BNP Paribas Looks to Keep Customers Amid U.S. Penalties

July 1 (Bloomberg) -- Robert Albertson, principal and chief strategist at Sandler O’Neill, and Bloomberg’s Michael Regan discuss the aftermath of the guilty plea and record $8.9 billion fine paid by BNP Paribas for violating U.S. government sanctions. They speak on “Bloomberg Surveillance.”

BNP Paribas SA (BNP), barred from some dollar transactions for a year, will use a six-month grace period to set up alternate payment systems for clients to keep them from taking their business elsewhere.

France’s largest bank pleaded guilty yesterday to violating U.S. sanctions and agreed to pay $8.97 billion. The ban on dollar transfers, also known as dollar clearing, will go into effect Jan. 1, giving the firm time to devise alternatives.

While the use of third parties to handle transactions will cost BNP Paribas millions of dollars, the Paris-based bank faces greater damage if it ends up losing clients. To avert that, it will seek to establish a system as seamless as possible so customers can’t tell that a part of their business is being handled by a different bank, according to Jean-Pierre Lambert, a Keefe, Bruyette & Woods Ltd. analyst in London.

“The biggest worry would be losing clients, but so far it looks to be contained,” Lambert said. “They want to make sure it’s set up properly, so that’s probably why they negotiated a transition period.”

BNP Paribas said in a statement yesterday that it “expects no impact on its operational or business capabilities to serve the vast majority of its clients.”

Photographer: Balint Porneczi/Bloomberg

The BNP Paribas headquarters in Paris. Close

The BNP Paribas headquarters in Paris.

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Photographer: Balint Porneczi/Bloomberg

The BNP Paribas headquarters in Paris.

The six-month reprieve will let BNP Paribas find third-party banks and adjust its technology infrastructure to provide a smooth transition for its customers, according to a person familiar with the matter. That way, clients won’t notice the shift, the person said.

Settlement Terms

Under the settlement with U.S. regulators and prosecutors, BNP Paribas agreed not to clear transactions initiated by its oil-and-gas trade-finance departments in Geneva, Paris, Singapore, Rome and Milan for a year. The firm also agreed not to serve as a correspondent bank for other lenders based in New York and London.

BNP Paribas is a member of two dollar-clearing networks in the U.S., the Fedwire Funds Service and the Clearing House Interbank Payments System. While almost all banks with a presence in the U.S. are members of the Fedwire, the Clearing House network has only 50 members. Those outside the network route their transactions through one of the members.

The French bank said it wouldn’t try to circumvent the ban by shifting the business to other departments within the firm. The settlement doesn’t prohibit BNP Paribas from routing those transactions through a correspondent bank.

Added Costs

Paying a third party to clear the money transfers could cost the bank about $40 million a year, Lambert estimated in a report last week. The inability to serve as a clearing agent for other banks could cost several million dollars more, based on a 2011 study by the Clearing House, which estimated that total wire-transfer fees in the U.S. were about $500 million a year.

Photographer: Andrew Harrer/Bloomberg

Richard Weber, chief of criminal investigation at the Internal Revenue Service (IRS), from left, Preet Bharara, U.S. attorney for the Southern District of New York, James Comey, director of the Federal Bureau of Investigation (FBI), Eric Holder, U.S. attorney general, James Cole, deputy U.S. attorney general, Leslie Caldwell, assistant attorney general for the criminal division, and Cyrus Vance Jr., Manhattan district attorney, hold a news conference on BNP Paribas SA at the Department of Justice in Washington, D.C., U.S., on Monday, June 30, 2014. Close

Richard Weber, chief of criminal investigation at the Internal Revenue Service (IRS),... Read More

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Photographer: Andrew Harrer/Bloomberg

Richard Weber, chief of criminal investigation at the Internal Revenue Service (IRS), from left, Preet Bharara, U.S. attorney for the Southern District of New York, James Comey, director of the Federal Bureau of Investigation (FBI), Eric Holder, U.S. attorney general, James Cole, deputy U.S. attorney general, Leslie Caldwell, assistant attorney general for the criminal division, and Cyrus Vance Jr., Manhattan district attorney, hold a news conference on BNP Paribas SA at the Department of Justice in Washington, D.C., U.S., on Monday, June 30, 2014.

Another bank agreeing to do the clearing might want to place its own employees in the BNP Paribas offices subject to prohibitions because it would be liable for complying with U.S. sanctions, Lambert said. That could involve a longer transition period, he said.

Representatives from the Federal Reserve, the Federal Deposit Insurance Corp. and New York’s Department of Financial Services met with European bank regulators in Paris on June 13 to brief them on the proposed agreement. The suspension of BNP Paribas’s dollar-clearing privileges drew the most heated response from French, U.K., Swiss, Italian and Belgian regulators, according to a person with knowledge of the meeting, which was held at the office of France’s Prudential Supervisory Authority near the Paris Opera.

To contact the reporter on this story: Yalman Onaran in New York at yonaran@bloomberg.net

To contact the editors responsible for this story: Peter Eichenbaum at peichenbaum@bloomberg.net Robert Friedman, David Scheer

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