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Foreign fining spree will come back to haunt America

When President Barack Obama attends the D-Day commemoration event this week in France, Francois Hollande, the French head of state, is expected to take his American guest aside for a little private chat about a certain French bank and the threat by the U.S. Justice Department of a $10-billion (U.S.) fine. BNP Paribas is accused of infringing U.S. sanctions against Iran, Sudan and Cuba, becoming the latest European bank to be caught in a campaign by Justice to bring alleged miscreants to book, but the scale of the penalty threatening BNP (it would amount to the largest corporate fine ever imposed by the U.S.) is provoking political uproar in Paris.

More importantly, it raises serious questions about the large and increasing political risk facing foreign corporations doing business in America.

Behind the scenes, there is plea-bargaining; the U.S. authorities are demanding the French bank and certain individuals plead guilty, a huge fine, and a temporary ban on the movement of dollars across the U.S. border. There is little doubt that BNP was breaking the U.S. sanctions law, making dollar payments to customers in sanctioned jurisdictions and concealing the transactions over an extended period, from 2002 to 2009.

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But the scale of the penalty makes Europeans wonder if the Justice Department is seeking easy foreign scalps in response to the American public's anger over its failure to put high-profile U.S. bankers behind bars over the subprime mortgage disaster. For President Hollande, fresh from humiliation in the European elections, it is another embarrassment which the victorious National Front party are exploiting with calls on the government to defend BNP and "the national interest" against American "racketeering."

Given the roll call of European banks recently fined for sanctions-busting and the scale of the accumulated penalties which amount to many billions of dollars, you might be forgiven for wondering if Justice is indeed engaging in a commercial, rather than prosecutorial activity. In 2012, Standard Chartered was fined $300-million, ING was fined $619-million and HSBC was forced to pay almost $2-billion for alleged money laundering. Last year, RBS was fined $100-million in relation to sanctions-busting over Iran, Libya, Sudan and Burma. These offences are only offences in the U.S.; as the Bank of France plaintively notes, BNP Paribas broke no European law. The U.S. is claiming jurisdiction over these transactions because they were settled in U.S. dollars rather than euros, renminbi or baht.

Last month, Credit Suisse became the largest bank in two decades to plead guilty to a criminal charge in the U.S., agreeing to pay a fine of $2.5-billion for "helping" its American clients to evade U.S. taxes. Again, the case involved the extraterritorial assertion of U.S. criminal law, in this case against a Swiss bank for doing business with Americans who don't want to pay their taxes.

For the Justice Department, the matter is quite simple: Do business with Americans anywhere and you must comply with U.S. law. For large banks, there is no choice but to comply because, currently, an inability to clear dollar transactions renders international banking impossible. The question is whether in the long-term this politicized and aggressive prosecutorial behaviour is in America's interest – and the answer is certainly no. Apart from banks, most global multinationals have created legal firewalls to cope with the political and judicial risk of doing business in the U.S. Most large European corporates erect careful barriers to distance their non-U.S. operations from the overbearing litigation risk, either from U.S. regulators or from the attack dogs of the U.S. plaintiffs bar.

It is almost as if doing business in America required companies to wear a bio-hazard suit, and if that seems an exaggeration, consider the plight of BP, which continues to suffer the biggest corporate shakedown in history over the Gulf of Mexico oil spill. The company gave warning last week of "staggering costs" from a claims administration in Louisiana that has seemingly gone out of control, turning a blind eye to corrupt plaintiffs and allowing farcical claims of economic loss from businesses with no connection whatsoever to the 2010 accident. Unless the oil company can secure redress from the U.S. Supreme Court, there must be question marks about BP's continuing future in America as no shareholder can reasonably tolerate that their investment continues to be consumed by ravenous parasites.

It cannot be sensible for Americans to willfully punish or even destroy foreign investors for political purpose. It is policy that is curiously at odds with the country's assertion of judicial and moral authority worldwide. While Mr. Obama seeks to use economic sanctions to punish America's enemies abroad, the effects are felt sharply by its friends, allies and investors. And the track record of bringing "enemies" to book is poor, to say the least.

Consider the President's decision to maintain sanctions on Myanmar; the rationale for imposing sanctions was to end military rule and to free Aung Saan Suu Kyi, the opposition leader. After 15 years house arrest during which Myanmar developed significant economic ties to China, the opposition leader is free and campaigning for the presidency of Myanmar. But America is keeping the pressure on this impoverished and politically fragile state due to the new factor of human rights violations against the Buddhist country's minority Muslim population, a hideous persecution that Ms Suu Kyi refuses to acknowledge.

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Economic sanctions do not hurt villains, not least because the bad and the good often swap sides. Rather than using its judicial system as the tool of a vengeful foreign policy, America would be better off promoting fairness and justice by example. That would earn it the respect that it is in the process of losing.

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About the Author

Carl Mortished is a Canadian financial journalist and freelance consultant based in the U.K. With a career spanning investment banking, journalism and consulting for global companies, he was for many years a financial writer and columnist for The Times of London. More

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