A satellite is an
artificial body placed in orbit around the earth or another planet.
It collects and/or communicates information.
BNP
Paribas (BNPP) used satellites (not
the ones in the orbit, but “satellite banks” - That is, at
least, how they called them.) to pass money from sanctioned clients
through U.S. payment systems. Compared to real satellites, satellite
banks had slightly different function: They
perhaps collected information but should
absolutely not communicate it, at least as regards the origin of
payments. It might have been more
appropriate to call the banks “popcorn banks”: You fill
them with corn and they give you back corn; simply, you cannot
recognize it any more...
Let's go back to the hard
facts: BNP Paribas has violated U.S. sanctions regulation by serving
clients in Cuba, Iran, and Sudan through U.S. payment systems. To
settle allegations, the bank will pay a fine of 8.8 BUSD to U.S.
authorities.
There are many points you
can discuss about this fine – the (high) amount, a possible
extra-territorial reach of U.S. authorities, the countries involved,
etc. I would like to focus here on the payment scheme that BNPP had
implemented and explain how it worked.
Background – How
work payment systems?
A payment is the process
of transferring money from one person (the payer) to another (the
payee). Payments are obviously crucial to
any economy: If you can't pay, you can't sell or buy.
Payment is really simple
if it is in cash. All you have to do is hand paper money or coins
over to your counterpart. Payment, however, becomes more complicated
when you don't pay in cash but via your bank account. Such
non-cash payments follow three steps:
- The payer authorizes the payment. To this end, he uses appropriate payment instruments such as credit transfers, credit cards, and cheques.
- Banks exchange payment instructions. This is called “processing”.
- The payer’s bank compensates the payee’s bank, either bilaterally or through accounts that the two banks hold with a third-party settlement agent. This is called “settlement”.
In practice and namely
due to technological evolution, the limits between the three steps
are blurred.
Let's have a closer look
at the processing:
It is pretty easy if both
payer and payee have accounts with the same bank. In this case,
processing is a purely internal process, which
depends on whether the bank holds accounts centrally in one location
or in different locations.
Processing
is a bit more complex if payer and payee don't use the same bank,
namely if they are not based in the same country. Here, banks have
two options: They can either hold accounts with a same third bank
(called the correspondent bank) and pass the payment through that
correspondent bank or participate in a common
payment system.
Settlement can be
done in central bank money or commercial bank money. In the first
case, the respective banks of the payer and the payee simply hold
accounts with a central bank or the payment system is operated by a
central bank. In the second case, they hold accounts with a private
commercial bank.
If
this in not yet complicated enough, you can carry
out the above steps in different
countries. Every time this is the case, the respective country might
want to regulate if and how funds pass through its jurisdiction. And
this is where the BNPP story begins.
How to transfer USD
to Sudan?
The
normal way
Ibrahim is a Sudanese
businessman. He is the CEO of an engineering company that works in
the Sudanese oil sector. He needs some equipment that he wants to buy
from a U.S. company in USD. Let's assume that he manages to get the
equipment and now owes 1 MUSD to his U.S. supplier, a company called
“Alaska”. How can Ibrahim pay Alaska,
knowing that the U.S. forbids any financial services from
or to Sudanese entities?
The normal way for
Ibrahim to pay his U.S. supplier would be the following: Ibrahim
instructs his Sudanese bank to pay Alaska through a credit transfer.
If his account with the Sudanese bank shows sufficient credit, the
Sudanese bank will send the funds to its account with a U.S.
correspondent bank. This correspondent bank then transfers these
funds internally to an account held by Alaska's U.S. bank. Finally,
the U.S. bank will advise the correspondent bank
to send the funds to a bank account
held by Alaska in the U.S. Bank in the United
States.
This is where U.S.
sanctions regulation kicks in. According to such
regulation, it is unlawful to process USD transactions
with Sudan through the United States. The problem here
is that the U.S. correspondent bank will see that the funds come from
Ibrahim and his Sudanese bank. Possibly, they can also see why
(“Payment of supply contract […]”) the payment has been made.
“Seeing” should not be understood literally here;
it's more about the U.S. payment system automatically scanning
payment messages for illicit content and blocking those payments if
it finds any.
The
indirect way
How can you (say the
Geneva subsidiary of BNPP) avoid the U.S. correspondent bank finding
any critical information about Sudan? The solution is pretty obvious:
First, you change the
originator of the payment by sliding one or more banks between the
Sudanese bank and the U.S. correspondent bank. This way, the latter
cannot see that the payment ultimately comes from Sudan. For example,
the client's Sudanese bank holds an account with BNPP Geneva, which
holds an account with another non-U.S. Bank, which holds an account
at the U.S. correspondent bank, which transfers the funds to the U.S.
client's bank's account with the U.S. correspondent bank, which
transfers the funds to the account held by the final U.S. client.
Second, you wait some
time between the different payments and don't mention the Sudan or
Ibrahim in any payment message in the payment
chain.
The
solution is as if you were minor, want to buy alcohol, and ask
your older brother to buy it for you, pretending that he buys for
himself. But please don't instruct your brother in front of the
store. Give the money a day before, at home...
Why so much money?
BNPP
accepted a fine of a bit more than 9x the total market value of both
World Cup finalist Argentina and Germany together!
The main reason why
U.S. authorities claimed that much money is that BNPP knew
that something was wrong. Admittedly so, initial legal advice seemed
to have validated the “satellite banking system”. However, later
on, there were numerous
warning signs both from internal and external compliance counsel,
that the scheme violated U.S. sanctions regulation.
What do U.S. Authorities think?
What does BNPP
think?
What will change at
BNPP?
The bank promises that
“all USD flows for the entire BNP Paribas
Group will be ultimately processed and controlled via the branch in
New York”. It goes without saying that the bank will also
enhance its compliance policies and procedures with regard to U.S.
sanctions laws and regulations.
And “North
America remains a strategic market for the Group where we plan to
further develop our retail, investment solutions and corporate &
investment banking franchise over the coming years”.
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