Weak security controls have been partly blamed for the rogue trader scandal at Société Générale that cost the bank €4.9bn ($7.2bn).
Preliminary findings (pdf) from an internal investigation found that stronger security systems, including biometric authentication of trading personnel, were needed to prevent a reoccurrence of the fraud.
Jérôme Kerviel, a junior trader at SocGen, secretly built up huge and risky positions in the derivatives market. He was taking greater and greater risks over a much longer period than previously thought, dating back to March 2007 for large amounts and to 2005 for smaller amounts. SocGen only discovered the fraud between 18 and 20 January. Unwinding the positions over the subsequent three days cost the bank billions.
Investigators said the the variety of concealment techniques used by the fraudster, a lack of systematic checks by staff when warning flags were raised and shortcomings in the control systems all contributed to the late discovery of Kerviel's activities. It said that it had discovered "no evidence of embezzlement, internal or external complicity" at this point in its ongoing inquiry.
Kerviel should have been concerned with exploiting small price differences in the value of similar matched assets to turn a profit for the bank. Instead he used his knowledge of the bank's IT systems to make deferred purchases which he cancelled, and employed other ruses to disguise the fact he was making huge gambles without laying off his bets.
The rogue trader used faked email messages to cover his tracks. He also logged into colleagues' accounts to make trades under their names rather than his.
The fraud led to the realisation that SocGen needed to improve its supervision and control systems in three crucial areas involving access security improvements: the introduction of biometric-based log-ins; improved alert procedures; and improvement to the bank's operational risk platform to keep closer tabs on potentially fraudulent activity, such as cancelled or modified trades.
Improved technology controls are only part of the answer. Between July 2006 and September 2007, operational risk systems raised 24 alerts over trades made by Kerviel which the bank staffers put down to anomalies in how the trading software operated. The risk monitoring unit only asked Kerviel's superiors to make sure he didn't exceed limits rather than taking a deeper look at the trading behaviour that gave rise to the alarms.
The investigation team is due to report its full findings before SocGen's annual general meeting 27 May. ®