France’s Very Bad Bank

Did BNP Paribas get off easy?

As the most liquid currency on the planet, the American dollar is by far the denomination of choice in international trade.1  Those who can’t access it are effectively barred from global commerce.

The only practical way to gain access to USD is through a US bank or the US branch of a foreign bank.  Doing so, however, subjects whoever transfers or receives USD to US law, even if that party is foreign.

Among the US laws applicable to USD transactions are the financial sanctions the US has imposed on countries like Cuba (in 1960), Iran (in 1995) and Sudan (in 1997) in an effort to deter human rights abuses and threats to global security.  These sanctions prohibit US banks and the US branches of foreign banks from doing business with counterparties in the blacklisted countries.

In a class by itself

Blood Money

BNP was Sudan’s banker during the genocide in Darfur

Between 2002 and 2012, BNP Paribas, France’s largest bank, engaged in more than $30 billion2 of USD transactions on behalf of entities in Cuba, Iran and Sudan.  The illegal transactions were centered in BNP’s oil & gas trading unit in Geneva.  That unit had for years been extending credit and transferring USD payments for buyers and sellers of petroleum products in all three of the sanctioned countries.  When those countries became subject to US sanctions, BNP apparently did not at first believe the US sanctions applied to it and, when advised otherwise by counsel, nevertheless carried on its USD dealings with the sanctioned entities, treating potential US legal penalties as just a business risk.

BNP knew full well that it was violating US sanctions and disguised every USD transaction with a sanctioned entity by stripping all references to that entity in the transfer orders placed with either its own New York branch or an unaffiliated (and unwitting) New York bank.  In numerous instances, BNP also interposed independent foreign (“satellite”) banks between the sanctioned counterparties and BNP’s branch in Geneva so as to conceal the identities of the real sources or beneficiaries of the USD transfers.

BNP continued to circumvent US sanctions even after ABN Amro was penalized in 2005 for engaging in similar deceptions.  At about the same time, BNP was warned by US authorities that the bank was under investigation for its compliance policies in this area.  Senior management at BNP ignored these ‘red flags’ as well as multiple internal warnings to stop dealing with countries subject to US sanctions.  To boot, the bank was also less than fully cooperative during the US investigation and, by dragging its feet, prevented US law enforcement from bringing criminal charges against individual BNP employees and cooperating satellite banks due to a five-year statute of limitations.

An international incident

For the enormity and persistence of its violations, BNP was fined a whopping $8.97 billion3 by US regulators and, more painfully, forced to plead guilty to criminal charges.  It is the first foreign bank ever to have been criminally convicted for sanctions violations.  Under its settlement with US authorities, the bank also prematurely retired 64 year-old COO Georges Chodron de Courcel for condoning the violations, demoted a number of other participating employees and agreed to suspend its so-called ‘dollar-clearing’ activities in oil & gas for one year, starting in 2015.4

As soon as he got wind of the penalties facing BNP, French president François Hollande personally called Barack Obama and told him that singling out BNP for a criminal conviction and an exorbitant fine5 was an offense against France since the bank did not violate any French laws.6   

As soon as he got wind of the penalties facing BNP, French president François Hollande personally called Barack Obama and told him that singling out BNP for a criminal conviction and an exorbitant fine5 was an offense against France since the bank did not violate any French laws.6   

Obama ignored Hollande’s plea7 and, surprisingly to many, none of the penalties imposed upon BNP turned out to really threaten its business or prospects.  Shortly after its settlement was reached, CEO Jean-Laurent Bonnafé announced publicly that BNP’s clients would stick by the bank and the penalties would have “no major impact on the business.”  The bank then declared its regular annual dividend and its stock was up 3.6% on the news.  

Given the size and duration of its illegal transactions, its falsification of records and, most damning, the intransigence of its senior management, can you think of any financial institution more deserving of being put out of business than BNP Paribas?  Were it not for Hollande’s intervention, BNP’s banking license in the US may well have been revoked and some BNP higher-ups charged with crimes.  In the current environment, if BNP were an American bank, it’s a fair guess that building security would soon be turning out its lights for the last time.

1 More than 61% of the world’s currency reserves are denominated in USD. About 25% are denominated in Euro.

2 Figures as high as $190 billion have been reported, but the US claims against the bank were based on $8.8 billion of proven criminal transactions.

3 BNP’s net income in 2013 was $6.5 billion.

4 ‘Dollar-clearing’ is the business of effecting payments in USD and BNP’s ‘dollar-clearing’ activities in oil & gas account for less than 1% of BNP’s group revenues.

5 The highest earlier fine for sanctions violations by any bank was $1.9 billion levied against HSBC in 2012. In 2005, ABN Amro was the first foreign bank to be fined for sanctions violations and the amount of the fine was $80 million.

6 Russian president Vladimir Putin even chimed in on France’s behalf, claiming that the BNP fine was an attempt by the US to blackmail France into reneging on a pending sale of two warships to Russia.

7 Obama reportedly replied that he doesn’t just “pick up the phone and call the Justice Department. Perhaps that happens elsewhere.”