Six weeks after reaching a multi-billion settlement with regulators in UK and the U.S., major banks might need to pump up their legal reserves again, as 15 of the world’s largest banks are on the radar of Brazil’s antitrust watchdog Administrative Council for Economic Defense or “CADE”. Reportedly, CADE is investigating these global banks for alleged manipulation of the Brazilian Real (R$).

CADE has accused banks of engaging in anti-competitive price fixing activities during 2007–2013, in order to rule out competition in the space; and for manipulating benchmark rates including Brazil’s PTax and WM/Reuters. Bank of America Corporation (BAC), Citigroup Inc (C), JPMorgan Chase & Co (JPM), UBS AG (UBS), Barclays Plc, (BCS) and The Royal Bank of Scotland Group plc (RBS) are among the 15 banks accused by CADE. Notably, these firms had also featured in the above-mentioned multi-billion settlement.

Other major banks facing investigation include Deutsche Bank AG (DB) and Morgan Stanley (MS), Bank of Tokyo-Mitsubishi (UFJ), Credit Suisse Group AG (CS), HSBC Holdings Plc (HSBC), Nomura Holdings Inc (NMR), Royal Bank of Canada (RY), Standard Bank Group Ltd and Standard Chartered Plc.
Probe & Allegations

Per the emailed statement by CADE, traders or “The Mafia” or “The Cartel”, of the banks allegedly fixed client spreads and shared confidential data in the currency market pertaining to spot and future trades as well as those related to volume of deal flow.

Front running and pushing through trades to rig benchmark rates are among the other accusations. Notably, all these trades were shared and discussed on online chat rooms through various Bloomberg terminals.

The watchdog is conducting dual investigations. Firstly, trading practices of these 15 banks with onshore Brazilian clients; and secondly, the trading of real by these banks for other currencies. Further, CADE has given a 30-day window for banks to respond. Among those accused, at least one participant is reportedly cooperating with CADE, hoping for lenient treatment.

Apart from banks, the Brazilian watchdog is also interrogating 30 individuals for their alleged illegal behavior during 2007–2013. Interestingly, no domestic bank has come into the picture so far.

Nonetheless, CADE is working with Brazil’s central bank and other international authorities on the case. Without disclosing much, the watchdog hinted that related penalties could amount to nearly 20% of the money raised from the scam.

The Road Ahead

Trading in the FX market guarantees significant revenues for banks at a very low risk. Nevertheless, a lack of oversight in the FX market aided banks to easily manipulate rates as early as December 2007.

However, conducts of these banks are now being carefully watched by various antitrust bodies, resulting in increasing legal hassles for the wrongdoers. While major banks continue to cooperate with pending litigations, their financials are hit by mounting legal expenses arising from settlements and increasing provisions to meet potential claims.

As a matter of caution, South Korea and South Africa are also investigating the impact of foreign currency manipulation by global banks in the UK and the U.S. in their respective nations.