Lots of forms of financial skulduggery can be described as "sophisticated," but not all of them are. A classification might be:
- If you do some complicated stuff in such a way that you'd have a plausible case that you're following the rules, even if the authorities knew about all your complicated stuff, then that's a "sophisticated" way to evade the rules.
- If you just, like, use Wite-Out to conceal the bad stuff that you're doing, then it's something else, even if you use a lot of Wite-Out and in complicated ways.
BNP Paribas pleaded guilty yesterday to violating U.S. sanctions against Sudan, Iran and Cuba, agreeing to pay almost $9 billion to various regulators and prosecutors. Those regulators and prosecutors variously described its methods as "elaborate" and "egregious schemes," but they stopped short of "sophisticated." Because in fact the methods mostly went something like this:
First, the payment from the Cuban entity would be made from its account at French Bank 1 to a BNPP Paris bank account at French Bank 1. As a book-to-book transfer -- i.e., a transfer from one account to another within the same financial institution -- no U.S. dollar clearing would occur. Second, BNPP Paris would transfer the money from its account at French Bank 1 to a transit account held at BNPP Paris itself. This bank-to-bank transfer would result in U.S. dollar clearing, with the payment typically being transferred through BNPP NY or on occasion by U.S. Bank 1. In order to prevent BNPP NY's OFAC filters from blocking the transactions, BNPP Paris would make no mention of Cuba or the Cuban entities involved. Third, BNPP Paris would conduct a book-to-book transfer from its own BNPP Paris account to an account held by the Cuban entity at BNPP Paris. Although BNPP Paris would list its own transit account as the beneficiary of the transaction passing through the United States, most of these payments bypassed the transit account and were credited directly to the Cuban entity's account at BNPP Paris.
Got it?1 A Cuban company had dollars at "French Bank 1" (not its real name) and wanted to move them to BNP Paribas, another French bank. The U.S. had decided that Cuban companies should not be able to move money between French banks. BNP Paribas made it happen anyway, by basically crossing out the Cuban company's name on the transfer and writing in its own.
As skulduggery, that is pretty underwhelming. Like, you'd expect your compliance officers to notice obvious stuff like that. And they did. But:2
BNPP continued to process transactions involving Sudanese Sanctioned Entities -- despite being well aware that its conduct violated U.S. law -- because the business was profitable and because BNPP Geneva did not want to risk its longstanding relationships with Sudanese clients. For example, in a July 2006 Credit Committee Meeting of BNPP's general management, despite expressing a concern about BNPP's role in processing U.S. dollar transactions with Sudanese Sanctioned Entities BNPP's senior compliance personnel signed off on the continuation of the transactions. An email summarizing that meeting explained that "[t]he relationship with this body of counterparties is a historical one and the commercial stakes are significant. For these reasons, Compliance does not want to stand in the way of maintaining this activity for ECEP and [BNPP Geneva] ..."
Presumably, Cuba and Iran fell into the same exception: Important enough to BNP Paribas that compliance was okay with violating U.S. law.
In another bit of its settlement, with the New York Department of Financial Services, BNP agreed to fire, or to have already fired, a bunch of people including, I think, the compliance people who were at that meeting.3 But we can still ask: Did they do a good job? If you were their boss -- if you were the chief executive of BNP Paribas in July 2006 -- would you have wanted them to stand in the way of these deals? Knowing what you know now, I suppose you could criticize their judgment; the $9 billion fine seems to be much more than BNP could have made in its sanctions-violating business.4
But at the time, I mean, BNP Paribas was conducting its own foreign policy in Sudan. Here is an e-mail from "a high-level Geneva employee" at BNP Paribas:5
I remember when you ... made me meet the Minister of Finance of Sudan and the President of the [Sudanese Government Bank 1], it had been specified that all business activity -- meaning in passing -- the Minister and the President had shown themselves to be very satisfied -- and it had received the full support of our General Management in Paris.
Maybe he was lying but I don't know. If your intention is to obey, or to look like you're obeying, or to have some plausible argument that you're obeying, U.S. sanctions against Sudan, meeting with Sudan's finance minister seems to be a bad idea.
But obviously BNP Paribas did not care about obeying U.S. sanctions against Sudan. It cared about not getting caught violating those sanctions, of course, and it is sad -- or whatever the bank equivalent of "sad" is, "less well capitalized" I guess -- that it did get caught. But the sanctions just had no moral bite with BNP Paribas. It did not occur to anyone there -- even in the compliance department -- that Cuban companies shouldn't be allowed to transfer money from one French bank to another French bank, because of U.S. law. That struck BNP's bankers as a dumb rule, to be avoided with dumb methods.6
I will not belabor the obvious fact that lots of people, some of them in the French government, agree with BNP on this count. It is intuitively weird that it's a crime in the U.S. for a French bank to help "a Dutch company to finance the purchase of crude oil products destined to be refined in and sold to Cuba."7 We talked a bit yesterday about how the use of the dollar as an instrument of U.S. foreign policy makes it less useful as an instrument of global trade, and it does seem like, if you were a Dutch company selling oil to Cuba, you'd have to think now about doing your business in euros. BNP Paribas conducted its own foreign policy because it didn't agree with U.S. foreign policy, and I suspect it's not alone in that.
But, anyway, now it's pleaded guilty to a crime and agreed to assorted penalties. One penalty is the $9 billion of fines, which are divvied up among the regulators; New York's DFS is getting a juicy $2.24 billion in recognition of the negotiating prowess of its superintendent, Benjamin Lawsky. But the fines, it seems, will not impact shareholders too much: BNP won't reduce its dividend, and the shares are up.
