When BNP Paribas was recently asked to pay a record $8.9bn fine for having breached US sanctions against countries like Cuba, Sudan, Iran and North Korea, it sent shockwaves through the global financial industry. For the first time ever, a bank is facing criminal charges and having to pay a fine so sizeable that it could seriously derail its finances, as well as the overall European economy.
For the US, the investigation into, and ensuing guilty plea of BNP’s processing of transactions on behalf of US-sanctioned countries, was a first major win against a European financial giant. Shortly after the verdict, media and industry commentators alike began speculating whether the magnitude and repercussions of such a punishment would set precedence for other banks. Other banks should start saving now, and prepare themselves for significant judicial implications.
Several media sources report that the regulatory mafia, which hammered down on BNP Paribas, is probing several other European banks, including Germany’s Commerzbank.
According to The New York Times the Manhattan District Attorney’s office is working with the Justice Department, New York’s banking regulator and the Federal Reserve on the Commerzbank investigation, probing whether the bank breached rules regarding Iran, Sudan, North Korea, Myanmar and Cuba. The case is said to likely cost Commerzbank a mere $500m fine, as part of a deferred prosecution agreement, which would suspend criminal charges in exchange for the financial penalty and other concessions. Commerzbank said in its 2013 annual report that it had set aside €934m ($1.2bn) in provisions for legal proceedings and recourse claims, so the fine’s size is not likely to have shattering consequences. What is far more concerning is the increased focus on European banks alone.
Some critics have questioned why US authorities have set their eyes on European banks and turned away from
The Commerzbank probe is said to be a precursor to much bigger things, namely a smack down on Germany’s heavy hitter, Deutsche Bank. France’s Crédit Agricole and Société Générale, as well as Italy’s UniCredit are among other lenders being investigated by US authorities. This will all in all cost European banks a further $50bn in litigation and settlement costs according to analysts from Morgan Stanley. European firms have already set aside or paid out more than $80bn since 2009.
Some critics have questioned why US authorities have set their eyes on European banks and turned away from domestic cases. The answer, authorities say, is that American banks by and large avoided processing transactions for Iran and Sudan. Still, it is worth questioning why US probes have focused on tax evasion by European banks and, lately, those who have circumvented US sanctions. To this extent, UK and EU authorities have been a lot slower to prosecute and more lenient on US banks, which largely were at fault for the 2008 financial crisis and to some extent can be blamed for the European recession. Whether this comes down to the well-known lack of resources and qualified personnel within watchdogs such as the UK’s Financial Conduct Authority, could be one explanation, but more probable is the argument that US regulators are simply more keen on prosecuting European banks and bringing in major settlements – despite the consequences this might have for the European economy.
It’s without doubt that probes into financial misconduct are necessary. The financial crisis and its widespread consequences are proof of the need for tough regulation when big banks act badly. That said, it does raise concerns that US authorities seem to be exercising a hegemonic muscle that no one else can match. With Europe’s economy only just teetering on recovery, its worrying that there seems to be no consideration for the consequences of destabilising France’s biggest bank by assets, or going after banks that are partly owned by the German state and could seriously damage diplomatic relations. In the case of BNP Paribas, French President Francois Hollande even attempted to intervene by pleading for a lesser punishment, but to no avail – US prosecutors persisted.
The debate has for some time centred on whether banks can be too big to jail. Agreed, no bank should avoid consequences for a heinous lack of respect for national laws and financial regulations. That said, it must be possible to apply some sort of balance, for if BNP Paribas was the precursor, who’s to say what size the next fine will have? And whether the bank in question will be able to pay? Certainly, banks that have indisputably broken sanctions should be punished, but it’s also worth keeping in mind that regulation can go too far, too soon.