[Extract from the conclusion of the Bank Of England Report on the Collapse of Barings]

WHY WAS THE TRUE POSITION NOT NOTICED EARLIER?

Controls

13.10

In 1992 Norris, as Chief Operating Officer of BSL, started to
introduce additional controls into the relatively uncontrolled
environment then prevailing at BSL. This process continued under his
direction when BSL and BB&Co were combined to form IBG (subsequently
BIB), of which he was designated Chief Executive Officer. Even so, as
late as 1995, it appears that the objective of imposing a
satisfactory level of controls had not been achieved within BIB. The
Chairman of Barings plc, Peter Baring, described the failure of
controls with regard to BFS as "absolute". We agree. It was this lack
of effective controls which provided the opportunity for Leeson to
undertake his unauthorised trading activities and reduced the
likelihood of their detection. 

13.11

We consider that those with direct executive responsibility for
establishing effective controls must bear much of the blame. We
identify below the ways in which, we have concluded, they failed to
discharge this responsibility; and how others at lower levels of
management were also at fault for failing to act effectively in
relation to their own responsibilities.  

13.12

As set out in paragraph 1.70, a number of warning signs were present
which, had they been properly addressed, should have caused Barings
to detect the unauthorised activities of Leeson and the losses that
they were generating. This did not happen, mainly because
individuals in a number of different departments failed to face up
to, or follow up on, identified problems; and because there was
inadequate communication between departments and between
individuals.

Lack of segregation of Leeson's duties

13.13

The fact that Leeson was permitted throughout to remain in charge
of both front office and back office at BFS was a most serious
failing. Witnesses whom we have interviewed on this point agreed
that the need for a separation of responsibilities was fundamental.
Tony Hawes, the Group Treasurer, had relatively early on (in
February 1994) identified this as unsatisfactory. He subsequently
made his views known to James Baker, prior to James Baker's
internal audit of BFS undertaken in July/August 1994. Although the
internal audit did not unearth the existence of the unauthorised
activities, the internal audit report did make specific
recommendations as to the separation of roles. These
recommendations were never implemented. 

13.14

At the local operational level Jones (who had responsibility for
Barings' operations in Singapore and was a Director of BFS) seems
to have taken no significant steps to give effect to the
recommended segregation of duties; even though in his management
response to the report he had stated that with immediate effect
Leeson would cease to perform certain functions and that he (Jones)
would ensure the adequate supervision of all settlement and
recording processes. We consider that this failure to put into
effect his management response to these recommendations in the
internal audit reports was reprehensible. Further, Bax (Director, of
BFS and Regional Manager of South Asian Region) failed to concern
himself with, or check as to, the implementation of the internal
audit report. 

13.15

The internal audit report was circulated widely among management in
London and was generally acknowledged as important. Copies were
seen by (among others) Norris, Chief Executive Officer of BIB;
Broadhurst, Group Finance Director of BIB, who had personally taken
an active role in the drafting of the report; Hopkins, Director of
Group Treasury and Risk of BIB; Barnett, Chief Operating Officer of
BIB; and Ron Baker, Head of FPG. Yet by February 1995 nothing had
been done to implement the recommendations of the report as to the
segregation of duties. Most of those who received the report said
that they considered that it was the responsibility of others (and
particularly Singapore management) to implement. We consider,
however, that management in London was not justified in simply
assuming that these recommendations would be acted upon. The
points raised by the report on segregation of duties were of such
importance that we consider that it was necessary for checks to
have been made to ensure that they had been implemented. But there
was no internal communication in this respect, and the necessary
steps to give prompt effect to the recommendations were not taken.
it is significant that when Railton, Futures and Options Settlements
Senior Clerk of BIB, was eventually sent out to Singapore in
February 1995, the discrepancies caused by Leeson's unauthorised
trading were uncovered within a relatively short space of time.

Supervision of BFS

13.16

Leeson was not properly supervised.

