French bank accepts harsh U.S. conditions, pulls out of Cuba

French bank accepts harsh U.S. conditions, pulls out of Cuba

By Johannes Werner and Vito Echevarria



CUBA STANDARD — As part of an agreement to pay record fines of $8.97

billion to settle allegations it used U.S. dollars in transactions with

Cuba, Iran, Sudan and Burma, French bank BNP Paribas promised U.S.

enforcers to terminate all business with U.S.-sanctioned countries "in

any currency," according to a 10-page settlement agreement released by

the Office of Foreign Assets Control (OFAC).



While the use of U.S. dollars in transactions with Cuba and other

U.S.-sanctioned countries violates U.S. laws, doing business with Cuba

is perfectly legal under French laws.



The amount is below the $10 billion U.S. authorities threatened to fine

BNP, according to earlier press reports, and BNP's Cuba-related dollar

transactions are dwarfed by those with Sudan and Cuba. Also, if BNP's

practices involving Cuba are an indicator, foreign banks doing business

with Cuba have instituted internal policies to avoid U.S. dollar

transactions since at least 2007.



Even so, the cost to Cuba is likely high. In the settlement, BNP agrees

to "terminate all business and prohibiting new business in any currency

with sanctioned entities," fire employees who violate U.S. sanctions,

and relocate its global sanctions compliance unit from Paris to New

York, according to OFAC. It will also be forced to handle all of its

global dollar transactions through a third entity for one year,

according to a BNP press release.



"We express our regret for these past errors that led us today to this

agreement," BNP CEO Jean-Laurent Bonnafé said in the release.



BNP's harsh penalty and surrender to Washington makes the

extraterritorial reach of U.S. laws obvious and sends yet another chill

through third-country banks doing business with Cuba. Observers believe

this will prompt the Cuban government and its business partners to

reduce dollar transactions to those impossible to avoid — thus raising

transaction costs even more — seek business with banks less vulnerable

to U.S. threats, and cause other large western banks to pull out or

abstain from doing business with Cuba.



The Irish Independent reported July 3 that the Bank of Ireland became

the latest financial institute to tell customers they will stop doing

business with Cuba.



One way bank abstinence may affect the Cuban economy is via its debt.



"Cuba has massive external debt, and is trying to restructure some of

it," said Judith Alison Lee of Washington law firm Gibson, Dunn &

Crutcher LLC. However, Cuba is having difficulty securing the most

advantageous restructuring arrangements, in large part because sanctions

prevent foreign banks with U.S. exposure from providing advisory

services related to U.S. dollar debt to Cuba.



"Assisting Cuba could expose them to liability, and as a result, many

are simply unwilling to conduct any transactions related to Cuba. As a

result, Cuba may have to rely on potentially less expert firms, which do

not have any U.S. exposure."



As of Tuesday, Cuba had not made any official statement regarding the

BNP settlement.



Following escalating U.S. enforcement actions over the past decade,

several banks such as Switzerland's UBS and Crédit Suisse,

Netherlands-based ING, and Britain's HSBC Holdings reduced their Cuba

business or abandoned the country altogether. According to press

reports, U.S. investigators are currently targeting France's Crédit

Agricole as well as Deutsche Bank.



The incriminated BNP transactions



The OFAC settlement agreement — which does not constitute an admission

of any fault on part of the bank — says BNP participated in eight credit

facilities in U.S. dollars to Cuban entities. In 2007, the bank

instituted an internal policy that blocked U.S. dollar transactions with

Cuba, and converted six of the eight credit facilities to euros. But it

wasn't until August 2012 that it converted the last Cuban credit

facility to euros, according to OFAC.



The bulk of BNP's alleged violations regarding Cuba center on 909

payments from 2005 through 2012 for a total of $689 million, performed

by the bank's Paris headquarters, its commodity finance division in

Geneva, Switzerland, and various third-country branches. They involve

trade finance instruments in U.S. dollars, retail banking transactions,

and one investment banking instrument in U.S. dollars for a Cuban entity

processed by the BNP branch in Milan, Italy.



