Royal Bank of Scotland will be hit with fines of almost 400 million pounds ($627 million) on Wednesday for its role in a global interest-rate rigging scandal, sources familiar with the situation said.
That will be the second-largest penalty so far in an international investigation involving over a dozen banks, and will heap embarrassment on a lender that had to be bailed out by British taxpayers at the height of the 2008 financial crisis.
British finance minister George Osborne has already said RBS, which is 82-percent owned by the state, must pay the fines out of bankers' bonuses rather than from the pockets of taxpayers, while critics say the scandal shows banks' riskier activities should be separated from basic lending functions.
Banks across the world are struggling to rebuild their reputations after the financial crisis, and many have been engulfed in a series of investigations into their past misdemeanors, including fixing benchmark interest rates, money laundering and mis-selling products to customers.
Britain's Barclays has already paid $450 million for its part in the manipulation of the London interbank offered rate (Libor), a benchmark used for trillions of dollars of financial instruments ranging from home loans to complex derivatives.
Some $1.5 billion of fines have also been handed out to Swiss bank UBS for interest-rate rigging.
One of the sources said Royal bank of Scotland (RBS) would pay around 90 million pounds to Britain's Financial Services Authority, about $150 million to the United States Department of Justice and about $325 million to the U.S. Commodity Futures Trading Commission (CFTC).
RBS said it expected to pay "significant penalties" to settle regulatory probes.
It was in "late stage settlement discussions" with regulators in Britain and the United States, but no fines had yet been agreed, the bank said in a statement, adding it expected regulators to impose other sanctions beyond the fines.
One of the sources said RBS would avoid admitting criminal liability in the United States but accept criminal charges against its business in Japan.
The bank will agree a "deferred prosecution agreement" with U.S. authorities, the source said. That means RBS will retain its U.S. banking license provided it doesn't step out of line again. The deal will prevent RBS from having to sell off its U.S. business Citizens at a reduced price.
John Hourican, head of RBS's investment bank, will part company with the bank following the settlement, sources have said. There is no suggestion he had any knowledge of wrongdoing.
Chief Executive Stephen Hester has warned of a "miserable day" for the bank, during which embarrassing emails exposing the extent of collusion between traders are set to be revealed.
RBS said last August it had dismissed staff following its own internal investigation.
The revelations could put the future of RBS's investment bank under renewed scrutiny and are likely to re-ignite calls from critics who want the bank to focus on basic lending activities in its domestic market.
British Business Secretary Vince Cable said the bank was "in limbo" and should have been fully nationalized when it was rescued in the financial crisis.
The Liberal Democrat said early hopes for a re-privatization of RBS now looked a "distant dream" and resurrected an idea he originally proposed in 2011 that shares in RBS should be distributed to the public by the government so that they share in any eventual recovery in the bank's stock price.
Taxpayers are sitting on a loss of about 15.7 billion pounds on the RBS stake, after Britain pumped in 45.5 billion to keep the bank afloat. In contrast, the United States has made tens of billions of dollars from its bank bailouts with the U.S. Treasury selling the last of its securities in banking giant Citigroup for nearly $900 million on Tuesday.
More than a dozen banks have been scrutinized by regulators as part of an investigation into interest-rate rigging. Dozens of individuals are also under scrutiny in the probe, initiated by the CFTC in October 2008.
Shares in RBS were up 1 percent at 340.9 pence by 1150 GMT, reflecting relief the fines might not be as large as the 500 million pounds some observers had expected.
(Additional reporting by Tim Castle and Myles Neligan; Editing by Mark Potter)