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Could someone explain to me (as a non-American non-financial type) the basis of US jurisdiction over banks not based in the US? Is it because they have a presen

Could someone explain to me (as a non-American non-financial type) the basis of US jurisdiction over banks not based in the US? Is it because they have a presence in the US, or some other reason?

privong 12y ago
> Is it because they have a presence in the US That is essentially it.
awjr 12y ago
I believe it has to do with the way US dollars are traded on the world market. In effect any bank holding US dollars has to hold them on US soil which, by default, brings US dollar transactions under US jurisdiction.
- viggity 12y ago
  Do you have a source on that, doesn't pass the sniff test for me. I thought it was because they have a presence in the US.
  - awjr 12y ago
    I did some more research. I think because BNP had offices in NY they came under US jurisdiction. I don't think I'm correct in saying that a bank that trades in US dollars comes under US jurisdiction. However if you do decide to set up offices in the US, expect your world banking practices to come under US scrutiny.
    - pcrh 12y ago
      At the end of each period, for example a day, banks calculate how much money was paid from accounts at bank A to those at bank B, from bank C to bank A, etc This results in a net credit or debt between the banks. Rather than send all the transactions back and forth, banks will "clear" this net amount between themselves. The "clearing house", which in the US is often either CHIPS [1] or Fedwire [2], handles this process, which handle most large interbank US dollar transactions globally. (Clearing also seems to mean currency exchange in the US, according to WSJ). BNP used this service in the US, so it fell under US law. [1] http://en.wikipedia.org/wiki/Clearing_House_Interbank_Payments_System http://en.wikipedia.org/wiki/Clearing_House_Interbank_Paymen... [2] http://en.wikipedia.org/wiki/Fedwire http://en.wikipedia.org/wiki/Fedwire
radmuzom 12y ago
Even though BNP is a foreign bank, it has to have a license to conduct banking in the United States. If they refuse to co-operate, the US will cancel that license. Given the amount of fine they are willing to pay, it is clear that the US business is important and profitable to them.
DangerousPie 12y ago
From what I read about this case the US threatened to withdraw BNP's US banking license. So even though the US does not actually have jurisdiction, they can choose to prevent a bank from trading in their country if they don't like their actions.
- snowwrestler 12y ago
  If a bank is operating in a country, then it seems obvious that that country's courts would have jurisdiction over it.
deleted 12y ago
[deleted]
dragonwriter 12y ago
> Could someone explain to me (as a non-American non-financial type) the basis of US jurisdiction over banks not based in the US? Entities physically present in, doing business in, and subject to licensing by the US and individual US states are subject to US law and the law of those states no matter where they are headquartered.
- mnw21cam 12y ago
  But an entity that is doing business in the US doesn't need to obey US law outside of the US. US-owned hotels in the UK are allowed to cut the tags off mattresses, even if their US branches are not.
  - dragonwriter 12y ago
    > But an entity that is doing business in the US doesn't need to obey US law outside of the US. That's not at all true. It doesn't have to obey US laws that only apply within the US outside of the US (but neither does anyone else.) But lots of US laws are not limited in territorial applicability to the US. In fact, there are US criminal laws that only apply outside of the US.
    - jtfairbank 12y ago
      That sounds fun, can you give some examples?
      - mark212 12y ago
        Google "Foreign Corrupt Practices Act" and you'll see the chief example.
      - jauer 12y ago
        18 U.S. Code S 2423(c): Engaging in Illicit Sexual Conduct in Foreign Places. Any United States citizen or alien admitted for permanent residence who travels in foreign commerce or resides, either temporarily or permanently, in a foreign country, and engages in any illicit sexual conduct with another person shall be fined under this title or imprisoned not more than 30 years, or both.
jackgavigan 12y ago
Basically, the US government's approach is "If you want to clear US dollars, you must conform to our laws." The following explanation will simplify things somewhat in the interest of brevity. Basically, all dollars (the ones that aren't physical cash, anyway) are ultimately held in accounts at one of the Federal Reserve banks. Banks like Citi, Wells Fargo, JP Morgan and Bank of America have accounts at the Federal Reserve. When clients of those banks transfer US dollars to someone who's a client of another bank, the real transfer of dollars takes place between the banks' accounts at the Federal Reserve. If your bank doesn't have an account at the Federal Reserve, then it needs to have an account with a bank that has an account at the Federal Reserve. (Or with a bank that has an account with a bank that has an account at the Federal Reserve, etc.) To be a member of the Federal Reserve, you need to hold a banking license in the US, which means that you are subject to US laws (because, if you ignore them, the US authorities will take your banking license away). You'll also have an office there (probably in New York) but that's kind of incidental. So, if you're a bank with a US banking license, and one of your clients annoys the US authorities, they can basically say "Stop doing business with that client." (or, in other words, impose sanctions). If you refuse to comply, they can take your licence away. That's effectively what happened with BNP Paribas - they were clearing US dollar transactions for clients that were subject to US sanctions. So, BNP has been effectively grounded for a year. Instead of going direct to the Federal Reserve to transfer US dollars to other banks, it will need to become a client of another bank that's a member of the Fed. It's embarassing, it'll cost them money (they'll have to pay the other bank) and they may well lose some business (from clients who want to deal with a top-tier US dollar clearing bank). In theory, they could have just turned around and said "Screw you, we're not paying any fine!", in which case the US authorities would have withdrawn their US banking license, seized any assets they could get their hands on (e.g. the dollars they have in their account at the Federal Reserve) and blacklisted the company, so no other US bank would do business with them. That would effectively have prevented them from doing any business in US dollars. To be a proper, credible international bank like BNP, you need to be able to handle US dollars. Hence, BNP is prepared to pay the fine. The alternative would be to effectively downsize massively.
- pcrh 12y ago
  It is not necessary to clear dollars through the US, they can be cleared through other financial centers, such as London or Frankfurt. If they had kept all their transactions outside of the US, they would not have been technically subject to US law. However, they did use US clearing houses, so they're subject.

