On Monday Jerome Kerviel’s appeal at the Paris Court of Appeals begins.  Kerviel was found guilty and sentenced to three years in prison in 2010 for being solely responsible for causing Societe Generale a huge 4.9 billion euro (£3.7 billion) loss.

Kerviel does not deny he took risky gambles but claims his bosses knew about it.  In other recent claims against the Bank Kerviel has argued evidence was tampered with.

In an interview with Le Parisien daily on Friday (and reported by the Financial Times) Mr. Koubbi, Kerviel’s lawyer reportedly said:  “The bank knew,…The smokescreen created by the bank will disappear quickly once we open our windows….”

Societe Generale, on the other hand has always claimed Kerviel was a rogue trader.  It said:

“Societe Generale is confident the appeal trial will uphold the sentence handed down by the lower court. It is important for the Bank, its employees, shareholders and customers that the court definitively recognise Jerome Kerviel’s guilt and the financial damage caused by his actions, as well as the damage caused to its reputation.

Since the beginning of the case, various investigative procedures – the police inquiry, 18 months of painstaking investigation and the trial in the Court of First Instance – have all unanimously confirmed the fraudulent actions committed by Jerome Kerviel, without the Bank’s knowledge, which consisted in taking unauthorised positions and concealing them with fictitious transactions, which when unwound resulted in an exceptional loss of €4.9 billion.”

Not the first & not the last

The Societe Generale case is not the first, and nor the last, in a line of cases where banks have suffered crippling losses.

In 1992 Barings Bank – one of the grandest names in British banking (and dubbed ‘boring Barings’ in London for its risk averse reputation) was brought down by a rogue trader in Singapore with losses of £827m. Leeson the banker behind the trades settled his own trades, enabling him to hide his losses. Bosses in London were criticised for failing to understand what was going on.

In a problem which has no geographic boundaries Allied Irish Bank (£697m), Daiwa Bank ($1.1bn) and Sumitomo Corporation ($2.6bn) are just some of the examples of other institutions who join the roll call of the powerful who have suffered losses caused by rogue traders who exploited weak internal financial controls.

Last year Kweku Adoboli was arrested for allegedly engaging in unauthorised trading that lost UBS about £1.5bn ($2.3bn) in the UK. Mr Adoboli denies the criminal charges and awaits trial in prison.

As recently as last month JP Morgan Chase announced that a hedging strategy had gone awry with losses announced at US$2 billion with many projecting that actual losses could ultimately more than double.

Closing the stable door

Societe Generale acted quickly to assure the public that it was taking steps to deal with the hole in its systems.  In 2008 on discovery of the problem it says “the Bank took immediate action to strengthen its control systems.”

Today it says “Societe Generale is engaged in a transformation plan aimed at achieving sustainable growth, which places risk management and the development of a risk management culture at the heart of the Bank’s priorities.”

Prevention better than cure

Against that back drop what can banks and other financial institutions do?

In the case of JP Morgan regulators are under the spotlight for failing to spot the problem despite having more than 100 examiners ’embedded’ at JPMorgan Chase & Co.  That is not the solution.

While the products which are traded may be complex simple steps can avoid problems.

In Societe Generale it is reported that the bank failed to follow up on upto 75 warnings. In other cases a failure to segregate functions, ignoring or failing to punish unauthorised trading and poor trader controls have all caused problems and are not difficult to deal with.

Trading losses of this magnitude go to the heart of financial services regulation and the key to compliance are robust systems and controls, properly implemented and policed.

Tone at the top is key

Consistent focus is required by Boards and management to build a culture of risk management and controls to avoid problems.  Put another way, a robust and effective compliance function is critical.  We are seeing many clients who are asking us to ‘healthcheck’ their systems.

If instead the culture is one of turning a blind eye to a star trader – be prepared to have a strong crisis management policy.

You may need it.