MINEOLA, N.Y. (CN) - A stockholder claims Lloyds Banking Group and more than 30 of its top executives conducted illegal banking transactions with countries sanctioned by the United States. The plaintiff - a German investment group - claims the executives hid their deals with Iran, Sudan and Libya by amending or "stripping" payment records, preventing other employees from knowing that they aided and abetted the undermining of U.S. national security.
Presidents Ronald Reagan, Bill Clinton and George W. Bush placed sanctions and trade embargos on Iran and Sudan, which they accused of "rogue nations dedicated to the development of nuclear weapons and the destruction of the state of Israel and other countries," according to the shareholder derivative complaint in Nassau County Court.
Plaintiff Erste-Sparinvest Kapitalanlagegesellschaft (ESK) claims these breaches of fiduciary duties exposed it and Lloyds TSB Bank PLC with significant fines and penalties for criminal investigations, a $350 million forfeiture and damaged the company and bank's reputation and goodwill worldwide.
The defendants - present and former directors - are accused of causing the bank to violate many laws, including the International Emergency Economic Powers Act (IEEPA), which prohibits exportation of services from the United States to Iran, Sudan or Libya.
ESK claims the defendants defrauded shareholders by making false entries on bank records and omitting the true identities of its customers.
ESK claims that from the mid-1990s through January 2007, Lloyds Bank violated New York and federal laws by falsifying outgoing U.S. dollar (USD) payment messages involving countries, banks or persons listed as sanctioned parties by the United States Department of the Treasury's Office of Foreign Assets Control (OFAC). The bank allegedly removed data from payment messages to avoid detection of the involvement of OFAC-sanctioned parties by U.S. depository institution filters. This allowed transactions to be processed by Lloyds' U.S. correspondent banks, which would have otherwise been blocked for investigation or rejected, according to the complaint.
In 2002, the focus on industrywide money laundering and sanctions increased, and Lloyd's Group Executive Committee decided to withdraw the USD-clearing business on behalf of "U.K. Iranian banks," ESK claims. But, it says, Lloyds continued to perform these services on a smaller scale for four Sudanese banks until January 2007.
Prosecutors began investigating Lloyds USD business with sanctioned countries in April 2007. Lloyds then conducted its own internal investigation, financially damaging the company, according to the complaint.
Before 2002, Lloyds maintained USD correspondent accounts for the former London-based branches of Bank Sepah, Bank Melli, Bank Mellat, Bank Saderat and the Iranian Overseas Investment Bank. These branches became subsidiaries incorporated under United Kingdom law. Those subsidiaries kept USD-correspondent accounts with Iranian banks. With heightened OFAC sanctions against Iran in 1995, the bank's U.K.-based international payment processing unit authorized its processing staff to manually review each message from the U.K. Iranian banks before transmission to the U.S., so any Iranian references would be removed, according to the complaint.
An internal bank memo allegedly told staff members that "any [Iranian] payments received either in paper form or via BIT IMT [a branch system through which Lloyds received payment instructions] expressed in U.S. dollars must not be processed and should be immediately referred to section management. The instructions should be processed in the normal way."
The bank's IPPU processor removed all incoming payment messages from its Common System [automated payment processing system] and manually re-keyed the payment back into the system, the complaint states. The amended message did not include any Iranian references. Lloyds is accused of using this process in the United States, Dubai and Tokyo. It did not use a dedicated "stripping" unit for Sudan, but made sure that no Sudanese references existed on a transaction-by-transaction basis for almost 20 years, shareholders say.
According to the complaint, Lloyds did not stop at removing references to Iran and Sudan from bank documents, but engaged in USD trade finance transactions. The bank group allegedly processed import and export letters of credit and inward and outward documentary collections and guarantees. From January 2002 through December 2007, Lloyds allegedly involved itself in about 1,500 of these transactions with Iranian banks in its United Kingdom, Dubai and Tokyo offices, totaling more than $300 million. EKS says Lloyds engaged in about 300 trade finance transactions with Sudan, with an aggregate value of $21 million. Many of the Iranian transactions involved exports of goods from the U.S. to Iran through other countries, according to the complaint.
Once Lloyds Bank's Group Financial Crime Unit raised concerns about the intentional removal of Iranian-related information from bank documents, it decided to return any payment instruction with Iranian references to those banks so they could remove the references on their own, according to the complaint. Lloyds allegedly did this by telling Iranian banks to put symbols in the field where the originating bank name should be.
From August 2002 to April 2004, the bank processed about $20 million in outgoing USD payment transactions on behalf of one Libyan customer, shareholders say. Lloyds made sure not to include any references to that country either.
The federal government said it will defer prosecution of the bank and the defendants for 24 months as long as they comply with all of their obligations. Prosecution may still take place, according to the complaint, if it is proven that the defendants "knowingly and willfully transmitted funds that went to or came from persons or entities designated at the time of the transaction by OFAC as specially designated terrorist, specially designated global terrorists, foreign terrorist organizations and proliferators of weapons of mass destruction."
Lloyds Banking Group is based in London. The public corporation trades on the New York Stock Exchange and has branches in New York City and Miami.
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