricultural and Medical Exports Changes
Under current law, certain types of agricultural goods, medicine, and medical devices may be exported to Cuba if a valid license is granted. While the Office of Foreign Assets Control of the U.S. Department of the Treasury (“OFAC”) generally administers and implements the Cuban Assets Control Regulations, the U.S. Department of Commerce has the authority to issue licenses for agricultural and medical exports. Such exports may only be paid for by “cash in advance,” as defined by the regulations, or financed by a third-country bank, i.e., a non-Cuban and non-U.S. bank.
In the Omnibus Appropriations Act, Congress directed OFAC to issue a “general license” authorizing travel-related transactions for the marketing and sale of agricultural and medical goods in Cuba. A general license would authorize certain qualifying travel-related transactions by operation of law, without requiring individual government licenses. While OFAC is developing that general license, the current requirement of a specific license to travel to Cuba remains in effect.
Congress also directed that no funds be administered to implement the current “cash in advance” policy, which requires payment prior to the shipment of goods. However, OFAC guidance issued on March 11, 2009 indicated that the Omnibus Appropriations Act did not alter the underlying statutory authority for the term in the Trade Sanctions Reform and Export Enhancement Act of 2000, and that the current limitations on the method of payment for sales to Cuba would remain in place.
Telecommunications Changes
On Monday, April 13, 2009, the White House announced that President Obama is directing the Secretaries of State, Treasury, and Commerce to take steps to authorize new telecommunications services and liberalize family visitation and remittances to Cuba. These steps have not yet been completed, and current policies remain in effect until their implementation.
Under the proposed new policy, U.S. telecommunications network providers would be able to enter into agreements to establish fiber-optic cable and satellite telecommunications facilities linking the United States and Cuba. U.S. telecommunications providers would also be permitted to enter into roaming service agreements with Cuba’s telecommunications service providers, and U.S. satellite radio and television service providers would be able to enter into transactions to provide services to customers in Cuba.
In addition to these changes, the President has directed that the scope of allowable humanitarian donations to Cuba be expanded, and that a general license be issued to lift all restrictions on family visits to Cuba and on family remittances to Cuban family members who are not prohibited members of the Government of Cuba or the Communist Party of Cuba.
Summary
Taken individually, the changes in Cuba sanctions affecting U.S. businesses are relatively small. However, they may demonstrate that the Obama administration and the current Congress are willing to pursue increased trade with Cuba, and additional easing of U.S. sanctions on Cuba could be possible.
This article was prepared by This e-mail address is being protected from spambots. You need JavaScript enabled to view it ( This e-mail address is being protected from spambots. You need JavaScript enabled to view it or 202 662 0426).