‘Liborgate’: Commission to propose criminal sanctions
By Sophie Mosca and Manon Malhère | Thursday 19 July 2012
On 19 July, the European Commission decided the action it plans to take in response to the ‘Liborgate’ scandal: it will amend its proposals for a directive and regulation on market abuse and insider dealing to apply criminal penalties to direct manipulation of interbank interest rate indices. The College of Commissioners will adopt its position on 25 July.
This fraud concerns the setting of interest rates by certain banks to mask the higher prices at which they acquired liquidities so as to give an impression of sound financial health and increase their margins. Its consequences will be not only financial but also regulatory.
AGREEMENT IN LATE 2012?
The Commission hopes that the Council and European Parliament will come to agreement before the end of the year so that the two texts – initially presented in October 2011 and which will therefore be amended – can enter into force in 2014.
The executive has proposed in its draft regulation on insider dealing and market manipulation (market abuse) to widen the definition of market manipulation to include over-the-counter derivatives and commodities as well as emissions allowances.
Its draft directive introduces criminal sanctions for insider dealing and market manipulation. It will impose criminal penalties on financial markets at European level for the first time ever. The only precedent concerns environmental damage and marine pollution (legislation on protection of the environment through criminal law). The question is particularly touchy since criminal law is at the heart of national sovereignty.
In the Council, work on the draft directive has apparently not advanced much, although work on the draft regulation seems to be moving forward. In Parliament, the Committee on Economic and Financial Affairs (ECON) will take up the issue as a matter of urgency after the summer recess, in September. On the draft directive, the Committee on Civil Liberties, Justice and Home Affairs (LIBE) proposed in a report adopted by a large majority, on 10 July, to toughen and harmonise criminal sanctions for abuse by imposing maximum prison sentences of at least five years on those guilty of serious insider dealing and market manipulation (see
The Commission does not stop there, however. “We are examining ways to improve how these reference rates are set” because self-regulation is not working, said a spokesman. The executive will present a proposal in the coming months to establish a supervision mechanism, because “these indices are public goods used confidently by market players” and “their confidence has been betrayed”.
Ten large international banks may have to pay at least €16 billion for having contributed to manipulation of interest rate indices like Libor (London interbank offered rate) and Euribor (Euro interbank offered rate), according to a memorandum by Morgan Stanley. This does not include financial penalties they may have to pay in connection with investigations by anti-trust authorities for collusion and concerted agreement, like those carried out by the European Commission.
The EU executive, like its American counterpart the Federal Trade Commission, has opened several probes to determine whether there was a concerted agreement by the banks and possibly certain regulators (some even suspect the Bank of England of being involved).
The Commission declined to disclose the progress of its investigations, which concern derivatives of the different Libor, Euribor and Tibor (Tokyo interbank offered rate) interest rates. It simply stated that it was “not legally bound by deadlines since these are anti-trust investigations” and that they were “in the preliminary stage”. Statements of objections will follow if the suspicions are confirmed.
The consequences will be pecuniary sanctions that will further weaken the sector as it struggles to recover from the crisis and that are bound to add to the credit crunch. But they will also include compensation for damages to individuals and companies wronged by the manipulation of these rates, which determine bank lending rates and interest on deposits and assets. Morgan Stanley estimates the bill at €6.4 billion. Class actions are being organised in the United States, in particular against the Bank of America.