Annual Top 10 ORX News Losses 2017
- 21 February 2018
The ORX News Top 10 of 2017 explores the ten largest operational risk loss events of 2017. All of the loss events are taken from last year's monthly top 5 loss event articles published by the ORX News team.
2017 in review
Operational risk losses continue to fall
Publicly reported operational risk losses fell by more than half this year, down from $49.8bn in 2016 to $23.1bn.
A drop in the number of large fines and settlements from legacy crisis-era issues may be the cause of this dramatic decrease.
Top 10 losses dominated by fraud and misconduct
The top 10 biggest operational risk losses of 2017, accounting for 45 per cent of all losses, were dominated by fraud and misconduct events. The themes are split geographically: conduct losses were concentrated in North America and Europe, whereas Asia/Pacific and Latin America experienced the most losses from fraud.
Conduct - a major source of loss
Although the three largest losses this year were frauds, overall, conduct-related events rose to become the most significant source of loss this year, accounting for $10.75bn of all losses in 2017. The significance of conduct risk is set to continue in 2018, as European regulators ramp up the introduction of new legislation, including MiFID II. It remains to be seen if losses will fall in North America as a consequence of Trump’s deregulatory regime.
Legacy losses were dominated by conduct risk. In January 2017, RBS announced it would provision a further £3.11bn to cover the ongoing costs of RMBS investigations in the US, and both Lloyds and Barclays provisioned an additional £700m each for PPI compensation. At least there is an end in sight for this issue, with the FCA announcing the final date for PPI claims as August 2019.
The top ten of 2017
1. Former BNDES president under investigation in relation to improper transactions totalling BRL 8.1 billion
The top spot was occupied by BRL 8.1bn ($2.6bn) of improper transactions at Brazilian Banco Nacional de Desenvolvimento Economico e Social (BNDES). Brazilian police discovered improper dealing between a BNDES subsidiary and a meat processing company. According to the investigators, the transactions were carried out with no due diligence and without following contractual requirements. Warrants have been issued for 37 people thought to have been involved in the scheme.
2. Shoko Chukin ordered to repay Japanese government following discovery it granted JPY 265 billion of fraudulent loans
Secondly, employees at Shoko Chukin bank improperly granted JPY 265bn ($2.2bn) of loans as part of a crisis response programme that offered low-rate financing to small businesses. Similar to other conduct issues that have arisen under pressure from high targets, employees at 97 of Shoko Chukin’s 100 branches were found to have improperly granted the loans by falsifying approval documents in an attempt to meet lending targets that did not align with demand.
3. SEC charges Woodbridge Group of Companies with running USD 1.22 billion Ponzi scheme
In third place, after a long-running investigation the SEC brought charges against the Woodbridge Group of Companies and their owner Robert Shapiro, accusing them of running a $1.22bn Ponzi scheme from 2012 until it collapsed in December 2017. According to the SEC, Woodbridge convinced 8,400 investors, many of them elderly, to take part in his scheme. The companies had already been the subject of legal action in eight states since 2015.
4. Société Générale agrees to pay EUR 963 million to settle dispute with Libyan Investment Authority
At number four is €963m ($1.05bn) that Société Générale agreed to pay to the Libyan Investment Authority (LIA), an oil wealth fund set up under Libya’s former dictator Muammar Gaddafi, in relation to a “fraudulent and corrupt scheme” involving $58.5m of bribes. The LIA claimed the bank had fraudulently secured $2.1 billion of trades with the fund between 2007 and 2009, which later soured. Goldman Sachs successfully defended against a similar case by the LIA in 2016.
5. Thema International Fund and its affiliates pay USD 1.1 billion to Madoff trustee
The ripples of Bernard Madoff’s Ponzi scheme are still being felt in loss number five. In July and September, Thema International Fund, an Irish fund which invested almost all of its assets in Madoff’s scheme, and a number of its affiliates agreed to pay a total of €1.1bn to Irving H Picard, the scheme’s liquidation trustee. According to Picard, the funds, linked to Austrian banker Sonja Kohn and the Benbassat family of Swiss bankers, provided Madoff with access to funds in Europe as his scheme began to run out of new cash flows in the US.
6. Former executives of Catalunya Caixa accused of causing EUR 720 million hole through irregular transactions
The sixth biggest lost is another fraud, also involving irregular transactions. Fifteen executives of Catalunya Caixa, a Spanish bank now part of BBVA, were accused in March of causing a loss of €720m ($766.1m) to the bank by conducting irregular real estate transactions between 2000 and 2013. Conflicts of interest were present in at least half the transactions, including executives buying shares in the companies involved only days before the transactions were made.
7. Eight Indian banks defrauded of INR 49.3bn by Kingfisher Airlines founder Vijay Mallya
At number seven was the combined loss of INR 49.3bn ($757.2m) from eight Indian banks, reportedly part of an INR 60.72bn loan fraud involving 17 banks, allegedly perpetrated by Vijay Mallya, the founder of now-defunct Kingfisher Airlines.
8. Western Union pays USD 591 million for AML and wire fraud failures
In the eighth biggest loss, Western Union agreed to pay a total of €586m to the DoJ, FTC, three state attorneys and 49 US states for AML breaches and aiding wire fraud. According to the investigations, Western Union failed to prevent its agents from sending hundreds of millions of dollars of black money to China between 2004 and 2012, structured in tranches of less than €10,000 to avoid US reporting requirements. This issue continued into 2018, as Western Union was fined $60m by the New York Department of Financial Services for the same conduct in January 2018.
9. Deutsche Bank reaches EUR 450 million settlement with investors over Kaupthing CDS
The penultimate loss is a hangover from the financial crisis. Deutsche Bank agreed to pay €450m ($483.8m) to settle claims it allegedly proposed to Icelandic bank Kaupthing that it should loan its clients money to invest in credit default swaps and buy credit linked notes, thereby lowering the troubled Icelandic bank’s CDS spread.
10. Agricultural Bank of China defrauded of CNY 3.2 billion by employees of billionaire Guo Wengui
Finally, in June three employees of Beijing Pangu Investment pleaded guilty to using fake documents to illegally obtain CNY 3.2bn ($470.6m) from Agricultural Bank of China. The company belongs to exiled Chinese billionaire Guo Wengui, who has been the subject of a propaganda campaign by the Chinese government after he made unsubstantiated corruption claims against it.