WASHINGTON BNP Paribas on Monday became the second foreign bank this year to plead guilty to violating U.S. laws, but perhaps the biggest question about the Justice Department action against the French company is what it means for U.S. banks.
Federal and state law enforcement officials struck a final settlement with BNP over allegations it allowed transactions with countries sanctioned by the U.S. The accord included two guilty pleas for criminal misconduct.
The French-based bank will pay $8.9 billion, which is the largest money laundering-related fine in history, eclipsing the previous record of $1.8 billion assessed on HSBC. Observers say there are at least three threats on the horizon for the rest of the industry posed by the settlement.
1. Justice forces a U.S. bank to plead guilty to a crime
BNP is the second bank this year to plead guilty to a crime. The first, Credit Suisse, acknowledged guilt and paid $2.6 billion in May as part of its settlement over tax fraud charges.
So far, both events have failed to produce the nightmare scenarios that critics first conjured when the idea of forcing banks to admit guilt was initially broached. Some analysts fear that Justice, emboldened by the lack of reaction from investors and the market in general, could soon force a domestic bank to plead guilty with far more damaging results.
"It is one thing to dismiss a criminal charge against a foreign bank, it's quite another to assume the reaction will be the same about a large domestic bank that caters to retail customers, local governments and small business," said Jaret Seiberg, an analyst with Guggenheim Partners. "If a domestic bank pleads guilty, it's a criminal enterprise. There's an open question as to whether small businesses and local governments are going to want or be able to do business with them."
At issue are state and local laws, as well as business' own policies, that prevent firms from doing business with criminals. BNP Paribas and Credit Suisse are both foreign-owned banks without a large retail presence inside the U.S., making any impact from a guilty plea largely subdued. But if a large domestic bank were forced to do the same thing, it could force municipalities, for example, to withdraw their funds.
"There are a lot of potential bank customers that have operating rules that they can't conduct business with parties that are guilty of criminal violations," said Wayne Abernathy, the American Bankers Association's executive vice president of financial institutions policy and regulatory affairs. "It's what's written in the law and what's written in the business practices of bank customers."
A criminal plea also could also result in a bank losing its charter, which could effectively doom the firm altogether. While such a scenario is unlikely, observers said the aftershocks of a guilty verdict are dangerously unclear.
"We are in uncharted territory here," said Seiberg. "We just don't know how in today's economy customers are going to react if their bank is deemed a criminal."
2. International regulators retaliate against a U.S. bank
The French government made it very clear in the run-up to the BNP settlement that it was deeply unhappy with the size of the potential fine that was going to be paid by the bank. French President Francois Hollande even raised the matter personally to President Obama, who said he would not get involved.
Given that Justice held its course and hit BNP with a large penalty, some worry that foreign governments could soon retaliate against U.S. institutions. While obviously bad for the banks themselves, the cross-border regulatory environment may be further strained as countries become suspicious of each other.
"This comes at a time when the global financial framework is really crumbling," said Karen Shaw Petrou, a managing partner with Federal Financial Analytics. "The French have made it very clear that they view it as a national issue. ... If the U.S. is perceived as being mean to foreign banks, there is a risk that foreign government could be meaner to U.S. banks. The overall global regulatory structure could become even more tattered."
The biggest threat is that regulators will no longer cooperate effectively on issues like international bank resolutions or higher capital requirements.
"There's definitely a fear what's this going to do with the ability to work with these countries going forward, with U.S. firms doing business abroad or our ability to work government to government on financial issues," said Abernathy.
3. Foreign banks may pull back or restructure their U.S. operations
Given that many of the recent money laundering penalties have been levied against foreign institutions, including BNP Paribas and HSBC, it's reasonable to assume that some may have second thoughts about doing significant business in the U.S.
To be sure, few international banks would be willing to terminate all U.S. relationships, particularly given their importance in dollar-clearing activities. (BNP's deal with New York state authorities would prevent certain units from engaging in dollar-clearing activities for one year beginning in January 2015.) But observers said the fear of being singled out because of their foreign ownership might persuade them to pull back on their U.S. businesses or at the very least restructure.
"There is a critical need to be here, but how big does one have to be?" asked Petrou. "How much do you subsidiarize? What's the business here?"
Such restructuring could, for example, make it harder for regulators to resolve the institution, particularly given the Federal Deposit Insurance Corp.'s current strategy for handling a cross-border failure.
Overall, observers said the impact of the BNP settlement may not be immediate, but could be significant in the long run.
"The long term consequences are unknown and too hard to guess," said Abernathy. "Anyone who makes a guess with any confidence is kidding themselves."