Le Monde Diplomatique, July 2014
Fining the banks for all the wrong crimes
BNP Paribas’s sins
US financial regulation is back — but it’s aggressively pursuing crimes, and criminals, not relevant to the near-destruction of the world economic system in 2008.
by Ibrahim Warde
BNP Paribas was sentenced to a $8.9 billion fine (1); its Swiss subsidiary has been charged with violating US sanctions against Cuba, Iran and Sudan between 2002 and 2009. This vividly illustrates how judicial practices have changed for international finance. Two other French banks, Société Générale and Crédit Agricole, are also in trouble with US authorities.
In April, President Hollande wrote to President Obama to highlight the “disproportionate nature of the planned sanctions” against BNP Paribas. Christian Noyer, governor of the Banque de France, was surprised at US law being applied to transactions that “conform to French and European rules, laws and regulations, as well as the rules laid down by the UN” (2).
Perhaps he would have been less surprised if he had paid closer attention to political changes. In the late 1980s, when there was much debate about US decline (particularly in relation to an up-and-coming Japan), the British political scientist Susan Strange drew attention to US “structural power”: “the power to shape and determine the structures of the global political economy within which other states, their political institutions, their economic enterprises and ... professional people have to operate” (3).
During the 1990s, sanctions (originating in the cold war) expanded a lot against countries and individuals deemed “enemies of the US”. Extraterritoriality reached a new level in 1996 with the Iran and Libya Sanctions Act, which allowed the US to impose sanctions on companies in countries that did business with Iran and Libya. After 9/11, US power over international banks was really toughened up, as part of the “financial war on terror” (4).
US surveillance of capital flows became global. As part of the US’s “exorbitant privilege” (General de Gaulle’s words), all transactions in dollars, even when not made in the US, came within the purview of US law. The powers of the Office of Foreign Assets Control, the Treasury Department agency responsible for compliance with sanctions, have grown.
The big international banks ignored these changes. BNP Paribas, acting on poor advice, committed repeated blunders. It ignored signals, including the visit to its Paris HQ in 2006 of Stuart Levey, then under-secretary for terrorism and financial intelligence at the US Treasury Department, who warned the bank about its relations with Iran. BNP Paribas continued to do business with sanctioned countries, in particular Sudan, to the tune of $30bn. Although American investigators uncovered an elaborate system involving third-country banks designed to elude controls, the bank kept denying accusations. Failing to acknowledge wrongdoing and show contrition, BNP Paribas was judged “non-cooperative”. At one point, the US authorities raised the stakes, floating the possibility of a $16bn or even $60bn fine (based on the principle that the fine could amount to double the sums involved), whereas the bank had only earmarked $1.1bn.
More creative retribution
The superintendent of the New York State Department of Financial Services, Benjamin Lawsky, who was the most aggressive investigator, kept upping the ante, and demanded dismissals, as a more “creative” retribution; one of the bank’s three chief operating officers, Georges Chodron de Courcel, plus other directors, left. Lawsky has also threatened a temporary suspension of dollar transactions for BNP Paribas customers, and even raised the possibility of revoking the bank’s licence to operate in the US.
This case makes clear that the financial regulation agencies are back with a vengeance. In March, the Financial Times estimated that fines paid by US and foreign banks in the past five years totalled around $100bn. For 2013 the figure was $52bn (5). The US’s biggest bank, JPMorgan Chase, holds the record, $13bn for a variety of mortgage abuses. Close behind is Bank of America, currently in the final stages of negotiations with the federal authorities and likely to pay $12bn for similar offences.
The US regulators have most major international financial institutions in their sights. In 2012 Holland’s ING and the UK’s Standard Chartered had to pay fines of $619m and $677m for doing business with sanctioned countries. Another British bank, HSBC, paid $1.9bn to settle a number of transgressions, including involvement in money laundering, abetting tax evasion and sanction busting. Some Swiss banks were also convicted of helping US clients defraud the tax authorities. Crédit Suisse, the first to plead guilty to this offence in 20 years, was fined $2.6bn.
