Lloyds TSB and Iran (Sanctions)

– in the House of Commons at 2:38 pm on 12th February 2009.

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Motion made, and Question proposed, That this House do now adjourn.—( Helen Jones.)

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Photo of Andrew MacKinlay Andrew MacKinlay Labour, Thurrock 2:52 pm, 12th February 2009

On 13 January, I stumbled across a copy of The Wall Street Journal. An articled headed "Tehran's strip club" reported something that is widely known across the Atlantic in the United States but has not had much oxygen, or light shed on it, in the United Kingdom either in the media or in Parliament. Nevertheless, it relates to our security policy, and our attempts to combat terrorism and have high standards of banking.

I discovered that Lloyds TSB had pleaded guilty to the Attorney General's Department in the United States to doing things in London to circumvent US sanctions against Iran. Not only The Wall Street Journal, but many other journals report that Lloyds TSB has entered into what is described as a deferred prosecution agreement with the US federal authorities, whereby it has already paid $300 million to those authorities by way of a fine. That was done not with a view to settling the matter, but to entering into an agreement with the federal authorities to make full disclosure of what is known in the industry as "stripping" in relation to money that came from Iran via London and got into the United States by the falsifying of documents in London. This is a very serious matter. The US Department of Justice and the district attorney concerned have done a favour not only to the United States but to the wider international financial community and us in the United Kingdom by detecting that operation.

As I have said, there is no disagreement or debate about the matter. Lloyds TSB has acknowledged fully and unreservedly that it was involved in the practice. However, it made that declaration after being discovered. Lloyds TSB was certainly using the practice, which is illegal in the US, between 2001 and 2004, but never acknowledged that until being challenged after 2007. Indeed, in the period up to 2007, Lloyds TSB used similar practices in relation to moneys that came from Sudan, which were stripped here in London and then got into the US financial and banking system.

What was the purpose of such a complicated process? I inquired about that. It would seem that Lloyds—and, regrettably, some other financial institutions here in London—helped Iran's rogue banks to infiltrate the US. The Iranians needed American dollars, sometimes to purchase things within the US borders, but also to channel other moneys through US banks to third countries or other parties demanding payment in dollars. All the evidence suggests that at least some of the money was destined to be used to purchase dual-use materials or technology, as part of the Iranians' desire to increase their weaponry and develop weapons, to the disadvantage of the international community.

The system worked like this. The UK branches or subsidiaries of the Iranian banks would send electronic messages via what is described as the SWIFT banking payment system, which would go to Lloyds. Employees at Lloyds in London would then re-key the data into a new SWIFT message, carefully removing any reference to Iran or its banks. Employees at the British bank called the process "stripping", as I have already said. The US sophisticated screening operations and software would normally have flagged up concerns, but as the transfers came from a respected British financial institution, the alert system did not operate. As I have said, that is agreed ground, and Lloyds TSB has acknowledged it. The Iranians also benefited sometimes from overnight deposits in the US, taking advantage of favourable interest rates.

The US authorities are now in a race to track down the ultimate destinations of those moneys and their precise origins. The district attorney's office has made it clear that he fears some of the funds

"may have been used to purchase raw materials for long-range missiles."

I also regret to tell the House that it is not just Lloyds TSB that is involved. Since starting to delve into the issue, I have discovered that Barclays is having to co-operate with both the US Department of Justice and the district attorney, apparently in relation to similar transactions. Regrettably, the Royal Bank of Scotland has indicated that ABN Amro, which it bought earlier this year with our money, is also being investigated by the US Department of Justice about a similar issue.

On 21 January, I raised this matter at Prime Minister's questions, and the Prime Minister undertook to look into the matter and to write to me. I asked him how on earth this action could have been taken in London by Lloyds TSB, a British financial institution, to get around US sanctions, and how Lloyds TSB staff could have falsified documents—not my words; that is the admission—to get round those sanctions. Bearing in mind the fact that the United Kingdom has boasted about the need for a strict regime of banking transparency across the membership of the United Nations in order to combat terrorism, how could this have happened in the United Kingdom without there being a breach of UK law? I asked what regulatory bodies such as the Financial Services Authority, the Serious Organised Crime Agency, the Bank of England and the Treasury, and our security and intelligence services, had been doing about it.

