By Pravin Bowry
Last week Barclays Bank Plc (not its subsidiary Barclays Bank Kenya) was ordered to pay the largest ever civil monetary penalty imposed by the UK and US authorities to settle allegations that it manipulated key interest rates over a period of five years from 2005 to 2009.
The total cumulative fine was mind boggling $453 million or the equivalent to Sh38.16 billion under today’s exchange rate!
Incidentally, this fine was after a 30 per cent discount because Barclays cooperated! And the fine reflects around 10 per cent of pre tax profits of Barclays financial year.
The British Financial Services Authority (FSA) and the US Commodity Futures Trading Commission (CFTC) conducted the probe having roped in the FBI and England’s Department of Justice and found Barclays guilty of unbelievable malpractices which are likely to change the pattern of international banking forever.
What in simple banking and legal terms was this fraud all about and what are the ramifications of the fraud coming into public domain?
The scam involves LIBOR, the London Inter- Bank Offered Rate, which is supposed to be an unimpeachable financial yardstick, weighing the costs banks face when they borrow from one another.
Every single day LIBOR sets the prices of loans and derivatives contracts and underpins some $360 billion worth of loans and financial contracts.
The weakness of the system is that banks can set their own LIBOR rates, and Barclays was shown to have influenced the rate at the behest of their clients, mainly 14 big time traders.
The unscrupulous traders with connivance of bank officials were those placing bets on interest rate derivatives. These contracts influenced market worth $559 trillion in 2011 alone.
Barclays also tried to manipulate Euribor, a separately managed series of euro dominated rates. A small price charge of say 0.01 per cent can translate into a profit of millions of dollars at any given rate.
Proving the fraud was not particularly difficult, as it was all captured in graphic email messages since 2005 asking for LIBOR and its Yen and Euro equivalent to be altered.
