BNP Paribas To Plead Guilty & Pay $9 Billion Fine: No Slap On The Wrist
On Monday, BNP Paribas' attorneys will enter a federal courthouse in Manhattan and enter a guilty plea to federal and state charges and consent to pay almost $9 billion in fines and penalties. BNP Paribas, France's largest bank, will plead guilty to violations of the International Emergency Economic Powers Act and New York State laws against filing false business records in connection with BNP Paribas' facilitation of billions of dollars of transactions in violation of sanctions against Sudan and Iran. You can read my prior posts here and here.
Record Setting Penalty Will Force BNP Paribas To Raise Capital
The $8.9 billion penalty will set a record for violation of sanctions. BNP Paribas' CEO Jean-Laurent Bonnafe sent a message to his employees late on June 27: "I want to say this clearly, we are going to be heavily sanctioned." As a point of comparison, this penalty is more than triple the prior record criminal sanction ever imposed on a bank, set in May 2014 when Credit Suisse pled guilty to facilitating tax evasion and agreed to pay a $2.6 billion penalty.
Because the penalty dwarfs the $1.1 billion that the bank set as a reserve, BNP Paribas will issue new bonds in order to raise the cash to pay the US. The bank will also likely cancel its dividend for 2014 and 2015. But the bank's CEO has told his employees that the firm will survive these penalties. "Malfunctions have occurred and mistakes were made. But this difficulty we are experiencing should not impact our roadmap."
The BNP Paribas Board has approved the settlement. Approximately half of the funds will be paid to federal authorities, the Department of Justice and the Office of Foreign Assets Control. The other half of the money will be split between New York's Department of Financial Services, head by Ben Lawsky, and the Manhattan District Attorney's Office. The over $2 billion that Lawsky's DFS will receive is more than four times the roughly $550 million budget for the entire DFS last year.
One Year Ban On Dollar Clearing & Termination Of Key Employees
BNP Paribas has also agreed to two major demands of Ben Lawsky: (1) a one-year ban on BNP Paribas conducing dollar clearing transactions and (2) termination of key BNP Paribas employees.
Dollar clearing is the process by which a bank converts a foreign currency into US dollars in order to be able to pay dollar-denominated liabilities. Lawsky reportedly had insisted that BNP Paribas agreed to the suspension of its dollar clearing privileges, in lieu of New York revoking the bank's charter. It appears as that BNP will be granted a grace period until January 2015 to allow it to arrange for a US bank, likely Bank of America, to handle dollar clearing for its customers. BNP's fear is that its European customers will switch banks if BNP cannot seemelessly handle dollar clearing transactions.
BNP also appears to have acquiesced to Lawsky's demand that one dozen of its top executives be terminated. BNP Paribas COO Georges Chodron de Courcel has already publicly announced that he will be retiring after forty years. BNP is expected to announce the termination of other key executives who were in charge of units that conducted the forbidden transactions.
Guilty Pleas For Bank, But No Individual Prosecutions
While BNP will plead guilty to multiple felonies, no individual BNP executive will be prosecuted. Apparently, US prosecutors determined that the statute of limitations expired before they were able to obtain the information to seek indictments against individuals. It has been widely reported that US law enforcement has insisted on such harsh penalties against BNP because they believe the bank "dragged its feet" in providing accurate information in response to US subpoenas.
The bank's guilty plea appears designed to counter the belief that some companies are "too big to jail." The theory was that the same financial institutions that were deemed "too big to fail" during the 2008 financial meltdown because the economic system would meltdown if they dissolved were also immune to criminal prosecution because a felony conviction threatened to shutter them. It appears that Lawsky, in particular, engaged in narrow tailoring of the sanctions imposed on BNP so that it could survive these sanctions.
All The French Horses And All The French Men Could Not Save BNP From Prosecution
Over the last six months, the top echelon of France's political leadership has lobbied to head off this prosecution. In April, French Preseident Hollande sent President Obama a strongly worded letter on behalf of BNP, warning that any punishment imposed "should not be unfair and disproportionate." French Foreign Minister Laurent Fabias warned in a June 2014 statement that any punishment must be "proportional and reasonable." French Minister Michel Sapin warned, ""If all the U.S. authorities involved in this case do not treat BNP Paribas fairly, France will respond firmly to protect its fundamental interests." France sought to tie the outcome of current European Union - United States trade negotiations to the outcome of the BNP prosecutions.
Despite French pressure, President Obama refused to intercede on BNP's behalf. "My answer on the bank prosecutions is short and simple: the tradition of the United States is that the president does not meddle in prosecutions." President Obama forcefully stated that under longstanding US practice, "I do not pick up the phone and tell the Attorney General how to prosecute cases" in order "to make sure that rule of law is not in any way impacted by political expediency."
The BNP Prosecution Gives Teeth To Sanctions
The astounding punishments to be imposed on BNP Paribas give "teeth" to the sanctions that have been imposed on Iran and Sudan. The debate about how to head off an Iranian nuclear weapon often devolves to a fight between "Bomb Iran" and "Let sanctions work." In order for sanctions to have any prospect of working, they must be respected by multi-national banks, such as BNP Paribas, so that pariah regimes will not have any way to spend their petrodollars.
It is clear that no set of sanctions will ever be perfectly enforced. Narcotics traffickers have proven over the last forty years that they can launder their profits. But the scope of BNP Paribas' assistance to Iran and Sudan emboldened those countries in ignoring the tough talk from the West about nuclear proliferation and genocide in Darfur.
After the BNP prosecution, I expect that it will be much more difficult for rogue states to find backdoors to the world financial system. Even if an individual banker (or his division) would be willing to take the risk in search of quick profits, this prosecution will cause major banks to erect stronger firewalls to avoid being the next bank slapped with a $9 billion penalty.