The Pakistan election was fair

S Y Quraishi in The Indian Express


The general election in Pakistan is being described as a milestone in the democratic history of the country. This is only the second transition from one full-term civilian government to another, and the first under the new Election Law, 2018. I got a great opportunity to observe the event from a ringside seat as a member of the Commonwealth Election Observers Group. The 15-member group headed by Abdulsalami Abubakar, former head of state of Nigeria, spent 12 days to observe events leading up to the election, the polling and counting day and the declaration of the results over three days.

The group met delegations from the leading political parties, civil society and the media to understand the pre-electoral environment, which was reported to point to a not-too-fair election. We were told of massive pre-poll “rigging”. Mainly, three things were cited: Forcing of certain party leaders to return their tickets, muzzling of the media, and misuse of the army and judiciary in favour of a particular party. It is difficult to understand how the changing loyalties of political leaders can be described as rigging — such political engineering is common in the Subcontinent where turncoats and horse trading are household terms. Some media representatives said that after a lot of subtle and overt intimidation, many have decided on self censorship as a wiser option. The hold of the army on institutions like the judiciary, the National Accountability Bureau, the media, etc was a common refrain. We were told naming the army was taboo, full of risks. Therefore, alternative expressions or euphemisms had been evolved, like “establishment”, “powers that be”, “khalai makhlooq” (people from outer space), “angels” and even “agriculture department”.

People who questioned the impartiality of the military and judiciary cited the timing of court cases against certain political leaders and candidates. Media were allegedly prevented from fully covering certain issues like the rights of the minorities and the role of state institutions. For the poll-day arrangements, questions were focused on the large-scale deployment of the army. Concerns were raised about the order to deploy soldiers inside the polling stations. We, therefore, decided to focus special attention on these concerns.

We observed that candidates from across parties and independents were able to campaign freely and peacefully. Maybe we arrived too late, by which time the games were already played. The overall security situation was tense, especially in Khyber Pakhtunkhwa (KPK) and Balochistan, where terrorist attacks in the preceding weeks claimed more than 170 lives, including of three candidates. However, the parties were able to organise their rallies freely as per Election Rules 2017. A lot of negative and abusive campaigning was initially reported but after the Election Commission of Pakistan’s (ECP) stern action under the model code, most people fell in line.

We found the electoral system quite robust, with a substantially reformed legal framework consisting of the Constitution of Pakistan, the Elections Act, 2017 and Election Rules, 2017, which has led to a greater autonomy of the ECP, including financial autonomy, power to make rules and punish for contempt, and to deregister or delist an existing political party. Officials deputed for election duties have now been brought under the ECP’s disciplinary control.

Some legal reforms for enhancing women voters’ participation are noteworthy. The ECP can declare an election null and void if less than 10 per cent women have voted in a constituency. This had a salutary effect in those frontier regions where women were traditionally not allowed to vote. Each party has to nominate a minimum of 5 per cent women candidates for the general seats in the National Assembly. This is in addition to 70 seats in the National Assembly (272 members) which are filled by nomination by the political parties according to the number of seats won. (Incidentally, 10 seats are reserved for minorities). Special campaigns by the National Database and Registration Authority (NADRA), political parties and civil society helped increase their enrolment as voters. Separate polling stations for women, run entirely by women, also encouraged turnout.

Polling day passed off peacefully much to everyone’s relief. There was a 53 per cent turnout, significantly higher than the 48 per cent in 2013.

Unlike India, the counting in Pakistan is done at the polling station itself immediately after polling closes. There were several questions raised about the counting. Some parties alleged that the polling agents were not allowed to observe the counting from close up. Some complained that their agents were thrown out of the stations. There were allegations that Form 45 (result sheet) was neither given to polling agents nor pasted on the wall of the PS. The ECP denied the first allegation clarifying that only those agents who were in excess of one per party were asked to leave. It, however, admitted to several instances of the second allegation and promised to take action. The ECP also admitted the failure of the Result Transmission System because it had not been pilot tested adequately. The foreign minister, whom we met, attributed this, in a lighter vein, to the failure of the British technology on which the app was based.

The conduct of the proscribed militant-dominated religious organisations was watched with interest, a phenomenon of special concern to India. We noted that the ECP, in accordance with the law, did not allow the registration of such entities and individuals to contest elections. However, its mechanism for filtering candidates linked to such organisations was weak which led to three candidates managing to slip through scrutiny. They were, however, delisted on the eve of the election after a hue and cry of the media and civil society. It is remarkable that religious parties with extremist connections were totally routed both in national and provincial assemblies. Tehreek-e-Labbaik managed to get only two seats in Karachi whereas the Allah-o-Akbar party drew a blank.

The elections were closely observed by a huge force of volunteers of civil society led by the Free and Fair Election Network (FAFEN) and Trust for Democracy Education and Accountability, besides international observers from the EU, Commonwealth and several diplomats. FAFEN deployed 19,683 citizen observers (including 5,846 women) at more than 65,000 polling stations (almost 80 per cent of the total). Most observers were satisfied with arrangements and conduct of elections. The Commonwealth group commended the ECP for a laudable job in the short time it had to implement its mandate for holding transparent elections on schedule. It regarded the General Election 2018 as an important milestone in strengthening democracy in Pakistan.
Quraishi is former chief election commissioner of India

How to get away with financial fraud

Dan Davies in The Guardian


Guys, you’ve got to hear this,” I said. I was sitting in front of my computer one day in July 2012, with one eye on a screen of share prices and the other on a live stream of the House of Commons Treasury select committee hearings. As the Barclays share price took a graceful swan dive, I pulled my headphones out of the socket and turned up the volume so everyone could hear. My colleagues left their terminals and came around to watch BBC Parliament with me.

It didn’t take long to realise what was happening. “Bob’s getting murdered,” someone said.

Bob Diamond, the swashbuckling chief executive of Barclays, had been called before the committee to explain exactly what his bank had been playing at in regards to the Libor rate-fixing scandal. The day before his appearance, he had made things very much worse by seeming to accuse the deputy governor of the Bank of England of ordering him to fiddle an important benchmark, then walking back the accusation as soon as it was challenged. He was trying to turn on his legendary charm in front of a committee of angry MPs, and it wasn’t working. On our trading floor, in Mayfair, calls were coming in from all over the City. Investors needed to know what was happening and whether the damage was reparable.

A couple of weeks later, the damage was done. The money was gone, Diamond was out of a job and the market, as it always does, had moved on. We were left asking ourselves: How did we get it so wrong?

At the time I was working for a French stockbroking firm, on the team responsible for the banking sector. I was the team’s regulation specialist. I had been aware of “the Libor affair”, and had written about it on several occasions during the previous months. My colleagues and I had assumed that it would be the typical kind of regulatory risk for the banks – a slap on the wrist, a few hundred million dollars of fines, no more than that.

The first puzzle was that, to start with, it looked like we were right. By the time it caught the attention of the mainstream media, the Libor scandal had reached what would usually be the end of the story – the announcement, on 27 June 2012, of a regulatory sanction. Barclays had admitted a set of facts, made undertakings not to do anything similar again, and agreed to pay finesof £59.5m to the UK’s Financial Services Authority, $200m to the US Commodity Futures Trading Commission and a further $160m to the US Department of Justice. That’s how these things are usually dealt with. If anything, it was considered quite a tough penalty.

But the Libor case marked the beginning of a new process for the regulators. As well as publishing their judgment, they gave a long summary of the evidence and reasoning that led to their decision. In the case of the Libor fines, the majority of that evidence took the form of transcripts of emails and Bloomberg chat. Bloomberg’s trading terminals – the $50,000-a-year news and financial-data servers that every trader uses – have an instant-messaging function in addition to supplying prices and transmitting news. Financial market professionals are vastly more addicted to this chat than teen girls are to Instagram, and many of them failed to realise that if you discussed illegal activity on this medium, you were making things easy for the authorities.

The transcripts left no room for doubt.

Trader C: “The big day [has] arrived … My NYK are screaming at me about an unchanged 3m libor. As always, any help wd be greatly appreciated. What do you think you’ll go for 3m?”

Submitter: “I am going 90 altho 91 is what I should be posting.”

Trader C: “[…] when I retire and write a book about this business your name will be written in golden letters […]”.

Submitter: “I would prefer this [to] not be in any book!”

Perhaps it’s unfair to judge the Libor conspirators on their chat records; few of the journalists who covered the story would like to see their own Twitter direct-message history paraded in front of an angry public. Trading, for all its bluster, is basically a service industry, and there is no service industry anywhere in the world whose employees don’t blow off steam by acting out or insulting the customers behind their backs. But traders tend to have more than the usual level of self-confidence, bordering on arrogance. And in a general climate in which the public was both unhappy with the banking industry and unimpressed with casual banter about ostentatious displays of wealth, the Libor transcripts appeared crass beyond belief. Every single popular stereotype about traders was confirmed. An abstruse and technical set of regulatory breaches suddenly became a morality play, a story of swaggering villains who fixed the market as if it was a horse race. The politicians could hardly have failed to get involved.

It is not a pleasant thing to see your industry subjected to criticism that is at once overheated, ill-informed and entirely justified. In 2012, the financial sector finally got the kind of enemies it deserved. The popular version of events might have been oversimplified and wrong in lots of technical detail, but in the broad sweep, it was right. The nuanced and technical version of events which the specialists obsessed over might have been right on the detail, but it missed one utterly crucial point: a massive crime of dishonesty had taken place. There was a word for what had happened, and that word was fraud. For a period of months, it seemed to me as if the more you knew about the Libor scandal, the less you understood it.

That’s how we got it so wrong. We were looking for incidental breaches of technical regulations, not systematic crime. And the thing is, that’s normal. The nature of fraud is that it works outside your field of vision, subverting the normal checks and balances so that the world changes while the picture stays the same. People in financial markets have been missing the wood for the trees for as long as there have been markets.

