David Lewis, who headed the Australian Prudential Regulation Authority’s (APRA’s) probe, said that as the investigation unfolded, it became clear that the problems were not confined to the trading desk. “During our investigation, we interviewed a lot of people involved — including the four traders,” he said. “The traders were young, highly motivated, and very gung ho — as traders tend to be. One thing became clear immediately: they didn’t think that they had done anything wrong.

“They didn’t think that they were stealing anything; they thought it was their job to make money for the bank and — in their minds — this is what they were doing. Yes, they knew that they were breaking the bank’s rules. But, to them, these were just bureaucracy that got in the way of what the bank really expected them to do.”

Lewis added that the investigation revealed widespread issues within NAB, despite a sophisticated controls system, and most were connected with cultural and human elements, as opposed to system breakdowns. Despite several probes, NAB’s internal audit department was ‘warned off’ when it queried what was happening on the FX options desk. Internal auditors were told the traders were ‘untouchable’.

Meanwhile, risk managers failed to properly challenge the traders and the executive risk committees managed to miss the early warning signs of the coming scandal, despite regular breaches of daily excess limits being reported.

Most seriously, Lewis said, the organisational culture at the bank was a far cry from its state policy and procedure.

Indeed, sources close to the bank said that the FX options saga unfolded despite the fact that key executives and board members has studied the so-called Ludwig report into massive rogue trading losses at Allfirst — a subsidiary of Allied Irish Banks — in 2002. There, FX trader John Rusnak managed to lose around $1.5 billion over the course of five years through manipulating the bank’s trading systems and bullying back office staff.

Far from risk management being taken seriously at NAB, it was hampered by a culture in which “risk management controls were seen as tripwires to be negotiated rather than presenting any genuine constraint on risk taking behaviour,” said Lewis.

He added APRA was alarmed at the reaction of other CEOs to the NAB affair. “Since APRA’s report into the NAB FX losses became public, I have heard many chief executives assert: ‘Of course, we’re different. That could never happen to us’,” Lewis said.

“I admire their confidence. But frankly, as a regulator, I would have been more comforted if they had been a little more pessimistic. Somehow — ‘There, but for the grace of God, go I’ — sounds more reassuring. Complacency is the number one enemy to good corporate governance.”

However, despite the huge cultural breakdown at NAB, Lewis said, the bank’s response was impressive. “Within NAB, the whole affair has been enormously cathartic; the bank has set about a program of corporate renewal that is unprecedented in Australian financial institutions,” he said. “And, what’s more, the widespread publicity given to APRA’s report has had the effect of raising standards of risk management and corporate governance across the finance sector.”

Stuart Fagg is the Editor of Risk Management magazine, Lawyers Weekly’s sister publication

Countdown to chaos: how they did it

Over a four year period traders had:

Entered genuine spot deals with false rates - known as profit smoothing

Entered bogus spot deals

Entered bogus FX options deals