European legislators this week approved mandatory jail sentences of at least four years for individuals convicted of serious market manipulation and insider dealing offenses.

European Parliament overwhelmingly passed the new regulation on Tuesday during its plenary session, which would require judges imposing a country's maximum penalty for market abuse offenses to include at least four years of jail time, according to European Parliament's press service. The European Commission, the Council of Ministers and European Parliament had formed a trilogue agreement on the matter in December. Lawmakers said they hope a stringent, EU-wide stance on offenses like the benchmark rate rigging scandal involving the London Interbank Offered Rate (LIBOR) will help restore confidence in financial markets and protect investors.

“Criminals who get rich by manipulating markets and insider dealing should not get away with just an administrative penalty,” MEP Emine Bozkurt of the Netherlands and the Civil Liberties Committee representative said in a statement. “Ensuring that justice is seen to be done will help to rebuild our citizens' trust in financial markets. We have enabled the authorities (to) prosecute such crimes more effectively, both by providing training and resources for their staff and by making it possible to extend jurisdiction where necessary to deal with cross-border crime.”

The law applies to serious market abuses like unlawful disclosure of information, insider dealing, or market manipulation, as well as “inciting, aiding, or abetting” market abuse, and attempts to commit those offenses. The law breaks down mandatory penalties into four-year or two-year minimum imprisonment. The most serious cases of market manipulation or insider dealing would trigger a four-year minimum sentence. Unlawful disclosure of information would carry a two-year minimum sentence.

The regulation will include harmonized definitions of offenses and penalties. Member states would be allowed to go beyond the EU directive and enact even stiffer mandatory criminal penalties. The directive also includes a provision that legal persons, i.e. companies, also will be held liable for market abuse.

“Today's vote is a big step forward in enabling courts across the EU to halt market abuse,” MEP Arlene McCarthy of the U.K., who represents the Economic and Monetary Affairs Committee and led the legislation through parliament, said in a statement. “This is the first law to introduce tough, EU-wide criminal penalties for market abuse, with a minimum jail sentence of four years for serious offenses such as insider dealing and market manipulation. The LIBOR scandal may not be the last – allegations of market manipulation are now emerging in the oil, gas, and foreign exchange markets, too.”

McCarthy's sentiments were echoed by EU Justice Commissioner and Vice President Viviane Reding and Internal Markets and Services Commissioner Michel Barnier. Reding and Barnier issued a joint statement, which said that parliament's vote shows “there must be zero tolerance for manipulators in our financial markets. The EU's new market abuse framework will ensure that those who commit market abuse will face huge fines or jail across Europe.”

Currently, offenders can avoid criminal sanctions due to differences in the national laws of the bloc's 28 member states, according to the European Commission. In some member states, authorities do not have effective powers to impose sanctions, and in others, criminal sanctions do not apply to certain financial offenses like market manipulation.

According to parliament's press service, market manipulation and insider dealing offenses that would trigger a four-year jail sentence would include:

·         Entering into a transaction or placing an order which gives false or misleading signals about the supply, demand, or price of one or more financial instruments;

·         Providing false or misleading inputs to manipulate the calculation of benchmarks, as was done in the LIBOR case and Euro Interbank Offered Rate (EURIBOR) case;

·         Using inside information with the intent to buy or sell financial instruments, cancel, or amend an order.

Members of parliament easily passed the measure, in a 618 to 20 vote with 43 abstentions. Once the directive is published in the Official Journal, expected to happen in June, member states would then have two years to implement the new law.

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