Record Fine for French Bank

U.S. uses dollar power to penalize BNP Paribas for violating sanctions.

The precedent-setting fine French bank BNP Paribas agreed to pay U.S. authorities -- nearly $9 billion -- highlights the long reach of Washington's financial sanctions and an obscure part of the global financial system that makes that reach possible.

The giant French bank pleaded guilty Monday to violating sanctions against Iran, Sudan, and Cuba. Between 2004 and 2012, BNP used "sophisticated schemes" to move more than $8.8 billion for blacklisted entities through the U.S. financial system, according to the Justice Department.

In addition to the guilty plea, the firm agreed to fire 13 people and cease processing certain types of U.S. dollar transactions for one year. Suspending the bank's ability to facilitate dollar payments is a new type of penalty with unpredictable consequences. The ban also highlights a crucial part of the plumbing of the international financial system that gives Washington the ability to hold foreign banks to U.S. sanctions laws, even if their customers have nothing to do with the United States.

When a bank converts foreign currency into dollars, the transaction is routed through a U.S. dollar-transfer system. That nexus with the U.S. financial system gives American authorities jurisdiction over the transaction and subjects the bank to U.S. law. The mechanism, known as "dollar clearing," is essential for international banks because most global business and trade is conducted in dollars. BNP routes hundreds of billions of dollars through New York every day, according to Reuters. (Foreign banks do not need U.S. subsidiaries to route international transactions through the United States.) BNP is a member of a private transfer system in New York called the Clearing House Interbank Payments System, which processes $1.5 trillion worth of transactions daily.

When the United States blacklists a company or an individual, not only do American banks and U.S. branches of foreign banks have to comply, but so do the financial institutions that process dollar payments. The dominance of the U.S. dollar in global trade gives American authorities the ability to go after banks all over the world.

"The U.S. is really the only country that can do this because the U.S. dollar is the reserve currency and the oil trade is denominated in dollars," said Zachary Goldman, a former Treasury Department sanctions official who now heads the Center on Law and Security at New York University.

For BNP, not being able to move dollars into or out of the United States for a year will be problematic. Though straight wire transfers are not a huge business for banks, converting other currencies into dollars is an integral service to trade financing, investments, and other international deals. If the bank isn't able to provide that service, it will have to find another bank to do it, which means it risks losing business.

"It will increase their costs some; it might delay the sending of funds," said Nancy Atkinson, a senior analyst with Aite Group. "Clients might choose to leave the bank and go to someone else."

BNP has extensive operations in the United States, including investment banking offices in New York, Chicago, and San Francisco, as well as 700 retail branches spread across 20 states through subsidiary BancWest Corporation. Jean-Pierre Lambert, a Keefe, Bruyette & Woods Ltd. analyst, estimated the ban could cost BNP $40 million, according to Bloomberg.

The $8.9 billion fine is several times over the previous record for sanctions violations, which London-based HSBC paid in 2012. HSBC was dinged $1.9 billion for doing business with drug cartels in Mexico and customers in sanctioned countries, including Iran, Libya, Sudan, Burma, and Cuba.

The giant fine is a result of the scale of the misconduct and the lengths to which the bank went to cover it up, according to the Justice Department. In less than a year, between July 2006 and June 2007, BNP processed $6.4 billion worth of transactions for blacklisted Sudanese entities and individuals, including $4 billion for a bank owned by the Sudanese government. And BNP went ahead with the business despite warnings from several lawyers and senior compliance personnel, according to documents released by DOJ. "This practice effectively means that we are circumventing the US embargo on transactions in USD by Sudan," one compliance officer warned in 2005. The bank processed $1.7 billion in transactions for customers in Cuba. When some payments to Cuba were blocked, BNP lumped transactions together and stripped them of identifying information to conceal their recipients, according to DOJ. Through 2012, BNP did more than $650 million worth of business with Iran, including working with a company in Dubai that was a front for an Iranian oil company.

