Royal Bank of Scotland
By Philip Mattera
The Royal Bank of Scotland has faced more controversy during the past five years than in the previous 280 years of its existence. In 2008 RBS, which had gotten caught up in the mortgage-backed securities frenzy and had gone far out on a limb in the acquisition of the large Dutch bank ABN AMRO, started posting massive losses and had to be bailed out by the British government, which injected more than £45 billion ($71 billion) to keep it afloat.
Becoming more than 80 percent taxpayer-owned did not shield RBS from a series of legal problems, including a $500 million settlement of charges that ABN AMRO repeatedly violated U.S. economic sanctions against countries such as Iran and altered documents in an effort to conceal its actions. More recently, RBS had to pay hundreds of millions of dollars to settle allegations relating to the manipulation of the LIBOR interest rate index.In 2015 it pleaded guilty to a U.S. criminal charge of currency market manipulation but was allowed to continue business as usual.
Rising with North Sea Oil
Founded in 1727, RBS did most of its business during its first two centuries in Scotland, locked in a perennial competition with its rival, the Bank of Scotland. It was not until 1971 that the Bank of England eased restrictions on Scottish banks operating in England. That, plus the economic boom generated by the rise of the North Sea oil industry, allowed RBS to blossom.
The company embarked on an aggressive plan of expansion and diversification, moving into areas such as insurance. RBS also expanded its foreign banking activities. In the United States, it acquired Rhode Island-based Citizens Financial Group in 1988 and went on to purchase a series of other banks in the Northeast. In the UK, RBS won a takeover battle for National Westminster Bank in 2000 and proceeded to eliminate more than 10,000 jobs—a process that gave RBS CEO Frederick Goodwin the nickname “Fred the Shred.”
This new posture began to get RBS in trouble with regulators. In 2002 the UK’s Financial Services Authority fined it £750,000 for employing weak controls against money laundering. In 2005 its Citizens Financial Group unit, facing criticism by officials in Massachusetts, offered refunds to its elderly customers who had been persuaded to purchase variable annuities that regulators said were inappropriate for seniors. In 2006 industry regulator NASD (now FINRA) imposed a fine of $850,000 against CCO Investment Services, a securities broker-dealer unit of Citizens Bank.
The Big Bailout
The problems of RBS grew much more severe in 2008. Already over-extended as a result of its massive takeover of the Dutch bank ABN AMRO in 2007, RBS was further weakened by it heavy exposure to rapidly deteriorating mortgage-backed securities (especially through its U.S. investment banking arm RBS Greenwich Capital). As RBS began reporting unprecedented losses, the British government had to provide a £20 billion bailout for the bank, as a result of which the government became its majority shareholder and Goodwin was ousted (he was later stripped of his knighthood as well).
RBS also made use of the government’s so-called asset protection plan, which allowed the bank to offload toxic assets into a separate entity backed by taxpayers. RBS resisted pressure to sell off Citizens Financial Group, but it agreed to divest its insurance unit and to close more than 300 branches in England and Wales. In 2009 RBS received another £25 billion capital infusion from the British government, raising the public stake in the company to more than 80 percent.
Trading with the Enemy
Regulatory and legal problems escalated as well. In March 2010 RBS was fined £28.6 million by the UK Office of Fair Trading for sharing confidential loan pricing data with rival bank Barclays.
In May 2010 the U.S. Justice Department announced that the former ABN AMRO would pay $500 million to settle charges that it violated the Trading with the Enemy Act, the International Economic Powers Act and the Bank Secrecy Act by altering documents to cover up the fact that it was doing prohibited business with countries such as Iran and Libya that were covered by U.S. economic sanctions. “Over the course of a decade, ABN AMRO assisted sanctioned countries and entities in evading U.S. laws by facilitating hundreds of millions of U.S. dollar transactions,” a U.S. attorney stated in a press release. The Financial Services Authority subsequently fined RBS £5.6 million for failing to have adequate systems and controls in place to prevent violations of UK financial sanctions.
In January 2011 the Financial Services Authority fined RBS and its National Westminster Bank unit £2.8 million for multiple failings in the way they handled customer complaints, accusing them of responding inadequately to more than half the complaints examined. In June 2011 the National Credit Union Administration sued RBS Securities and J.P. Morgan Securities for violating federal and state law by misrepresenting the quality of mortgage-backed securities sold to U.S. credit unions. A second suit filed the following month by the agency against the two firms asked for total damages of more than $1.5 billion. (The cases are pending.)
