UBS felony plea in Libor deal ushers in tougher enforcement era

December 21, 2012

By Nick Paraskeva, Compliance Complete contributor

NEW YORK, Dec. 21 (Thomson Reuters Accelus) – The UBS felony fraud plea for manipulating reporting of the Libor interbank lending rate marks a regulatory turning point towards tougher enforcement. After the U.S. election confirmed Dodd-Frank is here to stay, and with most Group of 20 reforms mapped out, rulemaking will proceed at a slower pace. The shift will impact the financial-industry, both in the U.S. and globally, which will face a greater supervisory willingness to impose high penalties, and a focus on ethical compliance.

“Today’s announcement – and $1.5 billion global resolution – underscores the Justice Department’s firm commitment to investigating and prosecuting such conduct, and to holding perpetrators of these crimes accountable for their actions,” said U.S. Attorney General Eric Holder in announcing the deal this week. His involvement in the enforcement was notable, as previous announcements have been made by Assistant Attorney General Lanny Breuer.

UBS’s Japan unit signed a plea agreement with the DoJ admitting its criminal conduct, and has agreed to pay a $100 million fine as part of the global resolution. Swiss parent company UBS AG entered a less severe non-prosecution agreement (NPA) with the U.S. government, which required a further $400 million penalty, but no guilty plea.

The first U.S. financial industry felony plea since Drexel Burnham Lambert’s no-contest plea deal in 1988, and the huge $1.5 billion fines, will catch the attention of senior management at other banks as well as their compliance and control professionals.

The settlement is intended to show resolve, following criticism in the U.S. and other countries that large banks and their management were not held accountable for any criminal actions during the financial crisis.

The international enforcement of UBS also shows a new level of cooperation between regulators. In addition to the DoJ fine, UBS paid a further $1 billion in fines to regulators in three countries. This included $700 million to the U.S. Commodity Futures Trading Commission (CFTC), $259.2 million to the U.K. Financial Services Authority (FSA), and $64.3 million to the Swiss Financial Markets Authority (FINMA).

While the DoJ said that UBS violations continued “at the height of the financial crisis,” they started several years before in 2005. Libor manipulation was not central in causing the crisis and continued until 2010, well after the worst of emergency had passed. In the last two years, noted the DoJ, “UBS made important and positive changes in its management, compliance and training to ensure adherence to the law”.

Given that the case was for behavior between 2005 and 2010, even if it is now fully eradicated, a pipeline of new actions will continue to be brought against other banks based on a similar fact pattern. It is not the activity that is new, but the response to it. The link with the crisis is that these longstanding violations are now being more deeply investigated and more harshly treated as a result of the post-crash atmosphere.

In June, Barclays became the first bank to settle Libor charges, by paying what now looks like a bargain $452 million to the DoJ, CFTC, and UK FSA. The DoJ said the “monetary penalty recognizes Barclays’s extraordinary cooperation” as they were the first bank to cooperate in disclosing the conduct. The fines for UBS are over three times as large as Barclays, with the possibility of still larger fines in future settlements.

Holder said “the Financial Fraud Enforcement Task Force’s extraordinary efforts…enabled us to execute the largest financial and health-care fraud takedowns on record and the biggest bank fraud prosecution in a generation”. President Obama created the Task Force in 2009 after criticism that very few charges were being brought. Obama’s second term may see more prosecutions, and continued ratcheting up of fines.

Too big to prosecute

It is significant that the smaller Japanese UBS subsidiary pleaded guilty to felony wire fraud. By contrast, the bank’s Swiss parent company UBS AG agreed to a less severe non-prosecution agreement and fines. The DoJ said this reflected UBS AG’s cooperation in disclosing the misconduct, and remedial measures and controls it has already implemented. The Department was criticized for not bringing criminal charges against HSBC for money laundering, rather than the $1.9 billion fine and deferred prosecution agreement.

The term too-big-to-prosecute reflects unwillingness by authorities to bring criminal charges against large banking entities. For UBS, this would have meant charging the U.S entity, which may have jeopardized its banking license. If governments are willing to lend money to a large bank to prevent collapse, it is argued, their judicial arms are also unlikely to put them out of business by bringing serious criminal charges.