Some places in the world are what they call “low-trust societies”. The political institutions are fragile and corrupt, business practices are dodgy, debts are rarely repaid and people rightly fear being ripped off on any transaction. In the “high-trust societies”, conversely, businesses are honest, laws are fair and consistently enforced, and the majority of people can go about their day in the knowledge that the overall level of integrity in economic life is very high. With that in mind, and given what we know about the following two countries, why is it that the Canadian financial sector is so fraud-ridden that Joe Queenan, writing in Forbes magazine in 1989, nicknamed Vancouver the “Scam Capital of the World”, while shipowners in Greece will regularly do multimillion-dollar deals on a handshake?

We might call this the “Canadian paradox”. There are different kinds of dishonesty in the world. The most profitable kind is commercial fraud, and commercial fraud is parasitical on the overall health of the business sector on which it preys. It is much more difficult to be a fraudster in a society in which people only do business with relatives, or where commerce is based on family networks going back centuries. It is much easier to carry out a securities fraud in a market where dishonesty is the rare exception rather than the everyday rule.

 

Traders at Bloomberg terminals on the floor of the New York stock exchange, 2013. Photograph: Brendan McDermid / Reuters/REUTERS

The existence of the Canadian paradox suggests that there is a specifically economic dimension to a certain kind of crime of dishonesty. Trust – particularly between complete strangers, with no interactions beside relatively anonymous market transactions – is the basis of the modern industrial economy. And the story of the development of the modern economy is in large part the story of the invention and improvement of technologies and institutions for managing that trust.

And as industrial society develops, it becomes easier to be a victim. In The Wealth of Nations, Adam Smith described how prosperity derived from the division of labour – the 18 distinct operations that went into the manufacture of a pin, for example. While this was going on, the modern world also saw a growing division of trust. The more a society benefits from the division of labour in checking up on things, the further you can go into a con game before you realise that you’re in one. In the case of several dealers in the Libor market, by the time anyone realised something was crooked, they were several billions of dollars in over their heads.

In hindsight, the Libor system was always a shoddy piece of work. Some not-very-well-paid clerks from the British Bankers’ Association would call up a few dozen banks and ask: “If you were to borrow, say, a million dollars in [a given currency] for a 30-day deposit, what would you expect to pay?” A deposit, in this context, is a short-term loan from one bank to another. Due to customers’ inconvenient habit of borrowing from one bank and putting the money in an account at another, banks are constantly left with either surplus customer deposits, or a shortage of funds. The “London inter-bank offered-rate” (Libor) market is where they sort this out by borrowing from and lending to each other, at the “offered rate” of interest.

Once they had their answers, the clerks would throw away the highest and lowest outliers and calculate the average of the rest, which would be recorded as “30-day Libor” for that currency. The process would be repeated for three-month loans, six-month loans and any other periods of interest, and the rates would be published. You would then have a little table recording the state of the market on that day – you could decide which currency you wanted to borrow in, and how long you wanted the use of the money, and the Libor panel would give you a good sense of what high-quality banks were paying to do the same.

Compared with the amount of time and effort that goes into the systems for nearly everything else that banks do, not very much trouble was taken over this process. Other markets rose and fell, stock exchanges mutated and were taken over by super-fast robots, but the Libor rate for the day was still determined by a process that could be termed “a quick ring-around”. Nobody noticed until it was too late that hundreds of trillions of dollars of the world economy rested on a number compiled by the few dozen people in the world with the greatest incentive to fiddle it.

It started to fall apart with the onset of the global financial crisis in 2007, and all the more so after the collapse of Lehman Brothers in 2008, when banks were so scared that they effectively stopped lending to each other. Although the market was completely frozen, the daily Libor ring-around still took place, and banks still gave, almost entirely speculatively, answers to the question “If you were to borrow a reasonable sum, what would you expect to pay?”

But the daily quotes were published, and that meant everyone could see what everyone else was saying about their funding costs. And one of the telltale signs that a bank in trouble is when its funding costs start to rise. If your Libor submission is taken as an indicator of whether you’re in trouble or not, you really don’t want to be the highest number on the daily list. Naturally, then, quite a few banks started using the Libor submission process as a form of false advertising, putting in a lowballed quote in order to make it look like they were still obtaining money easily when, in fact, they could hardly borrow at all. And so it came to pass that several banks created internal message trails saying, in effect, “Dear Lowly Employee, for the benefit of the bank and its shareholders, please start submitting a lower Libor quote, signed Senior Executive”. This turned out to be a silly thing to do.

All this was known at the time. There was an article in the Wall Street Journal about it. I used to prepare PowerPoint slides with charts on them that had gaps for the year 2008 because the data was “somewhat hypothetical”. Even earlier, in late 2007, the Bank of England held a “liaison group” meeting so that representatives from the banks could discuss the issue of Libor reporting. What nobody seemed to realise is that an ongoing fraud was being committed. There was a conspiracy to tell a lie (to the Libor phone panel, about a bank’s true cost of funding) in order to induce someone to enter into a bargain at a disadvantage to themselves. The general public caught on to all this a lot quicker than the experts did, which put the last nail in the coffin of the already weakened trust in the financial system. You could make a case that a lot of the populist politics of the subsequent decade can be traced back to the Libor affair.

Libor teaches us a valuable lesson about commercial fraud – that unlike other crimes, it has a problem of denial as well as one of detection. There are very few other criminal acts where the victim not only consents to the criminal act, but voluntarily transfers the money or valuable goods to the criminal. And the hierarchies, status distinctions and networks that make up a modern economy also create powerful psychological barriers against seeing fraud when it is happening. White-collar crime is partly defined by the kind of person who commits it: a person of high status in the community, the kind of person who is always given the benefit of the doubt.

In popular culture, the fraudster is the “confidence man”, somewhere between a stage magician and the trickster gods of mythology. In films such as The Sting and Dirty Rotten Scoundrels, they are master psychologists, exploiting the greed and myopia of their victims, and creating a world of illusion. People like this do exist (albeit rarely). But they are not typical of white-collar criminals.

The interesting questions are never about individual psychology. There are plenty of larger-than-life characters. But there are also plenty of people like Enron’s Jeff Skilling and Baring’s Nick Leeson: aggressively dull clerks and managers whose only interest derives from the disasters they caused. And even for the real craftsmen, the actual work is, of necessity, incredibly prosaic.

The way most white-collar crime works is by manipulating institutional psychology. That means creating something that looks as much as possible like a normal set of transactions. The drama comes later, when it all unwinds.

Fraudsters don’t play on moral weaknesses, greed or fear; they play on weaknesses in the system of checks and balances – the audit processes that are meant to supplement an overall environment of trust. One point that comes up again and again when looking at famous and large-scale frauds is that, in many cases, everything could have been brought to a halt at a very early stage if anyone had taken care to confirm all the facts. But nobody does confirm all the facts. There are just too bloody many of them. Even after the financial rubble has settled and the arrests been made, this is a huge problem.

 

Jeffrey Skilling and Sherron Watkins of Enron at a Senate commerce committee hearing in 2002. Photograph: Ron Edmonds/AP

It is a commonplace of law enforcement that commercial frauds are difficult to prosecute. In many countries, proposals have been made, and sometimes passed into law, to remove juries from complex fraud trials, or to move the task of dealing with them out of the criminal justice system and into regulatory or other non-judicial processes. Such moves are understandable. There is a need to be seen to get prosecutions and to maintain confidence in the whole system. However, taking the opinions of the general public out of the question seems to me to be a counsel of despair.

When analysed properly, there isn’t much that is truly difficult about the proverbial “complex fraud trial”. The underlying crime is often surprisingly crude: someone did something dishonest and enriched themselves at the expense of others. What makes white-collar trials so arduous for jurors is really their length, and the amount of detail that needs to be brought for a successful conviction. Such trials are not long and detailed because there is anything difficult to understand. They are long and difficult because so many liars are involved, and when a case has a lot of liars, it takes time and evidence to establish that they are lying.

This state of affairs is actually quite uncommon in the criminal justice system. Most trials only have a couple of liars in the witness box, and the question is a simple one of whether the accused did it or not. In a fraud trial, rather than denying responsibility for the actions involved, the defendant is often insisting that no crime was committed at all, that there is an innocent interpretation for everything.

In January this year, the construction giant Carillion collapsed. Although they had issued a profits warning last summer, they continued to land government contracts. It was assumed that, since they had been audited by KPMG, one of the big-four accounting firms, any serious problems would have been spotted.
At the time of writing, nobody has been prosecuted over the collapse of Carillion. Maybe nobody will and maybe nobody should. It’s possible, after all, for a big firm to go bust, even really suddenly, without it being a result of anything culpable. But the accounting looks weird – at the very least, they seem to have recognised revenue a long time before it actually arrived. It’s not surprising that the accounting standards bodies are asking some questions. So are the Treasury select committee: one MP told a partner at KPMG that “I would not hire you to do an audit of the contents of my fridge.”

In general, cases of major fraud should have been prevented by auditors, whose specific job it is to review every set of accounts as a neutral outside party, and certify that they are a true and fair view of the business. But they don’t always do this. Why not? The answer is simple: some auditors are willing to bend the rules, and some are too easily fooled. And whatever reforms are made to the accounting standards and to the rules governing the profession, the same problems have cropped up again and again.

First, there is the problem that the vast majority of auditors are both honest and competent. This is a good thing, of course, but the bad thing about it is that it means that most people have never met a crooked or incompetent auditor, and therefore have no real understanding that such people exist.

To find a really bad guy at a big-four accountancy firm, you have to be quite unlucky (or quite lucky if that was what you were looking for). But as a crooked manager of a company, churning around your auditors until you find a bad ’un is exactly what you do – and when you find one, you hang on to them. This means that the bad auditors are gravitationally drawn into auditing the bad companies, while the majority of the profession has an unrepresentative view of how likely that could be.

Second, there is the problem that even if an auditor is both honest and competent, he has to have a spine, or he might as well not be. Fraudsters can be both persistent and overbearing, and not all the people who went into accountancy firms out of university did so because they were commanding, alpha-type personalities.

