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U.S. Authorities Are Expected to Slap BNP With Nearly $9 Billion in Penalties

The logo of French bank BNP Paribas seen in a photo taken on June 24 in Lille, northern France. Agence France-Presse/Getty Images

Last summer, BNP Paribas SA BNP.FR +0.56% executives flew to New York to share an embarrassing admission with U.S. authorities: The French bank had continued to process potentially illicit dollar transactions with countries blacklisted by Washington years after the U.S. began an in-depth probe into the lender.

More than three years into the investigation, U.S. authorities had at times been frustrated with what they perceived to be a lack of cooperation by BNP Paribas. Officials from the Justice Department and the New York District Attorney's office attending the meeting at the Federal Reserve Bank of New York in Lower Manhattan were stunned.

"We can't believe we're having this conversation now," said one of the U.S. officials, according to a person present.

On Monday, U.S. authorities are expected to announce a landmark settlement with the bank: a guilty plea; a rare temporary ban on directly processing certain dollar transfers; and nearly $9 billion in penalties—a record in a sanctions violation case—for allegedly attempting to conceal some $30 billion in transactions with sanctioned countries.

The looming settlement marks an abrupt fall from grace for the mother ship of France's banking industry and forms the closing chapter of a management failure that is producing astonishing fallout.

Run by some of France's brightest brains from a Paris headquarters' corridor nicknamed the "Hall of Mirrors"—in reference to the famed room at the Versailles Palace—BNP Paribas deftly navigated the financial and euro sovereign-debt crises.

The bank suffered no major rogue-trader hit like crosstown rival Société Générale SA, GLE.FR -0.93% and has largely escaped other scandals that have wounded rivals. At the heart of the bank's crisis-dodging sagacity, current and former BNP Paribas officials say, is the company's "inspection générale"—a potent and highly autonomous force of about 1,000 functioning like internal police.

In 2007, in the wake of the Bush administration's aggressive push to close loopholes that allowed European companies to continue trading in dollars with countries under U.S. sanctions, BNP Paribas issued internal orders—including on the recommendation of the inspection générale—to stop dealing with Sudan, Iran and Cuba, current and former bank officials said.

When U.S. authorities approached BNP Paribas in late 2009, saying they suspected the bank was doing business with blacklisted countries such as Iran and Sudan, senior executives at the French lender realized they had a huge task ahead of them: comb through trillions of dollars worth of transactions cleared by the bank in New York in search of any transactions connected with sanctioned countries.

Yet they expected to succeed in clearing up what they thought was most certainly a misunderstanding, the people said.

During the meeting in New York last summer, however, BNP Paribas admitted it had processed transactions with Iran and other sanctioned countries, including some after the U.S. probe started, the people familiar with the matter said. The bank said it had no knowledge of the alleged misconduct before the probe and blamed it on a small group of employees at its trade-finance unit, notably in Switzerland, the people said.

That disclosure, said a former BNP Paribas director familiar with the investigation, left the bank's senior management caught in a damning paradox: "They claim they knew nothing but then, who was running the bank?"

"It's incomprehensible," he said.

Just a few months ago, BNP Paribas exuded might and confidence, earmarking the U.S. as a major growth driver, earning a number of industry accolades and patting staff on the back for their stellar performance.

In March, the bank said it had rewarded Chief Operating Officer Georges Chodron de Courcel with a 17% pay rise, citing "the quality and the prudence with which he handled the business under his charge." The trade-finance unit he oversees had just climbed to the pinnacle of a European survey on best service.

Inside BNP Paribas's offices in central Paris, however, top executives were caught in perhaps the most severe storm at the bank, whose roots can be traced back to the mid-19th century.

The $1.1 billion that BNP Paribas had set aside against fourth-quarter earnings for possible penalties stemming from the U.S. sanctions probes—an amount French banking regulators had validated—suddenly appeared extremely thin. In their discussions with the bank, U.S. authorities were now evoking possible penalties exceeding $10 billion and the New York Department of Financial Services wasn't ruling out rescinding BNP Paribas's license.

The bank sought help from the French government, saying it was the victim of overzealous U.S. authorities that were trying to use the BNP Paribas case to quell public outcry that they had been too soft on the banking industry in the aftermath of the 2008 financial crisis.

In a letter to President Barack Obama dated April 7, French President François Hollande said that while he respected the independence of the U.S. judicial system, he wished the case proceeded "on a reasonable basis." Mr. Obama said earlier this month that he doesn't "meddle" in U.S. prosecutions.

BNP Paribas Chief Executive Jean Laurent Bonnafé delivering a speech during the bank's 2012 results conference in Paris on Feb. 14, 2013. Associated Press

But the bewildering $10 billion figure sparked soul-searching at the bank, where senior executives wondered what had gone wrong, according to people familiar with the matter.

During the previous decade, the French bank had duly taken notice of the U.S. government's intention to bust sanction offenders, the people said.