I suppose this makes sense; the transmission mechanism from "punish shareholders" to "improve employee behavior" has always struck me as pretty indirect. So another penalty imposed by Lawsky, demanding that various employees be fired, seems more likely to actually influence behavior, though it isn't perhaps as glamorous as multibillion-dollar fines. (Of course, you can do both!) The firings extend pretty high up, though not to the very top, making the point I suppose that BNP's foreign policy was conducted at a level below the CEO.
The other major penalty is a ban on dollar clearing by certain BNP offices and business lines, to start at the end of the year.8 This seems to be a very small penalty in economic effect, which is weird: Doing dollar transactions on behalf of Sudanese, Cuban and Iranian clients was important enough to BNP Paribas that it violated U.S. law to serve those clients, but being banned from dollar clearing will have "no impact on its operational or business capabilities to serve the vast majority of its clients."
One possible explanation is that BNP Paribas wasn't doing dollar clearing for a lot of those illegal transactions. Starting in 2004, after a previous settlement with DFS and the Fed, BNP decided that the way to avoid trouble would be to clear its illegal transactions through another bank:9
Shortly after BNPP entered into the MOU, two senior BNPP Paris executives and BNPP Geneva executives met in Geneva to discuss how "embargoes against sensitive countries (Sudan, Libya, Syria ... )" affected BNP's business and operational issues with respect to sensitive countries. At that meeting, the executives decidd to switch to an unaffiliated bank in the United States ("U.S. Bank 1") to process payments for countries subject to U.S. sanctions. Following that meeting, BNPP Geneva employees were instructed to have U.S. dollar payments involving Sanctioned Entities cleared through U.S. Bank 1 instead of BNPP New York.
The decision to switch dollar clearing involving Sanctioned Entities to US. Bank 1 was at least in part an attempt to decrease BNPP New York's exposure to enforcement actions by U.S. authorities ...
This is a little disappointing, honestly; I liked the dollar-clearing ban because I assumed it was a punishment that fit the crime. But in fact BNP was mostly using other banks to clear its illegal transactions anyway. So I guess it can keep doing that.
I mean, it probably won't. Still, these penalties feel vaguely unsettling. They're gigantic, which will disappoint those who dislike the American exercise of power through financial regulation. And yet they seem not to have hurt BNP that much, which will disappoint those who want to see more robust enforcement against banks.
One lesson, perhaps, is that penalties, in isolation, are not the best way to enforce financial regulation. What you'd want, ideally, is a culture that buys into the regulations -- if not among front-office bankers, at least among compliance officers. The best way to enforce capital rules is to have bankers who want their banks to be stable and well capitalized; the best way to enforce disclosure rules is to have bankers who want their investors to be well informed; the best way to enforce anti-fraud rules is to have bankers who want to treat their clients fairly. The second-best way is to have compliance officers who believe in those things. If you can't persuade even the compliance officers to buy into a regulatory system, then you can always fine them and fire them and think up clever new ways to penalize their banks. But at that point -- when the rules have been violated and the bank is both in trouble and aggrieved -- no one's going to be happy.
1 That's from paragraph 53 of the Statement of Facts stipulated to by BNP Paribas and the U.S. Department of Justice yesterday.
2 Paragraph 37 of the Statement of Facts.
3 Not really sure; the list is in paragraph 57 of the DFS consent order, and includes the Group Head of Compliance, the Head of Ethics and Compliance North America, and "a former attorney of BNP Paribas's CIB Legal Department."
4 The biggest number I've seen is "more than $190 billion" of transactions, from DFS (paragraph 1); I'm guessing BNP did not get paid 4 percent of the value of transactions it cleared. From Bloomberg (BNP FP <equity> FA IS) I see revenues from "Other Countries," which seems to include Africa among others, running from $786 million in 2005 to $2.4 billion in 2009.
5 Paragraph 32 of the Statement of Facts.
6 That said, Sudan is a bit of a separate question: Lots of people within BNP Paribas -- mostly in compliance but still -- got a little queasy at supporting the Sudanese state.
In April 2006, a senior BNPP Paris compliance officer stated in a memorandum that "[t]he growth of revenue from oil is unlikely to help end the conflict [in Darfur], and it is probable that Sudan will remain torn up by insurrections and resulting repressive measures for a long time." In March 2007, another senior BNPP Paris compliance officer reminded other high-level BNPP compliance and legal employees that certain Sudanese banks with which BNPP dealt "play a pivotal part in the support of the Sudanese government which ... has hosted Osama Bin Laden and refuse the United Nations intervention in Darfur." A few months later, in May 2007, a BNPP Paris executive with responsibilities for compliance across all BNPP branches warned in a memorandum that: "In a context where the International Community puts pressure to bring an end to the dramatic situation in Darfur, no one would understand why BNP Paribas persists [in Sudan] which could be interpreted as supporting the leaders in place."
That dramatic situation is in paragraph 20 of the Statement of Facts. Unsurprisingly, prosecutors make the most of ties to terrorism and genocide: "BNPP banked on never being held to account for its criminal support of countries and entities engaged in acts of terrorism and other atrocities," says Preet Bharara, and Benjamin Lawsky says that BNP "illegally funneled money to countries involved in terrorism and genocide."
7 That's paragraph 52 of the Statement of Facts.
8 See paragraphs 53-55 of the DFS consent order. Roughly speaking, the New York branch of BNP can't clear dollars on behalf of oil and gas financing businesses in the Geneva, Paris, Singapore, Rome and Milan branches, for one year. It also can't clear "as a correspondent bank for unaffiliated third party banks in New York and London" for two years.
9 From paragraphs 29-30 of the Statement of Facts.
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