Operational Risk

3.1

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OPERATIONS RISK

Operations risk can be further subdivided into the risk of fraud, risk of nondeliberate incorrect information, disaster risk, and personnel risk.

3.1.1 The Risk of Fraud

The actual diversion of cash can take the form of creating unauthorized payments, conducting transactions at prices that are not the best available in
return for bribes, or utilizing ones position to engage in profitable personal
trading at the expense of the firms profits.
Deception about earnings, in order to generate unearned bonuses or further ones career (or simply avoid being fired), can take the form of recording trades at incorrect prices or misreporting the current value of positions.
Well encounter examples of such deceptions that occurred at Kidder Peabody, Barings, Allied Irish Bank (AIB), and Socit Gnrale in Section 4.1.
Section 4.1, covering financial disasters that were due to misleading reporting, should be read in conjunction with this section.
Deception about positions, in order to appear to be operating within
limits when an individual is actually outside them or to mislead management about the size of positions being taken, is done in order to preserve
freedom of actionavoiding requirements to close down positions. This
can be because a trader has a different belief about market movements than
management or a different view toward risk than management (the moral
hazard issue discussed in Section 2.1). Deception about positions can entail
the outright misreporting of positions through the failure to enter transactions (tickets in the drawer) or manipulation of management reporting, or
hiding positions by arranging for them to be temporarily held by another
party with an unrecorded promise to take the position back (parking).
Going back 30 years or so, the oral tradition within control functions
was to worry about position falsification primarily by traders simply not
entering some of their trades onto the firms books and records (tickets in
the drawer). This approach seems to be on the decline, presumably because
the possibility of the fraud being exposed through an inquiry from a counterparty to an unrecorded trade is too great. What seems to have replaced
it is the entry of fictitious trades designed either to offset the risk position
of actual trades, making the net risk look small, or to create bogus profit
and loss (P&L) to disguise actual earnings. Since fictitious trades lack a
real counterparty, they cannot be exposed through action of a counterparty
but can be uncovered only by internal controls. The creator of fraud is in
an ongoing battle with control personnelthe control personnel have the