Last week, a senior banker from a leading British bank pleaded guilty to conspiracy to defraud in connection with LIBOR1 manipulation. This is the first criminal conviction in the UK arising out of the two-year investigation into LIBOR manipulation by the UK’s Serious Fraud Office’s (SFO). The individual awaits sentencing. In the UK, the maximum sentence for conspiracy to defraud is 10 years. The SFO has withheld the individual’s name.
The SFO is currently prosecuting 11 other individuals for LIBOR related criminal offences, including three US-based bankers. Those individuals, all of whom indicated an intention to defend the charges, include a former trader at UBS and Citigroup, three former employees at ICAP Plc, two former brokers at RP Martin Holdings Limited, and six former employees at Barclays Bank Plc (Barclays).
The SFO is conducting these ongoing investigations into LIBOR manipulation in conjunction with UK authorities and overseas counterparts, including US authorities. The DOJ already has charged eight individuals in relation to LIBOR manipulation, including two from the Dutch bank Rabobank who entered guilty pleas and await sentencing. The DOJ and the SFO have charged four of the same individuals. It will be interesting to see how, in practice, those cases will run in parallel.
Regulatory fines levied across the EU and in the US for LIBOR-related misconduct and failings also have been significant, exceeding US$8 billion.
The UK’s market regulator, the Financial Conduct Authority (FCA), sanctioned seven regulated firms (four banks and one broking firm), including Lloyds Banking Group Plc (Lloyds), UBS AG, Royal Bank of Scotland Plc (RBS), Rabobank BA, Barclays, ICAP Europe Limited, and RP Martin (UK) Ltd. The fines imposed by the FCA to date exceed £586 million (US$941 million). In addition, the FCA is preparing to issue civil penalties against FCA-regulated individuals (14 have now received warning notices). Further details can be found in our previous Client Alert
Regulated firms also will have an interest in following FCA actions against individuals closely. Recently, after fining a former Barclays trader for seeking to exploit weaknesses in Barclays’ systems in order to manipulate London Gold Fixing and banning him from the industry, the FCA turned on Barclays itself, fining it £26 million (US$42 million) for related systems and controls failings.
In the US, Lloyds, Barclays, UBS and RBS have each entered into Deferred Prosecution Agreements and received total fines of more than US$2.5 billion. Japanese subsidiaries of UBS and RBS pleaded guilty to manipulation of the Japanese Yen LIBOR. Rabobank paid US$325 million to US authorities in 2013 to resolve LIBOR related accusations against it. Recently, the US Federal Deposit Insurance Corporation sued Deutsche Bank, Rabobank, HSBC, Citigroup and 11 other leading global banks over LIBOR manipulation.
Despite these prosecutions and significant fines levied to date, UK and US authorities have made it clear that criminal and regulatory actions in relation to LIBOR are not complete. Indeed, in January 2014, the SFO sought further “blockbuster” funding from the Treasury of an additional £19 million (US$30.5 million) (more than half the SFO’s total annual budget) to help pay for complex investigations including LIBOR. Recent reports suggest that the SFO is currently preparing to seek yet further funding, potentially exceeding the amount sought in January.
It also is worth noting the legislative response in the EU to the LIBOR scandal. Although in the UK wrongdoing connected with financial benchmarks could be prosecuted under pre-existing criminal statutes, a specific new criminal offence of taking misleading actions in connection with relevant financial benchmarks (at this stage, LIBOR) was introduced and came into effect in April 2013. A new EU Market Abuse Regulation also will create new civil and criminal offences of benchmark manipulation to complement national regimes.
The global investigations have now spread to other benchmarks (including the European benchmark equivalent – EURIBOR) as well as to the foreign exchange market (FOREX). In July 2014, the SFO announced a criminal investigation into FOREX manipulation. The FCA (again a step ahead) is reportedly already in talks with six major banks (RBS, HSBC, JP Morgan, Barclays, Citi and UBS) in relation to its own currency rigging investigation. Commentators are predicting hefty FCA fines, exceeding those imposed in relation to LIBOR, in the region of £1.8 billion (US$2.89 billion). The UK is already consulting on extending the financial benchmark criminal offence to seven other major benchmarks, and is consulting on a new criminal offence of manipulation of FOREX, expected to be introduced by the end of the year.
It seems regulated firms and individuals therefore should be looking to batten down the hatches in preparation for a further downpour of global prosecutions and fines. Those that have not already been hit by the storm should be taking a close look at internal culture and compliance as well as systems and controls.