Added to this, fraudsters are really keen on going over auditors’ heads and complaining to their bosses at the accounting firm, claiming that the auditor is being unhelpful and bureaucratic, not allowing the CEO to use his legitimate judgment in presenting the results of his own business.

Partly because auditors are often awful stick-in-the-muds and arse-coverers, and partly because auditing is a surprisingly competitive and unprofitable business that is typically used as a loss-leader to sell more remunerative consulting and IT work, you can’t assume that the auditor’s boss will support their employee, even though the employee is the one placing their signature (and the reputation of the whole practice) on the set of accounts. As with several other patterns of behaviour that tend to generate frauds, the dynamic by which a difficult audit partner gets overruled or removed happens so often, and reproduces itself so exactly, that it must reflect a fairly deep and ubiquitous incentive problem that will be very difficult to remove.

By way of a second line of defence, investors and brokerage firms often employ their own “analysts” to critically read sets of published accounts. The analyst is meant to be an industry expert, with enough financial training to read company accounts and to carry out valuations of companies and other assets. Although their primary job is to identify profitable opportunities in securities trading – shares or bonds that are either very undervalued or very overvalued – it would surely seem to be the case that part of this job would involve the identification of companies that are very overvalued because they are frauds.

Well, sometimes it works. A set of fraudulent accounts will often generate “tells”. In particular, fraudsters in a hurry, or with limited ability to browbeat the auditors, will not be able to fake the balance sheet to match the way they have faked the profits. Inflated sales might show up as having been carried out without need for inventories, and without any trace of the cash they should have generated. Analysts are also often good at spotting practices such as “channel stuffing”, when a company (usually one with a highly motivated and target-oriented sales force) sells a lot of product to wholesalers and intermediaries towards the end of the quarter, booking sales and moving inventory off its books. This makes growth look good in the short term, at the expense of future sales.

Often, an honest auditor who has buckled under pressure will include a cryptic-looking passage of legalese, buried in the notes to the accounts, explaining what accounting treatment has been used, and hoping that someone will read it and understand that the significance of this note is that all of the headline numbers are fake. Nearly all of the fraudulent accounting policies adopted by Enron could have been deduced from its public filings if you knew where to look.

More common is the situation that prevailed in the period immediately preceding the global financial crisis.Analysts occasionally noticed that some things didn’t add up, and said so, and one or two of them wrote reports that, if taken seriously, could have been seen as prescient warnings. The problem is that spotting frauds is difficult and, for the majority of investors, not worth expending the effort on. That means it is not worth it for most analysts, either. Frauds are rare. Frauds that can be spotted by careful analysis are even rarer. And frauds that are also large enough to offer serious rewards for betting against them come along roughly once every business cycle, in waves.

Analysts are also subject to very similar pressures to those that cause auditors to compromise their principles. Anyone accusing a company publicly of being a fraud is taking a big risk, and can expect significant retaliation. It is well to remember that frauds generally look like very successful companies, and there are sound accounting reasons for this. It is not just that once you have decided to fiddle the accounts you might as well make them look great rather than mediocre.

If you are extracting cash fraudulently, you usually need to be growing the fake earnings at a higher rate. So people who are correctly identifying frauds can often look like they are jealously attacking success. Frauds also tend to carry out lots of financial transactions and pay large commissions to investment banks, all the while making investors believe they are rich. The psychological barriers against questioning a successful CEO are not quite as powerful as those against questioning the honesty of a doctor or lawyer, but they are substantial.

And finally, most analysts’ opinions are not read. A fraudster does not have to fool everyone; he just needs to fool enough people to get his money.

If you are looking to the financial system to protect investors, you are going to end up being disappointed. But this is inevitable. Investors don’t want to be protected from fraud; they want to invest. Since the invention of stock markets, there has been surprisingly little correlation between the amount of fraud in a market and the return to investors. It’s been credibly estimated that in the Victorian era, one in six companies floated on the London Stock Exchange was a fraud. But people got rich. It’s the Canadian paradox. Although in the short term, you save your money by checking everything out, in the long term, success goes to those who trust.

The inside story of the Tory election scandal

Ed Howker and Guy Basnett in The Guardian


A few hours after dawn on 8 May 2015, the morning after his unexpected victory in the general election, David Cameron delivered a celebratory speech to the jubilant staff of Conservative campaign headquarters, at 4 Matthew Parker Street, Westminster. “I’m not an old man but I remember casting a vote in 1987 and that was a great victory,” he said. “I remember 2010, achieving that dream of getting Labour out and getting the Tories back in, and that was amazing. But I think this is the sweetest victory of them all.”

The assembled Tory campaign staffers cheered and whistled as Cameron declared: “We are on the brink of something so exciting.” The election result would indeed change British politics, although not in the way that Cameron intended: the obliteration of the Conservatives’ Liberal Democrat coalition partners cleared the way for the referendum that set Britain on a path to leave the EU and ended Cameron’s political career. As a result, Theresa May is now the prime minister, while Cameron is on a speaking tour of US universities and George Osborne is moonlighting as a newspaper editor.

Until recently, Britain thought it knew how the Conservative party had defied expectations to win the election. After the initial shock that predictions of a hung parliament had proved incorrect, a new narrative was soon established. Commentators explained that the Tories had prevailed by successfully emphasising the threat of a Labour coalition with the SNP and deploying the “pumped-up” prime minister for a spurt of decisive last-minute campaigning. Several newspapers reported that the Tories had spent less to win their 12-seat majority in 2015 than they did to win 24 fewer seats in 2010.

In truth, the victorious Conservative campaign was the most complex ever mounted in Britain, run by two of the world’s most successful campaign consultants. Warehouses of telephone pollsters were put to work for a year before the election, their task to track the views of undecided voters in key marginal seats. The party also distributed thousands of detailed surveys to voters in marginals, and merged all this polling data with information from electoral rolls and commercial market research to produce the most comprehensive picture yet of who might be persuaded to vote Conservative.

Armed with an unprecedented level of detail, the Conservatives began distributing leaflets and letters that directly addressed the hopes and fears of their target voters. And in the final weeks of the campaign, shock troops of volunteers were dispatched to the doorsteps of undecided voters with a mission to persuade and cajole on the party’s behalf. In the most high-profile fight, an elite squad of strategists moved from the London HQ to Kent, where the Ukip leader Nigel Farage was making his bid for parliament.

If the sophistication of the 2015 campaign was not widely known, that was by design: the Conservative Home website, a meeting place for party loyalists, called the victory a “stealth win”. But over the last few months, another story has emerged – an account that is told in a paper trail of hotel bills, emails and witness statements that has led to a year-long investigation by the Electoral Commission and the police.

The startling evidence, first unearthed by Channel 4 News and confirmed in a condemnatory report released last week by the Electoral Commission – the independent body that oversees election law and regulates political finance in the UK – suggests that the Conservative party gained an advantage by breaching election spending laws during the 2015 election. This allowed the party to send its most dedicated volunteers into key seats, in which data had identified specific voters whose turnout could swing the contest. Some of this spending was not properly declared, and some of it was entirely off the books. The sums involved are deceptively small, but the impact may have been decisive.

At present, up to 20 sitting Conservative MPs are the subject of criminal investigation by 16 police forces. If any of the candidates are charged and found guilty of an election offence, they could be barred from political office for three years or spend up to a year in prison. The whole case is unprecedented: this is the largest number of MPs ever to be investigated for violations of electoral law. In the past, cases of alleged election fraud have usually focused on a single MP. This time, there are so many cases that police forces across England have taken the unusual step of coordinating their investigations.

The release of last week’s 38-page Electoral Commission report produced a minor political earthquake: as a result of the biggest investigation the commission has ever undertaken, it levied its largest-ever fine against the Conservative party and referred the case of the party’s treasurer, Simon Day, to the Metropolitan police for further criminal investigation. “There was a realistic prospect,” the report said, that the undeclared spending by the party had “enabled its candidates to gain a financial advantage over opponents.”

The party’s response to the report has been dismissive from the very start. During their investigation, the Electoral Commission was forced to file papers with the high court, demanding that the Conservative party disclose information about its election campaign, after the party had failed to fully comply with their requests for information for three months. Since the report was published, Conservative ministers and spokesmen have pointed out that the commission found only “a series of administrative errors” and that other parties have been fined for their activity in the 2015 election too. Conservatives also say that the missing money identified by the commission represents just 0.6% of the total spent by the party during the 2015 election.

It is true that the sums involved in this case are small: the Electoral Commission’s highest-ever fine turns out to be just £70,000, and it has been applied to punish undeclared and misdeclared Conservative spending totalling just £250,000. Most reports on the commission’s findings have echoed this defence, allowing that some criminal charges may indeed be filed, while overlooking the impact of the overspending on the result.

But British elections are designed to be cheap. Laws that date back to the 1880s limit campaign spending precisely so that people of all backgrounds, and not only the wealthy, have a fair chance to compete for votes. And if that egalitarian principle enhances our political culture, it has another less obvious consequence: even small sums of additional, illegal money, if shrewdly spent, can make a huge difference to results.

Thanks to the Electoral Commission report, we now know that some of the Conservative party’s central spending did benefit MPs in the tightest races, but it was not declared. It is possible even that this money helped to secure the victories from which the Conservative majority was derived. Slowly, a chilling prospect emerges that British politics, our relationship with Europe and the future of our economy, were all transformed following a contest that wasn’t a fair fight.

The Conservatives’ election worries were never financial. By the end of 2014, newspapers reported that the party had raised substantially more money than its rivals, assembling a £78m “war chest” that would allow it to “funnel huge amounts of cash into key seats”, according to the Observer. The campaign would be constrained only by two factors: the legal spending limits for each candidate and the number of volunteers the party could recruit to take its message to voters.

