Ten years after Barings fiasco, problems remain

Ten after a young trader in Singapore ruined Britain's oldest merchant bank, Asian financial markets are now protected by stronger safeguards against fraud but firms with poor internal controls remain vulnerable, analysts said.

Technological and new regulations have radically changed the markets since Barings, founded in the 18th century and former bankers to the Queen, collapsed after 28-year-old Nick Leeson amassed some US$1.4 billion in losses from derivatives trading.

Leeson his wife Lisa fled Singapore for Malaysia on February 23, 1995 after he could no longer cover up his losses, sparking a cross-border police chase that ended in his arrest in Frankfurt, Germany on March 2.

He was extradited nine months after the scandal to Singapore, where he pleaded guilty and was sentenced to six and a half years in jail. Leeson was freed in 1999 for good behavior.

Asian have tightened the rules since the Barings debacle but an analyst said government watchdogs must not stifle market vibrancy in the Internet age.

"Indeed there is a risk that an excessively tight regulatory regime actually encourages a sense of complacency," said Julian Jessop, chief economist of the London-based consultancy Capital Economics Ltd.

He said senior managers might be lulled into thinking that Leeson-style fraud cannot happen to them now.

"It is much better to have strong internal controls and greater understanding of the risks involved.

"Financial products are likely to evolve faster than regulators can keep up, so the onus has to be on the participants, and their bosses, to know what they are doing," Jessop told reporters.

Leeson trading in derivatives linked to the Japanese stock market index out of the Singapore International Monetary Exchange (SIMEX).

It was later found out that Barings bosses, lulled by bonuses generated by Leeson's falsely declared profits, allowed him to carry out trades on the floor and at the same time run the back office, which was supposed to act as a check.

In his book Rogue Trader written while he was in prison, Leeson described the set-up in Barings that enabled him to sugarcoat his mounting losses as a "bizarre structure, and one which allowed me to run my own show without anyone interfering."

Leeson, who survived a bout with colon cancer while in prison, has since earned a psychology degree and now earns money giving after-dinner speeches.

Recent show that despite tighter regulations, opportunities for fraud and negligence persist.

In Singapore, publicly listed China Aviation Oil (中國航油) has sought court protection from creditors after losing US$530 million in speculative trading in oil derivatives last year.

On a global level, the collapse of US corporate icons Enron and WorldCom and Italian food giant Parlamat are also grim reminders of the need for continued vigilance, analysts said.

"I think you can never come to a state where you will have enough safeguards," Stephen Loke, president of the Center for Corporate Social Responsibility in Singapore, told reporters.

"Every time you plug a loophole, there are always innovative ways to get around safeguards that are put in place. We should always assume that there's a thief in the dark and the minute we let our guard down, he sneaks in."

The Monetary Authority of Singapore (MAS), in a statement to reporters, said it has strengthened the legislative framework after the Barings debacle.

Amendments introduced to the Futures Trading Act and the Futures Trading Regulations allowing the MAS to more closely monitor activities of traders selling futures contracts.

The amendments were carried over to the Securities and Futures Act introduced in 2002.

SIMEX its successor the Singapore Exchange Derivatives Trading Ltd beefed up their regulatory and risk management framework to strengthen oversight over the futures market, MAS said.

But the MAS, the city-state's de facto central bank, stressed that the primary responsibility for preventing fraud lies with the boards and management of financial institutions.

This is why the MAS and other regulators put increasing emphasis on reinforcing corporate boards and senior management to ensure good internal controls and sound risk-management practices within their companies, it said.

Jessop, the economist, said that overall, Asia's record of financial scandals pales when compared with the rest of the world.

"Consider the scandals at WorldCom, Enron, Parmalat and Allied Irish Bank -- [they are] all outside Asia. Barings and China Aviation Oil are small beer," Jessop said.