Engineers break into Investment Banking (IB)

[Andy Nguyen]

Most people with access to books and records are, by policy, required to take two weeks off with limited access to systems. Many instances of fraud have been detected during these vacation periods.

Just came across a WSJ article that discusses this exact rule. Interesting read.

'A trader who doesn't take vacation is a trader who doesn't want to let anyone else look at his book.'

A case in point was rogue trader Jerome Kerviel, who was finally caught in early 2008 after running up losses of nearly €5 billion ($7.2 billion at the time) at the French bank Société Générale. He told investigators that "the simple fact that I didn't take days off in 2007 should have alerted the management. It is one of the primary rules of internal control: A trader who doesn't take vacation is a trader who doesn't want to let anyone else look at his book."

Mr. Kerviel had in fact taken four days off in 2007, but his point was a good one. Anyone clinging too desperately to his desk rather than taking his allotted holiday should be marched off to the examiners' office.

The Federal Deposit Insurance Corp. has recommended for many years that commercial banks introduce mandatory, two-week vacations for employees as a safeguard against fraud. It states in its Manual for Examination Policies that "perpetration of an embezzlement of any substantial size usually requires the constant presence of the embezzler in order to manipulate records, respond to inquiries from customers or other employees, and otherwise prevent detection." During each employee's absence, his or her duties should be taken over by a colleague who can check on them.

This wise idea has since spread to investment banks and their trading desks. Following the Kerviel case, Europe's banking authorities recommended that banks require their traders to take two-week holidays, during which their colleagues would take over their books and ensure everything was correct.

The Securities and Exchange Commission issued a statement in February saying that it, too, supported the two-week vacation idea. The agency added that traders' books should be handed over to other, equally experienced traders who could spot any curiosities. Moreover, the process would only work if the traders on holiday were limited or blocked entirely from accessing their books remotely. In our Internet age, simply being away from the office isn't enough.

Most of the major banks have followed the advice of the European regulators and the SEC, extending what was recently a week of mandatory leave to two. It used to be that a week was enough to riffle through a trader's desk and computer files. The growing sophistication of trading and the sheer variety of tradable products means it takes longer to conduct each review.