Attestation Update – A&A for CPAs

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Fine against BNP Paribas for money laundering in context of their financial statements

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Previously discussed that maybe BNP Paribas got off easy for illegally laundering $190 billion.

This post will give some context to the fine.

The $8,973M fine is equal to 6,593M Euros.

For the rest of this article, all amounts are in millions of Euros.

The bulk of the evasion of sanctions ran from 2002 through 2009 but continued into 2012, well after the bank knew the investigation was underway. That is concentrated on 8 years but stretched out to about 11 years. Let’s assume the volume was actually dropping in ’11 and ’12 so it is essentially a 10 year run of money laundering.

That means the fine was paid in one year, but it is an accumulation of 10 years activity. Thus we can amortize the fine over 10 years

Fine in relation to financial statements

Let’s look at the fine in relation to the 2013 consolidated financial statements, which can be found here on this page of their website.

Balance sheet (page 126)

Total assets are 1,800,139M at 12/31/13. Cash is 101,066M. That’s 1.8 trillion euros of assets and 101 billion in cash.

They can wire 6,593M tomorrow morning without batting an eye. The fine is 6.5% of cash on hand. Won’t need to liquidate any investment. Barely noticeable on the balance sheet.

Total consolidated equity is 91,162M. The fine is 7.2% of equity.

Public comments from the bank claim the tier 1 capital ratio will drop around 0.5% to just over 10%. That will leave them comparable to other large European banks. No regulatory compliance problem, as I understand. ANother report I won’t link said the capital ratio was 10.6% before the fine, so I’m guessing it will be about 101% after.

Total revenue, aggregated based on consolidated income statement on page 124:

  • 38,955 interest income
  • 12,301 commission income
  •   4,581 gain on financial instruments
  •   1,665 gain on available for sale
  • 34,350 income from other activities
  • 91,852 gross revenue
  • 8,630 Operating income 7832 add back 798 provision for sanctions
  • 83,222 gross expenses

So the 6.6B fine is 7.2% of gross revenue, or 7.9% of gross expenses.

Amortize the fine over 10 years against the ’13 cost structure, and the increased cost of doing business is 0.79% of annual expenses, or 2.9 days average operating expenses, on 365 day year. That’s a fairly steep increase in costs, but certainly absorbable.

Net income attributable to equity holders (page 124)

  • FY 13 – 4,832
  • FY 12 – 6,564
  • Average 5,698.

So the 6.6M fine is 123% of FY 13 net income and 100.4% of FY 12.

Spread over a decade of laundering, that is about 11.5% of annual net income, based on average of ’12 and ‘13. About 1/8th reduction in the bottom line for each year of laundering. A steep hit, but tolerable. Essentially, the last decade wasn’t quite as good as investors thought at the time.

Dividend paid (page 382)

  • FY 13 – 1,868
  • FY 12 – 1,863
  • FY 11 – 1,449
  • FY 10 – 2,518
  • FY 09 – 1,778
  • 5 yr ave – 1,895

So the 6.6M fine is equal to 3.48 years of average dividends. Say 3.5 years, or 14 quarters.

Amortizing the fine over a decade would be 34.8% of a year’s dividend. That is a loss of 4.2 months dividend per year as the amortized cost of doing business.

BNP has said publicly that the only impact on dividends is the company won’t be increasing payout as was expected. The impact on stockholders? They won’t see an increased dividend. Not too bad.

Perhaps the US$8.9B fine is just a cost of doing business. Adjust for the chance of getting away with it and the fine is likely a quite tolerable cost.

On the other, other hand…

The Economist points out that’s No way to treat a criminal.

On one hand, BNP held half of Sudan’s foreign reserves, which funded the government, which allowed the army to operate, which army could then kill tens of thousands of people a year. BNP says it broke no European laws. The Economist said that is true and at the same time it is a sad commentary on Europe.

One wag in the comments section said that BNP not having any reservations about enabling mass genocide is an attitude with a fabled history in Europe. See entries in the history book for Europe, 1939-1945.

Article also points out that internal auditors pointed out there is problem, external attorneys did the same, and US authorities gave plenty of warning. Even when the senior brass decided to stop dealing with Sudan, they didn’t bother to make sure their staff followed instructions.

The article has difficult time finding any reason to be sympathetic to BNP.

On the other hand, the article sees heavy handedness in the settlement. The terms are strong. The regulators, Mr. Lawsky by name, seem eager to grab a big share of the settlement for themselves.

A bank has little choice but to settle when criminal charges are laid on the table.

On the whole a difficult situation. The articles’ sad conclusion is the heavy-handedness makes the bank look like the victim.

In other words, a bank that catered to mass murderers has had some success in portraying itself as a victim. Any process that can make BNP’s dealings with Sudan look anything less than shameful must be very flawed indeed.

Written by Jim Ulvog

July 8, 2014, 10:07 am at 10:07 am

Posted in Other stuff

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