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Where are the checks and balances at GraceKennedy?
By Al Edwards
Friday, September 18, 2009
The announcement that bond trading losses of approximately US$19.93 million at First Global Bank (about a quarter of the bank's capital base) put its parent company Grace Kennedy in an untenable position, poses a number of questions. How effective are its checks and balances?
Wray... reposed too much faith in this trader and as a result the bank suffered the consequences
How efficient is its management team? Why did its internal audit team get caught napping, and why is this the second time in three years that there has been a major foul-up costing the group millions of dollars?
Following the disclosure earlier this month of irregular trading activities and breaches of internal procedures within First Global Bank, Grace Kennedy placed J$900 million of new capital into the bank in order to adequately satisfy the capital base to total assets ratio required by Bank of Jamaica regulations. No inference can be drawn that the bank's viability can be called into question.
What is of particular concern, though, is Grace Kennedy's inability to spot major breaches in its operations before calamitous damage is done where the parent inevitably has to foot the bill, thus impairing its balance sheet.
Back in 2006 major irregularities were discovered in its Information Division headed then by Brian Goldson. This proved costly and almost up-ended its remittance arm.
After this major foul-up, the decision was taken to rebrand its money division as GraceKennedy Money Services. Under this arm fell Western Union Money Transfer, FX Trader and Bill Express. This division handles around J$5.5 billion in cash a month through its 300 distribution points throughout the Caribbean. It also has outbound transfers from Jamaica of between US$9 million to US$10 million.
LEESON... unsupervised and unauthorised speculative trading on Singapore's Singapore International Monetary Exchange (SIMEX) caused the fall of England's oldest investment bank, Barings
In its year-end financial report for the year 2006, the chairman and CEO of Grace Kennedy, Douglas Orane wrote: " Durng the latter part of the year, weaknesses in internal controls coupled with difficulties experienced in implementing new IT systems, caused our Jamaican remittance business to make provisions totalling $466 million. This was primarily due to doubtful receivables for which collections efforts are continuing. In addition, evidence emerged that there has been fraud in the Jamaican remittance business. Corrective steps have been taken to avoid a repeat of these occurrences.
"The effect of this provision has been a drop in profits of our remittance business which significantly contributed to our Group profits being below that forecasted in 2006."
Goldson, who also held a seat on the board subsequently resigned, but the operations of Grace's remittance arm were seriously called into question and its internal controls were found wanting. There should be means by which a company monitors its accounting systems for conformance with expected behaviour. Internal controls ensure that management is carrying out its internal auditing duties. After the passing of the Sarbanes-Oxley Act many American companies are required to include an internal control report in their annual reports.
The internal control report should outline management's responsibilities for establishing and maintainng internal conrols and procedures. It is incumbent on companies to evaluate how effective the controls are, and the chief executive oficer has to certify that the company's internal controls have been followed. Internal controls play an important role in preventing and detecting fraud and protecting a company's resources, both physical and intangible. This debacle at First Global which saw a series of unauthorised trades in US treasury bonds which went undisclosed cost the bank almost US$20 million, exposed the inadequacy of its risk assessment, risk management and internal controls mechanisms.
Where was the identification and analysis of relevant risks and what decisions were taken on risk management? Many have looked to First Gobal Bank's CEO, Wayne Wray, for the answer to these questions and some are calling for his resignation. Perhaps even more damning is the fact that when the initial losses were made, subsequent trades were undertaken to recover those losses and a deeper hole was being dug. It has transpired that the bond trades were made with international brokers on a leveraged basis. However, it may be the case that this trader was given autonomy in his trading activities and was very successful in the past, with trading gains bolstering Grace Kennedy's balance sheet.When the going was good, everyone turned a blind eye - until now.
The trader has been dismissed but it is yet to be ascertained whether any legal action will be taken against him. Was he indeed a rogue trader similar to Barings Bank's Nick Leeson? Nick Leeson was a former derivatives broker with no formal training as a dealer whose unsupervised and unauthorised speculative trading on Singapore's Singapore International Monetary Exchange (SIMEX) caused the fall of England's oldest investment bank, Barings. From 1992, Leeson made unauthorised speculative trades that at first made made large profits for Barings; 10 million pounds which accounted for 10 per cent of Barings' annual income. He earned a bonus of 130, 000 pounds on his salary of 50,000 pounds for that year. However, his luck soon went sour, and he used one of Barings 'error accounts (accounts used to correct mistakes made in trading) to hide his losses. He used this account to cover further bad trades. He insisted that he never used the account for his own gain.
