Author: Azizur Rahman
2 June 2015
4 min read
Why the Bank of England’s investigation by the Serious Fraud Office could prove a costly reminder of the value of anti-fraud measures.
It seems as if the Bank of England is making some unwanted history for itself.
The Bank is the subject of a criminal investigation by the Serious Fraud Office (SFO) in relation to emergency lending measures it took when the credit crisis was at its height in late 2007 and early 2008. Back then, it is claimed, the race to prevent financial markets freezing up saw banks invited to bid to borrow funds from the Bank of England in exchange for collateral.
This series of what came to be known as liquidity auctions is what is being investigated by the SFO. Confirming it has opened an official investigation, the SFO said it was “investigating material referred to it by the Bank of England concerning liquidity auctions”. From the subject of the investigation came the statement that the Bank of England had commissioned an independent inquiry into liquidity auctions and that the findings of that inquiry had been referred to the SFO last November.
At this stage, a number of questions remain unanswered. For example, why was the investigation not made public until now? Are Bank of England employees suspected of involvement in any attempt to rig the auctions? And what, if anything, did the initial inquiry uncover that wasn’t already known or suspected?
The liquidity auctions, it could be argued, were an important stop gap in helping banks function effectively until quantitative easing began in 2009. But the SFO’s investigation will only bolster the arguments of those who believe that the Bank of England is occasionally way too close to the City. This was an accusation that was levelled at the Bank when the rigging of foreign exchange markets first reared its head. Ánd although the Bank does appear to be blameless on that count, the liquidity auctions investigation could prove to be a damning indictment of the Bank.
While mis-selling of financial products, Libor and forex have seen many banks scandalised in recent years, the Bank of England has never been accused of serious wrongdoing in recent memory. It certainly has not been investigated by the SFO before. If anything, it has made an effort to be more open and accountable in recent years. It has also taken on responsibility for regulation of the banking sector. So how has it found itself at the centre of such a potentially damaging investigation?
The banking industry has never been one where whistleblowing has been particularly strong. For this reason, issues such as Libor, Forex and mis-selling of products have taken years to seep out into the public arena. While the banks who found themselves at the centre of such investigations had to pay – and are still paying – substantial fines, it remains to be seen whether they have cleaned up the way they do business. Instilling a whistleblowing culture would go some way towards this. The Bank of England may itself be wondering whether this latest episode could have been avoided if it had in place a fit-for-purpose whistleblowing facility. While such a facility may not have averted the problem immediately, it could well have alerted senior figures to the problem. This could then have ensured that action was taken to put things right. There is little chance it could have prevented trouble for the Bank but whistleblowing could have at least given it a chance to sort it out without the need for a costly internal inquiry followed by a reputation-damaging SFO investigation.
But this goes deeper than the need to save face. The past decade has seen the introduction of legislation that has placed companies, organisations and their senior personnel under greater scrutiny. The Bribery Act came into force in 2011, making any company with a UK connection liable if its staff, representatives, agents, third parties or partners are involved in bribery anywhere in the world. This can carry punishments of unlimited fines and up to 10 years in prison. Faced with such a prospect, the value of early, informed whistleblowing when it comes to highlighting wrongdoing becomes clear.
Like the Bribery Act, the Companies Act 2006, the Fraud Act 2006 and the Theft Act 1968 all hold directors, managers or other senior company figures criminally liable for their firm’s illegality if it was done with either their consent, connivance or neglect. While consent involves at least some knowledge of the wrongdoing, connivance can be the turning of a blind eye. The theme running through this legislation, however, is that if you do not know - or make no effort to know - what is going on in your organisation then you can pay a heavy price. We are living in a period where the SFO is trying to encourage self-reporting of misconduct. For this reason alone, whistle blowing has to be regarded as important.
It must be remembered, however, that setting up whistle blowing facilities has to be done carefully. The confidentiality of whistle blowers and the exact way that they are able to report their suspicions have to be considered carefully so that a climate of openness and clear communication can be encouraged. It is a climate that has to be encouraged from the top down, so that all ranks of staff know that their suspicions will be treated seriously, without any chance of reprisal.
Quite what prompted this late investigation regarding the Bank of England’s liquidity auctions remains to be seen. There may be an argument for saying that any rigging of the auctions was fraud by false representation, whereby someone made such a representation knowing that it is or might be, untrue or misleading. Under the Fraud Act 2006, each single case of auction rigging would be classed as a separate offence. Another section of the Fraud Act that may be relevant to the liquidity auctions is fraud by abuse of position. This is where a person who occupies a post in which they are expected to safeguard, or not act against, the financial interests of another then dishonestly abuses that position; intending to make a gain for him or herself or to cause loss, or risk of loss, to another. As exact details of what may have happened at the Bank of England are not yet known, it is hard to determine the relevance of this offence. Similarly, the third offence under the new Fraud Act, fraud by failure to disclose, may or may not be appropriate. This is defined as when a person dishonestly fails to disclose to another person information which he is under a legal duty to disclose in order to make a gain for himself or cause a loss or risk of loss to another.
At the time of writing, we do not have full and accurate details of what may have happened at the Bank of England. It will be up to the SFO to determine whether there is a clear case of fraud to answer. But the Bank of England must surely be asking its own questions about the value of a proper whistleblowing facility.
Aziz Rahman is Senior Partner at Rahman Ravelli and its founder. His ability to coordinate national, international and multi-agency defences has led to success in some of the most significant corporate crime cases of this century and top rankings in international legal guides. He is recognised worldwide as one of the most capable legal experts regarding top-level, high-value commercial and financial disputes.