IT security controls partly blamed for SocGen debacle

[InfoSec News <alerts () infosecnews org>]

http://www.theregister.co.uk/2008/02/21/socgen_probe_latest/

By John Leyden
The Register
21st February 2008

Weak security controls have been partly blamed for the rogue trader 
scandal at Socit Gnrale that cost the bank 4.9bn ($7.2bn).

Preliminary findings (pdf [1]) from an internal investigation found that 
stronger security systems, including biometric authentication of trading 
personnel, were needed to prevent a reoccurrence of the fraud.

Jrme Kerviel, a junior trader at SocGen, secretly built up huge and 
risky positions in the derivatives market. He was taking greater and 
greater risks over a much longer period than previously thought, dating 
back to March 2007 for large amounts and to 2005 for smaller amounts. 
SocGen only discovered the fraud between 18 and 20 January. Unwinding 
the positions over the subsequent three days cost the bank billions.

Investigators said the the variety of concealment techniques used by the 
fraudster, a lack of systematic checks by staff when warning flags were 
raised and shortcomings in the control systems all contributed to the 
late discovery of Kerviel's activities. It said that it had discovered 
"no evidence of embezzlement, internal or external complicity" at this 
point in its ongoing inquiry.

Kerviel should have been concerned with exploiting small price 
differences in the value of similar matched assets to turn a profit for 
the bank. Instead he used his knowledge of the bank's IT systems to make 
deferred purchases which he cancelled, and employed other ruses to 
disguise the fact he was making huge gambles without laying off his 
bets.

The rogue trader used faked email messages to cover his tracks. He also 
logged into colleagues' accounts to make trades under their names rather 
than his.

The fraud led to the realisation that SocGen needed to improve its 
supervision and control systems in three crucial areas involving access 
security improvements: the introduction of biometric-based log-ins; 
improved alert procedures; and improvement to the bank's operational 
risk platform to keep closer tabs on potentially fraudulent activity, 
such as cancelled or modified trades.

Improved technology controls are only part of the answer. Between July 
2006 and September 2007, operational risk systems raised 24 alerts over 
trades made by Kerviel which the bank staffers put down to anomalies in 
how the trading software operated. The risk monitoring unit only asked 
Kerviel's superiors to make sure he didn't exceed limits rather than 
taking a deeper look at the trading behaviour that gave rise to the 
alarms.

The investigation team is due to report its full findings before 
SocGen's annual general meeting 27 May.

[1] http://www.sp.socgen.com/sdp/sdp.nsf/V3ID/A3246AB84993471DC12573F5006C82F4/$file/comiteSpecialFevrier08gbbis.pdf


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