JPMorgan Chase and Citigroup have become the first U.S. banks fined for the alleged manipulation of benchmark interest rates that affect hundreds of billions of dollars in contracts around the world.
On Wednesday, the European Commission slapped six financial giants, including Deutsche Bank, Royal Bank of Scotland and JPMorgan, with a total of $2.3 billion in penalties for colluding to rig European and Japanese interest rates for profit. The commission is one of several regulators around the world that have been examining the manipulation of key interest rates such as the London interbank offered rate known as Libor.
In the United States, the Commodity Futures Trading Commission has already penalized four European banks — RBS, Barclays, UBS and Rabobank — for their role in the scheme, but the agency, along with the Justice Department, is still investigating domestic banks.
Each of the cases that have been settled so far revealed a corporate culture in which traders bragged about the schemes in e-mails and Internet chat rooms. Authorities say the latest cases illustrate more of the same brazen disregard for the law.
Between September 2005 and May 2008, traders at the banks worked together before submitting data for the calculation of Euribor as well as their trading and pricing strategies, according to the commission. Regulators learned of the full scope of their deception from traders at Barclays.
A similar scheme was afoot in Japan, where traders at the same banks allegedly worked together to manipulate rates to benefit their bottom line from 2007 to 2010.
“What is shocking about the LIBOR and EURIBOR scandals is not only the manipulation of benchmarks…but the collusion between banks who are supposed to be competing with each other,” said Joaquín Almunia, EU Competition Commissioner, in a statement.
For its part, JPMorgan has only settled allegations relating to the Japanese benchmark rate for $108 million. The bank, along with HSBC and Credit Agricole, maintains its innocence in the Euribor case.
In a statement, JPMorgan said, “The settlement makes no finding that JPMorgan Chase management had any knowledge or involvement in the conduct at issue, or that the traders’ actions had any impact on the firm’s LIBOR submissions or the published LIBOR rates.”
Citigroup, meanwhile, agreed to a $95 million fine for its participation in the Japanese scheme. It received full immunity for one of the violations by cooperating with authorities, avoiding an additional $74 million fine.
“We’re pleased to resolve this matter with the European Commission and to put this investigation behind us,” said Danielle Romero-Apsilos, a spokeswoman for the bank. “Citi continues to cooperate with other regulators in connection with investigations and inquiries related to various interbank offered rates and other benchmark rates.”
The two U.S.banks paid the lowest fines and had the fewest number of traders involved in the scheme.
Deutsche Bank, which is still under investigation by U.S. and British regulators, received the highest fine at $633 million. The bank’s chief executive Juergen Fitschen said, in a statement, the charges stem from “past practices of individuals which were in gross violation of Deutsche Bank’s values and beliefs.”
French banking giant Societe Generale was saddled with the second largest fine at $604 million. Bank officials maintain that its role was limited to one rogue trader who acted without management’s knowledge.
Swiss powerhouse UBS avoided a $3.3 billion fine, while Barclays dodged a $937 million fine for revealing the existence of the scheme.
Barclays was the first bank to ‘fess up to its role in rigging the rates in June 2012, when it agreed to pay $450 million to settle allegations. UBS followed its lead in December by reaching a $1.5 billion settlement with global authorities, which included the indictment of two of its traders and a guilty plea by its Japanese subsidiary.
The CFTC uncovered evidence of Barclays senior management and numerous traders in London, New York and Tokyo making false reports to improve the bank’s trading position dating to 2005. At the height of the recession, the bank submitted low figures to keep rates down and to deflect public scrutiny about its condition.
About a dozen financial institutions, including Barclays and JPMorgan, submit data to set the daily Libor rate. Until recently, that information was collected on behalf of the British Bankers’ Association by Thompson Reuters, which calculates the averages and devises the Libor rate.
In July, the association transferred the administration of the benchmark to NYSE Euronext to restore integrity to the system. Critics of the system, however, are skeptical about the transparency in how banks set their daily rates, questioning whether it leaves the process wide open to fraud.