In BNP Case and Beyond, Regulators Search for Penalties to Fit the Crimes
United States bank regulators are descending deep into the plumbing of the financial system as they seek the most fitting punishment for the giant French bank now in the cross hairs of the law enforcement authorities.
BNP Paribas is expected to plead guilty in the coming weeks to charges that it processed payments for companies and countries that were subject to United States sanctions. A criminal conviction would leave a stain on the bank’s reputation. BNP Paribas is also expected to pay financial penalties of about $8 billion, which would leave a sizable, though manageable, dent on its balance sheet. And a settlement is likely to require that the bank fire some senior executives.
Despite those potential punishments, some regulators want to do more — and that is why they have turned their attention to the depths of the banking system. They are considering restrictions on the BNP Paribas operations that funnel billions ofs through the vast network of pipes that connect the world’s largest banks.
Specifically, Benjamin M. Lawsky, New York State’s top financial regulator, is considering whether to temporarily suspend BNP Paribas’s ability to process dollar payments, according to people briefed on the settlement talks. This activity, often known as dollar clearing, may not in itself generate large profits, but it plays a crucial role in moving money between the bank and its clients in its core businesses, like lending and trading.
The fact that regulators are considering restrictions on such an important banking activity has added a significant twist to the debate over how to punish large banks.
Some legal specialists said that crimping dollar clearing could lead to unpredictable consequences. “It is a new form of punishment,” Oliver I. Ireland, a partner at Morrison & Foerster, said. “It seems to me to be a very uncertain tool to achieve an end.”
But consumer advocates said that banks and their representatives often overstated the potential effect of punishments. As a result, they said, law enforcement authorities should treat dark predictions about a dollar-clearing ban on BNP Paribas with skepticism. “This strikes me as less than a modest sanction,” said Dennis Kelleher, president of Better Markets, a group that has lobbied for tougher regulation of big banks.
BNP Paribas declined to comment on its dollar-clearing operations.
The United States authorities have enormous sway over dollar clearing because such transactions ultimately clear in the United States, even when they are initiated overseas. The United States government itself plays a hugely important role in processing payments through the Federal Reserve’s Fedwire Funds Service system. The question for regulators, however, is whether they can isolate a certain type of clearing, allowing them to focus the desired level of punishment on a certain business.
Bankers who work in the clearing business said that, in theory, a focused approach was possible. In particular, a bank can break out dollar clearing by business line or type of customer if it is part of the widely used Swift payments system. BNP Paribas appears to be part of Swift. As a result, regulators could require BNP Paribas to temporarily halt dollar clearing, for instance, within the division that made the payments that regulators say evaded sanctions.
There are, however, outcomes in which a dollar-clearing suspension may not hurt BNP Paribas much at all. The regulators may, for instance, prevent the bank from conducting clearing operations itself but allow BNP Paribas to contract its clearing to other banks for a certain period. Under that situation, the bank would most likely not experience significant disruption in core businesses like trading and lending. BNP Paribas’s customers would still be able to send the bank money, and it could still send dollars out.
Clearing specialists said, however, that an important activity known as correspondent banking would most likely be hurt even if BNP Paribas were allowed to use other banks to do its clearing. In correspondent banking, banks perform basic activities, including dollar clearing, for other financial institutions. Correspondent banking clients that use BNP Paribas for dollar clearing would have to transfer that function to other banks and could decide not to return.
“It comes down to a matter of attrition — how many customers the bank loses during the period of suspension,” said Cornelius K. Hurley, a professor at the Boston University School of Law. BNP Paribas has a substantial payments business, but its most recent annual report did not break out the contribution from correspondent banking.
Still, some banking experts remain unsettled by the idea of a dollar-clearing ban, even if regulators can carefully focus such an action. “The American authorities cannot speak to how the corporate and financial institutional clients of BNP Paribas will react,” said Jacob Frenkel, a lawyer at Shulman Rogers.
Consumer advocates are also not placing too many hopes on a dollar-clearing ban being the sort of get-tough measure that gives regulators the edge against large banks.
“Enforcing a United States foreign policy objective against a foreign bank is so far afield from Wall Street bank fraud harming U.S. citizens,” Jeff Connaughton, who was chief of staff for Ted Kaufman, the former Democratic senator from Delaware, said in an email. “This experimentation with criminal plea consequences just seems contrived compared to the damage caused by the legacy of dramatic law enforcement failures against U.S. banks,” he said.
Still, regulators have signaled that they simply have to consider measures like dollar-clearing bans if they want to exact punishments that fit the crime — and help to deter future wrongdoing. “We try and act in a tough but fair manner when it comes to enforcement. But I doubt we get it right in every case,” Mr. Lawsky said in a speech in March, when he alluded to a dollar-clearing suspension. “That said, we are committed to trying to find the right balance that creates real deterrents.”