The Right Level of Accountability: Will the Fine on BNP Paribas Be Enough?

June 27th, 2014

On Monday, U.S. authorities are set to announce a massive $8.9 million fine on the French bank BNP Paribas. The fine is part of a deal under which the bank will pay for allegedly breaching U.S. sanctions with Iran, Sudan, and Cuba and handling $30 billion in transactions from those nations.

Fines like this, even while rare and seemingly huge, have often not had their intended purpose. In recent history, when authorities have fined banks for misconduct—either from failing to apply adequate money laundering controls, aiding in tax evasion, or even engaging in fraud—the fines have had little to no impact on the banks’ bottom lines—or their behavior.

Let’s start with Goldman Sachs, the investment bank that actually profited from the U.S. economic meltdown in 2008 by engaging in fraud and misleading investors. The firm paid a settlement fine of $550 million to the Securities and Exchange Commission (SEC) for those charges. While the head of the SEC Robert Khuzami, called it a “heavy price,” the market disagreed. The next day, Goldman Sachs’ share price rose $7, adding $1 billion to its market value. Many analysts argued “the stock market…believes that Goldman has struck an amazing deal with the SEC.”

In late 2012, the U.S. Department of Justice has reported that HSBC “willfully failed” to apply money laundering controls to at least $881 million in drug trafficking proceeds. HSBC paid a record $1.92 billion settlement for its criminal actions, but compared to its assets of $2.6 trillion, this is relatively small potatoes. As NPR noted, “that’s like fining somebody with a net worth of $3 million about $2,000.”

More recently, Credit Suisse paid a fine of $2.5 billion for helping Americans avoid taxes. This fine is quite large, but it also didn’t cause shareholders to rethink their investments or clients to move their accounts. As Zoe Chace, a reporter for NPR’s Planet Money, explains: “Fines happen all the time now. It’s become kind of normal. All the other banks are probably paying out for some crime of their own.”

Regulators understand this fundamental problem with fines and they are looking for an alternative. In this latest case, New York state financial regulator Benjamin Lawsky is trying a new tactic with BNP Paribas. Rather than asking the bank to admit guilt, the settlement may also include temporary restrictions on the bank’s ability to engage in “dollar clearing,” or processing payments in dollar denominations. This restriction really would sting since much of the bank’s international business is conducted in dollars.

The French government vehemently opposes both the fine and the restrictions, which it says are “disproportionate” and would weaken the bank to such a degree it could have negative effects on the banking system, and the European economy. While analysts are skeptical the impacts would be this large, another question remains. Would even this be enough?

You might ask why this is even questionable. How could a fine be so destructive that it weakens a nation’s economy and yet still not be enough to dissuade the bad behavior of other banks? The answer is that “banks” are not the actors that make decisions. It is the humans: the bankers and the executives who determine a banks future.

The HSBC case, for example, wasn’t just a failure of the system. The DOJ investigation into the bank’s misconduct revealed that senior HSBC officials were complicit in the illegal activity. According to court documents, individuals at HSBC went out of their way to allow the bank to act as a financial clearing house for these criminals. Other bank officials at HSBC made a “knowing calculation” that they would rather do business with criminals and “make a profit from those illegal transactions” than fulfill their obligations under U.S. law.

While these bankers may have been stung by the HSBC fine, none of them were held personally accountable. Their lives went on just as they always had. And that is the heart of the problem.

One solution to this problem is strengthening penalties for the executives and other decision-makers at institutions which commit the crimes. This is exactly the sentiment captured in the “Holding Individuals Accountable and Deterring Money Laundering Act” introduced by Maxine Waters (D., Calif.), and co-sponsored by Carolyn Maloney (D., N.Y.). Among other provisions, the measure would “raise the maximum prison sentence for willfully evading an institution’s Bank Secrecy Act program or controls to twenty years from the typical cap of five years.”

When HSBC “willfully failed” to apply money laundering controls to at least $881 million in drug trafficking proceeds not one executive went to jail. Neither did any of the bankers from Credit Suisse who knowingly helped Americans avoid their taxes. Neither, most likely, will any bankers from BNP Paribas who helped residents of Iran and Sudan avoid American sanctions meant to keep those nations, and the world, safe.

When it is individuals who are making the decisions—and the mistakes—they are the ones who should be held accountable. Without this accountability, no fine, no matter how large, will ever be adequate.

Written by Ann Hollingshead

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