1.

Introduction:
Barings Bank, founded in 1762, was one of the oldest and most prestigious
financial institutions in the world. Over its 233-year history, the bank played a
significant role in financing international trade and supported major ventures.
It served elite clients, including British royalty, and had a sterling reputation for
stability and success. Despite its prestigious history, Barings Bank's downfall
in 1995 was both sudden and dramatic, triggered by the unauthorized
speculative trading of Nick Leeson, a trader based in its Singapore office.
The collapse of Barings Bank
● In February 1995, Barings Bank collapsed after it was revealed that
Leeson’s speculative trades had led to losses of more than £827
million. The losses wiped out the bank’s capital, leading to its
bankruptcy. Barings Bank, which had survived for over 230 years, was
sold to Dutch bank ING for just £1.
● The collapse of Barings sent shockwaves through the financial world,
as it was seen as a failure of risk management and internal controls at
a prestigious institution.
Criminal Charges Against Nick Leeson
● Nick Leeson was arrested and charged with fraud for his role in the
collapse of Barings Bank. In 1996, he was sentenced to six and a half
years in a Singapore prison for forgery and financial crimes. Leeson
later wrote a book, “Rogue Trader”, which detailed his actions and the
failure of Barings' internal controls.
Job Losses and Impact on Employees
● The collapse of Barings Bank led to widespread job losses, with
employees losing their jobs as the bank was liquidated. Many
employees had no knowledge of Leeson’s activities but suffered the
consequences of the bank’s failure.
Reputational Damage
● Barings’ collapse severely damaged the reputation of the UK financial
system. The bank, which had served royalty and major corporations,
became a symbol of the dangers of weak internal controls and poor
governance.
Impact on Financial Markets
 ● The collapse of Barings Bank contributed to volatility in global financial
markets, particularly in Asia, where Leeson’s trades were
concentrated. It raised concerns about the stability of financial
institutions and led to calls for stricter regulations and better risk
management practices across the banking industry.

2. Internal control issues:

2.1. Lack of Segregation of Duties
● One of the most critical internal control failures at Barings Bank was
the lack of segregation of duties. Nick Leeson was responsible for
both trading and settling his trades, this dual role gave him unchecked
power and the ability to manipulate the bank's records, allowing him to
hide massive unauthorized trading positions.
● In a well-controlled financial system, the roles of trading and settlement
are typically segregated, ensuring that no single individual can perform
conflicting duties. This oversight would prevent one person from
covering up or manipulating financial results, as an independent team
would be tasked with reconciliation and review. Leeson took advantage
of this flaw, particularly by exploiting his ability to report false
information to management without independent verification. As a
result, his speculative positions and accumulating losses went
unnoticed, putting Barings at immense financial risk.

2.2. Inadequate Oversight and Supervision

● Barings Bank also suffered from inadequate oversight and
supervision. Senior management failed to properly monitor
Leeson’s trading activities, allowing him to take on outsized positions
without sufficient scrutiny. Despite the massive scale of Leeson’s
trades, no formal inquiries or investigations were conducted to
understand whether his positions aligned with the bank’s risk appetite.
This neglect can be attributed to a culture of over-reliance on a single
individual, where Leeson was trusted to manage risk responsibly
without direct oversight from higher-ups in the organization.
 ● The management at Barings leaned heavily on Leeson’s
reassurances, and even when inconsistencies or red flags arose—
such as unusually high profits followed by unexplained losses—they
failed to act appropriately. These failures in oversight were
exacerbated by the bank's decentralization, where the Singapore
office operated with considerable autonomy. This lack of
communication between offices further isolated Leeson’s activities and
allowed him to conceal growing risks. Typically, management should
have had a more active role in reviewing large, unusual transactions
and questioning discrepancies that emerged in financial reports. Their
failure to take such actions provided Leeson with a free hand to
continue his speculative trading unchecked.

