Allied Irish Banks - The Currency Derivatives Fiasco

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Case Details:

Case Code : FINC032
Case Length : 11 Pages
Period : 1997 - 2004
Pub. Date : 2004
Teaching Note :Not Available
Organization : Allied Irish Banks
Industry : Banking
Countries : Ireland / US

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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"It's very clear now that this guy targeted every control point of the system and systematically found ways around them, and built a web of concealment that was very sophisticated."¹

- Michael Buckley, CEO of Allied Irish Banks.

Introduction

On February 06, 2002, Allied Irish Banks (AIB)² revealed that its US subsidiary - Allfirst Financial Inc. (Allfirst)³ had incurred a loss of US $750 million (mn) in foreign exchange trading operations (Refer Exhibit I for information on the AIB Group).

The losses incurred were the result of fraudulent trading activities of John Rusnak (Rusnak), a trader in foreign currency operations at Allfirst. Rusnak's job was to make arbitrage profits by taking advantage of discrepancies in the price of currencies in the cash, futures and options markets.

During the period 1997 to 2001, Rusnak incurred heavy losses in foreign exchange transactions. However, he was able to successfully conceal these losses by constructing fictitious option trades that offseted those that were genuine.

He manipulated bank records and documents and reported false profits.

Due to the senior management's carelessness, and lack of knowledge and experience in foreign exchange trading, Allfirst finally landed up in a financial mess.

Analysts said that though AIB would be able to bear this loss as it amounted to less than 10% of its equity capital, it could also make the bank more vulnerable to future takeover attempts.

They commented that this scam had once again sent across a strong message that inadequate risk management control systems and improper supervision of traders' activities could lead to massive financial losses with a negative impact on even the most successful companies.

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1] Gallagher Sean, 'Allfirst Financial: Out of Control', Baseline, March 12, 2002.

2] AIB Group is Ireland's leading banking and financial services organization. It operates mainly in Ireland, Britain, Poland and the US. In 2003, the group employed about 25,000 people worldwide in more than 800 offices. As of December 31, 2003, AIB owned assets worth €81 bn.

3] Headquartered in Baltimore, US, Allfirst was a regional, diversified financial services company offering a full range of financial services including banking, trust, investment and insurance to retail, business and commercial customers. It was created by merging Dauphin Deposit Corporation and First Maryland Bancorp in 1999.