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SOCGEN SAYS IT HAS ADEQUATE CONTROLS

Nonetheless, SocGen believed it had adequate internal controls and procedures in place. In the Report of the Chairman on Internal Control Procedures that appears in SocGen's 2006 annual report, the bank says that the responsibility for internal controls was widely distributed among various groups within the organization. "Indeed, while the primary responsibility therein lies with the operational staff, a number of support departments are also involved, notably the Risk Division, the Internal Audit Department and the General Inspection Department, together with all of the group financial departments," the report states.

The bank, according to the report, employs roughly 600 staff members within its risk division and another 1,400 risk managers throughout the SocGen Group, outlying branches and subsidiaries. The latter are charged with monitoring risk exposure within the French network branches and subsidiaries, the report explains.

To manage operational risks such as the one Kerviel presented, SocGen had since 2003 maintained a database of "all internal operating losses incurred by the entities, both in France and abroad," the report notes. "This common database is used to analyze losses (by type of event, cause, activity, etc.) and monitor their evolution as well as the proposed corrective action plans. Each quarter, a report of the internal losses is submitted to General Management."

In other words, the database recorded only losses, not all transactions. Controllers had been instructed to monitor only the net, rather than the gross risk exposure of traders' activities. Since Kerviel hadn't actually lost the 50 billion euros—he was ahead 1.4 billion euros at the end of 2007, remember—he was gambling when the bank discovered the fraud, there would be nothing in the database to alert SocGen. And since he covered every real loss with a fake hedge, the offsetting transactions, one real, the other bogus, wouldn't register as losses. Kerviel would certainly have picked up that as would anyone who bothered to read through the bank's risk management report.

In the same report SocGen also announced the appointment in Paris of eight compliance officers to the trading rooms, "where they work in close proximity to the front office staff. In 2006 these officers were provided with new IT tools to improve the efficiency of their controls, notably when it comes to detecting market abuse."

SocGen did not say what these new IT tools were, but clearly neither the tools nor the compliance officers—and, most important, all the disparate risk control systems the bank had installed over the years—picked up on Kerviel's activities or curtailed them.

In the next installment, CIOZone will examine the key reasons these safeguarding measures weren't effective in the case of Jerome Kerviel.

Next: No Quick Fixes

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