What Can Foreign Financial Institutions Learn From the BNP Paribas SA Case?

Now that some of the surprise associated with the record $8.9736 billion fine imposed on BNP Paribas (“BNPP”) has worn off, what can foreign financial institutions, including non-bank financial institutions such as hedge funds, commodity traders and broker-dealers, learn from BNPP’s case? The severity of the fine, as well as the unprecedented suspension of dollar-clearing operations, were predicated upon the U.S. government’s conclusion that BNPP’s policies and procedures led to the stripping of names of U.S. embargoed countries and persons from U.S. dollar transfers in order to disguise the transactions and prevent them from being blocked under U.S. sanctions regulations. The involvement of BNPP’s New York branch in these transactions in turn led to enforcement action and settlements with the following U.S. federal and New York state regulators:

• United States Department of Justice: Asset Forfeiture and Money Laundering Section of the Criminal Division of the Department of Justice and the Office of the U.S. Attorney for the Southern District of New York ($2,876,600,000),
• United States Department of Treasury’s Office of Foreign Assets Control (OFAC) ($963,000,000),
• New York County District Attorney’s Office ($2,243,400,000),
• New York Department of Financial Services ($2,243,400,000) (temporary and deferred suspension of dollar-clearing activities),
• United States Federal Reserve Bank ($508,000,000) (establishment of a global U.S. sanctions compliance program in BNPP’s United States office with authority over all of the U.S. sanctions compliance programs of BNPP’s global offices and business lines)

Does This Case Indicate an Enhanced Enforcement Environment?

The fines imposed on BNPP are substantially larger than those imposed on a series of foreign financial institutions for sanctions violations, including HSBC ($1,900,000,000), Standard Chartered Bank ($327,000,000), ING Bank ($619,000,000), Barclays Bank ($298,000,000), Credit Suisse AG ($536,000,000) and Lloyds TSB Bank ($350,000,000), but this may reflect the government’s assessment of the extent to which BNPP senior management tolerated the illegal activity. This compliance failure led various U.S. federal and state regulators to impose on BNPP an unprecedented dollar-clearing suspension and the requirement that the financial institution move its compliance function to the United States (in addition to the large fines that were imposed).

The international press reports that the U.S. government is also considering future actions against other European financial institutions and associated individuals who may be engaged in similar conduct. It is fair to say that U.S. enforcement authorities will continue to look closely at companies (and associated individuals) they believe are using the U.S. financial system to violate U.S. sanctions regulations.

Finally, the current enforcement environment also raises risks for institutions, such as Standard Chartered PLC, that have paid fines for such violations in the past, and were required to implement improved compliance measures. Standard Chartered, which paid a $132 million fine to OFAC in 2012 (part of a total $667 million fine paid to U.S. regulators), was recently fined an additional $300 million by New York State’s Department of Financial Services (“DFS”) after an independent compliance monitor detected significant weaknesses in Standard Charter's system for detecting suspect transactions. Under the terms of the latest DFS order, Standard Chartered must suspend dollar clearing through its New York Branch for high-risk retail business clients at its Hong Kong subsidiary, exit high-risk client relationships within certain business lines at its branches in the United Arab Emirates, and not accept new dollar-clearing clients or accounts across its operations without prior approval from DFS.

What Conduct Outside of the United States Is Subject to the Reach of U.S. Sanctions Laws and Regulations?

The BNPP serves as a reminder that conduct outside of the United Stated may still be subject to the reach of U.S. sanctions laws and regulations:

1. Dollar-denominated transactions lead to U.S. jurisdiction

   If the transaction involves U.S. dollars that clear through U.S. financial institutions, the transaction will be subject to U.S. jurisdiction. If a transaction is denominated in U.S. dollars, U.S. authorities will likely be able to obtain jurisdiction.

2. U.S. branch offices lead to U.S. jurisdiction

   BNPP has branches in New York, Chicago, and San Francisco as well as an agency in Houston. The existence of BNPP’s New York office was directly related to the involvement of the New York state authorities in this case and the threatened revocation of BNPP’s license to do business in New York, which resulted in the unprecedented temporary and deferred ban on dollar-clearing transactions.

3. Employees who are present in the U.S., and other uses of the facilities of U.S. interstate commerce, lead to U.S. jurisdiction.

   If the foreign financial institution has employees or agents operating in the U.S., or is conducting business in U.S. interstate commerce (for example, sending emails using U.S. servers, or placing wire transactions with U.S. banks), U.S. authorities can claim jurisdiction over the activities they conduct in U.S. territory. Such contacts can be through a physical presence, or through electronic contacts made by telephone or email, or via documents saved on a server located in the United States.

What Lessons can be Learned by Other Non-Bank Financial Institutions?

While much of the enforcement focus by U.S. authorities to date has been on banking institutions, other financial institutions, such as hedge funds, commodity traders and broker-dealers, can learn some lessons from the BNPP case.

1. Know your responsibilities: Conduct a risk assessment and evaluate how your current and future business activities may trigger U.S. jurisdiction and the different U.S. laws and regulations that may apply. Such activities may involve U.S. persons, U.S. dollars, U.S. products or services (exports), or U.S. territory (travel to the U.S. or electronic transmissions that are routed to or through the U.S.). In conducting this risk assessment, consider the various U.S. federal and state regulators that may claim jurisdiction.
2. Establish effective policies and procedures: Governance failures can lead to penalties. Some of the fines and penalties imposed on BNPP were due to its failure to implement effective policies and procedures that could help to prevent U.S. sanctions violations. Having functional policies and procedures, including training, auditing and sanctions for non-compliance are essential.

Bingham’s multidisciplinary team of compliance, regulatory, litigation and white collar defense lawyers has extensive experience with U.S. and U.K. regulations and statutes affecting international businesses in countries around the world, from Asia to Africa and Europe to South America. We help U.S. and non-U.S. financial institutions, funds, public and private companies and individuals navigate laws and regulations affecting international business, including sanctions and anti-money laundering regulations. Through all potential stages of transactions, internal review and risk assessments, and investigations, our team can help you manage and defend your business.

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