Preventing rogue traders

Regular readers will have noticed the radio silence this week. I haven’t been able to publish a blog posting this past week due to persistent outages of my broadband service just at the times when I’ve had a break between projects. It’s one of the drawbacks of living in the sticks, though there are other compensations in being away from the treadmill of London life. It’s much easier to think clearly and strategically, for example. That’s one reason, amongst others, why I like to attend conferences in out-of the-way locations.

Earlier this week, I was pleasantly isolated with a great bunch of security professionals in the leafy surroundings of La Hulpe in Belgium, speaking at EnterSecurity 2009, a conference arranged by Endeavour Events. Also speaking was former rogue trader Nick Lesson, whose role in bringing down Barings Bank should have been a wake-up call for investment banks and regulators. Clearly it wasn’t, as recent history has demonstrated. What should we have learned from his escapades?

Nick Leeson is clear about the causes of Baring’s collapse, as well as the solution that we should have implemented. Unlike a typical fraudster, Nick craved success rather than money. He got into a situation that got progressively worse. And the longer it went on, the greater the sense of failure. But arrogance can be just as dangerous a motive for fraud. And it’s one that’s encouraged by employers.

Managing a team of empowered traders demands three things. Firstly, a thorough understanding by management of current business practices. Secondly, close monitoring of day-to-day activities. And thirdly, an authoritative audit process that’s able to challenge suspicious or dangerous practices. These things were lacking at Barings in the nineties. And most of them still are, more than a decade later.

What’s the answer? There is, in fact, only one really effective measure. Banks must recruit former traders for compliance monitoring. And that means paying them as much as traders in order to attract the best staff. It’s a necessary solution. But, unfortunately, like many desirable things in life, it’s unlikely to happen. 

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