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This collective fine for big banks involved in exchange fraud represent less than 1/1000 of the daily transactions in the market says Bill Black, former financial regulator

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SHARMINI PERIES, EXEC. PRODUCER, TRNN: Welcome to The Real News Network. I’m Sharmini Peries, coming to you from Baltimore. And welcome to this edition of the Bill Black report.

Finally, major banks are fined $4.3 billion over exchange market manipulations by Britain’s Financial Conduct Authority. Six of the world’s largest banks have been fined a collective amount of $4.3 billion. The banks are–and it’s worth taking this in slowly–HSBC, Royal Bank of Scotland, JPMorgan Chase, Citigroup, Royal Bank of Scotland, UBS AG, and the Bank of America. They were found to be negligent in trader collusion around the global currency. Martin Wheatley of Britain’s Financial Conduct Authority unveiled the penalties.

Joining us now from Kansas City, Missouri, to discuss all of this is Bill Black. He’s an associate professor of economics and law at the University of Missouri-Kansas City. He’s a white-collar criminologist and a former financial regulator and author of The Best Way to Rob a Bank Is to Own One.

Thank you for joining us again, Bill–twice this week.


PERIES: So, Bill, is this a major fine?

BLACK: It’s not a major fine, but it is the second-largest fraud in the history of the world. So the foreign exchange, roughly $4.5 trillion is traded every day in foreign exchange. Note that that’s in a single day, 1,000 times the fine.

PERIES: Alright. Give us some specifics here. What does this particular penalty mean? And will this then be the conduit for more regulation in this area?

BLACK: Well, right now it means business as usual, which means fraud as usual, very weak regulation and nonexistent prosecution. However, they’re claiming that there is an ongoing criminal investigation.

So first the regulation, as usual. The major disclosure here is that the Bank of England’s senior person on foreign exchange knew that this was likely to be a fraud involving the manipulation by the largest banks of the foreign exchange fix, as it’s called, and he knew that at least as early as 2008, and maybe in 2006. But as late as 2012, when the Bank of England was the principal regulator of much of finance, he–well, you have his conversation with banks who were engaged in manipulating and bankers who were engaged in manipulating the foreign exchange rate, in which he said, well, you know, a few years back, what’s being done wouldn’t have even–no one would have even batted an eye. So that tells you how pervasively corrupt the culture was. But he goes on to say, regulators now, they’d probably not be very favorable to this. But, of course, he made sure that he didn’t tell the regulatory staff at the Bank of England that there was this likely fraud.

You’ve already mentioned that these are large banks, but people need to understand these are the three largest banks of the world, and collectively, with Barclays, which has not settled yet, it’s actually seven of the nine largest banks in the world have been found through this investigation to have manipulated these rates. And so it’s more of the same story: fraud, it doesn’t simply exist in banking; it’s pervasive.

Notice you used the word negligence. And that is a tale in itself, because of course these actions were in no way negligent. They were quite intentional. And they were done to hurt customers and to benefit the banks and, more particularly, the bankers. So the regulators don’t have to prove fraud. They can recover simply through negligence. And they don’t want to embarrass the banks still. So they call it negligence when it in fact is clear fraud, collusion, the creation of an antitrust cartel.

Notice also that the banks, all of the banks–again, this is seven of the nine largest banks in the world–were also implicated in the largest fraud in world history, which is similar manipulation of the London Interbank Offered Rate, LIBOR, which is used to set the price for $350 trillion in financial product, and that the banks all represented (their senior bankers during these settlements) that everything had been cleaned up and nothing like this could possibly ever happen. Well, except that the government investigation found that these frauds began at least as early as 2008–and pretty much everyone believes they began far before that–and extended until into 2013 as they were claiming that they had cleaned everything up.

So the banks entered in bad faith into those earlier settlements, all of which should be pulled. In other words, when they lie to you like this, there’s a standard Justice Department response in the past, which is, hey, you lied to us in the representations, everything we gave away is hereby withdrawn, everything you admitted is hereby going to be used against you, and you bring the action against them. You’ll notice that there’s no threat to do that here.

