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Exclusive: As bank fines soar, U.S. threatened $16 billion BNP penalty

By Aruna Viswanatha and Karen Freifeld

WASHINGTON/NEW YORK (Reuters) - U.S. authorities negotiating with BNP Paribas over alleged sanctions violations at one point suggested that France's biggest bank pay a penalty as high as $16 billion, according to people familiar with the matter.

While the sources said that number was only proposed as a negotiating tactic in response to an offer from BNP of about $1 billion, the dollar figures being thrown around demonstrate what bankers and their allies say is an alarming trend of ever-increasing record penalties.

A $16 billion settlement would have pushed BNP's penalty above the biggest ever for a bank -- JPMorgan Chase & Co, which paid $13 billion last year to resolve a number of civil mortgage-related allegations.

More recently, authorities have been discussing a settlement with BNP in the range of $10 billion, sources have said. U.S. authorities are probing whether BNP evaded U.S. sanctions relating primarily to Sudan between 2002 and 2009, and whether it stripped out identifying information from wire transfers so they could pass through the U.S. financial system without raising red flags.

The New York State Department of Financial Services, one of the five offices negotiating the settlement with BNP, could receive at least $2 billion of an eventual $10 billion deal, according to a source familiar with the matter. That would be more than three times that office's $552 million annual budget this year.

A $10 billion fine would almost wipe out BNP's entire 2013 pretax income of about 8.2 billion euros ($11.2 billion). BNP reserved $1.1 billion against a potential fine.

Representatives of the Justice Department and BNP declined to comment on the negotiations.

In the past two years the U.S. Justice Department has said it's broken records on penalties for corporate misconduct at least seven times, including three times this year alone. The most recent was Credit Suisse in May, which paid $2.6 billion over charges that it helped American evade U.S. taxes, the largest penalty ever levied in a criminal tax case.

Total corporate criminal penalties in the United States overall increased about 647 percent between 2001 and 2012 to about $4.3 billion, according to figures compiled by University of Virginia law school professor Brandon Garrett.

The robust growth in corporate penalties, especially for banks, has defense lawyers questioning how authorities calculate each landmark settlement and how institutions can prepare for such fines they might face.

Banks are also deploying strategies to try to keep the numbers from growing, including enlisting top executives in settlement negotiations and taking their chances going to trial.

    "I think everyone realizes that it's an exuberant market," said one defense lawyer who has negotiated recent settlements with the Justice Department and declined to be named.

There are multiple explanations for the rising fines. For one, cases related to the 2007-2009 financial crisis have produced big settlements connected to trillions of dollars in subprime mortgage financial products. U.S. authorities have also turned their attention to other crimes involving big dollar amounts, including money laundering, sanctions violations and the rigging of benchmark interest rates.

The Justice Department may also be responding to political pressure, especially because no high-profile bankers have gone to jail for the role they played in fueling the financial crisis.

Critics say recent penalties have not been nearly stiff enough, and amount to the cost of doing business.

Regardless, the upward push of the settlements is stark.

    In cases over banks' money laundering controls, for example, criminal penalties have skyrocketed since 2010, when Wachovia forfeited $110 million to resolve charges that it willfully failed to establish a compliance program.

    By comparison, JPMorgan paid $1.7 billion earlier this year to resolve criminal charges over its failure to maintain an effective anti-money laundering program in connection with its business with convicted Ponzi schemer Bernard Madoff.

    A BNP settlement of $10 billion would be more than 14 times higher than the $667 million Standard Chartered paid to resolve sanctions violations in 2012, the highest fine for such violations to date.

    A former DOJ official said: "It's almost like more is law now."

   

    RATIONALE

Sources familiar with the BNP settlement talks say there are clear justifications for a fine of as much as $10 billion, as well as other severe potential penalties, such as suspending BNP's ability to process dollar payments.

They point to the sheer volume of the suspect transactions by BNP that allegedly violated U.S. sanctions: about 10 times larger than other banks which have resolved similar cases, according to a person familiar with the matter. A second source said the high level of senior management knowledge of the conduct is another contributing factor.

