Jérôme Kerviel

Kerviel case highlights dangers

PUBLISHED : Friday, 07 March, 2008, 12:00am
UPDATED : Friday, 07 March, 2008, 12:00am

Jerome Kerviel, 31, blamed for the Euro4.9 billion (HK$57.91 billion) worth of trading losses at French bank Societe Generale where he worked, faces charges of breach of trust, fabricating documents and illegally accessing computers. Fraud charges have been dropped.

We asked Neill Poole, managing director of consultancy Alvarez & Marsal Asia in Hong Kong, who has 17 years of experience in forensic accounting and investigation experience, whether this would have any lasting impact on the industry.

Do you see any long-term fallout to hit the banking sector? These things tend to have a limited lifespan, so it would not necessarily have major implications on confidence in banking systems. What we will see is that financial institutions and regulators will be looking closely at the systems and controls that they have in place, and will be learning lessons from this affair that will help them identify problems earlier if they start to happen again in the future.

Were you surprised? Although companies and financial institutions can put systems and controls in place, and improve them over time, if someone is determined to perpetrate fraud, I do not think there are many systems and controls in place that would prevent it. The question often is how long it can remain undetected. In that sense, it is not a huge surprise it happened. But the amounts involved appear surprising.

What was your first reaction when you read about the case in the paper? For losses to build up to that scale over a period of time and not be noticed by anybody usually implies some sort of control breakdown. There are various levels of controls in financial institutions, and they include IT controls, review and supervisory, segregation of duty controls, and so on. I would imagine that, although it is still being investigated, it would probably be a combination of weaknesses in two or more areas. Perhaps he had access to the IT systems when he should not have. This has certainly been suggested. It has also been suggested that it may have happened because he was able to use other people's passwords, and that he knew the systems in his pre-trading days when he was working in the back office. It may also be that, in terms of the supervisory controls, questions might have been asked and he might have been able to give answers that initially satisfied those responsible for supervising and auditing, but this should have been probed further and they should have felt that something was not quite right.

How would this affect the day-to-day life of people working in the sector? We can already see that in terms of different types of regulations that the banks and financial institutions have to comply with, including anti-money laundering, the compliance departments have grown rapidly and are still growing. I think that will be another stimulus for more emphasis on compliance teams, and it will possibly lead to more emphasis on oversight. One of the suggestions was that this case happened, or was not spotted as quickly as it otherwise could have been because various managers who were overseeing Kerviel had recently left Societe Generale. From that perspective, I would probably expect to see financial institutions increase staff in the compliance functions, and deploy other people to fill in temporary vacancies to make sure they have the proper coverage. It is likely that what the financial institutions will do is look at their existing systems and assess whether they work.

What do you think about the controls that are in place in Hong Kong? In general, there is a range of quality in terms of how financial institutions have upgraded their controls. Generally speaking there is room for improvement, but I don't think that is necessarily any different to other parts of the world, and it may vary from institution to institution.

Would you classify what Jerome Kerviel did as fraud? One of the suggestions was that he created fictitious accounts that hid accumulating losses. If that is proved, then it would be fraud. But if it was done in an open and transparent way, but was just not picked up because the controls were not working effectively, then arguably it may not have been fraudulent.

What tempts someone to commit fraud? Fraudsters come from all types of backgrounds and education levels, and they work in all sectors at all levels of commerce. Sometimes there is an acceptance that certain business practices are culturally acceptable. That tends to be used in the context of corruption more than fraud. But when it comes to pure fraud, quite often what we find is that there is an opportunity that has presented itself to somebody. But these people are not necessarily born fraudsters, and do not join an organisation with an intention to commit fraud.

What do you think motivated Kerviel? One of the suggestions in this case was that he did not personally benefit. So you have to question what the motivation was. He does not seem to have stolen. But if he was trying to build a portfolio of profit, which would then impact on his remuneration, then you could argue that he had the intention of benefiting from it.