International Sanctions and Bank Prosecutions

Seetha Ramachandran

U.S. Department of Justice

Deputy Chief

Asset Forfeiture Money Laundering Section

Money Laundering and Bank Integrity Unit

UNITED STATES v. LLOYDS TSB BANK PLC

• Deferred Prosecution Agreement filed

January 9, 2009

• One count Criminal Information filed

• Knowingly and willfully violated IEEPA

– Prohibits exportation of services to Iran w/out

authorization

– Any transaction in US that evaded & avoided

sanctions

• $350,000,000 forfeiture

TERMS OF DEFERRED PROSECUTION

• Lloyd’s must acknowledge responsibility

• Voluntarily terminate the noted conduct

• Cooperate with the US as noted

• Demonstrate future compliance w/ best

practices (international AML standards &

Wolfsberg Principles)

• Lloyds must meet all terms within 24 months

THE GLOBAL PAYMENT SYSTEM

Over the last 30 years, the world’s banks

have developed an international payment

system that has been instrumental in

fostering global economic prosperity,

allowing financial transactions to be

processed with confidence, speed, and

efficiency.

THE GLOBAL PAYMENT SYSTEM (cont’)

Role of SWIFT

• SWIFT is the co-operative supplying secure,

standardized messaging services to nearly

8,000 financial institutions in over 200

countries.

• In 2005, SWIFT handled more than 2.5 billion

messages globally (averaging more than 10

million messages per day).

TYPICAL FUND TRANSFER

• A typical funds transfer involves the

Originator instructing its bank (the

Originator’s Bank) to make payment to the

account of a payee (the Beneficiary) with the

Beneficiary’s Bank.

• In the context of international funds

transfers, the Originator’s Bank and the

Beneficiary’s Bank often do not have a

relationship that allows them to settle the

payment directly with each other.

• Intermediary accounts at Intermediary Banks

must be employed to settle the payment. A

typical funds transfer may involve multiple

banks in multiple countries

• The messages (payment orders) used to

execute funds transfers are carried over a

system such as CHIPS or SWIFT.

TYPICAL FUND TRANSFER (cont’)

SWIFT PAYMENT TRANSFER MESSAGES

(cont’)

• Most common SWIFT Message Types:

– MT103 (Single Customer Credit Transfer

Message)

– MT202 (Payment Instruction between

financial institutions)

COVER PAYMENT BASICS

• A cover payment involves two distinct

messages and two distinct funds transfers:

– MT103 – Direct payment order from the

originator’s bank to the beneficiary’s bank

(first funds transfer) to instruct the beneficiary

bank to pay beneficiary.

– MT202 – Bank-to-bank payment order to the

intermediary bank to instruct that the

beneficiary bank be paid by originator or

intermediary bank to COVER the funds paid

by the beneficiary bank to the beneficiary

(second funds transfer).

Payment

Order

Originator

(Frankfurt)

Originator’s Bank

(Frankfurt)

MT202

Cover

Payment

Beneficiary’s Bank

(Hong Kong)

Intermediary Bank of Beneficiary’s Bank

(New York)

Payment

Beneficiary

(Hong Kong)

Credit

MT103 Payment Order

Intermediary Bank for Originator’s Bank

(New York)

Payment (MT202)

MT202

Cover

Payment

COVER PAYMENT METHOD OF TRANSFER

SWIFT MESSAGE FORMATS

MT 103 • Used for customer transfers • Accepts 10,000 characters • Fields in an MT 103 include:

– Sender’s Reference (Field 20) – Value Date, Currency Code &

Amount (Field 32) – Originator (Field 50) – Originator’s Bank (Field 52) – Originator’s Bank’s Correspondent

(Field 53) – Intermediary Institution (Field 56) – Beneficiary’s Bank (Field 57) – Beneficiary Customer (Field 59) – Details of Bank Charges (Field 71) – Sender to Receiver Info (Field 72)

• Fields in bold are mandatory

MT 202

• Used for bank-to-bank transfers

• Input limited to 2,000 characters

• Fields in an MT 202 include:

– Sender’s Reference (Field 20)

– Related Reference (Field 21)

• In cover payment, the sender’s reference from field 20 in the related MT 103 is included here

– Value Date, Currency Code & Amount (Field 32)

– Originator’s Bank’s Correspondent (Field 53)

– Intermediary Institution (if any) (Field 56)

– Beneficiary Bank (Field 58)

– Sender to Receiver Info (Field 72)

– Fields in bold are mandatory

EXAMPLE OF AN MT202 AS A COVER PAYMENT

On December 23, 2006, Tony Almeida orders his bank in London to send $125,000 (US$) to Jack Bauer’s account at a German Bank. The London Bank sends an MT 103 directly to the German Bank and sends an MT 202 to its US$ Correspondent Bank.

MT 202

20: 111658856

21: 20/121212/SAM

32: 061223USD125,000.00

53: US Correspondent Bank

58: German Bank

MT 103 20: 121212/SAM 32: 061223USD125,000.00 50: Tony Almeida 52: London Bank 53: US Correspondent Bank 57: German Beneficiary Bk 59: Jack Bauer

WHY ARE COVER PAYMENTS USED?

• To avoid payment delays associated with

time zone differences when making

payments outside the local currency of the

beneficiary.

• To manage the fee deduction process.

• To gain access to various types of business

opportunities (“reciprocity”).

• To streamline payment details.

• To reduce cost of commercial transactions.

