If you were transferring euros into pounds on December 7, 2011, after 2:56, then you got a poor exchange rate because a pair of currency dealers in the UK manipulated the market to cause the pound to spike in value. This week saw the first arrest of an individual currency broker responsible for “ramping” or “front-running”.
HSBC’s head global FX manager had little trouble posting his $1m (£755,000) bond. Mark Johnson and his accomplice, former colleague, Stuart Scott earned HSBC $8m by using their inside information to manipulate a trade and pocketed $3m.
In October the brokers knew a client planned to exchange $3.5bn (£2.6bn) into pound sterling. While they were entrusted to get their client to get the best exchange rate, they used the confidential information to cheat the client to the benefit of themselves and the bank. And they charged the client $5m in fees!
In the days ahead of the deal, the men directed traders to assist them as they purchased stockpiles of Pounds that went into HSBC’s “proprietary” accounts. They managed to “ramp” the price of the pound up so that when they put through their client’s trade the price of Pound Sterling was at a two-day high. That’s when they sold the pounds they’d bought in preparation for the scheme.
First Round: Fine Banks, Second Round: Arrest Bank Execs
The arrest is the first time the US Department of Justice has charged individuals, but they had already repeatedly fined HSBC. The bank was one of six that saw fines by UK and US regulators last year for manipulating the currency market.
Citicorp, JPMorgan Chase & Co., Barclays Plc and Royal Bank of Scotland Plc pled guilty to charges of conspiring to manipulate the price of U.S. dollars and euros and USB admitted to wire-fraud. The six biggest banks paid fines of $5.8 bn, in May 2015, settling so that they could return to market trading.
The latest charges come some six years into the investigation of traders who called themselves members of “The Cartel”. They used secret chat rooms to collude in setting trade rates, working together to crush competition in the market. US Attorney General Loretta Lynch described the banks behavior as a: “brazen display of collusion”.
FX’s Scale dwarfs UK Economy
London is the global epicenter for foreign exchange as 40% of global transactions take place in The City. In 2013, according to the Bank for International Settlements, £3.3tn or with the exchange rate at the time, $5.3tn was traded per day on the forex markets. Year on, the figures have expanded, so we can safely say that much more money is exchanged daily, at this point. For perspective, this figure is double that of the UK’s annual economy which, according to World Bank was $2.52tn that same year.
Difficult to Prove Individual Cases
Because he lives in the US, Johnson was easier to arrest as he landed at JFK International Airport. Stuart Scott, HSBC’s former head of foreign exchange trading, who lives in the UK, was also charged.
Although dealers’ phone calls are recorded as a measure to record and protect clients, due to the nature of the market, it can be difficult to catch currency crimes because the market is inherently flexible. It is easier to fine the banks, who appear to set aside some of their profits as if this were the price of doing business.
Fines for Crimes are simply the Price of Doing Business
HSBC has continually been fined large amounts with little apparent consequence. In 2012 HSBC was fined $1.9b as a penalty for poor compliance that allowed money laundering to occur. This was a light slap on the wrist given that in just six months of that year HSBC saw profits of $12.7bn.
Clearly the risk of paying further penalties wasn’t a deterrent as the bank paid $249m in 2013. For charges of manipulating the FX market, US authorities charged them $275m and UK’s Financial Conduct Authority(FCA) fined them $343 in 2014. This year they have already been fined $470 for foreclosure abuse, meaning they profited by taking people’s homes due to predatory practices.
The Sane Alternative to Big Banks
Knowing that banks charge huge fees for making foreign exchange transactions, it’s clear from HSBC’s record that they profit on a massive scale each time they make large currency transactions. The reason they are able to act with impunity is simply that they are so large, and their profits so vast, they aren’t bothered to conform to the practices smaller foreign exchange firms are so scrupulous about.
Not only do you always get a better rate when using a currency exchange company, you’re also taking a stand against the predatory practices that big banks use every day. Catching one or two bankers might make them more accountable, for a time, but why trust them, hoping this is the case?
Instead of asking a big bank to transfer your hard earned funds, save yourself the fees and go with a trustworthy company that follows the FCA’s strict guidelines to the letter.