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Lessons from Leeson – Rogue Trader Nick Leeson provides insight on how to prevent governance failings

Nick Leeson was a keynote speaker at last week’s Smart Business Show in Belfast, and provided many valuable insights into how his unchecked risk-taking caused the spectacular collapse of Barings – personal bank to The Queen – in 1995. Mr Leeson was extremely candid about his own failings, those of the board and senior management of Barings, and their auditors.

Nick Leeson with Joy Allen of Leading Governance

In 1992, at the age of 25, Leeson was appointed to head up Barings’ Singapore operation. He began making unauthorized speculative trades that, at first, made large profits for Barings. In 1992 he made £10 million, which accounted for 10% of Barings' annual profit. Leeson earned a bonus of £130,000 on his salary of £50,000 for that year.

Knowledge and Understanding

Leeson’s luck changed in 1993 and he began using an error account (the “five eights” account) to hide his losses. This was not picked up by either internal or external auditors. During his talk, Mr Leeson highlighted a number of governance failures which allowed him to continue trading and covering his losses. These were “poor systems, poor controls and poor quality of people”. Leeson described how auditors would question his bosses about his activity, and they referred the queries directly to Leeson for an explanation. A key issue was that his managers and auditors did not really understand the business, and it was therefore relatively easy for Leeson to bamboozle them with plausible sounding, but completely deceptive answers. As Mr Leeson put it “knowledge is useless without understanding”.

Checks and Balances

Management at Barings Bank allowed Leeson to remain chief trader while also being responsible for settling his trades, jobs usually done by two different people. This made it much simpler for him to hide his losses from his superiors, and highlights the need to have adequate checks and balances to reduce the likelihood and impact of fraud.

By the end of 1993, Leeson’s losses exceeded £2 million. By the end of 1994, they had ballooned to £208 million. Mr Leeson described returning to the UK for Christmas with the expectation and even the desire to get caught, such was the stress of his situation. When he returned to Singapore he continued his futile attempt to trade his way out of his losses until 23 February, when he left a note saying “I’m sorry” and fled Singapore. His losses eventually reached £827 million (US$1.4 billion), twice the bank's available trading capital. Barings was declared insolvent on 26 February 1995.

Culture and Behaviours

Mr Leeson highlighted the importance of corporate culture in ensuring fraud is kept in check. He said “It’s about behaviours. I knew my behaviour was wrong, but I did it anyway”. In relation to the traditional view of governance he said “you can have risk and compliance officers that are token appointments – to be seen and not heard. There is a huge role in compliance and risk for non-executive directors”. Leeson was critical of the culture in Barings in that management wanted results, and employed people who appeared confident in what they were doing. Questioning and challenge were not part of the culture, neither for employees who needed guidance in what they were doing, nor by management in relation to how work was being undertaken. This led to a situation whereby Leeson was never questioned about how he was achieving such spectacular results. As others in the industry have pointed out, the board and managers should have known that the profits which Mr Leeson said he was making were impossible to achieve. As Leeson himself put it “there is a need to ask the hard questions, and sometimes asking the hard questions is emotionally and psychologically quite difficult, because you’re highlighting yourself that you don’t have that knowledge, that experience or that understanding”. He concluded that “you need a culture where people can freely express their opinions and there is an opportunity to challenge”.

Leeson pled guilty to two counts of "deceiving the bank's auditors and of cheating the Singapore exchange”, and served four and a half years in prison in Singapore. He was released from prison in 1999, having been diagnosed with colon cancer, which he survived. Mr Leeson has written two books about his experiences - Rogue Trader and Back from the Brink: Coping with Stress.