Could someone explain to me (as a non-American non-financial type) the basis of US jurisdiction over banks not based in the US? Is it because they have a presence in the US, or some other reason?

privong 12y ago

> Is it because they have a presence in the US That is essentially it.

awjr 12y ago

I believe it has to do with the way US dollars are traded on the world market. In effect any bank holding US dollars has to hold them on US soil which, by default, brings US dollar transactions under US jurisdiction.

viggity 12y ago
Do you have a source on that, doesn't pass the sniff test for me. I thought it was because they have a presence in the US.
- awjr 12y ago
  I did some more research. I think because BNP had offices in NY they came under US jurisdiction. I don't think I'm correct in saying that a bank that trades in US dollars comes under US jurisdiction. However if you do decide to set up offices in the US, expect your world banking practices to come under US scrutiny.
  - pcrh 12y ago
    At the end of each period, for example a day, banks calculate how much money was paid from accounts at bank A to those at bank B, from bank C to bank A, etc This results in a net credit or debt between the banks. Rather than send all the transactions back and forth, banks will "clear" this net amount between themselves. The "clearing house", which in the US is often either CHIPS [1] or Fedwire [2], handles this process, which handle most large interbank US dollar transactions globally. (Clearing also seems to mean currency exchange in the US, according to WSJ). BNP used this service in the US, so it fell under US law. [1] http://en.wikipedia.org/wiki/Clearing_House_Interbank_Payments_System http://en.wikipedia.org/wiki/Clearing_House_Interbank_Paymen... [2] http://en.wikipedia.org/wiki/Fedwire http://en.wikipedia.org/wiki/Fedwire

radmuzom 12y ago

Even though BNP is a foreign bank, it has to have a license to conduct banking in the United States. If they refuse to co-operate, the US will cancel that license. Given the amount of fine they are willing to pay, it is clear that the US business is important and profitable to them.