On 29 January, the Prime Minister wrote to me in reply to my questions. He said:

"The position with regard to the penalty levied against Lloyds TSB is set out in the statement by the US Department of Justice of 9 January 2009. There is nothing further I can add in relation to the agreement reached between the US authorities and Lloyds TSB which is a matter between those two parties. You asked why the Bank has not been prosecuted in the UK regarding this matter. The US action against Lloyds TSB concerns past breaches of US sanctions. We can only prosecute in the UK in relation to breaches of UK law."

In my view, the Prime Minister has missed the point. After 9/11, the United Kingdom led the call for transparency across the United Nations, and many of us are proud of the diligent work of Sir Jeremy Greenstock, the then United Kingdom ambassador to the UN, who led the sanctions committee. I had assumed, as had other hon. Members, that we had the most rigorous regime of scrutiny and oversight of our banking and financial sector, in order to frustrate illegal transfers across countries in breach of United Nations sanctions. I think that the Prime Minister still thinks that that is the case.

I had assumed, because of all the posturing from the Dispatch Box by successive Ministers about Iran exporting terrorism, and Defence Secretaries acknowledging that many British soldiers had been killed by ordnance emanating from Iran, that significant sanctions were in place. For a long time, all of us—particularly Her Majesty's Government—have been concerned about Iran's desire to develop missiles and nuclear weapons to a point that we believe will threaten our interests. I find it fantastic that it is not in breach of United Kingdom law for officials at Lloyds TSB in London to falsify documents. Even if I am wrong about the sanctions and that none existed at the time, there must surely be an offence relating to the falsifying of documents.

I am concerned that there is no indication of any attempt by the regulatory bodies to which I have referred to investigate this matter, or of any serious attempt to find the law in this matter. I felt, from the tone of his letter, that the Prime Minister went on to slap my wrists. He said:

"Contrary to the assertion that you made in the House, the US case against Lloyds TSB has not involved accusations of money laundering. Therefore there is no suggestion that Lloyds TSB has contravened UK anti-money laundering legislation."

I was slightly irritated by that, so I thought I would look up the definition of money laundering. I had assumed that it was quite an old term, but I found that it was apparently invented by The Guardian newspaper at the time of Watergate, so it is a relatively recent one. Money laundering is, I discovered,

"the practice of engaging in finance/financial transactions in order to conceal the identity, source and/or destination of illegally gained money".

The Prime Minister's thesis is that at the time of this action, the UK did not have sanctions against Iran in place; apparently we have had them only since early 2007, which will no doubt feature in the Minister's brief. The Prime Minister thus seems to think that this is not a matter for the UK authorities, but I believe that money laundering is.

Money laundering is something that has had to be combated—both in principle and, I think, in law—for a number of years. We are parties to an organisation known as the Financial Action Task Force on Money Laundering; it is based in Paris and is primarily known by its French name—Groupe d'action financière sur le blanchiment de capitaux. We signed in 1996—it was revised in 2003—and agreed to criminalise money laundering and to enable the authorities to confiscate the proceeds of money laundering. Countries are required to ensure that their banks

"report certain suspicious financial activities to the appropriate financial regulators and law enforcement authorities."

There is also something known as the suspicious activities report, to which even Members of Parliament are subject. Lloyds, of course, was hardly going to declare its own wrongdoing, but the UK has an obligation under FATF membership to bear down on such activities. That, however, we have singularly failed to do. Will the Minister kindly address that point in his reply?

The biggest potential payoff is that Lloyds must now disclose fully to the US authorities all the details of these wire transfers originating in Iran and help the CIA and the FBI to track them to their final destinations. I would like to be assured, however, that, at least from now on, the UK authorities will say they also want full disclosure.

