BNP Paribas

I am not sure if any of you have seen the fine that has been imposed on the French bank BNP Paribas by the US authorities. The numbers circulating are a bit varied, but in any circumstance they do surprise. I believe the most recent figure I have seen is $ 16 billion, but it has also been announced that it could be more. Clearly any fine of that magnitude simply can’t go unnoticed and uncommented by me!

First of all, following shortly behind the $ 2.6 billion fine imposed on Credit Suisse, I think by now it is abundantly clear that the current US government has decided that a good way to finance itself is to take money from big global banks. Just for the record, foreign banks are not alone at being targeted as may have been thought by some recently, given the $ 13 billion fine to JP Morgan last year and Bank of America being up to now $ 18 billion in fines related to their handling of mortgages. Given that much of the global economic crisis that we have been enduring since 2008 has its roots in the whole subprime debacle, I suppose it is only fair now that the instigators of these dubious financial practices pay something back to the community. However, the reasons behind the fines imposed on Credit Suisse and BNP Paribas are perhaps not as justified and certainly warrant a review.

The whole Credit Suisse affair has been discussed a fair bit already and so I will leave that for now, except for one little comment. The $2.6 billion fine has been imposed because the DoJ claims that Credit Suisse has actively assisted US citizens avoid paying taxes in the US. Now Credit Suisse are looking at using this payout as a tax write-off, subsequently depriving the Swiss economy of an income that was normally due. So at the end of the day, it is not Credit Suisse that ends up suffering from the fine imposed by the US, but the Swiss tax payers. A nice twist here that is likely to piss off a number of people…

Anyway, back to BNP Paribas. Here the fine is imposed due to the French bank having ignored US embargo rulings on certain countries. Normally such embargos would only concern US companies, but since BNP have been making payments to countries such as Iran in US$, these payments have been done in the US and so the embargo would take effect. I suppose if they would have done these payments in EUR or CHF there would not have been an issue, but since they have been done in US$ there is a problem. The global cash clearing systems is such that electronic transfers of any currency always remains in the country of the currency. It is only physical cash movements that may circumvent this, and obviously today large physical cash movements are really only done by criminals such as drug cartels, weapons dealers and terrorist financing. Not criminals like international banks…

Now this for me opens a number of questions though. Because these transfers obviously took place on American soil, the beneficiaries must have had their accounts established with US beneficiary banks. As such, with the embargos being in place, what I don’t understand is how could these accounts have been opened in the first place? Also, in case they were opened prior to the embargo, then why were the accounts not blocked as a result of the embargo? All banks in the US are subject to internal controls, external audits as well as inspections by the SEC etc., and yet nothing was ever done to stop the transactions.

Another question is how should such rules actually be imposed on a global level? The US decides to impose an embargo on say Cuba. This implies that no US company can execute transactions with people and/or companies in Cuba. However, France has not imposed such an embargo on Cuba. As a result, one would think that a French bank would be free to trade with Cuba as they see fit, and that a US imposed embargo does not impact them. In my opinion, this should be the case regardless of the currency of the transactions. However, if one attempts to do a wire transfer transiting through a US bank, then I would fully understand that this bank refuses to execute the transfer due to the embargo. Alternatively, since any bank to bank US$ wire transfer would be done through the Fedwire, then the embargo should simply have been implemented here, and if anybody is at fault then it would be the Fedwire. The only way then that fund transfers could be done is through account to account transfers within BNP Paribas, and if these are done through accounts established with branches outside the US then technically there has been no breach of a US embargo.

So, the “crime” of BNP Paribas can be seen as being questionable. Then what justifies a fine of $ 16 billion? How does one arrive at this figure, incidentally a figure which it seems may perhaps not be final? I get that the US wants to get back at the big bad banks, and that somebody has to pay for the global economic crisis, but the consequences of fines of this magnitude can be quite severe on a number of levels. Given the threat that has been made of actually temporarily suspending the US banking license for BNP Paribas in addition to the monetary fine, a penalty that would result in catastrophic results for the French bank, it has been rumored that they may be looking at handing over the full responsibility of these transactions on their Swiss subsidiary. This would allow BNP Paribas to continue to function in the US, but it would probably sink the Swiss subsidiary with a considerable negative impact here both financially and humanly. I suppose then that like Credit Suisse they would try and use this as a tax write-off as well.

The decision fell last night, and the fine will be $ 8.9 billion in the end. I suppose when you are threatened a $ 16 billion fine, cutting the amount almost in half is not bad. Still, what an absurd amount to pay...