Commentary and information about public safety and security, intelligence and counterintelligence, open government and secrecy, and other issues in northern Idaho and eastern Washington.

Location: Coeur d'Alene, Idaho, United States

Raised in Palouse, WA. Graduated from Washington State University. US Army (Counterintelligence). US Secret Service (Technical Security Division) in Fantasyland-on-the-Potomac and Los Angeles. Now living in north Idaho.

Sunday, January 27, 2008

The Importance of Diligent Oversight

This week we learned of the Societe Generale fraud, a costly but excellent example of what can happen when oversight either does not exist or is not diligently exercised by those required to perform it.

When legislators set up agencies or allow regulated businesses to exist, they usually impose oversight requirements to prevent abuses and protect the public.

Some of us who live in Coeur d'Alene, Idaho, have been concerned about our Mayor and City Council's failure to exert diligent oversight over our urban renewal agency, the Lake City Development Corporation. See Whitecaps post titled LCDC - The Cancer in Coeur d'Alene.

In the SoGen fraud, a low-level employee characterized as Mr. Average was able to circumvent a six-level system of security checks and execute futures trades which resulted in a $7 billion loss to SoGen.

How was the alleged fraudster, Jerome Kerviel, able to beat the elaborate oversight system that should have caught him much earlier? Early reports suggest he began work in a rather menial position that enabled him to learn the vulnerabilities of the protections in place. He then slowly and patiently worked himself into a position as a trader where here was able to do the unthinkable.

In her January 27, 2008, New York Times article headlined Rogue Trader in Custody in France, writer Nicola Clark reports:

Daniel Bouton, the Société Générale chief executive ... described Mr. Kerviel’s elaborate efforts to hide his activities as being like a “mutating virus.” "The nature of his fictitious and fraudulent operations were constantly evolving,” Mr. Bouton said. “And when the control systems detected an anomaly, he managed to convince control officers that it was nothing more than a minor error.”

In short, Kerviel was apparently able to convince those with responsibility for oversight that what he was doing was the right thing to do. The oversight appears to have failed in part because Kerviel's overseers wanted to believe him. They lacked the healthy skepticism diligent overseers have.


Anonymous Anonymous said...

I see that the gentleman, Barry McHugh, who just announced his run for Kootenai County Prosecuting Attorney has some experience with racketeering investigations. I certainly hope that causes the lcdc sycophants some heartache.

5:53 AM, February 03, 2008  

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