Before I move on from the Financial Action Task Force, I want to emphasise the fact that it places a duty on banks to know their clients. Lloyds TSB has not used that as a defence in any case, but there is no doubt that the particular FATF agreement to which the UK is party requires us to ensure the highest standards of banking. The UK has clearly failed in that regard and we should be ashamed of that. It is acutely embarrassing to the UK, particularly to the Foreign Office, which, metaphorically speaking, beat around the head those states that were somewhat reluctant after 9/11 to adopt the required transparency.

I probed and probed to the best of my ability on this matter, Madam Deputy Speaker, and I indicated to you that I felt that things had not been properly reported. I discovered through use of a computer that there had been one or two references to this issue in the UK press and in Parliament, which I shall allude to. In particular, I discovered that a man named Conal Walsh had written in The Observer on 8 October 2006:

"The Financial Services Authority is urgently scouring Britain's banking system for evidence of Iranian terrorism funding following an alert from the US authorities. The move comes after officials at the FSA were shown American intelligence indicating that suspicious Iranian funds were being funnelled through the City of London and other financial centres."

Apart from that report of 2006, however, there is no indication that the agencies to which I referred earlier have really done anything. I think I am entitled to ask the Minister what—if the Observer article was correct—the FSA found.

On 26 June last year, Mr. Hague asked the Chancellor of the Exchequer

"what steps are planned to be taken through the Financial Action Task Force to ensure that certain Iranian banks cannot abuse the international banking system to support proliferation activities and terrorism."

In her reply the then Treasury Minister, Kitty Ussher, actually referred to "anti-money laundering", which I thought quite interesting. She said:

"The Financial Action Task Force... has expressed concern that the Islamic Republic of Iran's lack of a comprehensive regime for anti-money laundering and combating the financing of terrorism... represents a significant vulnerability within the international financial system."—[ Hansard, 26 June 2008; Vol. 478, c. 466W.]

It was the Minister, not I, who referred to money laundering. Again, however, there was no indication of what was subsequently discovered.

On 24 November, the right hon. Member for Richmond, Yorks asked the Chancellor

"what assessment he has made of the implications for UK financial institutions of the decision by the United States administration to ban Iran from undertaking U-turn financial transactions"— apparently, that is the technical term for some of the activities to which I referred earlier—

"involving US financial institutions."

The new Minister, Ian Pearson, replied:

"The U-turn licence enabled Iranian entities to have indirect access to the US financial system—including through UK financial institutions. Revocation of that licence will mean financial institutions worldwide can no longer route payments for the benefit of Iran through the US."

He added:

"We are not aware that UK financial institutions made any significant use of the U-turn licence".—[ Hansard, 24 November 2008; Vol. 483, c. 951W.]

Someone was, or is, asleep.

Perhaps the Minister will confirm this later, but I should have thought that both morally and legally, under UK law and because of our international obligations, we had a duty to adhere to the best practices of international banking. Even if at the time of these practices by Lloyds TSB there was no Order in Council or statutory instrument making the activity specifically illegal in the United Kingdom, surely through our lack of intervention we were acquiescing in a serious breach of our international obligations.

I have referred to the deferred prosecution agreement, which is a legal document. The agreement reached between the Department of the United States Attorney General and Lloyds TSB admits that from 2001 until 2004 Lloyds

"falsified the business records of banks in Manhattan by engaging in a systematic process of altering wire transfer information"— in London—

" to hide the identity of its clients."

Lloyds had not owned up to that activity, although it had ceased to engage in it in 2004. It was rumbled only because in 2006 the diligent US authorities had embarked on an investigation of the relationship between the Government of Iran and two New York entities. It was during that investigation that they stumbled across evidence that Lloyds

"was engaged in the illegal transfer of funds into Manhattan on behalf of sanctioned Iranian banks."

Regrettably, it seems that they also discovered that other UK financial institutions might be involved in the practice.