At stake was whether BNP Paribas's trade-finance arm—a business traditionally dominated by French banks since colonial times—could continue to handle oil and commodities deals in countries targeted by U.S. sanctions. At BNP Paribas, the unit was expanding fast. It had clocked annual revenue of €1.2 billion ($1.6 billion) in 2006 and generated about a fifth of the investment-banking division's pretax profit.

In 2006, BNP Paribas commissioned legal opinions from several firms on whether its lucrative unit could continue to do business in countries under U.S. sanctions. A response from Clifford Chance came in plain language: "No," according to people familiar with the matter.

That same year, BNP Paribas was on a list of about 40 European banks to host a special visitor. The Bush administration had dispatched the Treasury's newly minted undersecretary for terrorism to Europe to convey the message that Washington expected all European banks and corporations to abide by U.S. embargoes, especially with Iran.

"There was no ambiguity," said a person briefed on the meeting between the official, Stuart Levey, and BNP Paribas executives. "We'd face the risk of being kicked out of the U.S. if we, Europeans, didn't start behaving like U.S. companies."

Mr. Levey declined to comment, according to a spokesman at HSBC Holdings HSBA.LN 0.00% PLC, where he now works as chief legal officer.

BNP Paribas executives came to the conclusion the bank could ill-afford to alienate U.S. authorities and jeopardize its American businesses, the people familiar with the matter said. In June 2007, BNP Paribas's chief executive at the time, Baudouin Prot, gave instructions to stop any transactions involving Sudan, one person said. Similar orders followed for Iran in September and Cuba in December, the person said.

By the time U.S. authorities acted on a tip from an informant and began their probe into BNP Paribas in 2009, Washington had signaled it wouldn't stop at political warnings and would spare no efforts to prosecute alleged offenders.

Two European banks, Lloyds Banking Group LLOY.LN 0.00% PLC and Credit Suisse Group AG CSGN.VX +0.55% had just settled sanctions cases in the U.S., paying penalties of $350 million and $536 million, respectively. The two cases showed how U.S. prosecutors had sought to avoid accusations of conducting extraterritorial justice by focusing on alleged systemic falsification of U.S. banking records. Prosecutors called the practice "stripping" or "camouflaging:" banks assisting Iranian or Sudanese entities to defeat U.S. embargoes by concealing the identities of real beneficiaries.

At the time, though, penalties were in the hundreds of millions of dollars and U.S. authorities stopped short of pursuing guilty pleas for fear it would rock the financial system.

In March 2010, BNP Paribas mentioned the U.S. probe in its annual report, saying it had agreed to launch an internal investigation into the matter. But the issue wasn't discussed by BNP Paribas's board, according to several directors at the time.

During the first meetings with U.S. authorities in 2010, the company's legal team, which at the time was headed by Hogan Lovells attorney Bob Bennett, said it didn't believe any of BNP Paribas's transactions had violated U.S. sanctions, according to people familiar with the matter.

Mr. Bennett declined to comment.

But in the course of their probe, people familiar with the matter said, U.S. authorities gathered elements suggesting that BNP Paribas employees took deliberate steps over several years to conceal dollar transactions with several sanctioned countries, including Sudan—at a time when the nation was engaged in what the U.S. and others call genocide. The probe also yielded emails and other documents investigators interpreted as resembling instructions on how to process dollar transactions without raising the suspicion of U.S. authorities, the people said.

Current and former BNP Paribas managers said Mr. Prot, the bank CEO until December 2011, and his successor, Jean-Laurent Bonnafé, couldn't be expected to have been aware of the alleged misconduct of a few employees because they had to steer the bank through extraordinary times. "Baudouin was working 16 hours a day, seven days a week," one of the former managers said. "He was trying to avert an implosion of the global financial system."

In May, in what appeared to be a thinly veiled reference to BNP Paribas and other banks under probe, U.S. Attorney General Eric Holder warned that "There is no such thing as too big to jail," signaling that for the first time in decades the government was ready to press guilty pleas on financial institutions.

Mr. Hollande and other French officials cried foul, saying inflicting a disproportionate punishment on BNP Paribas could destabilize Europe's banking industry when it is limping out of the financial crisis.

As bargaining over possible multibillion-dollar penalties intensified in recent weeks, BNP Paribas insiders have said they have been enduring the equivalent of a long, grueling perp walk.

In early June, several newspapers reported that Mr. Chodron de Courcel, BNP Paribas's chief operating officer, featured prominently on a list of executives who U.S. authorities wanted to see removed as part of a settlement.

"My photo is all over the place," the veteran BNP Paribas banker said on the sidelines of the women's final at the French Open. .

The bank has since said that Mr. Chodron de Courcel would step down from his position at the end of June—at his request.

On Friday, Mr. Bonnafé, the BNP Paribas's CEO, sent a humble message to the bank's 200,000 employees: "Let me put it clearly: we will be severely punished. Because some malfunctions occurred and mistakes were made."