The speed with which Allied Irish Banks recapitalised its US subsidiary Allfirst after the discovery of massive trading losses in February, and the steps it took to address the causes of the debacle, have enabled the bank to avoid punitive action by US regulators.
Nevertheless, the US Federal Reserve has required AIB and Allfirst to agree to a written, public agreement on the further steps it is taking to remedy the weaknesses at Allfirst.
This agreement, published yesterday, sets out the measures to be taken by AIB and a timetable for informing the regulators of action taken on the basis of the Ludwig report and other reviews by outside consultants.
It includes a requirement that within 180 days, the boards of AIB and Allfirst make available for supervisory review written details of any management and operational changes made as a result of the banks' review of risk management procedures.
The Federal Reserve has a scale of responses to banking scandals: the first and least serious a private letter, the second a signed agreement not made public, and the third a written agreement made public - as in the case of AIB/Allfirst.Where a bank fails to take action and is unco-operative, and in more serious cases where bank clients suffer losses, the US central bank can impose a heavy monetary fine and issue a cease-and-desist order to stop trading.
It can also issue a prohibition notice on individuals against working in a registered banking institution. This action could be taken against Mr John Rusnak, the foreign currency trader who covered up losses of $691.2 million (€760.15), and possibly other officials fired by the bank over the scandal.
A spokesman for the Federal Reserve in Washington said yesterday that it was still working with law enforcement authorities, including the FBI, on possible violations of federal and state laws. Mr Rusnak has not yet been charged with any offence.
AIB group chief executive Mr Michael Buckley said yesterday that the bank had "worked assiduously with our regulators in putting together a very comprehensive action programme and will continue to stay in close touch with them as we implement it over the coming months".
The bank was pleased that the agreement "endorsed the speed with which we have acted to remedy the control weaknesses identified in the Ludwig report", he said. AIB and Allfirst were "committed to ensuring that all the steps outlined in the agreement are taken quickly and effectively".
The agreement acknowledges that "the bank properly recognised the need to take appropriate actions to improve management oversight, day to day risk management, internal controls, audit standards, management information systems and policies and procedures for treasury management and operations functions". The agreement was published by the Federal Reserve Board in Washington and signed by the Federal Reserve Bank of Richmond, the Maryland Commissioner of Financial Regulation and the Central Bank of Ireland, and AIB and Allfirst.
The bank could still face enforcement action from the US Securities and Exchange Commission but this is now unlikely. The SEC has not contacted the bank since the crisis broke on February 6th, an Allfirst official said.
In February AIB commissioned former US Comptroller of the Currency, Mr Eugene Ludwig, to report on the fraud at Allfirst. Six staff members, including the head of treasury, Mr David Cronin, were fired after his report found that Allfirst's controls were riddled with weaknesses, and compounded by inexperienced and poorly supervised officials. AIB has since appointed Mr Eugene Sheehy, chairman of Allfirst, to replace Mr Frank Bramble who took early retirement.
Allfirst agreement sets reform timetable: page 2
