AIB chief executive Mr Michael Buckley was only informed of the €860 million loss due to a foreign exchange fraud at its US subsidiary on Monday night, it was confirmed today.
The foreign exchange trader at the centre of the fraud, Mr John Rusnak was suspended from trading duties in early January after irregularities were discovered in his accounts.
The fraud was uncovered during a management review of the treasury division of Allfirst and is thought to have occurred over a 12 month period.
The alarm was raised after Mr Rusnak required increasing amounts of cash to cover his loss making positions.
The FBI are pursuing Mr Rusnak who disappeared at the weekend after the extent of the massive fraud AIB’s Allfirst became apparent.
At a press conference in Dublin today Mr Buckley said that until the trader in interviewed the bank will not know for definite if the trader acted alone. But considering the length and complexity of the fraud some kind of collusion seems likely.
It appears that Mr Rusnak was hiding losses on spot foreign exchange deals by writing false currency options to offset his losses. The options contracts which involved a bogus counter party were then entered into Allfirst’s accounts as a legitimate deal.
Most of the foreign exchange deals were investments in the Far East and Japan which have experienced volatile currency markets in recent years.
The practice of offsetting possible short term losses on spot deals by writing longer term options - known as hedging - is a legitimate method of managing risk by banks. However the falsification of these contracts raises serious questions about Allfirst’s internal control procedures and client monitoring.
Mr Buckley said the complexity of the fraud was such that it took the bank considerable time to realise the material loss to the bank.
AIB formed Allfirst Financial in 1999 when it merged First Maryland Bancorp, which it bought in 1989, with Dauphin Deposit Corp.