    A third consideration was the bank's poor cooperation with the government’s investigation, an element that also figured in Credit Suisse's guilty plea and record fine.

    Cases involving violations of U.S. sanctions also give prosecutors wide latitude to assess criminal penalties, prosecutors and defense lawyers said, since they are done as forfeitures rather than as fines calculated under sentencing guidelines.

    When Dutch lender ING Bank NV agreed to forfeit a then-record $619 million in 2012 over illegal transactions with Cuban and Iranian entities, court documents said the bank moved more than $2 billion on behalf of sanctioned entities. A deferred prosecution agreement that explained the fine said only that ING acknowledged that "at least" $619 million was involved in the transactions described.

In general, sentencing guidelines provide a range of things to consider when calculating a corporate penalty, including the pervasiveness of the conduct and whether senior management participated in it, with the ability to discount a fine for companies who cooperate in an investigation and fix their problems.

But even the guidelines offer wide ranges to determine penalties, leaving prosecutors with the discretion to charge the case in a way that gets them to a penalty they seek.

    "The numbers are going up because they can," one former prosecutor said.

    Sources also attributed some of the growth to the large number of agencies and offices involved in some investigations into financial institutions, each run by aggressive officials seeking their own stamp on a case. BNP is negotiating with at least five offices, including the U.S. Justice Department, the U.S. Attorney's Office in the Southern District of New York, the Treasury Department, the Manhattan District Attorney's office and the New York Department of Financial Services.  

    

    EXTORTION

    Some lawyers representing major banks said they viewed the escalating penalties as essentially exploiting defendants who usually don't fight back in court.

    "Lots of sophisticated observers view these as extortion at this point," said one bank lawyer who declined to be named.

In an attempt to exert downward pressure on the penalties, some banks, including Bank of America, have tried to fight more, with mixed results. A federal jury in New York last October found the bank liable for fraud at its Countrywide unit, but a magistrate judge in North Carolina in March recommended dismissal of another Justice Department lawsuit against the bank over allegedly fraudulent mortgage securities.

    Observers said the steep sums at stake have also forced top bank executives and bank allies to get more involved in settlement talks. JPMorgan's Chief Executive Officer Jamie Dimon traveled to Washington to visit U.S. Attorney General Eric Holder while the bank negotiated its $13 billion deal last year.

In the case of BNP, numerous top French officials have intervened, including French President Francois Hollande, who appealed directly to the White House, asking whether the potential penalties will be fair and proportionate to any crime.

In early May, BNP CEO Jean-Laurent Bonnafe and the bank's lawyers met with the New York Department of Financial Services and made a plea for leniency, one source said earlier this month.

   

    BEYOND FINES

Prosecutors and regulators have also looked to more tailored punishments beyond fines to try to improve conduct, including installing monitors and demanding terminations at a company.

One of the major sticking points in settlement discussions with BNP has been the New York bank regulator's threat to temporarily suspend BNP Paribas's ability to clear U.S. dollar transactions.

A suspension could be a significant blow for BNP Paribas, which clears hundreds of billions of dollars through New York every day.

    The efforts to deter future misconduct have also pushed prosecutors to explore more prosecutions of individuals, with more of a focus on what executives' role at high levels of a company might have been in enabling misconduct, lawyers said.

    "It's clear to me from the cases I'm handling that they are looking hard and long for cases to bring against individuals," another former prosecutor turned defense lawyer said.

In general, prosecutors are looking to craft penalties that harm, but don't kill financial firms, especially those that are critical to the smooth functioning of larger markets.

    "It's always supposed to be, the monetary penalty has to have some ability to hurt," said one former prosecutor who now counsels banks in criminal inquiries. "They need to come up with a number that hurts but allows them to keep doing business."

(Reporting by Aruna Viswanatha and Karen Freifeld, with additional reporting by Howard Schneider; Editing by Karey Van Hall and John Pickering)

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