The encyclopedia · Trading & Investing · Financial decision · 1997–2002
Allied Irish Bank lost $691M when a single trader invented fake forex options
John Rusnak hid $691M in losses at AIB's US subsidiary for five years. The bank was forced to sell the subsidiary and cut 1,100 jobs.
Allied Irish Bank · 2002-02-04
What happened
John Rusnak was a foreign exchange trader at Allfirst Financial, the US subsidiary of Allied Irish Bank (AIB). He joined the company in 1993 and began working as a proprietary forex trader in 1997. Over the next five years, he accumulated $691 million in trading losses by making unauthorized bets on currency movements and inventing fictitious options trades to conceal the damage.
Rusnak's scheme exploited weak oversight at Allfirst. He entered false trades into the bank's systems to create the appearance of hedged, low-risk positions. In reality, he was making directional bets on the Japanese yen and other currencies. When the bets went wrong, he fabricated new fictitious trades to cover the losses, creating a cycle that grew larger each year.
The fraud was discovered in February 2002 when a routine reconciliation flagged discrepancies. AIB announced the loss on February 4, 2002, revealing that Allfirst had lost $691 million. The revelation shocked the Irish banking sector and damaged AIB's reputation. Rusnak was arrested and charged with bank fraud.
In July 2003, AIB sold Allfirst to M&T Bank of Buffalo, New York, retaining a 23% stake. Over 1,100 Allfirst employees lost their jobs in the sale. Rusnak pleaded guilty to bank fraud in January 2003 and was sentenced to 7.5 years in prison. He was released from home confinement in January 2009 and began making monthly restitution payments of $1,000.
Why it happened
- Rusnak exploited weak internal controls at Allfirst, entering fictitious options trades into the bank's systems to create the appearance of hedged positions while placing directional bets on the yen.
- The bank's risk management failed to verify the existence of the hedges Rusnak claimed to hold. For five years, no one checked whether the offsetting trades actually existed.
- AIB's oversight of its US subsidiary was insufficient. The parent bank relied on Allfirst's local management, who had limited trading expertise and did not understand the forex positions.
The lesson
A bank that accepts its trader's marks without independently verifying the hedging positions has no risk management at all — the fiction is indistinguishable from a real trade until it is too late.
Sources
- John Rusnak — Wikipedia
- CNN — AIB lost $691M from unauthorized trading: John Rusnak details (Feb 2002; Allfirst subsidiary; 5-year scheme; fictitious options trading)
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