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20150804 Putting Hayes where the sun won't shine doesn't help Compliance and Risk Officers

Nigel Morris-Cotterill

In terms of sentencing in English law, there is, in effect, an upper figure. Murder is generally subject to a life term, but convicts are released "on licence" - some earlier than later but, if they are going to be released at all, rarely more than 14 years. The maximum sentence for theft, robbery, money laundering, terrorist financing is, in each case, 14 years per count. Unlike the USA which imposes sentences that run several hundred years after the lifetime of the convict, UK courts rarely impose consecutive sentences where long terms are called for. This is especially so in the case of white collar criminals who, in the UK, are generally treated very gently. And then chunks of the sentence are often suspended.

Tom Hayes is the criminal who has broken that mould.

It is hard to know whether the crimes of Hayes are regarded with such seriousness by the sentencing judge, HH Cooke, J, when delivering his reasons on 3rd August, because Hayes, and his conspirators, mounted an attack on the entire financial system or because, at last, courts are beginning to see fraud and related offences with the appropriate level of seriousness. It is improbable that Hayes will not appeal, even though the Judge provided for release on licence - with no minimum period to be served served ("you will serve up to half your sentence in custody" not "you will serve at least half your sentence.") I have asked His Honour Cooke, J if he "mis-spoke" but as at the time of writing I have not received a reply.

Cooke, J pulled no punches : his first paragraph of his sentencing was as follows:

"The sentence I am imposing is one of 14 years in all.
a) on counts 1-9, 9 years and six months, concurrent on each count.
b) on counts 5-8, bearing in mind totality, 4 years six months on concurrent on each count, but consecutive to Counts 1-4 making 14 years in all."

So there it is, plain for all to see, the Judge sentenced Hayes to the maximum he could, under the guidelines that he is required to adhere to.

Cooke, J made it plain that Hayes fully understood what he was doing and that it was dishonest. He conspired with others who also understood the dishonesty and he used "subtle and surreptitious means" so that others who would not otherwise have taken part became involved.

All of that seems very straightforward; but there are depths that, when plumbed, raise serious questions for compliance and risk management officers.

The following statements are key:

- you admitted your part in conspiring with others to influence the submissions at the banks which employed you, and of other banks, by whatever means you and the brokers could use.

- sometimes it was a question of seeking favours from individuals

- sometimes those individuals were treated or entertained by the brokers as you knew and approved.

- you worked with three sets of brokers, whom you rewarded, to influence other banks to make submissions which suited you or your bank's trading book

- you admitted in clear terms that you understood that the LIBOR submission process was meant to independent of trading considerations and that LIBOR submissions were intended to represent the true borrowing rate of the submitting banks.

Putting these points together, can be summarised as "you deliberately set out to breach the independence of the process and were successful in doing so, by means that included conduct that may be, in its own right, criminal." Later, Cooke, J makes it clear "you made corrupt payments to brokers for their assistance."

Where the reasons create even greater problems for compliance / risk management staff is in saying "the extent to which the published rates changed from what they would have been cannot be assessed, particularly as there appear to have been some other banks... attempting the same activity with contrary trading interests to yours."

Explanation: no one knows whether you did in fact move the market and if you did by how much. Equally, no one knows whether the market remained static because other players were doing the same as you, in the same currency (JPY) intending to have the opposite effect.

Cooke, J may have shot himself in the foot with that last explanation because he goes on to find, "that the sums involved ran into the millions of USD - well over the Category A figure of GBP500,000 with its starting point based on GBP1m. Juxtaposing a statement that the success of the fraud cannot be quantified with a statement purporting to do just that would seem to be a good starting point for an appeal. However, the result might be read as "you did wrong, you've admitted you've done wrong. We know it was a serious wrong, that it had the capability of very substantial harm, we just don't know exactly how much harm was done."

Having said all of that, why is it such a big thing for compliance / risk managers?

The answer is simple: Hayes and his associates operated within organisations to use them to commit crimes.

Compliance and Risk Officers are already in a difficult position, monitoring for evidence of fraud, bribery and money laundering. But, as the Judge said, the bank should be able to rely on the integrity of its staff and that is now seen to have broken down. The question is how far it is necessary to monitor: Hayes directed actions but they were taken by third parties operating off-site.

While the company is, unless it can establish that its staff are off on a frolic of their own, vicariously liable for the conduct of its employees in the course of his duties,

The case will increase the burden on compliance and risk officers who must also, if they are to do their jobs properly, take on additional functions combining internal audit and investigations. That means more people and more resources. Are companies prepared to do that or will we see, as usual, compliance teams being expected to do more with less - and even their training budgets controlled by HR with the result that they do not get to choose the education they most need to equip themselves to do the job?

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