Management at Barings Bank also allowed Leeson to remain Chief Trader while being responsible for settling his trades, jobs that are usually done by two different people. This made it simpler for him to hide his losses from his superiors. By the end of 1992, the account losses exceeded 2 million, which ballooned to 208 million pounds by the end of 1994. In 1995 he was charged with fraud for deceiving his superiors about the riskiness of his activities and the scale of his losses. Leeson himself placed much of the blame on the bank's own deficient internal audit and risk management practices.
The Singapore authorities were scathngly critical of Barings' management, claiming that it should have paid closer attention to Leeson's activities and should have spotted irregularities with the error account.
For the six-month period ended June 30, 2009, Grace Kennedy reported a net profit of J$1.7 billion. By September, a trader, due to poor risk management, in effect wiped out that profit figure. It is still unclear why a commercial bank would be trading US treasury bonds, bearing in mind that it does not have the proper regulatory framework structure in place for that activity. Wayne Wray was a very adept merchant banker who made a reputation for structuring loan deals. It may be a case that he reposed too much faith in this trader and as a result the bank suffered the consequences.
The question is, will the bank continue to trade these instruments and what procedures will it now put in place? How will it now deal with mark to market losses and how do both the Bank of Jamaica and the Financial Services Commisssion view this incident?
Anthony Minvielle, formerly of Barclay Capital and soon to join BNP Paribas, speaking, with Caribbean Business Report from New York said: "Grace has some very good executives, Orane, Taffe and Burton who run a tight ship. The problem is that the younger managers with their MBAs and so-called international experience want to prove themselves and want the senior guys to take them off the leash. It's not a good idea to blood them too early, it takes time to master your trade. Maybe this trader was given too much leeway. These young Turks these costs the company millions. I'm sure the World Bank's IFC who have a stake in First Global must have concerns about this and will want to ensure that First Global tightens up its risk management and internal controls.
"Orane did a good job of damage control and that 's why he is one of the best CEOs in Jamaica, but right now the Caribbean is getting a bad reputation for the quality of its financial services entities. Coming on the heels of Allen Stanford, David Smith and shady offshore operations, this latest mishap once again puts the Caribbean under the spotlight."
By Al Edwards
Friday, September 18, 2009
The announcement that bond trading losses of approximately US$19.93 million at First Global Bank (about a quarter of the bank's capital base) put its parent company Grace Kennedy in an untenable position, poses a number of questions. How effective are its checks and balances?
Wray... reposed too much faith in this trader and as a result the bank suffered the consequences How efficient is its management team? Why did its internal audit team get caught napping, and why is this the second time in three years that there has been a major foul-up costing the group millions of dollars?
Following the disclosure earlier this month of irregular trading activities and breaches of internal procedures within First Global Bank, Grace Kennedy placed J$900 million of new capital into the bank in order to adequately satisfy the capital base to total assets ratio required by Bank of Jamaica regulations. No inference can be drawn that the bank's viability can be called into question.
What is of particular concern, though, is Grace Kennedy's inability to spot major breaches in its operations before calamitous damage is done where the parent inevitably has to foot the bill, thus impairing its balance sheet.
Back in 2006 major irregularities were discovered in its Information Division headed then by Brian Goldson. This proved costly and almost up-ended its remittance arm.
After this major foul-up, the decision was taken to rebrand its money division as GraceKennedy Money Services. Under this arm fell Western Union Money Transfer, FX Trader and Bill Express. This division handles around J$5.5 billion in cash a month through its 300 distribution points throughout the Caribbean. It also has outbound transfers from Jamaica of between US$9 million to US$10 million.
LEESON... unsupervised and unauthorised speculative trading on Singapore's Singapore International Monetary Exchange (SIMEX) caused the fall of England's oldest investment bank, Barings In its year-end financial report for the year 2006, the chairman and CEO of Grace Kennedy, Douglas Orane wrote: " Durng the latter part of the year, weaknesses in internal controls coupled with difficulties experienced in implementing new IT systems, caused our Jamaican remittance business to make provisions totalling $466 million. This was primarily due to doubtful receivables for which collections efforts are continuing. In addition, evidence emerged that there has been fraud in the Jamaican remittance business. Corrective steps have been taken to avoid a repeat of these occurrences.
"The effect of this provision has been a drop in profits of our remittance business which significantly contributed to our Group profits being below that forecasted in 2006."
