By Johannes Werner and Vito Echevarria

CUBA STANDARD — As part of an agreement that includes record fines of $8.97 billion to settle allegations it used U.S. dollars in transactions with Cuba, Iran, Sudan and Burma, French bank BNP Paribas promised U.S. enforcers to terminate all business with U.S.-sanctioned countries “in any currency,” according to a 10-page settlement agreement released by the Office of Foreign Assets Control (OFAC).

While the use of U.S. dollars in transactions with Cuba and other U.S.-sanctioned countries violates U.S. laws, doing business with Cuba is perfectly legal under French laws.

The amount is below the $10 billion U.S. authorities threatened to fine BNP, according to earlier press reports, and BNP’s Cuba-related dollar transactions are dwarfed by those with Sudan and Cuba. Also, if BNP’s practices involving Cuba are an indicator, foreign banks doing business with Cuba have instituted internal policies to avoid U.S. dollar transactions since at least 2007.

Even so, the cost to Cuba is likely high. In the settlement, BNP agrees to “terminate all business and prohibiting new business in any currency with sanctioned entities,” fire employees who violated U.S. sanctions, and relocate its global sanctions compliance unit from Paris to New York, according to OFAC. It will also be forced to handle all of its global dollar transactions through a third entity for one year, according to a BNP press release.

“We express our regret for these past errors that led us today to this agreement,” BNP CEO Jean-Laurent Bonnafé said in the release.

BNP’s harsh penalty and surrender to Washington makes the extraterritorial reach of U.S. laws obvious and sends yet another chill through third-country banks doing business with Cuba. Observers believe that this will prompt the Cuban government and its business partners again to reduce dollar transactions to those impossible to avoid — thus raising transaction costs even more — and to seek business with banks less vulnerable to U.S. threats, and it will cause other large western banks to pull out or abstain from doing business with Cuba.

The Irish Independent reported July 3 that the Bank of Ireland became the latest financial institute to tell customers it will stop doing business with Cuba.

Following escalating U.S. enforcement over the past decade, several banks such as Switzerland’s UBS and Crédit Suisse, Netherlands-based ING, and Britain’s HSBC Holdings reduced their Cuba business or abandoned the country altogether. According to press reports, U.S. investigators are currently targeting France’s Crédit Agricole as well as Deutsche Bank.

One way a bank pullout may affect the Cuban economy is via its debt.

“Cuba has massive external debt, and is trying to restructure some of it,” said Judith Alison Lee of Washington law firm Gibson, Dunn & Crutcher LLC. However, Cuba is having difficulty securing the most advantageous restructuring arrangements, in large part because sanctions prevent foreign banks with U.S. exposure from providing advisory services related to U.S. dollar debt to Cuba.

“Assisting Cuba could expose them to liability, and as a result, many are simply unwilling to conduct any transactions related to Cuba. As a result, Cuba may have to rely on potentially less expert firms, which do not have any U.S. exposure.”

The incriminated BNP transactions

The OFAC settlement agreement — which does not constitute an admission of any fault on part of the bank — says BNP participated in eight credit facilities in U.S. dollars to Cuban entities. In 2007, the bank instituted an internal policy that blocked U.S. dollar transactions with Cuba, and converted six of the eight credit facilities to euros. But it wasn’t until August 2012 that it converted the last Cuban credit facility to euros, according to OFAC.

The bulk of BNP’s alleged violations regarding Cuba center on 909 payments from 2005 through 2012 for a total of $689 million, performed by the bank’s Paris headquarters, its commodity finance division in Geneva, Switzerland, and various third-country branches. They involve trade finance instruments in U.S. dollars, retail banking transactions, and one investment banking instrument in U.S. dollars for a Cuban entity processed by the BNP branch in Milan, Italy.

That compares to $1.12 billion for BNP transactions with Iran and $8.37 billion with Sudan.

