The American guillotine has fallen. After lengthy negotiations, prosecutors and regulators announced on June 30 the penalties they planned to impose on BNP Paribas, France’s largest bank, for evading American sanctions on doing business with Cuba, Iran and the Sudan: an almost $9 billion fine, a guilty plea to criminal charges of conspiracy and falsifying records and a suspension of its right to clear certain dollar transactions.
While not the largest-ever fine imposed on a bank (see table below), it is more than BNP’s profits last year. The requirement to plead guilty to a felony is both unusual and dangerous: some jurisdictions could withdraw BNP’s banking license and some customers may be forced to move elsewhere. Worst of all, the mandatory exclusion from dollar clearing for a year on much of its oil and gas business, forcing it to route transactions through other banks, is a heavy blow for a bank that plays a key role in international trade.
BNP Paribas is profitable, well capitalized and liquid: it can pay the fine without turning to the markets for money or letting its prudential ratios slip below acceptable levels, it says. The bank will immediately take a charge of €5.8 billion ($7.9 billion) on top of the $1.1 billion it had already set aside and will freeze dividends at last year’s level. Its core tier-1 capital ratio — a measure of its ability to absorb losses — will still be around 10% (down from 10.6% at the end of March) and its leverage ratio will fall from 3.7% to 3%, according to Jean-Laurent Bonnefé, the bank’s chief executive, and Lars Machenil, its chief financial officer. BNP’s share price, which had been sliding since February, rose 3.6% the day the settlement was announced.
But the announcement raises a raft of questions about the proportionality of penalties, the responsibility of individuals in corporate crime, the duties of firms dealing with objectionable regimes and the reasonableness of America imposing its foreign policy via the international financial system and its dominant currency. The bank’s dealings with and for Sudan — where Osama bin Laden found refuge and the UN’s attempt to stem the bloodletting in Darfur was resisted — lie at the heart of the charges against it. BNP concealed a total of $190 billion-worth of dollar-based transactions between 2002 and 2012, according to New York’s Department of Financial Services (DFS), including some involving Cuba and Iran. Because they were denominated in dollars, these deals ultimately had to pass through New York and thus came under its regulatory authority. To disguise their origins, BNP stripped identifying information from documentation and re-routed payments through a network of satellite banks.
Internal emails show that a number of senior bank executives were aware of the deals; there was some unease within the bank about the process. In 2005, for example, an email from a senior compliance officer referred to the existence of a network of Arab banks used by BNP to circumvent the embargo against Sudan. According to the DFS, such concerns were dismissed, not least by Georges Chodron de Courcel, the bank’s chief operating officer at the time, who “signed off on continuing illicit transactions,” according to regulatory filings. The commercial stakes were significant: in 2006 letters of credit provided by BNP’s Geneva office were equal to a quarter of all Sudan’s exports and a fifth of its imports.
In 2007 Baudouin Prot, BNP’s then chief executive, ordered an end to sanctions-busting but failed to notice when his troops did not immediately comply. It was not until 2010 that BNP finally ceased dealing with Cuba and late 2012 with Iran. The long lag doubtless fanned regulatory anger and contributed to the size of the fine. By the time the negotiators sat down to work out a settlement, in early 2014, regulatory hearts were hardening, in part because American legislators were clamoring for financial scalps. A deferred-prosecution agreement such as HSBC had secured in 2012 was no longer on offer; it was a guilty plea or nothing for BNP.
The case has left people on both sides of the Atlantic unhappy. One reason is that the individuals responsible seem to be getting off lightly. Some have been disciplined by BNP with demotions and cuts in pay, and some top brass are being pushed out the door, including Mr Chodron de Courcel. None, however, has faced even the mildest legal sanction so far; instead, the bank’s shareholders and customers look likely to bear the brunt of BNP’s misdeeds.
A second source of discontent — in Europe, at any rate — is that the case appears to be an example of America throwing its financial weight around, using the threat of withholding access to its market and currency to force compliance with its own priorities. The French central bank sent a clear message that, whatever the rights and wrongs of BNP’s behavior, crippling so large a European bank could harm the world’s financial system, as well as a region struggling for growth.
BNP’s behavior in doing business with the likes of Sudan may have been morally reprehensible but it did not break European or French laws (though falsifying documents would be a crime anywhere). By eagerly exploiting their authority over dollar-denominated transactions, American regulators are increasing the incentives for international banks to set up a payments system based on another currency.
BNP is not out of the woods yet. The Swiss banking regulator says it will look into the bank’s Geneva operations, and conversations with customers and banking supervisors that seek to limit the damage are under way. For BNP, though, at least the worst may be over. Other European banks are not so lucky. Société Générale, Crédit Agricole and Deutsche Bank are all believed to be in American regulators’ sights for sanctions-busting. The saga continues.