HSBC Chairman Douglas Flint had some advice for bank executives meeting in London last week: Read up on how the U.S. uses financial warfare against its enemies in a foreign-policy shift that's entangling lenders.
Since HSBC agreed to pay $1.9 billion to settle money-laundering probes in the U.S. 18 months ago, the largest such accord at the time, the Department of Justice has magnified its demands. It wants a guilty plea and a $10 billion fine from France's BNP Paribas for doing business in sanctioned nations such as Sudan and Iran, people with knowledge of the matter say.
The amount sought from BNP Paribas is adding to U.S. operational risks and the unpredictability of fines, European banking executives interviewed by Bloomberg News said. Sharon Bowles, a European Union lawmaker who chairs the bloc's economic and monetary affairs committee, said she's worried the collateral damage will be the banking system's stability.
"I'm concerned about the system risk to banks," Bowles said in an interview. "There is now a different regime in the U.S., and they pay much more punitive fines than is the norm in Europe. We have spent a lot of taxpayers' money to stabilize the banking system, which could now be destabilized."
At a June 4 meeting of the Institute of International Finance's board, Flint, 58, advised participants including Barclays Chief Executive Officer Antony Jenkins to read former U.S. deputy national security adviser Juan Zarate's "Treasury's War: The Unleashing of a New Era of Financial Warfare," according to two people who were present.
In his book, Zarate recounts how U.S. foreign policy is increasingly targeting financial activity by criminals, enemy states and individuals in sanctioned regimes. Caught in the middle are international lenders, whose desire to avoid business and reputational risk assures their cooperation.
"As we move into a zero-tolerance enforcement environment, we're forcing banks to make very hard business decisions on where they want to be," Zarate, now an adviser to the Center for Strategic & International Studies in Washington, said in a phone interview. "Have we reached a tipping point, and are we accelerating the de-Americanization of the financial system? Is this the moment the country may need to take a step back?"
Bank of France Governor Christian Noyer said yesterday on BFM Television that the U.S. investigation into BNP Paribas's dealings with sanctioned nations may encourage companies to stop using dollars in international transactions.
The drive for harsher punishments accelerated last month when U.S. prosecutors forced Credit Suisse to plead guilty to a criminal charge and pay $2.6 billion for helping Americans dodge taxes. The Zurich-based bank, Switzerland's second-largest, became the first global lender in a decade to admit to a crime in a U.S. courtroom.
U.S. Attorney General Eric Holder, who had faced criticism from lawmakers for not prosecuting banks, said at the time that the Credit Suisse case shows "no financial institution, no matter its size or global reach, is above the law."
Banks including Deutsche Bank AG, London-based Barclays and BNP Paribas have said they're maintaining their U.S. businesses. Regulators may make it harder for them to do so.
New York State's top banking regulator, Benjamin Lawsky, wants to temporarily suspend BNP Paribas's dollar-clearing operations, which could damage the bank's business and has become a sticking point in negotiations, according to a person familiar with the matter who asked not to be identified because the talks are private.
BNP Paribas isn't alone among European banks facing fines for sanctions violations. Germany's Deutsche Bank, France's Societe Generale and Credit Agricole and Italy's UniCredit all have said they're being probed by U.S. officials.
Peter Carr, a Justice Department spokesman, declined to comment. So did Flint and spokesmen for London-based HSBC, BNP Paribas, Barclays, Credit Suisse, Frankfurt-based Deutsche Bank, Credit Agricole, Societe Generale and UniCredit in Milan.
"Global banks are rethinking the cost of doing business, and which countries they want to be in, not just in the U.S. but globally," said Tim Adams, who heads the IIF, a Washington- based financial-industry lobbying group.
U.S. banks also have been hit with fines. The six largest U.S. lenders, led by JPMorgan Chase and Bank of America, have piled up more than $100 billion in legal costs since the financial crisis. New York-based JPMorgan agreed in November to a record $13 billion settlement to end civil claims over its sales of mortgage bonds. U.S. prosecutors want as much as $17 billion from Charlotte, North Carolina-based Bank of America to resolve similar investigations, according to people with knowledge of the matter.
While most of the alleged misconduct by U.S. banks involves domestic violations, their foreign practices are under scrutiny as well.
The Justice Department is investigating whether financial firms made improper payments to secure investments from sovereign-wealth funds, and the Securities and Exchange Commission is looking into whether U.S. banks including JPMorgan and Goldman Sachs hired people in Asia so that their relatives in government would steer business to the firm, people with knowledge of the matter have said.
The use of criminal charges and business prohibitions increase the threat of commercial disruptions for all lenders, according to interviews with four bank executives in the U.S. A guilty plea or conviction would be more devastating for a domestic firm with a bigger network of U.S. clients, some said. Efforts to punish business lines could inflict even more harm than fines, they said.
Two of the executives said they're concerned that U.S. banks might face retaliation from European regulators. Firms under investigation in the region could end up with fines being multiplied as a payback for a large BNP penalty, they said.
"Something has happened in the last year that's been very worrying for global universal banks," said Inigo Lecubarri, who helps manage the $800 million Abaco Financials Fund in London. "Regulators, especially in the U.S. but also in the U.K., have found an easy way to make money. These banks have a reputation at stake that they need to protect, and markets applaud settlements, and the combination is an incentive to settling. The result is a big step back from globalization. After the crisis, nobody's going global."
At stake for European banks are their international ambitions and remaining appetite to be in the world's biggest financial market. The potential sanctions violations are in addition to rules already requiring foreign banks in the U.S. to hold more capital. Those restrictions are prompting Credit Suisse to ponder selling stakes in an electronic interest-rates- trading unit, a person briefed on the plan said this week.
Any European retrenchment probably will benefit Wall Street firms such as Goldman Sachs, which said last month that it has been gaining market share in trading.
"With diminished competition, large U.S. investment banks could gain an almost monopolistic stranglehold over megadeals originated by multinational U.S.-based companies," said Mark Williams, author of "Uncontrolled Risk," a book on the rise and collapse of Lehman Brothers Holdings Inc., and an executive- in-residence at Boston University.
The share of investment-banking fees paid for mergers and acquisitions, bond sales and initial public offerings to European banks competing in the U.S. including Barclays, Credit Suisse and Deutsche Bank declined to 17.9 percent in 2013 from 19.2 percent in 2012, data compiled by New York-based consulting firm Freeman & Co. show. Meanwhile, U.S. firms operating in Europe such as Bank of America, Goldman Sachs and JPMorgan saw their share of investment-banking fees rise to 23.6 percent in 2013 from 20.9 percent in 2012, the data show.
"The run rate of fines has been quite astonishing, and there is a momentum here that we can't ignore," said Guy de Blonay, who manages $900 million in assets including European bank shares in a financials fund for Jupiter Asset Management in London. "Legacy issues are now becoming an important issue not to dismiss too easily. To operate in the U.S., it has become more expensive than it used to be."