Barclays scandal poses uncomfortable questions for Serious Fraud Office

Barclays’ manipulation of the LIBOR has raised questions about the Bank of England’s lack of regulatory oversight. AAP

The United Kingdom has had a remarkably poor track record in prosecuting serious economic fraud. In part, this can be traced to deficiencies in the toolkit available to the Serious Fraud Office, a fact acknowledged in an independent review conducted in 2008, which found that the agency expended “significantly more resources per case than its New York counterparts and achieves significantly less for its efforts, as measured by both its productivity (the number of defendants prosecuted) and its conviction rate”.

Just as FIFA, the governing body of world soccer, has pledged to introduce additional referees and goal-line video technology, the Serious Fraud Office is to be handed a significant increase in its leveraging capacity to bring complex investigations to a close - and hopefully brings enhanced productivity with it.

As I reported last month, a consultation process is under way in the United Kingdom to introduce the deferred prosecution as the primary mechanism to bring corporate wrongdoers to account. The proposed reforms focus primarily on the operation of the UK’s Bribery Act which, on paper, contains some of the most stringent provisions against corruption. The reforms have been justified on the basis that they bring enforcement practice in line with counterpart agencies in the United States, reduce the possibility of arbitrage and accrue revenue to the Treasury. The efficacy of the proposed system is likely to tested sooner rather than later.

The corruption under investigation centres neither on extractive industries nor multinational operations in the developing world. Rather, it focuses on alleged corruption within the City of London: one of the twin epicentres of global capital markets. There are three strands to the investigation, each of which raises profoundly uncomfortable questions for corporate, regulatory and political actors as well as the SFO itself.

First, there is the question of whether investment banks individually or collectively colluded in manipulating the LIBOR rate to facilitate derivative bets. Barclays has conceded that its internal controls were insufficient to stop the mispricing of LIBOR rates from 2005-2009 and paid a total of $454 million as a consequence to regulators from the United States and the United Kingdom.

Second, there is the unresolved question of whether the action was implicitly or explicitly condoned by the Bank of England through a lack of oversight, notwithstanding the fact that concerns with the operation of LIBOR date back to 2007. In its defence, Barclays has complained that it repeatedly expressed concern to British regulatory authorities that other unnamed banks at the height of the crisis were deliberately providing implausibly low figures to the LIBOR panel.

Third, there is the even more problematic issue of whether the lack of decisive action was the result of bureaucratic pressure - a question teased out in testimony from Paul Tucker, the Deputy Governor of the Bank of England to the Treasury Select Committee on Monday). Mr Tucker mounted a vigorous defence to MPs, arguing that at no stage did he or civil servants seek to influence Barclays submission. The import of the conversation, he claimed, was an attempt to help the bank help itself by not being run off a cliff by trading staff. In emails released by the Bank of England to the Treasury Select Committee, the unnamed Whitehall senior source cited by Barclays former chief executive, Bob Diamond, in a note detailing a conversation with Mr Tucker in which which the central banker allegedly expressed political concern at the LIBOR rates posted by Barclays was revealed to be Sir Jeremy Haywood, the Cabinet Secretary.

Whether Mr Haywood was, in turn, reflecting the considerations of his political masters remains at this stage unresolved. It can only be addressed by calling him to give evidence. The then Chancellor, Ed Balls, has called on his successor George Osborne to withdraw accusations that there may have been political interference, thus ensuring that the political firefight will continue.

What is more troublesome, however, is the testimony provided by the Deputy Governor of the Bank of England that the scandal has revealed a heretofore unrecognised “cesspit”. What he had thought to be a malfunctioning market was in fact a dishonest one. He called on the Financial Services Authority’s review of the operation of LIBOR to be extended to all unregulated markets. As the Guardian’s Nils Pratley has acerbically noted, Mr Tucker my be innocent; but the innocence on display hardly provides confidence in his ability to lead the Bank of England.

Just who or what institution should be the primary focus for the Serious Fraud Office investigation is therefore unclear. In addition, the very staging of parliamentary inquiries limit capacity to pursue criminal investigations. In addition, the agency is coming to the investigation exceptionally late in the game, with little if anything to add in terms of reputation or resources.

The decision to reopen the investigation into LIBOR after ruling it out last year demonstrates not only the severity of the crisis, but the lack of experience and capacity in dealing with malfeasance and misfeasance in the City of London.

An additional cash injection by the British government of $4.65 million is laughable when set against the fact that Barclays alone has committed $155 million to date on the investigation and the bank of only one of a number of entities facing the multi-agency global probe. Moreover, the SFO’s request for formal assistance from the Financial Services Authority (FSA) has yet to be answered. The FSA has its own reputation to protect. It had decided not to prosecute any executive from RBS over its collapse - the biggest bank failure in British history - on the grounds that there were no reasonable prospect of securing a conviction. In the event that this is reasonable to expect in the LIBOR scandal, the FSA is likely to want to retain its turf, if only as an epitaph - the agency is to be disbanded next year in large part as a consequence of its failure to police the boom that preceded the 2007 global financial crisis.

Where the SFO does have potential traction is in the expanded range of mechanisms at (or soon to be at) its disposal. The possibility to offer a deferred prosecution has the potential to act as an incentive for the banks under investigation if there is a calculation that the activity complained of is at a par with or demonstrably worse than that accepted by Barclays in its settlement agreements.

The deferred prosecution and its companion, the non-prosecution agreement, has been one of the most successful (if contested) mechanisms used by the Department of Justice in dealing with economic crime, most notably contraventions of the Foreign Corrupt Practices Act. It was used sporadically to prosecute securities and accounting fraud in the aftermath of Enron but was discontinued following judicial claims of overreach in a case involving KPMG, where the Department was accused of acting unconstitutionally. The non-prosecution agreement with Barclays saw its return to the financial services arena with a vengeance.

If, however, the SFO had any thought that its application of the deferred prosecution could prevent future arbitrage, however, it is sorely mistaken. The British government has explicitly precluded the use of non-prosecution agreements and require judicial approval that a settlement is fair, reasonable and in the public interest, thus constraining the discretion available to its US counterpart.

For a corporation looking to embark on settlement talks, the United States remains a more rational choice not least because the reputational staining associated with a non-prosecution agreement is less indelible. The SFO has a lot to prove - and lose - in the coming months. Having a seat at the refereeing table is not the same as exercising ultimate decision. That is likely to remain in the hands of the US Deparmtent of Justice for some time to come.

Justin O'Brien writes a column for The Conversation, The ethical deal, and is director of the UNSW Centre for Law, Markets and Regulation portal, where this story also appears.