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Price fixing, although it resembles the strong-armed business approach one might associate with the criminal underworld, is a white collar crime often perpetrated by company executives.
Just as a few local gangs might get together to agree on who gets to operate in which turf or who might handle the prostitution in a certain area, corporate executives get together in conference calls or at high-powered business powwows and settle secret deals on how pricing for various goods and services might be controlled.
That said, price fixing scams can be so far-reaching into a business sector that they can reach gigantic proportions involving some of the world’s best-known companies and some of the biggest dollar amounts ever associated with crime.
Rolling Stone Magazine recently ran a lengthy article on the Libor fixing scandal that could be the largest crime in terms of dollar losses ever committed. The world’s largest banks in the United States, Europe and Asia, including Barclays, UBS, Bank of America, JPMorgan Chase and the Royal Bank of Scotland ,have been caught up in that mess. The actual misdeed was bankers reporting false data to British regulators to try to manipulate the London interbank offered rate, which is supposed to be the average rate banks use when they loan money to each other. But some bankers tried to tip the scales their way to enhance specific deals or to make the bank appear healthier than it was, because a better position is appealing to stockholders.
Price fixing is a white collar crime often perpetrated by company executives
The problem is that an estimated six trillion dollars in commercial and consumer loans use the Libor as a benchmark rate. Tips the rate one way or another and it affects millions of consumers around the world.
Price fixing scams are frequently put into action by companies that are not exactly household names. Look for Ford Motor Company and price fixing online, for example, and you will see Ford is suing auto part suppliers for price fixing. That’s because companies like Ford are too much in the public eye to fix prices. If they change the headlight design of a car that becomes headline news, let alone trying to sneak a price-fixing scheme past the public.
Instead companies like Toyo Tire & Rubber Co., a Japanese company with a client list that included Toyota, Subaru and Nissan, was charged with fixing prices of anti-vibration rubber parts. In November 2013, Toyo settled with the U.S. Justice Department, agreeing to pay $120 million to have an investigation against it dropped..
A series of settlements over price fixing involving well-known and lesser-known airlines has been announced in recent years, but here, again, it is the air cargo side of the business — a little less visible to the average consumer — that has included, to date, 23 settlements by companies that colluded to control prices on air shipping services.
In February, the global law firm Hausfeld LLP, announced that Cathay Pacific had agreed to pay $65 million to settle charges of price fixing for its shipping services. That added to an already impressive list of class action victories that involved All Nippon Airways, American Airlines, British Airways, SAS, Cargolux, Lufthansa and 15 others who paid fines of $3.2 million (Malaysia Airlines) to $115 million (Korean Air) to settle charges against them. In total, the conspiracy has resulted in $758 million in fines that largely get dispersed to Hausfeld’s class action clients who were cheated by the collusion.
Price fixing impacts consumers in two ways. First, controlling prices generally results in artificially high prices for goods or services. Secondly, price fixing can box out competing companies, which hurts their business, resulting in fewer jobs.
Regulators have recognized that Libor fixing has the potential to due considerable harm to consumers as a class and have doled out fines that are among the largest ever meted out for corporate malfeasance. By the end of 2013, financial firms had coughed up $2.3 billion to settle charges of rate manipulation, including Deutsche Bank and Société Générale, which paid fines of $633 million and $606 million, respectfully, to settle charges against them.
The US Federal Deposit Insurance Corporation (FDIC) has sued 16 banks for allegedly manipulating the London interbank offered rate (LIBOR).
The LIBOR rate is used to set trillions of dollars of financial contracts, including mortgages and financial transactions around the world.
The regulator said the manipulation caused substantial losses to 38 US banks which were shut down during and after the 2008 financial crisis.
The sued banks include Barclays, HSBC, Citigroup and Royal Bank of Scotland.
The British Bankers’ Association (BBA) has also been sued by the FDIC.
“BBA participated in the alleged scheme to protect the revenue stream it generated from selling Libor licenses and to appease the Panel Bank Defendants that were members of the BBA,” it was quoted as saying by the AFP news agency.
