Lloyds' DPA Could be Just the First of Many for Banks

January 12, 2009
Anxiously waiting for the other (proverbial) shoe to drop is an age old practice, particularly at banks dealing with regulators.
But following the $350 million deferred prosecution agreement (DPA) Lloyds TSB Group reached with the U.S. Justice Department and the New York County District Attorney, banks are waiting for lots of other shoes to fall.

That’s because the Lloyd’s settlement is only the first dramatic resolution of one of at least nine other investigations by the Justice Department and Manhattan D.A. Robert Morgenthau. The names of all of the other institutions aren’t known, but Credit Suisse announced year ago that it was working with the Justice Department and reiterated that today.

Under the DPA, Lloyds agreed that it violated the International Emergency Economic Power Act. The act allows the President (or his proxy at the U.S. Treasury Department’s Office of Foreign Asset Control) to impose sanctions on countries and entities giving material support to terrorism.

According to reports, at stake was the ability of Iran to buy technology for its nuclear program and for other military uses. Perhaps that is why Lloyds agreed to a whopping $350 million forfeiture - $175 million to New York and an equal sum to the Fed.
Lloyds folded, at least according to the Justice document, because the bank’s material support of sanctioned entities was manifold and undeniable. Between 2001 and 2004, Lloyds allowed over $300 million in wire transfers into the United States from Iranian banks, including Bank Melli, Bank Saderat and Bank Sepah, whose origins were concealed so that Iran was able to engage in otherwise prohibited transactions. Lloyds also allowed $20 million of transfers from sanctioned Sudanese clients to enter the United States up until 2007.

It would be nice to think that someone at Lloyds merely goofed up – you know, turned their back for a second while the wires were being processed and didn’t notice that the money was coming from Iran or the Sudan. But the Justice documents make clear that “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.”

The process was referred to by employees as stripping and, perhaps unfairly, it is possible to imagine new Lloyds’ employees being schooled in “Stripping 101.”

Lloyds’ business with the Justice is by no means finished. But the bank’s argument in another outstanding case with the department seems further eroded by the January 9, 2009 DPA.

In that case, Lloyds argued in January of 2008 that the United States had no jurisdiction over it. The case involved a claim that Lloyds had knowingly helped a Cypriot millionaire wanted by U.S. investigators launder profits from an insider trading scheme. Justice was seeking $130 million from Lloyds (and $160 million from the Bank of Cyprus).
Justice countered Lloyd’s challenge by pointing out that the crime and subsequent money laundering initially took place in the United States and was, under 18 U.S.C. 1956(b), within U.S. jurisdiction. Besides, the bank had agreed to be regulated by the Federal Reserve, signing an agreement with the Fed to open a New York branch.

The Lloyds and Bank of Cyprus cases are unresolved in the courts, but observers think the resolution of this sanctions case, coupled with Lloyds expressed desire to continue to do U.S. business, will result in an out-of-court resolution. (Bank of Cyprus may hold out, but that is a different matter.)

Kieran Beer

Kieran Beer is the Editor-in-Chief of Fortent Inform, moneylaundering.com and Money Laundering Alert. He has been a financial journalist for 20 years. Prior to joining Fortent, he was a writer for Bloomberg Markets magazine and Executive Editor of Bloomberg Wealth Manager. Before working at Bloomberg, Beer served as editor-in-chief of The Bond Buyer, founding editor of Thomson Municipal News/The Bond Buyer Wire and editor of the American Banker. He began his career at Institutional Investor, where he worked as a reporter and editor in the newsletter division and was a contributor to Institutional Investor magazine.

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