AN OPPORTUNITY MISSED RATHER THAN A CASE SETTLED / THE FINANCIAL TIMES COMMENT & ANALYSIS

July 1, 2014 6:45 pm

An opportunity missed rather than a case settled

By Robert Jenkins

The authorities have reaffirmed that banks such as BNP are too big to jail, says Robert Jenkins

©AFP

So it is settled then. BNP Paribas has pleaded guilty to breaking the law; a fine has been levied and a handful of employees have been “disciplined.” In addition, a small portion of the French bank’s activity has been temporarily curtailed. This is what the authorities trumpet as tough. Is it? This punishment is meant to change behaviour. Will it?

The BNP settlement breaks new ground but it does not dig deep. At first glance the fine of $8.9bn is extremely stringent. It is several times what other banks have paid after being accused of similar dirty dealings. However, the alleged violations were also extremely serious, in both nature and scale. BNP has acknowledged criminal wrongdoing in transmitting $30bn-worth of payments to Sudan, Iran and other countries subject to US sanctions.

If one expresses the penalty in terms of cents per dollar of illegal payments processed, then the cost of misdeeds appears to have declined, not increased. Perhaps the US authorities felt a volume discount was in order.

Relative to the offence committed the fine is arguably small. Relative to the bank’s earnings it is modest. The expense will probably be tax deductible. The management team will settle the bill with other people’s money (that of shareholders).

The bank will avoid permanent damage. Indeed, the French banking regulator has assured the market that BNP will easily be able to absorb the consequences of the sanctions. Last year’s dividend level can be maintained. Most irksome for the bank will be the forcible suspension of its dollar clearing service for clients of the oil and gas unit where most of the rot was found. Still, the share price is up on the news. It would appear that the actions were less harsh than feared.

True, this settlement marks the first time that a bank has been found guilty of this particular type of offence. No doubt officials will offer the case as proof that no bank is “too big to jail.” But what does that mean anyway? One cannot jail a bank. 

One can certainly withdraw its licence to operate, but this has not been done. No, the authorities may have demonstrated that no bank is too big to prosecute but they have unwittingly reaffirmed that large banks remain too big to jail.

If one cannot jail a bank perhaps one can jail a banker. Indeed, institutions do not break laws – individuals do. Lest there be any doubt on this point Benjamin Lawsky, the superintendent of New York’s Department of Financial Services stated that “BNP employees – with the knowledge of multiple senior executives – engaged in a longstanding scheme that illegally funnelled money to countries involved in terrorism and genocide.”

So there you have it. And the punishment? About a dozen employees have been dismissed and others will be demoted or suffer pay cuts. A number of senior executives are departing. It would be interesting to know on what terms and with what perks. But no individual who was cited for wrongdoing will go to prison.

This was a missed opportunity. If no one goes to jail and the fine does no permanent damage, the settlement becomes more a transaction tax than a deterrent. It is unlikely to be seen as justice in the eyes of the public – people who tend to go to prison when they break the law.

Will it change behaviour? Time will tell. Will it deter BNP employees and others with respect to the area of sanctions violations? Probably. Will it deter wrongdoing in finance more generally? I fear not.

The banking lobby responds to each regulatory salvo with a request for a cost-benefit analysis. Can anyone doubt that a little jail time is worth reams of regulation and conduct codes? Surely a sentence or two is worth 10,000 words.


The writer is a former member of the Financial Policy Committee of the Bank of England

Copyright The Financial Times Limited 2014.