BNP Paribas Sued by US Authorities: Chronicle of Events

BNP Paribas Sued by US Authorities Chronicle of Events

The French bank agreed to pay a fine of nearly 6.5 billion euros on Monday, June 30, for using dollars in its transactions with “enemies of the United States” under embargo, such as Iran and Cuba.

As part of the agreement with the US court, BNP Paribas is prohibited to make payments in dollars on behalf of oil and gas traders for a year.

This highly symbolic ban on the US point of view does not take effect immediately, but six months after the signing of the agreement with the law, early in 2015. BNP Paribas offices in Geneva, Milan, Paris Rome and Singapore will be involved.

Facing pressure from the US authorities, the bank has made concessions: one of its directors, Georges Chodron de Courcel, left his post on Monday. In total, BNP Paribas separated thirteen employees to appease the US authorities.

Let’s revise the milestones of this case:

  1. Charges pressed against BNP
  2. Why the US Can impose a fine on a French bank?
  3. What do the French authorities say?
  4. Does BNP have the means to pay the fine?
  5. What are risks other than fine?
  6. Are the funds of BNP clients in danger?
  7. Charges pressed against BNP

BNP Paribas is suspected by the US court to have bypassed embargoes imposed by the United States against Cuba, Iran, Sudan and Libya between 2000 and 2010 – like many other European banks.

According to the Financial Times, the legality of BNP operations has been unclear since 2005. According to the Wall Street Journal, Washington have, however, given the French bank authorization to operate in Iran earlier this year.

For several weeks, the press gave a fairly wide range of estimated fine, with an amount ranging between $3 billion (€2 billion) and $16 billion (€11.7 billion). In the end, the fine was set at $8.834 billion (6.45 billion euros).

Why the US Can impose a fine on a French bank?

The United States believes that any transaction made in dollars must comply with US law. In this case, BNP Paribas transactions have violated the embargo declared by the United States against certain countries and regimes.

The logic is this: any transaction in dollars has to go through a clearinghouse on US soil, which is taking a risk by ensuring that the transaction is completed. The transaction must therefore comply with US law and the rules imposed by Washington, as explained in the page dedicated to embargoes by the BNP website.

Because, ultimately, it is to ensure, through the delivery and payment of securities (and given the number of exchange denominated in US currency), the stability of the US financial system and the greenback itself.

Washington set up during the Cold War years this legislative arsenal of economic sanctions against countries and individuals specifically designated as “enemies of the United States” or those “supporting terrorism”. The arsenal of sanctions was then reinforced by two laws (Helms-Burton and D’Amato-Kennedy) to Cuba, Iran and Libya.

A body under the responsibility of the deputy secretary of state terrorism, OFAC (Office of Foreign Assets Control, “Foreign Assets Control Office”) is responsible for ensuring the proper implementation of these sanctions, whether they are imposed by the UN or the US alone.

Since the mid-2000s, and especially since the subprime crisis, the US administration has raised the tone by launching an international hunt for banks violating arms embargoes. It considers that any transaction made in dollars must comply with US regulations, even if it is led by a structure that is not American.

Under international law, countries are generally not permitted to exercise extraterritorial powers like the United States and sanctioning foreign banks. But one legal principle overrides all others: that of the protection of state sovereignty. A principle summary stressed emphatically by the Attorney General of the United States, Eric Holder, in his statement: “No individual or entity that hurt our economy is not above the law.”

However, Washington has an important lever for enforcing any transaction in dollars that must be compensated on American soil – that is to say, through a clearing house that validates financial regularity of the transaction. It is precisely the fact that the transactions of the BNP have been made in dollars makes them criminal in the eyes of the United States.

In 2012, the new US doctrine has already forced the Dutch bank ING to cough up $619 million in fines (for illegal transactions with Iran) or the British Standard Chartered to pay $ 667 million for trade with Iran, Burma, Libya and Sudan.

In another area, tax evasion, but still criminal, Washington forced early May Credit Suisse to plead guilty to criminal activity and pay a fine of just under € 2 billion to the US Department of Justice.

What do the French authorities say?

What do the French authorities say

The French financial authorities had acted very discreet on this delicate issue. But the fines invoked put an end to this silence.

“We are entitled to seek a balance,” requested the Minister of economy Arnaud Montebourg. The Foreign Minister Laurent Fabius had also warned that such a fine would impact the discussions on free trade agreement under discussion between the EU and the United States.

President François Hollande himself had called for a “proportionate” settlement, and had discussed the matter with his US counterpart Barack Obama at a dinner on the eve of the commemoration of the D-Day of 1944. The US president had for his part said very clearly that he refused to interfere in this matter.

This mobilization of French politicians is viewed with some caution in the US. “If the goal is to influence the decision of American justice, it will probably be counter-productive, warned Charles Kolb, president of the French-American Foundation, who had been an advisor to the White House until the early 1990s.

