ResPublica Fellow Alan Riley on why the Sherman Act may turn out to be the most effective Libor-busting weapon
The
regulatory settlement that Barclays reached with the US and British authorities
has resulted in both bankers and commentators overlooking the most likely way
Libor will be investigated - via the Antitrust Laws. Since the early 1990s the
Justice Department has built what is one of the most effective white collar
prosecution machines in the world. Over 50 international cartels have been
busted, billions of dollars imposed in criminal fines and hundreds of
executives have been gaoled.
While some
of the abuses alleged regarding Libor involve participating banks submitting
false rates for their own gain there are also allegations of collusion between
participating banks. UBS in fact has obtained conditional immunity from
penalties under the Sherman Act for price-fixing from the Antitrust Division.
It is very rare for conditional immunity to be offered without the Division
then successfully prosecuting and penalising culpable executives and
businesses.
It is
difficult to argue that collusion between participating banks is not
price-fixing for the purposes of the Sherman Act. Price-fixing includes not
only direct fixing of prices offered to consumers, but also a very wide range
of indirect price fixing, from agreements on discounts, agreements to restrict
output, market allocation and bid rigging. In this context it is difficult to
see how collusive Libor rate setting by competitor banks of an interest rate
which itself is used by the participating banks can be other than a form of
price-fixing.
That being
the case, the Antitrust Division have jurisdiction to bring to bear their honed
cartel investigation and enforcement machine. The key element in the machine is
the Corporate Leniency Programme (CLP). This Programme offers legal immunity
for the first member of the cartel into the Division. The immunity is for
corporate and personal fines, as well immunity from gaol sentences for
executives. It also can provide a basis for single rather than Sherman Act
treble damages to be applied to any civil damages case against the holder of
CLP immunity.
A single
leniency applicant usually triggers more applicants seeking to offer more
evidence in return for further fine reductions. If the applicants cannot offer
more evidence they can also take advantage of the Division’s Amnesty Plus
programme. Applicants can offer evidence regarding other cartels they have been
involved in return for legal immunity in respect of the second cartel and
greater discounts on the fine in respect of the first cartel. In sectors such
as chemicals and computer chips Amnesty Plus has been very successful at
winding up networks of cartels across entire market sectors. It remains to be
seen whether Amnesty Plus similarly will deliver evidence of any other illegal
rate setting behaviour by the banks outside the Libor framework.
The US has
few jurisdictional problems in running international cartel cases. Since at
least Nippon Paper in 1997 it has been able to take the view that the criminal
jurisdiction of the United States is engaged if US commerce is affected. Given
the worldwide deployment of Libor rates in financial products, including in the
United States, the involvement of US banks as members of Libor and the
existence of branches of foreign Libor participating banks on US soil
jurisdiction can be assumed. The US authorities may well take the view that any
actions on its part in respect of allegations of collusive dollar Libor setting
do not even amount to an application of its extra territorial jurisdiction.
In
principle, the US authorities would seek executives from any participating bank
they found to be involved in collusive price fixing anywhere in the world.
However, under the double criminality rule, extradition is only possible where
price-fixing is also criminal in the state where the alleged price-fixer
resides. The difficulty for the Division is that the only country with a major
financial centre which also has a criminal antitrust regime aside from the
United States is the United Kingdom. Notwithstanding the fact that the UK
legislation is poorly drafted and potentially unenforceable, the US can seek
extradition of any executives alleged to have been found price-fixing who are
resident in the United Kingdom. For executives further afield, the Division
would have to issue Interpol Red Notices, which would make travel difficult for
such executives and encourage them to hand themselves in (which has happened).
However, as
London is the other principal financial centre, if the Division has the
evidence, potentially a significant number of executives could be extradited
and committed for trial in US Federal Court. Usually the Division settles these
cases rapidly. Defendants faced with the prospect of heavy gaol sentences
following a public trial and the scale of the evidence in the hands of the
Division plead guilty under an agreed plea agreement. Given the broader
political context of holding the banking community to account, the prospect of
deploying the antitrust laws to speedily obtain a significant number of
convictions is likely to prove attractive.
The impact
of any application of the US criminal antitrust rules to the Libor case is
likely to have a particular impact on regulation in the London market. Given
that even if evidence of criminal price-fixing is available, the UK authorities
will find it very difficult to prosecute in timely fashion (there is no
comparable plea agreement system; the UK cartel offence includes a requirement
of ‘dishonesty’ which is likely to be difficult to meet and the UK Supreme Court
has further undermined the law in a parallel case, which will provide a number
of options for defence counsel to defeat any prosecution). One outcome is that
the UK may well move in the direction of a radical overhaul of its criminal
antitrust regime on US lines. Furthermore, the failure of other states to be
either able to prosecute bankers complicit in Libor rate setting or extradite
them may well lead to an upsurge in states enacting criminal antitrust regimes
across the world.
The far
greater impact of antitrust prosecutions would be that it would turbo charge
banking reform in the G20. If the Division can demonstrate price-fixing in
respect of Libor and hold individual executives accountable, and potentially
open up inquiries into other rate setting mechanisms then it is difficult to
see how such a development would not trigger momentum toward much more radical
global banking reform.