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[WASHINGTON] The US$4.3 billion in civil settlements struck Wednesday between six global banks and US and UK authorities over foreign exchange market manipulation sets the stage for negotiations over related ongoing probes that could bear much more severe consequences.
Citigroup, UBS, HSBC, Royal Bank of Scotland, JPMorgan Chase & Co and Bank of America agreed to make the payment to settle civil claims they failed to stop traders from trying to rig the foreign exchange market.
But the deal did not resolve an advanced criminal probe from the US Justice Department nor an investigation from New York's powerful banking regulator, Benjamin Lawsky, who has a reputation of helping extract record monetary settlements from global banks.
Sources familiar with the matter say the Justice Department could bring its first criminal charges early next year, and that Mr Lawsky could take action against banks under his jurisdiction ahead of his expected departure, which may come in early 2015.
Wednesday's deal appears to be the tip of the iceberg when it comes to further legal action, said Josh Rosner, managing director of Graham Fisher & Co, a New York research consultancy. "Did they let anyone off of criminal liability? What was settled?" he said.
Former prosecutors also said criminal authorities have extensive evidence, based upon transcripts released by UK's Financial Conduct Authority and US civil authorities of traders brazenly discussing attempts to manipulate foreign exchange rates.
"Recordings are typically the strongest evidence you can have," one former prosecutor said. Another former prosecutor familiar with the probes said he expected that the publicity around the first round of settlements would add momentum to the outstanding investigations.
It is unclear how much higher the settlement amounts will go beyond the US$4.3 billion, and which banks will move first in settling, especially with the US Justice Department.
Earlier this month JPMorgan said it was "currently engaged in discussions with DOJ" to resolve its investigation, one of the strongest such disclosures, suggesting it could be one of the first to settle criminal charges.
Justice Department spokesman Peter Carr said the agency's investigation is ongoing. Caitlin Ferrell, a spokeswoman for Lawsky, declined to comment on the investigation.
The banks also face a criminal probe from Britain's Serious Fraud Office (SFO), and interest from the European Commission, which has not yet opened a formal investigation.
Mr Lawsky, the head of New York's Department of Financial Services, has in recent months helped land record settlements from banks on sanctions and tax-related violations, and could significantly drive up the ultimate price tag on the forex probes.
Not only can he threaten some of the banks' licenses, but he also has been known to demand firings of employees and clawbacks of their bonuses.
In Mr Lawsky's probe, more than a dozen banks have been asked for documents, including Barclays, Credit Suisse, Deutsche Bank, Goldman, Lloyds Banking Group Plc, Societe Generale and Standard Chartered.
In a sign of Mr Lawsky's clout, Barclays pulled out of Wednesday's coordinated deal because it did not want to settle with other regulators without having come to an agreement with Mr Lawsky, two sources said.
Mr Lawsky has already installed a monitor from advisory firm Devon Capital at Barclays and is close to installing one at Deutsche Bank - a move that will allow him to collect greater evidence of alleged manipulation and could strengthen his hand in settlement talks, sources said.
One source said Mr Lawsky sought to install the monitors after receiving preliminary information that suggested the two banks were among the worst offenders.
Sources familiar with the Justice Department's criminal probe said banks could face a level of penalties more severe than those levied against them in a separate investigation into the rigging of the London interbank offer rate, a benchmark known as Libor.
For example, if a bank entered into a deferred prosecution agreement to settle Libor manipulation charges, it could be forced to plead guilty to criminal charges in the forex probe.
The Justice Department is also expected to pursue criminal charges against individuals. Sources have said prosecutors are likely to bring charges against traders and their supervisors, but are not likely to reach senior executives at any of the banks.
They note that transcripts provide damning evidence against traders, but do not explicitly implicate top-level employees.
In private chatroom transcripts released on Wednesday, traders are seen working together to move rates at which currency pairs like the US dollar and the British pound trade, and to cover their tracks.
One Citigroup trader, for example, asks a trader at UBS about another trader who may join the chatroom: "Is he gonna protect us...like we protect each other against our own branches." In another chat, an HSBC trader and others celebrate moving the rate: "Well done gents," one said. "Hooray nice team work,"another responds.