Thursday, August 30, 2012

Just when you thought it was safe to go back into the water you get an SFO enquiry - The continuing alleged criminal dilemma at Barclays!

The SFO website can be really quite helpful.
Their uncompromising mission statement reads;
"...Our aim is to protect society from extensive, deliberate criminal deception which could threaten public confidence in the financial system.  We investigate fraud and corruption that requires our investigative expertise and special powers to obtain and assess evidence to successfully prosecute fraudsters, freeze assets and compensate victims..."
Its criteria for taking on an investigation are clear and precise. They state:
"...We only take on the most significant cases  and the key factors we consider before taking on a case are..."

·         Does the value of the alleged fraud exceed £1 million?
·         Is there a significant international dimension?
·         Is the case likely to be of widespread public concern?
·         Does the case require highly specialised knowledge, for example, of financial markets?
·         Is there a need to use the SFO's special powers, such as Section 2 of the Criminal Justice Act?

In addition to the above criteria we look for factors such as:
·         Whether the case involves or is linked to organised crime.
·         Whether the fraud will impact on the integrity of the financial market.
·         Whether there is a wider group than shareholders or creditors who have lost money as a result of the alleged fraud.
·         Whether the fraudsters have targeted financial institutions and government (local or central) or other public serving authorities.
·         Whether the case involves multiple countries.
·         Whether the evidence to be obtained during the course of the investigation will be found in multiple locations (within the UK or in other countries).
·         Whether the case involves multiple and complex financial transactions, for example involving many companies, accounts, Trusts and countries.
·         Whether the investigation will need to involve a large accountancy analysis.

Imagine therefore how the main board members at Barclays Bank must be feeling right now, in the knowledge that the SFO are investigating them yet again. If I were a middle ranking employee at this criminogenic bank, I would be wondering how much longer I could bear to go on working there. If I were a junior working on the counter, I would find it very difficult to look my customers in the eye. If I were a customer, I would be seriously asking myself if I should move my accounts! I mean, this is getting silly, how many criminal investigations do you need to have before someone gets the idea that this institution is just a nest of crooks?

It seems that every time you open a newspaper, Barclays are being investigated for yet another criminal allegation. There is already one major SFO investigation going on into the criminal manipulation of the LIBOR interest rate. Now, the SFO have announced another investigation into payments between Barclays and Qatar Holding, adding to an already ongoing regulatory investigation into dealings between the two parties. It relates specifically to fees paid to the Qatar Investment Authority on deals in June and November 2008, when Barclays raised 11.5 billion pounds.

Barclays said on Wednesday that the Serious Fraud Office (SFO) started an investigation into "payments under certain commercial agreements" between it and Qatar, confirming an earlier report. The Financial Services Authority (FSA), Britain's financial watchdog, is already investigating the bank and four current and former senior employees, including finance director Chris Lucas, on whether sufficient disclosures were made about the fees it paid in a 2008 capital raising.

The SFO probe differs as it is examining the bank, rather than the bank plus four individuals. The bank did not reveal which payments between it and Qatar were being investigated by the SFO, although the FSA is expected to share information with the SFO that it has obtained, and both are expected to ask for further information from the bank.
Qatar Holding, the entity involved in the investigation, is a unit of the Qatar Investment Authority, which is the largest shareholder in Barclays with a 6.65 percent stake, according to Reuters data.
The bank is already staggering after being fined £290 million by British and U.S. regulators in June for rigging Libor interest rates, sparking criticism about its culture and risk-taking and forcing its chairman and chief executive to quit.
In July 2012, Barclays admitted that the FSA had started an independent investigation into the Bank on the topic of fee payments, when the bank admitted its finance director Chris Lucas was one of four current and past employees being scrutinised over the fundraising. The bank said at the time that it had satisfied its disclosure obligations and that it will co-operate fully with the FSA.

The investigation by the FSA will now run alongside that of the SFO, which is understood to involve a broad look at the company's conduct with the Qataris. The Guardian is quoted as saying  '...A source close to the inquiry said: "The SFO is looking into the role of the company [Barclays]. I wouldn't discount anything..."

In June 2008, Barclays raised £4.5bn through an issue of new shares and in November 2008 it raised more than £7bn. Much of the focus appears to be on information provided in the June 2008 fundraising that describes "an agreement for provision of advisory services" by Qatar to Barclays in the Middle East.
Qatar Holding is a unit of the Qatar Investment Authority, which is the largest shareholder in Barclays with a 6.65% stake, according to data compiled by Reuters.
The June fundraising outlined an agreement "to explore opportunities for a co-operative business relationship" with Sumitomo Mitsui Banking Corporation of Japan. The fees disclosed for this fundraising totalled around £100m.
In the November 2008 fundraising, Barclays provided five separate disclosures of fees that amounted in total to around £300m. The Daily Telegraph of 30th August discloses that a figure of £110 million was paid to Sheikh Mansour Bin Zayed al Nahyan an Abu Dhabi royal,.

