Wed | Jan 16, 2019

No ban for banks guilty of market rigging

Published:Friday | May 22, 2015 | 12:00 AMAP

Four of the world's biggest banks agreed Wednesday to pay more than US$5 billion in penalties and plead guilty to rigging the currency markets, a rare instance in which federal prosecutors have wrung an admission of criminal wrongdoing from a major financial institution.

Traders at JPMorgan Chase, Citigroup's banking unit Citicorp, Barclays and the Royal Bank of Scotland were accused of working together to manipulate rates on the foreign exchange market, where hundreds of billions of dollars and euros change hands back and forth.

The penalties are a victory for the government and reflect a broader effort by the Justice Department, long criticised as reluctant to prosecute big banks, to tackle financial misconduct.

In the past 18 months, prosecutors have brought criminal cases against banks accused of tax evasion and sanctions violations, and have reached multibillion-dollar settlements with several others for their roles in the 2008 financial meltdown.

Still, the punishment announced Wednesday may have limited practical consequences.

The four banks will be able to continue to do business in the currency markets. No executives were charged, though that part of the investigation continues. And the fines, while large, are a fraction of what the institutions have made through currency trading over the past decade.

Prosecutors said traders shared customer orders through chat rooms and used that information to profit at their clients' expenses. The traders called themselves ‘The Cartel’ and in one of those chat rooms, a Barclays employee wrote: "if you aint cheating, you aint trying," investigators said.

The banks will pay a combined US$2.5 billion in criminal penalties for manipulation of currency rates between 2007 and 2013. The Federal Reserve is slapping them with an additional US$1.6 billion in fines. Finally, Britain's Barclays is paying an additional US$1.3 billion to British and U.S. regulators.

A fifth bank, Switzerland's UBS – which was scrutinised years earlier in a similar scheme –  has agreed to plead guilty to manipulating key interest rates and will pay a separate criminal penalty of US$203 million.

"Having to enter into a guilty plea, at the parent level by a major financial institution, is not something that they enter into lightly, nor is it something they enter into with any great joy in their hearts," Attorney General Loretta Lynch said.

All told, including an agreement announced last year, the group of banks will pay nearly US$9 billion in fines for manipulating the US$5.3 trillion currency market.

Still, JPMorgan Chase had US$4.1 billion in revenue from its fixed income and currencies business in the first quarter of this year alone, while Citi had US$3.48 billion.

Unlike stocks and bonds, currencies trade nearly 24 hours a day, seven days a week. The market pauses two times a day, a moment known as "the fix”. Traders in the cartel allegedly shared client orders with rivals ahead of the "fix" and pumped up currency rates to make profits.

Global companies do business in multiple currencies and rely on their banks to give them the closest thing to an official exchange rate each day. The banks are supposed to be looking out for them. Travellers who regularly exchange currencies also need to get a fair price for their euros or dollars.

The number of traders who took part in the currency fixing was small. JPMorgan said it has fired one trader. Citi said it dismissed nine employees. Barclays has fired eight employees tied to ‘The Cartel’, according to New York regulators.

The banks have agreed to help prosecutors investigate individuals who took part in the rigging.