Timing, as the adage has it, is everything.
For UBS, one of five banks trying to settle with US prosecutors over alleged manipulation of foreign-exchange benchmarks, a criminal conviction and hundreds of millions of dollars in extra penalties could rest on exactly when its traders attempted to rig one of the world’s biggest financial markets.
Wrangling over the details of an expected $6bn settlement has gone down to the wire, as the US Department of Justice has threatened to tear up an earlier 2012 deal in which it agreed not to file criminal charges against the Swiss bank for manipulating Libor, another major benchmark.
Scrapping the non-prosecution agreement, or NPA, could theoretically put UBS’s ability to operate in the US in jeopardy — although pulling its licence, described by legal experts as the “nuclear option”, is not understood to be under consideration in this case.
The decision on whether to scrap the NPA hinges partly on a question of dates, according to people familiar with the negotiation: did any of the alleged wrongdoing in the forex markets occur after the NPA on Libor was signed in December 2012?
The discussions have also been complicated by the fact that UBS has immunity from prosecution for antitrust violations connected to the forex probe because it was the first bank to alert authorities to possible misbehaviour in that market.
Prosecutors could still punish the bank on other grounds. The allegations in the forex probe have expanded beyond collusion to claims that UBS may have committed fraud by failing to make adequate disclosures to clients and counterparties. UBS has no immunity against fraud charges and is expected to pay up to $800m in penalties as part of the broader deal.
UBS and three of those banks were also part of a separate $4.3bn forex deal in November with US and UK regulators (as opposed to criminal prosecutors) The wrongdoing covered by that settlement stretched into 2013 but it punished the banks for having poor systems in place to prevent rigging rather than manipulation per se.
NPAs, and similar deals called deferred prosecution agreements, have been used by US prosecutors for years. They are supposed to act like a “sword of Damocles” hanging over the banks. They carry the threat of renewed criminal prosecution if the institutions commit any further illegal acts for a fixed period of time, in the Libor cases, two years from the signing date. In NPAs and DPAs, the institutions admit wrongdoing, pay hefty fines and may be required to overhaul their compliance structures and install someone to monitor their behaviour.
DPAs were introduced in the UK last year but have yet to be used.
It is extremely rare for a DPA to be torn up, but that could change. DoJ officials have been taking a harder public line lately, at a time when there has been criticism the deals reward banks that are “too big to jail”.
“Let me be clear: the criminal division will not hesitate to tear up a DPA or NPA and file criminal charges, where such action is appropriate and proportional to the breach,” Assistant Attorney General Leslie Caldwell said in a speech last month.
UBS is not the only bank worried about the long shadow of a Libor settlement, Barclays also signed a Libor NPA in 2012. Both the banks’ deals expired last year, but the DoJ extended them partially to allow it to examine whether the deals had been voided by alleged criminal activity in forex trading.
If the DoJ does tear up the UBS agreement, it would mark the first time it has brought criminal charges against a bank that breached the terms of an NPA.
Others will be watching closely. HSBC is one of several banks still being investigated by the DoJ over forex and authorities are understood to be considering tearing up its 2012 DPA for sanction breaches and money-laundering.
RBS meanwhile has been breathing a sigh of relief. It agreed to a DPA over Libor in 2013, but the two year period has already expired, meaning it will not be affected by the expected forex settlement.
As part of deal, all five banks involved are expected to commit to “assurances of good behaviour in the future” with an understanding that if they break this promise they will pay a heavy toll, according to a person familiar with the matter.
Reporting by Caroline Binham, Martin Arnold and Laura Noonan in London and Gina Chon in Washington.
Get alerts on US Department of Justice when a new story is published