Both of these jobs effectively placed Leeson in the position of being in charge
of both the front- and back-office workings of BFS. Because of this and also
due to the complicated nature of Barings’ regular management structural
changes, it was unclear who Leeson was supposed to report to. In effect, he
had no day-to-day boss, apart from supervision that he was supposed to
receive from Barings in London.
Soon after arriving in Singapore, Leeson took the SIMEX traders’ exam, which
he passed. But he didn’t tell SIMEX that he had been turned away by the
Securities and Futures Authority in the UK when he applied to take the
traders’ exam there, due to his failure to report a judgment against him for
a personal debt. Barings knew about Leeson’s problem in the UK, but they
too failed to inform SIMEX.
What followed was fairly complicated. Leeson set up a false BFS account
and began making gambles in the SIMEX futures market (using monies from
subsidiaries’ accounts that were not supposed to be used) and racked up
considerable losses. But instead of reporting those losses as losses, Leeson
reported them as gains. This went on and eventually came to a head just after
the Kobe earthquake in Japan, which caused the Japanese markets to tumble.
Leeson had bet on a rapid recovery for the Nikkei, but this recovery didn’t
materialize. After it was over, Leeson’s losses amounted to $1.4 billion, twice
the amount of Barings’ trading book.
The day Leeson and his wife fled Singapore, his superiors had arrived at the
BFS offices and discovered the false account, but it was too late. The Bank of
England attempted a bailout of Barings, but did not succeed. Barings was a
230-year-old institution, the personal bank to Her Majesty the Queen. About a
week after Barings’ collapse, the Dutch group ING purchased Barings for £1.
Here are some of the lessons that can be learned from the Barings Bank
scandal:
Watch for warning signs. Leeson’s disqualification for the UK trader’s
exam should have raised an alert.
Don’t play favorites.Barings was impressed with Leeson’s successes
and thus didn’t alert SIMEX that Leeson had been disqualified from
taking the UK trader’s exam.
Alwayssegregate major responsibilities.This case was a segregation of
duties violation deluxe: Leeson was in charge of both back- and front-
office operations. Not only could he create bogus accounts, but he could
also move money into them and in turn report the losses as profits, all
with no oversight.
Lack of supervision. Management oversight is key. Leeson had no real
supervision; it was unclear who his boss was. Given today’s virtual
workforce, this lesson cannot be overemphasized.
110 Part II: Diving into GRC
