Over the past decade, the United States has succeeded at exercising an extraordinary degree of “extraterritorial” control over the Western financial system. The apotheosis of this exercise was perhaps the nearly $9 billon penalty levied against BNP Paribas in 2014. Other non-US banks caught in the extraterritorial US net include HSBC, which paid $1.9 billion in 2012 for violating sanctions against Iran and laundering money in Mexico (for which it is in trouble again), Commerzbank, and many others.

The United States’ remarkable success at exercising control over overseas banks was never a foregone conclusion. Before there was the #resistance, there was La Resistance. Many European bankers and public officials never believed it right that transactions which might be perfectly legal under their own domestic law, and which in no obvious way involve any US entity, should be blocked by whim of the American government. Re l’affaire BNP, American Banker noted:

French government officials have repeatedly mentioned that BNP’s alleged actions don’t violate European law, even though it’s irrelevant to the debate at hand. The Justice Department doesn’t care if BNP’s actions violate European law; by operating in the U.S. (through Bank of the West and First Hawaiian Bank), BNP has agreed to follow U.S. law. And U.S. officials view sanctions violations seriously. (The violations do not have to occur in the U.S. for American authorities to act.)

More recently, Europeans have chafed as the US government has chipped away at Swiss banks’ vaunted secrecy and the prerogatives of other European tax havens, while allowing places like Delaware and Nevada to pick up the business that American authorities are dismantling overseas.

Nevertheless, thus far, the Europeans have played along, and the West’s dominance of global finance has meant that the US effectively controls conduits which are the lifeblood of non-Western powers like Russia and China as well. Russia, itself bitterly subject to American sanctions, hopes to escape the noose by deploying a blockchain-based parallel infrastructure for international transactions. Whether such an enterprise will prove laughable and quixotic, or whether it might pierce meaningful holes in the US-dominated conventional system, depends a great deal on how policymakers, bankers, and entrepreneurs around the world react to it.

Prior to, well, yesterday, the US could claim a moral high ground. Its extraterritorial financial control might be objectionable, yes, but absent some coordinating mechanism like that, there would always be a competitive race among politicians and bankers to allow themselves to be persuaded that Mexican drug lords are just legitimate businessmen from a hardscrabble country and why should the Iranians be prevented from getting nukes when the world winks at the Israelis? The US may not be the ideal global financial policeman, but like every other kind of global policeman that it is, it may be better than no policeman at all.

However, now, specifically with respect to its enforcement of financial sanctions on an apparently compliant Iran, it is the United States that seems, even among its Western partners, to be the rogue state in need of policing. However begrudging European acquiescence to extraterritorial US sanctions may have been two days ago, it is more begrudging today.

More than that, the remaining counterparties of the Iran nuclear deal — China, France, Russia, the UK, and the EU — all want the deal to continue. They will be at pains to persuade Iran that it continues to enjoy significant sanctions relief relative to what it would face if it abandoned the deal. Which puts those countries between a rock and the hard-place of extraterritorial enforcement by the US of reimposed prohibitions. At a policy level, the remaining signatories now have an active interest in enabling, even encouraging, evasion of US financial controls, an interest that is morally and politically defensible. All of a sudden La Resistance among sullen French bankers isn’t just about the juicy fees foregone, but a heroic struggle to #resist Donald Trump, to prevent the renuclearization of Iran. And policymakers might agree.

That might mean taking some of the pressure off of European and vacation isle tax havens, reversing the recent, American-enforced trend towards transparency. It might mean partnering with China and Russia to participate in the parallel, alternative financial arrangements that those countries seek to develop. It plainly puts at risk the hard won, absolutely extraordinary, hegemony that American regulators have over global finance.

All of this might seem contrary to American interests. But then on questions of financial transparency and control, not all Americans actually have the same interests. And for those among the US #resistance who see Vladimir Putin beneath every strand of orange hair, what Donald Trump has just done makes the possibility of a new Russian SWIFT considerably less laughable.

This entry was posted on Wednesday, May 9th, 2018 at 1:01 pm PDT.
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