Barclays’ governance, compliance weaknesses exposed in U.S. regulator’s findings
By Emmanuel Olaoye
WASHINGTON/NEW YORK, July 3 (Thomson Reuters Accelus) – A U.S. regulator’s case against Barclays revealed significant failures with the bank’s internal controls as well as failures with its corporate governance.
Barclays agreed last week to pay $453 million to U.S. and British authorities to settle allegations that it rigged key interbank lending rates, called the London Inter-bank Offering Rate (Libor) and a separate Euribor rate, by manipulating its reported rates in submissions to the British Bankers Association, which calculated the benchmark figures.
The probe, which could cost several banks billions of dollars, has already claimed the scalp of Barclays CEO Bob Diamond and has raised questions about the conduct of Barclays’ senior managers and compliance officers.
Diamond, who quit as CEO today under a barrage of pressure from politicians, is the highest-profile casualty of an interest rate-rigging scandal that spans more than a dozen major banks across the world.
The lack of specific internal controls, particularly in reviewing email communications, was one of the failures cited by a Commodity Futures Trading Commission regulatory order implementing its share of the Barclays settlement. The CFTC said Barclays lacked daily supervision and periodic reviews that could have detected the interest rate manipulation. The order also accused the bank’s senior management of encouraging executives to submit lower rates than the bank was actually paying.
Lack of internal controls
“Appropriate daily supervision of the desk by the supervisors, as well as periodic review of the communications, should have discovered the conduct. However, Barclays lacked specific internal controls and procedures that would have enabled Barclays’ management or compliance to discover this conduct,” the CFTC order said.
Barclays gave its consent to the order, without specifically admitting or denying it’s findings.
Referring to activities to manipulate the Euribor rate, the CFTC order said: “Multiple traders engaged in this conduct, and no attempt was made by any of the traders to conceal the requests from supervisors at Barclays during the more than four-year period in which the activity occurred … and on occasion, the traders discussed their requests with trading desk managers.”
It said a Barclay’s supervisor passed on a trader’s concerns to a senior compliance officer and a member of Barclay’s senior management that the bank was being dishonest in submissions that reported the Libor rates. The Barclay’s senior compliance officer then told Britain’s Financial Services Authority he was concerned that Libor reports by banks were distorted.
The senior compliance officer reported in an internal email “directed to several levels of Barclays’ senior management” that he had informed FSA of his concerns regarding potential distortion of Libor.
However, CFTC said, the Barclays’ senior compliance officer did not tell the FSA that Barclays was altering its own Libor submissions. “The same Barclays senior compliance officer did not follow up internally with the Libor submitters or their supervisor to confirm that Barclays was making its Libor submissions properly,” and the banks practices did not change.
Furthermore, the CFTC report alluded to the possibility of pressure by the Bank of England on Barclay’s to manipulate its Libor reports.
“Barclays increasingly felt tremendous external pressures concerning how it was being perceived in the market and media, particularly due to its higher Libor submissions relative to the other panel banks. Barclays continued to believe that the other panel banks’ Libor submissions were unrealistically low.
“Even though it maintained that its liquidity position was in fact strong, Barclays was increasingly worried about these market and media perceptions. At this time, the Bank of England had a conversation with a senior individual in Barclays, in which it raised questions about Barclays’ liquidity position and its relatively high Libor submissions.
“In late October 2008, reacting to this pressure and the discussion with the Bank of England, Barclays believed it needed to lower its Libor submissions even further,” the CFTC order said. As a result, bank senior managers ordered that the Libor submissions be lowered further.
William Black, professor of Economics and Law at the University of Missouri, said the sanctions highlighted why the largest financial institutions needed stronger governance controls. Too often he said big banks blamed their shortcomings on the actions of a few rogue employees when they are found to have engaged in serious misconduct.
As an example, he cited JP Morgan’s CEO Jamie Dimon blaming the bank’s $2 billion in trading losses on the actions on the “poorly conceived” strategies of executives in the bank’s trading unit. Last week, Barclays CEO Bob Diamond said in an open letter to Andrew Tyrie, chairman of the Treasury Select Committee, that some of the bank’s employees had manipulated their interest rate submissions for their own benefit.
“There are really generic problems with governance,” Black said.
The banks involved in the scandal could face a “Pandora’s box” of bigger fines, anti-trust charges and even criminal charges, Black said. He noted the Barclays case was very different to the collapse of MF Global collapse, because the alleged misconduct involved competitive issues where several banks colluded to manipulate the inter-bank interest rates.
“The EU has gotten much more aggressive over competition enforcement in the last 15 years.”
“The damage will be much more harder to quash with the more aggressive enforcement.”
(This article was produced by the Compliance Complete service of Thomson Reuters Accelus. <a href=”http://accelus.thomsonreuters.com/solut ions/regulatory-intelligence/compliance- complete/” target=_new”>Compliance Complete</a> provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 230 regulators and exchanges.)