The FDIC has sued 16 banks for allegedly manipulating the LIBOR
The FDIC alleged that the banks mentioned in its lawsuit rigged the rate from August 2007 to at least mid-2011.
Other banks named in the lawsuit include Bank of America, JPMorgan Chase, Deutsche Bank, Lloyds Bank, Credit Suisse, UBS, and Rabobank.
LIBOR is the average rate at which banks lend money to one another and is decided on a daily basis.
Most of the world’s biggest banks contribute estimates to form the LIBOR.
But there have been allegations that some have looked to profit from it by understating or overstating their submissions.
Over the past two years, regulators across the globe have been investigating the manipulation of the rate and there have been $3.7 billion in fines to date.
A string of international banks and brokers have faced both criminal and civil penalties for their involvement in the scandal.
Some banks have also been found to have understated their submissions in the period during and after the financial crisis.
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US regulator Commodity Futures Trading Commission said the way that the key LIBOR interest rate is set in the UK is still not clean and free of fraud.
“We have a lot more work to do,” said Gary Gensler, chairman of the Commodity Futures Trading Commission.
Gary Gensler suggested that the rate was often “completely made up”.
A number of banks have been fined hundreds of millions of pounds for rigging the lending rate.
Gary Gensler is in London to meet officials at the Financial Services Authority (FSA), the City watchdog.
LIBOR (London Interbank Offered Rate), which is set in London, is meant to reflect the average rate that banks pay to lend to each other and is used to benchmark everything from car loans and mortgages to complex financial transactions around the world.
Speaking of the scandal, Gary Gensler spoke of “pervasive rigging” and said authorities could not guarantee the rate is fraud-free, but refused to criticize the FSA or suggest that setting the rate should be moved to the US.
He also labeled the FSA a “terrific partner”, as the FSA defended itself against criticism of its role in the LIBOR scandal by MPs.
The LIBOR scandal emerged in June last year when UK and US authorities fined Barclays $465 million for fixing the key inter-bank interest rate. Since then, Swiss bank UBS and Royal Bank of Scotland have been given fines of $1.5 billion and $625 million, respectively.
According to the CFTC, which hit RBS with a $330 million fine, RBS made hundreds of attempts to manipulate the rates and succeeded on a number of occasions.
LIBOR is a benchmark interest rate set each day by the British Bankers’ Association (BBA). It is based on estimates received from 16 major international banks based in London of how much they must pay in order to borrow cash from other banks.
Gary Gensler compared the manipulation of rates to an estate agent trying to sell you a house.
“They are trying to reference the price of the houses in the neighborhood [when] there have been no transactions in the neighborhood and furthermore, the agent is not willing to share the data and is often just making it all up,” he said.
US regulator Commodity Futures Trading Commission said the way that the key LIBOR interest rate is set in the UK is still not clean and free of fraud
The BBA said it would not comment on Gary Gensler’s comments but said: “The BBA has strongly stated the need for greater regulatory oversight of LIBOR.”
It added that it was working closely with the government and regulators to change the system.
A government-commissioned review suggested taking the responsibility away from the BBA and placing it in the hands of an outside authority, such as a commercial body or an industry group.
UK’s MPs on the Treasury Committee published their report “Fixing Libor” in August, which said the FSA had failed to investigate market rumors of rate-rigging properly.
Responding, the FSA said it had been engaging with US authorities since 2008.
In its report of last year, the Treasury Committee blamed Barclays bosses for “disgraceful” behavior, which damaged the UK’s reputation, but was also critical of regulators.
It said the Bank of England had been “naive” about the possibility of Libor manipulation during the financial crisis and had been “relatively inactive”, but said the failure of the FSA to do its job and properly investigate the market rumors was far worse.
It said the FSA had not identified any “weakness in compliance” at Barclays, despite conducting numerous visits.
The FSA responded by saying it had increased the intensity of its supervision since 2008, focusing on firms’ control functions and board oversight, and that its successors – the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) – would build on this new approach to supervision.