In fact, the scandal in which so many MPs now find themselves embroiled concerns precisely those limits. The spending that has been found to be in violation by the Electoral Commission was used to bring Conservative campaigners into the tightest marginal election battles. Separately, multiple police investigations are examining whether individual candidates and their election agents broke the law.

It is difficult to understand the election expenses scandal without understanding the election strategy that had been unveiled three years before the vote. At a closed session on the first day of the 2012 Conservative conference, the party’s campaign director, Stephen Gilbert, laid out a plan that would come to be known as the 40/40 strategy. For the 2015 election, the party would focus single-mindedly on holding 40 marginal seats and winning another 40. Candidates for these seats would be selected early, and full-time campaign managers – heavily subsidised by Conservative campaign headquarters (CCHQ) – would be appointed in every 40/40 seat.

The 40/40 campaign would be centrally controlled and would require two ingredients. The first was detailed information about every potential Conservative voter in each of the marginal seats. The second was a field team capable of making contact with them and persuading them to vote Tory.

To put the plan into action, the party turned to two men who have helped reshape the way elections are fought. The first, the Australian political strategist Lynton Crosby, had overseen the Tories’ 2005 general election campaign and Boris Johnson’s two victories in London mayoral elections.

Crosby’s notoriety made him the subject of considerable press attention – but the second man behind the Conservative campaign may have been even more important. This was the American strategist Jim Messina, who was hired as a strategy adviser in August 2013. Senior Conservative staff had been awestruck by Barack Obama’s comfortable victories in the 2008 and 2012 presidential elections, crediting their relentless focus on data to Messina.


British elections are designed to be cheap: even small sums of additional money can make a huge difference to results

Using vast databases, commercial market research, complex questionnaires and phone banks, Messina had been able to map the fears and desires of swing voters, and design highly personalised messaging that would appeal to them. The Conservatives hired him to perform the same magic in Britain. To do so, Messina used commercial call centres to track the views of between 1,000 and 2,000 voters in all 80 of the seats targeted by the 40/40 strategy.

This data was crucial to the Conservative campaign: it determined which voters the party needed to contact and which messages they would hear. This began with direct mail – personally addressed to voters in each target seat, who were divided into 40 different categories, with a slightly different message for each one.

But the big-data strategy requires more than leaflets: once you have identified the voters who might be persuaded to switch, and fine-tuned what message to give them, you have to send campaigners to actually knock on their doors and urge them to go to the polls on election day. This requires an army of volunteers, spread across dozens of constituencies. It fell to the party’s co-chairman, Grant Shapps, to establish the necessary volunteer outreach program, which was dubbed Team2015.

Shapps had begun sending out recruitment emails to the party’s mailing list in the summer of 2013, hoping to build a centrally controlled base of activists who could be deployed to marginal constituencies. CCHQ demanded that Team2015 coordinators be established in every swing seat. It was an uphill struggle. Rallying enthusiastic volunteers to David Cameron’s cause turned out to be a harder task than attracting Obama supporters had been.

 

‘Under David Cameron’s leadership, the number of party members had further depleted, halving to fewer than 150,000.’ Photograph: Peter Nicholls/PA

Conservative membership had been in long-term decline from a peak of 2.8 million in 1952. Under David Cameron’s leadership, the number of party members had further depleted, halving to fewer than 150,000. Those remaining members tended to be older and less active – not the dynamic door-knocking volunteers that Team2015 wanted to recruit. While some local Conservative associations reported new members, most described numbers as “hit and miss”. One seat’s early Team2015 report records: “[Team2015] invited to party with MP – no one turned up!”

In some marginal seats, Team2015 was almost nonexistent. One campaign manager recalls: “Trying to get members to volunteer was practically impossible, so Team2015 volunteers were even worse. People would put their names down, generally via CCHQ, who would then pass the person’s details to the local campaign manager but, in my case, when I tried to contact them I never got any volunteers.”

As the election drew nearer, Shapps made upbeat reports on the growing volunteer force. But, according to Conservative Home, the party’s records indicate that only about 15,000 people ever turned up to campaign, and fewer than that did so regularly.

There was, however, another team at work. Unsupervised by CCHQ to start with, it would later be adopted as a critical element in the party’s “ground war” since – unlike Team2015 – it had managed to deliver platoons of committed Conservative activists to the places that needed them most in a series of crucial byelections the year before. It was called RoadTrip.

RoadTrip2015 was the brainchild of Mark Clarke, who would become infamous after the election as “the Tatler Tory”, pilloried in the press over accusations that he bullied a young Conservative who later killed himself, and made unwanted sexual advances towards female members of the party – allegations he has always denied. But in 2014, as a failed parliamentary candidate desperate to get back into the party’s good graces, he launched a grassroots volunteer scheme that sent party members into marginal seats to distribute leaflets, knock on doors, and work the voters.

RoadTrip2015’s work began with a March 2014 trip to Cannock Chase, a West Midlands Labour marginal where 50 volunteers battled through a hailstorm to the doorsteps of swing voters. In the months that followed there were trips to Harlow, Chester and Cheadle. In Enfield, Team2015 marshalled 130 volunteers and party co-chair Grant Shapps attended too. But what put the scheme on the map, and drew the admiration of Conservative commentators and MPs, was the Newark bylection in early June 2014.

On 31 May, the Saturday before the byelection, Clarke successfully marshalled 500 volunteers to Nottinghamshire to campaign for the Conservative candidate, Robert Jenrick. Clarke posted his invitation across social media and on the Conservative Home website: “Join us, Grant Shapps and the hundreds of people signed up this Saturday to come to Newark. Afterwards, join Eric Pickles for the inaugural annual RoadTrip2015 dinner (a free curry) in nearby Nottingham. We will take care of your travel from cities like London, Manchester, Birmingham, Bristol and York.”

The Newark campaign was the first major stress test for the Conservatives’ parliamentary election team. By polling day, 5 June, they were feeling intense pressure from Ukip, which had triumphed in the European elections two weeks earlier – showing they were more than capable of stealing support away from the Conservatives.

Before Clarke’s RoadTrip arrived in Newark, a small team of senior Conservative staff – including Stephen Gilbert and a “campaign specialist” named Marion Little – had quietly taken position on the outskirts of the town at the Kelham House country manor hotel. In Newark itself, many more junior party employees – some of them campaign managers from other 40/40 seats – worked from temporary offices during the day and, at night, stayed in a Premier Inn.

The well-resourced Tory campaign turned out to be decisive and Robert Jenrick was returned with a 7,403 majority – rather smaller than his predecessor, but still substantial. But, on the evening of the count an exasperated Nigel Farage, interviewed by Channel 4 News political correspondent Michael Crick, raised the first concerns about Conservative election expenses – which, he suggested, might have breached the £100,000 limit for campaign spending in a byelection.

“Given the number of paid professional people from the Conservative party here, it is difficult to believe that their returns are going to come in below the figure,” Farage said, referring to the documents every candidate must file to detail their campaign costs. “I’d love to see what their returns are. Because it seems to me the scale of the campaign they fought here is so vast … There will certainly be some questions.”

The rules in a byelection contest are simple. All costs incurred in promoting the candidate in parliamentary elections – advertising, staff costs, unsolicited leaflets and letters, transport for campaigners, hotels that volunteers do not pay for themselves, and administrative costs such as phone bills and stationery – must be declared. Deliberate overspending can be a criminal offence, and it may also lead to an election being declared void.

Robert Jenrick’s campaign in Newark had declared expenses of £96,191. But the Electoral Commission later found that his return did not include the hotel bills for 54 nights of accommodation for senior Conservative staff, or 125 nights of hotel rooms for junior Conservative staff at the Premier Inn. Those costs totalled more than £10,000; had they been declared, the campaign would have breached the spending limits. Farage had been correct. (When questioned by Channel 4 News in 2016, Jenrick denied all wrongdoing. In response to questions about by-election hotel expenses, the party responded that “all byelection spending has been correctly recorded in accordance with the law”.)

At the time, however, these details remained unknown – and Channel 4 News reporters did not discover the undeclared hotel bills until long after the one-year time limit for the imnvestigation and prosecution of election crimes had passed. As a result, there was little attention to increasing Conservative spending in two more crucial byelections.

In October 2014, another huge team of Conservatives descended on Clacton-on-Sea, where Douglas Carswell had defected from the Conservatives to stand as a Ukip candidate. Again, hotels were booked for visiting campaign staff, and a return of £84,049 was filed – which did not mention all the party’s hotel costs of 290 nights at the Lifehouse Spa & Hotel, and 71 nights at the Premier Inn, worth at least £22,000. Had they been declared, the overspending would have been more than £8,000.

In Rochester and Strood, where the defection to Ukip of yet another Tory candidate, Mark Reckless, prompted another byelection in November 2014, the Conservatives could have breached the spending limit by a far larger amount – more than £51,096. As detailed in the Electoral Commission report, their candidate did not declare hotel costs of at least £54,304 against expenses of £96,793. The Conservatives still lost both contests. (Neither of the Conservative candidates responded to requests for comment. The party replied on their behalf that all spending was filed in accordance with the law.)

In these byelections, RoadTrip2015 – which was now supported by CCHQ and endorsed by Shapps – became an increasingly important influence. When the campaign launched a Facebook page advertising for a “Clacton Volunteer Force”, 1,300 people signed up to take part. In Rochester and Strood, it offered volunteers who turned out on Saturday 8 November “FREE transport there and back, FREE drinks and access to the FREE RoadTrip2015 Disraeli Dinner with a very special guest speaker!” The guest speaker was Theresa May, who was filmed celebrating with volunteers. She said: “What you do matters so much because, although what the politicians do has got a role to play, in terms of election campaigning, it’s the people who go out on the doorsteps, who knock on those doors, who make those telephone calls, who put those leaflets through the door, that make a real difference to the results we have.”

By the time of the 2015 general election, the tactics that the party had used to saturate all three byelection constituencies with activists and workers would all come together: there would be more buses of volunteers, more undeclared hotel bookings, and more senior advisers moved out of London into crucial seats. But this time, it would be discovered.