Nothing like this had happened since the savings and loans crisis of the 1980s, which led to 1,100 prosecutions for abuse and fraud, brought by US regulators; 800 bankers were jailed (6). Immediately after, the regulatory system entered a period of laissez-faire unprecedented since the reforms introduced under the New Deal.
The ideology of deregulation changed the landscape. Alan Greenspan, Federal Reserve chairman from 1987 to 2006, insisted that the only regulation capable of promoting financial innovation — which he thought to be the engine of economic growth — was self-regulation. The astonishing growth of the financial markets and the apparent health of the US economy (over 10 years of continuous growth from March 1991) seemed to bear him out.
‘See no evil’
For the sake of “necessary modernisation”, important laws were passed, implementing neoliberal principles. The 1999 Gramm-Leach-Bliley Act (or Financial Services Modernization Act) formalised the end of the separation of commercial banking and other financial sectors, and in 2000 the Commodity Futures Modernization Act made possible the exponential growth of derivatives, and put them beyond all effective control. The regulators were in thrall to the same ideology, and indulged culprits, except over terrorism or sanction busting. When a bank was caught, it was just rapped over the knuckles: it was not deterred by the ritual of paying a small fine without, as the formula goes, “admitting or denying wrongdoing”. Almost everything was tolerated, if not approved of: “what the eyes don’t see...” When the 2008 financial crisis broke, the regulators were caught out — the subprime derivatives and credit default swaps at the origin of the collapse were not illegal — and they were helpless. The banks had taken the real economy hostage. Former Treasury Secretary Timothy Geithner wrote in his recent memoirs: “Old Testament vengeance appeals to the populist fury of the moment, but the truly moral thing to do during a raging financial inferno is to put it out. The goal should be to protect the innocent, even if some of the arsonists escape their full measure of justice” (7).
The arsonists were main beneficiaries of the huge bailouts (estimated at around $13 trillion) (8), which have cost taxpayers dearly, but have enabled the financial sector, and to a lesser extent the US economy, to revive. Some regulators, long criticised for leniency, now want to demonstrate the price of defying the law, and prosecute where they can, aggressively. Bank employees as well as outside informants are encouraged to become whistleblowers in return for financial recompense and a guarantee of keeping their jobs.
In these circumstances, it’s understandable that compliance departments have become more powerful and are continually vigilant. Given new powers under the Dodd-Frank Act (2010), they are more active, albeit without making the system safer or more stable.
Litigation resolution — the size of fines — remains arbitrary, because these crises involve many participants in an ever-changing context. Government agencies are motivated by different legal, ideological, financial and political considerations. For federal agencies, foreign policy is significant, while state-level authorities such as the DFS and the state of New York are guided by electoral and domestic factors. The banks are advised by lawyers and consultants, mainly specialists in PR and communications.
A bank’s strategy, and who it recruits, including former senior civil servants, can be critical. HSBC’s case seemed hopeless: charges of money laundering, tax evasion and other offences. (It had organised the transfer of suitcases of money for a Mexican drugs cartel.) But it got off with a fine of $1.9bn and avoided criminal sanctions. It will not have been unhelpful that HSBC’s Chief Legal Officer was Stuart Levey — the same Levey who as a US Treasury Department under-secretary had toured major European banks in 2006 to warn them off business with sanctioned countries.
Ibrahim Warde is an adjunct professor of international business at the Fletcher School of Law and Diplomacy, Tufts University (Massachusetts), and the author of The Price of Fear: the Truth behind the Financial War on Terror, University of California Press, 2007.
(1) The Wall Street Journal, 29 May 2014.
(3) Susan Strange, States and Markets, Pinter, London, 1988.
(4) See Ibrahim Warde, The Price of Fear: the Truth behind the Financial War on Terror, University of California Press, 2007.
(5) Richard McGregor and Aaron Stanley, “Banks pay out $100bn in US fines”, Financial Times, London, 25 March 2014.
(6) Gretchen Morgenson and Louise Story, “In financial crisis, no prosecutions of top figures”, The New York Times, 14 April 2011.
(7) Timothy F Geithner, Stress Test: Reflections on Financial Crises, Crown, New York, 2014.