“A Hidden War”

This chapter examines the rise of financial sanctions as a tool of U.S. foreign policy and the role of U.S. prosecutors in enforcing sanctions against global banks. It describes how the United States developed its financial sanctions capabilities against terrorist groups, then turned them against state actors such as North Korea, culminating with elaborate sanctions programs against Iran and Russia. It shows how U.S. federal and state prosecutors uncovered large-scale sanctions evasion efforts at numerous global banks that processed U.S. dollar payments. This enforcement campaign led to some of the largest criminal fines ever levied, and global banks such as HSBC and BNP Paribas agreed to implement U.S. sanctions and anti-money laundering controls in their worldwide operations, thus broadening the reach of U.S. policy. Although U.S. enforcement actions faced strong criticism by U.S. allies, banks facing large fines, negative publicity, and potential loss of access to essential U.S. dollar payment infrastructure complied with U.S. demands. Unlike other cases, U.S. sanctions did not lead to multilateral reforms, instead triggering efforts by sanctioned states and bystanders to reduce their dependence on the U.S. dollar and U.S. payment systems.

Introduction

This chapter provides an overview of U.S. criminal enforcement actions against global banks, including aggregate statistics about their targets and the penalties levied. It then examines the characteristics and motives of the principal actors involved: the global banks themselves, the regulatory agencies that supervise them, and the prosecutors who brought criminal cases against them. The chapter develops the book’s three central arguments, which structure the case studies examined in the following chapters. First, it argues that prosecutors bring to global bank oversight a set of priorities, incentives, and tools that differ fundamentally from those of the specialized agencies and transnational networks that traditionally occupied that field. Second, it contends that the U.S. government’s ability to impose its will on global banks stems from its control over vital hubs of the international financial infrastructure, such as the U.S. dollar and U.S.-based payment systems. Third, it argues that although U.S. enforcement actions have triggered complaints of unilateralism and can in some cases be self-interested, they can also unlock obstacles to international cooperation and lead to widespread benefits.

Conclusion

This chapter summarizes the findings of the case studies examined in the previous chapters and discusses their implications. The cases support the conjectures proposed in the introduction. Consistent with the differences in incentives and capabilities between regulators and prosecutors, the latter repeatedly provided robust enforcement against harmful practices by global banks that had not been effectively addressed by the former. Their ability to do so was buttressed by U.S. control over the international financial infrastructure, such as access to U.S. dollar payments, and the country’s leverage over global banks that rely on that infrastructure. Although banks and foreign governments often complained of U.S. unilateralism, in two cases—benchmark manipulation and tax evasion—U.S. enforcement actions led to substantial and widely beneficial international reforms. These conclusions challenge the widespread notion that U.S. enforcement actions against global banks are ineffective due to the “too big to jail” problem. They also qualify arguments to the effect that explicit deployment of U.S. structural power over international finance to achieve policy goals necessarily threatens to erode U.S. centrality in international finance.

“Geneva Is Beautiful This Time of Year”

This chapter examines the U.S. enforcement campaign against Swiss banks that facilitated tax evasion by U.S. customers and its impact on the global regime for tax information sharing. After reviewing the legal and policy issues raised by offshore tax evasion, the chapter examines how the U.S. criminal prosecution of UBS led to the release of tens of thousands of U.S. customer names to the IRS, opening an unprecedented breach in Swiss bank secrecy. The UBS case opened the way for prosecutions of other Swiss banks; negotiations with Switzerland on tax disclosure; and U.S. adoption of the Foreign Account Tax Compliance Act (FATCA), which penalizes foreign banks that fail to disclose U.S. customer accounts. While the U.S. approach initially encountered significant resistance, many countries, including major offshore centers, concluded bilateral information-sharing agreements with the United States, while some onshore jurisdictions adopted FATCA-like legislation to fight offshore tax evasion. Eventually, the U.S. approach provided a model for multilateral reform through the OECD’s Common Reporting Standard (CRS), which provides automatic exchange of account information among numerous jurisdictions.

“An Extortion and an Act of Piracy”

This chapter examines the efforts by Argentine bondholders that refused to consent to the country’s debt restructuring to use U.S. court proceedings to enforce their claims. It shows how, despite the theoretical availability of legal remedies against defaulting sovereigns, debt holders historically faced severe practical limitations of their ability to identify and attach assets to satisfy their claims. The chapter then relates how NML Capital, a U.S.-based investment fund, convinced a U.S. federal judge to accept a controversial interpretation of the bonds’ pari passu clause and to issue an injunction prohibiting Argentina from paying its other bondholders unless it also paid the holdouts. By extending the injunction to global banks and other central elements of the international financial infrastructure, the U.S. court effectively imposed financial sanctions on Argentina to enforce a private debt claim. This strategy proved successful, compelling Argentina to repay the holdout bondholders. The decision threatened to disrupt the sovereign debt restructuring process and led the IMF and other multilateral actors to initiate reforms to strengthen the legal basis for future restructurings.

“I Think We Got Away with It”

This chapter examines the enforcement campaign against manipulation of interest rate and foreign exchange benchmarks by traders and other employees of global banks. After reviewing the history, functioning, and weaknesses of LIBOR, the world’s most important interest rate benchmark, the chapter relates how the banking industry, banking regulators, and central bankers responded ineffectively to signs of LIBOR manipulation that emerged in 2008. By contrast, robust enforcement actions spearheaded by the U.S. Department of Justice and the Commodities Futures Trading Commission, beginning with the Barclays case in 2012, attracted worldwide attention. They led directly to parliamentary investigations, leadership turnover at some banks, and significant domestic and international benchmark reforms, culminating with an industry-wide shift away from LIBOR toward more reliable indices. Likewise, the foreign exchange manipulation scandal and related prosecutions led to the adoption of international reforms. In both cases, several individuals were also charged criminally, most notably UBS trader Tom Hayes. By using its authority over global banks to protect the integrity of widely used financial benchmarks that have the characteristics of public goods, U.S. actions benefited users of these benchmarks around the world.