Goldson, who also held a seat on the board subsequently resigned, but the operations of Grace's remittance arm were seriously called into question and its internal controls were found wanting. There should be means by which a company monitors its accounting systems for conformance with expected behaviour. Internal controls ensure that management is carrying out its internal auditing duties. After the passing of the Sarbanes-Oxley Act many American companies are required to include an internal control report in their annual reports.
The internal control report should outline management's responsibilities for establishing and maintainng internal conrols and procedures. It is incumbent on companies to evaluate how effective the controls are, and the chief executive oficer has to certify that the company's internal controls have been followed. Internal controls play an important role in preventing and detecting fraud and protecting a company's resources, both physical and intangible. This debacle at First Global which saw a series of unauthorised trades in US treasury bonds which went undisclosed cost the bank almost US$20 million, exposed the inadequacy of its risk assessment, risk management and internal controls mechanisms.
Where was the identification and analysis of relevant risks and what decisions were taken on risk management? Many have looked to First Gobal Bank's CEO, Wayne Wray, for the answer to these questions and some are calling for his resignation. Perhaps even more damning is the fact that when the initial losses were made, subsequent trades were undertaken to recover those losses and a deeper hole was being dug. It has transpired that the bond trades were made with international brokers on a leveraged basis. However, it may be the case that this trader was given autonomy in his trading activities and was very successful in the past, with trading gains bolstering Grace Kennedy's balance sheet.When the going was good, everyone turned a blind eye - until now.
The trader has been dismissed but it is yet to be ascertained whether any legal action will be taken against him. Was he indeed a rogue trader similar to Barings Bank's Nick Leeson? Nick Leeson was a former derivatives broker with no formal training as a dealer whose unsupervised and unauthorised speculative trading on Singapore's Singapore International Monetary Exchange (SIMEX) caused the fall of England's oldest investment bank, Barings. From 1992, Leeson made unauthorised speculative trades that at first made made large profits for Barings; 10 million pounds which accounted for 10 per cent of Barings' annual income. He earned a bonus of 130, 000 pounds on his salary of 50,000 pounds for that year. However, his luck soon went sour, and he used one of Barings 'error accounts (accounts used to correct mistakes made in trading) to hide his losses. He used this account to cover further bad trades. He insisted that he never used the account for his own gain.
Management at Barings Bank also allowed Leeson to remain Chief Trader while being responsible for settling his trades, jobs that are usually done by two different people. This made it simpler for him to hide his losses from his superiors. By the end of 1992, the account losses exceeded 2 million, which ballooned to 208 million pounds by the end of 1994. In 1995 he was charged with fraud for deceiving his superiors about the riskiness of his activities and the scale of his losses. Leeson himself placed much of the blame on the bank's own deficient internal audit and risk management practices.
The Singapore authorities were scathngly critical of Barings' management, claiming that it should have paid closer attention to Leeson's activities and should have spotted irregularities with the error account.
For the six-month period ended June 30, 2009, Grace Kennedy reported a net profit of J$1.7 billion. By September, a trader, due to poor risk management, in effect wiped out that profit figure. It is still unclear why a commercial bank would be trading US treasury bonds, bearing in mind that it does not have the proper regulatory framework structure in place for that activity. Wayne Wray was a very adept merchant banker who made a reputation for structuring loan deals. It may be a case that he reposed too much faith in this trader and as a result the bank suffered the consequences.
The question is, will the bank continue to trade these instruments and what procedures will it now put in place? How will it now deal with mark to market losses and how do both the Bank of Jamaica and the Financial Services Commisssion view this incident?
Anthony Minvielle, formerly of Barclay Capital and soon to join BNP Paribas, speaking, with Caribbean Business Report from New York said: "Grace has some very good executives, Orane, Taffe and Burton who run a tight ship. The problem is that the younger managers with their MBAs and so-called international experience want to prove themselves and want the senior guys to take them off the leash. It's not a good idea to blood them too early, it takes time to master your trade. Maybe this trader was given too much leeway. These young Turks these costs the company millions. I'm sure the World Bank's IFC who have a stake in First Global must have concerns about this and will want to ensure that First Global tightens up its risk management and internal controls.
"Orane did a good job of damage control and that 's why he is one of the best CEOs in Jamaica, but right now the Caribbean is getting a bad reputation for the quality of its financial services entities. Coming on the heels of Allen Stanford, David Smith and shady offshore operations, this latest mishap once again puts the Caribbean under the spotlight."