Wednesday, November 26, 2014

Why Pick on BNP Paribas?

CAMBRIDGE – To Europeans with whom I speak, the $8.9 billion fine imposed on the French financial-services company BNP Paribas for violating American sanctions against Cuba, Iran, and Sudan seems excessive. Yes, BNP did something seriously wrong. But $8.9 billion? Isn’t that extremely disproportionate for an otherwise highly responsible bank? French President François Hollande asked US President Barack Obama to intervene to have the fine reduced, as did the European Union’s commissioner for the internal market and services, Michel Barnier.

The fine is indeed much higher than those levied before. Hefty fines for currency-trading violations are not new (HSBC, for example, was hit with a $1.9 billion fine in 2012); but a fine close to $10 billion is.

Three factors, not all of which are being discussed, seem to explain the size of the penalty. First, BNP’s infraction was part of a pattern of deliberate and repeated behavior. Second, the settlement came at a time when the American authorities faced heavy criticism for being soft on big banks during and after the 2008 financial crisis. Finally, and more speculatively, the United States’ effort to make finance a more efficacious foreign-policy tool could have affected its treatment of BNP.

On the first issue, European businesspeople and media organizations need to appreciate fully how US prosecutors of financial crimes think. Once an investigation shows clearly that wrongdoing has occurred, the authorities expect the target to come clean, cooperate, and restructure the firm to ensure that the infractions do not recur. But BNP continued the banned transactions and knowingly sought to cover its tracks. The transfer documentation reportedly was regularly stripped of key details such as the destination of wire transfers, so that the transaction would be harder to investigate and less likely to provide evidence of malfeasance.

In American corporate criminal actions, the targeted US firm often brings in a prominent figure – a former prosecutor or a former judge – to investigate the behavior and people involved and report to the target’s board of directors. The latest example of this practice now in the news is that of General Motors, which hired Anton Valukas, a prominent former prosecutor who examined and reported on the dealings of the failed investment bank Lehman Brothers to the bankruptcy court. Valukas’s task for GM was to investigate and report on the company’s faulty ignition switches, which have been linked to 13 deaths.

The targeted firm then typically fires the most egregious wrongdoers and puts management-control systems in place to reduce the chance that similar problems will arise in the future. Perhaps the investigation interprets ambiguity in a way most favorable to the organization and its senior management, but it is understood that the investigation will indeed uncover the core facts and lead to effective reforms.

Some might view this way of proceeding as moralism, though some of it results from under-staffed, under-funded prosecutors economizing on resources. The target pays for its own investigation. BNP did not seem to do any of this with gusto; its investigation did not match the effort made, for example, by GM. It did not prevent subsequent violations by implementing effective controls to detect problems.

The second factor is that BNP’s case came to a head at a time when US prosecutors were being accused of treating banks as “too big to jail,” for fear that pressing charges against them would weaken them too much and thus undermine the real economy. BNP just happened to be one of the next banks in line for prosecution and thus found itself in the crosshairs.

BNP did lobby European authorities to make a too-big-to-jail plea to the US authorities. The European authorities made the plea, claiming that the large fine would cripple BNP; it did not work.

Finally, bear in mind that the case coincided with the crises in Ukraine and elsewhere, with the major US enforcement action being financial and economic sanctions on Russia, the largest of which are still being threatened. Recall BNP’s transgressions: the US barred financial transactions with Sudan, Iran, and Cuba through banks that touched US soil (or the US dollar) in their dealings. Most banks complied. BNP did not, engineering secret transactions involving all three countries.

At a time when the US is reluctant or unable to project military might to back up its foreign-policy goals, it is seeking to use financial might as a surrogate. The effort might induce a financial backlash in the future, but BNP’s problems emerged when effective sanctions were at the forefront of policymakers’ minds – and, one suspects, not absent from prosecutors’ minds.

If the US is to make its financial weaponry an effective foreign-policy tool, big banks cannot blithely proceed to do what US authorities have prohibited. It would take only a few noncompliant banks to render financial sanctions ineffective. And it is difficult to detect which banks are not complying and to what extent.

So when one miscreant is discovered, the enforcement authorities hit it hard, to signal to others that, while they might not get caught, the financial penalties will far exceed the limited benefits of disobeying the government’s foreign-policy edicts. This general move for criminal enforcement – greater penalties to account for the difficulties of detection – is a standard prosecutorial move in the US and around the world.

