BNP Paribas case sheds light on rising liability for compliance roles and renews debate on tactics

Thirteen is a very unlucky number indeed for a group of BNP Paribas executives. In a plea agreement filed this week in a Manhattan federal court, BNP Paribas (BNPP) consented to the firings of 13 senior managers with ties to the bank’s systemic violation of US sanctions and falsification of transaction records.

BNPP also agreed to pay $8.9 billion penalty to the Department of Justice, Federal Reserve, Office of Foreign Assets Control and New York Department of Financial Services (DFS). The French financial giant will plead guilty to criminal charges of violating federal and New York state law.

While the monetary penalty is one of the largest ever imposed on an institution, it is the insistence by US regulators that individuals be held accountable that sets the BNPP case apart from previous high-profile enforcement actions. The New York DFS reportedly demanded that any plea agreement include firings of executives. Among the 13 set to part ways with BNPP are the bank’s Chief Operating Officer, its former Head of Compliance, and the Head of Ethics and Compliance for North America, Stephen Strombelline.

The case fits into a larger trend in the financial crime field. In the wake of highly visible money laundering, sanctions and tax evasion scandals involving major financial institutions, US regulators have faced mounting calls for tougher enforcement from politicians, pundits and public opinion. One response from enforcement agencies has been to target individuals within institutions. As financial crime compliance professionals often bear the role most directly responsible for detecting and preventing violations, increased liability risks are falling heavily on them.

“We are taking action today not only to penalize the bank, but also expose and sanction individual BNPP employees for wrongdoing,” said DFS Superintendent Benjamin Lawsky in a press release announcing the agreement. “In order to deter future offenses, it is important to remember that banks do not commit misconduct – bankers do.”

Compliance officers at BNPP repeatedly ignored or enabled sanctions violations

BNPP admitted to knowingly and willfully moving more than $8.8 billion from 2004 to 2012 through the US financial system on behalf of Iranian, Sudanese and Cuban entities sanctioned by the US. Bank employees intentionally concealed the identities of these clients when sending transactions through its New York affiliate.

The bank had standing policies and procedures in place, apparently condoned by senior managers, to strip transactions routed through its US affiliate of any references to sanctioned countries or entities. Such stripping took place in multiple bank branches, including Geneva and Paris.

Sorting through documents related to the bank’s guilty plea and consent order with the DFS, a clear pattern emerges – BNPP compliance officers repeatedly raised concerns over sanctions violations, only to be disregarded or even enlisted in concealing wrongdoing. Court documents illustrate several instances in which officers weighed business interests and profitability more heavily than compliance with US law.

According to the statement of facts filed along with the plea agreement, compliance officers in the bank’s Geneva branch initially questioned an operation to strip transactions related to Sudanese entities, but later determined that the customers were too lucrative to walk away from.  “Commercial stakes are significant,” says an officer in a 2006 email. “For these reasons, Compliance does not want to stand in the way of maintaining this activity.”

BNPP appears to have continued its “cavalier – and criminal – approach to compliance” even after other major European banks were hit with US enforcement actions for sanctions violations. After Dutch institution ABN Amro was penalized in 2005, North American Head of Ethics and Compliance Strombelline sent a revealing email to other employees at BNPP: “the dirty little secret is not so secret anymore, oui?”

US regulator issues rare dollar clearing ban, but impact is debated

BNNP will also be barred from processing US dollar clearing transactions in several of its business units as part of the plea agreement. The dollar clearing ban, which affects the banks’ offices in Paris, Geneva, Rome, Milan and Singapore, focuses on the units that processed transactions at the core of the investigation.

The dollar clearing ban is a rarely-used enforcement tactic, and has the potential to seriously damage an institution by severing its ties to the US financial system. However, critics of the BNPP agreement are already arguing that the way the ban is being applied in this case will mean its effect is minimal.

“The one thing [US agencies] have done here that they’re really proud of is the dollar clearing ban,” said Joshua Simmons, Policy Counsel at the research and advocacy group Global Financial Integrity. “But if you’ve seen what that’s actually done, not only have they delayed [the ban] six months to allow clients to find a way around it, but it also only lasts a year.”

On the other hand, Boston University professor and Director of the BU Center for Finance, Law and Policy Cornelius Hurley explained that even a year is a very long time when a bank is sending its best customers to third party correspondent banks for a basic banking service.

“Moreover, being an admitted felon and having to raise additional capital do not go well together,” Hurley said. “BNP’s competitors will (and should) have a field day picking off its customers.

The ban means that an entity routing a payment through the bank’s divisions of trade finance and Oil & Gas Energy & Commodity Finance Business would not be able to go through with the transaction. The Chief Executive Officer of BNPP, Jean Laurent Bonnafe, in a message to retail banking clients this week, affirmed that the dollar clearing ban only affects 1% of the bank’s business.

Penalty sparks accusations of ‘double standard’ by US enforcement agencies

Leading up to the announcement, French political officials and analysts voiced their resentment over an American “double standard” of justice for the prosecution of foreign financial institutions.

Christian Noyer, governor of Banque de France, warned of the repercussions if the US were to place a dollar clearing ban on BNPP, which deals in dollars for many of its transactions. Noyer warned that the status of the dollar as a reserve currency could be damaged if the US were to take such a measure.

Even President Francois Holland voiced his concern, reportedly making a personal appeal to President Barack Obama. On June 4, in a press conference in Brussels, Hollande said: “I am conscious of the risks of totally disproportionate, unfair sanctions that could have economic and financial consequences for the whole of the euro zone,” and said the matter was a concern for Franco-US relations.

Professor Hurley said that in fact, there appears to be a triple standard: 1) for large foreign banks vulnerable to prosecution 2) for US banks that are not “too big to fail” and 3) for certain “too big to fail” banks that he says have seemingly been granted immunity for prosecution.

Simmons, however, sees that US enforcement action remains constant throughout the international spectrum.

“There is no double standard because for fines, they are high across the board and in terms of prosecution, it’s the same because there is none.”

Like the Credit Suisse guilty plea and $2.6 billion penalty in May, the announcement of the BNPP agreement appeared to have a limited impact on investors and customers – the bank’s shares went up 3% the day after the plea deal was announced.

With the agreement made public, the uproar over US regulatory actions in France also seemed to quiet, with French Minister of Finance Michel Sapin announcing that France’s “demands” were met.

As BNPP cuts execs loose, some argue for greater individuality liability

The New York Department of Financial Services will receive $2.24 billion of the nearly $9 billion penalty incurred. The DFS stated in a press release on behalf of New York Governor Andrew Cuomo that the total sum of transactions violating New York banking laws was actually $190 billion from 2002 to 2012.

In earlier media reports, DFS was said to be mulling a revocation of the bank’s charter or bringing civil cases against individuals. Simmons from the Global Financial Integrity organization said that revoking the bank’s charter or bringing criminal charges against individuals would have been a gamechanger.

“There’s going to be a shift in that paradigm that is going to indicate to these massive banks that you can’t just put a price tag on this,” Simmons said. “When the government is seeking only fines, it doesn’t really matter if it’s a civil procedure or criminal procedure.”

GFI is one of many advocacy organizations that are pushing for a policy change, along with US Democratic Representatives Maxine Waters and Carolyn Maloney, who have introduced bills to deter money laundering and hold executives responsible.

As part of its own internal investigation, BNP disciplined 32 employees, from demotion to pay cuts. Twenty-seven additional employees who would have been disciplined previously left the bank. Still, no one person will face criminal charges or civil penalties in the US.

“No one individual is too big to jail,” Simmons added.