THE PROBLEM WITH COVER PAYMENTS

• In a cover payment, the Intermediary Bank

receiving the payment order related to the

second funds transfer - the MT 202 - does

not receive the payment order related to

the first funds transfer - the MT 103.

• As a result, the Intermediary Bank has no

ability to monitor or filter the payment

details involved in the MT 103.

• Only the bank originating the cover

payment can monitor and filter both legs

of the cover payment (MT 103 & MT 202)

Payment

Order

Originator

(Frankfurt)

Originator’s Bank

(Frankfurt)

MT202

Cover

Payment

Beneficiary’s Bank

(Hong Kong)

Intermediary Bank of Beneficiary’s Bank

(New York)

Payment

Beneficiary

(Hong Kong)

Credit

MT103 Payment Order

Intermediary Bank for Originator’s Bank

(New York)

Payment (MT202)

MT202

Cover

Payment

COVER PAYMENT METHOD OF TRANSFER

WHY IS THIS IMPORTANT?

In varying degrees, U.S. sanctions restrict or prohibit

trade and financial transactions with targeted

countries and their agents, as well as terrorists and

narcotics traffickers.

OFAC -The Office of Foreign Assets Control

• An office within the US Department of the

Treasury charged with administering and

enforcing US economic (and financial) sanctions

and trade embargoes.

IEEPA - International Emergency Economic Powers

Act

• IEEPA is the principal statute which enables and

underlies US economic sanctions administered by

OFAC. (50 U.S.C. § 1701 et seq.)

OFAC/IEEPA

• Unlawful Act –It shall be unlawful for a person to

violate, attempt to violate, conspire to violate, or

cause a violation of any license, order, regulation,

or prohibition issued under this title.

• Criminal Penalty - A person who willfully commits,

attempts to commit, conspires to commit, or aids

or abets in the commission of, an unlawful act…

(50 U.S.C. § 1705)

• Increased Penalties for OFAC Violations (2007)

– Retroactive Civil Penalties increased to $250,000

or twice the value of the transaction

– Criminal Penalties increased to $1,000,000 and /or

20 years’ imprisonment

• In a cover payment, Intermediary Bank receiving the payment order related to the second funds transfer - the MT 202 - does not receive the payment order related to the first funds transfer - the MT 103.

• As a result, the Intermediary Bank has no ability to monitor or filter the payment details involved in the MT 103.

WHY IS THIS IMPORTANT?

AND . . .

• If the ORIGINATOR information is not

included in the COVER PAYMENT and is

stripped from the payment details in the

MT 103, then no US bank will be able to

monitor or filter the payment details

involved in the transaction.

STATEMENT OF FACTS/CONDUCT

• Conduct began in mid-1990’s

– Ended in April 2004 for Iran & September 2007 for Sudan

• Stripped relevant info from payment messages to avoid OFAC sanctions for countries, banks & persons

– Countries included Iran, Libya and Sudan

• Criminal conduct was designed to assist clients in avoiding detection by US banks OFAC filters

• Caused US banks to provide prohibited services

Iranian Bank - UK

Lloyds TSB Bank

Swift 202

US Correspondent

US Bank

Swift 202 and Stripped Swift 103 contain no references to Iran

lmj

UNKNOWN PARTIESUNKNOWN PARTIES IN THE COVERIN THE COVER PAYMENTPAYMENT

• Specific written policy & payment processors

for manually handling (“stripping”) US$

Iranian payments

• 1996 internal letter stated that Lloyd’s

International Payment Processing Unit:

“decided to handle all the outward

payments manually to ensure that the [U.K.

Iranian Bank] names were not included on

the payment instructions received in the

U.S.A.”

STATEMENT OF FACTS/CONDUCT (cont’)

• Incoming SWIFT message manually removed

from system, stripped of any reference to

sanctioned countries/entities (Field 52) & re-

keyed

• Transactions to US banks appeared to

originate at Lloyds

– Cover payments – MT202’s

• Also engaged in US$ trade finance

transactions

STATEMENT OF FACTS/CONDUCT (cont’)

• Conduct occurred primarily at Lloyd’s offices in

the UK, Tokyo & Dubai

• In mid-2002, Lloyds sought to stop stripping

messages themselves

– Returned messages to Iranian bks for correction

– Advised Iranian banks how to format messages

themselves to avoid OFAC filters (code in Field

52)

STATEMENT OF FACTS/CONDUCT (cont’)

COVER PAYMENT CONCERNS

• US intermediary banks are subject to

increased risk of unknowingly facilitating

illicit activities

• US intermediary banks do not receive all the

details about the customer payment (MT103)

to which the cover payment (MT202) relates

because the MT 202 format doesn’t

require/allow detailed info

– Originator and Beneficiary Info

COOPERATION TERMS

• Independent review required within 270 days:

– Review all US$ payments from 4/2002 thru 12/2007

– Provide to USG all SWIFT messages for US$

payments through correspondent accts held by

Iranian banks

– MT 100 & 200 series messages

– Electronic & spreadsheet format

– All account statements for Iranian correspondent

bank accts

– Review/report all SWIFT messages for matches to

OFAC entities, Foreign Terrorist Organizations &

proliferators of Weapons of Mass Destruction

International Sanctions and Bank Prosecutions

Seetha Ramachandran

U.S. Department of Justice

Deputy Chief

Asset Forfeiture Money Laundering Section

Money Laundering and Bank Integrity Unit