Tuesday, January 29, 2008

How to catch Kerviel

I know nothing about finance and my sole knowledge of the Kerviel case is based on this excellent article.

I am now going to shout my mouth off about how this fraud could have been avoided.

1. The bank broke rule one of fraud detection. “He never took holidays and when he left the office he refused to let other traders take over his positions". Everyone must take their holidays.

2.“Every two or three days he was changing his position. He would input a transaction that would trigger a control in three days and before that happened he would replace it with a different one.” These sorts of checks need to be randomised. If the checks are this deterministic they can be easily circumvented.

3. Benford's law. I bet a shiny Euro coin that Kerviel straight made up some of the data he entered into the company system. I double that bet that this fake data he entered looks entirely random. And thus if this data was checked to see if it obeyed Benford's law it would have been detected as fraudulent.

4. Knowing nothing about finance this is where I run out of ideas. What I would do next is obey the advice of this book
p66 "one of the best ways of analysing an organisational problem is to ask not "What can we improve?" but "what can we change?". It could be that something as simple as randomly changing the seating occasionally could discourage nefarious activity.

So any other ideas for simple checks and balances that could prevent such frauds?

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