Early Warning Indicators: AIB Currency Trading Losses

There were many early warning indicators or missed opportunities for AIB or Allfirst to have detected Mr. Rusnak’s fraud. These missed opportunities are discussed below:

1. Failures of Rusnak’s superiors to adequately supervise his activity

Mr. Rusnak’s supervisors— his departed trading manager, the treasury funds manager, and the treasurer— failed to examine in any depth Mr. Rusnak’s positions and trades. Such a review should have occurred as a matter of course, but certainly should have taken place given the overall size of Mr. Rusnak’s positions, of which Mr. Rusnak’s superiors in Allfirst treasury, were aware.

2. Inadequate responses to issues with Rusnak’s trading that were identified

  • Prime brokerage account issues: Beyond this, Allfirst treasury personnel failed to give sufficient attention to issues about Mr. Rusnak’s trading that were identified. One such issue was the prime brokerage accounts. Treasury risk control was concerned about the usage of prime brokerage account. The Allfirst treasurer directed that the treasury funds manager bar Mr. Rusnak from using the prime brokerage accounts for a period of time. After a brief hiatus, Mr. Rusnak was allowed to resume trading, with the guidelines in the future there be an audit trail of each prime account trade entered into during the day.. There is no evidence that the front office supervisors scrutinized each of Mr. Rusnak’s trades. And the back office did not always confirm the end of day prime settlement.
  • Difficulties confirming Mr. Rusnak’s trades: The back office continuously had difficulty in confirming Mr. Rusnak’s trades.  The failure by treasury management to follow through on back office inquiries may have contributed to an attitude among operations staffers that the confirmation process was a pointless formality.
  • Citibank enquiry: AIB’s Group treasurer, Mr. Ryan, had received an inquiry from Citibank about a large gross monthly prime-account settlement that was due to occur at the beginning of April. the exposure was more than $1 billion. AIB and Allfirst did not look into this satisfactorily.
  • AIB’s contact with the Allfirst treasurer on market information: In late May 2001, a market source suggested to AIB that Allfirst was engaging in very heavy foreign exchange trading. This prompted a telephone call directly to Allfirst’s treasurer from Mr. Buckley. After looking into the matter, the Allfirst treasurer responded orally and in writing that there had been no unusual or extra large transactions in the last two weeks, and that Allfirst’s average turnover was $159 million. This response satisfied AIB.
  • The SEC comment letter: In September/October, the SEC had sent a comment letter on Allfirst financial statements which contained an inquiry into the cash flow related to foreign exchange activity. In researching the issue, the Allfirst financial reporting unit determined that Allfirst had at that time, large offsetting foreign positions. As a result of their concerns, they asked internal audit to pay special attention to trading in an upcoming treasury audit.

3. Failure of adjacent trader to notice or report on Rusnak’s activity

The trader responsible for covering customer foreign-currency trading sat next to Mr. Rusnak on the trading desk. They had separate telephone lines and a common one. They also shared a Reuters terminal. At times when Mr. Rusnak was away from the desk, Mr. Rusnak would communicate with the other trader about his (Mr. Rusnak’s) trading activity. The customer trader has denied any knowledge of improper conduct.

4. Failures to fully implement audit and supervisory recommendations

The reports of internal audit and risk assessment and supervisory examinations contained a number of recommendations relating to treasury control structures that were noted over time. While some of these recommendations were implemented, a number of others do not appear to have been fully addressed. There does not appear to have been any rigorous procedure in internal audit for ensuring that suggestions made by audit, risk assessment or in supervisory examinations were fully followed through in the context of the Allfirst treasury operations.

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