13.17

Leeson's back office functions were never effectively monitored; and
to the extent that there were other staff in the back office in
Singapore they were relatively junior and it would seem, simply
obeyed Leeson's instructions. The matter was compounded by the fact
that Jones concerned himself primarily with the affairs of BSS and
devoted little attention to BFS. Bax took no steps to ensure that
the appropriate degree of supervision and internal control was in
place. Thus BFS was operated almost entirely by Leeson alone. 

13.18

This lack of supervision was reflected in the failure on the part
of Jones to deal satisfactorily with the letters of SIMEX to BFS on
11 January 1995 (marked for Jones' attention) and 27 January 1995.
These letters were important. The letter of 11 January 1995, which
referred to the account '88888', queried the accuracy of information
provided by BFS relating to certain margin requirements, complained
of the lack of information and explanations in the absence of Leeson
and referred to a possible violation of SIMEX rules by BFS's
financing the treading margins of client; yet Jones did not send a
copy of this letter to Barings in London at the time and essentially
left it to Leeson to draft the response. The letter of 27 January
1995 sought an assurance of BFS's ability to fund its margin calls;
and, although a copy of this was sent (by Bax) to Barings in London,
it should have caused Jones to investigate why such a letter had been
sent and to check that adequate answers to it were given; especially
in the light of the letter of 11 January 1995 received some two weeks
earlier. 

13.19

The lack of supervision of BFS extended elsewhere. The head of FPG
in BSJ, Gueler, who was based in Tokyo and was experienced in the
operation of Japanese markets, accepted that he had responsibility
for analysing the risks on Leeson's intra-day trading activities
from 1992 until the last quarter of 1994 (thereafter Walz had
principal responsibility). He did not have a clear understanding of
the extent of the supervision which he was to have over BFS's
trading activities, and has disputed that he was responsible for
supervising Leeson's switching activities. Whatever the precise
position was as to his responsibilities in this regard, knowing as
he did that BFS's trading activities were not properly supervised,
he should not have allowed this lack of proper supervision to
continue. We also consider that he should have questioned with
management the high reported profitability of the switching
activities before he actually did so in October 1994. Further,
although they had responsibility for the financial products traded
on a proprietary basis within BFS, neither Ron Baker nor Walz
checked properly on BFS's trading activities. This unsatisfactory
position was made worse by the fact that reporting lines with
regard to Leeson were not clearly understood; there were no clearly
laid down reporting lines for Leeson, through the management chain,
to Ron Baker; and there was also uncertainty as to whether Ron
Baker reported to Maclean or Norris.

13.20

Nor did senior management in London address the position adequately.
Norris had identified Jones as being extremely difficult to manage
within the matrix structure of organisation which had been
introduced by 1993. Indeed, Norris had formed the view in 1993 that
Jones should be replaced; although, in the event, he decided not to
do so, mainly because he did not want to cause any upset for Bax.
It was also the case that Broadhurst and Jones were barely on
speaking terms. We express no criticism in principal of a matrix
structure; but such a structure can only work effectively,
especially in a global operation, with tight controls, with a
clear understanding of individual responsibilities and with
managers at the 'hubs' communicating effectively. This did not
happen in the case of BFS and, given the perception which senior
management of BIB had of Jones (which was that he was a poor
communicator and that he undertook little involvement in the affairs
of BFS, as opposed to BSS) the risk of a failure of operational
controls relating to BFS should have been recognised and acted upon
at an early stage.  

13.21

A further significant failing was that Barings did not control the
high level of BFS's 'switching' positions by the use of gross
limits or otherwise (and notwithstanding the fact that James Baker
had made a recommendation that this be considered in the internal
audit report). This was imprudent. The responsibility for this lay
with Ron Baker (as Head of FPG), Walz (as Head of Equity Financial
Products), Hopkins (as Director of Group Treasury and Risk) and
Norris (as Chief Executive Officer). In addition, Ron Baker and
Walz should have taken more vigorous steps than they did to
require Leeson not to increase, and where possible to reduce, his
positions in accordance with the decision of ALCO on 26 January
1995. In fact, Leeson's positions increased after that date. 

