Those people worried about their credit rating should have pity on Britain’s banks, for theirs is far, far worse, which is much of the reason for their current crimes. UK banks, which should be bastions of probity, particularly since they are central to the health of both the British economy and, thus, British society, are guilty of nefarious conduct that would not be becoming of a crooked pawn shop.
A slap on the wrist for conduct unbecoming of a crooked pawn shop
Having received a slap on the wrist for almost bringing the British economy to its knees in 2007-8, through reckless expansion driven by light regulation and massive bonuses, not only did they continue to mis-sell payment protection insurance (PPI), indulge in money laundering and set up tax-evasion schemes; but some also blithely capitalised on the ease with which the £3.5 trillion-a-day foreign exchange market (forex), inter-bank lending rates and central bank lending rates can be rigged.
That British banks have poor credit ratings is fairly self evident. In 2007, for instance, Lloyds TSB was obliged to write off £200 million as a result of the US sub-prime mortgage crisis. Subsequently, to save the bank during the financial crisis, the government was obliged to take a 43.4% stake in Lloyds in October, 2008, and pumped in nearly £20 billion of taxpayer money. Ironically, not long after this, Lloyds was seriously remiss and negligent in its due diligence prior to its takeover of HBOS. Consequently, in August, 2009, Lloyd’s bad debt had ballooned to £13.4 billion.
However, the rot did not stop there. In August, 2013, Lloyds Banking Group’s PPI mis-selling liabilities amounted to £7.3 billion, and the bank was fined for its involvement in money laundering, through helping the Alavi Foundation, Bank Melli, the Government of Iran and others circumvent U.S. laws banning financial transactions with certain states. Additionally, HM Revenue and Customs brought a case against Lloyds for illicitly pouring hundreds of millions of pounds into transatlantic tax avoidance schemes in the form of loans to American financial institutions.
Of course, Lloyds was not the only bank involved in such malfeasance and, therefore, not the only bank to indulge in rate rigging aimed at improving its credit rating by giving a false impression of its financial health, while also boosting profits and, in the process, defrauding savers of interest amounting to billions of pounds.
The rates that were rigged are the London Interbank Offered Rate (LIBOR), its euro equivalent known as EURIBOR, and the Repo rate, which is the rate at which the Bank of England lends money to commercial banks. These are absolutely crucial rates that are normally used to control inflation and underpin trillions of pounds worth of loans and financial contracts. As such, they are fundamental to the correct operation of both UK and international financial markets and economies. This fraud is all the more heinous because one of the rates being rigged determined the amounts payable to the Bank of England under the Special Liquidity Scheme (SLS), the Government’s emergency fund aimed at saving UK banks from free-fall in 2007-8.
A massive fraud on the taxpayer
According to Mark Carney, the Bank of England’s governor, “Such manipulation is highly reprehensible, clearly unlawful and may amount to criminal conduct on the part of the individuals involved.” Since the SLS was aimed at improving the liquidity position of the banking system, Owen Watkins, barrister in the corporate team at Lewis Silkin, considers that: “This is effectively a fraud on the taxpayer as the SLS was a taxpayer-backed measure.” Mark Garnier, MP, concurs: “This is, on the face of it, a deliberate action to defraud the taxpayer.”
Royal Bank of Scotland, Lloyds Banking Group, HSBC and Barclays were all implicated in the rate-fixing frauds and face fines. Indeed, Britain’s SFO is investigating more than 20 financial institutions in relation to fraudulent rate rigging; but so far only 17 people have been charged, including Barclays employees – Peter Charles Johnson, Jonathan James Matthew and Stylianos Contogoulas – in connection with the manipulation of LIBOR. In addition, it is understood that there are other very serious foreign exchange crimes in the investigative pipeline, such that UK banks are expected to set aside another £22 billion to cover fines for their heinous misconduct. Not unexpectedly, this criminality is also reflected in the scale of cybercrime in Britain’s banks, which is thought to be substantially understated.
The SFO is also currently investigating possible criminality in the way the Bank of England lent money to banks under, what was, a new type of liquidity auction scheme during the financial crisis of 2007-8. Under the scheme banks were allowed to offer a wider range of assets as collateral against the three-month loans. It now seems these auctions were manipulated, with or without the knowledge of Bank of England officials, such that the value of the collateral was exaggerated to make the borrowing banks look financially stronger than they actually were.
Too big to fail, too big to nail, too big to jail!
Just recently, HSBC has been shown to be complicit in tax evasion (which HSBC’s Chief Executive also indulged in personally) and providing banking services to criminals, drug smugglers, and friends and families of dictators. This scandal is yet another example of British banks largely getting away with murder. In a legal opinion that makes reference to HM Revenue & Custom’s (HMRC) failure to act against HSBC on evidence it held for almost five years, former Director of Public Prosecutions, Lord Macdonald, writes: “It seems clear, from the evidence we have seen, that there exists credible evidence that HSBC Swiss and/or its employees have engaged over many years in systematic and profitable collusion in serious criminal activity against the exchequers of a number of countries.
