WASHINGTON BNP Paribas' likely criminal plea and payment of a massive fine to U.S. law enforcement authorities have ballooned into a full-scale international incident, with French President Francois Hollande raising the issue directly at dinner with President Obama on Thursday.
The negotiations between state, federal and now international authorities have become a flash point for several major debates, including whether large institutions remain "too big to jail" and whether the U.S. is treating foreign banks like BNP Paribas of Paris differently than domestic banks.
But how the issue plays out has also stoked fears about the efficacy of cross-border resolution plans and highlighted the cultural divide between the U.S. banking system and other countries' systems. We offer the following frequently asked questions as a guide to the myriad of issues in play.
What did BNP Paribas allegedly do?
The bank said in February that it was under investigation for transactions with countries under U.S. sanctions, which media reports have identified as Iran, Cuba and the Sudan. The Justice Department, along with New York authorities, are probing whether the bank disguised those transactions through a process known as "stripping," in which employees remove key details, including the locations of the wire transfer, so that they don't draw scrutiny.
In the world of anti-money laundering, stripping is a serious offense and several institutions have paid severe penalties as a result. According to media reports, BNP is being pressured to plead guilty to criminal charges as a result of the investigation and the DOJ is seeking a fine of between $5 billion to $10 billion. (Spokespersons for BNP and DOJ declined to comment for this article.)
Wow, that's steep. Are penalties always that tough?
No. Since 2009, six banks have been hit with fines related to alleged violations of U.S. sanctions, for a total of $3.3 billion in penalties. If BNP agrees to a $10 billion fine, it would be more than three times as much as all the other penalties combined.
This has led French government officials to openly complain that the fine is excessive. French Foreign Minister Laurent Fabius said this week that a fine "has to be proportionate and reasonable."
"These figures are not reasonable," he said, according to published reports.
The issue has fueled concerns in France that the Justice Department is attempting to make an example of BNP to rebut domestic criticisms that it is unwilling to take tough action against large institutions. It has also sparked allegations that DOJ is taking actions against a foreign bank that they wouldn't against a U.S. institution.
Is the penalty too high?
That's difficult to know because law enforcement officials have not disclosed the specific details of their accusations against BNP. It's unclear, for example, how long the alleged stripping occurred and whether senior executives at the firm were aware of it. Those and other factors would make a large difference in the assessment of a penalty. Since negotiations are ongoing and expected to take weeks to resolve, we won't know all the facts for some time.
But by way of comparison, a $10 billion fine would be two and a half times larger than the penalties assessed on BP as part of the Deepwater Horizon oil spill, which is the largest criminal fine to date. The Libor scandal, meanwhile, resulted in a $1.1 billion criminal fine and a total of $3.7 billion in fines paid to regulators. On the other extreme, JPMorgan Chase (JPM) paid more than $13 billion to resolve civil charges related to its mortgage business.
It is clear that law enforcement officials are trying to increase the severity of penalties assessed in cases like this. The largest sanctions fine to date against a bank came in 2012, when HSBC paid $1.2 billion for sanctions violations as part of a total of $1.9 billion in penalties related to its lack of controls in monitoring foreign transactions. According to a DOJ investigation, HSBC's U.S. and Mexican operations allowed drug traffickers to launder more than $880 million through its systems between 2006 and 2010. The bank was also cited for helping customers in such countries as Iran and Sudan skirt U.S. sanctions when processing their payments.
Presumably, the Justice Department will have to establish why BNP's alleged activities are more egregious than HSBC's in order to justify a significantly larger penalty.
Is the U.S. punishing BNP harshly because it's foreign?
No, but that's a popular line of reasoning in France at the moment. The institutions hit with sanctions violations in the past several years are foreign-owned, including HSBC, Standard Chartered, ING, Barclays, Credit Suisse and Lloyds. But that fact is likely a result of the difficulty some foreign banks have had in complying with U.S. law and the possible resistance some institutions feel in having to do so.