DangerousPie 12y ago

From what I read about this case the US threatened to withdraw BNP's US banking license. So even though the US does not actually have jurisdiction, they can choose to prevent a bank from trading in their country if they don't like their actions.

snowwrestler 12y ago
If a bank is operating in a country, then it seems obvious that that country's courts would have jurisdiction over it.

deleted 12y ago

[deleted]

dragonwriter 12y ago

> Could someone explain to me (as a non-American non-financial type) the basis of US jurisdiction over banks not based in the US? Entities physically present in, doing business in, and subject to licensing by the US and individual US states are subject to US law and the law of those states no matter where they are headquartered.

mnw21cam 12y ago
But an entity that is doing business in the US doesn't need to obey US law outside of the US. US-owned hotels in the UK are allowed to cut the tags off mattresses, even if their US branches are not.
- dragonwriter 12y ago
  > But an entity that is doing business in the US doesn't need to obey US law outside of the US. That's not at all true. It doesn't have to obey US laws that only apply within the US outside of the US (but neither does anyone else.) But lots of US laws are not limited in territorial applicability to the US. In fact, there are US criminal laws that only apply outside of the US.
  - jtfairbank 12y ago
    That sounds fun, can you give some examples?
    - mark212 12y ago
      Google "Foreign Corrupt Practices Act" and you'll see the chief example.
    - jauer 12y ago
      18 U.S. Code S 2423(c): Engaging in Illicit Sexual Conduct in Foreign Places. Any United States citizen or alien admitted for permanent residence who travels in foreign commerce or resides, either temporarily or permanently, in a foreign country, and engages in any illicit sexual conduct with another person shall be fined under this title or imprisoned not more than 30 years, or both.

jackgavigan 12y ago

Basically, the US government's approach is "If you want to clear US dollars, you must conform to our laws." The following explanation will simplify things somewhat in the interest of brevity. Basically, all dollars (the ones that aren't physical cash, anyway) are ultimately held in accounts at one of the Federal Reserve banks. Banks like Citi, Wells Fargo, JP Morgan and Bank of America have accounts at the Federal Reserve. When clients of those banks transfer US dollars to someone who's a client of another bank, the real transfer of dollars takes place between the banks' accounts at the Federal Reserve. If your bank doesn't have an account at the Federal Reserve, then it needs to have an account with a bank that has an account at the Federal Reserve. (Or with a bank that has an account with a bank that has an account at the Federal Reserve, etc.) To be a member of the Federal Reserve, you need to hold a banking license in the US, which means that you are subject to US laws (because, if you ignore them, the US authorities will take your banking license away). You'll also have an office there (probably in New York) but that's kind of incidental. So, if you're a bank with a US banking license, and one of your clients annoys the US authorities, they can basically say "Stop doing business with that client." (or, in other words, impose sanctions). If you refuse to comply, they can take your licence away. That's effectively what happened with BNP Paribas - they were clearing US dollar transactions for clients that were subject to US sanctions. So, BNP has been effectively grounded for a year. Instead of going direct to the Federal Reserve to transfer US dollars to other banks, it will need to become a client of another bank that's a member of the Fed. It's embarassing, it'll cost them money (they'll have to pay the other bank) and they may well lose some business (from clients who want to deal with a top-tier US dollar clearing bank). In theory, they could have just turned around and said "Screw you, we're not paying any fine!", in which case the US authorities would have withdrawn their US banking license, seized any assets they could get their hands on (e.g. the dollars they have in their account at the Federal Reserve) and blacklisted the company, so no other US bank would do business with them. That would effectively have prevented them from doing any business in US dollars. To be a proper, credible international bank like BNP, you need to be able to handle US dollars. Hence, BNP is prepared to pay the fine. The alternative would be to effectively downsize massively.

pcrh 12y ago
It is not necessary to clear dollars through the US, they can be cleared through other financial centers, such as London or Frankfurt. If they had kept all their transactions outside of the US, they would not have been technically subject to US law. However, they did use US clearing houses, so they're subject.