“Is the LIBOR scandal the crime of the century?”
business.time.com 9th July 2012
On Monday 3rd August, 2015 a City trader, Tom Hayes (the ‘Rainman’) was found guilty of rate-rigging the London Inter-Bank Offer Rate (LIBOR) market and sentenced to 14-years in prison. The charges related to activities between 2006-10, hence they continued long after the Financial Crash. Hayes was charged in 2013. In pronouncing sentence on Hayes, the Judge, Mr Justice Cooke observed that he was “sending a signal”. He also said that:
“the integrity that ought to characterise banking was absent here….
You as a trader succumbed to temptation because you could .…. It was commonplace at the time and common practice and not perceived as wrong but the fact that you were doing it all the same is no excuse”. (Daily Mail report; 8th August, 2015)
Hayes is widely reported in the media to have been convicted of “conspiracy to fraud”. ‘Conspiracy to fraud’ is a common law offence. He does not appear to have been convicted under The Fraud Act (2006), which replaced the Theft Acts 1968-96 and which also introduced new offences. The government originally intended to abolish the common law offence of conspiracy to fraud, although subsequently it was at least temporarily reprieved; hence presumably its survival and use in this prosecution.
The official guidelines on selecting the appropriate charges in fraud cases propose the following:
“In selecting charges in fraud cases, the prosecutor should first consider:
– whether the behaviour could be prosecuted under statute – whether under the Fraud Act 2006 or another Act or as a statutory conspiracy
– whether the available statutory charges adequately reflect the gravity of the offence”
(gov.uk: Guidance; Use of the common law offence of conspiracy to defraud; 2007)
The first choice should thus be to prosecute under statute law. The government guidelines on “conspiracy to defraud” also include the following important reference in this extract:
“3. The new offences [under the Fraud Act 2006] are designed to catch behaviour that previously fell through gaps in the Theft Acts and could only be prosecuted as conspiracy to defraud. Indeed the Act is based on a Law Commission report (Cm 5560) which also recommended the abolition of the common law offence of conspiracy to defraud. The argument is that the offence is unfairly uncertain, and wide enough to have the potential to catch behaviour that should not be criminal. Furthermore it can seem anomalous that what is legal if performed by one person should be criminal if performed by many.
(gov.uk: Guidance; Use of the common law offence of conspiracy to defraud; 2007)
This makes fairly clear that the common law offence is unfair, uncertain and criminalises what should be non-criminal behaviour. This implies that the common law is less satisfactory, and should not be needed because the Fraud Act (2006) is a modern Act designed to do the job better. Indeed that is what Parliament clearly intended.
Only prosecutors have instead resorted to the common law in this major ‘market abuse’ case, presumably (save a counter-explanation not yet offered) because the common law offence of ‘conspiracy to fraud’ alone was effective, and the Fraud Act (2006) is ineffective or unusable.
If, as seems apparent, Hayes was convicted under the Common Law offence then questions must be asked about the effectiveness of the Fraud Act, 2006. Indeed examination of the parliamentary debates of the Fraud Act, 2006 show that MPs were much exercised about catching behaviour that “should not be criminal”. It is striking how detached, how wide of the mark the Fraud Bill debates were if we juxtapose legislators’ backward-looking priorities with what was happening close to Westminster in the Square Mile in 2006, as banking descended toward the Credit Crunch, our financial system spiralled toward collapse and integrity absented itself. An explanation is required of government and of Parliament why we have found ourselves in this profoundly unsatisfactory predicament. Something has gone seriously wrong; not least with Parliament’s handling and management of fraud legislation.
We have been failed, at least ‘prima facie’ by Westminster, again: badly. Is the Fraud Act (2006) a dud? Worse, our legislators appear to lack the wisdom, competence, judgement, worldliness or sophistication to legislate for fraud; a subject that requires some understanding how matters in the ‘real world’ actually function, and the pressures and temptations they induce. This is a serious defect in any legislature. It may be that our representatives are simply the wrong sort of people.
Meanwhile, has this conviction been a triumph for justice? Well, almost at the same time as the Tom Hayes jury were grappling with the verdict, the FCA publicly warned that:
“Banks are failing to improve their oversight of market benchmarks, despite the nearly $20bn of fines levied on lenders over the Libor and foreign-exchange rigging scandals” (ft.com: 29th July, 2015).
The FCA statement on bank oversight failings was only issued after $20bn of fines had accumulated, and a very few days before Hayes was found guilty. Is anyone listening to the FCA? ‘Fourteen years’ may make the required difference (and be worth rather more than $20bn as a sanction): if they were hard-of-hearing before, we may suspect they will be listening now: the judge’s 14-year ‘signal’ is now accompanied by the apparent collapse of the oft-paraded ‘sole rogue trader’ thesis: the Daily Mail (8th August) has reported that eleven more bankers are now facing trial. Is this activity enough?
Only twelve months ago, in a short paper titled “Foul! Show Market Abuse the Red Card” the distinguished criminal and regulatory litigator David Corker wrote the following:
“It is clear that things in these markets are not going to continue as before but the question is whether changing anything will actually change anything significant” (Financial Monthly, July, 2014).
