Credit Suisse Group AG (CSGN) emerged from a guilty plea this week relatively unscathed. The punishment that prosecutors are now holding over BNP Paribas SA (BNP)’s head could have more severe consequences.
A temporary ban on transferring money into and out of the U.S., floated by New York’s Superintendent of Financial Services Benjamin Lawsky, would be in addition to more than $5 billion in fines and a guilty plea to criminal charges for violating U.S. sanctions, according a person with knowledge of the talks. No similar punishment targeting a business was imposed when Credit Suisse’s main bank subsidiary admitted helping U.S. citizens evade taxes.
Regulators haven’t determined how harsh the BNP Paribas prohibition would be, according to one of the people who asked not to be identified because the negotiations are private. If the French lender isn’t allowed to pay another bank to provide the service, it could push some customers to competitors.
“When your client has to go to a rival bank to get the most basic banking service, even for a few months, you’ll lose them,” said Fred Cannon, New York-based head of research at Keefe, Bruyette & Woods Inc. “Not all, but some will take their business completely to that rival and not come back.”
BNP Paribas fell as much as 3 percent in Paris trading to the lowest since Oct. 1, and was down 1.6 percent at 50.83 euros as of 2:31 p.m. local time. The stock is down 10 percent in 2014.
Manhattan U.S. Attorney Preet Bharara and other prosecutors are pressuring the Paris-based bank to plead guilty to moving funds for clients in violation of U.S. sanctions on Sudan, Iran and Cuba, according to some of the people.
Lawsky is considering a deal that would terminate some bank employees and claw back pay in addition to the wire-transfer ban, all intended to punish the BNP Paribas unit seen as responsible for the violations, according to the person familiar with his strategy. Spokesmen for Lawsky, Bharara and BNP Paribas declined to comment.
While the business of moving money isn’t a significant source of revenue for banks, it’s an essential service clients rely on to conduct business globally. The loss of customers would be a much bigger financial burden, Cannon said.
“The risk is more than the fine, the risk is them losing the right to do some businesses in the U.S.,” said Alain Tchibozo, an analyst at Mediobanca SpA in London who has an outperform recommendation on the stock. “If they were to stop running this platform, it would affect their earnings power.”
Banks transfer money around the world for clients trading goods, making investments and paying suppliers. The two cash-payment networks in the U.S., one run by the Federal Reserve and the other a cooperative of some of the largest banks, settle about $4 trillion of transactions daily.
The Fedwire Funds Service functions as the domestic cash-payment network for about 8,300 financial institutions. The Clearing House Interbank Payments System brings together some of the world’s largest firms, easing transfers in and out of the U.S. More than half of its 50 participants are headquartered overseas. BNP Paribas is a member of both networks.
Banks charge little for cash transfers, which are done electronically and in real time, bringing down the cost to the lenders. The Clearing House estimated in a 2011 study that wire-transfer fees in the U.S. were about $500 million a year. That would be 0.0001 percent of the $973 trillion of wire transfers in 2010, according to Bank for International Settlements data.
Based on that estimate, BNP Paribas’s cost for paying another bank to clear its clients’ wire transfers for a few months wouldn’t exceed a few million dollars.
“The fees are down to pennies for each transaction,” said Jeanne Capachin, a senior consultant at research firm Graber Associates who has followed the global payments system for three decades. “So if they’re allowed to pay some other institution to do it, that would be an additional expense for them, but not put them out of business.”
The ban probably wouldn’t include money transfers within the U.S. since that’s outside the purview of the violation being punished, according to Capachin. BNP Paribas owns Bancwest Corp., which operates more than 670 branches in 20 U.S. states, serving more than 2.4 million households and businesses, the unit’s website says.
Credit Suisse, Switzerland’s second-biggest lender, agreed to pay $2.6 billion in addition to having a unit plead guilty. The Zurich-based firm’s shares rose 1 percent yesterday after the settlement was announced, and were little changed today. Credit Suisse did extensive research and found no legal barriers that would prevent customers doing business with the bank because of the criminal plea, Chief Executive Officer Brady Dougan told reporters and analysts.
Regulators and prosecutors have made it clear they don’t want to put either lender out of business with criminal charges or pull the banks’ licenses in the U.S.
Regardless of how much pain a temporary ban might inflict, its impact, like that of a fine, can be measured in dollars. By letting firms continue to do business after pleading guilty to criminal charges, authorities are hollowing out the deterrence effect, according to KBW’s Cannon.
“The only difference between civil and criminal is taking away the license,” said Cannon. “If you don’t take away the charter, then you eliminate that difference and the deterrence power of a criminal conviction. Why would a bank be afraid of facing criminal charges if it just means paying some fines like in a lawsuit and continue business as usual?”
In a 1995 case involving Japan’s Daiwa Bank, regulators withdrew its license to do business in the U.S. as soon as they filed conspiracy and fraud charges related to a $1.1 billion bond-trading scandal. Daiwa, which changed its name to Resona Holdings Inc. in 2002 after multiple mergers, shut most international operations after the U.S. scandal and became a domestic lender.
Top management should pay with their jobs if punishments are to have some deterrence, said Tamar Frankel, professor of corporate governance at the Boston University School of Law.
“If everybody in the corporation lives happily thereafter following a guilty plea, we’ve done nothing,” Frankel said. “You want the corporation to live, but you also want people inside the corporation to behave well. So you need to hold people responsible. You don’t have to jail them, but you need to make them pay with their jobs.”
North America accounted for 10 percent of revenue at BNP Paribas, which is targeting about one-fifth of its sales growth to come from the region in the next two years.
Even if the French bank keeps its U.S. license, the financial impact of a wire-transfer ban on BNP Paribas could be worse than intended, according to Charles Whitehead, a professor of corporate law at Cornell University in Ithaca, New York. Because banks cross-sell many services, losing corporate clients could reduce revenue in all types of businesses, he said.
“The regulators say they don’t want to put BNP Paribas out of business, so they’ll likely tailor the punishment so it only causes some lost revenue and some clients,” Whitehead said. “Might they still unintentionally cause the whole U.S. business to collapse? It’s conceivable, but highly unlikely.”
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