Today, two pieces of rather antiquated legislation exist to tame the influence of money on our elections. The first law governs spending by constituency candidates in the run-up to a general election during two time periods: the “long campaign” runs from about six months before polling day until parliament is dissolved; what follows is the “short campaign”, a final frenzied push for votes that lasted for 38 days in 2015.

The spending limits in each period are tight, with exact values depending on the type of constituency (borough or county) and the number of voters. For the “long campaign” in 2015, the totals were typically around £35,000 to £45,000. While in the short campaign, the most crucial campaign period, the limits were tighter still, set at £8,700 plus 6p or 9p per elector, giving a limit of around £10,000 to £16,000.

The limits are low, theoretically allowing as many people as possible to mount a viable campaign for election. Any costs incurred promoting the candidate in the constituency – from advertising, administration and public meetings, to party-paid transport for campaigners, staff costs and accommodation – must be honestly declared. At the end of the campaign, every penny spent must be declared in an official spending return submitted soon after the end of the campaign. Each spending return includes a declaration that certifies it is “complete and accurate … as required by law”. This must be signed by both the candidate and their election agent – a member of the local party that they appoint to manage their spending. Failing to declare spending, and spending over the limit, are criminal offences.

The second election spending law applies to political parties, and sets much higher limits for their spending on national campaigning during a specified period – roughly a year – before the election. The precise limit is derived by multiplying the number of constituencies being contested by £30,000. For the Conservatives in 2015, this gave the party a national limit of £18.9m to spend promoting David Cameron and his plan for the country through advertisements, billboards and direct mail. As it turned out, the party ended up declaring a figure well below the limit – around £15.6m. It is the responsibility of the national party treasurers to ensure that these national returns are correct, and again they commit an offence if they are found not to be.

Of course, the existence of two different laws setting out two different spending limits – one for local spending and one for national spending – is a source of potential confusion. In the real world of campaigning, there are bound to be expenses that do not fit neatly into one category or the other. For example, leaflets may contain a national message on one page – promoting the party’s leader or policies – and a local message, from the constituency candidate, on another page. When this happens, both the party and the candidates are required to make an “honest assessment”, in the words of law, about how much of the cost of the leaflet should be declared on both returns, before “splitting” the value accordingly. To aid transparency, election material must, by law, carry an “imprint” that shows whether it was produced for the local candidate or for the national campaign.

But the presence of two separate spending laws also presents an opportunity for abuse. Much of the scandal surrounding the Conservative party’s 2015 election spending relates to evidence that suggests spending declared as “national” – where limits are much higher – was, in reality, used to promote local candidates, who face much tighter spending limits.

In fact, it is the enormous difference between the national limits, in the millions, and the local limits, in the tens of thousands, that makes these allegations so significant. Even small amounts of candidate overspending – easily buried in the multimillion-pound national accounts – could have a significant impact on a local campaign, and even shift the result.

Following Ukip’s triumph in the Clacton and Rochester byelections in late 2014, the Conservative campaign faced a miserable winter. Labour led the polls for a few months, and by April 2015, pollsters and pundits were predicting a hung parliament.

The Conservatives made two moves that helped to turn the tables. The first was a new message – to stoke fear that without a clear Conservative majority, Britain would be run by a coalition between Labour and the Scottish National Party.

The second was a new tactic, based on RoadTrip2015. Mark Clarke’s day-long campaign events in the run-up to the general election had given the Conservatives a taste of what the party desperately needed – enthusiastic volunteers knocking on doors in areas that mattered. Historically, Labour had better form bringing activists into marginal battlegrounds, largely thanks to its more active membership drawn from the unions. The Conservative party, with its dwindling and increasingly inactive membership, often found it had no response.


The Conservative party insists that the BattleBus was only intended to conduct national campaigning

But a new plan grew from the seeds of RoadTrip, one that involved busloads of activists and block-booked hotel rooms. BattleBus2015 would send a fleet of coaches to three regions of the UK – the south-west, the Midlands and the north – for the final 10 days of the election campaign. These mobile units, each with around 40 party activists, would stay in hotels in each region, from where they would be loaded onto coaches and driven into different marginals to campaign each day. This would allow the party to flood 29 key seats with much-needed support: nine in the south-west, 10 in the Midlands and 10 in the north.

Receipts for the hotels and coaches, obtained later by Channel 4 News, would prove the operation was expensive. The Electoral Commission later calculated that the BattleBus operation cost £102,483, which works out to around £3,500 for each seat it visited. But while the national party could easily absorb the cost before hitting its spending cap, many of the local candidates were already cutting it fine. If they had to declare the extra costs associated with bringing in more campaigners, the majority would breach the limit.

In the event, £38,996 of the BattleBus costs were declared on the Conservative party’s national return, while the other £63,487, which included the hotels used by volunteers, was not declared at all. The Conservative party put this down to “human error”.

None of the 29 candidates visited by BattleBus declared any of its costs. Whether this should be categorised as national or local spending depends on what the activists did: if they promoted local candidates, even part of the time, then at least some costs associated in bringing them to the constituency should have been declared locally.

The Conservative party insists that BattleBus was only intended to conduct national campaigning. The Electoral Commission report states that it “has found no evidence to suggest that the party had funded the BattleBus2015 campaign with the intention that it would promote or procure the electoral success of candidates”. But, the report continues, “coaches of activists were transported to marginal constituencies to campaign alongside or in close proximity to local campaigners,” and “it is apparent that candidate campaigning did take place during the BattleBus2015 campaign”. It adds that, in the commission’s view, a proportion of the costs should have been declared in candidate campaign filings, “casting doubt” on whether these candidate spending returns were accurate.

The Conservative party has responded to these allegations by insisting that BattleBus volunteers did not promote local candidates. But on Twitter, in the weeks before the election, the BattleBus activists hailed their own efforts to win over voters for specific candidates. On 2 May, one volunteer wrote: “1,300 voters talked to on the doorstep in Amber Valley today for @VoteNigelMills!”. Another posted: “Nice homes in the beautiful Amber Valley – great reaction on the doorsteps in support of Nigel Mills.”

Photographs posted on social media add to the layers of evidence. One young female activist is pictured on a doorstep holding a leaflet bearing the name of Nigel Mills. In the north, a group of activists in Sherwood were photographed holding calling cards for the candidate Mark Spencer, carrying his name and image, and the words: “I called by today with my local team to hear your views.” Channel 4 News has spoken to a handful of volunteers who say their time on the BattleBus involved local campaigning.

Gregg and Louise Kinsell, a married couple from Market Drayton, Shropshire, joined the Conservative party in the run-up to the election, motivated by a mix of patriotic pride, shared values and a liking for David Cameron. They signed up to join BattleBus2015 for its final stretch in the south-west, visiting four constituencies over four days: Stroud; Plymouth, Sutton and Devonport; St Ives and North Cornwall. The aim of the south-west tour was to turn the nine yellow seats of the Liberal Democrats into a sea of blue for the Conservatives – and the Tories won all but one.

The BattleBus operation is still being investigated, but the Kinsells firmly believe that, contrary to claims of Conservative party HQ, they and their fellow volunteers did promote local candidates. “The coach would pull in”, Louise says, “and they’d all be cheering. Honestly, we were like the big hitters coming down to make sure that we win. That’s exactly how it was.”

The couple recall that senior activists gave them scripts about the local candidates to memorise on the bus, in order to be ready to sing their virtues on the doorsteps of undecided voters. Specially prepared briefing notes helped them absorb local issues. And they claim they were handed bundles of locally focused leaflets and calling cards to slip through the letterboxes of prospective voters. The voting intentions of the people they called upon were carefully logged. The couple are clear that they were used as a tactic to “sway marginal seats”, and are angry at the ongoing claim of the Conservative party and some MPs that the BattleBus operation only promoted the national message. “If people are saying – and the MPs concerned in these areas are saying that it was part of a greater expense nationally for the Conservatives, that’s an obvious falsehood,” Gregg says.

 

Nigel Farage, Al Murray and the winning Conservative candidate Craig Mackinlay at the count for the South Thanet seat, May 2015. Photograph: Matt Dunham/AP

But if there was one seat, among the 40/40 constituencies, that the Conservatives were most set upon winning, it was South Thanet in Kent. There, the Conservative party’s principal rival, Nigel Farage, would take on Craig Mackinlay in the most closely watched contest of the 2015 election.

Today the investigation into the Conservative victory in South Thanet is staffed by nine officers from the Kent police serious economic crime unit. The questions they are considering are familiar to those raised in the 2014 byelections. Were the hotel costs for visiting Conservative staffers in South Thanet – nearly £20,000 in total – properly declared?

After his election victory, Craig Mackinlay filed expenses of £14,838 for the short campaign – just £178 under the spending limit – but made no mention of the Royal Harbour hotel in Ramsgate where senior party workers had taken rooms. Was that an honest account of his expenses? And if not, who was responsible?

The search for answers has so far taken in boxes of internal Conservative documents, the testimony of campaigners, and a six-hour police interview earlier this month with Mackinlay. But a more basic question about the election remains disputed: who actually ran his South Thanet campaign? The list is longer than it should be.

At the top is the name Nathan Gray, Mackinlay’s election agent. In common with many of the “campaign managers” employed as part of the 40/40 strategy, Gray’s enthusiasm for politics was not matched by his experience. Then 26, he had never done the job before. (Gray denies any wrongdoing.)

In the aftermath of the great victory against Nigel Farage in South Thanet, Gray was largely written out of the story and replaced by Nick Timothy, a long-time special advisor to Theresa May who is now the prime minister’s joint chief of staff. In his book Why the Tories Won, Tim Ross describes how Timothy “was sent to take charge of the party’s flagging campaign to stop Farage in Thanet”. Grant Shapps even said recently that Timothy was “front and centre” in South Thanet. But he was not responsible for filing the expenses return and, when contacted about his involvement, a spokesperson stated that he provided “assistance for the Conservative party’s national team and would have given advice to any candidate who asked for it and indeed did so”. There is no suggestion that Timothy is at fault.

