BNP Paribas - Sanctions, Fines And Politics

BNP Paribas: Sanctions, Fines And Politics

BNP Paribas is facing a potential fine of up to $10bn for breaking
sanctions imposed by the US government on Iran. This would be by far the
largest fine ever imposed on a bank by US regulators for
sanctions-breaking, and one of the largest regulatory fines in history.

BNP is by no means the first bank to be fined by the US for
sanctions-breaking. In the last 5 years, banks fined for breaching
sanctions include:

Lloyds TSB (2009; Iran, Sudan, Libya: $350m)
Credit Suisse (2009; Iran, Libya, Sudan, Burma; $536m)
Barclays (2010; Cuba, Iran and Libya;$298m);
ABN AMRO (2010; Iran, Libya, Sudan, Cuba; $500m)
Standard Chartered (2012; Iran; $300m);
ING Bank (2012; Cuba and Iran; $619bn);
HSBC ( 2012; Iran, North Korea, money laundering;$1.92bn, );
RBS (2013; Iran, Libya, Sudan, Burma; $100m)

Other European banks including Deutsche Bank, Crédit Agricole and
Société Générale are still under investigation for breaking sanctions
and money laundering rules.

Nor is this confined to banks. In January 2014 Clearstream Banking, a
Luxembourg-based unit of the Deutsche Boerse, agreed to pay $152m to
settle allegations that it created a facility to enable the Iran Central
Bank to execute transactions in European markets. But this did not end
the matter: a grand jury is now looking at whether it should face
prosecution for breaking Iran sanctions.

US regulators are definitely getting tougher. BNP Paribas's potential
fine is much larger than anything imposed so far, and regulators are
looking at other penalties too, such as temporary suspension of US
dollar clearing. The consequences for BNP Paribas of such penalties
could be severe. The proposed fine alone would reduce its capital to
levels likely to worry European regulators, while interruption or
restriction of its US activities would be likely to cost it customers
both in the US and elsewhere.

BNP Paribas is also under pressure to plead guilty to a felony, as
Credit Suisse did recently in relation to client tax evasion. But being
convicted of a serious criminal offense is seriously damaging to a
bank's reputation and may force some kinds of customer to go elsewhere.
BNP Paribas will want to avoid this if at all possible – but regulators
these days are less willing to accept settlement out of court. There is
a new determination to hold financial institutions (though not
necessarily their executives or their customers) to account for criminal
behavior.

But there is a problem. In Europe, people are beginning to question the
continual stream of investigations, indictments and regulatory fines
involving European banks. Some even go so far as to accuse US regulators
of pursuing a "vendetta" against European banks to appease public anger
about the banking industry without harming the US industry. The
dominance of European banks on the US regulators' hit list is indeed
noticeable, and not just for sanctions-busting: European banks also
feature prominently in regulatory investigations into rigging of
benchmark rates.

But the US regulators don't need to be "picking on" European banks for
those banks to feature prominently in criminal prosecutions for
sanctions breaking and tax evasion. Internationally, there is no
consistency of law. The offenses for which these banks have been fined
are not necessarily offenses in their countries of origin.

Consider Credit Suisse's recent conviction for "conspiracy to evade
taxes". Credit Suisse helped US citizens to evade tax. Under US law,
both Credit Suisse and the customers involved were guilty of a crime.
But Credit Suisse is a Swiss bank, and tax evasion is not a crime in
Switzerland – but disclosing customer information is. Credit Suisse
cannot disclose the details of the customers it has been helping to
evade taxes without the permission of the Swiss government – and as a
Swiss commenter pointed out on my recent post about Credit Suisse, the
Swiss government is not necessarily willing to give that permission. In
this case, a compromise appears to have been reached: Credit Suisse
itself has pleaded guilty and will pay a penalty under US law, but the
customers themselves remain protected by Swiss privacy laws.

The situation is similar with European banks accused of breaking US
sanctions. European sanctions against Iran are not the same as US
sanctions – they are milder, and targeted at certain sectors only.
European banks remain deeply involved in the Middle East. It is likely
therefore that in due course just about every large European bank will
face fines and other penalties for sanctions-breaking in the US.


European authorities are not blind to this problem. According to the
Financial Times, Christian Noyer of the French central bank said at a
recent news conference that BNP had broken no French or European laws:

"We have indeed verified that all the transactions were in line with EU
and French rules, regulations and directives".

Several sources report that Noyer is taking a close interest in the
activities of US regulators in relation to French banks, and the BNP
Paribas case in particular because of its size and the possible
consequences for French customers and taxpayers.

No-one is suggesting that a bank operating in the US should not expect
to obey US laws. The difficulty is the "reach" of US laws. Should they
apply to business that is transacted outside the US by a bank that is
domiciled outside the US, even if the customers involved are US
citizens? And should the penalties applied put at risk the finances of
non-US customers and taxpayers?

When RBS was fined by the US regulator, a number of people joked that
the US government was fining the UK government. This is because since
its failure and nationalization in 2008, RBS is 81% owned by the UK
government. And it's a serious point. When a bank is fined, the penalty
is paid from profits – which affects the return to shareholders. In the
case of RBS, the stream of regulatory fines imposed on it by regulators
from a number of countries have been a contributory factor in its recent
poor performance, including a couple of eye-watering losses. Much to the
annoyance of its primary shareholder, this has delayed its return to the
private sector until well after the next general election.

The problem with BNP Paribas is slightly different. BNP Paribas is not
state-owned. But the size of the fine, coming as it does in the middle
of the ECB's stress tests, raises the possibility that the bank may need
to be recapitalized. To start with, new capital would be sought from the
private sector, perhaps by means of rights issues. But if this proved
inadequate, then the bank would need to convert bonds to equity and/or
haircut its large depositors (as was done in Cyprus), or as a last
resort be bailed out by the French government. Marine Le Pen, leader of
the right-wing Front National party in France, warned that US regulatory
action would hurt ordinary savers and borrowers in France, and called
for the French government to "do more" to protect the bank. So far, the
French government – mindful of the general unpopularity of banks since
the financial crisis – appears to have resisted this call. But politics
being what it is, there may well be diplomatic pressure at some point on
US regulators to take a softer line with particularly significant
European banks. And it is entirely possible that regulators will give in
to this pressure. After all, no-one wants a banking crisis caused by
regulatory fines and legal action, do they?

There is no easy answer to this problem. Diplomatically, it would give a
better impression if the US regulators could be seen to be investigating
US banks with the same zeal that they show towards European banks. But
it is sadly a fact that European banks are a mess and European
regulators have been captive and ineffective. Calls for regulatory
action to be watered down because of legal differences and concerns
about knock-on impacts in European countries, although understandable,
do sound very much like special pleading.

It's not in anyone's interests for European banks to remain corrupt. In
trying to clean up European banks, US regulators may be doing everyone a
favor.

Source: BNP Paribas: Sanctions, Fines And Politics -
http://www.forbes.com/sites/francescoppola/2014/05/31/bnp-paribas-sanctions-fines-and-politics/