In 2001, one of America’s most innovative companies ever, Enron Corporation (ENE, Financial) had filed for bankruptcy, harshly shocking the world, especially the helpless employees and investors, with the murky reality of systematic corporate fraud and planned number churning. Unfortunately, instances of resourceful and strategic accounting frauds continue to plague the financial world with the latest news that top banks have allegedly plotted with traders to manipulate foreign exchange rates coming to light.
On Monday 11 May 2015, market sources have revealed that the main banking entities of five major Banks namely Switzerland based UBS (UBS, Financial), Citigroup (C, Financial), London based Barclays (BCS, Financial), JPMorgan Chase & Co (JPM, Financial) and Royal Bank of Scotland (RBS, Financial) are anticipated to plead guilty to the U.S. Department of Justice on criminal charges of manipulation and collusion with traders following extensive foreign exchange rigging investigations.
Banking and foreign exchange
The foreign currency exchange market or Forex in short does not have any central exchange for regulated trading and accounting like the New York Stock Exchange for the stock market. In the absence of a centralized mechanism, significant market players like top banks along with financial enterprises and traders contribute to the making and setting of currency exchange rates. Expected currency transaction prompt bids by banks that quote tentative ask prices, thus setting a base value in the market. As major banks constantly and consistently deal with high value foreign exchange transactions, as high as billions of units, they are prime contributors to the measure of currency exchange rates and its subsequent values in the market which trades with nearly $5.3 trillion every day.
As there is no regulatory central body, these major market players may manipulate the numbers in conjunction with forex brokers and traders to set favourable exchange rates. There have been instances of this in the past with the Switzerland based financial bank, Credit Suisse (CS) pleading guilty to charges of facilitating tax evasion for wealthy Americans in the U.S. last year to help wealthy Americans evade taxes. This was the biggest establishment to plead guilty to a criminal offense in the financial history of the U.S. in the last two decades. Unfortunately, this monumental event was soon followed by a similar confession by a global bank and the biggest financial institution in France, BNP Paribas (BNPQY) for violating U.S. sanctions against Iran, Cuba and financially helpless Sudan, leading to huge financial losses to the tune of nearly $8 million to the U.S. exchequer. Both banks faced global censure and were levied with probations and burdensome fines. It is only recently that the U.S. Labor Department granted some exemptions to these banks.
Current scenario
Following the above revelations, the U.S. Department of Justice investigating the suspected forex scam has been engaging in talks with these major banks for the last few months to resolve all the allegations with online proofs of confidential information sharing between the bank representatives and forex traders. This will fix the exchange rates in the fundamentally unregulated currency exchange market for mutual benefit. It is said that Barclays, UBS, Citigroup, JPMorgan Chase and Royal Bank of Scotland have already agreed to a settlement with the UK's Financial Conduct Authority and the Commodity Futures Trading Commission of America.
With an official declaration of the unprecedented guilty pleas by global banking majors expected any day, U.S. authorities are already working on strict but measured sanctions to limit repercussions to innocent employees and control collateral financial losses.
