Why it matters: On May 24, 2017, the New York Department of Financial Services announced that it had fined BNP Paribas S.A. and its New York branch $350 million for “significant, long-term violations” of New York banking law in connection with the bank’s global foreign-exchange business, including “major deficiencies” in oversight that allowed “nearly unfettered misconduct” by bank employees.
Detailed discussion: On May 24, 2017, the New York Department of Financial Services announced that it has imposed a $350 million fine on BNP Paribas S.A. (BNP Paribas) and its New York branch for “significant, long-term violations” of New York banking law arising out of the BNP Paribas global foreign-exchange (FX) business. The DFS said that such violations included “major deficiencies in the Bank’s oversight that allowed nearly unfettered misconduct by more than a dozen BNPP traders and salespeople.”
As detailed in the DFS consent order, the misconduct and violations at issue occurred between 2007 and 2013 and involved numerous BNP Paribas employees in New York and other key FX trading hubs, including London and Tokyo. The DFS said that all such employees had to date “been terminated, resigned or otherwise disciplined” and BNP Paribas agreed in the consent order to not reemploy any such terminated employees in the future.
According to the DFS findings, a number of BNP Paribas FX traders participated in multiparty online chat rooms where they engaged in a variety of misconduct, including (1) “Collusive conduct … that involved fake trades designed to manipulate prices; [including ] collusion in setting spreads for customers trading in certain currencies, in order to widen the spreads and artificially increase profits;” (2) “Improperly exchanging information about past and impending customer trades in order to maximize profits at customers’ expense … [and] improper sharing of confidential customer information via personal e-mail—including through use of a sophisticated codebook that helped identify dozens of clients, central banks or important market participants and specified trading volumes;” (3) “Manipulation of the price at which daily benchmark rates were set—both from collusive market activity and improper submissions to benchmark-fixing bodies;” and (4) “Misleading customers by hiding markups on executed trades, including by using secretive hand signals when customers were on the phone; or by deliberately ‘underfilling’ a customer trades, in order to keep part of a profitable trade for the Bank’s own book.”
The DFS press release goes on to detail some of the most egregious of the employee collusive behavior, including secret hand gestures and the creation of secret trading groups (or “cartels”) and codebooks with the colorful monikers “ZAR Domination” and “We Reign,” respectively.
The DFS said that in addition to paying the $350 million fine, BNP Paribas will be obligated under the consent order to (1) “submit plans to improve senior management oversight of the company’s compliance with New York State laws and regulations relating to the company’s foreign exchange trading business;” and (2) “enhance internal controls and risk management, and improve its compliance risk management program with regard to compliance by BNPP with New York laws and regulations with respect to its foreign-exchange trading business across the firm.”
Financial Services Superintendent Maria T. Vullo said in the DFS press release that “[p]articipants in the foreign exchange market rely on a transparent and fair market to ensure competitive prices for their trades for all participants … Here the Bank paid little or no attention to the supervision of its foreign exchange trading business, allowing BNPP traders and others to violate New York State law over the course of many years and repeatedly abused the trust of their customers. DFS appreciates the Bank’s cooperation in resolving this matter and for the remedial measures taken to address some of the misconduct arising within the Bank’s FX Trading Business in connection with our investigation.”