The record fines imposed by the European Union today as part of its settlement with eight global financial institutions for fixing benchmark interest rates highlight both the risks of collusion and the rewards of coming clean.
Although the EU fined the group of financial institutions a record total of 1.7 billion euros (about $2.3 billion), two of the participants in the cartels—UBS and Barclays—escaped any fines because they alerted the European officials to the wrongdoing.
The financial institutions settled charges that they fixed rates for the London interbank offered rate (“Libor”) in the Japanese yen and the euro interbank offered rate (“Euribor”) in euros. Four of these financial institutions—Barclays, Deutsche Bank, RBS and Société Générale—conspired to fix interest rate derivatives in the euro. Six of them—UBS, RBS, Deutsche Bank, Citigroup, JPMorgan and broker RP Martin—participated in cartels that fixed interest rate derivatives in the yen. Pursuant to the Commission’s cartel settlement procedure, the companies’ fines were reduced by 10% for agreeing to settle.
The Europeans’ investigation follows related investigations into conspiracies to fix the Libor rate by U.S., British and Swiss regulators that led to five financial institutions, including Barclays, RBS and UBS, admitting wrongdoing and agreeing to pay more than $3 billion.
In announcing the settlement, Joaquín Almunia, the EU’s competition commissioner, stated that “What is shocking about the LIBOR and EURIBOR scandals is not only the manipulation of benchmarks, which is being tackled by financial regulators worldwide, but also the collusion between banks who are supposed to be competing with each other.”
The banks’ settlement with the EU marks the first time that Citigroup and JPMorgan, will pay penalties in the rate-fixing investigations. Citigroup, which will pay 70 million euros in fines, avoided fines of an additional 55 million euros because it cooperated with the European investigation.
The international expansion of investigations into international conspiracies to fix benchmark interest rates is not surprising. Competitors that collude to eliminate competition put themselves at the mercy of not just the multiple regulators that police competition around the world, but also of their co-conspirators when their interests diverge.
As soon as members of a price-fixing conspiracy suspect that cartel activities may be revealed, there can be a race to prosecutors’ doors to get a deal avoiding civil fines or even criminal penalties. After the first whistle-blower reveals the existence of a cartel, however, the next conspirator through the door has to reveal some new wrongdoing in order to get a deal. If that conspirator is aware of any related cartels, they are likely to be revealed to the prosecutors, who will then start new investigations.
After that point, all the other conspirators may soon come to realize that their elaborate cartels were really interlocking houses of cards that could not survive even one defection.