One of the Middle East investors who helped Barclays avoid a government bailout in 2008, the sheikh effectively sold his remaining stake in the bank in October 2010 after cashing in a total profit of about £2.25bn. Sheikh Mansour was one of three Gulf investors who helped Barclays raise £7bn in 2008 at the height of the financial crisis. The cash injection, the bulk of which came from Qatari investment vehicles, helped persuade the UK Government that Barclays could survive without a state bail-out. 

The revelation of these payments were tucked away at the bottom of page 87 of Barclays’ results.
"...Under other disclosure matters the statement was made that "...The FSA has commenced an investigation involving Barclays and four current and former senior employees...The FSA is investigating the sufficiency of disclosure in relation to fees payable under certain commercial agreements and whether these may have related to Barclays capital raisings in June and November 2008.
Barclays considers that it  satisfied its disclosure  obligations and confirms that it will cooperate with FSA's investigation..."

So what might this be talking about? It appears to relate to the two big capital raising exercises by Barclays in June 2008 and October / November 2008, when the bank raised nearly £12bn

This money came primarily from sovereign wealth funds and, in particular, from Qatar Holding and Sheikh Mansour Bin Zayed Al-Nahyan, a member of the Abu Dhabi royal family who in his spare time just happens to own Manchester City football club.
The first £4.5bn capital raising in June 2008 was controversial because it largely bypassed existing investors and instead raised more than £1.7bn from Qatar Holding, as well as significant amounts from Sumitomo Mitsui Banking Corporation, China Development Bank and Temasek Holdings, the Singaporean fund.
The second deal, announced at the end of October 2008 and completed in November was more controversial – in particular because the bank paid hundreds of millions of dollars in fees to three investors in exchange for their investment of around £5.4bn in Barclays, on top of the punitively high cost of the funding exercise.
Barclays raised £4.3bn in ‘mandatory convertible notes’ of which £2.8bn was taken up by Sheihk Mansour, Qatar Holding, and a company called Challenger (a Qatari vehicle set up in the British Virgin Islands for the express purpose of investing in Barclays), and which paid out a lucrative 14% coupon.
It also raised £3bn of ‘reserve capital instruments ‘ – effectively warrants – from Qatar Holding and Sheikh Mansour, which paid out 9.75% in the short-term.
These two issues came with some very unusual fees attached.
Qatar Holding received £12 million,  Challenger received £12 million and Sheikh Mansour received £112 million by way of commissions for investments they had agreed to make.

Qatar Holding and Sheikh Mansour each received a further £30m million each as commissions for other investments they agreed to make.

Qatar Holdings received a fee of £66 million for arranging certain subscriptions.

Credit Suisse and JP Morgan Cazenove each received £11.3 million in fees.
The two banks each received a further £900,000 each for assisting Barclays.

Quite why Barclays felt they had to pay these huge fees in exchange for the three investments in Barclays on extremely generous terms is not clear. It is  unusual to say the least, investors don’t  normally get paid sweetheart fees for the privilege of investing in something on which they expect to realise a vast profit.

These fee payments could only have been agreed at the very highest level of the bank, indeed it was the culture in the bank to refer every contentious decision upwards to the top. Speaking exclusively to The Independent in July 2012, a former senior Barclays employee exposed the “culture of fear” that operated at the bank. 

It is certain that Bob Diamond would have been aware of his subordinates' activities in making these payments.

Speaking on condition of anonymity, the banker said that senior Barclays bosses would have been told about every important issue such as Libor concerns and other important matters because staff were drilled to pass anything untoward up to their managers. Failure to do this meant the sack.

"Libor fixing (as well as all important decisions) was escalated by several people up to their directors, they would then have escalated it up the line because at Barclays if you don't escalate, and it is found out that you haven't, it is grounds for disciplinary action. You will be dismissed."

The banker also describes the dark side of working for Mr Diamond's bank. He spoke of management by intimidation, even physical threat, punishing hours and a ruthless grading system that left workers in terror of their annual appraisals. Employees were often reduced to tears by the end of a day, but only when they had departed from the building. Such weakness would not be tolerated inside.

It is not hard to understand why ordinary workers, fearful for their jobs in a time of serious recession would sooner turn a blind eye to anything untoward rather than get involved by bringing themselves to notice.

So there you have it. What we do know is that Barclays paid a total of around £400 million in fees to raise capital to support their balance sheet in 2008, instead of having to rely on British Government funding, in a way similar to that which shored up RBS. Asking the Government for financial help would have tied their hands considerably in terms of continuing to make their own investment decisions, and would have subjected their business dealings to some significant scrutiny and inquisitive oversight. Raising the money independently from helpful shareholders was probably a more palatable option.
What we do now know is that there are alleged suspicions surrounding those payments, so serious as to demand the special investigatory powers of the SFO to be employed. We also know that the SFO only intervenes in the most serious of financial crime cases, particularly in cases of fraud and corruption, where their " aim is to protect society from extensive, deliberate criminal deception which could threaten public confidence in the financial system..."

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