Investigating and prosecuting Libor culprits

Global Fraud Focus: Examining cross-border issues

The global financial crisis revealed bad policies, practices and pitfalls along with outright criminality in global banks. Far-reaching internal and external investigations are finding culprits who unlawfully manipulated the London Interbank Offering Rate (Libor) — one of the cornerstones of market balance.

We discussed the Libor scandal in an earlier Global Fraud Focus column. (See Bankers without ethics, Fraud Magazine May/June 2013) Since then, both the U.K. Serious Fraud Office (SFO) and the U.K. Financial Conduct Authority (FCA) have been very busy.

An SFO release reported a senior banker (whose identity is protected by a court order) from a leading British bank pleaded guilty at Southwark Crown Court on Oct. 3, 2014, to conspiracy to defraud in connection with manipulating the Libor. This is the first criminal conviction resulting from SFO investigations into Libor manipulation.

"Whoever this banker is, his or her bosses who created the culture that allowed this to happen must be held to account," said Labour MP John Mann, who sits on the Treasury select committee, according to the March 4, article Bank of England embroiled in money-market fraud probe, by Caroline Binham, in the Financial Times.

In the article, Chris Leslie, shadow (opposition) Treasury minister, said, "This is not down to a single rogue individual. This is just the beginning of a long process of weeding out a crooked culture in banks which has deep roots." The SFO charged 11 others who await trial.

U.K. Treasury Department spokesman said that those found guilty of playing a part in the scandal should feel the "full force of the law," according to the Oct. 7 and 8, 2014, article in the Daily Mail, "Banker admits rate rigging — but you can't know where he works," by James Salmon and Vanessa Allen for The Daily Mail and Martin Robinson for Mailonline.

Seven banks and brokerage firms have settled allegations of interest-rate rigging in the U.K. and the U.S., according to The Mail article, including: Barclays, fined £290 million in June 2012; Royal Bank of Scotland, £390 million; and Lloyds, £148 million.

Champagne decisions

The Financial Times article reports that damning emails showed how traders bragged about moving Libor interest rates up and down to fix their bets on the stock market and promised each other kickbacks and Champagne. It's staggering to consider how bottles of Champagne could affect global finances.

We previously explained in the May/June 2013 Global Fraud Focus column the importance of the Libor rate — the rate at which banks will lend money to each other —and how it affects the economy. Bankers agreed among themselves to present figures that would rig that rate.

Interestingly, the anonymous convicted banker pleaded guilty to a charge of conspiracy to defraud. Conspiracy is an inchoate offense involving an agreement between two or more people to do an unlawful act or a lawful act by unlawful means. The prosecution must provide clear evidence of that agreement that would then be provided to the defendant in the disclosure process. If this evidence weren't compelling then a guilty plea would have been, in my view, highly unlikely. Therefore "conspiracy" connotes collusion of at least one additional offender and possibly more.

These types of investigations are expensive. Proving an agreement took place means a lot more than just showing traders knew each other and regularly exchanged emails, texts and telephone calls. Investigators must collect hundreds of thousands of gigabytes of email and text-message evidence from banks and meticulously examine them.

The SFO realizes the importance of these investigations and has applied for an additional £26.5 million from the U.K. government to deal with these and other blockbuster corruption cases. This is more than 75 percent of its annual budget of £35.2 million. (See Serious Fraud Office seeks 75% extra funding, by Caroline Binham, Financial Times, Oct. 23, 2014.)

Gargantuan fraud examinations

Fraud examinations often mushroom to unmanageable sizes, and the Libor investigations aren't an exception. For example, one discovery in a banker's emails might lead to the identification of several complicit bankers and traders and then to more.

I've had to limit the parameters of past examinations because: 1) resources were finite 2) they can become unfocused after discovery of so much evidence and 3) they can become almost impossible to prosecute because of their size and complexity.