The authorities discovered that Iranian business men were looking for high-quality American electronics. They had to act stealthily. They sought special parts coveted by Iran and especially by those seeking to make roadside bombs to kill United States troops in Iraq. That seems to have been the position. When the US Attorney General was asked whether these moneys were being directed towards terrorism, he said, "Actually that's why we need the full disclosure. We want to know where this came from and where it was going to." If the United States has not, as of this afternoon, fully discovered and had declared to it the totality of this criminal act in the United States, what confidence can I have, as a Member of the House of Commons, that our FSA, our security and intelligence services, the Bank of England and the Treasury have the slightest notion of what has gone on? I have no confidence about that. All the evidence suggests that there has been wilful ignorance and a washing of hands on the part of these agencies.

These were not random acts, nor were they a mistake; they were not undertaken by rogue individuals. It is indicative that Lloyds TSB knowingly set out to break United States law and condones the action of a large number of its employees acting on its behalf. That could have happened only with the permission of people at the highest level. One internal Lloyds TSB document said that transactions from the London branches of Iranian banks should be processed in "the normal way", which meant removing information that would tie them to Iran—this is all according to the agreement that Lloyds has now entered into with the US authorities.

Lloyds eventually dedicated specific employees to scrubbing the Iranian transactions—I think there was even an instruction book on how the employees dealt with that. One of the main questions on which the United States authorities are focusing is whether the money went to terrorism. I, too, want to know the answer to that, and I am entitled to know it, given that, apparently, I and others in this House have sent our armed forces into conflict situations where ordnance is coming from Iran.

In summary, I ask the Minister to address the following points. Will he tell us precisely to what extent this has been examined by the Treasury, the Bank of England, the FSA, SOCA and our security and intelligence services? I guess that he will not tell us about the last of those, and that goes to the heart of the problems with this place—there is no oversight of the security and intelligence services. The ridiculous Intelligence and Security Committee is not a parliamentary Committee; we do not even know, and we not allowed to know, whether it is even trespassing on this issue. That is a further indication of why we need a proper parliamentary Committee. Perhaps we could also create a precedent—perhaps the Minister will indicate whether the Intelligence and Security Committee has looked at this. If it has not, will he invite it to do so?

I have focused largely on Iran, but some $20 million came from Sudan, through this process, to the US. As has been indicated, this practice went on until 2007—I do not know whether it is a coincidence, but that was when a statutory instrument was passed here. That was probably the cut-off point. It rather indicates that there was full knowledge of and consent about this grave matter by people at a certain level in Lloyds—they were watching all the time. I want the Minister to tell me specifically whether it is lawful for a UK bank to falsify documents in the UK—let us forget about the US on that particular point.

Obviously, this was a systematic process; people were prepared to do this and it was sanctioned at the highest level in Lloyds TSB. One of the things that we have discovered over the past few weeks is that people do not do things for nowt—clearly, bonuses would have been paid to these people. I would like the Minister to say—if he would not mind—whether or not bonuses were paid to the staff and managers involved.

Over the past three or four months, the sums of money that have been discussed in this place are beyond belief—not billions, but trillions—so a mere $300 million may appear small change. But to most of us, it is a very serious matter. That is the sum paid to the US authorities by Lloyds TSB as an interim payment. It is no exaggeration to say that that is our money, which is not to say that the US authorities were wrong to demand it. Therefore, we have a right to know what happened. There was criminal wrongdoing, and the response by the UK has been pathetic. I am disappointed with the Prime Minister—not because he wrote the letter, but because he should have told the Treasury that it had to look into what happened. I will not let him get away with washing his hands of this issue; it is a very serious matter. It makes us a laughing stock around the world, it will prejudice the reputation of reputable financial institutions in this country, and I look forward to the Minister's response.

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A

I was unaware of the findings remarked upon regarding Lloyds TSB, and to be honest find it very disturbing, i was already fully aware that our relations with other countries is delicate but this beond my comprehension, there will be repocussions however we are a diplomatic country the financial implications could be great if not soon in the near future, and would be in our best interest to be prepared and get our ecconomy back on its feet so we can cope with the when that time arrises all will reveal itself, other than that much work to be done to mend damage done, i can see a bigger picture but i feel it very sensative material so would rather sit on the bench excuse the pun, i can understand how politics can spoil ones sleep.