2.3. Poor Risk Management Systems

● Barings Bank's risk management systems were severely lacking,
contributing to Leeson’s ability to operate without adequate restrictions.
A robust risk management system would have helped the bank detect
and mitigate unauthorized risk-taking. However, Barings did not have
comprehensive risk controls in place to limit Leeson’s exposure to the
volatile Japanese derivatives market. The absence of key risk
management tools, such as position limits, stress testing, and real-time
monitoring of trading activities, allowed Leeson to accumulate massive
unauthorized trading positions that went unchecked for years.
● Leeson’s ability to avoid detection was also facilitated by Barings’
inadequate use of reporting systems to track and evaluate market
risks. Risk management functions within the bank were poorly
resourced, and there were no independent mechanisms to verify that
risk exposure stayed within acceptable boundaries. Without such
systems in place, Leeson was able to manipulate trade records and
hide losses in error accounts, further compounding the problem.

3. Analysis of internal control weaknesses:

There are 3 main internal control weaknesses that contributed to the collapse
of Barings Bank in 1995, namely:
- Lack of segregation of duties
- Inadequate supervision and oversight
- Failure to monitor risk exposure
3.1. Lack of segregation of duties:
3.1.1. Nick Leeson’s dual roles:
Nick Leeson held dual responsibilities at Barings Bank in Singapore:
● Front Office (Trading): Leeson was the head derivatives trader. In this
role, he executed trades on behalf of clients and the bank, mostly in
futures and options contracts.
● Back Office (Settlement and accounting): Leeson also had oversight
of the back-office functions that involved the settlement, reconciliation,
and reporting of trades, which should have been completely
independent of his trading activities.
This combination of responsibilities violated the principle of segregation of
duties and gave Leeson an unprecedented level of autonomy and control,
allowing him to conceal unauthorized and speculative trading activities.
3.1.2. Contributing factors:
● Overtrust in Leeson: Barings placed enormous trust in Leeson,
largely due to his initial success in generating profits. His authority went
unchecked, and senior management failed to ask probing questions
about the riskiness of his trades. There was little questioning of the
overall structure that allowed such concentration of power in a single
individual.
● Weak governance structure: Barings' governance was weak. Senior
management failed to establish or enforce adequate controls that
would prevent one person from holding such pivotal roles. For
example, it was noted that senior management’s response to the
recommendation of placing a suitable experienced person to run the
back office was that there was not sufficient work for a full-time
treasury and risk manager even if compliance duties were incorporated
into the function. Even if the reason cited was accurate, given the high
profitability of the Singapore unit together with the nature of the
products being traded, derivatives, senior management’s approach
should have been guided by the principle of implementing controls
 sufficient to mitigate and manage the risk consistent with the bank’s
risk appetite.
● Failure of external auditors: Barings’ external auditors did not identify
the lack of segregation of duties as a key issue during their reviews.
Auditors are expected to flag major breaches of internal controls, but in
this case, they failed to detect the significant risk posed by Leeson’s
dual role.
3.1.3. Impact of the lack of segregation of duties:
The absence of separation between the front-office and back-office
responsibilities created a significant control deficiency with the following
impacts:
● Lack of independent checks: Normally, the back office is responsible
for verifying trades made by the front office, ensuring that transactions
are accurately recorded and that any discrepancies are promptly
flagged. With Leeson overseeing both roles, no independent checks
were performed. He was able to manipulate records, falsify entries, and
hide massive losses in a special error account (Account 88888), which
went undetected for a prolonged period.
● Falsified records: Leeson exploited his control over both functions to
fabricate reports and hide his increasingly risky positions. He recorded
fictitious trades, exaggerated profits, and disguised real losses by
shifting them between accounts, which allowed him to continue taking
speculative positions without being challenged. Between January 1993
and December 1995, the reported profit on trading activities was