Funding of BFS

13.22

The manner in which Barings in London funded the trading of BFS was
wholly unsatisfactory. Evidence given to the inquiry indicated that
Leeson regarded Barings in London as the 'cash cow'. Significant US
Dollar amounts were regularly remitted through BSL's client account
by way of 'top up' to BFS without any clear understanding on the
part of Barings' management on whose behalf those monies were to
be applied, and without any real demur. This level of funding
became ever higher, both in absolute terms and in terms relative to
the authorised 'switching' activities. At the time of the collapse
the balance of the 'top up' payments exceeded £300 million.

(1) Settlements and Treasury

13.23

There was no clear understanding as to whether or to what extent the
sums requested by BFS were for client trading or for house
trading. In consequence the true position was not reflected in the
accounts. The Settlements Departments was simply not able to
reconcile the 'top up' payments as loans to clients; and yet that
is how the payments seem to have been considered (to the extent that
the matter was thought about at all) by most of senior management.
The requests by BFS to Barings in London were, for the most part,
acted on without question. Granger, Manager of Futures and Options
Settlements, BIB, was concerned that she could not reconcile the
payments as loans to clients; and was concerned that BSL's client
account might be funding house trading. However, she failed to raise
her concerns with Gamby, Director of Settlements, or to ensure that
those problems which she had identified were appraised by him. 
Granger further appreciated that inadequate information for the
funding requests was being provided by BFS which could not be
verified. She should have had a proper understanding of what these
large advances actually represented and for what purpose they were
being paid before they were authorised (mainly by her) to be paid. 
Gamby knew that Granger was authorising payments by SWIFT to BFS,
only part of which were recoverable from London clients. He was also
aware that Granger had expressed concerns about the flow of
information coming from BFS. We consider that Gamby, as Director of
Settlements, should himself have taken steps to understand what
these payments to BFS actually represented and for what purpose they
were being paid. Yet neither Gamby nor Granger took sufficient steps
to address the position. 

13.24

Granger mentioned her concerns about the lack of reconciliation
and about the inadequacy of information provided by BFS to Tony
Hawes, Group Treasurer. Tony Hawes had by the end of 1993 himself
realised that there was a lack of reconciliation. This issue was
eventually (by the autumn of 1994) raised by Tony Hawes with
Hopkins. Hopkins told us that he was extremely concerned about it.
Furthermore, James Baker (who had  himself previously had the point
mentioned to him by Tony Hawes) in his internal audit report had
recommended a review by Group Treasury of BFS's funding
requirements. Yet no effective attempt was made, whether by Hopkins
or Tony Hawes or anyone else, to follow up these concerns and
recommendations and no prompt and detailed investigation was
undertaken into the precise basis for the funding of BFS. Nor was
there any significant attempt to consider the Group position
taking into account the funding of BFS by Barings both in London
and in Japan.

13.25 

The upshot was that nothing was done (by the Settlements Department
or Treasury Department) properly to respond to the problems
identified, in spite of the increasing level of funding and the
inadequate details, provided by BFS in its requests for payments. 

