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U.S. imposes record fine on BNP in sanctions warning to banks

By Joseph Ax, Aruna Viswanatha and Maya Nikolaeva

NEW YORK/WASHINGTON/PARIS (Reuters) - French bank BNP Paribas BNPP.PA has pleaded guilty to two criminal charges and agreed to pay almost $9 billion to resolve accusations it violated U.S. sanctions against Sudan, Cuba and Iran, a severe punishment aimed at sending a clear message to other financial institutions around the world.

The guilty plea is the direct consequence of a broader U.S. Justice Department shift in strategy that is expected to try to snare more major banks for possible money laundering or sanctions violations.

In an unprecedented move, regulators banned BNP for a year from conducting certain U.S. dollar transactions, a critical part of the bank's global business, in addition to the fine which was a record for violating American sanctions.

"Through a series of egregious schemes to evade detection and with the knowledge of multiple senior executives, BNP employees concealed more than $190 billion in transactions between 2002 and 2012 for clients subject to U.S. sanctions including Sudan, Iran and Cuba," the New York State regulator said.

U.S. authorities said the severe penalties reflected BNP's drive to put profits first, even after U.S. officials warned the bank of its obligation to crack down on illegal activity.

Shares in BNP closed 3.6 percent higher on Tuesday.

The bank essentially functioned as the "central bank for the government of Sudan," concealed its tracks and failed to cooperate when first contacted by law enforcement, U.S. authorities said.

They also found BNP had evaded sanctions against entities in Iran and Cuba, in part by stripping information from wire transfers so they could pass through the U.S. system without raising red flags.

With its Sudanese clients, the bank admitted it set up elaborate payment structures that routed transactions through satellite banks to disguise their origin.

"BNPP banked on never being held to account for its criminal support of countries and entities engaged in acts of terrorism and other atrocities, but that is exactly what we did today," said Manhattan U.S. Attorney Preet Bharara, whose office helped to prosecute the case.

"We deeply regret the past misconduct that led to this settlement," BNP's Chief Executive Officer Jean-Laurent Bonnafe told analysts and investors on a conference call on Tuesday. He said the bank would implement a significant strengthening of its internal controls and processes.

French banks Credit Agricole and SocGen have disclosed that they too are reviewing whether they violated U.S. sanctions. SocGen said in its latest annual report it was in discussions with the Treasury Department's Office of Foreign Assets Control over potential sanctions violations. The two banks could not be immediately reached for comment.

STINGING REBUKE

The settlement marks a stinging rebuke for BNP, the grand dame of French banking and one of the world's five biggest banks by assets. Until now it had managed to avoid the sort of scandals that have damaged many rivals.

From BNP's historic Parisian headquarters, where Napoleon married Josephine in 1796, the bank's management has always prided itself on the sort of tight risk controls that helped it successfully navigate the financial and euro zone debt crises.

France's bank supervisor said that BNP could cope with the sanctions without risking its financial health, and Finance Minister Michel Sapin said the bank "will still be able to finance economic activity" in France. But the stock is down around 16 percent since mid-February because of the affair.

Worries about the future of France's biggest listed bank and the knock-on effect on the fragile French economy prompted President Francois Hollande to express concern to Barack Obama and a French threat to derail U.S.-EU trade talks.

Leslie Caldwell, who leads the Justice Department's criminal division, said in an interview that a unit within the department has its sights set on a range of firms potentially involved in illicit money flows.

The penalties imposed on BNP Paribas dwarf any previously handed out for sanctions avoidance and are far bigger than those against Credit Suisse CSGN.VX in May, which became the largest bank in decades to plead guilty to a U.S. criminal charge, for helping Americans to evade taxes.

No individuals were charged on Monday, but U.S. authorities said they had not wrapped up their inquiry. "The case which BNP is pleading to now is against the corporation alone, but our investigation into potential individual culpability is continuing," Manhattan District Attorney Cyrus Vance said.

BNP said it would take an exceptional charge of 5.8 billion euros ($7.9 billion) in the second quarter of this year. It plans to keep its dividend payment at 1.5 euros per share this year, the same as in 2013, and expects its core capital adequacy ratio to be around 10 percent at the end of June, consistent with long-term targets. The bank had been expected to cut its dividend, sell bonds or some assets to help pay for the fine.

BLUNTING THE IMPACT

BNP will have to suspend its dollar-clearing operations through its New York branch and other U.S. affiliates during all of 2015 at the business lines where the misconduct took place, the U.S. authorities said.

The ban could trigger a client exodus, and it is not clear how BNP may blunt its impact. It said the affected dollar-clearing operations would he handled through another bank, which it did not name. "We have not observed any massive uncertainty among clients," said BNP Finance Director Lars Machenil.

Nancy Atkinson, a senior analyst at research firm Aite Group, said it would be relatively easy for BNP to find a bank to process its clients' dollar transactions because it is a fairly commoditized service that essentially involves cross-checking money transfers against government lists of sanctioned individuals and entities.

"As long as the bank has a strong reputation and has not had a problem [with money transfers previously], I don't think them taking on BNP Paribas is going to affect them too much," Atkinson said.

Some of the business lines affected were dollar clearing on behalf of the oil and gas finance business from Geneva, Paris and Singapore, the trade finance business from Milan, and for oil and gas-related clients from Rome.

Analysts at Keefe, Bruyette & Woods said in recent report that any restriction on dollar clearing at BNP was "likely to be invisible to end-users" and would entail around $55 million (40 million euros) in extra, direct costs for a one-year period.

The ban was proposed as one condition for not revoking BNP's license to operate in New York, which would have effectively been a death warrant, sources had previously told Reuters.

In addition, the bank will need to prohibit all U.S. dollar clearing as a correspondent bank for unaffiliated third-party banks in New York and London for two years.

Authorities said 13 individuals, including Group Chief Operating Officer Georges Chodron de Courcel, would leave the bank, out of 45 employees who were disciplined.

"CONTRARY TO PRINCIPLES"

Most of BNP's failures related to transactions with Sudan, which the U.S. imposed sanctions on in 1997. It strengthened them in 2006 because it said the government there supported terrorism and violated human rights, in particular with respect to a conflict in Darfur.

Bonnafe said the failures that came to light in the course of the investigation "run contrary to the principles on which BNP Paribas has always sought to operate."

But internal bank memos revealed in the settlement showed BNP officials were aware of the humanitarian crisis in Sudan and the ties of the government with al Qaeda founder Osama bin Laden, but chose to do business with Sudan because it was commercially attractive.

Vance said prosecutors insisted on a guilty plea because of how long the conduct went on, even well after the inquiry began, the volume of transactions, and the nature of the conduct.

BNP, which has 190,000 staff and more than 34 million customers across Europe, the United States and Asia, said the settlement would not affect a strategic plan it laid out in March. Its plan includes expansion in North America, where it owns San Francisco-based Bank of the West and First Hawaiian Bank, to raise revenue and profits outside European markets.

(Reporting by Joseph Ax in New York and Aruna Viswanatha in Washington and Maya Nikolaeva in Paris; Additional reoporting by Nate Raymond, Ingrid Melander, Julia Edwards, Lionel Laurent and Peter Rudegeair; Writing by Douwe Miedema and Steve Slater; Editing by Peter Millership and Tom Brown)

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