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.
Senior executives were implicated and explicit emails showed how the bank sought to make LIBOR rates to profit on trades and hide its high borrowing costs.
What is totally incomprehensible is why the management is not facing criminal charges for corporate criminality, with the Barclays CEO Bob Diamond (who was paid £ 250 million over the past five years out of which £28 million was paid last year!) and three of his seniors volunteering to forgo their huge annual bonuses.
The Department of Justice is embroiled with non-prosecution agreements with Barclays but there is a move now to contend that these agreements do not and cannot protect the individuals involved.
The question that remains unanswered is why the Bank in its corporate structure, the executives and directors and employees are not facing criminal charges for various offences which are apparent.
UK authorities have agreed to refer the matter to the Serious Fraud Office which in turn contends that it does not have the resources or funds to undertake such a mammoth investigation and citing legal technicalities.
On the issue of corporate criminal liability, there are two divergent schools of thought. On the one hand scholars opine that a corporate entity such as Barclays Bank cannot face criminal liability unless there exists a specific provision to that effect whereas the other school of thought believes that even a corporate entity can be held criminally liable as any other individual.
Identifying corporate criminal liability becomes that much more difficult when investigators are unable to identify the specific individual’s act which is attributed to the fraud. Knowledgeable investigators of the scam believe that the authors of the emails should be able to prove the intention of the frauds or conspiracies.
Whether the persons in question have the status and authority which in law makes their acts the acts of the company so that the persons are treated as the company itself, in most cases, the directors, is perhaps the hurdle.
The evidence is indicative of big time collusion by many players and the magnitude and the handing over of the fine will open a flood gate of civil cases all over the world.
A few months ago, the Parliamentary select committee on the depreciation of the shilling was convened to look into allegations that five major banks in Kenya had manipulated the foreign exchange trading by borrowing money from the Central Bank and buying up dollars which had the effect of weakening the shilling against major world currencies and in turn the banks made profits.
Would the authorities in Kenya dare to follow the precedent set by U.K regulatory authorities?
Calls for change to and tightening of laws to prosecute errant bankers i will now be taken seriously.
The writer is a lawyer.
bowryp@hotmail.com