That compares to $1.12 billion for BNP transactions with Iran and $8.37

billion with Sudan.



While legal under French and Swiss laws, the use of U.S. dollars in

transactions with Cuba and other U.S.-sanctioned countries violates U.S.

laws. SWIFT payments in U.S. dollars must clear through U.S.-based

computers, and that violates U.S. sanctions, policy enforcers in

Washington insist.



In addition, OFAC holds against the bank what it considers efforts to

cloak transactions.



"BNPP appears to have engaged in a systematic practice, spanning many

years and many BNPP branches and business lines, that concealed,

removed, omitted or obscured references to … sanctioned parties in U.S.

dollar … SWIFT payment messages sent to U.S. financial institutions,"

the settlement agreement says.



According to the agreement, BNP omitted references to Cuba, Iran and

Sudan in SWIFT payment orders to U.S. corresponding banks, replacing the

names of sanctioned parties with that of BNP or a code name.



BNP in 2004 shifted the U.S. processing of SWIFT dollar payments from

its New York branch to a U.S. bank in New York, in order to avoid

liability, OFAC claims. The document also states that until 2007, the

French bank followed requests from its customers in U.S.-sanctioned

countries to conceal dollar transactions.



Just as Washington seems to be easing on Cuba, ties between France and

the United States are being strained. French Foreign Minister Laurent

Fabius, who visited Havana in March, complained on France 2 TV that

"these figures are not reasonable." "The fine has to be proportionate

and reasonable," he said. Other French politicians hinted that the

settlement may scuttle negotiations between the United States and the

European Union over a trans-Atlantic free-trade pact.



The mechanics of U.S. pressure



The BNP case is the latest and biggest in a fast-escalating series of

fines against third-country banks.



A legal expert on OFAC's enforcement of trade sanctions, Judith Alison

Lee of the Washington law firm Gibson, Dunn & Crutcher LLC, says that

targeting banks has been a growing element of OFAC's strategy since

2005. Foreign banks are increasingly being ensnared in a package

proceedings for a variety of reasons, from doing business with nuclear

proliferators like North Korea and Iran, to facilitating the flow of

dollars for state sponsors of terrorism (such as Iran and Sudan), to

money laundering, to facilitating U.S. tax evasion. In those U.S.

investigations, Cuba is almost an afterthought, with OFAC simply

following Washington's long-standing regime change-driven embargo.



"Since approximately 2005, the U.S. Treasury Department has begun

relying on these banking-related sanctions more frequently," said Lee.

"The primary reason for this reliance is that the sanctions have

arguably proven effective. In particular, the sanctions influence the

decision-making of foreign financial institutions by forcing them to

make a choice: Either do business with the targeted country (e.g.,

Iran), or do business in the United States. These new forms of sanctions

have proven fairly successful — for example, bringing the Iranians to

the negotiating table over their nuclear program. It's no surprise then

that —given their success — OFAC has employed similar types against

Cuba, hoping to further increase the pressure on that country."



Depending on the nature of the alleged sanctions violations, other U.S.

agencies can initiate sanctions proceedings against foreign banks that

trade with Cuba, working hand-in-hand with OFAC.



"OFAC works closely with other agencies, including the Department of

Justice, to penalize European banks that conduct transactions with Cuba

in violation of U.S. law," said Lee. "For example, in many enforcement

actions taken against European banks, (the Department of Justice) will

suspend prosecution if the bank agrees to pay both (it and) OFAC a

certain settlement sum. Over the past few years, other agencies, both

federal and state, have become increasingly involved."



For example, the New York State Department of Financial Services played

a role in the agreement with Standard Chartered Bank and BNP Paribas.



One foreign banker who spoke on background said that Cuba has the

misfortune of being listed as a "state sponsor of terrorism" by the U.S.

State Department, and because of that, European and other international

banks' Cuba-related activities get red-flagged by OFAC, even if the

amounts involved are modest. "I don't think Obama's OFAC is targeting

banks doing business with Cuba (alone)," he said. "They are targeting

banks doing stuff with Iran, North, Korea, Sudan, Syria, and the mostly

minor Cuba transactions just get swept up into the rap sheet."



