Last week, the news media made much of the latest penalty imposed by US authorities on French banking giant Société Générale SA (SocGen) for processing sanctions-violating transactions.
On the back of the settlements, the US Attorney General for SDNY, Berman, has been full of celebratory praise for the "outstanding work" done by his team and his fellow investigative bodies.
But we have examined the settlements, and they don't seem at all impressive. Rather, they seem the result of defective investigative work. Current SocGen shareholders, and ADR-holders, should be vexed.
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| Snapshot of Holders of SocGen's Sponsored ADR, including Oregon Public Employees Retirement System (incomplete list) via Bloomberg LP |
The $1.4 billion settlement will come out of SocGen's shareholders' pockets – not from the employees involved in the long-enduring misconduct nor the supervisors overseeing it.
Thus, shareholders have long paid the wrongdoers' (no doubt handsome) salaries and now pay for their bad decision-making. Or, said another way, current shareholders are paying for a concealed, misguided scheme which, as we will see, spanned an 8 or 9-year period ending 8 years ago.
Thus, shareholders have long paid the wrongdoers' (no doubt handsome) salaries and now pay for their bad decision-making. Or, said another way, current shareholders are paying for a concealed, misguided scheme which, as we will see, spanned an 8 or 9-year period ending 8 years ago.
To be clear, this was no idle incident. As admitted to by SocGen, this was broad, intentional misconduct, spanning many years, comprising thousands of illicit transactions, deliberately implemented (with procedures drawn up) and concealed. The wrongdoers were aware, throughout, that they were breaking the law.
Excerpts from the Statement of Facts mutually agreed-to by the US Justice Department and SocGen, include:
- In total, SG engaged in more than 2,500 sanctions-violating transactions through financial institutions located in the County of New York, valued at close to $13 billion, during this period.
- For example, a senior member of SG’s Money Market department back office (“MMBO”) wrote to another MMBO employee in 2004 that “[t]he American authorities have now identified the procedure we were using (two MT 202s) to ‘circumvent’ the OFAC rules.”
- In total, SG processed over 9,000 outgoing transactions that failed to disclose an ultimate sanctioned party sender or beneficiary (“non-transparent transactions”), with a total value of more than $13 billion. The overwhelming majority of these transactions involved an Iranian nexus and would have been eligible for the U-Turn License. There were, however, at least 887 non-U-turn transactions with a total value of $292.3 million that were both nontransparent and violated U.S. sanctions. 381 of these transactions with a total value of $63.6 million were related to the Cuban credit facility conduct described below, while the remaining 506 transactions with a total value of $228.7 million involved other SG business with a sanctioned nexus.
- Between 2003 and 2010, in connection with the Cuban Credit Facilities, SG engaged in 3,100 unlawful U.S. dollar transactions that were processed through United States financial institutions located in the County of New York, worth approximately $15.1 billion
- Since at least 2002, SG engaged in the Concealment Practice in order to minimize the risk that sanctions-violating transactions would be detected and/or blocked in the United States. SG employees used cover payments for this purpose, in which SG would send one SWIFT payment message to the relevant U.S. bank, located in the County of New York, omitting the “beneficiary” field that would otherwise disclose the ultimate beneficiary of the payment, and listing only the bank to which the funds should be sent. SG would then send a second SWIFT message to the non-U.S. recipient bank, providing the name of the sanctioned party beneficiary to whom the funds should be remitted. Using this procedure (the “Cover Procedure”), SG would ensure that the sanctioned party beneficiary information was not disclosed to the United States bank that was involved in the transaction.
So, it was rather easy to get around the sanctions controls, and SocGen's employees did so many times .... which is hardly comforting. But now that that's been uncovered we would, of course, have several SocGen employees awaiting criminal prosecution. Oh, no – there's none of that.
Let's understand why.
Let's understand why.
SocGen failed to self-report its misconduct – oops!
