A group of global banks will pay more than $5 billion in penalties and plead guilty to rigging the world's currency market, the first time in more than two decades that major players in the financial industry have admitted to criminal wrongdoing.
JPMorgan Chase, Citigroup, Barclays and The Royal Bank of Scotland conspired with one another to fix rates on U.S. dollars and euros traded in the huge global market for currencies, according to a resolution announced Wednesday between the banks and the Department of Justice. A group of currency traders, who called themselves "The Cartel," allegedly shared customer orders through chat rooms and used that information to profit at the expense of their clients.
The resolution is complex and involves multiple regulators in the U.S. and overseas.
The four banks will pay a combined $2.5 billion in criminal penalties to the DOJ for criminal manipulation of currency rates between December 2007 and January 2013, according to the agreement. The Federal Reserve is slapping them with an additional $1.6 billion in fines, as the banks' chief regulator. Finally, British bank Barclays is paying an additional $1.3 billion to British and U.S. regulators for its role in the scheme.
Another bank, Switzerland's UBS, has agreed to plead guilty to manipulating key interest rates and will pay a separate criminal penalty of $203 million.
Big banks overall have already been fined billions of dollars for their role in the housing bubble and subsequent financial crisis. But even so, the latest penalties are big. Including a separate agreement with the Federal Reserve announced Wednesday and another announced last year, the group of banks will pay nearly $9 billion in fines for manipulating the $5.3 trillion global currency market.
Unlike the stock and bond markets, currencies trade nearly 24 hours a day, seven days a week. The market pauses two times a day, a moment known as "the fix." Traders in the cartel allegedly shared client orders with rivals ahead of the "fix", pumping up currency rates to make profits.
Global companies, who do business in multiple currencies, rely on their banks to give them the closest thing to an official exchange rate each day. The banks are supposed to be looking out for them instead of conspiring to get even bigger profits by using customers' orders against them. Travelers who regularly exchange currencies also need to get a fair price for their euros or dollars.
It is rare to see a bank plead guilty to wrongdoing. Even in the aftermath of the financial crisis, most financial companies reached "non-prosecution agreements" or "deferred prosecution agreements" with regulators, agreeing to pay billions in fines but not admitting any guilt. If any guilt were found, it was usually one of the bank's subsidiaries or divisions — not the bank holding company.
One of the most notable banks to plead guilty to any criminal wrongdoing was investment bank Drexel Burnham Lambert, which plead guilty to fraud in the 1980s following the implosion of the junk bond bubble.
The number of traders who participated in the criminal activity was small. JPMorgan, in a statement, said the one trader involved has been fired. Citi said it fired nine employees involved.
The agreement between the banks and the DOJ is subject to court approval. If approved, all five banks have agreed to three years of corporate probation overseen by a court. The banks will also help prosecutors with their investigations into individual criminal activity related to the currency market rigging.