The mechanics of fraud at Allied Irish

THE fraud at Allied Irish Banks' US subsidiary took place over at least a year and involved thousands of foreign exchange tradees. Under international regulations, banks are obliged to take out options whenever they carry out foreign exchange deals. These options hedge banks against the risk of the underlying deals. Hedging is not perfect but it insulates banks against major foreign exchange losses.

John Resnick, a middle ranking dealer at AIB's Allfirst business, pretended to hedge his deals with options but all the option contracts were fictitious. The contracts were entered into Allfirst's systems as if they existed, but they did not.

Allfirst management first became concerned last month when Resnick began asking for cash from central controls. An internal investigation was set up and Resnick was repeatedly questioned. AIB's board was informed only on Monday evening and is still trying to piece together what happened and why.

The bank has lost $750m (£530m) but it is unclear who has gained. There is, however, a strong belief within the bank that Resnick was working with other people, either fellow employees or outsiders.