The nearly $9 billion (CHF8 billion) fine imposed on French bank BNP Paribas could have a major impact on the Geneva commodities sector, according to one expert. The violations arose mainly from the bank’s Geneva-based trade finance unit that has greased the wheels of the explosive growth of commodities trading in the region.
In 2006, BNP Paribas’s illicit financing of the Sudanese oil business meant that its Geneva branch bankrolled a quarter of all Sudan’s exports and a fifth of its imports, according to the US Department of Justice.
Between 2002 and 2007 these Sudanese transactions running through Geneva exceeded $6 billion (CHF5.3 billion) in value.
Trade finance is a specialist banking service that provides credit to traders. The funding is vital for plugging the financial gap between traders buying a commodity in one part of the world and receiving payment once the goods have been successfully shipped to another country.
“It can take several weeks before a trader gets paid,” Emmanuel Fragnière, a commodities expert at the HEG university in Fribourg, told swissinfo.ch. “Clients only pay up when the cookies are on the shelf in the supermarket.”
The movement of oil, gas, grains, coffee and sugar around the globe simply could not exist without such lines of credit, said Fragnière.
France's largest bank, BNP Paribas, has agreed to pay nearly $9 billion to resolve criminal allegations that it processed transactions for clients in Sudan and other blacklisted countries in violation of US trade sanctions, the Justice Department announced on Monday. The bank pleaded guilty to state charges in New York and plans another guilty plea in federal court next month.
After months of negotiations, BNP admitted to violating US trade sanctions by processing billions of dollars in illegal transactions on behalf of clients in Sudan, Cuba and Iran. The United States had imposed sanctions on the countries to block their participation in the global financial system.
The transactions, which prosecutors say were processed through its New York branch office from at least 2004 through 2012, were handled at the same time as human rights abuses – including the genocide in Sudan – were occurring in those nations.
The roughly $8.9 billion deal is the largest sanctions case brought by the Justice Department and the largest penalty in any criminal case involving a bank. Prosecutors say the penalty was necessary not only because of the sheer volume of the illicit transactions but also because of the bank’s efforts to hide them and executives’ lack of cooperation with the Justice Department.
The Geneva Trading and Shipping Association, the main lobby group for the region’s commodities industry, claims the city and its environs is the number one geographic player in the multi-billion dollar industry.
BNP Paribas has been widely credited with pioneering and refining the service and is acknowledged as being a huge player in Geneva.
Fragnière is concerned that Geneva-based traders may themselves pay a steep price for BNP Paribas’s guilty plea. The bank has agreed to “suspend US dollar clearing operations through its New York branch and other affiliates for one year for business lines on which the misconduct centered”, the DoJ stated.
Fragnière is doubtful whether the bank can continue its trade finance services with this impediment.
“The bank now faces a big decision on whether it is worth keeping its trade finance operations running,” he told swissinfo.ch.
“The Geneva unit may have been making a profit, but it is just a small niche operation when you look at the bank’s total balance sheet. The fine is not just bad news for Paris, it is also bad news for Geneva.”
In addition to the fine for breaking US sanctions, BNP Paribas – like all other banks – has to contend with international regulations forcing banks to put aside more funds to cover potential losses in all business areas.
US banks JP Morgan and Morgan Stanley recently decided that the cost of such regulations did not make it worth their while to continue with trade finance, as they divested their units to Mercuria – the ten-year-old Swiss oil and energy trader – and Russian oil giant Rosneft respectively.
Crippling credit crunch
The commodities trading sector may be faced with a crippling credit crunch if BNP Paribas and other banks make the same decision, according to Fragnière.
The credit crunch that followed the 2008 financial crisis resulted in a 30-40% drop in financing for the industry, which still has not been fully made up, he added.
The larger trading houses such as Mercuria, Trafigura and Glencore could absorb another credit crunch with their own in-house trade finance units, Fragnière believes. But smaller traders could easily be compelled to cut costs and slash staffing levels.
“The Geneva commodities trading industry would survive such a crisis but there would be blood on the floor,” he told swissinfo.ch. “For traders to survive they would have to reinvent themselves and find new operative models to squeeze out greater margins.”