From the NYTimes, © NYTimes 2014

Investment Banking | Legal/Regulatory

A Grieving Father Pulls a Thread That Unravels BNP’s Illegal Deals

By JESSICA SILVER-GREENBERG and BEN PROTESS

June 30, 2014

A bus bombing two decades ago — and a New Jersey father’s quest for justice — inadvertently set off a chain of events that led American prosecutors to accuse some of the world’s biggest banks of transferring money for nations like Iran.

On Monday, that crackdown culminated with the guilty plea of BNP Paribas, which admitted to doing billions of dollars in deals with Iran and other countries blacklisted by the United States and agreed to pay a record $8.9 billion penalty to state and federal authorities.

The trail that ultimately led to BNP began in 2006, when the Manhattan district attorney’s office came upon a lawsuit filed by the father, who blamed Iran for financing the Gaza bus bombing that killed his 20-year-old daughter. Buried in the court filings, prosecutors found a stunning accusation: a charity that owned a gleaming office tower on Fifth Avenue was actually a “front” for the Iranian government, a claim that the prosecutors later verified.

The prosecutors soon discovered that Credit Suisse and Lloyds, two of the world’s most prestigious banks, had acted as Iran’s portal to the United States financial system. To disguise the illicit transactions — the United States is closed for business to Iran — Credit Suisse and Lloyds stripped out the Iranian clients’ names from wire transfers to the Fifth Avenue charity and affiliated entities. The findings led the Manhattan prosecutors and the Justice Department in Washington to announce criminal cases against both banks.

As those cases were coming to light in 2009, a whistle-blower stepped forward to point the finger at BNP, France’s biggest bank. That tip has now materialized in a landmark criminal settlement, with BNP pleading guilty to criminal charges, capping a sweeping investigation into the bank’s ties to Sudan and Iran.

The twists and turns leading to the BNP case — a series of whistle-blower tips and fortuitous discoveries recounted in interviews with current and former prosecutors — open a window into the interconnected yet shadowy world of global finance. At its center is New York City, the heart of American capitalism where banks process billions of dollars in payments on behalf of international clients.

It is a cautionary tale of how European banks, spotting a lucrative business opportunity that American rivals shunned, opened their doors to countries under sanctions and ultimately exposed their reputations to the stain of criminal cases. The interviews with prosecutors, some who spoke freely and others anonymously, also tell a story of how a local prosecutor’s office in New York, perhaps better known for crackdowns on drugs and organized crime, landed in the middle of an international investigation into terrorist bombings and foreign banks.

“We’re often asked why a local prosecutor is getting involved in a case of global financial crime, and my answer is how could we not,” Cyrus R. Vance Jr., the Manhattan district attorney, said in an interview. “We’re situated in the finance capital of the world. We just had to know where to look to connect the dots.”

The district attorney’s role in the case, which began under Mr. Vance’s predecessor, Robert M. Morgenthau, was not always clear. Adam Kaufmann, a prosecutor who helped lead the investigations, once traveled to Washington to meet with officials from the Treasury Department’s Office of Foreign Assets Control, the primary enforcer of American sanctions against Iran. The Treasury Department, he recalled, was baffled as to why a Manhattan prosecutor was investigating the case at all.

The investigation, Mr. Kaufmann explained, began in earnest back in January 2006. At the time, in a cramped office cubicle in lower Manhattan, a 32-year-old analyst for the Manhattan district attorney’s office pored over the New Jersey father’s lawsuit against Iran. The father, Stephen Flatow of West Orange, N.J., accused Iran of funding the terrorist group responsible for the suicide bombing in Gaza that killed his daughter, Alisa, in 1995.

A federal judge awarded Mr. Flatow, a lawyer at a title company, $250 million in damages. Iran never paid. And so Mr. Flatow sought to collect from the Alavi Foundation, the charity that he claimed was a front for the Iranian government.

The analyst at the district attorney’s office, Eitan Arusy, took a keen interest in the father’s accusations. Before joining the office, he was an Israeli soldier who happened to have responded to the scene of that very same bus bombing.

And the Alavi Foundation, it turned out, was in the heart of the district attorney’s jurisdiction. It held an ownership stake in a Fifth Avenue skyscraper just steps from Rockefeller Center and the Museum of Modern Art. The 36-story tower, formerly known as the Piaget Building, was built in the late 1970s by a non-profit tied to the Shah of Iran.

