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FINANCIAL RISK MANAGEMENT

Like Barings, AIBs management and risk control units demonstrated a


fairly startling level of incompetence in failing to figure out that something
was amiss. AIB at least has the excuse that Rusnaks business continued
to look small and insignificant, so it never drew much management attention. However, the scope and length of time over which Rusnaks deception
continued provided ample opportunity for even the most minimal level of
controls to catch up with him.
The most egregious was the back offices failure to confirm all trades.
Rusnak succeeded in convincing backoffice personnel that not all of these
trades needed to be confirmed. He relied partly on an argument that trades
whose initial payments offset one another didnt really need to be checked
since they did not give rise to net immediate cash flow, ignoring the fact
that the purported trades had different terms and hence significant impact
on future cash flows. He relied partly on booking imaginary trades with
counterparties in the Asian time zone, making confirmation for U.S.based
backoffice staff a potentially unpleasant task involving middleofthenight
phone calls, perhaps making it easier to persuade them that this work was
not really necessary. He also relied on arguments that costs should be cut by
weakening or eliminating key controls.
Once this outside control was missing, the way was opened for the
ongoing manipulation of trading records. Auditors could have caught
this, but the spot audits performed used far too small a sample. Suspicious movements in cash balances, daily trading profit and loss (P&L),
sizes of gross positions, and levels of daily turnover were all ignored by
Rusnaks managers through a combination of inexperience in FX options
and overreliance on trust in Rusnaks supposedly excellent character as
a substitute for vigilant supervision. His management was too willing
to withhold information from control functions and too compliant with
Rusnaks bullying of operations personnel as part of a general culture
of hostility toward control staff. This is precisely the sort of frontoffice
pressure that reduces support staff independence, which was referred to
in Section 3.1.1.
4.1.4.5 How the Unauthorized Positions Were Eventually Detected In December
2001, a backoffice supervisor noticed trade tickets that did not have confirmations attached. When informed that the backoffice personnel did not
believe all trades required confirmations, he insisted that confirmation be
sought for existing unconfirmed trades. Although it took some time for the
instructions to be carried out, when they finally were carried out in early
February 2002, despite some efforts by Rusnak to forge written confirmations and bully the back office into not seeking verbal confirmations, his
fraud was brought to light within a few days.

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