Submitted by A Harding

Photo of Charles Walker Charles Walker Conservative, Broxbourne 3:21 pm, 12th February 2009

I congratulate Andrew Mackinlay on securing this debate and bringing this important matter to the attention of the House. I intend to make only a brief contribution.

We live in a morally ambivalent age, and nothing will change that. But what on earth was a British bank doing, doing business with Iran? It was a shameful performance by Lloyds TSB. As the hon. Gentleman rightly points out, the $300 million fine is not coming from a magical printing press. It is shareholders' money and, as taxpayers, we are the shareholders, so it is our money. We need to know exactly what was going on.

All this happened a few years ago. Since then, we have had a bail-out of the banking sector, in which Lloyds TSB received the full endorsement of Government to take over HBOS, with this appalling act in the US hanging over its head. We can ask Lloyds TSB and its senior board members—they are still in place—how much money is enough. How much money do they need to make? Why did they do business with Iran? After all, we know full well that in Iran homosexual men are routinely murdered and hanged from cranes. Lloyds TSB makes great play of its corporate social responsibility. It claims to value its people. Well, in this matter, its corporate social responsibility does not amount to a hill of beans.

As the hon. Gentleman so rightly pointed out, we do not know whether the transactions conducted via Lloyds TSB have resulted in the loss of life of young American men and women who are meant to be our allies and whom we are meant to support. Lloyds TSB still has a huge amount of explaining to do on this issue and I hope that the Minister can address those issues when he winds up.

I do not expect the banking sector to be a paragon of virtue. Indeed, we have seen over the past year that it is very far from that. It is one thing to make bets on derivatives and overseas mortgage markets; it is quite another to do business with the regime in Iran. Lloyds TSB not only did business with that regime, but actively falsified the evidence and covered it up. It cannot claim that an innocent mistake was made, or a rogue manager was responsible and the bank had no idea what was happening. It was sanctioned at the very highest levels of one of the UK's leading plcs. And at that time it was one of our leading plcs—it was probably one of the top large companies quoted on the stock exchange. Again, I agree with the hon. Member for Thurrock that that is of critical importance.

The hon. Gentleman also highlighted the very important fact that Lloyds did business with Sudan as well as with Iran. Month in and month out, hon. Members and Ministers come to this place to express concern and disgust about what is going on in terms of the persecution of minorities in Sudan, yet one of this country's leading banks was doing business there. I imagine that Lloyds bank thought that it was a sweetener to secure further business. I do not know for sure, but I have a strong suspicion that if the people involved had not been caught they would have continued to grow their business in Iran.

I accept that there are issues to do with dual jurisdiction, and that we live in a global marketplace where there will always be conflicts and problems such as have been set out today. However, I shall conclude my brief comments by repeating my question of a few moments ago—that is, how much money is enough?

I always thought that the people who run our major industries, and most politicians, were fundamentally decent people tasked with making hugely important decisions. A lot of people do not like the decisions that our leading business men and politicians take, but they put themselves in such leadership positions, and that means that they have to take difficult decisions and stand by them. The British people are fair minded: we may not like the decisions that are taken, but we recognise the right of the people involved to make those decisions and the reasons why they take them.

However, I doubt that anyone in this country can fathom how probably decent people thought that it was legitimate to do business in Iran. On the scale of things, and compared to Lloyds' global portfolio, the amounts of money involved are quite small. It did business in Iran because it wanted to earn a little extra. Again, how much money is enough? How much profit did it need to make? Frankly, it is not surprising that our banking sector is in its current mess if such morally ambivalent people are in leadership positions.

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Photo of Stephen Timms Stephen Timms Financial Secretary (HM Treasury) (also in the Department for Business, Innovation and Skills) 3:27 pm, 12th February 2009

I am grateful to my hon. Friend Andrew Mackinlay for drawing the House's attention to this very important issue. He referred to the letter dated 29 January that he received from the Prime Minister, but let me say a word about the settlement that has been reached. My hon. Friend described it as an interim settlement, and I think that he took that to mean that there could be a further fine.