An analysis of the campaign written afterwards for the South Thanet Conservative Association credits someone else entirely: “In February [2015] CCHQ sent a professional team to help us. Their leader, Marion Little, is a very experienced election ‘trouble shooter’, and from the moment she arrived she effectively took control of the whole campaign.”

A Conservative staffer since 1984, Little had held the previous title “battleground director” of the Conservative party. And just as she had a formidable presence in the byelections of Newark, Clacton and Rochester and Strood, so she transformed the South Thanet Conservative’s constituency office into a military command post. Little was also not responsible for filing the election spending for South Thanet but she worked long into the night, battle planning and deploying troops: “Dear Team ‘South Thanet’,” she wrote in an email on 23 March. “Just to confirm that this weeks’ [sic] meeting schedule is as follows …” When Nick Timothy did make suggestions, they were run by Little: “Are we not putting ‘two horse race’ on everything?” he asked her in one email sent on 29 March 2015, before adding: “don’t we need to?”

Little didn’t respond when asked whether her role in South Thanet involved local campaigning.

Buses of activists also descended from London. Volunteers were dubbed the “South Thanet Soldiers”. One Labour campaigner, Peter Wallace, recalled seeing hordes of well-dressed young Conservatives working the constituency week after week. “They were like Terminators,” he said, “straight out of GQ, out of London and on our patch. They blew us away.”

Photographs and videos taken by Conservatives in the final weeks of campaigning show the scale of the resources used to bolster the party. There were visits from Boris Johnson and George Osborne, and groups of campaigners arriving on liveried Conservative coaches ready to work for Craig Mackinlay. On the morning of the election, party co-chairs Grant Shapps and Lord Feldman arrived with Mark Clarke and a coach of last-minute campaigners.

In the end Mackinlay defeated Farage in some style. The problem is that when Timothy and Little stayed down in South Thanet, they lived in some style too. The local spending limit in the election was just £15,016, but the bill for rooms housing the troubleshooters from CCHQ at the Royal Harbour hotel ran to £15,641 alone. Mackinlay denies any wrongdoing.

“They had a few rooms block-booked, yeah,” James Thomas, the owner of the Royal Harbour, told Channel 4 News. “All hotels become headquarters, unofficially sometimes,” he added. “Mr Farage was going to be defeated by them, so they made sure they had the right brains to do that.”

More hotel receipts, uncovered by Channel 4 News, showed more party workersstaying at the Margate Premier Inn, some for 12 nights, with a total cost of £3,809. Little’s name was on the bill, but these costs were not declared in the local return or the party’s national expenses. It appeared to resemble the spending in the 2014 byelections – the money was off-the-books. The difference was that, this time, the Conservatives won.

The first report into the Conservative party’s election expenses was broadcast by Michael Crick on Channel 4 News in late January 2016. It was a short item on a slow news day, which simply asked why the cost of rooms at the Royal Harbour hotel in South Thanet had been declared as part of the Conservatives’ national – rather than local – campaign expenses. Why, Crick asked, would a team of top Conservatives be based at a small provincial hotel miles from anywhere if not to work on behalf of the Conservative candidate fighting Nigel Farage for the seat?

When investigative reporters at Channel Four News began to look at the threads connecting tactics in South Thanet to other high-profile Conservative campaigns, a tangle of receipts and emails revealed the party’s hidden spending elsewhere: undeclared hotels, busloads of activists on specialist missions, and senior CCHQ staff buried deep in provincial England.

For months, the Conservative party repeated that all their campaign spending was “in accordance with the law”. A member of the party’s governing body stepped in front of the cameras on 1 March to announce: “Channel 4 has got it wrong.” But eventually the Electoral Commission, which had been widely criticised as toothless, developed canines and sank them into the case. After pressing the party for three months, they were finally provided with seven boxes of papers in May 2016. The secrets they held would make police investigations inevitable but, even then, the Conservatives dug in.

One of the nation’s leading QCs was dispatched by Craig Mackinlay to Folkestone magistrates’ court to halt a Kent police investigation into election spending offences in South Thanet. He failed, and the detectives’ work continued. By the middle of June, 17 forces were conducting investigations into 27 sitting Conservative MPs. Since then, 12 police forces have passed files to the CPS to review, and up to 20 sitting MPs wait to discover if criminal charges will be brought, while other forces still sift through evidence.

In the meantime, the prime minister re-elected in 2015 has melted away, while the election expenses scandal continues to lap at the door of No 10 Downing Street. Theresa May’s chief of staff Nick Timothy and her political secretary Stephen Parkinson were both part of the team dispatched to South Thanet by CCHQ; both took rooms in the Royal Harbour hotel. Whether the reality of their work is reflected in the spending documents signed by Mackinlay is the essential question that Kent police must answer. The photograph in which May appears, walking with members of the senior campaign team on South Thanet’s seafront three weeks before election day, should also give the prime minister pause to consider her own party’s tactics.

Should the Conservative MPs still under investigation face trial and be convicted, May’s government will be imperilled. Her majority is just 17.

In deciding whether or not to prosecute, the CPS must consider two clear tests. The first concerns the public interest in pursuing prosecutions and is met easily: the integrity of our election process is at stake. The second test regards the chance of success at trial. This is harder to meet, because the law says that prosecutors would have to prove that the candidate or agent knowingly submitted a false return.

A likely defence is clear. In South Thanet, Mackinlay has told police that the senior Conservatives who came into his constituency to work on his campaign were not under his “direction or control”, so he is not accountable for their activity. Other MPs who enjoyed a visit from the BattleBus have said that they were told by party headquarters that it was a national scheme. While few of the MPs under investigation have publicly revealed what they knew of the real effect of BattleBus, some have stated publicly that they received an email from the RoadTrip founder and BattleBus organiser Mark Clarke, instructing them not to declare the costs. (Clarke declined our request for comment.)

After one year of investigation, the Electoral Commission has found categorically that at least some of the spending the party claimed was national spending was spent on “candidate campaigning” and therefore should have been declared by candidates on their local returns. They did not. This, the commission said, had potentially given them a “financial advantage over opponents”. It was the responsibility of the candidates and their agents to do so. According to the law, the responsibility for failing to do so lies only with the candidate and the agent.

It is too soon to say whether charges will be brought. Lancashire police recently told the BBC that it has dropped its investigation into one MP who received the BattleBus, David Morris. Press reports have cited police sources who suggest that prosecutors “might decide to make an example” of others.

But if prosecutors decide not to “make an example”, they may set a legal precedent instead. Future candidates will reasonably conclude that they can, with the assistance of their parties, circumvent the electoral laws intended to keep our democracy free and fair – and that parties and candidates alike may do so without facing any penalty.

Libor scandal: the bankers who fixed the world’s most important number

Liam Vaughan and Gavin Finch in The Guardian


At the Tokyo headquarters of the Swiss bank UBS, in the middle of a deserted trading floor, Tom Hayes sat rapt before a bank of eight computer screens. Collar askew, pale features pinched, blond hair mussed from a habit of pulling at it when he was deep in thought, the British trader was even more dishevelled than usual. It was 15 September 2008, and it looked, in Hayes’s mind, like the end of the world.

Hayes had been woken up at dawn in his apartment by a call from his boss, telling him to get to the office immediately. In New York, Lehman Brothers was hurtling towards bankruptcy. At his desk, Hayes watched the world processing the news and panicking. As each market opened, it became a sea of flashing red as investors frantically dumped their holdings. In moments like this, Hayes entered an almost unconscious state, rapidly processing the tide of information before him and calculating the best escape route.

Hayes was a phenomenon at UBS, one of the best the bank had at trading derivatives. So far, the mounting financial crisis had actually been good for him. The chaos had let him buy cheaply from those desperate to get out, and sell high to the unlucky few who still needed to trade. While most dealers closed up shop in fear, Hayes, with a seemingly limitless appetite for risk, stayed in. He was 28, and he was up more than $70 million for the year.

Now that was under threat. Not only did Hayes have to extract himself from every deal he had done with Lehman, he had also made a series of enormous bets that in the coming days interest rates would remain stable. The collapse of Lehman Brothers, the fourth-largest investment bank in the US, would surely cause those rates, which were really just barometers of risk, to spike. As Hayes examined his trading book, one rate mattered more than any other: the London interbank offered rate, or Libor, a benchmark that influences $350 trillion of securities and loans around the world. For traders such as Hayes, this number was the Holy Grail. And two years earlier, he had discovered a way to rig it.

Libor was set by a self-selected, self-policing committee of the world’s largest banks. The rate measured how much it cost them to borrow from each other. Every morning, each bank submitted an estimate, an average was taken, and a number was published at midday. The process was repeated in different currencies, and for various amounts of time, ranging from overnight to a year. During his time as a junior trader in London, Hayes had got to know several of the 16 individuals responsible for making their bank’s daily submission for the Japanese yen. His flash of insight was realising that these men mostly relied on inter-dealer brokers, the fast-talking middlemen involved in every trade, for guidance on what to submit each day.

Brokers are the middlemen in the world of finance, facilitating deals between traders at different banks in everything from Treasury bonds to over-the-counter derivatives. If a trader wants to buy or sell, he could theoretically ring all the banks to get a price. Or he could go through a broker who is in touch with everyone and can find a counter-party in seconds. Hardly a dollar changes hands in the cash and derivatives markets without a broker matching the deal and taking his cut. In the opaque, over-the-counter derivatives market, where there is no centralised exchange, brokers are at the epicentre of information flow. That puts them in a powerful position. Only they can get a picture of what all the banks are doing. While brokers had no official role in setting Libor, the rate-setters at the banks relied on them for information on where cash was trading.

