Last year, Barclays Bank received the largest fine ever handed down by a U.K. regulator for its role in manipulating the world’s biggest foreign exchange markets. The toxic nature of the organisation’s corporate governance may be responsible for its own code word (Cadmium) to describe the five-year investigation into how it arranged a cash bailout using Middle Eastern funds during the financial crisis to stop the bank being partially nationalised.
On 20 June, the U.K.’s corporate crime agency, the Serious Fraud Office (SFO), charged Barclays PLC—the parent company of Barclays Bank—and four former executives with conspiracy to commit fraud, as well as providing unlawful financial assistance over the bank’s dealings with Qatar at the height of the financial crisis.
The SFO’s investigation into the details surrounding the bank’s Qatari loans has been ongoing since August 2012. It was deemed so serious that HM Treasury, the U.K. government’s economic and finance ministry, gave it special funding to continue pursuing it. And the significance of its decision to prosecute should not be underestimated: these are the first criminal charges in the U.K. to be filed against a bank and its former executives that emanate from activities they carried out during the financial crisis.
The SFO dubbed its investigation “Mirror.” Barclays refers to it as “Cadmium,” named—perhaps ironically—after the toxic chemical element that can produce adverse health effects following chronic exposure.
Those charged are:
Former Barclays CEO John Varley;
Roger Jenkins, former executive chairman of investment banking and investment management in the Middle East and North Africa for Barclays Capital;
Thomas Kalaris, a former CEO of Barclays Wealth and Investment Management division; and
Richard Boath, Barclays’ former European head of financial institutions group
All four are charged with conspiracy to commit fraud regarding capital raising in June 2008. Varley and Jenkins face another fraud conspiracy charge relating to capital raising in October 2008, as well as a charge of providing unlawful financial assistance in violation of the U.K. Companies Act. Barclays PLC faces all three charges.
The four defendants are due to appear at London’s Westminster Magistrates’ Court on 3 July.
The background to the case is simple enough. Barclays approached Qatari investors—namely Qatar Holding and Challenger Universal, which have links to the royal families of Qatar and Abu Dhabi, as well as Qatar’s then prime minister—in June and October 2008 to raise funds as the financial crisis took hold. The fundraising was controversial because it looked to outside investors rather than giving existing shareholders priority.
From these two cash-calls, Barclays received £11.8bn (US$15bn), which allowed the bank to avoid a government bailout at a time when rivals Lloyds Banking Group and Royal Bank of Scotland were forced to rely on a taxpayer rescue.
However, Barclays also conducted side-deals with these investors that were only partially disclosed to the market at the time. And it is the nature of these deals that has prompted investigations from both the SFO and the U.K.’s financial regulator, the Financial Conduct Authority (FCA).
Barclays is alleged to secretly have lent £2.3bn (US$3bn) back to Qatar Holdings to buy shares in the bank. Varley and Jenkins are also alleged to have arranged payments totalling £332m (US$423m) to Qatar Holdings for “advisory services” with regards to the deals.
“It will be interesting to see if this is a case that relies on specific documents to demonstrate knowledge and guilty intent, or whether it is the sort of case whereby that knowledge is implied because of the seniority of the individual’s role.”
Claire Shaw, Business Crime Lawyer, Keystone Law
The FCA said in 2013 that it would fine the bank £50m for improper disclosure to the market, but then stayed its case pending the SFO’s criminal investigation, which was announced in August 2012. The FCA reopened its case earlier this year and is yet to decide whether to amend its earlier findings. Barclays has always contested the fine.
Barclays is also facing a US$1bn lawsuit from the financier who put the Abu Dhabi investment together, Amanda Staveley, and a whistleblowing claim from Boath.
The SFO’s decision to prosecute Barclays has stimulated much debate among lawyers over the nature of the charges, the likelihood of a successful conviction, and the fact that the agency has not offered a deferred prosecution agreement (DPA), which would at least see Barclays avoid criminal charges.
Michael Potts, managing partner at London-based fraud lawyers Byrne and Partners, says that “there is a strong public interest in such a prosecution given the implications of the financial crisis for the world economy.” Indeed, “there has long been a clamour for individuals at banks to be held accountable for the casino banking that led to the crash and the tax payer bailouts,” says Raj Chada, criminal defence solicitor at London law firm Hodge Jones & Allen.
But he adds that “the irony here is that this prosecution has nothing to do with behaviour that caused the crash, but is related instead to the terms of a bail out. Even more strange is that Barclays have found themselves in this mess as they eschewed a U.K. Government bailout and went to Qatar instead.”
Others are unsure of the merits of the case. Jonathan Pickworth, partner at global law firm White & Case, is dismissive. “Why is it in the public interest to prosecute the bank for its fundraising efforts almost a decade ago? Who does it punish and what purpose does it serve?” he asks. “All the former management team moved on many years ago. This will only hurt the current shareholders and today’s hardworking employees.”
Claire Shaw, a business crime lawyer at Keystone Law who formerly worked at the SFO, is “intrigued” as to how the charges have been framed, and wonders “why the SFO has gone for fraud when it involves the payment of large sums of money in order to get funding, which sounds more like a corruption case.” She adds that it is also difficult to determine at this stage who the victim of the fraud is. “It’s not the U.K. tax payer, as they weren’t affected,” she says.
