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The US Department of Justice’s statement sets out that, between 1995 and 2007, Lloyds TSB, in both the UK and Dubai, made changes, as my hon. Friend
has explained, to SWIFT messages—messages on the international worldwide funds transfer network, which are known in the US as wire transfers—worth more than US$350 million that involved principally Iran, but also Sudan, as he has mentioned, and, I understand, Libya as well. That involved removing payment originator information from some inter-bank payment instructions, so that payments would not be identified by US correspondent banks as originating from countries subject to US sanctions. The infringement related to removing originator information, rather than to the transactions themselves. That is quite an important point. The infringement had to do with the removal of that information.
I understand that Lloyds TSB ceased removing payment originator information from Iranian transactions in 2003. I think that my hon. Friend said 2004; anyway, it was round about then. It is perhaps worth noting that the US banks did process the payments, even though the SWIFT messages did not contain originator information. My hon. Friend suggested that that was because they thought that if the payments were from a UK bank, everything must be fine. My hon. Friend said that ABN AMRO had also been doing such things, too. I was not aware of that; I do not know whether that is correct, but I have no reason to doubt it. It was not a UK bank at the time. There is at least a question that ought to be raised about how the transactions were processed by the US banks, even though the messages did not contain originator information.
As we have heard, as a result of the breaches of US law, Lloyds has agreed to pay a fine of $350 million. Lloyds has notified the markets of that, and made provisions in its accounts last year for the payment of the penalty. Given its hedging arrangements, the £180 million provision in place in its accounts will, I understand, cover the full size of the penalty. It is important to stress that the US investigation is specific to breaches of US sanctions law; I know that my hon. Friend was concerned about that point. The US investigation does not allege that Lloyds TSB breached international sanctions, or that it facilitated terrorist finance, proliferation finance or money laundering. Indeed, the deferred prosecution agreement between the US authorities and Lloyds records that subsequent screening of the payments routed through the US between August 2002 and the time when the accounts were closed found no matches with names on the US terrorist or weapons of mass destruction watch lists. The US Department of Justice has acknowledged that Lloyds’ co-operation with it has provided substantial assistance to the New York District Attorney and the Department of Justice.
My hon. Friend, perfectly fairly, asks why no one has been prosecuted in the UK over the issue. As he says, he raised the matter with the Prime Minister on the Floor of the House on 21 January. He has anticipated the answer: it is that we can prosecute only for breaches of UK law, and not for breaches of US law. As I have set out, the US case against Lloyds TSB concerns breaches of US sanctions. I certainly have not seen evidence of breaches of UK law in this case. I have seen no evidence of breaches of international sanctions, money laundering rules or terrorist finance rules. That is consistent with the findings in the US case, which is specific to breaches of US sanctions.
It is worth noting that the US imposed comprehensive financial sanctions on Iran after the Iranian revolution in 1979; we remember some of the circumstances. However, United Nations and European Union sanctions against Iran have been much more recent, and more targeted. Given the history of relations between the US and Iran, it is not a surprise that breaches of US-Iran sanctions did not necessarily amount to breaches of UK or European Union law.
Given the concerns that my hon. Friend raised about the way in which changes were made to the messages, I shall say a little more about how international banking practice relating to the transparency of inter-bank payments has developed. Decisions on what payment information should be included in SWIFT messages has, in the past, been regarded as a commercial matter for the banks. The decision was dependent mainly on what was required, technically, to allow the SWIFT messaging system to be used successfully. However, new international standards for measures to counter illicit financing were introduced following the 11 September terrorist attacks. The Financial Action Task Force, to which my hon. Friend referred, made nine special recommendations on terrorist financing in 2001, one of which—special recommendation VII—covers wire transfers. It aimed to correct the lack of transparency in inter-bank payments, which was recognised as a potential weakness in the system. Special recommendation VII calls on countries to
“take measures to require financial institutions, including money remitters, to include accurate and meaningful originator information...on funds transfers and related messages”.