represented to be approximately GBP 54 million. However, results of
the investigation that followed the collapse showed the same period
actually produced a loss of over GBP 827 million.
● Delayed detection of fraud: Because the back office had no
independence from the front office, internal audits and financial reports
were misleading. Senior management and internal auditors did not
detect the growing financial exposure. They relied on inaccurate
reports generated under Leeson’s control, trusting the integrity of the
data without realizing it was being manipulated.
 ● Increased risk appetite: The lack of oversight enabled Leeson to take
on larger, unauthorized risks in an attempt to recover previous losses.
With no one cross-checking his trades and exposures, Leeson
escalated his speculative trading in the Nikkei index futures and
options markets. His access to both functions allowed him to maintain
the appearance of profitability, while his real losses mounted to over
£800 million.
3.2. Inadequate supervision and oversight:
3.2.1. Senior management’s negligence:
Despite the critical role of effective monitoring and remedial measures in
maintaining the stability of a financial institution, Barings Bank’s management
failed to uphold these essential practices. The collapse of the bank can be
attributed, in part, to inadequate monitoring of its internal control system,
namely:
● Lack of skepticism from management, until it was too late, of the
apparent high levels of profits being generated out of the authorised,
but supposedly low-risk, arbitrage activity conducted by Leeson. At one
point, the Singapore operation accounted for 60% of the worldwide
revenue from derivatives operations.
● Lack of question and limitation from Barings management on the
funding requirements of the Singapore operation, which rose
dramatically towards the end of February 1995. They were twice the
size of the Barings Group capital just before the collapse.
● Inaction upon receiving warnings from internal auditors. It was
reported that Barings internal audit team raised concerns to senior
management that the control of both the front and back offices was an
excessive concentration of power, noting that there is a significant risk
for override of controls. Management, despite indicating that the
practice would cease immediately, failed to follow through on that
promise.
3.2.2. Contributing factors:
● Matrix-based reporting system: As Leeson reported through various
management lines, the responsibility for overseeing his trading
 activities was ambiguous. There appeared to be no one ultimately in
charge of monitoring the Singapore operation.
● Poor communication between London and Singapore: Barings had
a decentralized structure where Leeson operated out of Singapore, far
from the bank’s London headquarters. This physical and operational
separation meant that senior managers had little visibility into Leeson’s
daily activities. Communication between Singapore and London was
informal and inadequate, making it easy for Leeson to hide the full
extent of his activities.
● Senior management’s lack of knowledge: The management of
Barings Bank appeared to lack basic understanding of risk and return.
Simple arbitrage of furtures contract, the approved strategy for the
branch, was regarded as low-risk and therefore should only produce
moderate profits. However, as reported by Leeson, they were very
high. Even so, given the profitability of the Singapore operation and the
nature of the products being traded (derivatives), senior management
should have implemented sufficient controls to mitigate risks to an
acceptable level.
● Organizational culture encouraging overconfidence: Barings Bank
had a culture that prioritized profitability over prudent risk management.
Leeson was seen as a “star trader” because of the profits he was
generating, which led management to overlook the potential risks of his
trading strategies. There was an implicit encouragement of high-risk
behavior, as long as it resulted in short-term gains.
3.2.3. Impact of inadequate supervision and oversight:
● Unchecked risk-taking and speculative trading: Due to inadequate
supervision, Nick Leeson was able to engage in unauthorized
speculative trading activities, primarily in futures and options on the
Nikkei 225 index. Without proper oversight, he repeatedly violated the
bank’s risk tolerance by taking larger, riskier positions in an attempt to
recover losses.
● Late detection of losses: By the time Barings Bank became aware of
the true extent of Leeson’s trading activities, the losses had ballooned
to over £800 million. This financial hole was too large for the bank to
 cover, leading to its insolvency and subsequent acquisition by ING for
