On 21 July 2014, the Serious Fraud Office (SFO), which has been collecting information over the past few months, opened a criminal investigation into allegations of fraudulent conduct in the foreign exchange (Forex) market. This investigation will target individuals, who risk imprisonment, and banks who risk fines similar to those imposed following the LIBOR scandal, in relation to which banks and inter-dealer brokers have paid out more than USD 6 billion so far. The SFO has the power to investigate both anti-trust and fraud offences.
Around 15 international agencies are currently investigating claims of collusion and price manipulation in Forex, the abuses allegedly having been coordinated using online chatrooms. The SFO will work together with both the Financial Conduct Authority (FCA) and the US Department of Justice (DoJ), which launched its own criminal investigation in October last year. The DoJ is examining, among other allegations, whether traders from different banks colluded to share information over the spread they were charging large investors, and whether they used knowledge of upcoming client orders to “front run” trades (i.e. to use information about client orders to trade in advance to improve the trader’s own position). At least 15 banks have co-operated with regulators in London, Europe and the US, in addition to conducting their own internal investigations. Deutsche Bank has allegedly fired three Forex traders in New York as a result of the inquiry, and about 20 senior traders across the banking sector have been suspended. An official SFO investigation could protect some traders from any potential extradition to the US if they were charged in parallel proceedings by the DoJ.
The investigations are focussed around the WM/Reuters closing rate, which is calculated by taking the median rate of trades carried out in a 60 second window either side of 4pm daily. The fraudulent techniques varied, but allegedly included practices such as “front-running”, increasing trade activity around the 4pm window in order to influence the rate, and colluding with other banks to enter into false trades which were almost immediately unwound.
Since the WM/Reuters rate is based on actual trades, there will be a record of all trades made. Patterns and trends of banks undertaking increased activity around the 4pm window should therefore, in theory, be relatively easy to demonstrate. A positive finding of fraudulent conduct by the SFO would potentially assist those who suspect that they have suffered loss as a result of Forex manipulation who are considering bringing claims. In the meantime, customers who have engaged in large volumes of Forex transactions on a regular basis at the relevant WM/Reuters rate with any of the banks under investigation should take advice as to possible claims that may be available to them.