By Karen Freifeld and Aruna Viswanatha
(Reuters) - Only days before U.S. authorities reached a landmark $8.97 billion settlement with BNP Paribas over the bank’s dealings with countries subject to U.S. sanctions, New York Governor Andrew Cuomo intervened to ensure the state government got a much bigger share of the proceeds, according to three people familiar with the situation.
One of these people said Cuomo called Cyrus Vance, the Manhattan District Attorney, on June 27 to seek a big chunk of the $2.2 billion that was going to be available to Vance to tap for law enforcement projects.
Vance eventually agreed that $1.05 billion of the $2.2 billion would go into the state’s coffers because otherwise the whole deal could be jeopardized, this person said. The settlement was announced on Monday, June 30, after last-minute negotiations over the preceding weekend.
The state’s general fund was already set to receive $2.24 billion from a state regulator’s piece of the settlement, and the eleventh-hour deal pushed the state’s take up to $3.29 billion. That change was contained in a side agreement signed by Vance on June 29, and a lawyer for Cuomo on June 30.
The years-long negotiations with BNP – and the tussle over the proceeds – were complex. The deal required agreement among at least five powerful law-enforcement and regulatory authorities: the U.S. Department of Justice in Washington and its U.S. Attorney’s office in Manhattan, the Federal Reserve, the U.S. Department of the Treasury, the New York State Department of Financial Services (NYSDFS), and the Manhattan District Attorney’s Office.
Officials involved in the talks were told that New York State financial regulator Benjamin Lawsky would not sign off on his portion of the settlement unless a side agreement involving the extra money for the state was reached, according to the three sources. Lawsky is Cuomo's former chief of staff and was nominated to be head of the NYSDFS by Cuomo in 2011.
Lawsky's signature was crucial to the larger agreement because he had the ability to pull BNP's all-important license to operate in New York as the bank was set to plead guilty to criminal charges over the violations in both state and federal court.
Cuomo’s press aides referred questions to NYSDFS spokesman Matt Anderson. In a statement, Anderson said: "Particularly given the size of the settlement in this instance, it is appropriate for the State Budget Division and the Governor’s Office to be involved in the division and use of the funds. However, the overall penalties imposed on the bank were determined solely by regulatory and law enforcement officials."
Joan Vollero, a spokeswoman for Vance, declined to comment.
The state’s general fund is controlled by Cuomo and by state legislators who will decide how to spend the extra money, giving the governor the ability to propose funding for priority projects, cut taxes and close possible gaps in next year’s budget. Cuomo is up for re-election in November.
The outcome may not be bad for New York taxpayers, as it means the money can be spent on a number of different things and not mainly on law enforcement initiatives.
Vance still keeps $449 million to spend on upgrading technology for New York City police, improve safety at housing projects and other law enforcement programs. The city gets $447 million, and another $298 million is allocated to programs to counter drug abuse. The rest of the settlement – $4.5 billion - goes to the federal government.
Amy Spitalnick, spokeswoman for the New York City Mayor's Office of Management and Budget, said it is reviewing the settlement. The Manhattan District Attorney’s office is primarily funded by city taxpayers and Vance is elected by voters in Manhattan.
Some legal sources said that the episode shows how the incentives for regulators and prosecutors in plea or settlement negotiations are getting distorted as the amount of money at stake soars.
Former prosecutor John Moscow, who used to work in the Manhattan District Attorney's office and is now at the law firm Baker & Hostetler, said he wasn't surprised Cuomo would want to find a way to direct more money to the state's general fund. “I understand the governor looking to get as much money as he can for his state,” Moscow said, “but a big foot approach may tend to make cooperation more difficult in the future.”
A spokeswoman for BNP Paribas declined comment. The money has already been paid to U.S. authorities, according to the Department of Justice.
The Manhattan District Attorney's office and the Cuomo administration butted heads two years ago over a similar case against British bank Standard Chartered.
Federal and state prosecutors had been conducting a joint investigation into the bank's dealings with Iran and other countries for more than two years. Lawsky intervened as that probe was nearing its end and publicly threatened to revoke the bank's license to operate in New York.
Standard Chartered settled with Lawsky for $340 million in August 2012, money that he passed onto the state's general fund. Four months later, it agreed to pay the other authorities, including Vance's office, another $327 million.
There is also a track record of nasty fights among New York officials over settlement monies.
Earlier this year, Cuomo tangled with New York Attorney General Eric Schneiderman over the state's $613 million portion of a $13 billion mortgage-related settlement against JPMorgan Chase & Co. Cuomo accused Schneiderman of having too much leeway with the money.
In 2009, then New York City Mayor Michael Bloomberg accused then Manhattan District Attorney Robert Morgenthau of maintaining secret bank accounts amid a fight over whether the city was getting its fair share of big settlements.
Vance had intended to deposit the $2.2 billion his office was set to receive into a federal asset forfeiture fund, according to two sources. The District Attorney's share of some previous settlements was posted in a similar fund.
The fund Vance planned to use this time, controlled by the U.S. Department of Treasury, holds proceeds from asset forfeitures and is available to fund projects by law enforcement agencies around the country. Vance would have access to money deposited into the fund.
It is unclear why Vance favored channeling the BNP money to a federal fund given the restrictions on its use. It also isn't clear how he intended to spend the $2.2 billion.
After the change demanded by Cuomo, the $2.2 billion was instead recorded under a state forfeiture law and New York state was designated a victim of BNP's sanctions violations, allowing the $1.05 billion to be designated as restitution and reparations to the state.
Sending the money to the state as restitution appears to be a bit of a stretch; it’s hard to see how the state was injured by BNP’s conduct to the tune of a billion dollars. The violations involved the processing of bank transfers involving sanctioned countries, mainly Sudan in the case of BNP.
When asked by Reuters about the restitution at an unrelated press conference last week, Vance said BNP had victimized and deceived the state and the banking community through its conduct.
State and federal authorities have in past cases involving sanctions violations shown they have some discretion in how to divide settlement money.
In June 2012, ING Bank NV settled allegations that it violated U.S. sanctions against Cuba, Iran and other countries, agreeing to pay a fine of $619 million. The money was split between the federal government and the Manhattan District Attorney.
Vance then followed an existing revenue sharing agreement between New York City and New York State, and directed roughly half of his office's share into each general fund.
In the much more rancorous negotiations over Standard Chartered, the $340 million for Lawsky's office went to the state's general fund, while Vance sent his $113 million share through a federal assets forfeiture fund.
(Reporting by Karen Freifeld in New York and Aruna Viswanatha in Washington; Editing by Karey Van Hall, Martin Howell)