In September 2011 the Federal Housing Finance Agency sued RBS and other firms for abuses in the sale of mortgage-backed securities to Fannie Mae and Freddie Mac (in 2015 a judge ruled against the bank and ordered it and co-defendant Nomura to pay a total of $806 million in damages). In November 2011 the Financial Services Authority fined Coutts & Company, the private banking unit of RBS, £6.3 million for abuses relating to its marketing of an investment fund linked to the failed U.S. insurer AIG.
In December 2011 the Financial Services Authority published a 450-page report on the failure of RBS that blamed the crisis on poor management decisions such as over-reliance on risky short-term wholesale funding and the failure to prevent a serious weakening of the bank’s capital position and deterioration in the underlying quality of its assets. Also cited was the ABN AMRO acquisition, which the report said RBS pursued “without appropriate heed to the risks involved and with inadequate due diligence.” The FSA acknowledged that its own inadequate oversight also played a role.
In March 2012 the Financial Services Authority fined Coutts £8.75 million for failing to establish and maintain effective controls against money laundering by high-risk customers. The agency said “the failings at Coutts were serious, systemic and were allowed to persist for almost three years. They resulted in an unacceptable risk of Coutts handling the proceeds of crime.”
In April 2012 Citizens Bank agreed to pay $137.5 million to settle a class-action lawsuit alleging that it manipulated the sequence in which it processed customer transactions in order to maximize overdraft fees.
The LIBOR Scandal
In February 2013 RBS suffered a major blow to its reputation when U.S. and British regulators announced that the bank would pay a total of $612 million to settle charges that it was involved in the manipulation of the LIBOR interest rate index. To resolve the criminal component of the case, RBS paid penalties of $150 million and agreed to have a Japanese subsidiary plead guilty to wire fraud and admit its role in the Japanese Yen portion of the LIBOR scandal. The civil components included a $325 million penalty imposed by the U.S. Commodities Futures Trading Commission and an £87.5 million fine imposed by the Financial Services Authority.
The CFTC press release about the settlement included seven pages of transcripts of communications among RBS currency traders in which they openly discussed the manipulations, including one in which the bank’s volatile rate submissions were likened to “a whore’s drawers.”
The LIBOR settlement escalated criticism of RBS, including a call by the outgoing governor of the Bank of England that the bank be broken up. There were more denunciations of the bank after RBS admitted in March 2013 that more than 90 of its employees were paid £1 million or above in 2012.
In December 2013 RBS was fined $530 million by the European Commission for LIBOR abuses.That same month, it agreed to pay $100 million to settle New York State and federal allegations relating to transactions with customers from countries subject to sanctions.
In November 2013 the SEC announced that RBS would pay $153 million to settle charges that it misled investors in a 2007 offering of subprime residential mortgage-back securities. The agency had accused the bank of failing to carry out adequate due diligence about the loans on which the securities were based.
In November 2014 RBS was fined $290 million by the U.S Commodity Futures Trading Commission and $344 million by Britain's Financial Conduct Authority as part of a settlement of charges that it and other major banks manipulated the foreign exchange market.
In May 2015 the U.S. Justice Department announced that RBS was one of a group of banks pleading guilty to criminal charges of conspiring to fix foreign currency rates. RBS was fined $395 million (and another $274 million by the Federal Reserve) and put on probation for three years. The SEC gave it a waiver from a rule that would have barred it from remaining in the securities business.
In 2005 RBS’s Greenwich Capital unit received up to $100 million in state tax credits from Connecticut by agreeing to move its investment banking headquarters from New York to Stamford.
Other Information Sources
Violation Tracker summary page
Watchdog Groups and Campaigns
Key Books and Reports
A Big Deal? Corporate Social Responsibility and the Finance Sector in Europe (CORE Coalition, December 2005).
Farming Money: How European Banks and Private Finance Profit from Food Speculation and Land Grabs (Friends of the Earth Europe, January 2012).
Investing Responsibly: A Financial Puzzle (SOMO, September 2010).
Shaping the Future of Sustainable Finance (WWF and BankTrack, January 2006).
The Banks and Society: Rebuilding Trust (Ecumenical Council for Corporate Responsibility, March 2011).
The Failure of the Royal Bank of Scotland (Financial Services Authority, December 2011).
The Oil & Gas Bank: RBS and the Financing of Climate Change (PLATFORM, March 2007).
Undue Diligence: How Banks Do Business with Corrupt Regimes (Global Witness, March 2009).
Last updated June 14, 2015