The regulator also noted the committee’s concerns that it had been two years behind US regulatory authorities in initiating its formal Libor investigations.
But it said it had been aware of and engaged with the enquiries made by US regulators in 2008 and 2009 and had assisted the CFTC from the outset of its investigation. Once evidence of potential wrongdoing emerged it took more active steps, it said.
The committee had also accused the FSA of taking a narrow view of its power to initiate criminal proceedings for fraudulent conduct.
The watchdog denied this but said: “There may be merit in considering further the scope of the FCA’s powers in the future.”
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Martin Taylor, the former chief executive of Barclays, says the bank has engaged in “systematic dishonesty”.
It comes after Barclays was fined $450 million for trying to manipulate interest rates at which banks lend to each other.
Martin Taylor, who was chief executive of the bank from 1994 to 1998, said that Barclays’ deception looks like a deliberate strategy as it had been going on for years.
Other banks are also being probed.
The chief executive of Barclays, Bob Diamond, has come under pressure to resign.
Barclays has said its actions “fell well short of standards”.
In response, chief executive Bob Diamond and three other top executives at the bank are to give up their bonuses this year.
Investigators say that Barclays’ traders lied to make the bank look more secure during the financial crisis and, sometimes – working with traders at other banks – to make a profit.
Tracey McDermott, director of enforcement at the FSA, which imposed fines alongside the US financial regulator, said: “We have a number of investigations that are ongoing.
“Obviously we need to look at each case on its own particular facts but the initial indications are that Barclays was not the only firm that was involved in this.”
The US Department of Justice also said criminal investigations into “other financial institutions and individuals” was ongoing.
Martin Taylor, the former chief executive of Barclays, says the bank has engaged in "systematic dishonesty"
Other big names believed to be under investigation include Citigroup, JP Morgan, Deutsche Bank, HSBC and Royal Bank of Scotland.
Barclays’ misconduct relates to the daily setting of the London Interbank Offered Rate (LIBOR) and the Euro Interbank Offered Rate (EURIBOR).
These are two of the most important interest rates in the global financial markets and directly influence the value of trillions of dollars of financial deals between banks and other institutions.
They can also affect lending rates to the public, for instance with some mortgage deals.
It is not yet clear whether Barclays staff actually succeeded in manipulating the interest rates to the bank’s advantage and therefore whether it had any impact on borrowers.
While the FSA said only that the Barclays employees had attempted to do so, the US Department of Justice said that on some occasions they did affect the LIBOR and EURIBOR rates.
The fine imposed on Barclays is part of an international investigation into the setting of interbank rates between 2005 and 2009.
Each day the British Bankers’ Association (BBA) and the European Banking Association publish the LIBOR and EURIBOR rates by taking an average of the estimated rates submitted to them by leading banks.
Between 2005 and 2008, the Barclays staff who submitted estimates of their own interbank lending rates were frequently lobbied by its derivatives traders to put in figures which would benefit their trading positions, in order to produce a profit for the bank.
And between 2007 and 2009, during the height of the banking crisis, the staff put in artificially low figures, to avoid the suspicion that Barclays was under financial stress and thus having to borrow at noticeably higher rates than its competitors.
The FSA pointed out that Barclays traders were quite open about their routine attempts to lobby their colleagues who submitted the bank’s estimate of its borrowing costs to the BBA.
It was particularly concerned because it appeared to be “accepted culture” among some staff.
“Requests to Barclays’ submitters were made verbally and a large amount of email and instant message evidence consisting of derivatives traders’ requests also exists,” the FSA said.
In one instance, a trader recounted a conversation in which he had “begged” the submitter to put in a lower LIBOR figure.
“I’m like, dude, you’re killing us,” he said.
His manager replied: “Just tell him to… put it low.”
In turn, the staff submitting the data would respond to the traders’ requests.
“For you…anything,” said one.
“Done… for you big boy,” said another.
And: “I owe you big time… I’m opening a bottle of Bollinger.”