Following a five-year investigation, the SFO has decided to bring criminal charges against Barclays PLC and four former bank executives involved in arranging the finance to ensure that the bank did not need U.K. government bail-out funds during the financial crisis.
In a statement the SFO said: “The charges relate to Barclays PLC’s capital raising arrangements with Qatar Holding LLC and Challenger Universal Ltd, which took place in June and October 2008, and a US$3bn loan facility made available to the State of Qatar acting through the Ministry of Economy and Finance in November 2008.”
Challenger was the investment vehicle of Qatar’s prime minister at the time, Sheikh Hamad bin Jassim bin Jabr al-Thani.
“We are pleased that this matter, which led to the stay of our own case, is now in the public domain,” said the FCA in a written statement. “We welcome a fair and transparent hearing on the basis of the charges set out today by the SFO. We work closely with the SFO across a range of matters, in pursuit of our distinct objectives.”
Meanwhile, Barclays has responded by saying that it is “considering its position in relation to these developments.” It adds that “the SFO has informed Barclays that it has not made a decision as to whether it will also bring charges against Barclays Bank in respect of the loan.”
David Stern, head of business crime and financial regulation at the Chambers of David Josse Q.C., also believes that the prosecution “may suffer from the lack of any readily identifiable victims”, adding that “it could be argued that the financial restructuring of Barclays was of considerable benefit to UK taxpayers by avoiding a costly publicly-funded bail out as was provided to several other high street banks.”
Several lawyers are surprised that the SFO did not offer Barclays a DPA. In other cases, DPAs have been agreed with the company, while the SFO has still pursued individuals (often with the agreement of their former employer). For example, in the case of Rolls-Royce, the company has agreed a DPA while enquiries are still ongoing into the roles of several individuals. And in the case of “XYZ”, charges against individuals have been brought.
The enforcement agency has said that DPAs will only be considered if companies “co-operate fully”, which means turning over all documents at an early stage and not “hiding” key evidence as part of legal privilege. Many infer that Barclays was not prepared to go that far.
Lawyers believe that the SFO would be reluctant to consider a DPA now. One lawyer, who declined to be named, says that any hope that Barclays had of negotiating a deferred prosecution agreement (DPA) is “out of the question”. “A DPA is not possible since the SFO has now charged Barclays, and it will not reduce that to a DPA as a matter of policy,” he says.
“It looks like, by commencing proceedings, the time for a DPA has passed,” agrees Chada. “We do not know if there was ever a possibility of one—whether Barclays would ever have accepted that there was wrongdoing, whether they had co-operated fully enough, or even whether the SFO would have accepted it, so a trial seems inevitable.” He adds that “any fine for Barclays could be in the hundreds of millions.”
Yet it looks like the four former executives may escape prosecution in the U.S.—or at least for the same offences. Previously, when U.S. and U.K. authorities have wanted to bring charges against individuals and companies for the same offences, they have made their notifications at the same time.
Stern thinks that it a “remote possibility” that the same individuals could face similar charges in the U.S. given the U.K. charges now brought, although other persons who may be complicit in the alleged frauds—but who are not named in the SFO prosecution—could face charges in the U.S. He also says that charges could be brought against Barclays Bank rather than the parent company.
Others also believe that the chances of a U.S. prosecution for the individuals are slim. “If any U.S. action was going to be taken, it would have happened simultaneously with the U.K. announcement, as it was with Libor in June 2012,” says one lawyer. “But stranger things have happened, and two of the defendants are U.S. citizens, while Bob Diamond, another U.S. citizen, was CEO at the time.”
While lawyers believe that the SFO would not bring such a case unless it was sure it had the necessary evidence to win, a successful prosecution will not be easy. Potts at Byrne and Partners believes that “the charge of unlawful financial assistance will—in theory—be easier to prosecute as it does not require dishonesty, whereas the fraud allegations will require a dishonesty finding by the jury, and proving dishonesty is much more difficult, as has been demonstrated in the Libor trials.”
Shaw says that “as with any criminal case against an individual, it will rely on evidence of personal involvement and/or knowledge. Usually that’s difficult to prove, as e-mails and documents demonstrating such knowledge tend to fizzle out as you ascend up the structure of an organisation.”
“It will be interesting to see if this is a case that relies on specific documents to demonstrate knowledge and guilty intent, or whether it is the sort of case whereby that knowledge is implied because of the seniority of the individual’s role,” says Shaw. “If the latter, it’s inherently a weaker case, as the defence can demonstrate other things they were dealing with, as well as an absence of any correspondence on the issue, which tends to raise an element of doubt about knowledge. And that’s all a jury needs to acquit.”
Some lawyers have also criticised the length of time it has taken the SFO to bring charges. Shaw, however, thinks that the timeframe is typical rather than slow. “You can only really judge the SFO’s timeline to charge from the date that it accepted the case for trial,” she says. “My sources tell me that the SFO team was very well prepared and informed. It is pretty standard for a case of this nature to take five years. Just getting through the e-data takes years, let alone chasing down responses to requests for mutual legal assistance.”
Chada agrees that it is not unusual for such cases to take so long to investigate and prosecute. “These are complex matters with typically large amounts of documentation, as well as being in the spotlight. It is already thought that this will be one of the biggest fraud trials in history. As it involves a top UK bank, some of the industry’s most senior executives, and relates to the aftermath of the largest financial crash since the Great Depression, it was never going to be a short investigation.”