One day in 2006, Laura Billings, a prosecutor in the district attorney’s office who helped lead the Alavi Foundation investigation, visited the tower to see for herself whether anything suspicious was unfolding inside. But the building, which has housed the offices of Ivan F. Boesky, the famed Wall Street speculator who was convicted as part of the 1980s insider trading scandal, and is currently home to Godiva, the chocolate maker, was an ordinary office tower.

The prosecutors reached a breakthrough, however, during a visit to a Persian rug shop owner who had ties to Iran. Gathered around a table, picking at watermelon and pistachios, the shop owner and prosecutors discussed politics and family. At the end of the conversation came a revelation: the Alavi Foundation, the shop owner declared, was completely under the control of Iran.

Another confidential informant provided additional clues, specifically that the Alavi Foundation had received millions of dollars from Bank Melli, an Iranian state-owned bank. Get the payment records, the informant explained, and prosecutors would find the trail to Iran.

But when the prosecutors and the F.B.I. pulled the charity’s bank records, Bank Melli was nowhere to be found. Credit Suisse and Lloyds were there instead.

The evidence against the Alavi Foundation was extensive, former prosecutors say, but pointed to a federal case rather than a local one. The district attorney’s office ceded its Alavi investigation to the United States attorney’s office in Manhattan. Under United States attorney Preet Bharara, federal prosecutors filed a civil complaint accusing the Alavi Foundation of “providing numerous services to the Iranian government.” That action led to Mr. Bharara announcing a settlement agreement that forced the Alavi Foundation to forfeit its holdings in the office tower. When the government sells the building, the proceeds will flow to the families and estates of victims of terrorism.

With the Alavi Foundation case off its plate, the district attorney’s office turned its focus to Credit Suisse and Lloyds. The prosecutors offered the banks a choice: turn over records related to Iranian banks or face a criminal case.

The banks chose to cooperate, producing reams of records that laid bare a scheme to disguise how Bank Melli was funneling money into the United States. To avoid detection, the records showed, Credit Suisse and Lloyds falsified money-transfer paperwork, replacing Bank Melli’s name with their own.

“Please do not mention our name to any bank in the USA,” Bank Melli wrote to Lloyds in one of the documents obtained by prosecutors.

Unbeknown to the prosecutors in Manhattan, the Justice Department’s criminal division in Washington had its own investigation into Credit Suisse. The inquiry from the division’s asset forfeiture and money laundering section, now led by Jaikumar Ramaswamy, began with a tip from an I.R.S. agent who had spotted a suspicious transaction.

The parallel investigations merged at a legal conference in 2007, when Mr. Kaufmann from the district attorney’s office lunched with a Justice Department official. Out of the meeting came a plan to pursue not only Credit Suisse and Lloyds, but other foreign banks suspected of flouting United States sanctions. When Mr. Kaufmann left the office in 2013, he handed the cases to his successor, David Szuchman, and a senior prosecutor, Polly Greenberg.

The cases benefited from a trove of internal emails from Credit Suisse that showed how bank executives strategized ways to capture business from Iran once Lloyds left the market. If Credit Suisse did not act fast, the emails warned, it might lose out to other European banks.

In 2009, prosecutors kicked off a string of cases, first taking aim at Lloyds and then Credit Suisse. Barclays settled in 2010, laying the groundwork for ING, Standard Chartered and HSBC to strike their own deals in 2012.

“I felt strongly that banks should not be used as vehicles for transferring illicit funds or contraband on behalf of sanctioned countries,” Mr. Morgenthau, who at 94 is now of counsel to the law firm Wachtell, Lipton, Rosen & Katz said in an interview.

The BNP case announced on Monday traces to these deals. As the deals were being negotiated, a whistle-blower approached a rank-and-file prosecutor at the Manhattan district attorney’s office about BNP’s ties to Iran. BNP was also doing business with Sudan at a time that the nation was operating a genocidal regime. The whistle-blower is not expected to receive any compensation for assisting the case.

The case — a collaboration among the Justice Department in Washington, the United States attorney’s office and the district attorney’s office in Manhattan, as well as the Federal Reserve, Treasury Department and Benjamin M. Lawsky, New York State’s financial regulator — stood apart from the others. The volume of transactions reached tens of billions of dollars. And the $8.9 billion penalty is more than triple the amount that the six other banks collectively paid to resolve sanctions cases.

For Mr. Flatow, who eventually received $25 million, the actions are vindicating.

“The fact that our case laid the groundwork for these actions is really a tribute to Alisa who would be 40 this year,” he said.

Alain Delaqueriere contributed research.