At a time when it seemed global banks’ transgressions, from interest-rate rigging to money laundering, could hardly get worse, UBS AG managed to break new ground with this week’s revelations of Libor manipulation. Its admission of guilt also indicates the direction criminal prosecutions might take in the growing scandal.

In its $1.5 billion settlement with various countries’ authorities, UBS admitted to thousands of instances of interest-rate manipulation, involving more than 100 employees and managers, in currencies including the Japanese yen, the British pound, the Swiss franc, the U.S. dollar and the euro. The actions affected the London interbank offered rate, the global benchmark that influences the value of hundreds of trillions of dollars in mortgages, corporate loans and derivatives.

What sets UBS apart is not only the sheer extent of the behavior, but also the level of collusion with traders at other banks and the outright bribery of brokers who helped coordinate the manipulation.

One instance, which we call the “captain caos” scheme, deserves its place in the hall of fame of financial chicanery. According to the final notice from the U.K.’s Financial Services Authority, traders at UBS colluded with their peers at other banks “by entering into facilitation trades that aligned their respective commercial interests,” so they could all benefit from manipulating interest rates in Japanese yen.

Captain Caos

A UBS trader, according to the FSA notice, promised this to a broker aiding in the rigging effort: “I’ll pay you, you know, 50,000 dollars, 100,000 dollars ... whatever you want ... I’m a man of my word.” The spelling-challenged traders and brokers who took part in the scheme came to address one another with monikers such as “the three muscateers” and “captain caos.”

The yen manipulation stands out in another significant way: In a deal with the U.S. Justice Department, UBS’s Japanese subsidiary admitted to wire fraud. As we previously noted, wire fraud is one of the primary statutes U.S. prosecutors could use in pursuing criminal charges against individuals involved in Libor manipulation. The statute prohibits the use of any interstate or international communication in furtherance of an effort to deceive for personal gain. It carries a sentence of as much as 30 years in prison.

Some arrests of lower-level traders and brokers have already been made in the U.K., and charges against individuals are expected in the U.S. Investigators would do well to pay closer attention to the involvement of executives: Given the pervasiveness of the misbehavior and the length of time it went on, it’s hard to imagine that they were clueless. The FSA notice, for example, says that at least five senior UBS managers were aware of the manipulations to benefit the bank’s trading positions. In the U.S., conspiracy to commit fraud is also a crime, carrying a prison term of as much as five years.

The $1.5 billion in fines for UBS, more than triple the amount U.K. bank Barclays Plc agreed to pay in a settlement in June, brings the total levied this year on big European banks for various misdeeds to $6.1 billion, according to Bloomberg News. Making banks pay handsomely for their sins is an entirely appropriate way to send a signal that such behavior will not be tolerated. Hefty fines might also shock shareholders, who will bear the brunt of the financial pain, into demanding that executives are held accountable.

Criminal indictments, though, would do more to change the culture among the individuals who performed, aided and abetted deceitful acts, and to restore faith in markets. Authorities should also force banks to divulge information on their true borrowing costs over the period in question, so the financial effect of their transgressions -- and the required compensation to investors -- can be calculated.

Regulators, prosecutors and criminal courts around the world have their work cut out for them in establishing the truth and punishing the guilty. The UBS and Barclays cases are just the beginning.

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