While legal under French and Swiss laws, the use of U.S. dollars in transactions with Cuba and other U.S.-sanctioned countries violates U.S. laws. SWIFT payments in U.S. dollars must clear through U.S.-based computers, and that violates U.S. sanctions, policy enforcers in Washington insist.

In addition, OFAC holds against the bank what it considers efforts to cloak transactions.

“BNPP appears to have engaged in a systematic practice, spanning many years and many BNPP branches and business lines, that concealed, removed, omitted or obscured references to … sanctioned parties in U.S. dollar … SWIFT payment messages sent to U.S. financial institutions,” the settlement agreement says.

According to the agreement, BNP omitted references to Cuba, Iran and Sudan in SWIFT payment orders to U.S. corresponding banks, replacing the names of sanctioned parties with that of BNP or a code name.

BNP in 2004 shifted the U.S. processing of SWIFT dollar payments from its New York branch to a U.S. bank in New York, in order to avoid liability, OFAC claims. The document also states that until 2007, the French bank followed requests from its customers in U.S.-sanctioned countries to conceal dollar transactions.

Just as Washington seems to be easing on Cuba, ties between France and the United States are being strained. French Foreign Minister Laurent Fabius, who visited Havana in March, complained on France 2 TV that “these figures are not reasonable.” “The fine has to be proportionate and reasonable,” he said. Other French politicians hinted that the settlement may scuttle negotiations between the United States and the European Union over a trans-Atlantic free-trade pact.

The mechanics of U.S. pressure

The BNP case is the latest and biggest in a fast-escalating series of fines against third-country banks.

A legal expert on OFAC’s enforcement of trade sanctions, Judith Alison Lee of the Washington law firm Gibson, Dunn & Crutcher LLC, says that targeting banks has been a growing element of OFAC’s strategy since 2005. Foreign banks are increasingly being ensnared in a package proceedings for a variety of reasons, from doing business with nuclear proliferators like North Korea and Iran, to facilitating the flow of dollars for state sponsors of terrorism (such as Iran and Sudan), to money laundering, to facilitating U.S. tax evasion. In those U.S. investigations, Cuba is almost an afterthought, with OFAC simply following Washington’s long-standing regime change-driven embargo.

“Since approximately 2005, the U.S. Treasury Department has begun relying on these banking-related sanctions more frequently,” said Lee. “The primary reason for this reliance is that the sanctions have arguably proven effective. In particular, the sanctions influence the decision-making of foreign financial institutions by forcing them to make a choice: Either do business with the targeted country (e.g., Iran), or do business in the United States. These new forms of sanctions have proven fairly successful — for example, bringing the Iranians to the negotiating table over their nuclear program. It’s no surprise then that —given their success — OFAC has employed similar types against Cuba, hoping to further increase the pressure on that country.”

Depending on the nature of the alleged sanctions violations, other U.S. agencies can initiate sanctions proceedings against foreign banks that trade with Cuba, working hand-in-hand with OFAC.

“OFAC works closely with other agencies, including the Department of Justice, to penalize European banks that conduct transactions with Cuba in violation of U.S. law,” said Lee. “For example, in many enforcement actions taken against European banks, (the Department of Justice) will suspend prosecution if the bank agrees to pay both (it and) OFAC a certain settlement sum. Over the past few years, other agencies, both federal and state, have become increasingly involved.”

For example, the New York State Department of Financial Services played a role in the agreement with Standard Chartered Bank and BNP Paribas.

One foreign banker who spoke on background said that Cuba has the misfortune of being listed as a “state sponsor of terrorism” by the U.S. State Department, and because of that, European and other international banks’ Cuba-related activities get red-flagged by OFAC, even if the amounts involved are modest. “I don’t think Obama’s OFAC is targeting banks doing business with Cuba (alone),” he said. “They are targeting banks doing stuff with Iran, North, Korea, Sudan, Syria, and the mostly minor Cuba transactions just get swept up into the rap sheet.”

