Settlement exposes bank directors to criminal liability

Standard Chartered Bank reached a settlement agreement with the Competition Commission of South Africa in a currency manipulation case. Only once the settlement agreement has been evaluated by and approved by the Competition Tribunal does it acquireits legal status as a consent order, say the writers.

Standard Chartered Bank reached a settlement agreement with the Competition Commission of South Africa in a currency manipulation case. Only once the settlement agreement has been evaluated by and approved by the Competition Tribunal does it acquireits legal status as a consent order, say the writers.

Published Nov 23, 2023


Tinashe Kondo and Precious N Ndlovu

The settlement agreement reached by Standard Chartered Bank and the Competition Commission of South Africa is an important mantelpiece in dealing with the currency manipulation case.

Under the agreement, Standard Chartered Bank admitted liability for its part in the case. This vindicates the allegations of the Competition Commission which in 2015, had instituted a complaint against several financial entities, including Standard Chartered Bank for rand currency manipulation.

The initial complaint centred on allegations of price fixing by the “currency cartel”, in violation of S 4(1)(b)(i) of the Competition Act 89 of 1998.

The conduct in question pertained to an alleged manipulation of the USD/ZAR currency pair through the fixing of bids, offers, bid-offer spreads, the spot exchange rate; and the exchange rate at the FIX.

The complaint was subsequently amended in 2016, with the addition of more parties as well as a further allegation of market allocation in violation of S 4(1)(b)(ii) of the Competition Act. It was alleged that the parties colluded with one another by allowing a trader with a considerable open risk position to complete trades before others and by manipulating liquidity, contrary to typical market trading practices.

The matter had been referred to the Competition Tribunal in 2017.

What does the settlement mean for Standard Chartered Bank?

Technically, a settlement agreement is an agreement that is negotiated and agreed upon by the Competition Commission and the respondent firm facing prosecution.

Only once the settlement agreement has been evaluated by and approved by the Competition Tribunal does it acquire its legal status as a consent order, under Section 49D of the Competition Act 89 of 1998.

There are several consequences of the consent order, and these depend on the contents of the consent, as approved by the Tribunal.

First, through the admission, Standard Chartered Bank is liable to pay an administrative penalty of approximately R43 million. While there are several remedies within the framework of the Competition Act available to the courts and tribunal, such as cost orders, orders of the Tribunal and Divestiture, the competition authorities have favoured the issue of an administrative penalty in this case.

Essentially, this is a financial penalty for non-compliance with the act. It is meted out as a deterrent to would-be future offenders. This is capped at 10% of the annual turnover, for first-time offenders and 25% for repeat offenders.

Financially, this is not much of a setback for a multinational bank such as Standard Chartered Bank. For example, in the first-quarter of 2023, the bank’s first quarter pre-tax profit rose 21% due to rising interest rates and retail product sales in emerging markets.

Further, according to its 2022 Annual Report, its income had grown by 15% to $16.3 billion, the highest since 2014. In the same vein, profit before tax soared by 15% to $4.8bn.

Thus, its annual revenue and profits have grown tremendously. Arguably then, one can come to an easy conclusion that the settlement agreement merely amounts to a slap on the wrist from a financial perspective.

However, from a public image perspective, the admission does significant harm to the brand of Standard Chartered Bank. The bank situates itself as one that is a sustainable and responsible company, which works with partners to promote social and economic development.

Therefore, the admission in this case hurts the bank’s image which it portrays to the public as a responsible partner. In its Report to Society 2022, the local branch of the bank in South Africa noted that it was committed to social and economic transformation.

This is consistent with the approach of the Competition Act in South Africa which drives towards transformation and public interest, beyond the economic efficiencies emphasised in many other jurisdictions. Colluding with other banks in such a formidable manner runs contrary to the agenda.

In fact, it hurts the poorest of the poor who bear the price of a “rand under siege”.

Second, the effect of the consent order is that Standard Chartered Bank is immunised from administrative prosecution which the commission is pursuing against the other firms who were also allegedly involved in the manipulation of the USD/ZAR currency pair through price-fixing and market divisions.

For Standard Chartered Bank, it means that the proceedings against the bank are completed, and the currency manipulation of the USD/ZAR pair, as the subject of the consent order, may not be a basis upon which a referral may be made to the Tribunal for adjudication against the bank.

Third, since the bank’s consent order contains an admission of liability, this is equivalent to a finding that a prohibited practice has occurred.

This means that if the bank engages in other cartel conduct in the future, the consent order will be regarded as a “prior conviction”, to use a criminal term, which would be considered an aggravating factor when calculating the administrative penalty.

Fourth, the bank can potentially face claims for damages in a civil court, initiated by individuals or persons who have suffered financial losses, such as loss of profits because of the bank’s cartel conduct. Such civil claims will arise where such damages have not been included as part of the consent order.

It does not appear that such damages were included in the consent order between the commission and the bank.