“We are dealing with a problem of understanding of how the US judicial system works. It would be unthinkable to imagine a US senator or cabinet member picking up the phone to try to influence a decision in the context of a criminal investigation,” he explained. Worse, he said, it could stiffen the US position. “By doing this, you may place the judiciary back to the wall. They then have no choice but to take a hard line.”

The Governor of the Bank of France, Christian Noyer, said that the euro and the Chinese yuan could benefit from tighter US regulations on transactions in dollars to expand into international trade.

Does BNP have the means to pay the fine?

The provision of $1.1 billion (€800 million) set aside by the bank to cover the litigation should not be sufficient. The fine of €6.45 billion will strain the 2014 profits of the bank, now one of the strongest and most efficient in Europe.

Shortly after the announcement of the fine, the French banking regulator, French Prudential Supervisory Authority (ACPR), however, held that the BNP was able to “absorb the anticipated consequences” through liquidity situation and “quite strong” solvency.

There is a good news could sweeten the bill for the BNP: in the United States, financial penalties can be deducted from taxes. Last year, JPMorgan was able to save $2.2 billion (€1.6 billion) on a total fine of $5.1 billion. The question is whether that fine is deductible, depending on where the bank’s profits reside.

What are risks other than fine?

The New York Department of Financial Services have already announced they would not suspend the BNP bank license in the country, including the activity of the subsidiary of BNP in the United States, BancWest (10% of turnover of the group’s retail banking business).

But the French bank will see its dollar clearing activities suspended for one year. This intermediary activity has become an important activity for BNP Paribas and in particular its subsidiary BNP Paribas Securities Services, including the United States (the French bank claims to be among the top five worldwide in the interbank clearing).

Prohibition to hold dollars in compensation for the activity for its customers, however, concerns the “guilty” activities, that is to say oil and gas. And the bank has a deadline until 31 December 2014 to find an alternative solution, namely a facility that agrees to pay for its payments in dollars.

Are the funds of BNP clients in danger?

Whatever the consequences of this fine on the BNP, they do not jeopardize the deposits of its customers. There is in fact a guarantee fund for bank deposits.

This was confirmed by the Governor of the Bank of France: “It does not mean at all that it jeopardizes BNP Paribas, must be absolutely reassured its customers, but it can reduce its ability to distribute credit in throughout the world and in the French economy.”

If a bank were to fail, the guarantee fund deposits and resolutions (FGDR) compensates customers at the max of €100,000 euros per customer. The FGDR becomes the bank’s creditor instead of the customer.

BNP and several of its subsidiaries are subscribed to the FGDR. This is also one of the requirements for a bank (or a credit institution) authorized to operate in France, as explained in the FGDR document database.

Preliminary investigation for alleged insider trading at BNP Paribas

Preliminary investigation for alleged insider trading at BNP Paribas

A preliminary investigation was opened in Paris on possible insider trading that may have been committed by leaders of BNP Paribas, said on Tuesday, 18 November a source close to the matter told AFP, confirming a report in French newspaper Canard enchaîné.

According to the weekly, the individuals concerned are Baudouin Prot, ex-President of the bank, Michel Pébereau, his predecessor, and Philippe Bordenave, Deputy CEO. In the course of 2013 and early 2014, the three men had sold nearly 300,000 shares owned personally, while an investigation was under way in the United States.

Anticipation of a record fine consequences

In this case, the bank prosecuted in the US court for having made transactions in dollars, between 2002 and 2012, with entities of the three countries subject to US economic sanctions. BNP eventually agreed to pay a fine of $8.9 billion, a record for a foreign bank.

According to the weekly Canard enchaîné, the prosecutor ordered the AMF, the stock market watchdog, to determine “what inside information” did the three leaders have when they had sold their shares, prior to the resolution of this case. Did they know that the bank was moving towards a record fine and anticipated that this sanction would weigh on the value of the shares?

After the share price plummeted on the stock market when the US investigation was revealed to the general public and the risk to the bank, the resolution of the case, however, was greeted with a relative relief by the markets, since higher estimates of fines having been previously given.

The three men on BNP board sold their shares at an average price of between €44 and €49. Meanwhile, the value of the BNP Paribas did not answer: During Tuesday she was in the top of that range, at €48.

The financial national prosecution commissioned in early November its preliminary investigation after receiving information whose nature had not been specified by the source close to the case. The investigations will be conducted in cooperation with the AMF and will be “in charge and discharge,” added the source.

After a preliminary investigation, the prosecution has several options: no further action or designate investigating judges if it is felt that there is the need for further investigations. In the case of a complex issue, direct summoning of the respondents in court seems quite likely.

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  • Anna

    It pisses me off so much, thinking that someone always takes advantage of wars,
    deaths, epidemics, etc. This is the case of utmost unscrupulousness and greed.
    I think banks like that should be deprived of their license.