The Serious Fraud Office’s announcement that it will pursue legal action against former senior executives at Barclays is unique. It is the first time a senior banker has been legally charged in the UK for wrong doing during the financial crisis.
The charges are the result of a five-year investigation by the SFO into Barclays response to the financial crisis in 2008. The particular focus was how the bank was able to raise money to keep itself afloat when global financial markets went into meltdown in October 2008. Unlike other major UK banks which sought a bail-out from government, Barclays sought to keep itself afloat by borrowing money from an investment vehicle from the Qatari government.
At the time, senior executives at Barclays were preoccupied with ensuring the bank was kept out of state control. Part of the reason for this may have been ideological – seeing public ownership as necessarily a bad thing. Part of the reason for this might have been about the external image of the bank – being bailed out by the government would be likely to scare away investors. But there was third, much more personal reasons, according to Lord Myners, the then City Minister in the government. Being bailed out by the government meant that there would probably be massive curbs on executive bonuses.
There are two aspects of the deal which have resulted in these charges. First, when the bank raised £6.1bn from Qatar, the bank promised to pay fees of £322m for help in developing their business in the region. However, it is not clear what exactly these fees were for and where they went. The second more serious charge is that Barclays later loaned Qatar US$3bn (£2.35bn). The suspicion is clearly that Barclays was lending the Qataris money so they could in turn help bail the bank out. If this was the case, it is a case of ‘unlawful financial assistance’ – section 678 of the 2006 UK Companies Act. Roughly this states that a company cannot lend money to another entity which it then uses to purchase the company’s shares. This is designed to ensure a firm does not dilute its capital base.
One feature of the charges from the SFO, which has caught the attention of the public is that this is the first time senior bankers are being charged for wrong-doing during the financial crisis. Following revelations about the manipulation of the Libor market, there have been a string of regulatory actions bought against banks. But many of these have involved the bank paying large fines. Rarely have individual been legally held to account for wrong doing. It is only recently relatively junior traders like Tom Hayes have faced criminal trials for market manipulation. No individual has faced charges related to the 2008 financial crisis until the SFO announced legal action against four senior executives at Barclays at the time who were involved with the deal.
Often when corporations have been accused of wrong-doing in the UK in recent years, they have been offered a deferred prosecution agreement (DPA) by the SFO. This involves paying a large fine instead of going through a legal trial. For instance, Rolls Royce signed a DPA worth £497m to settle charges of bribery and corruption, and Tesco signed a DPA of £129m relating to accounting manipulation.