Most traders looked down on brokers as second-class citizens, too. Hayes recognised their worth. He saw what no one else did because he was different. His intimacy with numbers, his cold embrace of risk and his unusual habits were more than professional tics. Hayes would not be diagnosed with Asperger’s syndrome until 2015, when he was 35, but his co-workers, many of them savvy operators from fancy schools, often reminded Hayes that he wasn’t like them. They called him “Rain Man”.

By the time the market opened in London, Lehman’s demise was official. Hayes instant-messaged one of his trusted brokers in the City to tell him what direction he wanted Libor to move. Typically, he skipped any pleasantries. “Cash mate, really need it lower,” Hayes typed. “What’s the score?” The broker sent his assurances and, over the next few hours, followed a well-worn routine. Whenever one of the Libor-setting banks called and asked his opinion on what the benchmark would do, the broker said – incredibly, given the calamitous news – that the rate was likely to fall. Libor may have featured in hundreds of trillions of dollars of loans and derivatives, but this was how it was set: conversations among men who were, depending on the day, indifferent, optimistic or frightened. When Hayes checked the official figures later that night, he saw to his relief that yen Libor had fallen.

Hayes was not out of danger yet. Over the next three days, he barely left the office, surviving on three hours of sleep a night. As the market convulsed, his profit and loss jumped around from minus $20 million to plus $8 million in just hours, but Hayes had another ace up his sleeve. ICAP, the world’s biggest inter-dealer broker, sent out a “Libor prediction” email each day at around 7am to the individuals at the banks responsible for submitting Libor. Hayes messaged an insider at ICAP and instructed him to skew the predictions lower. Amid the chaos, Libor was the one thing Hayes believed he had some control over. He cranked his network to the max, offering his brokers extra payments for their cooperation and calling in favours at banks around the world.

By Thursday, 18 September, Hayes was exhausted. This was the moment he had been working towards all week. If Libor jumped today, all his puppeteering would have been for nothing. Libor moves in increments called basis points, equal to one one-hundredth of a percentage point, and every tick was worth roughly $750,000 to his bottom line.

For the umpteenth time since Lehman faltered, Hayes reached out to his brokers in London. “I need you to keep it as low as possible, all right?” he told one of them in a message. “I’ll pay you, you know, $50,000, $100,000, whatever. Whatever you want, all right?”

“All right,” the broker repeated.

“I’m a man of my word,” Hayes said.

“I know you are. No, that’s done, right, leave it to me,” the broker said.

Hayes was still in the Tokyo office at 8pm when that day’s Libors were published. The yen rate had fallen 1 basis point, while comparable money market rates in other currencies continued to soar. Hayes’s crisis had been averted. Using his network of brokers, he had personally sought to tilt part of the planet’s financial infrastructure. He pulled off his headset and headed home to bed. He had only recently upgraded from the superhero duvet he’d slept under since he was eight years old.

Hayes’s job was to make his employer as much money as possible by buying and selling derivatives. How exactly he did that – the special concoction of strategies, skills and tricks that make up a trader’s DNA – was largely left up to him. First and foremost he was a market-maker, providing liquidity to his clients, who were mostly traders at other banks. From the minute he logged on to his Bloomberg terminal each morning and the red light next to his name turned green, Hayes was on the phone quoting guaranteed bid and offer prices on the vast inventory of products he traded. Hayes prided himself on always being open for business no matter how choppy the markets. It was his calling card.

Hayes likened this part of his job to owning a fruit and vegetable stall. Buy low, sell high and pocket the difference. But rather than apples and pears, he dealt in complex financial securities worth hundreds of millions of dollars. His profit came from the spread between how much he paid for a security and how much he sold it for. In volatile times, the spread widened, reflecting the increased risk that the market might move against him before he had the chance to trade out of his position.

All of this offered a steady stream of income, but it wasn’t where the big money came from. The thing that really set Hayes apart was his ability to spot price anomalies and exploit them, a technique known as relative value trading. It appealed to his lifelong passion for seeking out patterns. During quiet spells, he spent his time scouring data, hunting for unseen opportunities. If he thought that the price of two similar securities had diverged unduly, he would buy one and short the other, betting that the spread between the two would shrink.

Everywhere he worked, Hayes set up his software to tell him exactly how much he stood to gain or lose from every fraction of a move in Libor in each currency. One of Hayes’s favourite trades involved betting that the gap between Libor in different durations would widen or narrow: what’s known in the industry as a basis trade. Each time Hayes made a trade, he would have to decide whether to lay off some of his risk by hedging his position using, for example, other derivatives.

Hayes’s dealing created a constantly changing trade book stretching years into the future, which was mapped out on a vast Excel spreadsheet. He liked to think of it as a living organism with thousands of interconnected moving parts. In a corner of one of his screens was a number he looked at more than any other: his rolling profit and loss. Ask any decent trader and he will be able to give it to you to the nearest $1,000. It was Hayes’s self-worth boiled down into a single indisputable number. 

Tom Hayes was a phenomenon at UBS, one of the best the bank had at trading derivatives. Photograph: Bloomberg via Getty Images

By the summer of 2007, the mortgage crisis in the US caused banks and investment funds around the world to become skittish about lending to each other without collateral. Firms that relied on the so-called money markets to fund their businesses were paralysed by the ballooning cost of short-term credit. On 14 September, customers of Northern Rock queued for hours to withdraw their savings after the bank announced it was relying on loans from the Bank of England to stay afloat.

After that, banks were only prepared to make unsecured loans to each other for a few days at a time, and interest rates on longer-term loans rocketed. Libor, as a barometer of stress in the system, reacted accordingly. In August 2007, the spread between three-month dollar Libor and the overnight indexed swap – a measure of banks’ overnight borrowing costs – jumped from 12 basis points to 73 basis points. By December it had soared to 106 basis points. A similar pattern could be seen in sterling, euros and most of the 12 other currencies published on the website of the British Bankers’ Association each day at noon.

Everyone could see that Libor rates had shot up, but questions began to be asked about whether they had climbed enough to reflect the severity of the credit squeeze. By August 2007, there was almost no trading in cash for durations of longer than a month. In some of the smaller currencies there were no lenders for any time frame. Yet, with trillions of dollars tied to Libor, the banks had to keep the trains running. The individuals responsible for submitting Libor rates each day had no choice but to put their thumb and forefinger in the air and pluck out numbers. It was clear that their “best guesses” were unrealistically optimistic.

A game of brinkmanship had developed in which rate-setters tried to predict what their rivals would submit, and then come in slightly lower. If they guessed wrong and input rates higher than their peers, they would receive angry phone calls from their managers telling them to get back into the pack. On trading floors around the world, frantic conversations took place between traders and their brokers about expectations for Libor.

Nobody knew where Libor should be, and nobody wanted to be an outlier. Even where bankers tried to be honest, there was no way of knowing if their estimates were accurate because there was no underlying interbank borrowing on which to compare them. The machine had broken down.

Vince McGonagle, a small and wiry man with a hangdog expression, had been at the enforcement division of the Commodity Futures Trading Commission (CFTC) in Washington for 11 years, during which time his red hair had turned grey around the edges. A practising Catholic, McGonagle got his law degree from Pepperdine University, a Christian school in Malibu, California, where students are prepared for “lives of purpose, service and leadership”.

While his classmates took highly paid positions defending companies and individuals accused of corporate corruption, McGonagle opted to build a career bringing cases against them. He joined the agency as a trial attorney and was now, at 44, a manager overseeing teams of lawyers and investigators.

McGonagle closed the door to his office and settled down to read the daily news. It was 16 April, 2008, and the headline on page one of the Wall Street Journal read: “Bankers Cast Doubt on Key Rate Amid Crisis”. It began: “One of the most important barometers of the world’s financial health could be sending false signals. In a development that has implications for borrowers everywhere, from Russian oil producers to homeowners in Detroit, bankers and traders are expressing concerns that the London interbank offered rate, known as Libor, is becoming unreliable.”

The story, written at the Journal’s London office near Fleet Street, went on to suggest that some of the world’s largest banks might have been providing deliberately low estimates of their borrowing costs to avoid tipping off the market “that they’re desperate for cash”. That was having the effect of distorting Libor, and therefore trillions of dollars of securities around the world.

The journalist’s sources told him that banks were paying much more for cash than they were letting on. They feared if they were honest they could go the same way as Bear Stearns, the 85-year-old New York securities firm that had collapsed the previous month.

The big flaw in Libor was that it relied on banks to tell the truth but encouraged them to lie. When the 150 variants of the benchmark were released each day, the banks’ individual submissions were also published, giving the world a snapshot of their relative creditworthiness. Historically, the individuals responsible for making their firm’s Libor submissions were able to base their estimates on a vibrant interbank money market, in which banks borrowed cash from each other to fund their day-to-day operations. They were prevented from deviating too far from the truth because their fellow market participants knew what rates they were really being charged. Over the previous few months, that had changed. Banks had stopped lending to each other for periods of longer than a few days, preferring to stockpile their cash. After Bear Stearns there was no guarantee they would get it back.

With so much at stake, lenders had become fixated on what their rivals were inputting. Any outlier at the higher – that is, riskier – end was in danger of becoming a pariah, unable to access the liquidity it needed to fund its balance sheet. Soon banks began to submit rates they thought would place them in the middle of the pack rather than what they truly believed they could borrow unsecured cash for. The motivation for low-balling was not tied to profit – many banks actually stood to lose out from lower Libors. This was about survival.

Ironically, just as Libor’s accuracy faltered, its importance rocketed. As the financial crisis deepened, central bankers monitored Libor in different currencies to see how successful their latest policy announcements were in calming markets. Governments looked at individual firms’ submissions for clues as to who they might be forced to bail out next. If banks were lying about Libor, it was not just affecting interest rates and derivatives payments. It was skewing reality.

There was no inkling at this stage that traders such as Hayes were pushing Libor around to boost their profits, but here was a benchmark that relied on the honesty of traders who had a direct interest in where it was set. Libor was overseen by the British Bankers Association (BBA). In both cases, the body responsible for overseeing the rate had no punitive powers, so there was little to discourage firms from cheating.

