What are the chances of a $10 billion US regulatory fine for BNP Paribas? Compliance Matters crunches some numbers.

Although the Wall Street Journal alleged last week that BNP Paribas, the largest bank in Euroland by assets, was negotiating a $10 billion settlement for breaking US sanctions in the style of HSBC, the bank is still declining to comment to the media. A spokesman told Compliance Matters that it is sticking to the only two oblique statements that it has already made on the subject, namely those in its public accounts. "We have one (mention) in the 4-year 2013 accounts, where we have made the provision of $1.1 billion, and we also mention it in the Q1 2014 accounts, where we say that the final figure might be different."

The good news – and it is the same good news at every huge bank that has to settle with US prosecutors over criminal allegations – is that no senior bank executives are going to gaol, according to the Journal's source. This it partly attributes to a five-year statute of limitations for crimes of this kind, although the idea that people who colluded, recklessly or otherwise, in terrorist finance or sanction-subversion only five years ago should be immune from prosecution might seem outlandish to non-American ears.

A five-year limitation for helping terrorists?

Since 11th September 2001 there has been a massive inflation in the number of “specially designated nationals” or “blocked persons” on the US Government's blacklist which the Office of Foreign Assets Control forces banks both American and foreign to observe. HSBC's private banking operations ran further and further into trouble as the US sanctions against various targets, particularly Iran but also Burma, Cuba, North Korea, Sudan and many people, tightened over the years and the bank grew more and more creative in evading them.

What might BNP have done?

Today's US prosecutors might be asserting that BNP has been going down the same route as HSBC, whose affiliates systematically bypassed their “OFAC filters” when sending “OFAC-sensitive” money transmissions or wire transfers through their dollar-denominated correspondent accounts at HSBC's US private bank in New York. Before the banking conglomerate paid its $1.9 billion fine in December 2012, it emerged (although the bank never admitted any criminality) that HSBC Europe and HSBC Middle East had doctored the information on the transfers to remove all reference to that state and sent the transactions along to the US office which turned a blind eye.

Then there is the practice of turning a blind eye to relationships with banks linked, or reported in open-source material to be linked, to terrorist finance. HSBC New York went down this route by granting correspondent relationships to the notorious Al Rajhi Bank and others. It is unknown whether BNP has been indulging in this practice, although the Wall Street Journal believes that we shall know in the next few weeks.

Recent settlements, recent precedents

Very recently, in a Virginia courtroom, Credit Suisse pled guilty to “conspiracy to assist US customers in presenting false income tax returns” and had to pay $2.8 billion. Benjamin Lawsky, the head of New York's Department of Financial Services who allegedly wants to become governor of New York, is rumoured to be in favour of taking away BNP's licence to clear dollar transactions - an unprecedented step that would be ruinous to the group - but US authorities have always avoided this obvious decision in the past, just as they have avoided the idea of imprisoning senior bankers. The Wall Street Journal's sources do, however, believe that some sort of admission of wrongdoing is in the offing. The largest ever settlement against a bank in the US, meanwhile, was $13 billion that JP Morgan Chase agreed to pay the Government to settle civil charges that it misrepresented and overstated the quality of mortgages it was selling to investors before the crash of 2008. Its chief financial officer then said that the bank had not admitted to breaking any laws, whereas the Department of Justice gave a different impression in its own propaganda.

BNP's own words

In the 2013 accounts, the reference to the impending fine is both wordy and secretive: "The group’s financial statements also include a 1.1 billion US dollar provision, or 0.8 billion euros, related to the retrospective review of US dollar payments involving parties subject to US economic sanctions. As noted in its financial statements in recent years, following discussions with the US authorities, the bank conducted over several years an internal retrospective review of certain US dollar payments involving countries, persons and entities that could have been subject to economic sanctions under US law. The review identified a significant volume of transactions that could be considered impermissible under US laws and regulations including, in particular, those of OFAC. The bank has presented the findings of this review to the US authorities and commenced subsequent discussions with them. There have been no discussions with the US authorities about the amount of any fines or penalties. There therefore remains considerable uncertainty as to the actual amount of fines or penalties that the US authorities could impose on the bank following completion of the ongoing process, the timing of which is uncertain. The actual amount could thus be different, possibly very different, from the amount of the provision. Given its exceptional nature and significant amount, in accordance with IFRS [International Financial Reporting Standards] this provision has been set out as a specific line item in the income statement within operating income."

The Q1 2014 accounts say: "The discussions that took place during the first quarter of 2014 concerning US dollar payments involving countries subject to US sanctions demonstrate that a high degree of uncertainty exists as to the nature and amount of penalties that the US authorities could impose on the bank following completion of the ongoing process: there is the possibility that the amount of the fines could be far in excess of the amount of the provision."