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Rogue trader exploits system loopholes losing Societe Generale £3.6bn

Karl Flinders

French bank Societe Generale has lost £3.6bn following unauthorised activity of a rogue trader who covered up fraudulent activity as a result of his understanding of the bank's fraud control systems.

Paris-based Jerome Kerviel used his knowledge of automatic checks, which are carried out on trades to check they are legitimate, to avoid being found out. He risked billions by betting on future trends in the stock market.

The failure to monitor fraudulent activity of this scale from an employee highlights the need for banks to constantly monitor and upgrade their fraud systems.

"Aided by his in-depth knowledge of the control procedures resulting from his former employment in the middle office, he managed to conceal these positions through a scheme of elaborate fictitious transactions," said a Societe Generale statement.

Ralph Silva, analyst at TowerGroup, said a fraud of this scale should have been spotted by technology systems which have checks and balances build in.

He said a combination of checks not being enforced and the fact that monitoring software quickly becomes out of date can open banks up to fraud. "Software is always behind fraud and you have to constantly update it," he added. "Traders and IT staff work closely together in investment banks and in some cases checks and balances are turned off to enable a particular trade to go ahead."

He said the Societe Generale fraud reinforces the need for banks to ensure that the rules which are built into technology are enforced and that technology is up to date.

Steven Philippsohn, head of fraud at legal firm PCB, said the fact that an individual in a relatively low ranking position could do this, highlights a failure in fraud detection systems.

"You do not have to be a rocket scientist to commit a fraud like this and the monitoring technology is clearly not working in Societe Generale's case," he said.





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