Barclays scandal highlights value of monitoring and testing – governance experts
By Emmanuel Olaoye
WASHINGTON/NEW YORK, July 10 (Thomson Reuters Accelus) - A major theme in the Barclays scandal over rate-rigging is the firm’s failure to conduct adequate monitoring and testing of its compliance program, governance experts have told Thomson Reuters Accelus.
Barclays has agreed to pay $453 million to settle charges by U.S. and UK authorities that its employees manipulated the London Interbank Offered Rate, or LIBOR, a key benchmark for global financial transactions, including payments on mortgages, credit cards and other financial contracts. LIBOR is set daily by the British Bankers Association based on submissions by banks of what they estimate they would have to pay for unsecured borrowings for periods of from overnight to one year.
In its filings, Barclays said its traders have communicated with its staff who submitted rates to the BBA, asking that the rates be adjusted to increase the traders’ chance of success on credit transactions.
The case, which is part of a wider probe involving the other LIBOR-submitting banks, has claimed the scalp of Barclays’ chief executive Bob Diamond, who resigned last week. In his appearance before the UK Treasury Select Committee on Wednesday, Diamond blamed the incidents on the behavior of 14 rogue employees at the bank.
Diamond said the wrongdoing was not discovered by senior management until the firm began investigating the incidents this month. “I think I have been very clear that this did not get above the supervisor level until we uncovered it,” he said.
John Alan James, professor at Pace University’s Lubin School of Business, said the failure of Barclays’ compliance department and its internal audit function could explain why the wrongdoing was never escalated to senior management. He said ongoing monitoring and testing of the firm’s policies was a key element of an effective compliance program.
“Somebody wasn’t monitoring. If internal audit had come in and looked at the failure they would say this is not adequate,” James said. “Internal audit is supposed to be monitoring compliance and asking compliance: Are you monitoring one level down?”
James noted the similarities between the Barclays scandal and Lehman Brothers’ use of an accounting gimmick called Repo 105 to hide the debt on its books. Having an employee in internal audit reporting to the board would have protected the organization against fraudulent actions, he said.
William K. Black, professor of economics and law at the University of Missouri-Kansas City, said the scandal suggested that large financial institutions lack the controls to prevent rogue employee operations that could cost the firm billions of dollars.
“To have as a defense that it was just a rogue group of employees – you can’t have governance like that,” Black said.
(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.)