Meanwhile, the U.S. Congress is responsible for the steep rise in

amounts. In 2009, Congress raised the statutory maximum from a cap of

$11,000 to $250,000 per violation, or twice the value of the underlying

transaction. This has enabled OFAC to reap unprecedented amounts for

such fines. In 2008, OFAC collected a total of $3.5 million for 108

settled matters. After the statutory changes in 2009, OFAC collected

$772 million for just 27 settled matters.



With such enhanced financial powers from Congress, OFAC has become a

feared household name among the world's bankers. Some of the

institutions targeted were ING Bank, HSBC Holdings, Crédit Suisse, and

Barclays Bank, which paid the heaviest fines settled with OFAC thus far.

In 2012, OFAC collected over $1.1 billion in fines for just 16 matters.

Although OFAC reaped in just $137 million in 2013 for 26 matters, 2014

will be a record-breaker with the BNP Paribas settlement, which includes

a $963 million OFAC fine.



Getting off Washington's 'terror' list



Pro-normalization activists in the United States have recently focused

on pressing the Obama Administration to take Cuba of the State

Department's list of "terrorism-sponsoring nations," as a crucial tool

to improve relations.



Washington lawyer Lee is skeptical.



"The State Department and OFAC maintain different lists, and inclusion

or removal from one does not necessarily change the status of an entity

or a country on the other," she says. "Even if the president relaxed

sanctions on Cuba, Congress could still independently ratchet up

pressure through additional legislation."



Another OFAC expert, Washington attorney and one-time OFAC official Hal

Eren, noted that even the use of non-U.S. dollar currencies between Cuba

and its trading partners can trigger sanctions enforcement. Enforcement

actions are overwhelmingly triggered by U.S. dollar (transactions), but

can also involve other currencies, he said.



"What matters is where the transaction occurs and who conducts it," Lee

added. "Red flags generally include systematic attempts by large

financial institutions to cover their tracks and hide any transactions

which could violate U.S. sanctions on Cuba."



Eren said that any type of international commerce Cuba conducts can

become a sanctions target – from commodity trade financing for nickel,

sugar, or oil sales, to payments for Cuban medical services.



Some political observers have criticized Washington for penalizing

international banks' transactions with Cuba with the same severity as

countries conducting allegedly more nefarious activities, such as Iran

and North Korea, since Havana has nothing to do with nuclear

proliferation, or international terrorism. "Florida has a Cuban-American

population and is a swing state," said OFAC legal expert Erich Ferrari

in Washington, referring to that community's influence on presidential

elections. "If you're not tough enough on Cuba, you have the potential

of losing that state. That's why we have Cuba (OFAC) sanctions today."



Downside for the dollar?



A number of international banks still have a Cuban presence, such as

Scotiabank and National Bank of Canada (whose offices are at Havana's

glitzy Miramar Trade Center), and Spain's Banco Bilbao Vizcaya

Argentaria (BBVA). But they tend to keep a low profile, due to the U.S.

embargo.



To minimize exposure to Washington's sanctions campaign against Cuba,

these banks are facilitating the island's international trade in other

currencies.



"Here, we only use the euro or the Canadian dollar," said Havana-based

Chilean businessman Ángel Domper, whose trading firm TJP Internacional

supplies the island's supermarkets and tourism sector with food items

from various Latin American countries.



For the time being, international banks are still likely to comply with

OFAC's demands, simply because they don't want to be shut out of the

U.S. economy.



"The dollar is the prevailing trade currency," said Ferrari.

"International banks are going to have to have a presence in New York.

These banks are saying 'what are we going to make from these Cuba

transactions versus losing a license (in USA)?'"



But in the long run, there may be a downside to the U.S. crackdown on

foreign banks.



Says Washington lawyer Lee: "If foreign banks are increasingly subjected

to having their licenses being revoked (to operate in USA), such steep

penalties may incur a re-thinking of the decision to conduct

transactions using the dollar."



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