Five Banks Plead Guilty to Criminal Charges, Will Pay 5 Billion in Fines

Authorities announced today that five of the world’s largest banks have agreed to pay about $5.6 billion and plead guilty to multiple crimes related to manipulating foreign currencies and interest rates.

The charges are shocking.

From The New York Times:

The Justice Department forced four of the banks — Citigroup, JPMorgan Chase, Barclays and the Royal Bank of Scotland — to plead guilty to antitrust violations in the foreign exchange market as part of a scheme that padded the banks’ profits and enriched the traders who carried out the plot. The traders were supposed to be competitors, but much like companies that rigged the price of vitamins and automotive parts, they colluded to manipulate the largest and yet least regulated market in the financial world, where some $5 trillion changes hands every day, prosecutors said.

The Department of Justice, the Federal Reserve, and other U.S. and European authorities and regulators said corporate units of those banks acknowledged their traders rigged foreign exchange prices of U.S. dollars and euros for several years starting in December 2007.

U.S. Attorney General Loretta Lynch called the scheme a “brazen display of collusion.” She said investigators found that traders in the nearly unregulated foreign-exchange market, the world’s largest trading forum, colluded in you-scratch-my-back-and-I’ll-scratch-yours forms of plotting, reports USA Today:

“Starting as early as Dec 2007, currency traders at several multinational banks formed a group dubbed ‘The Cartel,’ ” Lynch said. “It is perhaps fitting that those traders chose that name, as it aptly describes the brazenly illegal behavior they were engaging in on a near-daily basis.”

Federal prosecutors said Euro-U.S dollar traders at Citicorp, JPMorgan, Barclays and RBS — self-described members of the cartel — used an exclusive electronic chat room and coded language to manipulate benchmark exchange rates of the two currencies in ways that benefited their own trading positions.

“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,” the Department of Justice said.

One chat room exchange showed that a Barclays foreign exchange trader appeared to be desperate to join The Cartel and reap the benefit of its trading advantages in 2011.

After extensive discussion of whether or not this trader “would add value” to the group, the group’s trading members invited him to join for a “1 month trial,” but warned: “mess this up and sleep with one eye open at night.”

Transcripts of other exchanges cited a Barclays employee who said “if you aint cheating, you aint trying,” as well as a Barclays foreign-exchange trader who reportedly said, “[Y]es, the less competition the better.”

A fifth bank, UBS AG, will plead guilty to manipulating Libor and other benchmark interest rates. UBS acknowledged involvement in the rate-rigging, but received conditional immunity from criminal prosecution because it was the first to report foreign-exchange misconduct to DOJ investigators. It will also pay a $203 million criminal penalty for breaching a 2012 non-prosecution agreement with the Justice Department over Libor.

UBS also agreed to plead guilty to one count of wire fraud and will accept a three-year term of probation for Libor rate manipulation by its traders. In addition, UBS will pay $342 million to the Federal Reserve and make remedial changes to its foreign-exchange business practices.

Lynch said of the guilty pleas:

“Today’s historic resolutions are the latest in our ongoing efforts to investigate and prosecute financial crimes, and they serve as a stark reminder that this Department of Justice intends to vigorously prosecute all those who tilt the economic system in their favor; who subvert our marketplaces; and who enrich themselves at the expense of American consumers.”

But will the criminal charges and hefty fines bring about change?

Not likely:

Although they could be technically barred by American regulators from managing mutual funds or corporate pension plans or perform certain other securities activities, the banks have obtained waivers from the Securities and Exchange Commission that will allow them to conduct business as usual. In fact, the cases were not announced until after the S.E.C. had time to act.

Banks have already fired dozens of traders and employees who were involved in the scheme.

Jimmy Gurulé, a former assistant attorney general and Treasury official, questioned whether the criminal pleas and massive fines would produce meaningful change in banks’ activities:

“Once again the actual perpetrators and criminal architects of the fraud scheme will avoid criminal liability,” said Gurulé, now a University of Notre Dame law professor. “While the payment of these large fines may help to reduce the federal deficit, such penalties will do little to change the pervasive culture of corruption that currently exists in the banking sector. Real change will only occur when corrupt bank officials are indicted, convicted and sent to prison for their crimes.”

Of course, no one is going to prison, and some of the banks have already said they don’t expect the fines to impact operations much.

Just a nice little slap on the wrist, and the fraud business will continue as usual.

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