Ramping—what it means for financial-crime prosecutions….
A number of financial sector frauds are now being reported in the news.
Notable is the arrest of the HSBC executive in charge of global forex cash trading, and an outstanding warrant for a former executive at that bank.
Forex is short for foreign exchange of currencies. This is the biggest of the global financial markets. Trading in the forex market averages 5.3 trillion dollars per day!
HSBC is a British bank, one of the largest investment banks in the world, headquartered in London. Prior to the Financial Crisis of 2008, HSBC was a leader in bank transfers.
This was back in the day when bank transfers weren’t as easy to do as now. HSBC acted as an intermediary, transferring a depositor’s money from one bank or credit union into its own bank and then on to another bank or credit union.
Forex is a similar operation. An intermediary bank accomplishes a transfer of one party’s currency into a different currency that is used by another country.
Usually forex transactions are a matter of exchanging smaller countries’ currency for the big five global currencies; the US dollar, EURO, Yen, British pound, or Swiss Franc.
For business transactions, forex facilitates trade between two or more parties operating in different country currencies.
International businesses; big investors called “money-market traders”; and tourists, all depend heavily on the forex market to “get to where they’re trying to go” financially or in person.
HSBC investigated the alleged fraud, a $3.5 billion purchase of sterling in 2011 for the Cairn Energy PLC, one of Europe’s leading independent oil and gas exploration and development companies, and found no breach of HSBC’s own code of conduct.
However, after the Financial Crisis of 2008 turned over a lot of financial rocks and slimy beings scurried out into the light, HSBC was alleged to have been involved in several kinds of shady dealings.
Lawsuits against HSBC have involved subprime mortgages, money laundering, involvement in Bernard Madoff’s ponzi scheme, and other payments to clients accused of fraud or tax-evasion.
Now, the U.S. Department of Justice alleges that traders at HSBC used a scam known as “ramping” to benefit themselves and the bank at the expense of a client.
What exactly is “ramping”?
Ramping is a type of “front-running”. Front-running, as previously discussed on this blog, is where a broker, knowing a large client will invest a lot of money in a certain stock, buys a lot of that stock first and then invests his client’s money afterwards.
The broker gets the stock at a cheap price. The investor often pays the much higher price that sellers will ask after they see demand for their stock go up as a result of the broker’s front-running purchase.
In this case of ramping, HSBC brokers were alleged to have traded sterling ahead of their client’s order. It’s assumed they did this to create a profit on HSBCs trading book.
In addition, US authorities claim that HSBC bankers misled Cairn when the company questioned why there was a steep rise in sterling prices just before the bank bought 3.5 billion dollars worth of sterling on behalf of Cairn. HSBC bankers blamed a Russian bank for the sudden ramping up of the price for sterling.
Eventually HSBC paid fines of $10 billion dollars to the US and UK governments for the Cairn sterling transaction while arguing that no criminal offense of market abuse occurred.
But now the US Justice Department has instead accused the two HSBC executives of wire-fraud. This is a criminal matter.
This case is an indication of how governments tend to operate when there is apparent financial fraud. The original event might not be deemed illegal at the time.
Still, a government will collect fines in the millions or billions of dollars if it can before coming back later with a criminal case that alleges fraud, e.g. postal fraud, wire fraud, violation of the RICO Act, etc.
But often, the governments don’t prosecute. For example, there was no prosecution by the US after HSBC paid a $2 billion fine in 2012 for laundering billions of dollars of drug money from Mexico and Columbia.
And usually the victims of financial crimes get “pennies on the dollar”— or nothing at all.
HSBC is only one of the global big banks accused of ramping, front-running, insider trading, etc. Many view these crimes as the “way business is done”. I don’t!
It’s high time governments crack down harder and more consistently on all kinds of financial cons who steal large amounts of money and well-being from other people and companies and non-profits that are trying to serve us.