RPT-New York's Lawsky wants senior BNP execs fired in probe -sources

Sun Jun 1, 2014 7:00am EDT

(Repeats with no changes to text)

By Karen Freifeld

NEW YORK, June 1 (Reuters) - New York state's top banking regulator, Benjamin Lawsky, is asking BNP Paribas SA to fire some senior executives as part of a settlement of allegations that the French bank violated U.S. sanctions, two sources familiar with the matter said on Saturday.

Lawsky has demanded that more than a dozen employees be terminated, and one of the sources said that includes people in the bank's "upper management." The source declined to provide further details.

The other source said Lawsky is not expected to want the bank's top two or three executives fired. Some employees have already been told they will no longer be with the bank, and more firings were expected, the source said.

The identities of the employees could not be learned. It is unclear how hard Lawsky plans to push his demand.

BNP Paribas and Lawsky's office declined to comment.

BNP Paribas is also in talks with other U.S. authorities, including the Justice Department and the Manhattan District Attorney, to resolve probes into whether it evaded U.S. sanctions related primarily to Sudan from roughly 2002 through 2009. Authorities have alleged that the bank stripped out identifying information from wire transfers so they could pass through the U.S. financial system without raising red flags.

Sources familiar with the negotiations said a settlement includes the possibility of a fine that could eventually exceed $10 billion as well as other penalties, including a guilty plea and possible temporary suspension of the bank's authority to clear U.S. dollar transactions.

Although the monetary penalty is not yet set, one source said, negotiations with BNP Paribas were now "north of $8 billion."

Given that figure, the New York State Department of Financial Services and the Manhattan DA could get $2 billion each, with the other half going to the Justice Department and other federal authorities involved in the probes, the source said. Other federal authorities involved in the case include the U.S. Attorney's office in Manhattan and the U.S. Treasury Department. The Manhattan DA started the probe around 2008.

A resolution of the investigation is still weeks away, one of the sources said.

The Justice Department and Manhattan DA declined comment.

The details of settlement talks show how regulators are now demanding that bank employees be held personally accountable for their activities.

Lawsky, a former federal prosecutor who has extracted large penalties from other banks such as Standard Chartered Plc and Credit Suisse Group AG, has said he is making personal accountability a focus in his probes.

"If a bank commits a criminal act or if a bank commits serious regulatory violations, someone within that bank did it. The corporation is an inanimate thing," Lawsky said last month.

However, he added that several other factors needed to be analyzed in deciding whether top management should be held accountable for the activities of their subordinates. He said he would look at things such as "what they did or what they didn't do, or what they stuck their head in the sand about, or what they didn't help remediate.

"I think it has to be a careful analysis, when you're talking about individuals and their lives and their careers," Lawsky said.

One source said some of the very top executives at BNP Paribas may have been at the bank during the period under investigation, but they were more junior at the time and in different business lines.

STICKING POINT

The expected size of the fine - which is 20 percent more than BNP Paribas' 2013 pretax income - has raised fears the bank could be forced to raise capital and restrict its dividends. BNP Paribas' stock is down more than 13 percent since Feb. 13, when it first took a 1.1 billion euro ($1.5 billion) provision for a potential sanctions fine as part of a total litigation provision of 2.7 billion euros.

But the bank also faces other potentially damaging penalties.

One of the major sticking points in settlement discussions with Lawsky's office - discussions one of the sources said are going on almost every day - is over the threat of BNP Paribas temporarily losing its ability to clear U.S. dollar transactions.

It's unclear how long such a suspension would last, or what business lines would be barred, the sources said. But any suspension could be a devastating blow for BNP Paribas, one source said. BNP Paribas clears hundreds of billions of dollars through New York every day, another source said.

"It's a draconian penalty that would have major rippling effects throughout the economy and the payment system," said Gilbert Schwartz, a partner at Schwartz & Ballen, a Washington, D.C. law firm that specializes in banking.

"It's one thing to say, 'you can't have a branch in the U.S.,'" Schwartz said. "That would be bad enough, but at least you'd be able to do business worldwide. If you can't have an account at a bank because you can't dollar clear, you're effectively out of business."

The bank clears the transactions across its different businesses, serving customers in trade finance, custodian accounts, and foreign exchange transactions. It is worried not only about losing money-making transactions if its dollar-clearing authority is suspended, but also about losing those customers altogether, one source said.

While a suspension would hurt BNP Paribas, the bank could find workarounds through relationships with other banks to mitigate the effects of any ban, one source said.

Those involved in the discussions are hoping to have more clarity on the issue by next week, one source said.

(Additional reporting by Aruna Viswanatha and Douwe Miedema in Washington; Editing by Paritosh Bansal and Nick Zieminski)