A Fraud’s a Fraud, isn’t it?

Much has been and will be written about the revelations that traders at Barclays Bank made misleading reports of the bank’s borrowing rates when contributing to the setting of LIBOR rates over a period of years. Both the US and UK authorities have imposed fines in the hundreds of millions of dollars on the bank – large but not in the context of the bank’s own profits (around £5bn) or the size of the global interbank lending markets (which might be in the region of $300 trillion). Emails seen by the regulators and published after the fining decisions look depressingly and suspiciously “chummy” with traders seeking to have the figures massaged for enough personal or business gain to make them offer bottles of expensive champagne in return for such favours. From a lay perspective, the endemic dishonesty of the bankers involved seems to speak for itself.

So, unsurprisingly, there have been calls (from commentators all the way up to Ed Miliband, the leader of the opposition) for criminal prosecutions of everyone involved as well as for leading bankers, like the CEO of Barclays, Bob Diamond, to resign, be sacked, repay all their bonuses, be put in jail, and placed in stocks outside the Bank of England. Or all of those things. Landing a hit on Diamond is particularly sweet for many because Barclays had infuriatingly managed to hold the nearest to the high ground available to any bank during the financial crisis by not having had to receive a direct bail out from the government.

But, accepting that there was clearly something wrong and criminally wrong about the behaviour of Barclays traders (and potentially those in the 19 other banks which are still being investigated and which were not as co-operative as Barclays in putting their hands up to what had happened), what crimes may have been committed and how might they be prosecuted in the UK?

There are three main options, first, as offences under the Fraud Act 2006, second as common law conspiracy to defraud and third, as instances of the cartel offence under the Enterprise Act 2002. Although the cartel offence is not an immediately obvious one to apply here, for practical reasons it may offer the most effective approach to take.

Fraud Act 2006

The first place to start would logically be the Fraud Act 2006. This statute sought to simplify and clarify the law on fraud which had got bogged down by complex definitional issues which may have had the effect of discouraging the CPS from bringing prosecutions which weren’t factually simple. The Act makes a general offence of fraud which may be committed in a number of ways. The two most relevant to the LIBOR allegations are in section 2, fraud by misrepresentation and section 3, fraud by failure to disclose information.

At least on the face of things it is possible to see how charges under either section could be brought. Section 2 requires proof of the following (to the criminal standard of beyond reasonable doubt): the defendant dishonestly made a false representation, knowing that it might be untrue or misleading and with the intent to make gain for himself or another. Section 3 requires the following to be proven: the defendant failed to make a disclosure of information to another person when they were under a legal duty to make a disclosure, dishonestly intending by that lack of disclosure to make a gain or cause someone else a loss. Section 3 is somewhat harder to use in the circumstances because there may be some argument about whether the traders were under a legal duty to contribute to the setting of LIBOR. The process by which LIBOR is calculated, what it is used for and its history is admirably set out in the article in the London Review of Books by Professor Donald MacKenzie here.

Other potentially problematic issues in fraud cases can arise from the fact that the offences are focused entirely on what was going on in the minds of the defendants. So, whether the individuals involved were dishonest in the criminal sense has to be established as does their intent to gain. The test for dishonesty used is that established by the Court of Appeal in the case of R v Ghosh [1982] 1QB 1053 and has two parts: first, was what the defendant did dishonest by the ordinary standards of reasonable and honest people, and second, must the defendant have realised that what they were doing was dishonest by those standards.

The test for dishonesty is a fair one because it excludes reasonable mistakes which might look bad when looked at afterwards as well as avoiding the risk of people being found to have been dishonest in ways which no-one at the time would have considered to be dishonest just because it ultimately had bad consequences. However, this does also make it difficult for prosecutors to secure convictions in complicated cases.

A practical difficulty in the LIBOR case is thrown up by the realistic possibility that jurors might conclude that a little massaging of information needn’t be necessarily dishonest. If your boss asks you “have you got those figures for tomorrow’s meeting yet?” and you say “not quite, I’m working on them” when in reality you haven’t started but expect to get them ahead of the deadline, possibly by asking someone else to show you what they did for last month, are you being criminally dishonest? Do you become dishonest by going and asking someone else to give you their numbers, or to adjust theirs so that your working doesn’t look off? Or are some little white lies the sort of thing that reasonable and honest people can make at work sometimes? My righteously indignant part would say “yes, utterly deplorable” but thinking back to real life I might have a nagging suspicion that it wasn’t so far away from something I or any number of other ordinary, reasonable and honest people might sometimes do, thinking that nobody would particularly get hurt. Sure, we’d gain a little, at least in terms of not getting shouted at by the boss who might not be impressed by the honest answer of “no, I haven’t even looked at them and will cobble together something just ahead of your meeting if you stop hassling me”.

