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What the Libor scandal tells us about corruption

August 27th, 2015 - Posted by Sam Hemmant in Anti-Bribery And Corruption

Tom Hayes, a 35-year-old former derivatives trader at Citigroup and UBS, was convicted of eight counts of conspiracy to defraud and sentenced to 14 years in jail at Southwark Crown Court.  The conviction is the first that has resulted from the Serious Fraud Office's (SFO) investigation into the Libor scandal.  Hayes worked at UBS until 2009 and then at Citigroup until 2010.

After the case, the SFO said that it anticipates more criminal charges will be brought against other traders suspected of manipulating Libor – the interbank lending rate.  The court was told that between 2006 and 2010, Hayes conspired with others to manipulate and fix the Yen Libor.  The Libor is used to set the rates of borrowing on more than £190 trillion of contracts globally.

Strong deterrent message
Following the trial, David Green, the director of the SFO, said the lengthy sentence would "send a strong deterrent message" to others considering manipulating the benchmark rates.  He added, ""We follow the evidence wherever it takes us, and that might be as high up the organisation as you might choose ... If there is evidence and it is in the public interest, we will prosecute someone."  The length of the sentence was meant as "part punishment, part deterrent", Green said.  "The jury were sure that in his admitted manipulation of Libor, Hayes was indeed dishonest.  The verdicts underline the point that bankers are subject to the same standards of honesty as the rest of us."

Do not stop due diligence at the gate
The SFO has charged 13 people as part of its investigation into the rigging of Libor, an inquiry which started in 2012.  The investigation is ongoing.

Mr Justice Cooke, who sentenced, said: "The conduct involved here is to be marked out as dishonest and wrong and a message sent to the world of banking accordingly.  The reputation of Libor is important to the City as a financial sector and the banking institutions of the City.  Probity and honesty is essential as is trust.  The Libor activity of which you played a leading part put all that in jeopardy," Hayes was told.

While Hayes acted alone without the blessing of his superiors and it is clearly impossible to control completely the actions of individual employees if they are determined to engage in corruption, effective risk management can help banks avoid the largest penalties when a member of staff crosses the line.

Stringent due diligence and compliance policies are likely to be taken into account by lawmakers when issuing penalties for breaches of financial regulations.  Furthermore, banks and other organisations that cooperate with prosecutors while having proper due diligence procedures in place, can apply for Deferred Prosecution Agreements (DPAs) and potentially benefit from lesser penalties, including part fine or part compensation payments.

Corruption can come from anywhere and global financial institutions need to protect themselves from the actions of employees as much as they need to from third party business partner activities.  It is clear from this case that other financial institutions, particularly those in foreign countries, must be treated with the same caution as any other supplier, business partner, consultant or adviser.

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