My understanding is that that is not the case: the matter has been settled and Lloyds has signed a deferred prosecution agreement, as my hon. Friend the Member for Thurrock rightly said. That means that the matter is settled as long as Lloyds sticks to the agreement for the next two years.

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Photo of Andrew MacKinlay Andrew MacKinlay Labour, Thurrock

It is early in his response, but the Minister is uttering the spin given to him by Lloyds TSB and the Treasury. He says that the matter has been settled, but it will be final only if there is full disclosure. The settlement is contingent on Lloyds TSB coming up with the fine and full disclosure, but that process has not been concluded yet. The US authorities will draw a line under the matter only when they are satisfied that it has been concluded. I do not feel comfortable that some people involved in criminal activity might get off scot-free, but that has not been agreed yet. The deferred prosecution is precisely that—deferred.

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Photo of Stephen Timms Stephen Timms Financial Secretary (HM Treasury) (also in the Department for Business, Innovation and Skills)

Indeed, and as long as Lloyds sticks to the agreement for two years there will no further fine or action. The disclosure process to which my hon. Friend referred is not about to start, and neither did it commence with the agreement on 9 January: as I shall explain in a moment, it happened well before that.

I want first to explain a little more of the facts of the US case; secondly, to explain how the case fits into UK law and international best practice at that time—I hope to answer some of my hon. Friend's questions—and thirdly, to explain more generally the actions that we have taken to improve the transparency of inter-bank payments and to deal with the financial threats posed by Iran.

The US Department of Justice's statement of 9 January 2009 set out that Lloyds TSB committed a violation of the US International Emergency Economic Powers Act—legislation under which the US Executive are able to prohibit transactions in response to an "extraordinary threat" arising outside the United States. Of course, the US has had sanctions in place against Iran since 1979, so now for 30 years. They have been progressively tightened since then due to growing concerns about the Iranian regime's sponsorship of terrorism, as my hon. Friend said, and, more recently, its nuclear programme. However, until November last year, US financial sanctions against Iran included a special licensing arrangement, to which my hon. Friend referred, known as the U-turn exception, which allowed some US dollar transactions that involved Iran to be processed through US dollar clearing in New York.

Those transactions were allowed if, first, they were sent between two non-US banks; and secondly, if the transactions did not require the debiting or crediting of an account of an Iranian individual or entity managed on the books of a US bank. The way that my hon. Friend referred to that slightly gave the impression that a bank had to apply for such a licence. My understanding is that that was a general licence that could be exercised if those two conditions were met. In other words, the exception applied if the Iranian link to the transaction did not touch the US or a US bank directly. It was designed to prevent US sanctions completely shutting off Iranian access to the dollar, given that oil transactions are globally denominated in US dollars. There was quite a wide interest in Iranian oil sales having such access.

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Photo of Andrew MacKinlay Andrew MacKinlay Labour, Thurrock

The Minister might recall that I raised the issue in the context of a reply to Mr. Hague, where the then Minister, our hon. Friend Ian Pearson indicated in his reply that there was not much activity. I raised it in the House to demonstrate that, in my view, there has not been due diligence by our authorities, because demonstrably a lot of activity was going on, but the reply, diligently given by a decent Minister but fed to him by the machine behind, indicated that there was nothing much in this. I do not want to labour the point by going back over my notes, but the Official Report will show that the tenor of the reply was that there was no problem. Well, there was a problem, and part of my submission to the House is that there has not been due diligence by the other agencies, not even to scratch the surface of this matter.

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Photo of Stephen Timms Stephen Timms Financial Secretary (HM Treasury) (also in the Department for Business, Innovation and Skills)

The point that I want to underline is that the general licence allowed banks to conduct such transactions with Iran in those circumstances.

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.

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Photo of Andrew MacKinlay Andrew MacKinlay Labour, Thurrock

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.

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Photo of Stephen Timms Stephen Timms Financial Secretary (HM Treasury) (also in the Department for Business, Innovation and Skills)

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.

Question put and agreed to.

House adjourned.

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