These objections might well be surmountable – the immediate reaction to the news about Barclays’ practices around LIBOR certainly suggest that most people’s instinctive reaction is that they were dishonest. It might be somewhat harder to establish that the individuals involved must have known this, particularly if the practices were very widespread so that they would have seemed normal and unobjectionable to those in the industry.

The other potentially difficult area evidentially would be in showing an intention to gain by means of the fraud. Clearly there was some advantage to be had by the traders involved otherwise they might not have appeared so grateful for their correspondents helping them out. However, under the Act, the only relevant types of gain are those involving money or property. So, in my example above of getting figures together for your boss, the main gain would generally be one of keeping your boss sweet and avoiding a scene in the office as he shouted at you for not having started on something. That might ultimately lead to you getting a bad appraisal, losing your bonus or even having performance management processes started but that would depend upon the circumstances.

It is possible that there would be clear links between the figures sent out by traders phoning in their LIBOR estimates and their bonuses or other direct financial rewards for performance. However, these would need to be very clear in the evidence. Most bonuses depend on a wide range of factors. It is unlikely that the traders’ contracts would link their remuneration directly to specific LIBOR rates – as we have seen in the separate scandal about mis-selling of interest-rate swaps to businesses, these systems are designed to enable the traders to make profits for themselves and their employers and their shareholders whichever direction the actual interest rates go. Professor MacKenzie’s article linked above suggests that even small unexpected variations will often be scrutinised so the power of individual banks to move the range of LIBOR in any market is limited; this would suggest that individual traders would be loathe to work on a commission or bonus basis which was so far outside their control.

This difficulty may explain why the Fraud Act is not so helpful for prosecuting anyone at Barclays. Establishing the causal link between misrepresentations about LIBOR and any individual’s intention to gain or cause someone else loss would be potentially a difficult task.

Another practical difficulty comes from the dates of the activities. The Fraud Act came into effect in January 2007. At least part of the allegations against Barclays relate to disclosures before this date. This means that prosecutions would need to be framed in terms of both the old and new law and this would add a layer of complexity unless a decision was taken to only proceed in relation to the newer allegations. This might lead to difficult arguments about the extent to which the Fraud Act changed the law and whether activity which was insufficiently clearly fraudulent to be prosecuted under the old law could really be seen to involve the appropriate level of dishonesty and intent when carried on into 2007. While that is an unattractive line it is one which defence counsel might want to pursue in order to prevent their clients being human sacrifices for the cult of banker bashing.

Conspiracy to Defraud

Although there is a common law offence of conspiracy to defraud it is somewhat difficult to prosecute. Formally it would be necessary for the CPS/SFO to gain consent from the Director of Public Prosecutions to use it and this could only be obtained by showing why there were not other statutory offences which could be used so that it would be in the public interest to proceed under the common law. The evidential difficulties I’ve sketched out under the Fraud Act are unlikely to be sufficient and so there would be a risk that a decision to allow a prosecution under the common law could be challenged successfully. This is particularly strong given that much of the common law offence is also covered by the next, and I believe, best option, the cartel offence under the Enterprise Act 2002.

Cartel Offence, Enterprise Act 2002

Section 188 of the Enterprise Act makes dishonest arrangements which if operated as intended would fix the price of any good or service whether directly or indirectly criminal offences. If nothing else it is clear that the intention of the communications between traders at Barclays and other banks was to influence the LIBOR rates which were to be published and so to fix the prices at which they and other banks might borrow money from one another. Price fixing in competition law does not require effectiveness (so a cartel where all the cartellists cheat would still be illegal) or for the fix to be in for a specific price rather than a general tendency towards a price.

