Next rogue trader could hit banks anytime

By Jim Finkle - Analysis

BOSTON (Reuters) - Forget complex computer software, psychological testing or even morality: Rogue traders can strike anytime, anywhere.

"All of the things that make a great trader make a great fraudster too," says Mark Rasch, a consultant with FTI Consulting who previously ran the U.S. Justice Department's computer crimes unit.

Even the regulator who helped calm U.S. financial markets after the 9/11 attacks worries about the terror a lone trader might wreak on the world's biggest banks and security houses.

"There are no foolproof systems," says Harvey Pitt, who was chairman of the U.S. Securities and Exchange Commission in 2001-2002. "You always worry about the possibility of rogue traders."

There's reason to worry: bankers, regulators and investors are shocked at how a mid-level employee's unauthorised stock trading led to a $7.2 billion (3.62 billion pound) loss at French bank Societe Generale and sent European markets into a tailspin.

It's impossible to root out all potential troublemakers, say former regulators and risk management consultants. But banks can take preventive steps. These include regular reviews of credit files and other easily accessible reports, such as real estate purchases or even divorce papers.

"It ought to include a whole variety of checks -- even if somebody has (previously) passed whatever kinds of reviews," Pitt says.

Many frauds require constant attention by the perpetrators so they can maintain the appearance that nothing unusual is going on. That is why the banks with the best controls require employees to take one or two full weeks off per year where they have no contact with the office. Auditors have a chance of identifying long-term fraud if the perpetrator is not around to cover it up.