Breakdown of Risk Controls at Barings Bank

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The collapse of Baring’s Bank in 1995 occurred principally as a result of huge losses that resulted from unauthorized derivatives trading activity by the head of the Singapore office, Nick Leeson.[1] The chain of events that led to the collapse of the bank could have been mitigated, if not entirely avoided, had management and/or the board of directors followed recommendations contained in internal reports that drew attention to the risks present in the highly leveraged trading program constructed by Nick Leeson, or by more thoroughly questioning the exorbitantly large profits being regularly reported by the relatively small Singapore office.

The Nick Leeson case must be considered a textbook example of the perils of concentrating unchecked power in the hands of a single individual, and serves as a backdrop for a discussion of the roles of ethics in the business world, and the role of the board of directors in ensuring that the interests of shareholders and other stakeholders are respected.

In this paper I will examine 3 things:
First, what legal actions could be taken against Nick Leeson, and against others implicated in this case, by whom, and explain how I would reach a decision on these actions. Second, I will examine the Nick Leeson case from an ethical perspective. I will undertake a discussion of this case against the backdrop of the most popular ethical framework (Utilitarianism), contrast this view with reference to Egoisim, and then outline what Nick Leeson ought to have done to act with more integrity. Finally, I will discuss what role the board of directors could and should have played in overseeing the operations of Barings. Legal Recourse and Action

Let us begin by first examining the legal implications and ramifications surrounding the peripheral players in the Baring’s Bank case. This includes the office staff in the Singapore office of Barings (beside Nick Leeson), the management team of Baring’s derivatives program located in London, and the compliance/risk management department employees of the bank. We will then examine the legal issues surrounding Nick Leeson himself.

Staff working in the Singapore office alongside Nick Leeson are likely to have witnessed some of his attempts to mask the true nature of his activities, and may have participated, knowingly or unknowingly, in furthering his illicit activities. This likely took the form of activities such as falsifying account documentation, transaction records, and compliance reports, all of which would constitute violations of securities regulations. Further investigation into participation of the office staff in furthering Leeson’s activities should be conducted. While the office staff cannot be expected to be familiar enough with derivatives trading that they could intervene on their own accord, they had a duty to inform management (beside Leeson) of any obviously questionable requests from Leeson. The decision to impose sanctions on the office staff should be based on evidence that individuals acted willingly and knowingly to further Leeson’s scheme, or were grossly negligent in informing their superiors about blatant fraud.

The management team of Barings derivatives trading group should be closely investigated in this matter. Specifically, managers in the derivatives trading group should be expected to have the knowledge and experience to properly monitor the derivatives trading operation being run by Nick Leeson in Singapore. By all accounts it seems that the Singapore office operated largely unchecked by managers from head office in London, and unchecked by Barings own internal compliance department. The report from the Bank of England into the Barings affair concluded that: Management failed to give due priority to their own internal auditors, who generally performed well but whose comments were ignored. Management failed to ensure that client trading and proprietary trading were separately controlled and accounted for, and properly...
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