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By Global Public Square staff
We’re sure you heard about the Paris-based bank, BNP Paribas, which fell afoul of Washington's regulators and agreed to plead guilty to a felony and pay a staggering $8.9 billion fine – larger than its annual profits.
So it must have violated a slew of laws, right? Actually, no. It hadn't violated French law, or EU law, or any of its obligations under the WTO or the United Nations. It hadn't even violated a French-American treaty.
What in the world?
BNP Paribas violated a set of unilateral American sanctions, passed by Congress, that were never affirmed or followed by the European Union or France.And neither the buyers nor the sellers in any of the transactions BNP was involved in were Americans.
So what was Washington's hold on BNP? It all centers on the central role that the dollar plays in today's globalized economy. You see, even if two foreign companies want to do a deal, assuming it’s a large transaction, the deal is likely to be denominated in dollars – the currency that everyone has access to, is available in ample supply, is a symbol of stability and, as a result, remains the world's reserve currency.
But here's the catch: If the deal is denominated in dollars, at some point it has to go through an institution with an American banking license, which gives it access to the Federal Reserve System. Without this access, no bank can really function in the global economy today.
Welcome to America's economic nuclear weapon.
In fact, it's even more lethal because, unlike nukes, only America has this weapon. And in some ways this power has grown as economies have become more globalized and trade and capital flow faster around the world.
It’s this weapon that is the real force behind the Iranian sanctions, the reason that Iran simply cannot conduct much international trade anymore. It’s this weapon that lies behind the threats to ramp up sanctions against Russia that, if acted upon, would ensure that Russian banks, companies, and businessmen named would lose access to the dollar window and thus, make all their transactions more difficult and expensive.
Now this might seem a good thing when you consider what BNP has pled guilty to – aiding and abetting the tyrannical, murderous, even genocidal regime in Sudan.And it has brought Iran to the negotiating table. And Russia should worry about the costs of its actions in Ukraine.
But, but, but…The problem is that this is a unilateral American power that is prone to abuse. Right now, in wielding this weapon, a handful of American officials are prosecutors, judges, juries and hangmen. They accuse a company, determine that it’s guilty, threaten to withdraw access to the dollar, and then levy fines.
The Economist says that the legal process used against BNP Paribas – with no agreed upon rules, no checks and balances, no appeals process was – “closer to an extortion racket than justice.”
And in America's usual chaotic and entrepreneurial system, this means that local regulators can pursue their own agendas for self-serving motives. In the BNP case, New York's regulator got a portion of the fine that is four times the size of his agency's annual budget.
The capriciousness with which the U.S. has sometimes used its authority has led to growing resentment across the world, from France to Moscow to Beijing. For now, the dollar reigns supreme. But if these actions proliferate, it will fuel the search for some alternative system that does not place countries at the mercy of any and every American regulator.
This dollar window is somewhat like another favorite American weapon – the killer drone. When used in a carefully controlled set of circumstances, for vital and justifiable reasons, against truly nefarious people it serves a powerful purpose. But if used too often, or loosely, carelessly and arrogantly, it can produce a backlash that undermines the basic objective.
BNP got what it deserved.
But perhaps it's time for the United States to set up a proper system with checks and balances that determines when this exorbitant privilege of having the world's reserve currency can be used as a deadly weapon of economic war.