AIB's ability to recover some of the $691 million loss suffered through the Allfirst foreign exchange fraud from its insurers may have been helped by the charging of its former dealer Mr John Rusnak with fraud offences.
Any payout by the bank's insurers will depend on the outcome of the legal proceedings. If Mr Rusnak is convicted, insurance industry sources say AIB's case for a payout from its insurers under its fidelity cover would be strengthened. The extent of any payout would depend on the level of cover AIB had in place and whether the insurers could limit or refuse a payout on the basis that the controls at Allfirst were inadequate.
One industry source said the bank may have to cover some of the loss itself because it operated its own insurance company - captive insurance - to cover some of its business risks. AIB declined to comment on its insurance arrangements.
Mr Rusnak was indicted by a US federal grand jury at the Federal District Court in Maryland on Wednesday on seven fraud charges. He faces one charge of devising a fraudulent scheme to obtain the bank's money to create the impression he was generating profits so he could receive his salary and bonuses. The other six charges relate to entering fictitious trades into the bank's records.
The indictment followed a four-month investigation by the Federal Bureau of Investigation (FBI) into the currency trading at Allfirst, which resulted in losses of $691 million. Each charge carries a sentence of up to 30 years in prison and a $1 million fine.
AIB would have insured against losses arising from fraud or theft by employees through a fidelity policy. Market sources said AIB self-insured against some of this risk through its own offshore insurance company - where a company sets up its own insurance operation to cover some of the risks involved in its business.
A senior market source said AIB would still have to carry a sizable amount of the loss even if it got a payout from its insurers, because a significant amount of the risk would have been carried through its captive insurance company.
Another source suggested the existence of the captive operation to carry the first tranche of the loss would have meant the checks and balances required by the external insurer would not have been as rigorous as those normally required if the insurer carried the full risk. For this reason, this source suggested, AIB was more likely to receive a payout from its insurers if Mr Rusnak is found guilty.
Analysts are divided about whether AIB will be able to get a payout from its insurers.
"If he [Mr Rusnak] was found criminally liable, it could strengthen their case for making a claim... It would prove that it wasn't just an issue of inadequate controls," said ABN-Amro analyst Mr Eamonn Hughes.
Most investors had written off any prospect of a successful insurance claim, according to Mr John Kelly of NCB Stockbrokers. "They \ would be silly not to try and get some money back... But I don't think anybody is counting on it," he commented.
AIB's ability to make a claim could also depend on the findings of Kroll Inc, the US security and investigation company the bank hired to follow the money trail leading from Mr Rusnak's trades. Kroll investigators are focusing on the possibility of involvement in the fraud by counterparties at other banks. If this is confirmed, it could support AIB's claims of a complex conspiracy rather than a straightforward collapse of internal controls.
If the insurers have to make a payout, they are likely to look at all the other parties involved to see where they can offset some of their own loss, insurance industry sources commented. The role of the auditors, other Allfirst and AIB officers and regulators could come under scrutiny, they suggested.
