The Bank of England is embroiled in an unprecedented criminal investigation over the potential rigging of its money-market auctions launched at the onset of the financial crisis.
Investigators at the UK's Serious Fraud Office are probing the results of an independent inquiry that have been referred to it. The SFO confirmed the investigation after it was reported by the Financial Times.
The BoE's oversight committee instructed Lord Grabiner QC last year to investigate whether any bank official knew of, or even participated in, attempts to rig a series of auctions as the financial crisis began to bite in late 2007 and 2008, the Financial Times reported last year.
It is the first time the bank has been caught up in a criminal inquiry in the law agency's 28-year history.
The revelation comes as the BoE faces intensified scrutiny over its governance, in particular over the rigor of an earlier investigation into its involvement in the foreign exchange rigging scandal.
Governor Mark Carney this week told MPs that, in the aftermath of that forex inquiry, the BoE had spotted 50 instances of potential market abuse that in the past it might have missed.
It is unclear whether the fresh SFO probe focuses on the behavior of external traders or BoE officials, or both. The SFO confirmed it was "investigating material referred to it by the Bank of England concerning liquidity auctions during the financial crisis in 2007 and 2008."
Following the SFO statement, the BoE confirmed both its Grabiner inquiry and that it had referred the findings to the agency.
"Following the confirmation by the Serious Fraud Office (SFO) that it is investigating material referred to it by the Bank of England, the bank can now confirm that it commissioned Lord Grabiner QC to conduct an independent inquiry into liquidity auctions during the financial crisis in 2007 and 2008. Following the conclusion of that initial inquiry, the BoE referred the matter to the SFO on 20 November 2014. Given the SFO investigation is ongoing, it is not appropriate for the bank to provide any additional comment on the matter at this time."
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During the central bank's internal investigation into the auctions, Lord Grabiner interviewed about 10 staff, who were provided with defense lawyers at the expense of the bank, people familiar with the investigation told the FT last year.
His inquiries were focused on late 2007 and early 2008 when the BoE ran a series of auctions as a way of keeping interbank lending markets functioning. This was before it launched its full quantitative-easing program in 2009.
In that intense period, the bank lent money for various periods against low and even negative interest rates in exchange for a wide range of collateral such as asset-backed securities.
Mr Carney declined to give any details about the money-markets internal inquiry during questioning by politicians at the Treasury select committee on Tuesday. They were discussing an earlier, separate probe led by Lord Grabiner, into whether officials were aware of potential manipulation of the forex market, which has led to six banks paying a total of $4.3 billion to US, UK and Swiss authorities.
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Andrew Tyrie MP, chairman of the Treasury Select Committee, said: "The Bank referred this to the Serious Fraud Office when Lord Grabiner's initial findings were made clear to them. This was the right thing to do. I was informed about the referral on 21 November 2014. We must now await the outcome of the SFO's work. The sooner their findings are published the better."
The BoE has pledged to be more accountable after criticism by politicians that a lack of checks on its very top levels of decision-making hampered its response to the crisis. Last week it pledged to end the era of "constructive ambiguity", when a raise of the governor's eyebrows sufficed to influence bank behavior.
While not forming part of the current inquiry, there is already evidence that traders took advantage of the BoE's attempts to tackle the financial crisis.
Lloyds Banking Group's £218 million fine paid to US and UK regulators in July 2014 over Libor rigging was partly because the bank's traders had tried to manipulate a benchmark used to calculate the fees on a BoE lending program.
Separately, the UK financial watchdog banned and fined a former Credit Suisse bond trader £663,000 last year for allegedly manipulating the gilt market in 2011 during the BoE's program of QE.
In his first investigation, Lord Grabiner cleared BoE officials of wrongdoing, although he did criticize its former chief forex dealer, who has been sacked for unrelated misconduct.
The select committee had questioned the rigor of the forex report by Lord Grabiner as well as the investigation's terms of reference. Mr Carney told the committee that Lord Grabiner had a "free rein" to question whomever he felt pertinent to his inquiries.