To Europeans with whom I speak, the $8.9 billion fine imposed on the French financial services company BNP Paribas for violating American sanctions against Cuba, Iran, and Sudan seems excessive. Yes, BNP did something seriously wrong. But $8.9 billion? Isn't that extremely disproportionate for an otherwise highly responsible bank? French President François Hollande asked United States President Barack Obama to intervene to have the fine reduced, as did the European Union's commissioner for the internal market and services, Michel Barnier.
The fine is indeed much higher than those levied before. Hefty fines for currency-trading violations are not new (HSBC, for example, was hit with a $1.9 billion fine in 2012); but a fine close to $10 billion is.
Three factors, not all of which are being discussed, seem to explain the size of the penalty. First, BNP's infraction was part of a pattern of deliberate and repeated behaviour. Second, the settlement came at a time when the American authorities faced heavy criticism for being soft on big banks during and after the 2008 financial crisis. Finally, and more speculatively, the US' effort to make finance a more efficacious foreign-policy tool could have affected its treatment of BNP.
On the first issue, European businesspeople and media organisations need to appreciate fully how US prosecutors of financial crimes think. Once an investigation shows clearly that wrongdoing has occurred, the authorities expect the target to come clean, cooperate, and restructure the firm to ensure that the infractions do not recur. But BNP continued the banned transactions and knowingly sought to cover its tracks. The transfer documentation reportedly was regularly stripped of key details such as the destination of wire transfers, so that the transaction would be harder to investigate and less likely to provide evidence of malfeasance.
Corporate crime in US
In American corporate criminal actions, the targeted US firm often brings in a prominent figure — a former prosecutor or a former judge — to investigate the behaviour and people involved and report to the target's board of directors. The latest example of this practice now in the news is that of General Motors, which hired Anton Valukas, a prominent former prosecutor who examined and reported on the dealings of the failed investment bank Lehman Brothers to the bankruptcy court. Valukas's task for GM was to investigate and report on the company's faulty ignition switches, which have been linked to 13 deaths.
The targeted firm then typically fires the most egregious wrongdoers and puts management-control systems in place to reduce the chance that similar problems will arise in the future. Perhaps the investigation interprets ambiguity in a way most favourable to the organisation and its senior management, but it is understood that the investigation will indeed uncover the core facts and lead to effective reforms.
Some might view this way of proceeding as moralism, though some of it results from under-staffed, under-funded prosecutors economising on resources. The target pays for its own investigation. BNP did not seem to do any of this with gusto; its investigation did not match the effort made, for example, by GM. It did not prevent subsequent violations by implementing effective controls to detect problems.
The second factor is that BNP's case came to a head at a time when US prosecutors were being accused of treating banks as 'too big to jail', for fear that pressing charges against them would weaken them too much and thus undermine the real economy. BNP just happened to be one of the next banks in line for prosecution and thus found itself in the crosshairs.
BNP did lobby European authorities to make a too-big-to-jail plea to the US authorities. The European authorities made the plea, claiming that the large fine would cripple BNP; it did not work.
Finally, bear in mind that the case coincided with the crises in Ukraine and elsewhere, with the major US enforcement action being financial and economic sanctions on Russia, the largest of which are still being threatened. Recall BNP's transgressions: the US barred financial transactions with Sudan, Iran, and Cuba through banks that touched US soil (or the US dollar) in their dealings. Most banks complied. BNP did not, engineering secret transactions involving all three countries.
At a time when the US is reluctant or unable to project military might to back up its foreign-policy goals, it is seeking to use financial might as a surrogate. The effort might induce a financial backlash in the future, but BNP's problems emerged when effective sanctions were at the forefront of policymakers' minds — and, one suspects, not absent from prosecutors' minds.
If the US is to make its financial weaponry an effective foreign-policy tool, big banks cannot blithely proceed to do what United States authorities have prohibited. It would take only a few noncompliant banks to render financial sanctions ineffective. And it is difficult to detect which banks are not complying and to what extent.
So when one miscreant is discovered, the enforcement authorities hit it hard, to signal to others that, while they might not get caught, the financial penalties will far exceed the limited benefits of disobeying the government's foreign-policy edicts. This general move for criminal enforcement — greater penalties to account for the difficulties of detection — is a standard prosecutorial move in the US and around the world.
Thus, European critics of the fine imposed on BNP Paribas are right to emphasise its disproportionate nature. What they overlook is that this was precisely the point.
The author, a professor at Harvard Law School, is an expert on securities law and financial markets. He is the author of numerous studies of the impact of politics on corporate organisation and corporate governance around the world.