The tough battle against bank fraud

Ki Nan Tsui

The Nation

With the recent collapse or near collapse of big trees - respectable financial institutions and companies - in the global corporate jungle, the sound was loud and clear, even if we were not there to personally witness the falls.

The trial of Jerome Kerviel, the rogue trader at Société Générale, reminds us how vital it is to prevent fraud at the operational level.

The unfortunate incident reinforces the need for financial institutions to beef up their operational risk management (ORM), a topic to be addressed by KPMG at its "Mitigating Fraud Risks in Financial Institutions" seminar at the Peninsula Hotel tomorrow.

The Société Générale case, which cost the bank some ¤4.9 billion (Bt242 billion), illustrates how a comprehensive and up-to-date fraud-risk-management system could have at least partly prevented such a white-collar crime from happening, says IG Chandran, partner and head of advisory services at KPMG Phoomchai Holdings.

Rogue traders and fraud are not uncommon. Recent financial history has been marred by large-scale scams such as the fall of Barings Bank and the more recent series of mishaps at National Bank of Australia, including tax evasion, option-trading losses and write-offs of billions of capitalised mortgage-servicing rights.

The collapse of Barings Bank in particular, according to Chandran, stemmed from its London office's lack of understanding of the derivatives that the father of all rogue traders, Nick Leeson, was trading.

The US$1.4 billion (Bt44.2 billion) loss from futures-contracts speculation led to the demise of London's oldest merchant bank.

"New products are moving quicker than the knowledge to understand them," Chandran says. The London office was practically handing Leeson money on a golden plate. There was no margin, and no way of detecting the anomaly.

"There is not enough expertise to deal with different kinds of risks," says Kaisri Nuengsigkapian, chief executive of KPMG Phoomchai.

And fraud, like viruses and bacteria, tends to spread faster too - as the result of the increasing interdependency and interconnectedness of financial institutions, Kaisri says.

In the shrinking Atlantic pond, the credit crunch in the US sent Northern Rock in a downward spiral.

The recent Basel Capital Appraisal II is designed to spur financial institutions to take a structured approach to ORM.

According to research by John Lee, a partner and head of financial risk management for Asia-Pacific, based at KPMG Malaysia, the Basel I risk-capital regime was less comprehensive and primarily focused on credit and market risk. 

Although no recent cases of fraud by major Thai companies have emerged, it doesn't mean that it won't happen here, Kaisri says.

KPMG's fraud survey of last year shows that 46 per cent of Thai executive respondents were aware of fraud within their organisations and 44 per cent expected the occurrences to increase. Chandran believes that fraud will happen sooner or later again - because of "common recurring weaknesses".

There is no bulletproof, airtight way to prevent fraud. The best way is to start with the family and go vertically from there, says Chandran.

One cannot pre-empt too much. After all, businesses taking no risks are likely not to produce returns, Kaisri adds.