Thus, European critics of the fine imposed on BNP Paribas are right to emphasize its disproportionate nature. What they overlook is that this was precisely the point.

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    1. CommentedVelko Simeonov

      BNP is doing the same thing pretty much any other major bank is doing in its everyday business, break all rules falsify any records, do whatever it takes to get that high yield. Big banks have been caught in the past couple years of rigging securities, FX, commodities and all other markets they operate or are somehow dependent upon. So why were they not fined 10B, rigging the euribor rate is a much heavier offense that helping cubans wire money here and there. But those banks were also american, and americans never go against their interest. BNP is french so the US administration got a perfect chance to enforce certain policies (global trade and financial controls against uncooperating countries and regimes), look good in front of their voters (look we are now chasing the evil banksters and will make them pay) and all that at the expense of someone else - the french (which ever since the second IRAQ war are not too beloved in the US anyway). Everything else is just useless babble. The good news is that the rest of the world is starting to take notice and hopefully soon they would start taking appropriate measures as well.

    2. CommentedPhilippe Abeille

      I propose that US pay 1 milion € for each person killed in the different wars since 1945.

        CommentedPaulo Sérgio

        In his reply to PHILIPPE ABEILLE, the commentator KEVIN LIM forgot to mention Rwanda, the case with the single largest loss of life.

        CommentedKevin Lim

        Sure, and France should pay 1 million euros for each algerian killed in their independence struggle, 1 million euros for each victim of the First Indochina War, 1 million euros for every american killed liberating France, 1 million euros for every french jew sent to the death camps by the Vichy regime, 1 billion euros per pacific island nuked for bomb testing.

        And no asking the ECB or the Bundebank or Germany for the money. Because European solidarity should stop at paying for overpriced french veggies.

    3. CommentedPaulo Sérgio

      It's obvious, of course, the French see no wrongdoing in the actions of BNP - much the same as they'll sell Russia that ship and train them how to use it against The Ukraine - it's just business.

      The real issue here is not French morals, or lack thereof, but rather stagnation. In Europe today, Germany is assuming the classical role that France has played for quite some time. The Germans are there and the French are not in terms of leadership.

      Further, it's not just the Germans who're pulling ahead, the Spanish, for example, are exiting the financial crisis and the tasteless PIIGS acronym more vigorously than France.

      Unfortunately, a terrible quantity of loss of prestige for Paris these days, and it shows in the presidential ratings of Mr Hollande. The US president currently holds a 48% approval ratings which is exceedingly poor - which compares with about 20% for the resident of the Élysée Palace. If the USA's poor presidential ratings capture the mood in much of the western world, the French ratings show a lack of in-touch with domestic politics and poor leadership.

      (rant over)


      Provided the US maintains a strong, world-leading economy, economic sanctions can have real muscle, but, this has not been the case over the last couple of years, and its European partners have been much harder hit by their own debt issues. So, US economic sanctions have been like the dollar because of diverging needs, interests in the western world - it's not as solid a grouping as imagined.

    4. CommentedChristos Kissas

      BNP did not violate any French or UN regulation through its dealings; it violated purely US regulations. The problem is that the bank used the US dollar in its transactions, and the US consider that using its currency requires compliance with its laws, even if the transaction took place eleswhere. This issue is going to bring many undesirable side effects in the relations between Europe and the United States. In the long run, it might also lead many Europeans to look for alternatives in their international dealings. All in all, I think it will do more harm than good. You can read my article in 'New Europe' on this subject:

    5. CommentedPrateek Raj

      While the fine is excessive to stop others from repeating such an offense, however that is not the only signal such a penalty sends. The fact that BNP Paribas is a French and not an US bank, may be viewed by businesses as biased, specially given the fact that many American banks that were charged with unprofessional practices during the financial crisis, have been let off with smaller fines (no matter the explanation). Although currently US is the dominant financial hub in the world, an impression of lack of parity, may hurt US markets in an increasingly competitive financial market.

    6. CommentedEnis Kapuano

      Europeans did not wait too much: Euopean Commission is questioning Luxembourg in respect of it's tax deal with AMAZON; stay tuned for a fine of at least the same size.