Control Deficiencies at Allfirst Treasury That Led to Fraud

There were many control deficiencies in Allfirst Treasury that made the fraud by Mr. Rusnak possible. The key control deficiencies are listed below:

1. The failure of the back office to attempt to confirm bogus options with Asian counterparties

This is one of the most important control deficiencies in the Allfirst’s treasury. Even though they had the policy that all the trades need to be confirmed, Mr. Rusnak was able to skip that from the process. In some way, he convinced the back office employees that these trades were offsetting transactions and need not be confirmed and that they were trades with Asian counterparties.

2. The failure of the middle and back offices to obtain foreign exchange rates from an independent source

The Allfirst’s internal audit and risk was unable to uncover the problems in the Treasury at many occasions. Even when they reported any problems or concerns, they were addressed by the treasury but relapsed quickly, for example the failure to obtain FX rates from independent sources.

Instead of obtaining the rates from independent sources, Mr. Rusnak got them to design the systems in such a way that rates were downloaded from Mr. Rusnak’s Reuters terminal to his personal computer’s hard disk drive, and then fed into a database on the shared network, making it accessible to the front, back, and middle offices. This issue was highlighted by internal audit but could not be controlled. This helped Mr. Rusnak to engage in price manipulation.

3. Other Deficiencies

There were also deficiencies in internal audit, as well as in the treasury risk control and credit risk review areas.

For example, the internal audit's samples failed to reveal any bogus option trades. Allfirst internal audit also appeared to have suffered from inadequate staffing, lack of experience, and too little focus on foreign exchange trading as a risk area. The entire risk assessment department only amounts to two people who are responsible for assessing risk company-wide at Allfirst.

For their part, the middle office and the credit risk review area failed to investigate the frequent instances where Mr. Rusnak exceeded the counterparty credit limits that AIB and Allfirst had established for foreign exchange trading. Neither the middle office nor the credit group considered itself responsible for investigating such excesses.

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