SFO narrows focus of Bank of England money-market probe

The Serious Fraud Office's unprecedented investigation into whether the Bank of England's interventions in the money market during the financial crisis were rigged - and whether any BoE official was complicit - is focusing on one specific instance of alleged wrongdoing.

The investigation was first reported by the Financial Times on Wednesday and later confirmed by the BoE. It is already almost three months old. A dossier was first passed to the SFO by the central bank in late 2014.

The SFO, according to people familiar with the issue, decided to narrow the focus of its probe following a wider internal inquiry commissioned by the bank from Lord Grabiner, a senior British commercial lawyer.

The BoE has tried to improve accountability and transparency under the governorship of Mark Carney. As early as last summer, it commissioned an investigation into whether any of its officials were aware of - or participated in - alleged rigging of a series of money-market auctions the BoE launched in late 2007 and through 2008 in the depths of the financial crisis.

As money markets froze, the BoE stepped in to provide emergency liquidity through to lenders, allowing them to swap a wider range of assets for funding through various schemes.

Allegations that the liquidity auctions may have been rigged come at a particularly sensitive time for the central bank after its embarrassing cameo role in the Libor-rigging investigation and also in the foreign exchange manipulation scandal.

The former BoE deputy governor Sir Paul Tucker was head of the markets division which ran the auctions in the early phase of the crisis. His name has already been mentioned in connection with the Libor rate-rigging scandal when Bob Diamond, the sacked former chief executive of Barclays, disclosed details of a private email exchange about Libor rates. Lord King was governor at the time.

Investigations into Libor, forex and now the money-market auctions have a common theme: information flows and the way the bank interacted with market participants.

It was external traders' allegations that BoE officials were aware of collusion in the $5.3tn-a-day forex market that prompted the central bank's oversight committee to instruct Lord Grabiner, who is known for his advice on complex City situations. Following a £3m investigation, he cleared BoE officials of wrongdoing except for criticism for its chief forex dealer Martin Mallett, whom the BoE sacked for what it said was unrelated misconduct last year.

The bank turned to Lord Grabiner again last summer. His task was to scrutinise the liquidity auctions and he interviewed about 10 officials who were provided defence lawyers at the expense of the central bank, people familiar with the situation told the FT last year.

Despite the bank professing only last week a new era of openness in the wake of the forex scandal, it has consistently refused to comment on whether there were issues around the auctions. This position was again in evidence this week, when the Treasury select committee questioned Mr Carney over a November article by the FT that revealed the bank's internal investigation.

Steve Baker, Conservative MP and a member of the committee who asked Mr Carney about the article, said on Thursday: "The Bank of England is an increasingly dominant player in financial markets, and if it is going to be so powerful it is crucially important that power is exercised with complete transparency so it can be properly scrutinised."

The matter is now just one of several investigations on the SFO's books into emergency action taken during the crisis. It adds to an existing probe of Barclays' arrangements with Qatar as part of a cash call, and to a look at alleged manipulation of the Libor interbank benchmark rate.

The probe gives the SFO an opportunity to improve its image in the run-up to May's general election after plans were revived by Theresa May, home secretary, to roll it into a wider crime-fighting agency.

The agency has had several key wins in court recently and has wasted no time on involving itself in other matters, from accounting issues at Tesco, to HM Revenue & Customs calling on its assistance in relation to HSBC's tax advice woes.

Andrew Tyrie, chairman of the Treasury committee, said of the SFO that "the sooner their findings are published the better".

However it is unlikely that any significant developments will come before the May general election, even with the agency's targeted approach. SFO probes typically take years to arrive at a decision on whether to lay charges.

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