EU Fines Financial Institutions Over Fixing Key Benchmarks

7 years, 10 months ago - December 05, 2013
Six financial institutions were fined €1.71 billion ($2.32 billion) by European Union regulators Wednesday for colluding in an attempt to manipulate key benchmark interest rates, the EU's largest-ever penalty in a cartel case.

The settlements involved penalties against some of the world's biggest banks, including Deutsche Bank AG, Société Générale SA, Royal Bank of Scotland Group PLC and J.P. Morgan Chase & Co. The action brings to roughly €6 billion the total penalties levied by regulators against financial institutions in connection with probes into manipulation of the London interbank offered rate, or Libor, and other widely used financial benchmarks.

Further penalties are possible. The EU's competition commissioner, Joaquín Almunia, said Wednesday at a news conference in Brussels that his office is pursuing cartel proceedings against several other large financial institutions, including the U.K.'s HSBC Holdings PLC and ICAP PLC, France's Credit Agricole SA, and the U.S.'s J.P. Morgan, for their alleged roles in colluding to rig one or more benchmark rates.

The EU "is determined to pursue all those who may have been involved in the cartel," Mr. Almunia said. He said that if the institutions are proven guilty, they will eventually receive "adequate sanctions."

"We intend to defend ourselves vigorously," an HSBC spokesman said. J.P. Morgan also said it intends to defend itself. Representatives of ICAP and Crédit Agricole didn't immediately respond to requests for comment.

Wednesday's announcement was the culmination of an EU cartel investigation that started more than two years ago, and echoes the findings of U.S. and British regulators that over the past year have accused five financial institutions of widespread efforts to manipulate Libor and the euro interbank offered rate, or Euribor. The U.S. and British cases—in which the financial institutions all admitted wrongdoing—have focused primarily on fraudulent actions by bands of traders within the same bank, as opposed to collusive efforts between employees of different institutions.

"What is shocking about the Libor and Euribor scandals is not only the manipulation of benchmarks, which is being tackled by financial regulators world-wide, but also the collusion between banks who are supposed to be competing with each other," Mr. Almunia said.

The penalties are significant not only because of their size, but also because they represent the first admissions of wrongdoing by several financial institutions—even if those admissions were modest in scale. J.P. Morgan, for example, said Wednesday that its roughly €80 million settlement regarding manipulation of the Japanese yen version of Libor related to "the conduct of two former traders during a one-month period in early 2007." The New York-based bank is fighting charges that it was part of a separate cartel involving Euribor.

J.P. Morgan and Citigroup Inc.—the latter of which is paying about €70 million to settle the Libor probe—are the first two U.S. banks to be financially penalized for being involved in the manipulation of benchmark rates. Until now, the absence of any U.S. banks from the ranks of punished institutions has been a source of grumbling among senior European finance executives.

The announcement also underscores the widespread nature of the attempted manipulation, involving coordinated campaigns by employees of many of the world's biggest financial institutions to fudge benchmarks that underpin interest rates on everything from mortgages to corporate loans to financial derivatives. Banks took pains Wednesday to emphasize that the actions were confined to small groups of individuals, and didn't involve senior executives. But an EU official involved in the case said that the lack of involvement of senior executives doesn't absolve the banks of responsibility for their employees' behavior.

The fines amount to the commission's largest ever in a cartel case, topping the previous record imposed in December 2012, when it fined seven firms a total of €1.5 billion for rigging the market for cathode-ray tubes used to make television and computer monitors.

Three banks that were involved in attempted rate manipulation dodged potentially major penalties by blowing the whistle on their competitors. Barclays PLC and UBS AG, which paid a total of nearly $2 billion in fines to U.S. and British regulators last year, avoided billions of euros in new penalties, the EU said Wednesday. Citigroup Inc., which was punished in 2011 by Japanese regulators, also won immunity as a whistleblower. Whistleblowers can win immunity in cartel cases or see their fines reduced under EU rules designed to encourage corporate wrongdoers to report collusion.

Like U.S. and British regulators that have punished banks for attempted rate manipulation, the EU based its case in part on electronic communications between traders at various banks. The EU found that traders were regularly in touch with each other trying to move rates up or down, according to a person familiar with the investigation.

"Can you set low as a favour for me?" an unidentified trader wrote to a rival via instant message, according to a transcript reviewed by The Wall Street Journal. The trader added: "I'll return the favour when I can." The trader at the other bank responded, "Just ask."

Germany's Deutsche Bank faced the stiffest fine Wednesday, agreeing to pay a total of about €725 million due to its role in colluding in the setting of both Euribor and the yen Libor. "Today's settlement marks one important step in our efforts to resolve the bank's legacy issues," the bank's co-chief executives said in a statement. "The settlement relates to past practices of individuals which were in gross violation of Deutsche Bank's values and beliefs."

Deutsche Bank is still under investigation by U.S. and British regulators and prosecutors, and is likely to face further penalties next year, according to people familiar with that investigation.

The second-largest penalty, of €446 million, was levied against Société Générale for collusion tied to Euribor. The Paris-based bank said in a statement that its inappropriate actions "essentially relate to inappropriate conduct by one employee who left Société Générale in September 2009."

Nationalized U.K. lender RBS agreed to pay about €391 million to settle charges that it colluded in connection with both Libor and Euribor. Earlier this year, RBS reached a settlement with U.S. and British investigators in which a unit of the bank pleaded guilty to U.S. fraud charges.

R.P. Martin Holdings Ltd., a small London cash broker, was also penalized Wednesday, agreeing to pay €247,000. Two of its employees have been criminally charged by British fraud prosecutors for their alleged roles in manipulating Libor; they haven't entered pleas. A company spokesman didn't immediately respond to requests for comment.


Text by Wall Street Journal

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