Global regulators have exposed flaws in banks' internal controlsthat may have allowed traders to manipulate interest rates aroundthe world, two people with knowledge of the probe said.

Investigators also have received e-mail evidence of potentialcollusion between firms setting the London interbank offered rate,said the people, who declined to be identified because they weren'tauthorized to speak publicly. Regulators are focusing on a lack ofso-called Chinese walls between traders and employees makinginterest-rate submissions on behalf of their banks, the peoplesaid. In some cases, the two groups may have sat close to eachother, one person said.

Britain's Financial Services Authority is probing whether banks'proprietary-trading desks exploited information they had about thedirection of Libor to trade interest-rate derivatives, potentiallydefrauding their firms' counterparties, the people said. Theinvestigation may lead to civil fines for the banks and criminalcharges for the traders involved, the people said. No penalties arelikely from the FSA before year-end, and the case hasn't movedtoward criminal charges, one person said.