Fraud Suspect May Have Had Help

How a low-level currency trader for Allied Irish Banks was able to bury $750 million in losses without detection is a mystery to bank analysts and those who make their living in the trade.

With more than a trillion dollars changing hands every day, major financial institutions have multilayered systems in place to track profits and losses, as well as suspicious trading activity. What insiders don’t catch, auditors are supposed to discover during routine checks of every trader’s books.

At Allied Irish’s Allfirst Financial Inc. unit, the system broke down, raising the possibility that John Michael Rusnak had help when he allegedly hid massive losses on currency trades in a flurry of fictitious options contracts, analysts said.

“I can’t conceive of a way a person could do it without help,” said Christopher Blum, a financial-services analyst with Edward Jones. “It’s hard to do, and that’s why it doesn’t happen very often. Usually, the (internal) policies work.”

Bank officials, too, were shocked by the failure of its internal controls.

“We are staggered by the amount of this loss,” said Frank P. Bramble, chairman of Allfirst Financial Inc. and chief executive of Allied Irish Bank’s U.S. operations. Bramble said the loss occurred in an “isolated” area of the bank “by an individual who found a way to crack our internal control systems.”

Unlike the trading of stocks and bonds, currency trades are not as heavily scrutinized by government watchdogs such as the Securities and Exchange Commission.

But financial institutions that engage in risky trades usually keep a close eye on their traders, experts said.

In most instances, a trader’s profit-and-loss record is tracked throughout the day.

Any anomalies are checked by a financial institution’s internal regulators. Job functions are split up to increase oversight, and jobs are often rotated, making it difficult to hide suspicious activity.

In addition, banks typically utilize background checks, employee fingerprinting and other methods of detecting employee fraud, according to the American Banking Assn., an industry trade group.

When those controls fail, both internal and external auditors hired by the company should uncover phony trades.

“There are usually control mechanisms in place and other people who typically review these types of trades,” said Alex Beuzelin, a senior market analyst with Ruesch International, a Washington-based currency trading company. “While entering fictitious trades could for a while mask those losses, you have to imagine that they would eventually be caught. It just took longer [in this case] than one would expect.”

Rusnak’s suspicious trades took place over 12 months, Allied officials said.

As a currency trader, Rusnak tried to make money by betting that a certain country’s currency would rise or fall against another currency over a specific period of time. Such traders tend to work in obscurity, rarely capturing the spotlight in financial circles.

Typically, currency speculators will hedge their position on the spot market with option contracts, which give the trader the option to buy or sell a currency at a certain price in the future.

Usually, losses arising from trades in the spot market would be at least partly offset by profits arising from options contracts. It’s pretty standard practice in the industry, experts say.

But in Rusnak’s case, the options contracts were fictitious, according to officers at Allied. Bank officials allege that he forged options purchases to conceal the losses.

Given the dollar amount involved, experts said Rusnak should have had a difficult time concealing his losses from Allfirst’s internal regulators.

Trades of that magnitude would dwarf the entire trading limit of many large currency trading operations, sounding internal alarms at most institutions.

“If they [the fictitious trades] didn’t appear on the corporate balance sheet, that should raise a red flag,” said Matthew Snowling, a bank analyst with Friedman, Billings, Ramsey & Co.

But if a trader has help from a colleague, uncovering the fraud becomes more complicated. Allied officials raised the possibility Wednesday that Rusnak had assistance, but said they have no evidence of collusion. The company is conducting an internal investigation.