Banks must show internal controls can detect fraud

The Central Bank has given Irish banks and building societies until the end of July to show that they are not vulnerable to the sort of fraud that cost AIB €789 million earlier this year. The Bank's governor, Mr John Hurley, has stipulated that the review be carried out by an "independent reporting party", who must adhere to a process set out by the Central Bank.

The directive covers all the major Irish banks and building societies as well as the subsidiaries of international banks that operate here. A number of the foreign-owned banks objected to being included in the process, but all have now agreed to comply, according to Central Bank sources.

The purpose of the exercise is to establish whether or not the various banks' internal controls are working. The failure of internal controls to spot the activities of Mr John Rusnak - a foreign exchange dealer at its Allfirst subsidiary - resulted in AIB falling victim to one of the largest financial frauds on record.

In a letter sent to the various credit institutions in the last two weeks, the assistant director general of the Bank, Mr Liam O'Reilly, outlines what the Bank now wants to happen. "The credit institution will provide a self-assesment of the principal risks in the institutions which need to be controlled and provide a detailed description of its internal control and risk management systems," according to the letter.

Areas such as treasury and trading operations will receive particular attention as they were the site of the Allfirst fraud. A description document will be signed off by all the banks' directors.

The Central Bank will review the document and meet the institutions along with their independent advisers to decide what tests should be carried out to determine whether the controls are adequate and being enforced.

The independent advisers must be "well-recognised auditing or consultancy firms with the necessary experience and expertise to complete this exercise", according to the Bank. The external auditors of the various institutions will be acceptable.

The advisers will then prepare an independent report along the lines agreed with the Central Bank. "The report will indicate the performance of each institution against the criteria agreed with the Bank. The report may identify areas for further examination and will incorporate the action required to deal with any issues arising from the exercise," according to the Bank.

Some 42 banks, not including AIB, are being examined by the Central Bank. They will all be obliged to bear the cost associated with the exercise. Some institutions have already appointed an independent reporting party and produced description documents.

AIB instigated its own external review of its control process in the wake of an independent report into the Allfirst fraud by US banking expert Mr Eugene Ludwig.

The Central Bank is conducting an investigation into the fraud in co-operation with the US Federal Reserve Bank which is the regulator of Allfirst. AIB is also helping the FBI with its inquiries into the affair.