“The corporate and wholesale nature of HSBC’s Swiss’ apparent involvement in what amounts to grave cross border crime makes it all the more obvious that the relevant evidence, once it came the attention of HMRC, should have been the subject of urgent and sustained criminal investigation.”
“People like me, people from our class, will never be prosecuted for money laundering, or any other financial crime. We are a protected species.” – quote from a director of a British high street bank.
This shows, yet again, that impunity is rife, largely because undertaking legal prosecutions is seen as putting the banks and the banking system at risk. They are too big to fail and, therefore, seen as too big to nail and too big to jail. This is also, perhaps, the reason why many of the fines – but not all – that have been imposed on banks are minuscule compared to the potential gains from the frauds perpetrated and the economic and social damage that is flagrantly being risked. Unlike Britain, Iceland and Ireland and, to some extent, Germany and the Netherlands, have jailed high-level bankers. The SFO is currently investigating Barclays executives; but only in connection with allegations of corruption in raising emergency funds in Qatar in 2008.
Despite this ostensible immunity, in November, 2014, Britain’s Chancellor, George Osborne, in a statement that smacks of gross naiveté, declared that now that a number of traders have been suspended or fired, the SFO is conducting criminal investigations and the banks face big fines, “the world can have confidence in the integrity of Britain’s financial markets”.
Might the impunity now, at last, be coming to an end?
Comeuppance for the banks may now be in train. Between 2008 and 2014, 15 major banks were obliged to set aside £144 billion to pay fines and legal costs. Two US banks – Bank of America and JP Morgan – account for half this sum. However, Moody’s, the ratings agency, considers Barclays, HSBC and Royal Bank of Scotland (74%-taxpayer owned) to be at high risk from on-going investigations and warned that scrutiny of bankers’ business practices and potential criminal activities was proceeding rapidly. One reason RBS is viewed as high-risk is because of further penalties that are expected for its selling of mortgage bonds prior to the banking crisis. HSBC is seen as high risk because of its breaches of money laundering rules in the US, and Barclays because of allegations about the way it raised money during the 2008 crisis from investors in the Middle East. According to Mark Carney, Governor of the Bank of England, the fines imposed on major banks since 2008 have reduced available credit by £2 trillion, thereby acting as a brake on the global economy. Clearly, for threatening the stability of economies around the world, fines are not enough; those responsible need to be jailed.
On 19th November, a report by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA), “The failure of HBOS plc” laid the blame for the near collapse of HBOS on its bosses. The report describes a boardroom lacking in banking experience and a management team which drove a culture of growth at all costs, resulting in bad debts of £45bn. The former City regulator, the Financial Services Authority, was criticised, both for its approach to overseeing banks in the run-up to the crisis and for the way it decided to only punish one of HBOS executives, Peter Cummings, after HBOS’s near collapse. According to Clive Adamson, the former FSA director of enforcement, “the people most culpable were let off”. However, now perhaps, ten or more former executives of HBOS, including chairman Lord Stevenson and chief executives Andy Hornby and James Crosby, could be subject to formal investigations, after a decision not to pursue them previously was considered “materially flawed”. Rather tellingly, Andy Hornby now works for Gala Coral, a betting business!
|Type of misconduct||Provisions|
|PPI mis-selling, 2010-15||£37.3bn|
|Interest rate hedging products mis-selling, 2012-15||£4.8bn|
|Endowment mortgages mis-selling, 2002-06||£1.9bn|
|Consumer Credit Act breaches, 2013-15||£1bn|
|Investment products and advice mis-selling, 2003-15||£0.9bn|
|Packaged bank account mis-selling, 2014-15||£0.8bn|
|Pensions mis-selling, 2000-02||£0.6bn|
|Unfair unauthorised overdraft charges, 2006-07||£0.6bn|
|ID theft and card protection insurance mis-selling, 2014-15||£0.5bn|
|Other issues / miscellaneous, 2000-15||£3.6bn|
Misconduct has cost UK banks £53bn over 15 years
UPDATE July, 2016
Jay Merchant, a multimillionaire, former star trader at Barclays, was jailed for six and a half years after being convicted for his role as ringleader in a transatlantic plot to manipulate Libor interest rates a decade ago. His former colleagues: Alex Pabon received two years, Jonathan Mathew was jailed for four years, and Peter Johnson, 61, the main Barclays Libor submitter, who pleaded guilty in 2014, was jailed for four years. The convictions are an overdue victory for the Serious Fraud Office, which has been pursuing investigations into the Libor scandal for four years. The SFO continues pursuing investigations into two more alleged Libor-fixing conspiracies.