BNP Paribas' Rubber Crutch May Cost Over $8 Billion
BNP Paribas, the largest French bank, is about to get slammed with the largest criminal penalties in United States history. According to the New York Times, BNP is in final negotiations to plead guilty to criminal violation of the sanctions imposed on Iran, Sudan and other countries and pay a huge monetary penalty. In April, BNP reserved $1.1 billion to pay the cost of its violations. That will not nearly be enough. The press is reporting that BNP is expected to pay at least $8 billion. The United States Department of Justice is pushing for the financial penalty to reach $10 billion, and is the subject of intense lobbying from the highest levels of the French Government.
According to the New York Times, until earlier this year, BNP believed it had a "secret weapon" to avoid all penalties: a legal memorandum drafted in 2004 (the "2004 Memo") by an unnamed "highly respected" law firm that "essentially authorized the bank to process certain transactions for Sudan, as long as BNP’s employees in New York were not involved in the arrangement." In April, BNP presented this memorandum to the Department of Justice and argued that because their employees had followed the "advice of counsel", the bank could not have had the intent to commit a crime. In order for there to be a criminal violation of the sanctions law, the defendant must act "willfully" - which means knowing (or blinding himself to the fact) that his acts are forbidden by the law. BNP's argument to the DOJ apparently was that the 2004 Memo made it impossible to find "willful" misconduct.
To BNP's great dismay, the 2004 Memo provided as much support as a rubber crutch. The DOJ apparently did not contend that the 2004 Memo got the law wrong, but instead contended that it got the facts wrong. The Department of Justice picked apart the 2004 Memo and determined that it did not cover the vast bulk of BNP's criminal activity.
The advice of counsel defense, a tool that comes up most often when defending complex financial cases, would apply only if BNP had been both fully forthcoming with its lawyers in 2004 and then actually followed the exact legal advice, according to legal experts. In this case, prosecutors concluded that many of BNP’s transactions did not pass both tests, the people briefed on the matter said.
Having spent much of my career working for large multi-national law firms that cater to financial institutions like BNP, I can provide some informed speculation on why the defense failed so miserably. To be clear, I have not read the 2004 Memo and do not know which law firm prepared it. But from my experience, I can shed light on the process by which the 2004 Memo was likely created, and why it would provide such little protection.
Law Firm Opinions Are Almost Always Contingent
The key word in every law firm opinion is "IF." A major law firm would never risk its reputation and a ruinous malpractice suit by providing an unqualified opinion that everything that the bank might do would comply with the law. Rather, the law firm would prepare a memorandum that set forth the law firm's understanding of the operative facts and then provide an analysis of how the law would apply to those facts. The opinion would explicitly state that it provided no legal analysis of the ramifications if the facts were different than it had understood. The opinion would also explicitly state that it was based upon the law as it existed as of the date of the memorandum, and that it could not predict future changes in the law.
Its Expensive & Difficult To Get Complete And Accurate Facts
Often the most expensive part of preparing a law firm opinion is conducting gaining an understanding of the operative facts. Hundreds (or thousands) of attorney hours can be spent interviewing executives and reading documents. This is a tedious, disruptive and expensive process. Clients sometimes seek to reduce this expense by providing the law firm with its operations manuals and telling the lawyers to presume that the manuals will be followed. Even if a full investigation is conducted, the information developed is likely to imperfectly capture all of the permutations of conduct by thousands of employees spread over dozens of offices. For example, employees are often loathe to admit to outside lawyers the shortcuts and deviations that they take from their company's standard operating procedure.
The Facts Will Change Over Time
Even if the law firm perfectly captures the facts as of the date of their opinion, those facts will change over time. Once the facts change from those assumed in the opinion, the opinion provides as much protection as a screen door on a submarine. Clients frequently continue to rely upon opinions that are based on outdated facts.
The Client Will Often Treat A Highly Contingent Analysis As If It Were A Blanket Blessing
The bankers at major financial institutions are there to make money. They do not have the patience to read long, nuanced legal opinions, nor do they have the training to do so. They want hard and fast lines, and they want to take advantage of every opportunity on the kosher side of the line. They will apply the advice in a legal opinion to new circumstances, even though those circumstances were not analyzed in the opinion.
BNP Pushed Beyond The Protection of The 2004 Memo
When the DOJ reviewed the 2004 Memorandum, it found all of the "ifs" and limitations that BNP apparently ignored. For example, BNP apparently treated the 2004 Memo as blessing transactions in both Iran and Sudan, even though the 2004 Memo only addressed one of the two countries. In addition, BNP overseas employees apparently reacted to advice in the 2004 Memo that transactions with certain banned counter-parties could not be processed "by delet[ing] any information that could tie the payments to entities that the United States had hit with sanctions."
Because BNP was not doing what the 2004 Memo assumed it would be doing, the 2004 Memo provided no protection when the DOJ came to hold BNP criminally liable.
Bottom Line:
When BNP commissioned its law firm to provide the 2004 Memo, it bought very nuanced and limited protection. BNP, however, acted as if it had received a broad license to act as it wished. This rash act will cost BNP billions of dollars.