While the same Ghosh test for dishonesty applies, it might be easier to apply for the cartel offence than for the Fraud Act offences in the LIBOR case. This is because in the LIBOR case, the misrepresentations or failures to disclose information are directed at the compilers of the LIBOR data and so the hypothetical analogy of the little white lie might apply. However, in the cartel scenario, the dishonesty can be said from the covert agreement between the participant banks knowing that agreeing with one another to fiddle the figures would be seen by all as not playing the game and subverting the LIBOR setting process. This is still potentially problematic and indeed there are currently legislative moves to remove the requirement for proof of dishonesty in cartel cases.

A more valuable benefit provided by use of the cartel offence is that it removes the need for any consideration of the gain that might be accrued to either the individual traders or their banks by misrepresenting the data for setting LIBOR. There is no need to show that the “cartel” would work or would benefit its participants: interestingly there was a case under the rather different civil law processes in the Competition Act 1980 where an investigation found that a price fixing cartel was positively harmful to the cartellists and they all ultimately benefited from being told to stop doing it and killing off their own industry (I seem to recall that it related to static caravans but haven’t had a chance to research a citation). The mere fact of an intention to agree to fix prices would be enough.

Similarly, it is not a bar to finding a cartel that the implementation of the agreement needed the involvement of a third party intermediary who might itself be innocent of criminal intent. Knowing that the information each bank sent to the LIBOR setting team at the British Banking Association would be dealt with in a particular way would be common to all banks contributing information and agreeing to modify their submissions in response to requests from competitor banks. Having an innocent intermediary would, if anything make price fixing more easy to do without detection (indeed it is a common tactic employed by traditional price-fixing cartels to use a third party conduit for information).

The cartel offence was designed specifically to deal with agreements made by employees of businesses who previously were immune to sanction (other than for common law conspiracy to defraud which had not in fact been successfully used in any cartel case). Awareness of the link between employees and the corporate governance structures of their business meant that the cartel offence is expected to be applicable in its “inchoate” forms – that is, in respect of those who aid, abet, counsel or procure their commission. Inadequate compliance procedures (which are unlikely to be difficult to prove here) at Barclays and other banks expose senior managers and compliance functions to personal criminal liability. Elsewhere in the Enterprise Act there are powers to impose disqualification orders on directors who ought to have known about cartel activities or who did know about them and did nothing. If massaging of LIBOR figures was a long-term cultural feature of banking, it is likely that this would lead to disqualification orders going right up to people like Bob Diamond. From my days advising companies on competition law I know that even the most hardened businessman who’ll take fines to their employer or even the low probability of jail for themselves can baulk at the obvious career-killing potential of being disqualified from either being a company director or involved in the management of a company for up to 15 years.

Another advantage the Enterprise Act has is that running cartel offence prosecutions would give impetus to investigating the banks under the OFT’s powers under the Competition Act 1998. As the criminal offences involved pretty much per se might also constitute serious civil infringements of the Competition Act which could lead to fines of up to 10% of global turnover for each bank that was involved the use of the criminal prosecution powers would open up a natural opportunity for a wider investigation of the interbank lending market. This would be subject to quasi-judicial oversight by the Competition Appeals Tribunal and entirely separate from governmental control. The fear of further massive fines and the other remedies which could be ordered might lead the relevant banks to agree to a market study and investigation by the Competition Commission (or the Competition and Markets Authority) to avoid this while placing them in the line of significant structural alterations to the market.

Disadvantages and Drawbacks

There are some drawbacks to prosecuting under the Enterprise Act. First, it would involve a degree of rethinking as to what the cartel offence included. There would be a risk that logically the entire system of sharing information to generate LIBOR might be arguably in breach of the civil competition rules in the Competition Act and Article 101 TFEU where there have been numerous cases over the years finding exchanges of live pricing information and intention to be anti-competitive. There would be strong defences to this on the basis of the value to the global financial system of LIBOR but these might, ironically, lead to the possibility to argue that banks giving misleading information to LIBOR led to greater scope for price competition by making the market rather less transparent than it might have been.

In the murky world of competition law there are lots of counter-intuitive findings for which we can blame dastardly economists. So, while generally price transparency is a good thing for consumers and allows them to make informed decisions (as LIBOR does), an excess of price transparency also dampens down competition between competitors because it allows for everyone to see who is trying to buck the market by extreme pricing. That might not be an issue for LIBOR where the top and bottom ends of the interest rate distribution are deliberately excluded from the published figures though.