Notice also the timing, in that RBS, Royal Bank of Scotland, is principally government-owned. But they have refused to actually run it. And as a result, the private managers who were there allowed these frauds, this massive manipulation, to continue into 2013 under public ownership but actually private administration. So it’s a scandal within a scandal at every level that you look at this.

PERIES: Bill, can you give us an example of how a ordinary person in the foreign exchange transaction is experiencing this?

BLACK: Right. Well, the obvious one, if of course, is that if you travel and you change currencies, that this affected you. But the far larger thing is invisible to us, and that is, the goods that we purchase from abroad (and, of course, that’s a huge amount of things) and the things that we sell, American manufacturers, businesses, services sell abroad. All of those things go through an exchange rate, frequently, and that was gimmicked. And here the particularly pernicious part is that it was the traders taking advantage of confidential information provided by the client to manipulate the rates in ways that were often hostile to the client and pro the bank and pro the traders.

And, of course, that’s the final thing: you’ve got this absurdity that says that this was able–this massive fraud was able to continue for a minimum of six years, and more likely far longer than that, while the senior management supposedly had roused from its deep hibernation, its ethical hibernation, and it supposedly investigated, scrubbed clean all the operations. Except none of that happened. And this required hundreds of people to be involved in these frauds. So the idea that it couldn’t be known, wasn’t known by senior management, but was known by the Bank of England official is facially preposterous.

PERIES: And finally, Bill, what role did the American regulators play in bringing about these penalties?

BLACK: Well, there’s actually–unfortunately, it’s behind a pay wall, but there is an article that says that one of the behind-the-scenes reasons that the remedy is so pitifully weak–I mean, this is farcical, this roughly $5 billion fine, compared to the size of the manipulation–is that the Commodity Futures Trading Commission was the lead regulator on this for the United States. And many of your viewers may know that the Republicans in Congress have been leading this sort of unholy war against the Commodity Futures Trading Commission, CFTC, for pretty much Obama’s entire term in office, and they have blocked it from being able to get the necessary resources to even have the computers they need to run competent real-time investigations and such. And they are eager to actually diminish further the Commodity Futures Trading Commission. You can look forward to efforts, probably early in the new Congress, to further attack and emasculate the abilities of the CFTC.

PERIES: So, Bill, thank you so much for coming on again for the second time this week. It was an important story this week, and I appreciate you making the time to explain it all.

BLACK: Well, it’s the modern world of banking. It used to be that every month a new scandal, and now it’s every four or five days.

PERIES: Bill, thank you.

BLACK: Thank you.

PERIES: And thank you for joining us on The Real News Network.


DISCLAIMER: Please note that transcripts for The Real News Network are typed from a recording of the program. TRNN cannot guarantee their complete accuracy.

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William K. Black, author of The Best Way to Rob a Bank is to Own One, teaches economics and law at the University of Missouri Kansas City (UMKC). He was the Executive Director of the Institute for Fraud Prevention from 2005-2007. He has taught previously at the LBJ School of Public Affairs at the University of Texas at Austin and at Santa Clara University, where he was also the distinguished scholar in residence for insurance law and a visiting scholar at the Markkula Center for Applied Ethics.

Black was litigation director of the Federal Home Loan Bank Board, deputy director of the FSLIC, SVP and general counsel of the Federal Home Loan Bank of San Francisco, and senior deputy chief counsel, Office of Thrift Supervision. He was deputy director of the National Commission on Financial Institution Reform, Recovery and Enforcement.

Black developed the concept of "control fraud" frauds in which the CEO or head of state uses the entity as a "weapon." Control frauds cause greater financial losses than all other forms of property crime combined. He recently helped the World Bank develop anti-corruption initiatives and served as an expert for OFHEO in its enforcement action against Fannie Mae's former senior management.