Report Suggests Soci??«t??« G??«n??«rale Bank Controls Subverted

A preliminary report indicates that the bank's huge losses were caused by a rogue trader's efforts to subvert controls and a lack of diligent supervision.

A preliminary report released Feb. 20 by three independent directors investigating the stunning $7.1 billion loss at Soci??«t??« G??«n??«rale found that rogue trader J??«r??me Kerviel began making unauthorized trades as early as 2005 and that the bank's internal controls failed to uncover his activities.

The report, commissioned by Soci??«t??« G??«n??«rale's board of directors and reviewed by auditors at PricewaterhouseCoopers, said Kerviel began making "bidirectional" trades in small amounts in 2005 and 2006, and in larger amounts in March 2007. By January 2008 Kerviel had exposed the bank to $73.5 billion's worth of risk, exceeding Soci??«t??« G??«n??«rale's market value.

The early report-a final version is expected May 27 at Soci??«t??« G??«n??«rale's annual shareholder meeting-suggests that on the whole the bank's controls were carried out according to appropriate procedures.

The report suggests that the failure to detect Kerviel's activities was due to several factors: the "efficiency and variety of concealment techniques" employed by Kerviel to hide the trades; the fact that the operating staff did not carry out more detailed checks on Kerviel's work, despite warnings; and the fact that certain controls that might have identified the fraud were not in place.

A Soci??«t??« G??«n??«rale spokesperson was not available at press time to determine whether the "controls" in place at the bank were homegrown initiatives or implemented through a third-party support provider.

Oracle, which provides Soci??«t??« G??«n??«rale's ERP (enterprise resource planning) software, has said in an e-mail to eWEEK that it does not provide GRC (governance, risk and compliance) software to the bank. GRC software is implemented to allow companies to discover fraudulent activities, among other functions.

Could GRC software have helped prevent the Soci??«t??« G??«n??«rale loss? Click here to read more.

The report also said there is no evidence to suggest that Kerviel worked with accomplices.

"At this stage of the investigation there is no evidence of embezzlement or internal or external complicity," the report said. The authors asserted that they were unable to interview everyone necessary to complete their full investigation because of an ongoing criminal investigation.