Practically there is also some risk that a novel use of the Enterprise Act would be beyond the capabilities of the OFT and SFO. They have already managed to stuff up a relatively routine high profile prosecution in relation to the transatlantic fuel surcharge cartel between Virgin and BA on technical grounds relating to the disclosure of evidence. There have been very few prosecutions under the Act in the 9 years it has been in force, the first and most successful one having relied on guilty pleas in the marine hoses cartel which were obtained by the US authorities agreeing not to prosecute provided that the defendants pleaded guilty in the UK. Although the US authorities have agreed not to press criminal charges against Barclays, their non-prosecution letter has specifically reserved them the right to proceed against individuals. The US might not be keen to wait on a slightly flaky UK process.

Another drawback is that the maximum sentences under the Enterprise Act are only five years and so maybe not enough for those baying for blood and comparing the penalties with those for the rioters last summer.

A final possible drawback of using competition law is that it makes the European Commission have a potential jurisdiction to investigate LIBOR from a civil law angle. There are likely to be strong policy reasons why in the present climate of European moves intended to damage the City of London it might not be in the best interests of the UK to hand Brussels the power to investigate and dismantle one of the key elements of the City’s global strength. I’m all for rebalancing the economy away from reliance on the City but not by destroying the City so that it and the economy become substantially smaller.

Nevertheless, it would be a good idea for the investigating authorities to think about the options that the Enterprise Act gives them so that at the very least we don’t end up in a situtation where nothing is done on the basis that nothing can be done. It would also be a nice metaphorical knee in the balls of those who portray competition law as some sort of malign foreign influence.

Update 3 July

While I was writing this blog it was announced by the Prime Minister in Parliament that a parliamentary select committee including MPs and Peers, chaired by Andrew Tyrie MP would be established to look at the allegations against Barclays. The scope of the committee’s remit was expressed as being fairly broad by David Cameron but narrowed when described by Andrew Tyrie. This was rejected by Ed Miliband in favour of a Leveson-style inquiry to be led by a judge and given a wide remit to investigate the operation of the banking industry generally. The CEO of Barclays resigned with immediate effect this morning.

However, it is not clear to me how the calls for “something to be done” and for there to be immediate and hard-hitting criminal prosecutions for all those involved can square with a long-running judicial inquiry. Unlike the Leveson inquiry where the criminal prosecutions are a small part of the overall story the core allegations to be looked at here relate to potentially criminal behaviour in the banking sector. Do we really want a judge to design the banking system and do we think that they would be capable of doing so (Lord Justice Leveson himself seems to be aware of the limitations of what he can realistically do to reform press standards and regulation where the regulations are by nature much simpler than in financial services)?

In any event, unlike with phone-hacking where there was an issue with whether the police had dragged their feet over prosecuting people and indeed whether they were themselves complicit in dishonorable practices with the media and politicians, there’s no particular evidence that the authorities here, in the US and in Europe have failed to act. I’m grateful to Angus MacCullouch, Senior Lecturer in Law at Lancaster University for noting that the EU Commission has, since October 2011 at least been investigating allegations of cartel behaviour in the related EURIBOR derivatives market and that there have been leniency applications in that investigation (which means that at least some of the banks involved have admitted their participation in a cartel). The nature of such investigations is that they tend to remain private until the case has been put together following investigation. Undoubtedly the US and UK authorities are continuing their investigations as the FSA itself stated when confirming that 19 other banks are being investigated alongside Barclays.

Interestingly, there has been little coverage of the EURIBOR dawn raids last year or of the realistic possibility that Barclays are the least worst offender in that they have co-operated with the authorities to get reduced fines and have their main case closed by the FSA first. There may still be US prosecutions of Barclays employees as well as of those in other banks, just as there may be UK ones. Just because we don’t have the railings along the Thames from Canary Wharf to the City with bankers’ heads impaled upon them doesn’t mean that nothing is being done or that nothing can be done. It is mere jingoism and party point scoring to say that the work should just be done and done first by the UK authorities in a system of regulation that rightly involves close co-operation between the US, UK and EU authorities.


One thought on “A Fraud’s a Fraud, isn’t it?

  1. Pingback: Botzarelli’s Second Law | botzarelli

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