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European Commission proposes criminal sanctions for rate-fixing following "LIBOR scandal"

The European Commission is proposing the introduction of criminal sanctions for actual or attempted manipulation of the market reference rates used by banks to lend to each other.

It has introduced amendments to its proposals for a Regulation and Directive on insider dealing and market manipulation that will explicitly prohibit the manipulation of such benchmarks, including the London Interbank Offered Rate (LIBOR) and its euro equivalent, EURIBOR.

The proposal, the Commission said, was a response to the investigations involving "a number of banks" that have been taking place in relation to possible manipulation of the rates since March 2011. These investigations have "called into question" the integrity of the rates, it said.

"Public confidence has taken a nosedive with the latest scandals about serious manipulations of lending rates by banks," Viviane Reding, the EU's Justice Commissioner, said in a statement. "EU action is needed to put an end to criminal activity in the banking sector and criminal law can serve as a strong deterrent. A swift agreement on these proposals will help restore much needed confidence of the public and investors in this crucial sector of the economy."

The LIBOR and EURIBOR rates are daily references based on the interest rates at which banks can borrow unsecured funds from other banks. They are widely used as the basis for financial instruments including interest rate and currency hedging instruments, and to set the interest rate for syndicated loans. Interbank rates are used to price some $550 trillion worth of loans, securities and derivatives globally, according to the Commission.

The proposed amendments explicitly extend the criminal offence of market manipulation to include the manipulation of benchmarks, and extend the criminal offence of "inciting, aiding and abetting and attempt" manipulation to specifically include behaviour in relation to benchmarks. The amendments catch benchmarks relating to equities, bonds and commodities, as well as interest rates, providing that the benchmark "determines the amount payable under a financial instrument". The Commission said that it would not "set the minimum types and levels of criminal sanctions", but would instead require each member state to provide its own sanctions in its national laws.

In the UK the Serious Fraud Office (SFO), the government department responsible for investigating and prosecuting serious and complex fraud, is currently investigating the possibility of bringing criminal charges against major banks in relation to the LIBOR rate. Depending on the results of its investigation it could prosecute under existing fraud or false accounting laws.

Last month Barclays became the first bank to announce that it had entered into settlement agreements with UK and US regulators worth £290 million for "misconduct" in relation to its LIBOR and EURIBOR contributions. A statement released by the bank indicated that it had been granted "conditional leniency" in connection with "potential US antitrust law violations" from the US Department of Justice as part of the settlement.

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