As the SFO has found, we need to compartmentalize fraud examinations by setting clear achievable prosecution charges, identifying the key core offenders and keeping the case as simple as possible. If a jury can't understand how the fraud went down, or if the defense muddies the waters by questioning your complicated explanations, then convictions are unlikely.

Bank of England's first criminal investigation

The Bank of England's internal enquiries into its role involving the manipulation of the £3.5 trillion-a-day foreign exchange markets revealed 50 cases of potential market abuse, reports Angela Monaghan in her March 3 article in The Guardian. The bank has referred 42 of these cases to the U.K. Financial Conduct Authority, according to the article.

In March 2014, the Bank of England opened a formal investigation into whether its officials knew of or facilitated the possible manipulation of liquidity auctions designed to inject cash into credit markets to alleviate the financial crisis. (For more information on how these liquidity auctions operate, see the March 5 BBC article, Bank of England liquidity auctions probed by fraud office.)

The Financial Times reported in November of 2014 that the enquiry came six weeks after six banks, including two with headquarters in the U.K., paid a total of $4.3 billion to U.S., U.K. and Swiss regulators to settle allegations they attempted to rig the market. (See Bank of England to probe whether staff helped rig money auctions, by Caroline Binham and Patrick Jenkins, The Financial Times, Nov. 21, 2014.) The Bank of England has passed the investigation's results to the SFO.

"Following the confirmation by the Serious Fraud Office (SFO) that it is investigating material referred to it by the Bank of England, the Bank can now confirm that it commissioned Lord Grabiner QC to conduct an independent inquiry into liquidity auctions during the financial crisis in 2007 and 2008," the Bank of England reported in a March 4, 2015, release. (Grabiner is a senior British advocate who led the separate forex inquiry.)

"Following the conclusion of that initial inquiry, the BoE referred the matter to the SFO on 20 November 2014. Given the SFO investigation is ongoing, it is not appropriate for the Bank to provide any additional comment on the matter at this time," according to the bank's release.

This is the first time in its history the bank of England, founded in 1694, has been under criminal investigation.

It's clear the Bank of England has been robust in identifying and reporting any irregularities. In February 2015, Minouche Shafik, a deputy governor of the bank, said reforms would put staff in a better position to confront errant financial firms and rogue traders breaching market rules, according to The Guardian in Bank of England to boost watchdog role after failing to spot forex rigging, Feb. 26, by Phillip Inman.

Inman reported that Lord Gabiner QC told the treasury committee, in relation to the foreign exchange manipulation, that "one of the curiosities of this marketplace is that it was not regulated. … My own view is that you can't leave a market of this size in an unregulated form. You really do need to have a careful look at it, but you must not undermine the valuable marketplace you have created because if you make it too expensive or too complicated it'll end up in Frankfurt or New York or somewhere else and then UK Plc loses out".

The FCA also has been busy. Last year it fined companies a total of £1,471,431,800, some of which were related to Libor-related activity. The FCA will wait until any SFO investigation is complete, but it might impose fines on banks if it finds they haven't acted criminally but have breached regulations. (See the FCA site.)

On Feb. 24 of this year the FCA fined Aviva Investors Global Services Limited £17,607,000 for failing to control its affairs responsibly and managing conflicts of interest fairly. Aviva availed itself of a 30 percent discount by agreeing to settle with the FCA by quickly reporting the breaches and freely cooperating. Aviva also promptly and comprehensively compensated funds and committed significant resources to remediate weaknesses in its systems and controls. The FCA also said it hadn't previously disciplined Aviva.

Tone at the top for bank C-suites

The global financial crisis beget many problems and frauds, including the Libor scandals in the U.K. and other countries. Law enforcement and regulatory authorities have been resolute in bringing wrongdoers to justice. We can only again exhort C-suites in banks (and all organizations) around the world to embrace Tone at the Top principles. (See the ACFE's PDF, Tone at the top: How management can prevent fraud in the workplace.)

Tim Harvey, CFE, JP, is director of the ACFE's UK Operations and a member of Transparency International and the British Society of Criminology.

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