/ 17 February 2017

Banks bust: ‘Price-rigging’ fine would be enough to wipe out SA’s budget deficit

In trouble: Local banks have agreed to co-operate with the competition authorities and some may have to cough up.
The commission is seeking an order from the tribunal to declare that the banks contravened the Competition Act. (Reuters)

If South Africa’s Competition Commission were to succeed in its price-fixing case against some of the world’s biggest banks, it would be enough to wipe out the country’s budget deficit, a commentator said on Thursday.

The commission is seeking massive fines against 17 banks for their hand in allegedly manipulating the rand-dollar currency trade over eight years. Implicated banks include Absa, Standard Bank and Investec, as well as international majors JPMorgan Chase, BNP Paribas and Standard Chartered.

On Wednesday, the commission said it had asked the Competition Tribunal to levy an administrative penalty of 10% of annual turnover — the highest applicable penalty under the Competition Act — against all the banks concerned.

Spread across 17 institutions, the penalties could be extensive if awarded. In the case of Standard Bank alone, the bank’s annual revenue in 2015 was R91.1‑billion, suggesting that a fine could equate to about R9.1‑billion.

Kokkie Kooyman, a portfolio manager at Denker Capital, said the
recommended penalty was “quite big”, adding that if all the banks paid up it would clear South Africa’s budget deficit.

“It won’t sink any of the banks, but it will be painful,” he said.

According to the 2016 budget, the deficit stood at about R140‑billion.

The commission claims that, from at least 2007, the implicated banks had colluded to influence the prices on spot currency trades — trades in which prices are agreed on the spot and paid for quickly — involving the United States dollar and the rand.

The commission said the respondents had also manipulated prices when dealers unlawfully agreed to hold back from trading at particular times, and had created fictitious bids and offers.

The allegedly unlawful trading was carried out mainly on the Reuters currency trading platform, with traders using the Bloomberg instant messaging system, telephone conversations and meetings to co-ordinate their trades in an attempt to buy or sell currencies at a desired price.

The commission said the traders would agree to post fake bids or offers, creating a false impression of oversupply, which would then drive the agreed currency price (either the rand or the dollar) upward. They also shared information about customers so that they could co-ordinate their quotes to them.

The motivation to collude and manipulate prices boils down to simple self-enrichment, said Kooyman. “The point would be to get a better price, resulting in bigger profits for the banks and a bigger bonus for the dealer.”

The implications
The trades can affect the going exchange rate. “And if that gets manipulated either way, it means that someone is losing,” said Christie Viljoen, an economist for advisory firm KPMG.

If the currency is artificially weaker, it could negatively affect companies that need to import goods into South Africa.

Similarly, if the currency is artificially stronger, it could negatively affect South African companies that want to export local commodities or goods.

This ultimately affects consumers and the wider public, said Viljoen. If South Africa makes less money on exports, there are fewer jobs in that sector. If imports are more expensive, inflation goes up and, in turn, interest rates will too.

Banks can trade in currency for their own investment purposes or for their clients. “If a bank transacts for clients, such as a mining or export company, and the price is not favourable, this can be negative for the client,” he said.

Clients could also include asset managers such as pension funds, government institutions such as the Reserve Bank, and individuals.

The commission’s approach follows an international trend. Regulators in a number of countries have in recent years hammered global banks for wrongdoing in a host of financial transactions.

According to Bloomberg, by the end of last year, about $9‑billion in fines had been levied against a dozen banks over the manipulation of the London interbank rate (Libor) and similar benchmarks over the past four years.

By some calculations, the total amounts paid by global banks in cases ranging from forex trading improprieties to selling toxic mortgages ahead of the global financial crisis is more than $200‑billion.

The Competition Commission’s investigation springs from a long-running criminal investigation in the US into the rigging of currency rates. In 2015, when the probe was initiated, Citigroup, Barclays, JPMorgan and the Royal Bank of Scotland Group had pleaded guilty in the US to conspiring to rig currency rates.

An amendment to the Competition Act, gazetted in April last year, criminalises collusive behaviour. But it will not apply in this case because the alleged price-fixing took place between 2007 and 2015.

Kooyman said that, internationally, when rigging has been found to have happened, the banks get fined and life goes on.

Still, the markets reacted strongly to the news when they opened on Thursday, with the implicated bank shares taking a knock of a few billion to their collective market capitalisations, before recovering during the course of the day.

Kooyman said it was unthinkable that a bank would not pay any fine that was imposed, because its banking licence would swiftly be revoked. Even if they don’t have a subsidiary in South Africa, all banks conducting trade in the country need a licence.

The Mail & Guardian understands that at least one of the international banks became aware of the matter only after the release of a media statement on Wednesday.

Investec said it will co-operate with the competition authorities, but did not have details on the nature of the investigation and so could not comment on the matter.

Absa’s spokesperson said the bank will also continue to co-operate with the authorities as the matter runs its course, but noted that the commission “has not sought any penalties against Absa”.

Macquarie, Standard Chartered, JPMorgan Chase and BNP Paribas declined to comment.

Standard Bank said it will “engage fully” with the relevant authorities but cannot comment further while the Competition Tribunal process continues.