When McGonagle finished reading the Wall Street Journal article, he emailed colleagues and asked them what they knew about Libor. His team put together a dossier, including some preliminary reports from within the financial community. In March, economists at the Bank for International Settlements, an umbrella group for central banks around the world, had published a paper that identified unusual patterns in Libor during the crisis, although it concluded these were “not caused by shortcomings in the design of the fixing mechanism”.

A month later, Scott Peng, an analyst at Citigroup in New York, sent his customers a research note that estimated the dollar Libor submissions of the 18 firms that set the rate were 20 to 30 basis points lower than they should have been because of a “prevailing fear” among the banks of “being perceived as a weak hand in this fragile market environment”.

While there was no evidence of manipulation by specific firms, McGonagle was coming around to the idea of launching an investigation.

In 2009, Hayes was lured away from UBS to join Citigroup. The head of Citigroup’s team in Asia, the former Lehman banker Chris Cecere, a small, goateed American with a big reputation for finding new ways to make money, had been given millions of dollars to attract the best talent – and Hayes was his round-one pick.

It wasn’t just the $3m signing bonus that had won Hayes over. The promise of a fresh start at one of the world’s biggest banks, with him at centre stage in its aggressive expansion into the Asian interest-rate derivatives market, had proved too tempting to resist. After persuading him to join, Cecere boasted to colleagues that he’d found “a real fucking animal”, who “knows everybody on the street”.

 

Citigroup in Canary Wharf, London Photograph: DBURKE / Alamy/Alamy

Cecere set in motion plans for Citigroup to join the Tibor (Tokyo interbank offered rate) panel which, Hayes would crow, was even easier to influence than Libor because fewer banks contributed to it. Hayes wanted to hit the ground running when he started trading, and being able to influence the two benchmarks that helped determine the profitability of the bulk of his positions was an important step. Another was bringing Citigroup’s own London-based Libor-setters on board.

On the afternoon of 8 December, Cecere was at his desk on the Tokyo trading floor. He had an office but seldom used it, preferring to be amid the action. He believed that six-month yen Libor was too high. After checking the submissions from the previous day, he was surprised to see that Citigroup had input one of the highest figures.

Cecere contacted the head of the risk treasury team in Tokyo, Stantley Tan, and asked him to find out who the yen-setter was and request that he lower his input by several basis points. It turned out the risk treasury desk in Canary Wharf was responsible for the bank’s Libor submissions.

“I spoke to our point man in London,” Tan wrote back to Cecere that afternoon. “I have asked him to consider moving quotes [lower]”.

Cecere checked the Libors again later that night and was annoyed to see that Citigroup had only reduced its six-month rate by a quarter of a basis point.

He wrote to Tan, “Can you speak with him again?”

The following day, Tan went back to the treasury desk in London as requested. He also forwarded the message chain to Andrew Thursfield, Citigroup’s head of risk treasury in London. The response he got back from his UK counterpart left little room for misinterpretation: it was a thinly veiled warning to back off.

Hayes, who sat just behind his boss, was not on the email chain, but Cecere sent it to him.

Thursfield was a straitlaced man in his forties who had spent more than 20 years in risk management at Citigroup after joining as a graduate trainee. He saw himself as the guardian of the firm’s balance sheet and didn’t take kindly to being told how to do his job by a pushy trader who knew nothing of the intricacies of bank funding.

Rather than lowering the inputs, Thursfield’s team increased its submission days later, pushing the published Libor rates higher. Hayes would have to try a different tack. On 14 December he sent an email to his London counterpart, asking him to approach the rate-setters directly.

“Do you talk to the cash desk and did we know in advance?” Hayes asked, referring to the bank’s decision to bump up its Libor submissions. “We need good dialogue with the cash desk. They can be invaluable to us. If we know ahead of time we can position and scalp the market.”

What Hayes didn’t realise was that no amount of schmoozing was going to get the rate-setters onside. Unlike some banks, Citigroup was taking the CFTC’s investigation into Libor seriously. In March 2009, Thursfield had personally delivered an 18-page presentation via video link to investigators on the rate-setting process. The cash traders weren’t about to risk their necks for someone they didn’t know who worked on the other side of the world.

It wasn’t just that they knew they were being watched. Thursfield was not only a stickler for the rules but had taken a personal dislike to Hayes when the pair had met three months earlier. It was October 2009, shortly after Hayes had accepted the job at Citigroup, and his boss had sent him to London to meet the bank’s key players.

“Good to meet you. You can help us out with Libors. I will let you know my axes,” Hayes said by way of an opening gambit when he was introduced to Thursfield.

Unshaven and dishevelled, Hayes told the Citigroup manager how the cash desk at UBS frequently skewed its submissions to suit his book. He boasted of his close relationships with rate-setters at other banks and how they would do favours for each other. Hayes was trying to charm Thursfield, but he had badly misjudged the man and the situation. The following day Thursfield called his manager, Steve Compton, and relayed his concerns.

“Once you stray on to talking about Libor fixings, I mean we just paid another $75,000 bill to the lawyer this week for the work they’re doing on the CFTC investigation,” Thursfield said. “Whoever is the desk head, or whatever, [should] have a close watch on just what he’s actually doing and how publicly. It’s all, you know, very much barrow-boy-type [behaviour].”

The knock on Hayes’s door came at 7am on a Tuesday, two weeks before Christmas 2012. Hayes padded down the bespoke pine staircase of his newly renovated home in Woldingham, Surrey, to let in more than a dozen police officers and Serious Fraud Office investigators. A year before, he had been fired from Citigroup, and shortly afterwards returned to the UK, where he married his girlfriend Sarah Tighe.

Hayes stood at his wife’s side as the officers swept through the property, gathering computers and documents into boxes and loading them into vehicles parked at the end of the gravel driveway. The couple had only moved in a fortnight before. Their infant son was upstairs in bed. Traffic was heavy by the time the former trader was led to the back of a waiting car. The 20-mile crawl from Surrey to the City of London passed in silence.

Bishopsgate police station is a grey, concrete building on one of the financial district’s busiest thoroughfares. In a formal interview, Hayes was told he had been brought in to answer questions relating to allegations that between 2006 and 2009 he had conspired to manipulate yen Libor with two of his colleagues. Hayes responded that he planned to help but would need time to consider the 112 pages of evidence so would not be answering any questions that day. It was late when he arrived back in Surrey.

In June, Barclays had become the first bank to reach a settlement with authorities, admitting to rigging the rate and agreeing to pay a then-record £290 million in fines. From the moment Barclays had settled, sparking a political firestorm that burned for weeks, Hayes’s destiny had been leading to this point. The Serious Fraud Office (SFO), which had previously resisted launching a probe into Libor rigging, was forced to reverse its position and on 6 July issued a statement announcing it would be undertaking a criminal investigation. That week the government launched its own review into the scandal. The British public and its politicians were out for scalps.

On 19 December, eight days after his arrest, Hayes was at home on his computer when a news bulletin popped up with a link to a press conference in Washington. As cameras flashed, Attorney General Eric Holder and Lanny Breuer, head of the Justice Department’s criminal division, took turns outlining the $1.5bn settlement the authorities had reached with UBS over Libor. The Swiss bank, they explained, had pleaded guilty to wire fraud at its Japanese arm. Then came the sucker punch.

“In addition to UBS Japan’s agreement to plead guilty, two former UBS traders have been charged, in a criminal complaint unsealed today, with conspiracy to manipulate Libor,” said Breuer. “Tom Hayes has also been charged with wire fraud and an antitrust violation.” Neither Tan nor Cecere has ever been charged with wrongdoing.

At that moment the full horror of the situation hit Hayes for the first time. The two most powerful lawyers in the US planned to extradite him on three separate criminal charges, each carrying a 20–30 year sentence. Less than 24 hours later, a member of Hayes’s legal team was on the phone to the SFO to discuss cutting a deal.

Fighting the charges seemed futile: the UBS settlement made reference to more than 2,000 attempts by Hayes and his colleagues to influence the rate over a four-year period. He was the star attraction, the “Jesse James of Libor”, as he would later tell it. The US authorities had yet to issue extradition papers, but it was only a matter of time.


RBS, Barclays and other banks fined in Swiss franc Libor case



So began a race to convince the SFO to take on Hayes as a sort of chief informant, who in return would receive leniency and, more importantly, an agreement that he would be dealt with in the UK.

To secure this arrangement Hayes had to agree to tell the SFO everything he knew and promise to testify against everybody involved. Crucially, he also had to plead guilty to dishonestly rigging Libor. It was not enough to admit trying to influence the rate. He had to confess that he knew it was wrong.

During two days of so-called scoping interviews to test his knowledge of the case, Hayes talked openly about his campaign to rig Libor, for the first time in his life. At the SFO’s offices near Trafalgar Square he admitted he had acted dishonestly and brought the investigators’ attention to aspects of the case they knew nothing about. The interviews covered everything from his entry into the industry and his trading strategies to how the Libor scheme began and the various individuals who helped him rig the rate. They barely had to prod to get him to talk. Hayes seemed to relish reliving moments from his past. His voice sped up when he talked about heady days piling into positions, squeezing the best prices from brokers and playing traders off against each other.

“The first thing you think is where’s the edge, where can I make a bit more money, how can I push, push the boundaries, maybe you know a bit of a grey area, push the edge of the envelope,” he said in one early interview. “But the point is, you are greedy, you want every little bit of money that you can possibly get because, like I say, that is how you are judged, that is your performance metric.”

Paper coffee cups piled up as Hayes went over the minutiae of the case. At one stage, Hayes was asked about how he viewed his attempts to move Libor around. The exchange would prove crucial.

“Well look, I mean, it’s a dishonest scheme, isn’t it?” Hayes said. “And I was part of the dishonest scheme, so obviously I was being dishonest.”

This article is adapted from The Fix: How Bankers Lied, Cheated and Colluded to Rig the World’s Most Important Number by Liam Vaughan and Gavin Finch