Banks’ Cycle of Misbehavior
By Peter J. Henning
November 3, 2014 1:13 pm
The latest round of global banks’ taking reserves for investigations into manipulation of foreign exchange rates calls to mind Ronald Reagan’s famous retort in a debate: “There you go again.”
It seems to be a never-ending refrain: Misconduct by traders and bankers is uncovered, multiple regulators mount investigations, and then millions, or even billions, of dollars in penalties are paid, all to little apparent effect.
It seems to be a never-ending refrain: Misconduct by traders and bankers is uncovered, multiple regulators mount investigations, and then millions, or even billions, of dollars in penalties are paid, all to little apparent effect.
The problem is that the misconduct never seems to abate, shifting instead from one unit to another inside companies whose thousands of employees are under relentless pressure to produce profits. So the intended message from all the expected big settlements seems to go largely unheeded.
Citigroup, Royal Bank of Scotland, and Barclays all announced new reserves last week totaling more than $2 billion to deal with investigations into foreign exchange rate manipulation, while HSBC added $378 million on Monday. The cases involve collusion in the $5.3 trillion daily foreign exchange market to affect rates. These come on top of announcements from Deutsche Bank and JPMorgan Chase that they had each added about $1 billion to their reserves for the expected cost of settlements.
We have seen settlements with prosecutors and regulators for this kind of misconduct before, no doubt reached in the hope that the penalties would deter future violations. In late 2012, a UBS subsidiary pleaded guilty to manipulating the London Interbank Offered Rate, or Libor, while the parent company reached a nonprosecution agreement with the Justice Department that required it to pay over $1.5 billion. A few months earlier, Barclays entered into a deferred prosecution agreement with federal prosecutors for its Libor manipulation that resulted in over $450 million in penalties.
But as The New York Times reported last week, federal prosecutors are threatening to reopen cases involving other violations that could subject banks to even higher penalties and broader compliance efforts. The Justice Department has extended agreements with UBS and Barclays for manipulating Libor that would have expired this year because of evidence the banks also manipulated foreign currencies.
When banks settle a case, a typical provision in the agreement allows the Justice Department to reinstate charges if there is any future violation of the law. Most important, admissions by the bank as part of the settlement can be used against it as evidence later, essentially stripping the bank of any possible defenses if the case were to proceed further. There is little chance, then, that a bank could fight the charges, so it would have to agree to a new settlement with more onerous terms and a new penalty.
But simply extracting more money out of the banks does not seem to have had much of an effect on their operations, apart from increased spending on compliance. The past year has seen record-breaking settlements with Bank of America and BNP Paribas for violations related to mortgage-backed securities and the economic sanctions laws, but whether those penalties have any real effect on how other banks operate is certainly an open question.
No doubt the Justice Department is frustrated by repeated instances of corporate misconduct, with banks like JPMorgan, Barclays and UBS subject to multiple settlement agreements for violations. But prosecutors appear to have few tools available to coerce banks to change corporate cultures that put profits ahead of compliance with the law — at least short of putting one out of business.
BNP Paribas had to plead guilty to a criminal charge of conspiring to violate the economic sanctions law, a rarity in resolving a case with a bank. Even then, the Justice Department worked to limit the fallout from the conviction with other regulators before announcing the case. That way, the bank’s global operations were not hamstrung by the loss of operating licenses or exclusion from important lines of business that might be expected after a guilty plea.
The government is not required to minimize the collateral consequences of a conviction, and individuals are usually required to fend for themselves if they are convicted of a crime. But the foreign exchange inquiry involves a number of leading global banks, each with thousands of employees worldwide. So there is no realistic possibility that federal prosecutors will seek a conviction that may threaten the continued existence of one of the banks.
Regulators could also try to obtain greater compliance by bringing more prosecutions of individuals for their role in the violations. But it is unlikely that any senior executives will be caught up in a manipulation case because they are far removed from the trading that affected foreign exchange rates.
So anyone charged with a violation will be much further down the corporate ladder.
Moreover, there may be obstacles to pursuing cases against individuals who worked outside the United States, which may limit how much of an effect prosecutions can have on the cycle of misbehavior at foreign banks.
Charges were filed in 2012 in Federal District Court in Manhattan against two former UBS traders, Tom Hayes and Roger Darin, for their role in manipulating Libor. In early October, Mr. Darin, a Swiss citizen who worked in offices in Singapore, Tokyo and Zurich, asked the court to dismiss the case because he does not have any connection to the United States. A brief filed with the court asserts that “if the government’s sweeping theory is accepted, then federal law could be used to prosecute any foreign national, acting outside the United States, who has affected any piece of financial information that can be accessed through the Internet.”
Federal prosecutors have been successful in recent years in pursuing cases against foreign executives for antitrust violations when their products are sold in the United States, with some receiving prison terms. Libor is not a product, however, but only a benchmark used in setting interest rates. Similarly, foreign exchange rates were established by a “fix” based on prices for currency trades over a 60-second period each day.
Although manipulation of the exchange rates certainly affects transactions in the United States, it is not clear whether someone with no direct contact with a customer in this country comes within the jurisdiction of American courts. If Mr. Darin succeeds in his argument that he falls outside the grasp of the Justice Department, that may seriously crimp efforts to pursue cases involving individuals at foreign banks with no ties to this country.
The government has imposed billions of dollars in fines over the past few years for corporate violations, part of an effort to show that no company is “too big to jail.” The greater hurdle is whether global banks will ever go far enough to truly reform their cultures and make compliance with the law something more than an easily ignored motto. And it is one that prosecutors and regulators may not have the tools to overcome.
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