“Prosecuting individuals is preferable as this raises few if any questions about institutional stability,” said Barney Frank, the co-author of the Dodd Frank law, the day after the UBS fine. In a letter to authorities, he said charging individual is a major deterrent. “I cannot conceive of a situation where a corporation is in fact guilty of violating the law where no individuals can and should be held accountable” said Frank.

Regulatory pressure

The CFTC’s enforcement division got the ball rolling when it referred the UBS matter to DoJ. Their aggressive stance on Libor puts pressure on other U.S. regulators to bring equivalent actions. This includes the Federal Reserve, which was known to have looked at banks’ LIBOR submissions as far back as 2008, but failed to take action. Its alert to the Bank of England, which is closer to Libor, also did not lead to action until the Barclay’s case.

The $700 million settlement “is the granddaddy of CFTC penalties,” said Commissioner Bart Chilton. The size of the U.S. fines is also causing international regulators to increase their level of their fines to avoid looking weak. The UK FSA’s £160 million penalty is the largest amount the regulator has ever imposed. It is over twice the size of the £59.5 million Barclay’s fine, which was a record amount for the UK at the time.

Other regulators may also act against the firm and others on related charges. The Hong Kong Monetary Authority announced an investigation of whether the bank committed misconduct on submissions to the local HIBOR index. The CFTC action also referred to activity by UBS traders in Japan, and authorities in the European Union and Canada are also looking at overall manipulation of their regional indices.

The charges will likely lead to more oversight of non-bank intermediaries such as money broker firms that helped enable the activity. UBS traders allegedly caused such broking firms to disseminate false and misleading information on rates to panel banks. The brokers were compensated, or threatened the bank would take business away. Compensation was by further trades, or wash trades to generate commission.


Other firms may assess whether the controls that the CFTC ordered UBS to take have a wider application in the sector. They include implementing firewalls to prevent improper communications between traders and other staff such as those submitting the rates. They also require better preparation and retention of documents, and new auditing, monitoring and training measures to implement the new processes.

Firms will seek to respond with stronger compliance and training, especially for traders and control staff. This will also require earlier reporting to regulators, and CFTC noted that the UBS conduct only came to light after they began an inquiry at their request in 2010. Notification is especially important for violations that are wide-ranging in the firm. The UBS case was firmwide, involving dozens of employees, across different regions, with manipulation involving LIBOR, the Euro rate (Euribor), and Tokyo rate (TIBOR).

The internal emails disclosed by the authorities included colorful language, and firms are again expected to issue advice to staff on this issue. The FSA said manipulation was also discussed in internal open chat forums and group emails, and was widely known within the firm. Despite being routine and widespread, manipulation of submissions was not detected by the firm’s Compliance or Group Internal Audit divisions.

The actions and disclosure of incriminating emails could also assist civil cases against banks. LIBOR is an average interest rate, calculated from submissions by banks, reflecting the rates they believe they would be charged if borrowing from other banks. As a reference for interest rate contracts, mortgages, credit cards, and other loans, a manipulated rate may lead to borrowers or lenders being ‘overcharged’.

Reputational risk

While enforcement actions should change behavior and the tone at the top, prevention of such activities will also require a concerted effort and industry investment in systems and controls that can detect them. The stakes are now larger for both the individuals concerned, as well as the firm.

Management directed false LIBOR submissions to protect UBS’s reputation from negative views that the bank had a high borrowing cost in the crisis. Banks may now re-assess the higher risk of such action. “No amount of profit is more important than the reputation of this firm, we are committed to doing business with integrity” said UBS CEO Sergio Ermotti. “We deeply regret this inappropriate and unethical behavior.”

It is not just reputation, but the bottom line that is impacted by breeches. In announcing the LIBOR fines, UBS said it believes its fourth quarter “will show a loss in the approximate range of CHF 2.0 to 2.5 billion, primarily as a result of total provisions for litigation and regulatory matters”.

(Nick Paraskeva is principal of Reg-Room LLC (, which provides regulatory information and consultancy. He covers various facets of the banking and securities industry and delivers exclusive analysis through Thomson Reuters. He can be contacted at (212) 217-0403 and Follow Nick on Twitter@regroom.)

(This article was produced by the Compliance Complete service of Thomson Reuters Accelus ( Compliance Complete ( provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 230 regulators and exchanges. Follow Accelus compliance news on Twitter at:

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