DUBLIN, Ireland, Feb. 6 (UPI) -- In a further erosion of investors' dwindling trust in blue chip companies Allied Irish Banks Plc, Ireland's largest bank, said Wednesday it is undertaking a full investigation into a suspected case of fraud amounting to $750 million at the foreign exchange trading operations of the Baltimore headquarters of its U.S. subsidiary Allfirst Financial Inc.
Allied Irish Banks said the decision followed the uncovering by Allfirst management of suspected fraudulent activities by one trader who has since failed to report for work.
The bank revealed that the foreign exchange trader who is missing in the probe is John Rusnak, an American in his 40s.
The lender said that Rusnak was suspected of entering fictitious foreign exchange trades into the bank's books and disappeared during a bank probe of the losses.
Rusnak is married with two children and has been described as a pillar of the community who was on the local school board.
The bank said Rusnak was a middle-level trader and not among the senior people in a small part of Allfirst's operations.
The lender said he had been cooperating with the bank's internal probe until he went missing at the weekend, prompting Allied Irish to call in the Federal Bureau of Investigation and has sought their assistance in searching for him.
The lender said it has also discontinued all foreign exchange trading operations in Allfirst with the exception of customer service obligations.
The Executive Vice-President/Treasurer of Allfirst, the Senior Vice-President with responsibility for Treasury Funds Management, the Senior Vice-President with responsibility for Investment Operations and two other staff members have been suspended pending completion of the investigation.
Allied Irish said experienced senior Treasury personnel have travelled to Baltimore and have now taken over day to day responsibility for Allfirst Treasury.
The lender said, "Preliminary investigations indicate that the suspected fraud amounts to $750 million."
Group Chief Executive Michael Buckley said, "We are hugely disappointed that our Allfirst control procedures failed to uncover this situation at an earlier stage. The investigation now underway will determine not only how it arose but also how we can guard against any recurrence.
"The Group's underlying business and profitability momentum is not impaired by this once-off blow. Our capital adequacy continues to be strong," Buckley said.
The lender said, "During a management review within the Treasury Division of Allfirst, indications of fraudulent activity in the foreign exchange trading area was discovered."
The lender said the losses arose on a series of unauthorized transactions in a number of foreign currency contracts. An individual dealer entered into a variety of spot and forward foreign exchange trades, which were apparently offsetting foreign currency option positions also entered into by the same dealer.
In the normal course, the profits and losses arising from the foreign exchange deals would have been offset against profits and losses arising on the options transactions. This activity is undertaken by experienced traders within approved risk limits. Open market risk positions are calculated using industry standard risk management systems.
"From our initial investigation, it is clear that the foreign exchange deals were transacted in the normal manner. However, the offsetting currency option contracts were fictitious. They were artificially entered into the Allfirst systems," Buckley said.
The bank said the case would lead to a one-off reduction in group 2001 earnings of $520 million after tax.
Meanwhile, Standard & Poor's Corp. said it has placed the ratings of Allied Irish Banks and related entities on watch with negative implications pending investigation of fraud claims.
S&P said that the review covered Allied Irish Bank's long-term rating of A plus, and the A long-term and A-1 short-term ratings it assigns to related entities including U.S. subsidiaries Allfirst Financial Inc. and Allfirst Bank.
"While Allied Irish Bank's strong profit momentum enables it to absorb this loss, and its underlying business momentum remains good, this is still a meaningful loss for the group," S&P said.
"S&P notes that AIB and Allfirst will still maintain good regulatory capital ratios, however, and that group liquidity is strong," the rating agency said.
S&P affirmed its A-1 short-term ratings on Allied Irish Banks and Allied Irish Banks NA Inc.
