The Allied Irish Bank Scandal

In 2004, ten of the bank’s top officers were discovered to have invested over $920,000 in offshore accounts and used the bank to hide the money for tax evasion purposes. The stock of the bank declined severely, causing great losses for personal investors, including many pension funds. The rogue trader went to jail, and the bank officers still employed resigned. In 1999, the Allied Irish Bank expanded its operations into the United States by merging two of its previous acquisitions, Maryland Bancorp and Dauphin Deposit Corporation, and creating Allfirst Bank. With Maryland Bancorp, AIB inherited one employee of seven years named John Rusnak, a foreign exchange trader who had formerly worked for the Chemical Bank of New York. Rusnak was an unassuming, married, father of two in his thirties, living in the Baltimore suburbs. In 2001, Rusnak was promoted to managing director in charge of foreign exchange trading, in the global trading section of the treasury funds management section. Although the title and responsibility were impressive, in physical terms Rusnak was the senior man of a two-man department in the outer regions Baltimore office; with a great dealof independence and very little direct supervision from the home office or the auditing department in his branch.

Although Rusnak used a great deal of complex technical jargon about formulas and options to impress superiors and underlings alike in describing his actions, basically he used the bank’s money to buy Japanese yen and lost a fortune when the value of the currency dropped drastically and continually. He started losing money and lying about it in 1997, gained ground in 1999, and then started losing again. This is when he made the classic mistake of gamblers and investors who are losing frightening amounts of money. He continued gambling on the yen, increasing his bets, vainly hoping that eventual winnings would enable him to break even. His losses-actually the bank’s losses-grew to a phenomenal size. Rusnak hid his losses by logging fraudulent gains into his computer that canceled out his bad investments, then making fake paper receipts and letters from the Asian banks he worked with. He was able to fool the bank’s computer because he would enter two options simultaneously for the same amount, one paying and one receiving, but the paying option would expire that day and the receipt would live a long life. No one checked why so many options would have a one-day half-life. Because of the time zone difference, no one in Allfirst Bank phoned the Asian banks in the middle of the night, so Rusnak was able to lie successfully during the day. He convinced the small department of auditors at the Baltimore branch who were supposed to check on his dealings that all was well. On paper, Rusnak appeared to be a brilliant investor, and he was given hefty annual bonuses based on the bogus gains of his currency speculation. The lack of discipline by the local auditors working with Rusnak, who took the numbers from Rusnak’s own computer to determine his cost-to-risk ratio, compounded with the distance and lack of communication with the home office in Ireland, worked to Rusnak’s advantage. They took him at his word and did not check the paperwork.