Rogue trader’s losses blamed on lax bank controls

The €760m loss blamed by AIB on a rogue trader may have been due to lax controls at its American subsidiary, it was claimed today.

Foreign currency trader John Rusnak was blamed by AIB bosses for losing the cash from Baltimore-based Allfirst in what was described as a ‘‘web of concealment’’.

But today the Wall Street Journal reported that Allfirst’s risk controls were not sophisticated and left the bank open to the losses.

The newspaper reported that Larry Smith, a ‘‘back-office’’ employee at the bank, who was supposed to verify that Mr Rusnak’s trades were genuine, has told investigators bosses instructed him not to bother confirming trades involving banks in Asia.

Mr Rusnak was known as ‘‘Johnny Ruz’’ among Asian currency traders for his daring deals, the newspaper reported.

The 37-year-old father-of-two is said to be co-operating with the FBI investigation into the loss and his lawyer has repeatedly denied Mr Rusnak stole any of the money the bank lost.

The loss has been blamed on Mr Rusnak betting unsuccessfully that the yen would rise against the dollar and then trying to cover his tracks, eventually losing the cash as he tried to cover up his failed deals.

Sources close to the investigation told the Wall Street Journal that Mr Smith raised concerns with his managers about the policy of not verifying Mr Rusnak’s trades but that no action was taken.

Mr Rusnak may have been confirming his own trades in the knowledge that Mr Smith was not required to verify them, opening up the massive losses which should have been impossible on the €5.6m he was limited to buying or selling each day.

Mr Smith, who was supposed to supervise Mr Rusnak’s deals, had to ask the trader for currency rates as his computer screen did not have the information, a situation which would prevent the standard banking practice of independent verification.

Another employee who was responsible for monitoring trading risks taken by Mr Rusnak also had to ask the trader for currency rates as she oversaw his activities, an Allfirst employee told the newspaper.

The newspaper also reported that, contrary to AIB claims that Mr Rusnak was not given cash to make significant gambles, he often made trades worth more than €113m with banks in Asia.

Traders were puzzled as to why a small provincial American bank would be making such huge deals, the newspaper reported.

And concerns about the degree of oversight carried out by Allfirst were known in American banking circles before the loss became public.

One unnamed US investment bank turned down the chance to buy a currency option from Mr Rusnak in November 2000 because of its concerns at lax controls on Allfirst’s trading department.

No charges have been brought against Mr Rusnak despite the investigation now having been under way for more than a month.

Allfirst is also being investigated by the American Federal Reserve Bank and by authorities in the state of Baltimore, where it is based.