Coming as it did when heads of state couldn’t agree on Russian sanctions, the enforcement action earlier this week against BNP-Paribas has important – if hidden – clout that gives the U.S. a far greater say here and in future sanctions negotiations. Whether or not the French bank was sufficiently punished for its now-admitted sins, the little-noticed Federal Reserve order against it changes the terms of foreign-bank compliance in the U.S. In short, to do business here, foreign banks – and, soon, broker-dealers and other financial institutions – will need to ensure that all of their global activities comply with U.S. rules if the transaction is in dollars. Lots of them are and most of them will be for the foreseeable future, so Uncle Sam just got a tough new hammer to nail down sanctions.
Press and public attention in the BNP-Paribas case have understandably focused on the dollar fine and the sanctions imposed against both the bank and its senior officers. In part because the French bank, like any public company, needed to tell its counterparties not to worry, penitence was in short supply and long-term damage denied. One might hope for a bit more of a mea culpa than the obligatory, third-party “mistakes were made” releases, but the damage done to BNP-Paribas’s U.S. and global franchise is thus uncertain. It may well be negligible, but only time will tell and I suspect a reputational hit of this magnitude will make more than a minor dent.
But, behind the fines and official comments lies one major requirement: the FRB told BNP-Paribas that henceforth all of its global dollar operations must comply with U.S. anti-money laundering and foreign-policy sanction requirements. To save face, the French supervisor got to say so too. And, both it and the FRB will determine the extent to which BNP-Paribas extends the scope of U.S. law throughout its global network to desired effect. However, the FRB holds the hammer and BNP’s U.S. franchise is the nail.
Some might counter that the FRB’s hammer is rubber because a lot of transactions arguably need not be done in dollars. But, a transition from greenbacks, should it happen at all will surely be slow given all the outstanding contracts that require dollars. And, even if one could wash these legal complications away, in what currencies at how much forex risk? The pound is not readily available as a dollar substitute not just because its liquidity is less than the dollar’s, but also because the U.K. doesn’t think a lot better about AML and sanction violations than the U.S. On to the EU? Maybe, but a lot of efforts to make it a reserve currency have foundered on all of the Eurozone risks the financial crisis exposed that repairs have yet to resolve. China anyone? Maybe, but the rule of law there is not exactly an exemplar. And, of course, even if direct transactions in goods and services can be executed in alternative currencies, what of the hedges needed to handle related risk? That market is largely a dollar-based one and, thus, yet another hold the U.S. has on global finance.
To be sure, tough talk from the FRB may well not mean correct walk from foreign firms that need dollar-clearing. We’ve seen all too many stringent – one might say even sanctimonious – standards that are put on the books and, then, stay firmly between closed covers. But, if the FRB now means what it says, the U.S. ability to sanction banks from recalcitrant or even rogue nations has taken an exponential leap forward.