When Corker writes of “these markets” he means “similar conduct [to LIBOR] in relation to any financial benchmark”. This is potentially very wide-ranging. In the scope of a short article Corker also touches on High Frequency Trading (HFT), on Clause 41 of the Serious Crimes Bill, on a long-standing SFO proposal for a new offence of “failure to prevent fraud”, the ‘Fair and Efficient Markets Review’ (FEMR) and allegations regarding ForEx malpractice. The LIBOR prosecution should therefore be seen in the context of sudden, wider government moves to change the whole legal framework in mid-2014 (far, far too late).
The Fair and Effective Markets Review has already reported (how quickly government and central bank can move when under pressure); and under Section 1 of its ‘near-term’ recommendations it proposes changes to:
“1c. Mandate detailed regulatory references to help firms prevent the ‘recycling’ of individuals with poor conduct records between firms;
1d. Extend UK criminal sanctions for market abuse for individuals and firms to a wider range of FICC instruments; and
1e. Lengthen the maximum sentence for criminal market abuse from seven to ten years’ imprisonment”
(FEMR Final Report: The Treasury, Bank of England and FCA; June, 2015; p.7).
Clearly the existing ‘recycling’ rules for individuals, the criminal sanctions for market abuse and the sentencing sanctions were inadequate. We should note however that Hayes received a 14-year sentence, not ten: this ‘review’ business itself seems to be a fast moving and unstable route-plan, built on shifting sand. It is also notable that prosecutions have been of individuals, but so far, there at least appear to have been no prosecutions of institutions; in spite of the reference to “firms” as well as individuals in guideline 1d above.
We may also observe that most of the items on the Corker list were there because they were either addressed by of followed George Osborne’s Mansionhouse speech in 2014.
George Osborne has been Chancellor since 2010. The Credit Crunch and all its consequences happened much earlier. What was the Chancellor doing for four years? Eliminating the deficit? Sleeping on the job? Anything?
As Corker argues, “the government has …. demonstrated its conversion to the view that there is a lot wrong with financial markets”. The Chancellor’s damascene conversion to the ‘lot wrong’ hypothesis happened long after the government introduced the new tripartite financial regulatory framework in 2012 in a form that even its architect, Sir John Vickers did not approve. The most most notable regulatory reform in this area is the FCA (replacing the discredited FSA), and its fines regime, which appears to have been the main armament in its sanctions repertoire; which, given the government’s perceived need for ‘conversion’ to the ‘lot wrong with financial markets thesis’, we may therefore believe implies that the new regulatory framework provided by the FCA has not fixed the problem after all. Why has the ‘conversion’ to the obvious failings of the “markets” (the ‘anti-market markets’ we may term them) taken so long, and why did the government choose a policy that decisively put the cart before the horse?
We can certainly now say, following this successful Serious Fraud Office (SFO) prosecution that we can see ‘changes’; but will this actually change “anything significant”, in Corker’s words? The evidence is yet to be tested (‘one swallow … …’), but while one prosecution and conviction suggests some sort of progress, and more trials seem certain; at the same time the recent FCA statement quoted above reminds us only that the FCA’s main line of attack, which has been the Fines regime, and its close concomitant, ‘naming and shaming’ institutions and persons in breach of the regulations through the published “Fines Table”, instead implies that this whole regulatory, non-criminal approach (and the government and Chancellor’s policy) has in fact failed; and wasted or misdirected years of regulatory effort. It is worth also remembering that George Osborne slashed SFO funding, by 38% over five years, until the rate-rigging scandal forced a spending U-turn. (ft.com: SFO secures cash for Libor investigation; 6th July, 2012).
Returning to LIBOR, as ‘The Independent’ trenchantly expressed the matter of LIBOR rate-rigging “Manipulating exchange rates is not a ‘victimless crime’. We’re all victims of it” (5th August, 2015). It is worth repeating: we are all victims of this crime. At the same time this is a City crime and its consequences spread far beyond the UK. This is a crime that affects a World benchmark bank rate. Remember, we are always being told with excessive pride (if not hubris), that London is the Centre of the World Financial System. This is why London is so “successful”; this, we are told, is what pays for everything in Britain. This is why London sucks all the oxygen out of the rest of Britain (and I suspect they are going to need it all to keep breathing).
So lets put some figures on it: The Washington based Council on Foreign Relations (CFR) wrote this on the extensive world-wide use of LIBOR:
“Many banks worldwide use Libor as a base rate for setting interest rates on consumer and corporate loans. Indeed, hundreds of trillions of dollars in securities and loans are linked to Libor-government and corporate debt, as well as auto, student, and home loans, including over half of America’s flexible-rate mortgages. When Libor rises, rates and payments on loans often increase; likewise, they fall when Libor goes down.” (cfr.org: ‘Understanding the LIBOR scandal’)
“Hundreds of trillions of dollars” of people’s futures are tied to LIBOR; not just in the US or the UK, but throughout the world. William Black of the US economics and law think-tank ‘New Economic Perspectives’ (NEP) has estimated that the bid-rigging in LIBOR totalled “$300+ trillion in assets”; more than world GDP (NEP: 8th July, 2015). No wonder $20bn in fines might look like a mere ‘cost of doing business’ as some (especially US) critics have said of the US and UK fines sanction strategy.