BNP Paribas Settlement Subsidy Could Cost Taxpayers $3 Billion

Bank Could Get Huge Tax Break in Terror-Related Justice Dept. Settlement


As the Justice Department approaches a multi-billion-dollar settlement with the bank BNP Paribas over allegedly hiding information linking transactions to terrorist regimes, there may be billions at stake for taxpayers. Unless the Justice Department explicitly forbids it, BNP Paribas may be able to write off its settlement, forcing U.S. taxpayers to bear costs that could exceed $3 billion.

In fact, as BNP Paribas and French authorities lobby the White House and federal agencies to reduce the settlement amount, the tax deductibility of the settlement may become a key bargaining chip.

“Unlike some agencies, the Justice Department does not always disclose the terms of its settlements, leaving the after-tax value of the settlement a secret. The Department of Justice should forbid deductibility and publish the terms of its deal so the public can judge whether the agency is truly holding BNP Paribas accountable,” said Phineas Baxandall, Senior Analyst at the U.S. Public Interest Research Group. “If BNP truly did aid terrorists as the Justice Department alleges, they certainly shouldn’t get a tax break for it.”

The French banking giant reportedly intentionally hid information to help clients evade U.S. sanctions placed on Iran and Sudan for the sponsorship of terrorist groups. The bank is being investigated for charges that it removed identifying information from $30 billion dollars in wire transfers that would have otherwise alerted authorities that American economic sanctions were violated.

Based on the 35 percent federal tax rate on corporate profits and the $9 billion settlement amount discussed in recent reports, the French bank could shift $3.15 billion back onto taxpayers without the maneuver ever becoming public.

Whether or not a settlement is tax-deductible does not depend on whether there is a guilty plea. Unless a settlement spells out otherwise, companies that acknowledge fault can still deduct amounts they deem to be normal business restitution or compensation.

“Will the Justice Department forbid tax deductibility, as it did with the $2.6 billion Credit Suisse settlement last month,” asked Baxandall. “Or will the agency forbid tax deductibility on only a fraction of the settlement, as it did with $2 billion of the $13 billion JPMorgan settlement last November? Or will the Justice Department allow the bank to use the whole settlement as a tax write off, as it has in several other cases? The real value of the final deal may depend a lot on tax deductibility.”

It is also possible that the Justice Department will avoid discussion of the issue by not disclosing the tax deductibility of the settlement. When the Justice Department announced a $1.9 billion settlement at the end of 2012 with the bank HSBC for money laundering for known terror groups and Mexican drug cartels, for instance, the agency never disclosed the terms of the deal or whether it forbid the bank from taking a tax deduction. A deduction for that settlement could have been worth $700 million at taxpayer expense.

The Justice Department hasn’t explained its policies for allowing some companies to treat settlement payments like an ordinary cost of doing business or why it often does not disclose the terms of settlements.

“When ordinary Americans break the rules, we don’t have the option of deducting our parking tickets or library fines,” said Baxandall. “Just because big banks have teams of lawyers negotiating for them shouldn’t leave taxpayers picking up the tab for their misdeeds.”

In discussion of the BNP Paribas case last week, the New York Times Deal Book column criticized that the way the Justice Department “metes out corporate justice is so toothless, arbitrary and opaque. …The randomness and lack of transparency are not fair.”

Bipartisan bills in both the U.S. House and Senate, The Truth in Settlements Act (S. 1898 – fact sheet) would require agencies to report the expected after-tax value of settlements if they are allowed as tax deductions. The bills would also require agencies to post online a variety of details about settlements to make their true value apparent to the public. The bills are cosponsored by Sens. Warren and Coburn in the Senate, and Representatives Cole and Cartwright in the House.

Another bipartisan bill in the Senate (S. 1654) cosponsored by Senators Harry Reed (RI-D) and Chuck Grassley (IA-R) would restrict tax deductibility for settlements and require agencies to spell out the intended tax status of settlements. A similar bill in the House sponsored by Representative Peter Welch (VT-D) would also forbid such deductions.

A poll released this spring by the U.S. Public Interest Research Group Education Fund and conducted by Lake Research Partners found that substantial majorities across party lines overwhelmingly disapprove of settlement tax write offs and want federal agencies to be more transparent about them.

You can read U.S. PIRG’s research report on the tax implications of legal settlements, “Subsidizing Bad Behavior: How Corporate Legal Settlements for Harming the Public Become Lucrative Tax Write-Offs.

U.S. PIRG created a fact sheet on use of the settlement loophole by Wall Street financial firms.