FBI Director James Comey, center, flanked by Manhattan District Attorney Cyrus Vance, left, and Southern District U.S. Attorney Preet Bharara, speaks Monday about an $8.9 billion settlement between the government and French bank BNP Paribas. The offices of Vance and Bharara have spearheaded investigations of banks accused of violating U.S. sanctions. (AP/Susan Walsh)
The Justice Department’s $8.9 billion settlement with BNP Paribas gave prosecutors a chance to argue that they’re not afraid to get tough on big banks. But it also highlighted the roles of two large law firms that counseled BNP on transactions at the heart of the government’s case, suggesting that the French Bank relied on questionable advice to justify violating U.S. sanctions regimes.
In a statement of facts filed with Monday’s criminal plea deal, the DOJ wrote that two law firms—identified only as Law Firm 1 and Law Firm 2—advised the bank about prohibited transactions with Sudan, Iran and Cuba from at least 2004 to 2006. Based on a June 13 story by France’s Le Monde and reports in the U.S. identifying one of the firms as a well-respected U.S. firm, Law Firm 1 is apparently Cleary, Gottlieb, Steen & Hamilton. The Litigation Daily, an affiliate of the New York Law Journal, has confirmed that Law Firm 2 is Skadden, Arps, Slate, Meagher & Flom.
Both Cleary and Skadden declined to comment.
In an attempt to evade U.S. enforcement actions, BNP executives avoided using BNP New York to process prohibited payments and used an unaffiliated U.S. bank instead. According to the government, the French bank relied on incorrect advice in an October 2004 legal memo from Law Firm 1. This memo “suggested that BNPP may have been able to protect itself from being penalized by U.S. authorities if it conducted these prohibited transactions through another U.S. bank.”
The nature of the advice in Law Firm 1′s memo cannot be concluded based on a few excerpts selected by the government. The memo warned of other possible problems with this plan: While BNP might not be penalized, the memo said that U.S. law would require the payments to be frozen or blocked by the U.S. bank.
Still, BNP employees latched onto this legal opinion to justify processing banned transactions through an unaffiliated U.S. bank, which is not identified. From 2004 through 2007, the vast majority of BNP’s transactions involving Sudanese entities were cleared through the U.S. bank using a payment method that concealed from that bank the involvement of the sanctioned entities. It’s unclear from the government’s filing if Law Firm 1 knew about that concealment.
The legal advice changed after December 2005, when U.S. authorities fined ABN AMRO Bank $80 million for violating sanctions laws.
In May 2006, Law Firm 2 warned BNP that it could face criminal charges if it omitted identifying details from payments sent to the U.S. In March and June of 2006, Law Firm 1 wrote two more opinions reversing its earlier stance. The firm now stated that BNP could face sanctions even if transactions were routed through the U.S. bank, and that U.S. authorities had become sensitive to the use of “cover payments” that omitted identifying details.
Still, according to the government, BNP continued to process prohibited payments for nearly another year.
The government’s filing also notes the complicity of BNP’s senior in-house legal and compliance staff. “[They] repeatedly recognized BNPP’s role in circumventing U.S. sanctions against Sudan, and yet allowed these transactions to continue in part because of their importance to BNPP’s business relationships and ‘goodwill’ in Sudan,” prosecutors asserted. Lawyers who expressed concern about the bank’s actions were rebuffed, according to the Justice Department.
The roughly $8.9 billion deal is the largest sanctions case ever brought by the Justice Department and the largest penalty in any criminal case involving a bank. Prosecutors say the penalty was necessary not only because of the sheer volume of the illicit transactions but also because of the bank’s efforts to hide them and executives’ lack of cooperation with the Justice Department.
The settlement was the culmination of an investigation launched by the Manhattan District Attorney’s office in 2007. The Southern District U.S. Attorney’s office and the New York Department of Financial Services later joined the investigation.
Financial Services will receive $2.2 billion of the settlement, all of which will go into the state’s general fund. The D.A.’s office will be allowed to keep $449 million of its $2.2 billion share; the rest will go to the city and state.
BNP Paribas is the seventh major bank caught by the D.A. and federal authorities trying to evade federal sanctions. All told, the banks have paid $12 billion in penalties and forfeited funds.
Sullivan & Cromwell partner Karen Patton Seymour represented BNP along with the firm’s senior chairman, H. Rodgin Cohen.
As the BNP deal inched closer, French officials in recent weeks expressed deep concern about the punishment. They lobbied for White House intervention and warned that a large penalty could affect the entire European economy and hold up a trans-Atlantic free trade agreement.
The French economic minister last week asked the Justice Department to be “fair and proportionate” when deciding the potential penalty. President Francois Hollande wrote to the Obama administration in April asking for a “reasonable” solution, though the president himself deflected calls to get involved in the dispute.
Paris-based BNP on Monday entered a guilty plea before Manhattan Supreme Court Justice Michael Obus to falsifying business records in the first degree, a Class E felony, and the Class A misdemeanor of conspiracy in the first degree (See Superior Court Information and BNP’s Allocution). The bank is expected to plead guilty in federal court on July 9 for conspiring to violate the International Emergency Economic Powers Act and the Trading With the Enemy Act.
It has also agreed to fire multiple senior executives and will lose for one year its ability to process certain transactions in U.S. dollars. No individual BNP executives were charged.
“We deeply regret the past misconduct that led to this settlement,” Jean-Laurent Bonnafe, CEO of BNP, said in a statement. “The failures that have come to light in the course of this investigation run contrary to the principles on which BNP Paribas has always sought to operate.”
“It is not hyperbole to say that the most important values in the international community—respect for human rights, peaceful coexistence, and a world free of terrorism—depend in large part on the effectiveness of these sanctions,” said Manhattan District Attorney Cyrus Vance Jr., who attended a press conference in Washington with Attorney General Eric Holder and Southern District U.S. Attorney Preet Bharara announcing the deal.
Vance said the investigation started with a tip to his office.
@|Susan Beck is a reporter for Law Journal affiliate Litigation Daily. She can be reached at firstname.lastname@example.org. Jan Wolfe of Litigation Daily and The Associated Press contributed to this report.