It’s an amazingly powerful weapon that only the US government can wield—kicking anyone it doesn’t like out of the world’s US-dollar-based financial system.
It’s a weapon foreign banks fear. A sound institution can be rendered insolvent at the flip of a switch that the US government controls. It would be akin to an economic kiss of death. When applied to entire countries—such as the case with Iran—it’s like a nuclear attack on the country’s financial system.
That is because, thanks to the petrodollar regime, the US dollar is still the world’s reserve currency, and that indirectly gives the US a chokehold on international trade.
For example, if a company in Italy wants to buy products made in India, the Indian seller probably will want to be paid in US dollars. So the company in Italy first needs to purchase those dollars on the foreign exchange market. But it can’t do so without involving a bank that is permitted to operate in the US. And no such bank will cooperate if it finds that the Italian company is on any of Washington’s bad-boy lists.
The US dollar may be just a facilitator for an international transaction unrelated to any product or service tied to the US, but it’s a facilitator most buyers and sellers in world markets want to use. Thus Uncle Sam’s ability to say “no dollars for you” gives it tremendous leverage to pressure other countries.
The BRICS countries have been trying to move toward a more multipolar international financial system, but it’s an arduous process. Any weakening of the US government’s ability to use the dollar as a stick to compel compliance is likely years away.
When the time comes, no country will care about losing access to the US financial system any more than it would worry today about being shut out of the peso-based Mexican financial system. But for a while yet, losing Uncle Sam’s blessing still can be an economic kiss of death, as the recent experience of Banca Privada d’Andorra shows.
Andorra, a Peculiar Country Without a Central Bank
The Principality of Andorra is a tiny jurisdiction sandwiched between Spain and France in the eastern Pyrenees mountains. It hasn’t joined the EU and thus is not burdened by every edict passed down in Brussels. However, as a matter of practice, the euro is in general use. Interestingly, the country does not have a central bank.
Andorra is a renowned offshore banking jurisdiction. Banking is the country’s second-biggest source of income, after tourism. Its five banks had made names for themselves by being particularly well capitalized, welcoming to nonresidents (even Americans), and willing to work with offshore companies and international trusts.
One Andorran bank that had been recommended prominently by others (but not by International Man) is Banca Privada d’Andorra (BPA).
Recently BPA received the financial kiss of death from FinCEN, the US Treasury Department’s financial crimes bureau. FinCEN accused BPA of laundering money for individuals in Russia, China, and Venezuela—interestingly, all geopolitical rivals of the US.
Never mind that unlike murder, robbery and rape, money laundering is a victimless, make-believe crime invented by US politicians.
But let’s set that argument aside and assume that money laundering is indeed a real crime. While FinCEN seems to enjoy pointing the money-laundering finger here and there, it never mentions that New York and London are among of the busiest money laundering centers in the world, which underscores the political, not criminal, nature of their accusations.
And that’s all it takes, a mere accusation from FinCEN to shatter the reputation of a foreign bank and the confidence of its depositors.
The foreign bank has little recourse. There is no adjudication to determine whether the accusation has any merit nor is there any opportunity for the bank to make a defense to stop the damage to its reputation.
And not even the most solvent foreign banks—such as BPA—are immune.
Shortly after FinCEN made its accusation public, BPA’s global correspondent accounts—which allow it to conduct international transactions—were closed. No other bank wants to risk Washington’s ire by doing business with a blacklisted institution. BPA was effectively banned from the international financial system.
This predictably led to an evaporation of confidence by BPA’s depositors. To prevent a run on the bank, the Andorran government took BPA under its administration and imposed a €2,500 per week withdrawal limit on depositors.
However, it’s not just BPA that is feeling the results of Washington’s displeasure. FinCEN’s accusation against BPA is sending a shockwave that is shaking Andorra to its core.
The ordeal has led S&P to downgrade Andorra’s credit rating, noting that “The risk profile of Andorra’s financial sector, which is large relative to the size of the domestic economy, has increased beyond our expectations.”
For comparison, BPA’s assets amount to €3 billion, and the Andorran government’s annual budget is only €400 million. There is no way the government could bail out BPA even if it wanted to.
The last time there was a banking crisis in a European country with an oversized financial sector, many depositors were blindsided with a bail-in and lost most, or in some cases, all of their money over €100,000.
While the damage to BPA’s customers appears to be contained for the moment, it remains to be seen whether Andorra turns into the next Cyprus.
BPA is hardly the only example of a US government attack on a foreign bank. In a similar fashion in 2013, the US effectively shut down Bank Wegelin, Switzerland’s oldest bank, which, like BPA, operated without branches in the US.
To appreciate the brazen overreach that has become routine for FinCEN, it helps to examine matters from an alternative perspective.
Imagine that China was the world’s dominant financial power instead of the US and it had the power to enforce its will and trample over the sovereignty of other countries. Imagine bureaucrats in Beijing having the power to effectively shut down any bank in the world. Imagine those same bureaucrats accusing BNY Mellon (Bank of New York is the oldest bank in the US) of breaking some Chinese financial law and cutting it off from the international financial system, causing a crisis of confidence and effectively shuttering it.
In a world of fiat currencies and fractional reserve banking, that is a power—a financial weapon—that the steward of the international financial system wields.
Currently, that steward is the US. It remains to be seen whether or not the BRICS will learn to be just as overbearing once their parallel international financial system is up and running.
In any case, the new system will give the world an alternative, and that will be a good thing.
But regardless of what the international financial system is going to look like, you should take action now to protect yourself from getting caught in the crossfire when financial weapons are going off.
One way to make sure your savings don’t go poof the next time some bureaucrat at FinCEN decides a bank did something that they didn’t like is to put the money into hard assets in safe jurisdictions. Physical gold and silver stored offshore and foreign real estate fit the bill.