£530m fraud at Allied Irish Banks

A ROGUE trader is being hunted by the FBI after carrying out a £530m fraud. Middle-ranking executive John Rusnak, described by colleagues as a typical 'Mr Middle America', has gone on the run after pulling off the fraud at Ireland's biggest bank.

The FBI was called in after 860m euros went missing from the main American subsidiary of Allied Irish Banks (AIB). The bank moved immediately to reassure the City and its customers that its future was secure despite the loss, which triggered memories of Nick Leeson and the collapse of Barings Bank.

But news of the scam triggered a sell-off in AIB shares. They fell more than 17% in London, wiping around £1.2bn from the bank's market value.

Rusnak, who disappeared on Sunday, is described as a church going father-of-two and a pillar of his local community in Baltimore, Maryland. Earning about £70,000 a year, he had worked for seven years in the foreign exchange division at Allfirst Financial Inc's headquarters at Baltimore, one of the 50 largest banks in the US.

Fellow workers described Rusnak, in his early forties, as a 'normal, regular guy' and said they never suspected he was perpetrating such a huge fraud.

A bank source said: 'You could call him Mr Middle America. He is on the school board, he lives a very unostentatious lifestyle. This has come as a big surprise.' A number of other senior executives at the bank, including the executive vice-president treasurer, who is Irish, have been suspended during investigations by the bank and the FBI. The other suspended employees are American.

The bogus trades date back to early 2001 and include one shortly after Christmas. On Sunday morning, senior executives contacted him and gave him until nightfall to explain himself. He promised to call them back but instead left town. He took his wife and children who returned home last night but are alleged to have dropped him off along the way. AIB's director for finance and risk, Gary Kennedy, said 'alarm bells went off' when Rusnak didn't return calls on Sunday night, then failed to arrive for work on Monday. It emerged today that Allied executives held off phoning their Dublin bosses with the bad news until Monday night.

The fraud was extremely sophisticated and involved thousands of foreign exchange trades carried out over at least the past year involving betting on which way currencies would move, and special options should have been taken out to hedge the bets. Rusnak pretended to take out the options but failed to do so, effectively leaving his bank vulnerable to currency movements.

Over the 12 months he managed to lose £530m, but the bank is still not sure why he did it or who benefited and to what extent. It is, however, likely that fellow employees or outsiders were involved.

In Dublin today, Michael Buckley, AIB's chief executive, said: 'It's a very heavy blow to the bank. This was a complex and a very determined fraud. We will be writing off the money in our 2001 accounts.

'An investigation identified one trader as being at the centre of this and last weekend, as the net was closing in on the trader, he went missing and did not turn up to work on Monday morning. We called in the FBI and sent a special investigation team out from Dublin to take responsibility on a day-to-day basis for Allfirst. We have suspended a number of people in direct line above the trader involved but that does not mean we suspect any complicity on their part. But it is good practice in this situation.'

Buckley denied the embarrassment at the bank - which, although Irish-based, handles hundreds of millions of pounds of mortgage business in Britain - mirrored the Leeson affair. He said the bank would write the money off and continue to trade.

'What Nick Leeson did was cause terminal damage to Barings,' he said. 'But an important point I want to make is that even when we write off that £530m, we will be making a profit after tax for 2001 of £245m. Our total capital base to support the business will be £4.1bn. This is a heavy blow to the bank but it is by no means fatal and business will continue as usual as far as customers and staff are concerned.'

Allfirst Financial is just one of the foreign interests of Allied Irish Bank. With 31,000 staff in more than 1,000 offices worldwide, AIB is just ahead of its main rival, Bank of Ireland, as the largest Irish group in that sector. AIB is also quoted on the New York and Dublin stock exchanges and has close to 100,000 shareholders.

Buckley said Rusnak is thought still to be in the Baltimore area and there were 'indications' of possible collusion with 'either somebody else within the organisation or with some external parties. 'The investigation into how this happened is still going on,' he said. 'We have concentrated so far on discovering how much money is involved. That was our first responsibility - then to notify our shareholders and the markets as soon as possible, which is what we have done.'

He admitted that it was 'alarming' that Rusnak's superiors had not known what he had been doing. 'The nature of this fraud was very complex. We have a very adequate series of checks and balances. But someone who is determined and very expert and in a position to overcome that system can do it.' He said the trader had been 'using artificially created trades to offset losses he had been making on real trades'.

Buckley added: 'My job now is to try to rebuild the damage that has been done. We have no fears about our controls situation in any other part of our treasury operation. Where it hurts is in the profits we would be reporting for 2001.'

The mechanics of fraud at Allied Irish

The rogues gallery