The Cartel and the Currency Fix: How Banks Rigged the System
The Department of Justice’s investigation revealed a clandestine operation dubbed “The Cartel,” comprised of traders from these major banks. Between 2007 and 2013, these individuals used private electronic chat rooms and coded language to coordinate their trading activities and manipulate benchmark exchange rates. These benchmark rates are crucial as they are used to price trillions of dollars in transactions daily. Two key “fixes” were targeted: the 1:15 p.m. European Central Bank fix and the 4:00 p.m. World Markets/Reuters fix. These fixes are moments when trading data is collected to establish a daily reference rate.
By coordinating their buying and selling of U.S. dollars and euros around these fix times, “The Cartel” aimed to artificially inflate or deflate the exchange rate to maximize their profits. This wasn’t just about large institutional trades; these manipulated rates affected the entire market, impacting everyone from multinational corporations to individuals exchanging 20 US dollars to euros for personal use.
Beyond the Big Players: The Ripple Effect on Everyday Transactions
You might wonder how the actions of these powerful banks relate to your everyday financial transactions, such as exchanging 20 US dollars to euros. The FX market is a vast and interconnected network. Even subtle manipulations at the top can create distortions throughout the system. When benchmark rates are rigged, it affects the prices at which banks and financial institutions trade currencies. These institutions, in turn, pass on these slightly skewed rates to their customers, which include businesses and individuals.
Consider someone planning a trip to Europe and needing to convert 20 US dollars to euros. They rely on the prevailing exchange rate to determine how many euros they will receive. If the dollar-euro exchange rate has been artificially manipulated, even by a fraction of a cent, it can cumulatively impact millions of such transactions daily. While the effect on a single transaction of 20 US dollars to euros might seem negligible, the aggregate impact across the entire market is substantial, unfairly benefiting the manipulating banks at the expense of market participants.
The Price of Greed: Billions in Fines and Corporate Probation
The consequences for these banks are significant, reflecting the severity of their criminal behavior and the scale of the market manipulation. Citicorp, Barclays, JPMorgan, and RBS have each agreed to plead guilty to felony charges of conspiring to fix prices and rig bids for U.S. dollars and euros. The fines imposed are proportional to their involvement in the conspiracy:
- Citicorp: $925 million
- Barclays: $650 million
- JPMorgan: $550 million
- RBS: $395 million
In addition to these hefty fines, Barclays faced an additional $60 million penalty for violating a previous non-prosecution agreement related to LIBOR manipulation. UBS AG, another major player, also pleaded guilty to wire fraud for manipulating LIBOR and other benchmark interest rates, incurring a $203 million criminal penalty. All five banks will also face a three-year period of corporate probation, requiring court oversight and regular reporting to authorities.
Attorney General Loretta E. Lynch emphasized the gravity of these actions, stating, “The penalty these banks will now pay is fitting considering the long-running and egregious nature of their anticompetitive conduct. It is commensurate with the pervasive harm done. And it should deter competitors in the future from chasing profits without regard to fairness, to the law, or to the public welfare.”
A Wake-Up Call for Financial Institutions and a Reminder for Consumers
These guilty pleas and massive fines serve as a stark warning to financial institutions that criminal behavior in the markets will not be tolerated. As Assistant Attorney General Bill Baer stated, “The charged conspiracy fixed the U.S. dollar – euro exchange rate, affecting currencies that are at the heart of international commerce and undermining the integrity and the competitiveness of foreign currency exchange markets.”
For consumers, while the direct impact on converting 20 US dollars to euros might be small in individual instances, this case highlights the importance of market integrity and the potential consequences of unchecked financial power. It underscores the need for robust regulatory oversight and vigilance to ensure fair and transparent markets for everyone, from multinational corporations to individuals exchanging currency for their personal needs. The actions taken by the Department of Justice and other regulatory bodies demonstrate a commitment to holding even the largest financial institutions accountable and protecting the fairness of the global financial system, which ultimately impacts every transaction, large or small, including the seemingly simple act of converting 20 US dollars to euros.
