Case Study 1: Barings Bank, PLC.
In February 1995, Nick Leeson, a “rogue” trader for Barings Bank, UK, single-handedly caused
the financial collapse of a bank that had been in existence for hundreds of years. In fact,
Barings had financed the Louisiana Purchase between the US and France in 1803. Leeson was
dealing in risky financial derivatives in the Singapore office of Barings. He was the lone trader
there and was betting heavily on options for both the Singapore (SIPEX) and Nikkei exchange
indexes. These are similar to the Dow Jones Industrial Average (DJIA) and the S&P500 indexes
here in the US.
In the early 90s, Barings decided to get into the expanding futures/options business in Asia.
They established a Tokyo office to begin trading on the Tokyo Exchange. Later, they would look
to open a Singapore office for trading on the SIMEX. Leeson requested to set up the accounting
and settlement functions there and direct trading floor operations (different from trading). The
London office granted his request and he went to Singapore in April 1992. Initially, he could
only execute trades on behalf of clients and the Tokyo office for "arbitrage" (Lesson 10)
purposes. After a good deal of success in this area, he was allowed to pursue an official trading
license on the SIMEX. He was then given some "discretion" in his executions, meaning; he could
place orders on his own (speculative, or "proprietary" trading).
Even after given the right to trade, Leeson still supervised accounting and settlements. There
was no direct oversight of his "book" and he even set up a "dummy" account in which to funnel
losing trades. So, as far as the London office of Barings was concerned, he was always making
money because they never saw the losses and rarely questioned his request for funds to cover
his "margin calls" (Lesson 3). He took on huge positions as the market seemed to "go his way."
He also "wrote" options, taking on huge risk (Lesson 10).
He was, in fact, perpetuating a "hoax" in his record-keeping to hide losses. He would set the
prices put into the accounting system and "cross-trade" between the legitimate, internal,
accounts and his fictitious "88888" account. He would also record trades that were never
executed on the Exchange.
In January 1995, a huge earthquake hit Japan, sending its financial markets reeling. The Nikkei
crashed, which adversely affected Leeson's position (remember, he had been selling options). It
was only then that he tried to hedge his positions, but it was too late. By late February, he faxed
a letter of resignation, and when his position was discovered, he had lost $1.4 billion USD.
Barings, the bank which financed the Louisiana Purchase between the US and France, became
insolvent and was sold to a competing bank for $1.00!
Case Study 2: Punjab National Bank
The Punjab National Bank (PNB) is a public sector bank and is majority-owned by the Indian
government. Founded in 1894, PNB is on e of the oldest commercial banks in the country but
recent fraud cases have tarnished its reputation. The bank made headlines in January 2018 when
Indian authorities said that a global jeweler, Nirav Modi, deceitfully obtained letters of
undertaking (LoUs), or bank guarantees, and then laundered the proceeds of the funds through a
complex set of worldwide transactions using shell or dummy companies. PNB guaranteed the
illegal trade-financing loans. Several bank officials were involved in maneuvering the SWIFT
interbank messaging system to get the letters through. The fake letters were issued over seven
years in exchange for kickbacks. By February 12, 2018, the Central Bureau of Investigation
(CBI) uncovered over US$1.6 billion involving LoUs. CBI revealed that from 2015 to 2017, the
RBI issued several circulars, notices and questionnaires to the bank but none were acknowledged
and no corrective measures were taken by the (then) management. As a result, in March 2019,
the bank had to pay US$2.67 million as a penalty for non-compliance with regulatory directions.
The RBI penalized several other public sector banks for similar violations.
What went wrong? PNB’s internal risk system failed at monitoring the fraudulent transactions
involving LoUs materialized by Modi, in collusion with certain low-rank officials. An internal
report by PNB found that 54 bank officials—from clerks, foreign exchange managers and
auditors to heads of regional offices—failed to prevent the fraud. Eight thereof have been
charged by the federal police for their roles.
