LIBOR was invented by a British banker in the 1960s: "In fact, according to Minos A. Zombanakis, a former banker at Manufacturers Hanover who says he made the very first loan based on Libor by inventing the product on the fly, it was a sense of responsibility and trust between banks that underpinned the rate's success." LIBOR, based upon all the reporting I've read so far, has no force of law or even contract; merely a service provided by the British Bankers Association (which didn't create it; read on). That last bit is what's important. Here's his experience of the history. "This is how Libor came to be born: as a way to price short-term funding for a syndicate of banks." Not quite what you expected, what?? This is not, nor ever has been, a Fed Funds rate.
Near as I can tell, LIBOR was invented, and remains, as a shorthand for and by bankers. Initially just City of London bankers cared about it, on both sides of use. The bankers who input rates were the same ones who used the resulting average rate to set the interest rate on money lent out. There was no incentive to cheat, and if there were any, only those within the club got hurt. Kind of a zero sum game of poker at the Elks Lodge.
But, in time, LIBOR became more widely used. What isn't clear is whether any of the mechanisms were set down in either contracts or law that contributing banks (the ones who submit rates to be averaged) must tell the truth to the BBA or that the BBA asserts that the average rate it promotes is true and accurate. Without agreements to accuracy, there can't be a penalty for lying, since lying is not defined in the process.
Thus, no frog marching. We'll see.
[update]
I've spent some time spelunking, and come up with this reportage. Not suprising, to me, LIBOR fixing is quite legal, directly.
Peculiarly, the practice is not explicitly prohibited in UK law. As highlighted in a Parliamentary document published on 3 July, the FSA fine was imposed under the general discretion they enjoy under the Financial Services and Markets Act 2000. The fine was for breach of principle 5 of the FSA Handbook which states that, 'A firm must observe proper standards of market conduct'. Libor-rigging does not appear to fall within the FSA's market abuse criminal powers, which cover actions 'in relation to qualifying investments traded on a market'.
[update 2]
And then here's as close to a smoking gun as we're likely to find. This quote is from "Exhibit no. 5" at the bottom of the piece (the quote is from a Wall Street Journal piece linked to).
One major but basic problem: The FSA never established a rule that the data banks submit to Libor should be accurate and fair, said Steven Francis, a regulatory expert at law firm Reynolds Porter Chamberlain. "This is a major regulatory failing," he said. "It's frankly ridiculous that there wasn't one in place."
We ain't no frogs in this pond.
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