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.
French government officials have repeatedly mentioned that BNP's alleged actions don't violate European law, even though it's irrelevant to the debate at hand. The Justice Department doesn't care if BNP's actions violate European law; by operating in the U.S. (through Bank of the West and First Hawaiian Bank), BNP has agreed to follow U.S. law. And U.S. officials view sanctions violations seriously. (The violations do not have to occur in the U.S. for American authorities to act.)
"I don't think that's a fair comment that it wouldn't happen to a U.S. institution at all," said John Byrne, executive vice president of the Association of Certified Anti-Money Laundering Specialists and a former anti-money laundering official at Bank of America. "It's been clear that the banks were first charged with doing this this is pretty serious. There would be equal outrage toward a U.S. institution that engaged in this as well."
Attorney General Eric Holder has also weighed in pretty forcefully on the issue.
"Financial institutions will not be treated differently on the basis of their nationality," he said last month at a press conference about a separate penalty paid by Credit Suisse. "If there are domestic banks that have either similar fact situations or other fact situations that we think warrant the bringing of criminal charges, we will simply bring them. "
Is DOJ trying to prove something about "too big to jail"?
Almost certainly. Holder made comments last year that most observers took as a confirmation that some institutions are "too big to jail."
"I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them when we are hit with indications that if we do prosecute if we do bring a criminal charge it will have a negative impact on the national economy, perhaps even the world economy," said Holder.
He has subsequently tried to walk back those remarks several times, including at the Credit Suisse press conference last month.
"No bank is too big to jail. That notion is simply inconsistent with how this department has conducted itself," he said.
Still, the earlier remarks left the impression that DOJ preferred not to criminally prosecute large institutions. Critics pointed to the HSBC case as proof of this because it was not forced to plead guilty to a criminal charge as part of its settlement. Not coincidentally, Credit Suisse was forced to plead guilty to a charge as part of its settlement last month with DOJ over allegations of tax fraud.
The BNP case is seen as a stalking horse for this debate.
Why should other banks care?
Aside from the question of "too big to jail" and the enhanced penalties regulators are demanding for money laundering violations, there are other potentially disturbing issues at play.
For one, the fact that Hollande raised the issue directly to Obama who has pledged to not interfere with the case shows just how involved the French government is in negotiations over the BNP penalty. It's difficult to imagine Obama going to bat for Bank of America (BAC) or JPMorgan Chase in the same way with a foreign government.
But BNP is France's largest bank, and the interest the fine has sparked there shows just how differently the country views its relationship with the institution.
"Many foreign governments and it's not just the French but also the Japanese and Chinese view their large banks as national champions," said Karen Shaw Petrou, managing partner at Federal Financial Analytics. "They don't have thousands of community banks. Being a bank is being a ward of the state. It's just really different."
That cultural divide has implications for the next financial crisis. The Federal Deposit Insurance Corp. and its foreign counterparts are trying to create a system that allows for the simultaneous resolution of an international bank in multiple countries. Yet other countries do not necessarily share U.S. priorities when it comes to ending "too big to fail."
"How do you do cross-border regulation when some banks are seen as 'too big to fail' and they are seen by other countries as 'too big to jail'?" asked Petrou.