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 While the sources said that number was only proposed as a
negotiating tactic in response to an offer from BNP of about $1
billion, the dollar figures being thrown around demonstrate what
bankers and their allies say is an alarming trend of ever-increasing
record penalties.
A $16 billion settlement would have pushed BNP's penalty above the
biggest ever for a bank -- JPMorgan Chase & Co, which paid $13
billion last year to resolve a number of civil mortgage-related
allegations.
More recently, authorities have been discussing a settlement with
BNP in the range of $10 billion, sources have said. U.S. authorities
are probing whether BNP evaded U.S. sanctions relating primarily to
Sudan between 2002 and 2009, and whether it stripped out identifying
information from wire transfers so they could pass through the U.S.
financial system without raising red flags.
The New York State Department of Financial Services, one of the five
offices negotiating the settlement with BNP, could receive at least
$2 billion of an eventual $10 billion deal, according to a source
familiar with the matter. That would be more than three times that
office's $552 million annual budget this year.
 A $10 billion fine would almost wipe out BNP's entire 2013 pretax
income of about 8.2 billion euros ($11.2 billion). BNP reserved $1.1
billion against a potential fine.
Representatives of the Justice Department and BNP declined to
comment on the negotiations.
In the past two years the U.S. Justice Department has said it's
broken records on penalties for corporate misconduct at least seven
times, including three times this year alone. The most recent was
Credit Suisse in May, which paid $2.6 billion over charges that it
helped American evade U.S. taxes, the largest penalty ever levied in
a criminal tax case.
Total corporate criminal penalties in the United States overall
increased about 647 percent between 2001 and 2012 to about $4.3
billion, according to figures compiled by University of Virginia law
school professor Brandon Garrett.
The robust growth in corporate penalties, especially for banks, has
defense lawyers questioning how authorities calculate each landmark
settlement and how institutions can prepare for such fines they
might face.
Banks are also deploying strategies to try to keep the numbers from
growing, including enlisting top executives in settlement
negotiations and taking their chances going to trial.
"I think everyone realizes that it's an exuberant market," said one
defense lawyer who has negotiated recent settlements with the
Justice Department and declined to be named.
There are multiple explanations for the rising fines. For one, cases
related to the 2007-2009 financial crisis have produced big
settlements connected to trillions of dollars in subprime mortgage
financial products. U.S. authorities have also turned their
attention to other crimes involving big dollar amounts, including
money laundering, sanctions violations and the rigging of benchmark
interest rates.
The Justice Department may also be responding to political pressure,
especially because no high-profile bankers have gone to jail for the
role they played in fueling the financial crisis.
Critics say recent penalties have not been nearly stiff enough, and
amount to the cost of doing business.
Regardless, the upward push of the settlements is stark.
In cases over banks' money laundering controls, for example,
criminal penalties have skyrocketed since 2010, when Wachovia
forfeited $110 million to resolve charges that it willfully failed
to establish a compliance program.
By comparison, JPMorgan paid $1.7 billion earlier this year to
resolve criminal charges over its failure to maintain an effective
anti-money laundering program in connection with its business with
convicted Ponzi schemer Bernard Madoff.
A BNP settlement of $10 billion would be more than 14 times higher
than the $667 million Standard Chartered paid to resolve sanctions
violations in 2012, the highest fine for such violations to date.
A former DOJ official said: "It's almost like more is law now."
RATIONALE
Sources familiar with the BNP settlement talks say there are clear
justifications for a fine of as much as $10 billion, as well as
other severe potential penalties, such as suspending BNP's ability
to process dollar payments.
They point to the sheer volume of the suspect transactions by BNP
that allegedly violated U.S. sanctions: about 10 times larger than
other banks which have resolved similar cases, according to a person
familiar with the matter. A second source said the high level of
senior management knowledge of the conduct is another contributing
factor.
A third consideration was the bank's poor cooperation with the
government’s investigation, an element that also figured in Credit
Suisse's guilty plea and record fine.
