CONCLUSION: The Ludwig report confirms AIB group chief executive Mr Michael Buckley's initial assertion that it was the victim of a clever, devious and meticulously implemented fraud at its Allfirst subsidiary.
But it found this fraud was facilitated by "the weak control environment" at the US bank's treasury and the failure of senior executives at Group and Allfirst levels to "appreciate the risks" associated with Mr John Rusnak's style of trading.
"Even in the absence of any sign of fraudulent conduct, the mere scope of Mr Rusnak's trading activities and the size of the positions he was taking warranted a much closer risk-management," the report concluded.
The report instanced some missed opportunities for detecting the fraud:
on two occasions, March 2000 and May 2001, when information or suggestions about heavy volume trading at Allfirst was given to senior group executives;
when in February 2001 as the Group's 2000 accounts were being finalised, personnel in the financial reporting units of both Allfirst and AIB Group raised questions about the size of the cash flows required for Mr Rusnak's activities; and
a comment letter from the US Securities and Exchange Committee to Allfirst, which inquired into the cash flow related to foreign exchange activity.
While Mr Buckley initially asserted that controls up to the best international standards were in place at Allfirst, the report clearly shows those controls failed to operate. It outlined a shocking saga of a trader who got away with bullying back-office staff, who appeared to be able to trade without having to have his deals checked or supervised, who was able to cloak the size of his deals by trading through two significant prime brokerage accounts. It said Mr Rusnak's direct manager, Mr Robert Ray, and Allfirst treasurer Mr David Cronin failed to perform overall "reasonableness tests" on Mr Rusnak's activities. It referred to the "lack of attention to his activities".
Stating that the "procedures were there to prevent it", at the press conference to announce the fraud, Mr Buckley said the investigation would look at how these controls were overridden. What Mr Ludwig has told AIB is that management failure at Allfirst ensured the controls did not work and left the bank susceptible to fraud by a clever trader who had an "extraordinarily firm grasp of, and influence over, the bank's systems and procedures".
It pointed out the "enormous amount of trust" Mr Cronin placed in Mr Ray "which Mr Rusnak well understood" and how Mr Cronin and Mr Ray "tolerated instances of serious friction between Mr Rusnak and the back-office staff".
With the benefit of hindsight, the report said the AIB Group risk function should have had a greater role in supervising, monitoring and auditing trading activity at Allfirst, and that group committees should have received better information about the nature of proprietary trading at Allfirst.
The suggestion that the AIB Group Assets and Liabilities Committee should have been more proactive in dealing with those taking and controlling risk will be cool comfort now to AIB shareholders nursing a $691 million (€783 million) hole in the group accounts.