"BNP Paribas went to elaborate lengths to conceal prohibited transactions, cover its tracks, and deceive U.S. authorities," Attorney General Eric Holder said in a statement. "Sanctions are a key tool in protecting U.S. national security interests, but they only work if they are strictly enforced."

The settlement brings to a close a years-long investigation and months of negotiation between the bank and U.S. prosecutors but the result could still reverberate in U.S.-French relations. For instance, French Foreign Minister Laurent Fabius said on June 6 that the fine could hold up trade talks between Europe and the United States. French President François Hollande had pressed President Barack Obama for a lighter penalty, but Obama dismissed the idea that he could intervene.

Harvard Law School professor Hal Scott said the BNP fine is excessive and will unduly hurt shareholders but said the government should throw the book at the bank officials who flaunted the sanctions.

"I actually like the idea that we insist as part of the settlement that they get rid of the people involved; that's making the people who did it pay, rather than the shareholders," said Scott. "In my perfect world, the French government would agree to put those people in the United States and they'd be put in jail. That may be the best solution for everybody."



Afghanistan Escapes Blacklist

Afghan banks dodged an international black mark Friday when a watchdog organization gave the government another shot at cleaning up its corrupt banking system.

Afghanistan narrowly missed being cut off from the global financial system Friday, after rushing through last-minute laws to crack down on criminal use of its banks. The near-miss underscores how the U.S. withdrawal from Afghanistan could undercut the security of Afghanistan’s fragile economy, as its notoriously corrupt banks can no longer hide from international scrutiny behind an American shield.

The country was on the verge of being blacklisted -- along with Iran and North Korea -- by an intergovernmental organization that pressures countries to properly oversee banks to keep them from being used by terrorists, drug cartels, and corrupt politicians. The Financial Action Task Force (FATF) on Friday deemed Afghanistan's eleventh-hour legislating sufficient to escape the blacklist -- for now. But it warned that Kabul should make progress on implementing the laws before the group's next meeting in October.

Although FATF doesn't have the power to sanction banks, a black mark from the organization essentially has the same effect, as most international banks won't work with countries on the list. Losing the few global financial institutions still willing to work with Afghan banks would have been a major blow to the shaky Afghan economy as it weans itself from the foreign aid that has sustained the country for the last 13 years.

In February, FATF, which sets standards for financial-crimes law, moved Afghanistan to the gray list of countries "not making sufficient progress." FATF threatened to move Afghanistan to the blacklist if it didn't criminalize money laundering, establish a system to trace terrorist money, and track the cash flowing back and forth across the country's porous borders. Outgoing President Hamid Karzai, who opposed those measures, reversed course at the last minute and signed a package of anti-money-laundering laws Wednesday. Although it forestalled harsher FATF action, the organization said it hasn't evaluated the legislation yet.

The rampant corruption of and interconnectedness of the Afghan government and financial system complicated U.S. efforts in the Afghanistan war. The collapse of Kabul Bank in 2010 forced the United States to make a tough call between upholding law and order and accomplishing its military mission.

Kabul Bank shareholders, including Karzai's brother, reportedly used $900 million of institutional money to buy houses in Dubai and fund Karzai's presidential campaign. With U.S. help and encouragement, Afghan authorities investigated but then, under pressure from Karzai's government, gave up the chase. The United States initially pushed a broad anti-corruption strategy but the urgency of securing the country and conflicting agendas stymied the good-government push. The United States stopped supporting the investigators and prosecutors and tabled its anti-corruption priorities, as Sarah Chayes, former civilian advisor to U.S. forces in Afghanistan, detailed in an earlier article for Foreign Policy.

Chayes, who now studies kleptocracy at the Carnegie Endowment for International Peace, says the new law shows that international pressure can move Karzai.

"Too often international partners of kleptocratic or criminalized states blink too soon," Chayes said. "Kabul's reaction to the threat of a FATF blacklist shows that setting clear standards and sticking to them delivers results."

Despite the progress, past corruption crackdowns have shown they are only as good as the government enforcing them. Many are hopeful that a new leader can usher in real changes but the outcome of a June 14 run-off presidential election, which was mired in accusations of fraud, is still unknown.