Four of the globe’s largest financial institutions agreed to pay billions of dollars and plead guilty to criminal charges of manipulating the value of the world’s currencies through collusion in one of the world’s largest, yet least regulated, sectors: the foreign currency exchange market.
What happened: On Wednesday, Citigroup, JPMorgan, Chase, Barclays and Royal Bank of Scotland pleaded guilty to manipulating the price of US dollars and euros exchanged in the foreign currency exchange spot market.
A fifth bank, UBS AG, plead guilty to changing the London Interbank Offered Rate and other benchmark interest rates, paying a penalty of $203 million for breaching a December 2012 non-prosecution agreement.
What did they do: Between December 2007 and January 2013, euro-dollar traders at Citi, JPM, Barclays and RBS, which referred to themselves as “The Cartel,” used an exclusive electronic chat room and codes to change benchmark exchange rates to their benefit, coordinating trades by agreeing to or withholding bids at the two times during the data trading data is collected.
“By agreeing not to buy or sell at certain times, the traders protected each other’s trading positions by withholding supply of or demand for currency and suppressing competition in the FX market,” according to the Justice Department announcement.
What evidence: Some of the quotes from the docs, include statements of blatant collusion. “If you ain’t cheating, you aint trying,” one Barclays trader wrote in one of the secret chat rooms. They also tried to give customers the worst possible trading rates, as high as possible without making them suspicious or hurting future business.
Market volume: Foreign exchange revenue totaled $11.6 billion at 10 of the world’s largest banks in 2014, according to Coalition, an analytics firm, cited by the New York Times in a story Wednesday. That revenue has plummeted nearly every year since 2008, when it reached an estimated $21.7 billion.
Key takeaways: With the push for plea agreements, rather than the oft-used deferred-prosecution and non-prosecution agreement, the message from federal investigators and regulators is clear: banks that fail to properly oversee customers, insiders and transactions potentially indicative of criminal activity will face more punitive measures and penalties.
The case also represents a novel use of anti-trust laws, typically reserved for products and business practices and not financial services. In addition, the case shows a greater willingness for the US government to require major US banks to plead guilty in a financial crime case. It has reportedly been decades since a head, or major unit, of a US bank plead guilty to a criminal act.
It was in 2013 that the tax evasion case against one of Switzerland’s oldest banks, Wegelin & Co., made shockwaves as the US government required the institution to plead guilty to conspiring with US taxpayers to hide $1.2 billion in secret accounts and pay $74 million. That was the first ever guilty plea by a foreign bank to tax charges.
Agencies involved: As part of the plea, the Federal Reserve stated it was imposing penalties on the banks of more than $1.8 billion, including $205 million against Bank of America. Barclays also had to pay $1.3 billion in settlements with New York State Department of Financial Services (DFS), the Commodity Futures Trading Commission (CFTC) and the United Kingdom’s Financial Conduct Authority (FCA).
In total, combined with previously announcements settlements with regulatory agencies in the United States and abroad, including the Office of the Comptroller of the Currency (OCC) and the Swiss Financial Market Supervisory Authority (FINMA), today’s resolutions bring the total fines and penalties paid by these five banks for their conduct in the FX spot market to nearly $9 billion, according to the Justice Department.