a nominal amount of £1.
● Damage to the careers of responsible executives: Several senior
executives at Barings faced personal and professional consequences.
Many resigned or were dismissed following the collapse, and their
reputations were irreparably damaged. While they may not have
directly participated in Leeson’s activities, their failure to supervise and
manage him adequately led to their downfall.
3.3. Failure to monitor risk exposure:
3.3.1. The weaknesses in managing risks of Barings Bank:
● Absence of independent risk management: A fundamental flaw in
Barings Bank’s structure was the lack of an independent risk
management function. Typically, an independent risk management
department is responsible for monitoring the positions traders take,
ensuring compliance with the bank’s risk appetite, and alerting
management to potential risks. Without an independent risk
management department to oversee his activities, Leeson was able to
manipulate records, conceal losses, and take increasingly large
positions without being questioned.
● Failure to set and enforce risk limits: Leeson was not subject to any
formal trading limits. Typically, a bank would impose strict limits on how
large a position a trader could take in a particular market to avoid
excessive exposure to a single asset or strategy. In Leeson’s case,
there were no such controls in place, allowing him to take massive
positions in the Nikkei futures and options markets without
management intervention.
● Senior management’s lack of awareness and engagement: Senior
executives at Barings Bank did not take an active role in understanding
the risk profile of the bank’s operations, particularly Leeson’s trading
activities in Singapore. They did not conduct regular reviews of the
bank’s risk exposure or require detailed reports on the size and scope
of Leeson’s trading activities. This hands-off approach allowed Leeson
to operate with no oversight from the top levels of the organization.
3.3.2. Contributing factors:
 ● Incentive misalignment: The bank’s reward structure incentivized
high-risk, high-reward behavior. Leeson was rewarded for generating
short-term profits without sufficient regard for the risks he was taking.
This lack of alignment between risk and reward created a culture where
traders were encouraged to take excessive risks, knowing that they
would be rewarded for profits without being held accountable for
potential losses.
● Lack of knowledge about best risk management practices from
senior management: Given the autonomy entitled to Leeson and the
high-risk nature of derivatives trading, it is fair to assume that an
independent risk management function should have been established
to control the risks taken by the Singapore operation. However, the
senior management of Barings Bank appeared to be deficient of this
common knowledge.
● Underinvestment in risk expertise: Barings Bank underinvested in
recruiting and developing professionals with expertise in risk
management, particularly in the fast-growing area of derivatives. In an
era of rapid financial innovation, Barings failed to keep pace with
industry best practices by hiring experienced risk managers who could
identify potential problems early.
3.3.3. Impact of the failure to monitor risk exposure:
● Accumulation of massive losses and bank collapse: Leeson, through
unauthorized and risky trades, incurred losses amounting to £827 million ($1.3 billion
USD), far exceeding the capital reserves of Barings Bank. These losses were hidden
and compounded over time, leading to the eventual insolvency of the institution. This
marked the end of a 233-year-old financial institution, which was ultimately sold to
the Dutch bank ING for a symbolic £1.
● Tightened regulatory frameworks: The collapse led to significant regulatory
reforms aimed at preventing similar events from occurring. Financial regulators
worldwide tightened requirements for risk management, internal controls, and capital
adequacy. Authorities introduced more stringent measures to ensure that financial
institutions maintained independent risk management teams and could monitor and
report exposure accurately.
 ● Impact on risk management practices in the industry: Barings’ failure
highlighted the dangers of inadequate risk monitoring, leading banks and financial
institutions to place greater emphasis on their risk management practices. This
included implementing independent risk oversight functions, where risk managers
report directly to senior leadership, ensuring more robust internal controls, and
setting stricter risk limits for traders. The financial industry began shifting towards a
more risk-aware culture, balancing profitability with long-term sustainability and risk
mitigation.

