JPMorgan Chase & Co. (JPM) unwittingly helped BNP Paribas SA (BNP) violate U.S. sanctions as the French bank hid billions of dollars in transactions involving Sudan and Cuba, according to court documents and people with knowledge of the matter.
BNP Paribas turned to JPMorgan on the basis of legal advice from Cleary Gottlieb Steen & Hamilton LLP, said two people who asked not be named because the identities of the bank and the law firm haven’t been disclosed. The Paris-based bank relied on a legal memo that suggested using a U.S. bank might protect it from sanctions penalties, according to the statement of facts filed by prosecutors in New York.
JPMorgan is referred to as “U.S. Bank 1” while Cleary Gottlieb is identified as “U.S. Law Firm 1” in the court filings, the people said. Cleary Gottlieb later said such transactions may be illegal. Neither JPMorgan nor Cleary Gottlieb are accused of wrongdoing.
BNP Paribas, France’s largest bank, agreed June 30 to plead guilty to processing almost $9 billion in banned transactions involving Sudan, Iran and Cuba from 2004 to 2012. The company, which will pay a record $8.97 billion in penalties, will also be temporarily barred from handling some U.S. dollar transactions.
In 2011, JPMorgan paid $88.3 million to settle an unrelated civil probe into transactions involving Cuba, Iran and Sudan. Investigators at the Treasury Department cited incidents in which JPMorgan managers and supervisors “recklessly failed to exercise a minimal degree of caution or care” in their sanctions obligations. The bank said at the time that none of the alleged violations was intentional.
BNP Paribas used a network of non-U.S. banks, including at least nine Arab banks, to disguise U.S. dollar transactions, according to court papers. “To the U.S. bank, it appeared that the transaction was coming from the satellite bank rather than a Sudanese bank,” according to the statement of facts filed in court, which BNP Paribas admitted to as part of its settlement.
BNP Paribas would transfer funds from a Sudanese bank to an account maintained by one of the satellite banks, according to the filing. The satellite bank would then transfer the money to the beneficiary by submitting the funds through JPMorgan without any mention of Sudan, according to the statement of facts, which identified the bank only as “U.S. Bank 1.”
Joe Evangelisti, a spokesman for JPMorgan, and Cesaltine Gregorio, a BNP Paribas spokeswoman, declined to comment on the transactions. Sonja Steptoe, a spokeswoman for Cleary Gottlieb, and Peter Carr, a Justice Department spokesman, also declined to comment.
The plan to use JPMorgan was put together by BNP Paribas executives in Paris and Geneva in the fall of 2004 after transactions involving overseas clients caught the attention of U.S. and state regulators, according to the statement of facts. BNP Paribas signed documents with the regulators in September of that year promising to improve its compliance systems.
Shortly thereafter, senior BNP Paribas executives met in Geneva to discuss how “embargoes against sensitive countries,” specifically Sudan, Libya and Syria, would affect the bank’s business, according to the statement of facts. They discussed using an unaffiliated U.S. bank to process payments involving countries subject to U.S. sanctions, the document states. Until then such transactions were being handled by BNP Paribas’ New York branch.
Following that meeting, BNP Paribas employees in Geneva were instructed to have U.S. dollar payments involving sanctioned entities cleared through “U.S. Bank 1” instead of BNP Paribas’s New York unit.
“From 2004 through 2007, the vast majority of BNPP Geneva’s transactions involving Sudanese Sanctioned Entities were cleared through U.S. Bank 1 using a payment method that concealed from U.S. Bank 1 the involvement of Sanctioned Entities in the transactions,” according to the document.
In switching to JPMorgan, BNP Paribas executives relied on the legal opinion, which incorrectly suggested that U.S. authorities might not be able to punish BNP Paribas for prohibited transactions if no U.S. branch of the bank was involved, according to the statement of facts.
“You can’t do something indirectly if you can’t do it directly,” Douglas Jacobson, a lawyer specialized in international trade with Jacobson Burton PLLC in Washington, said in an interview. “This certainly on its face here is not consistent with what I would call sanctions compliance 101.”
In 2006, BNP Paribas enlisted a second law firm, Clifford Chance LLP, which warned the bank that removing identifying information from dollar payments sent to the U.S. in order to avoid economic sanctions was possibly illegal, according to the filing. Matt Hyams, a Clifford Chance spokesman, declined to comment.
That same year, Cleary Gottlieb informed BNP Paribas in two other opinions that U.S. sanctions could apply even if transactions were processed through JPMorgan rather than BNP Paribas’ New York branch.
The firm also said that U.S. authorities had become sensitive to the use of “cover payments” by foreign banks that omitted details about the nature of transactions. Cleary Gottlieb advised BNP Paribas executives to “ensure that they have adequate procedures in place to guard against any abuses of cover payment messages that could cause U.S. operations to engage in prohibited transactions.”
From July 2006 until BNP Paribas ended its banking relationship with Sudanese clients in June 2007, BNP Paribas processed $6.4 billion in illicit dollar transactions, according to the statement of facts.
A similar process was used by the firm to process Cuban transactions and bank employees were trained to remove any mention of the country before submitting them to JPMorgan. From October 2004 until early 2010, BNP Paribas processed more than $1.7 billion in Cuban-related illicit transactions.
Some of those transactions were processed through JPMorgan, according to the statement of facts.
In February 2006, JPMorgan rejected a transaction submitted on behalf of a Cuban credit facility after “back office employees had inadvertently made reference to Cuban entities,” the document states. Two other payments were also blocked by BNP Paribas’ New York branch. BNP Paribas resubmitted all three transactions after eliminating the references to the Cuban entity, according to the document.
“BNPP’s handling of these blocked payments was indicative of the bank’s cavalier — and criminal — approach to compliance with U.S. sanctions laws and regulations,” according to the statement of facts.
After the payments were blocked, a senior BNP Paribas attorney in Paris, wondering whether a U.S. investigation could be triggered, asked Cleary Gottlieb for advice. Cleary Gottlieb answered in a March 6, 2006 memo, saying the transactions violated U.S. sanctions — regardless of whether they were processed by JPMorgan or BNP Paribas’s New York facility. Cleary Gottlieb advised BNP Paribas to “consider discontinuing participation in any such U.S. dollar facility,” the statements of facts said.
A subordinate of the senior BNP Paribas attorney forwarded the Cleary Gottlieb memo to a bank compliance officer, drawing a reprimand from his boss who said “we now no longer have control,” according to the document.
The senior attorney then wrote to Cleary Gottlieb: “please suspend any further work on this file.”