That recommendation was agreed in 2001, and was followed up by technical work on how it should be implemented, which continued until 2005. Once the technical work was complete, the European Union decided to implement special recommendation VII at the Community level. That was done through the Transfer of Funds (Information on the Payer) Regulations 2007, known as the wire transfer regulation, which was taken forward during the UK presidency of the EU in 2005. Following an agreement by the Council of Finance Ministers in, I think, November 2006, the regulation came into effect in January 2007.
The EU wire transfer regulation requires payments to contain complete information—name, address and account number—on the payer. To remove payment information, as was done in the case that my hon. Friend rightly highlighted, is not permitted under the regulation.
Until the regulation took effect in January 2007, there was no requirement in UK or EU law for banks to provide full payer information. So the actions of Lloyds TSB involving transactions before January 2007 do not constitute breaches of UK or EU law. And, as I pointed out, Lloyds stopped removing payment information from Iran transactions in 2003, well before 2007 when the legal obligation to do so under UK law and EU law came into effect.
Actions to tighten the law have been complemented by efforts by the banking organisations to raise standards of best practice. The Wolfsberg group of international banks has set out what it calls messaging practice standards to ensure that the payment system is not abused. Wolfsberg also acted to encourage SWIFT to make technical changes to the messaging system that will increase the
amount of data that accompanies certain kinds of payment. Those changes are expected to come into effect at the end of 2009.
In addition, the Basel committee on banking supervision has been considering the issue at the request of the international regulatory community, and will shortly publish its own statement on the steps that banks should take to increase transparency in international payments.
Let me conclude by setting out the Government’s approach to financial restrictions against Iran. We have been at the forefront of international efforts, in the Financial Action Task Force and the European Union, to strengthen controls on terrorist finance and to improve the transparency of inter-bank payments.
Andrew Mackinlay: I apologise for interrupting. I indicated in my speech that part of the issue was the embarrassment to the United Kingdom and inconsistencies with our foreign policy. I listened carefully to the Minister. It took the United Kingdom and the EU six whole years to implement that financial agreement, yet we were bragging and boasting and beating people about the head around the world from 2001 through the United Nations, in a committee headed by Sir Jeremy Greenstock, to implement it without delay. It is a revelation to us. It shows how we—our Foreign Office and the Treasury—were deficient in due diligence on the matter. It is a disgrace.
Mr. Timms: Let me give my hon. Friend a little more information about the process that was followed. His characterisation of it is not quite right.
The FATF special recommendation to which I referred was agreed in October 2001, but the specific requirements on banks were not clarified until the Financial Action Task Force agreed an interpretive note in the middle of 2005. My hon. Friend asks why it took so long. That is a fair question. That was the period that the FATF took to achieve and agree that interpretive note. The European Union then acted quite promptly and a proposal was made in July 2005. As I have said, ECOFIN approved the regulation in November 2006, and the regulation took effect on 1 January 2007.
I shall set out a little bit more information on UK policy. We have been at the forefront of international efforts, including action to deal with the threats posed by Iran’s nuclear programme and by its weak anti-money laundering and terrorist finance controls. We continue to work closely with the US and other international partners to utilise a dual-track strategy towards Iran of pressure and engagement. We have taken a leading role in negotiating international financial measures to maintain pressure on the Iranian Government and to protect our financial systems from abuse.
Key measures that we have taken in the past few years include negotiating an international asset freeze against two Iranian banks—bank Melli and bank Sepah—negotiating FATF statements calling on states to protect their financial systems from money laundering and terrorist finance risks emanating from Iran, negotiating an EC regulation requiring banks to undertake enhanced due diligence on Iranian transactions and adopting new domestic powers in the Counter-Terrorism Act 2008 to allow us to impose financial restrictions in response to external money laundering, terrorist finance or weapons of mass destruction proliferation risks.
Taken together, those measures and others constitute a robust package of measures to protect our financial sector, which places the UK at the forefront of international action to tackle the threats posed by illicit financing linked to Iran. I hope that that presentation of the history over the past few years has illuminated some of the concerns to which my hon. Friend has drawn the
attention of the House. I hope that my hon. Friend welcomes the robust stance that the UK Government have taken and will continue to take on those matters.
3.47 pm
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