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French Bank May Be Banned From U.S. Dollar Clearing

New York’s banking regulator is targeting BNP Paribus for conducting business with countries such as Sudan, which the U.S. has sanctioned for its alleged support of terrorists. The regulator, Benjamin Lawsky, wants to force BNP to discontinue its dollar-clearing business. That could leave companies relying on its service in their dealings with vendors seeking out alternatives, a process that could disrupt their cash flow.

Foreign companies working with BNP Paribus to support payments in U.S. dollars to suppliers, or to receive payments from their American clients, could face problems if New York’s banking regulator follows through on threats to force the French bank to discontinue its dollar-clearing business.

Benjamin Lawsky, superintendent of New York’s Department of Financial Services, reportedly is upset because France’s biggest bank has breached U.S. sanctions by allowing payments from countries such as Sudan, which the White House says supports terrorists.

The News.com reports that BNP is developing proposals on how Lawsky could implement a ban, but discontinuing any part of BNP’s business of shifting around hundreds of billions of dollars daily for clients could be problematic for both the bank and its business clients.

“(It’s) a very threatening thing to the New York branch and the bank,” the publication quotes one person familiar with the business. “A client wants to have a bank that can clear.”

For companies such as BNP, the dollar-clearing business typically is crucial in many client relationships. The bank participates in the Clearing House Interbank Payments System (CHIPS), where approximately $1.6 trillion is cleared daily.

Besides seeking a criminal conviction, Lawsky reportedly could fine the bank as much as $10 billion. “Sources” told the News.com the negotiations are mainly about an unprecedented suspension of the bank’s authority to clear U.S. dollar transactions.

Large banks like BNP hold dollar accounts with the two main U.S. payment systems – CHIPS and FedWire. In doing so, foreign firms can make payments in dollars to their vendors. They also help in getting paid by American customers. BNP primarily clears dollars on behalf of its own clients.

CHIPS is owned by 23 large commercial banks and is supervised by the Federal Reserve. Suspending the bank’s access to both CHIPS and FedWire through a complete ban would force its clients to look for a different institution to clear dollars. And there’s a good likelihood that any companies that switch banks won’t return to BNP.

"To the extent you have to rely upon others to make those payments on your behalf, the bank is in jeopardy potentially of losing clients,” Gilbert Schwartz, a former Federal Reserve lawyer and now a partner at law firm Schwartz & Ballen, said in The News.com report. “The timing of the payments becomes much more variable and the assurance that the payments are going to be made in a timely fashion becomes problematic."

The bank reportedly is looking at options, such as sacrificing a business unit, to keep limit the damage to the overall company. The bank also could be lining up back-up providers.


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