Alarm over time fraud went undetected
As markets digested news of Societe Generale’s sensational losses at the hands of a rogue trader, questions soon turned to how such a fraud could be kept hidden for so long.
The group said the trader, thought to be a junior, was making deals far beyond the limits of his authorisation, covering his tracks with a web of false transactions.
Eyebrows have been raised that Societe Generale did not pick up on the fraudulent trading sooner, given that it has a 2,000-strong back office compliance department.
All major investment banks have extensive internal audit and compliance departments to ensure that a trader’s own books tally with those on the bank’s system which, in turn, feed directly through to the balance sheet.
Sandy Kumar, a partner at accounting giant Grant Thornton and expert in investment banking compliance, said that while traders are given free rein, this is only within certain limits and all trades should be regularly settled and checked.
Each trader is given a certain capital limit to trade off although their exposure to trading positions can be up to 10 or 20 times greater, according to Mr Kumar.
Crucially, he added, banks should have daily checks to ensure that traders operate within authorised bounds and that their systems match the bank’s books.
“Traders often run their own spread sheets and have their own methods of managing risk, but there should be a minimum daily independent check to reconcile the traders’ positions with the bank’s books,” he said.
Traders are supported by so-called middle office and back office functions. Middle office departments typically handle risk and product control and will often be responsible for picking up on transactions made outside a trader’s capital limits. Meanwhile, the back office division oversees the settling of transactions.
Mr Kumar, who worked as an in-house auditor in investment banks for 20 years, said the scale of the Societe Generale fraud is “phenomenal”.
“Most banks have cases where traders have been naughty, but in the majority of cases it is managed internally and kept quiet. It is the sheer scale of this which is unusual.
“It suggested that the independent checks just weren’t picking up on the trades,” he added.
