ALLIED IRISH BANK 2001 A ROGUE TRADER

1. ALLIED IRISH BANK 2001 A ROGUE TRADER COMPANY CURRENCY DISASTERS Jean Pierre Nordmann Kazia Flemming Elise Cannelle

2. The facts • AIB, the biggest Irish Bank suffered a rogue trader, who carried out a £530m fraud. • He was a middle-ranking executive described by colleagues as a typical `Mr Middle America`. • Earning about £70,000 a year, he had worked for seven years in the foreign exchange division at Allfirst Financial Inc's headquarters at Baltimore, one of the 50 largest banks in the US. • The fraud has been written off the money in the 2001 accounts (fraud was revealed early February 2002)

3. How to lose 530 million pounds? • The fraud at Allied Irish Banks' US subsidiary took place over at least a year and involved thousands of foreign exchange traders. • Under international regulations, banks are obliged to take out options whenever they carry out foreign exchange deals. These options hedge banks against the risk of the underlying deals. Hedging is not perfect but it insulates banks against major foreign exchange losses. • John Rusnak, a middle ranking dealer at AIB's Allfirst business, pretended to hedge his deals with options but all the option contracts were fictitious. The contracts were entered into Allfirst's systems as if they existed, but they did not.

4. An internal dysfunction: How did one trader get away with it for so long? • Rusnak worked in a tiny, two-person $10m foreign exchange operation. • He was avoiding detection by placing multiple forward or 'spot' trades in the yen-dollar market under the bank's set limits. He then fabricated data to show non-existent options had been purchased to cover losses. • However, the fictitious options trades should have been independently confirmed by other divisions, but were not. Others 'either wittingly or unwittingly' aided Rusnak's alleged deception.

5. A system dysfunction: • The complexity of the trading means that oversight systems should have been much more robust. Much tighter systems should be in place. Internal controls, the auditors, and even the regulators are looking very, very bad over this. There could be others like this. The big investment banks have really tight procedures, but the more staid mid-tier outfits have never been looked at as closely. • Banks bring difficulties on themselves. Staff, particularly on the trading desks where John Rusnak worked, receive modest basic salaries but huge bonuses for successful deals. There are incentives to take massive risks. And when trades go wrong there is an ever bigger incentive to take further risks and try to make good the profits before head office - in the AIB case, in far-off Dublin and the City of London - knows something has gone badly wrong. • AIB is a retail bank. Consequently, the only foreign currency that retail bankers are normally likely to handle would be for customers' overseas holidays, contrary to what often happens.

6. Which lessons to learn? • After Barings bankrupt, it was determined that the split between the supervision of banking firms and share dealing firms - which was at the heart of the Barings debacle - would not happen again. The other big change which has taken place since Barings is that one by one the merchant, investment and smaller commercial banks have been merged or taken over to create giant worldwide banking concerns which are large enough to absorb even the biggest losses and frauds without causing scarcely a ripple. This prevents the banks from bankrupt, but does not avoid fraud. • Audit and control system should be improved: more independent and competent. • Speculation should be re-think: if a bank can lose 500 million pound on forex, it means it can win it as well. Is that not unbalanced with its core competence, retail banking?

7. Any questions?