Outsourcing fingered as UBS cops £30m fine
Rogue trader should have been spotted in outsourced report
The perils of outsourcing have again come under the spotlight after regulators investigating the $US2.3bn loss at Swiss bank UBS pointed to key risk management failings at a third party provider based in India.
The FSA and Swiss regulator FINMA launched a joint investigation into UBS in September 2011 after it came to light that rogue trader Kweku Adoboli had incurred huge losses because he was allowed to make unauthorised trades from the London office of the bank.
The FINMA report (via PTI) explains that the bank’s operations team was responsible “for ensuring the timely confirmation of trades with deferred settlement terms”. These trades were listed on the “T+14 report” maintained by an unnamed outsourcing provider.
The report goes on to reveal that one of the main ways Adoboli hid the true risk exposure of his activities was by generating fictitious trades with deferred settlement dates on the Exchange Traded Fund (ETF) desk where he worked.
It added the following damning conclusion:
Deferred settlement trades should have been identified on the T+14 report. However, this report was non-operational between May and November 2009, and from November 2010 to September 2011 shortly before discovery of the Loss)…
The purpose of the T+14 report was to identify deferred settlement trades, as these posed a greater risk to the Bank than trades settling within the usual T+3 cycle. The importance of this report was not understood. The report failed twice, for extended periods of time, and the second failure of the report went unnoticed by UBS for approximately 10 months.
Although the outsourcing provider is clearly not solely to blame for what happened at the bank, its failings are painted as contributing factor and will call to mind other recent high profile cases from the financial world.
Back in August, New York State Department of Financial Services accused Standard Chartered of hiding $US250bn worth of secret transactions with Iran.
In a damning report, it blamed the UK bank for outsourcing key OFAC compliance processes to Chennai “with no evidence of any oversight or communication between the Chennai and the New York offices".
HSBC also came under scrutiny earlier in the summer after a US probe found issues with its own “offshoring reviewers in India”, who failed to spot issues regarding compliance with money laundering rules. ®
Offshoring completed, bonuses paid, management moved on.
Ah, the joys of cost-saving!
Leesons have (not) been learnt
Q. What do Nick Leeson, Jérôme Kerviel and Kweku Adoboli have in common (apart from costing their employers billions of dollars)?
A. They all started in back office positions and then moved to trading desks.
This should be a huge red flag, warning that a close eye needs to be kept on their activities. They know how the management systems work and their weaknesses, and (frighteningly often) the privileges necessary to do their old job are not completely revoked.
I tell my clients in financial services that anyone looking to move from the back office into trading should be encouraged, but encouraged to change employers as well. It's harsh on people who might make excellent traders, but at least somewhere else they won't have the keys to the kingdom in their back pocket.
More like shoveling blame overseas, if the report wasn't missed for months on end, it looks like it was never read, just a tick item on the compliance list.