From the looks of it, SocGen didn't disclose the individual misconduct until after the statutory clock had run for bringing criminal claims.
In other words, even after the so-called "Investigating Agencies" were onto them, they let SocGen self-report any individual violations (which they didn't do!), failed to follow up on a timely basis, and then simply fined the shareholders and declared that a success. The Investigating Agencies seem to have outsourced their decision-making to the party being investigated, and that party obliged by sending the investigators down the wrong path.
In other words, even after the so-called "Investigating Agencies" were onto them, they let SocGen self-report any individual violations (which they didn't do!), failed to follow up on a timely basis, and then simply fined the shareholders and declared that a success. The Investigating Agencies seem to have outsourced their decision-making to the party being investigated, and that party obliged by sending the investigators down the wrong path.
Now SocGen's stakeholders – which include US pension funds, and likely you and us! – are compensating US authorities for the misconduct of bank individuals 8 or more years back.
Here are some choice (or inconvenient) extracts regarding the scope of the operation and the statute of limitations running, with our emphasis added.
- Despite the awareness of both Group Compliance and senior SG management that SG had engaged in both the Concealment Practice and the unlawful U.S. dollar payments under the Cuban Credit Facilities, SG did not disclose its conduct to OFAC or any other U.S. regulator or law enforcement agency prior to the commencement of the present investigation.
- SG did not disclose the Concealment Practice or the Cuban Credit Facilities during these discussions, and its proposals for the scope of that lookback did not include the time period, business lines, or geographic regions that would have revealed that unlawful conduct. It was only after SG performed a detailed forensic analysis based on the broader scope of investigation required by the Investigating Agencies that it disclosed, in October 2014, the Concealment Practice and the Cuban Credit Facilities to the Investigating Agencies.
- As a result of this untimely disclosure, the statute of limitations for [Trading with the Enemy Act] or [International Economic Emergency Powers Act] violations relating to the Concealment Practice, and to much of the individual conduct involving the Cuban Credit Facilities, had already run by the time the Investigating Agencies learned of them.
Given enforcement agencies knew in 2014 that there were governance issues and large-scale unsustainable business practices ongoing at SocGen concealed from shareholders, why has it taken until 2018 to share that crucial information? Regulators often have a specific mission that would encourage the dissemination of precisely this type of information, to ensure efficient and orderly public markets, and maintain the public's trust and all. (The SEC's mission, for example, reads: "The mission of the SEC is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation. The SEC strives to promote a market environment that is worthy of the public's trust.")
It's worth reading the entire document, as there seems also to be evidence that US regulators could earlier have shut down the misconduct at SocGen, had they earnestly tried.
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| High 5s all around - but little achievement |
"Other banks should take heed: Enforcement of U.S. sanctions laws is, and will continue to be, a top priority of this Office and our partner agencies." (emphasis added)
But was it a "top priority?"
It took years to identify pretty basic noncompliance. Much of the misconduct was reported to them, or else it was missed. There doesn't seem to be much enforcement here, aside from the fining of shareholders.
Top priority enforcement would mean identifying anomalous transactions early and shutting down promptly any misconduct before it escalates – not fining an institution's shareholders 8 years after the last of a series of illicit transaction has taken place, which themselves in many cases endured for 8 or 9 years. The Investigating Agencies let SocGen define the scope of the investigation, and then followed the bait.
It took years to identify pretty basic noncompliance. Much of the misconduct was reported to them, or else it was missed. There doesn't seem to be much enforcement here, aside from the fining of shareholders.
Top priority enforcement would mean identifying anomalous transactions early and shutting down promptly any misconduct before it escalates – not fining an institution's shareholders 8 years after the last of a series of illicit transaction has taken place, which themselves in many cases endured for 8 or 9 years. The Investigating Agencies let SocGen define the scope of the investigation, and then followed the bait.
It seems very much like the fox was running the hen-house. And it results simply in more pain for the punter.
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