Finally, the consent order also exposes the bank’s directors and persons in management to potential criminal prosecution for the cartel offence under Section 73A of the Competition Act.

What does this mean for the other banks in the case?

The settlement agreement entails that the other firms, in our view, face a challenging and difficult long road ahead. Once the settlement agreement is confirmed by the Competition Tribunal, Standard Chartered Bank is obliged to work together with the Competition Commission to prove the case against the other 27 banks.

This is one of the terms of the consent agreement, that Standard Chartered Bank co-operates with the commission. Typically, what happens in these scenarios is that cartels thrive on secrecy and a lack of evidence.

Owing to the knowledge of their wrongfulness, cartels often mask their conduct to evade detection. However, in instances where another party to the agreement works with the commission, it is easier to unmask conduct and uncover evidence of wrongdoing by the cartel participants.

Accordingly, consent orders and the Corporate Leniency Policy of the Competition Commission have been inspirational in resolving many competition cases in democratic South Africa, particularly cartels.

However, this is not to say that another party may not want to reach an agreement with the commission. Recent cases have exposed that the Competition Commission will also entertain a party who is “second through the door”, as long as that party offers new evidence and perspectives that are useful for the Competition Commission’s case.

The debate on the appropriateness of an administrative penalty in competition matters will remain contentious for a long time. The debate also rages in other jurisdictions where the issue of finding an appropriate sanction for a competition offence has been under the spotlight.

Accordingly, the general populace may argue that this is not enough, given the gravity and seriousness of the offence. In essence, the sentence does not fit the crime. However, as in this case, other further remedies may be available.

The legislators have in the past, attempted to remedy the situation.

In 2009, they inserted S 73A(1) in the act which prescribes that anyone who causes or permits the firm to engage in cartel conduct, while being a director of the firm, is guilty of a criminal offence. This means that the directors of Standard Chartered Bank may potentially be exposed to criminal liability.

Furthermore, in 2018, the act was tightened to provide that firms who are guilty of repeat prohibited conduct may pay an administrative penalty of 25% of their annual turnover. This is a notable improvement that must be commended.

Accordingly, Standard Chartered Bank, if caught in future for contravening the act is exposed to a fine of up to 25%. In addition, section 49D prescribes that if a consent order is granted, nothing in the act prevents an award of civil damages under section 65 of the act.

Therefore, while there remain other avenues that can be explored to bring Standard Chartered Bank to task, it is unlikely that the provisions will be invoked.

As noted by the competition authorities in the past, cartel behaviour such as price-fixing is of an egregious nature that demands the highest attention from legislators and competition authorities.

It is so serious that it poses a threat to a young constitutional democracy such as South Africa. Collusive behaviour corrodes the fabric upon which society rests. Therefore, the approach of the Competition Commission of going for “soft wins” through consent orders and leniency has to be viewed with caution.

While there are notable benefits through co-operation that exposes serious rot, matters are often resolved with procedures that do not require thoughtful legal and economic analysis.

This raises serious concerns with regard to the suitability of these agreements in the long run. The fragile nature of our democracy demands a more heavy-handed approach to protect the interests of the people, especially those who are distant from the corridors of power.

There is, however, a balance or counter-factual to the above averments. As an enforcement mechanism, settlement procedures are aimed at achieving efficiencies, for the competition authorities and the respondent firms.

For the commission and the tribunal, settlement agreements achieve procedural efficiencies by eliminating full-scale investigations and litigation, saving of resources (human and financial) and streamlining their enforcement activities.

For Standard Chartered Bank (and Citi NA), they too are saved resources involved in the litigation process, the benefit of reduced administrative fines and minimal bad publicity that may result from prolonged litigation before the competition authorities.

In South Africa, settlement procedures have particularly proved to be useful enforcement mechanisms. For example, the uncovering of bid-rigging in the construction sector during the 2010 World Cup soccer tournament was also attributed to settlement agreements.

However, settlement procedures may have some pitfalls that militate against their “purported usefulness”.

For example, if they involve numerous firms as is the case in the currency manipulation case, they may prove to be cumbersome.

In such circumstances, the commission must conduct parallel proceedings regarding the same cartel conduct. That is, on one hand, the commission is negotiating settlement agreements and on the other, is proceeding with prosecuting the firms that are contesting the cartel allegations.

Thus, the argument can be made that this takes away from the procedural efficiencies that settlement procedures are directed at achieving.

Dr Kondo is a senior lecturer in the competition law in the Department of Mercantile and Labour Law at the University of the Western Cape. He is also a visiting lecturer in Competition Law in the LLM in International Trade Law at the Trade Policy Training Centre in Arusha, Tanzania.

Dr Ndlovu is senior lecturer in the Mercantile Law department in the Law Faculty at the University of the Western Cape. She holds an LLB (UFH), LLM and LLD (UWC). She co-ordinates the LLM Competition Law and Policy.

Cape Times