Meanwhile, the U.S. Congress is responsible for the steep rise in amounts. In 2009, Congress raised the statutory maximum from a cap of $11,000 to $250,000 per violation, or twice the value of the underlying transaction. This has enabled OFAC to reap unprecedented amounts for such fines. In 2008, OFAC collected a total of $3.5 million for 108 settled matters. After the statutory changes in 2009, OFAC collected $772 million for just 27 settled matters.

With such enhanced financial powers from Congress, OFAC has become a feared household name among the world’s bankers. Some of the institutions targeted were ING Bank, HSBC Holdings, Crédit Suisse, and Barclays Bank, which paid the heaviest fines settled with OFAC thus far. In 2012, OFAC collected over $1.1 billion in fines for just 16 matters. Although OFAC reaped in just $137 million in 2013 for 26 matters, 2014 will be a record-breaker with the BNP Paribas settlement, which includes a $963 million OFAC fine.

Getting off Washington’s ‘terror’ list

Pro-normalization activists in the United States have recently focused on pressing the Obama Administration to take Cuba of the State Department’s list of “terrorism-sponsoring nations,” as a crucial tool to improve relations.

Washington lawyer Lee is skeptical.

“The State Department and OFAC maintain different lists, and inclusion or removal from one does not necessarily change the status of an entity or a country on the other,” she says. “Even if the president relaxed sanctions on Cuba, Congress could still independently ratchet up pressure through additional legislation.”

Another OFAC expert, Washington attorney and one-time OFAC official Hal Eren, noted that even the use of non-U.S. dollar currencies between Cuba and its trading partners can trigger sanctions enforcement. Enforcement actions are overwhelmingly triggered by U.S. dollar (transactions), but can also involve other currencies, he said.

“What matters is where the transaction occurs and who conducts it,” Lee added. “Red flags generally include systematic attempts by large financial institutions to cover their tracks and hide any transactions which could violate U.S. sanctions on Cuba.”

Eren said that any type of international commerce Cuba conducts can become a sanctions target – from commodity trade financing for nickel, sugar, or oil sales, to payments for Cuban medical services.

Some political observers have criticized Washington for penalizing international banks’ transactions with Cuba with the same severity as countries conducting allegedly more nefarious activities, such as Iran and North Korea, since Havana has nothing to do with nuclear proliferation, or international terrorism. “Florida has a Cuban-American population and is a swing state,” said OFAC legal expert Erich Ferrari in Washington, referring to that community’s influence on presidential elections. “If you’re not tough enough on Cuba, you have the potential of losing that state. That’s why we have Cuba (OFAC) sanctions today.”

Downside for the dollar?

A number of international banks still have a Cuban presence, such as Scotiabank and National Bank of Canada (whose offices are at Havana’s glitzy Miramar Trade Center), and Spain’s Banco Bilbao Vizcaya Argentaria (BBVA). But they tend to keep a low profile, due to the U.S. embargo.

To minimize exposure to Washington’s sanctions campaign against Cuba, these banks are facilitating the island’s international trade in other currencies.

“Here, we only use the euro or the Canadian dollar,” said Havana-based Chilean businessman Ángel Domper, whose trading firm TJP Internacional supplies the island’s supermarkets and tourism sector with food items from various Latin American countries.

For the time being, international banks are still likely to comply with OFAC’s demands, simply because they don’t want to be shut out of the U.S. economy.

“The dollar is the prevailing trade currency,” said Ferrari. “International banks are going to have to have a presence in New York. These banks are saying ‘what are we going to make from these Cuba transactions versus losing a license (in USA)?’”

But in the long run, there may be a downside to the U.S. crackdown on foreign banks.

Says Washington lawyer Lee: “If foreign banks are increasingly subjected to having their licenses being revoked (to operate in USA), such steep penalties may incur a re-thinking of the decision to conduct transactions using the dollar.”