Cases involving violations of U.S. sanctions also give prosecutors
wide latitude to assess criminal penalties, prosecutors and defense
lawyers said, since they are done as forfeitures rather than as
fines calculated under sentencing guidelines.
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When Dutch lender ING Bank NV agreed to forfeit a then-record $619
million in 2012 over illegal transactions with Cuban and Iranian
entities, court documents said the bank moved more than $2 billion
on behalf of sanctioned entities. A deferred prosecution agreement
that explained the fine said only that ING acknowledged that "at
least" $619 million was involved in the transactions described.
In general, sentencing guidelines provide a range of things to
consider when calculating a corporate penalty, including the
pervasiveness of the conduct and whether senior management
participated in it, with the ability to discount a fine for
companies who cooperate in an investigation and fix their problems.
But even the guidelines offer wide ranges to determine penalties,
leaving prosecutors with the discretion to charge the case in a way
that gets them to a penalty they seek.
"The numbers are going up because they can," one former prosecutor
said.
Sources also attributed some of the growth to the large number of
agencies and offices involved in some investigations into financial
institutions, each run by aggressive officials seeking their own
stamp on a case. BNP is negotiating with at least five offices,
including the U.S. Justice Department, the U.S. Attorney's Office in
the Southern District of New York, the Treasury Department, the
Manhattan District Attorney's office and the New York Department of
Financial Services.
EXTORTION
Some lawyers representing major banks said they viewed the
escalating penalties as essentially exploiting defendants who
usually don't fight back in court.
"Lots of sophisticated observers view these as extortion at this
point," said one bank lawyer who declined to be named.
In an attempt to exert downward pressure on the penalties, some
banks, including Bank of America, have tried to fight more, with
mixed results. A federal jury in New York last October found the
bank liable for fraud at its Countrywide unit, but a magistrate
judge in North Carolina in March recommended dismissal of another
Justice Department lawsuit against the bank over allegedly
fraudulent mortgage securities.
Observers said the steep sums at stake have also forced top bank
executives and bank allies to get more involved in settlement talks.
JPMorgan's Chief Executive Officer Jamie Dimon traveled to
Washington to visit U.S. Attorney General Eric Holder while the bank
negotiated its $13 billion deal last year.
In the case of BNP, numerous top French officials have intervened,
including French President Francois Hollande, who appealed directly
to the White House, asking whether the potential penalties will be
fair and proportionate to any crime.
In early May, BNP CEO Jean-Laurent Bonnafe and the bank's lawyers
met with the New York Department of Financial Services and made a
plea for leniency, one source said earlier this month.
BEYOND FINES
Prosecutors and regulators have also looked to more tailored
punishments beyond fines to try to improve conduct, including
installing monitors and demanding terminations at a company.
One of the major sticking points in settlement discussions with BNP
has been the New York bank regulator's threat to temporarily suspend
BNP Paribas's ability to clear U.S. dollar transactions.
A suspension could be a significant blow for BNP Paribas, which
clears hundreds of billions of dollars through New York every day.
The efforts to deter future misconduct have also pushed prosecutors
to explore more prosecutions of individuals, with more of a focus on
what executives' role at high levels of a company might have been in
enabling misconduct, lawyers said.
"It's clear to me from the cases I'm handling that they are looking
hard and long for cases to bring against individuals," another
former prosecutor turned defense lawyer said.
In general, prosecutors are looking to craft penalties that harm,
but don't kill financial firms, especially those that are critical
to the smooth functioning of larger markets.
"It's always supposed to be, the monetary penalty has to have some
ability to hurt," said one former prosecutor who now counsels banks
in criminal inquiries. "They need to come up with a number that
hurts but allows them to keep doing business."
(Reporting by Aruna Viswanatha and Karen Freifeld, with additional
reporting by Howard Schneider; Editing by Karey Van Hall and John
Pickering)
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