Allied Irish Bank suffered Ireland's largest banking scandal due to fraudulent currency trading by rogue trader John Rusnak, causing losses of around $691 million. Rusnak accrued losses through non-existent options trades and used fake broker confirmations to hide unrecorded liabilities, but his fraudulent activities were discovered in early 2002 when the back office could not confirm his purported Asian trades and Rusnak stopped coming to work.

1. Allied Irish Bank 1
Derivatives

2. February 6, 2002
• AIB revealed an apparent currency fraud.
• Have to be commited by John Rusnak.
• Ireland’s largest and World’s fourth largest banking scandal.
• Losses around $691 million.
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Introduction

3. • Failure of the back office to obtain transactions confirmations
consistently.
• To recoup money which Rusnak had lost, sometime in 1997
• Weak control environment at Allfirst’s treasury.
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Reasons of the scandal

4. • AIB rogue trader had accrued losses by writing non existent
options.
• Started to sell Deep-in-the-money options for high
premiums.
• Racked up huge unrecorded liabilities for the bank.
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Events Occured

5. • Rusnak's technique was to enter two bogus options trades
into Allfirst's trading system.
• Resulted in the creation of fake assets, offsetting certain real
losing position in forex market.
• Upto Sep 1998, fictitious deals were validated by the help of
bogus broker confirmations.
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6. • Rusnak persuade the Allfirst back office option pairs do not
need to be confirmed.
• Loss-making trading was carried out under prime brokerage
accounts with Bank of America (BofA) and Citibank.
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7. • Settled with the broker and rolled into a forward transaction
• Swapped each day into a forward forex trade between Allfirst
and its prime broker.
• Accounts enabled Rusnak to increase significantly the size
and scope of his real trading.
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8. • Made the prime brokers the back office for those trades.
• Rusnak's trading grew, as did his losses - and so did his bogus
options positions.
• In 2000, it became clear that Rusnak's trading was using an
inordinately large proportion of the balance sheet.
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9. • In January 2001, head of treasury funds management Robert
Ray ordered him to scale back his use of the balance sheet.
• This left Rusnak in need of an alternative source of funds
• From February 2001, he turned to selling year-long, deep-in-
the-money options - real ones
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10. • Allfirst's true trading position was finally uncovered
• A back-office supervisor discovered that the supposedly
offsetting options deals were not being properly confirmed.
• The supervisor directed the back-office employee involved to
confirm all future similar trades.
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11. • Allfirst's back-office staff were unable to confirm his trades
with his supposed counterparties in Asia.
• Rusnak failed to appear for work on Monday, February 4
• Cronin reported the problems to Allfirst's senior
management.
• They, in turn, informed AIB in Dublin.
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