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From Banking and Finance Law Daily, May 20, 2015

Banks to pay record fines for misconduct in foreign exchange markets

By Colleen M. Svelnis, J.D.

The Federal Reserve Board has announced fines totaling more than $1.8 billion against six major banking organizations for their unsafe and unsound practices in the foreign exchange markets by failing to detect and address improper actions by their traders. These actions included the disclosure in electronic chatrooms of confidential customer information to traders at other organizations. UBS AG, Barclays Bank PLC, Citigroup Inc., and JPMorgan Chase & Co. were each fined $342 million; Royal Bank of Scotland PLC (RBS) was fined $274 million; and Bank of America Corporation was fined $205 million. According to the release, these are some of the largest fines ever assessed by the Fed.

According to the Fed, five of the banks failed to detect and address illegal agreements among traders to manipulate benchmark currency prices. Bank of America failed to detect and address conduct by traders who discussed the possibility of entering into similar agreements. In addition, the Fed determined that UBS, Citigroup, JPMorgan Chase, and Barclays engaged in unsafe and unsound conduct in FX sales, including conduct relating to how the organizations disclosed to customers the methods for determining price quotes.

In addition to the fines, the Fed issued cease and desist orders requiring the firms to improve their policies and procedures for oversight and controls over activities in the wholesale FX and similar types of markets.

Actions. Under the Consent Orders, the banks must correct deficiencies in their oversight and internal controls over traders who buy and sell U.S. dollars and foreign currencies for the organizations’ own accounts and for customers. In addition, the organizations:

  • must improve their senior management oversight, internal controls, risk management, and internal audit policies and procedures for their FX activities and for similar kinds of trading activities;

  • must cooperate in the investigation of the individuals involved in the conduct underlying these enforcement actions; and

  • are prohibited from re-employing or otherwise engaging individuals who were involved in unsafe and unsound conduct.

Justice Department. The Department of Justice is taking action concurrently, filing criminal charges against five of the organizations related to misconduct in the FX markets. Bank of America was not part of the actions taken by the Department of Justice and has not been charged by the Department of Justice in this matter.

Attorney General Loretta Lynch described how, for more than five years, traders from several multinational banks who called themselves “The Cartel” used a private electronic chatroom to manipulate the spot market’s exchange rate between euros and dollars using coded language to conceal their collusion. Lynch said the group worked to “push the exchange rate in directions favorable to their banks but detrimental to many others.” She explained how the “prices the market sets for those currencies influence virtually every sector of every economy in the world, and their actions inflated the banks’ profits while harming countless consumers, investors and institutions around the globe—from pension funds to major corporations, and including the banks’ own customers—who placed their faith in the market and relied on it to produce a competitive exchange rate.”

Citicorp, JPMorgan Chase & Co., Barclays PLC, and The Royal Bank of Scotland PLC have agreed to plead guilty to felony antitrust violations and will pay criminal fines totaling more than $2.5 billion. This is the largest set of antitrust fines obtained in the history of the Department of Justice. Additionally, UBS AG will pay a $203 million criminal penalty for breaching the non-prosecution agreement it entered in December 2012 regarding manipulation of the London Interbank Offered Rate, or LIBOR.

“The penalty all these banks will now pay is fitting considering the long-running and egregious nature of their anticompetitive conduct. It is commensurate with the pervasive harm done. And it should deter competitors in the future from chasing profits without regard to fairness, to the law or to the public welfare, said Lynch.”

Assistant Attorney General Bill Baer said the guilty pleas “represent major developments in our investigation into collusion affecting foreign exchange markets, particularly the spot market for trading U.S. dollars and euros.” Baer called the guilty pleas without precedent and said “In light of the seriousness of the crimes and the unjustified benefit to the bottom lines of these banks, we demanded parent-level guilty pleas, secured record fines of more than $2.5 billion and insisted upon three years of court-supervised probation.” Baer said the banks at issue are “market makers,” and that they represent 25 percent or more of dollar–euro exchange rate transactions each year. As such, he said they were “uniquely positioned to manipulate the market.”

Assistant Attorney General Leslie R. Caldwell also spoke about the guilty pleas, saying they “communicate loud and clear that we will hold financial institutions accountable for criminal misconduct. And we will enforce the agreements that we enter into with corporations.”

State actions. The New York Department of Financial Services has taken a separate action against Barclays and its New York branch based on FX-related conduct. Benjamin M. Lawsky, Superintendent of Financial Services for New York, announced that it has entered into a consent order with Barclays Bank for “systemic” misconduct. Barclays will pay $2.4 billion and is terminating eight additional employees who engaged in misconduct for New York banking law violations in connection with the “Cartel” scheme. The overall $2.4 billion penalty Barclays will pay includes $485 million to the New York State Department of Financial Services. The release states that a number of Barclay’s employees were involved and notes a lack of appropriate supervision or intervention by certain managers both of FX trading desks and of FX sales staff.

The Connecticut Department of Banking has joined the cease and desist provisions of the Fed's action against UBS, which has a branch located in Stamford, Conn..

Reaction and response. JP Morgan Chase stated in a release that it has already “commenced significant efforts in this regard to help ensure it is operating according to the high standards that the company and its regulators demand. With today’s agreements and the remediation and other efforts it is making, the company is able to continue to serve its clients and does not anticipate future material constraints on its business activities.”

Citigroup Chief Executive Officer Michael Corbat responded with a statement that the firm does not expect a material impact on its operations or ability to serve its clients. “The behavior that resulted in the settlements we announced today is an embarrassment to our firm, and stands in stark contrast to Citi's values. We began to take action quickly after becoming aware of these violations of our Code of Conduct and policies, and our internal investigation has so far resulted in nine terminations and additional disciplinary actions,” said Corbat. The payments required by each of the settlements are covered by existing legal reserves and will not require a charge to earnings in the second quarter of 2015, according to the statement.

UBS Chairman Axel A. Weber and Group Chief Executive Officer Sergio P. Ermotti also issued a response. “The conduct of a small number of employees was unacceptable and we have taken appropriate disciplinary actions. We made significant investments to strengthen our control framework and compliance programs. We self-detected this matter and reported it to the US Department of Justice and other authorities. Our actions demonstrate our determination to pursue a policy of zero tolerance for misconduct and a desire to promote the right culture in our industry.” According to the statement, the firm is fully provisioned for the resolutions, and they should have no financial impact on second quarter 2015 results.

Barclays CEO Antony Jenkins said “The misconduct at the core of these investigations is wholly incompatible with Barclays’ purpose and values and we deeply regret that it occurred. This demonstrates again the importance of our continuing work to build a values-based culture and strengthen our control environment. We remain completely committed to that effort.”

Philip Hampton, RBS Chairman, said that the firm “strongly condemn the actions of those responsible and regret the control failings that allowed such misconduct to take place. This episode has exposed serious shortcomings at both individual and collective levels from which we continue to learn. As part of this effort we are committed to implementing further improvements to systems and controls.

“We are continuing thorough investigations into the conduct of employees in this part of the business. As a result, we have dismissed three people and suspended two more pending further investigation. This work is on-going and will take into account the findings contained in these settlements,” he continued.

Companies: Bank of America Corporation; Barclays Bank PLC; Citigroup Inc.; JPMorgan Chase & Co.; Royal Bank of Scotland; UBS AG

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