4. Solutions to Overcome Internal Control Deficiencies at Barings Bank &

Conditions for Implementing Solutions

Deficiency Solution Conditions for

Implementing Solutions

Lack of Segregation of Establish strict Enforce the segregation

Duties segregation of duties of duties policy as
between the front office taught in the COSO
(trading) and the back framework in your
office (settlement, materials. Use separate
reconciliation, accounting) staff with distinct
functions in all offices, reporting lines in all
particularly in Singapore. trading offices, ensuring
Leeson should not have that no single person can
been allowed to handle handle both trading and
both settlement activities
without oversight

Centralize back-office Implement centralized

operations in London to controls for reconciliation
ensure better control over and reporting functions.
settlements and London must monitor
reconciliation from smaller all trades and
offices like Singapore. By settlements directly,
having the back office rather than allowing
report directly to the autonomy in satellite
headquarters, Barings offices. This ensures
could have avoided the consistent application of
risk of local internal control principles
concealment of trading across all locations
activities

Conduct regular internal Require regular external

audits of all offices, and internal audits of
 particularly in high-risk operations with
environments like emphasis on trading
derivatives trading. activities, as emphasized
Internal audits should in your materials. The
directly report to senior audit department should
management in London be independent from the
trading operations, with
the authority to flag
discrepancies
immediately to the board

Inadequate Supervision Strengthen the role of Enhance senior

and Oversight senior management in management’s active
overseeing trading involvement in risk
operations, requiring monitoring by mandating
weekly risk and trading regular reviews of
reports to be submitted trading positions,
directly to the head office ensuring that all risky
in London for review. positions are
Senior management must scrutinized. Management
hold traders accountable should demand full
for explaining deviations transparency of all
from normal trading trading activities, as
patterns required by the internal
control principles

Assign an independent Establish clear

risk officer in each reporting structures
satellite office, including between local offices
Singapore, with direct and the central risk
reporting lines to the management
London risk management department. All local risk
team. This would ensure officers should bypass the
that all trades are traders and report directly
monitored in real-time to the London office,
without reliance on local ensuring that risks are
management controlled from the center,
as discussed in the
materials

Implement direct lines Foster continuous

of communication communication and
between satellite offices oversight between
and the headquarters, satellite offices and
requiring daily headquarters, as
reconciliation of accounts emphasized in the control
and review of trading environment principles.
positions. This would Regular reporting and
minimize the delay in communication systems
identifying unauthorized should be implemented to
 trades detect any abnormal
trading behavior

Failure to Monitor Risk Establish an Hire experienced risk

Exposure independent risk professionals: Barings
management department must recruit risk
at Barings Bank that managers with
reports directly to senior specialized knowledge in
management in London, derivatives markets. This
independent of trading department should
operations. This operate separately from
department must monitor the front office to provide
all trades and positions in unbiased monitoring and
real-time to ensure reporting of risk exposure.
compliance with risk limits The team should report
directly to the board or the
head of risk

Set and enforce strict Develop risk limit

risk limits for all traders, policies: Risk limits
including Leeson. These should be formalized
limits should be based on based on market
Barings Bank’s overall conditions, asset types,
risk appetite and must be and overall risk tolerance.
monitored daily. Any Training must be provided
breaches should to traders and risk
automatically trigger an managers on these limits,
intervention by senior risk and there should be a
managers clear penalty structure for
breaches, such as
immediate position
reviews or halting trades

Implement real-time risk Invest in real-time risk

monitoring systems to management
track all trading positions technology: Barings
and automatically flag Bank must implement
when traders exceed pre- advanced risk monitoring
set risk limits. These software that provides
systems should be used continuous data on
by both the local office traders’ positions. The
(e.g., Singapore) and system should alert senior
London’s senior risk management if limits are
management team for breached. Additionally,
daily reviews senior management must
conduct daily reviews of
key market exposures to
ensure alignment with
Barings’ risk policies

Improve communication Standardize reporting

between the local protocols: Ensure daily
offices and risk reports are sent to
headquarters by senior risk managers in
requiring daily risk reports London. These reports
to be submitted to senior should highlight any risk
management in London. exposures, particularly in
These reports should derivatives markets, and
detail all open positions, must be reviewed in real-
exposure limits, and risks time by risk management
associated with each to detect potential issues
trading strategy early. Communication
channels between
traders, local risk teams,
and headquarters should
be formalized and
transparent

Require regular external Strengthen the external

audits of the bank’s risk audit framework: Barings
management practices should require annual
to ensure that Barings external audits of its risk
Bank’s risk exposure management practices,
aligns with its stated risk with a particular focus on
appetite. External auditors areas like derivatives
should focus on reviewing trading. Auditors should
derivatives trading, where provide an independent
risk exposure is typically review of risk exposure,
high trading limits, and overall
compliance with internal
risk policies, ensuring
external validation of
internal controls

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