(2) Credit

13.26

There was no system in place to ensure that the credit aspects of
this funding were reviewed. Although there were clear credit
implications if the sums were indeed considered to be advances on
behalf of clients, the Credit Committee did not pay attention to
the growth in the advances as recorded on the balance sheets. Tony
Hawes was, from late 1993 to August 1994, responsible for BSL's
credit unit: knowing that the 'top up' payments were not reconciled
to client records, while believing that they represented loans to
clients, he should have assessed the credit implications.  Hopkins,
as Director of Group Treasury and Risk from 23 August 1994 with
responsibility for credit matters relating to BSL until the end of
1994, recognised that there were weaknesses in the credit
department. By the autumn of 1994 he was also aware (having been
told by Tony Hawes, as noted above) that there was a lack of
reconciliation to client records of the advances to BFS. We
consider that Hopkins and Tony Hawes both have responsibility for
the credit failings in this respect. Maclean, as Chairman of the
Credit Committee, believed that BSL gave credit to clients in a way
which the credit department of BB&Co would not have accepted: we
consider that, as Chairman of the Committee, it was his
responsibility to ensure that proper details about what he
understood to be advances to clients were put before the Committee
for their consideration. Russell only became Head of Credit of BIB
on 1 January 1995, but his appointment had previously been
announced in August 1994; and he had had increasing involvement with
BSL's credit department during 1994 and had formed the view that
there were shortcomings in it. It was unfortunate that he did not
promptly address these shortcomings within BSL from 1 January 1995.

(3) Financial Controls

13.27

There was a failure of financial controls with regard to the 'top
up' payments. There should have been a proper understanding of what
the large advances as shown on the weekly balance sheets (of which
the advances to BFS were, in fact, a major component) actually
represented and for what purposes they were being paid.  Maclean, as
Head of Banking; Barnett, as Chief Operating Officer; Broadhurst, as
Group Finance Director (and who had, moreover, agreed with an initial
recommendation in an earlier draft of the internal audit report that
margin call reconciliation procedures for BFS should be introduced);
and Tony Hawes, as Group Treasurer share responsibility in this
regard. In addition, Broadhurst and Tony Hawes should have checked
that adequate verification of the requests from BFS were being
undertaken. Indeed, if it was considered that these advances were
advances to clients, there should have been a detailed assessment of
the question of charging clients for the costs of the advances, or at
the very least, of the cost to Barings of making such advances.

13.28

Norris was aware of a continuing debate about the level of funding
of BFS and of the 'switching' activities as a whole. We consider
that he must, as Chief Executive Officer, take some responsibility
for failing to acquaint himself with the position and to make
enquiries as to the precise basis of funding being provided to BFS
or as to the reconciliation to underlying records of the sums
advanced. 

Level of reported profitability of BFS

13.29

There was no sufficiently informed assessment as to how BFS could
generate such large (reported) profits from activities perceived
to be essentially risk free (being matched 'switching' activities).
Given the very high level of reported profitability, this was a
serious failure. This issue of the profitability of the 'switching'
activities was of such significance that it ought to have been
given much more detailed and critical assessment than it received.
Yet there was no informed analysis or appraisal of the issue;
indeed, to the extent that queries were from time to time raised
about it they seem to have been answered without any thorough
investigation. We consider that the responsibility for this rests
with the highest level of management within BIB, including Tuckey,
Norris, Maclean, Barnett, Hopkins, Ron Baker and Broadhurst; and
ultimately must be shared by Peter Baring, as Chairman of Barings
plc. 

13.30

Neither Ron Baker (with responsibility, as Head of FPG, for
Leeson's proprietary trading from the end of 1993), nor Walz (as
Head of Equity Financial Products and having responsibility for
risk for Equity Financial Products), had, in our view, any real
understanding of the nature or true profit potential of BFS's
apparent trading activities; and even while they expected Treasury
to fund BFS's ever increasing requirements, they failed to
familiarise themselves with what Leeson was doing or to exercise a
sufficient degree of supervision over BFS's trading activities.
Moreover, neither Norris, as Chief Executive Officer, nor Maclean,
as Head of Banking (of which Division FPG became part), took
sufficient steps to satisfy themselves that Ron Baker had proper
management control over BFS's trading activities.  

Implications of the SLK receivable

13.31

We consider that the incident communicated by C&L Singapore to
London by the beginning of February 1995 of the alleged receivable
from SLK in the sterling equivalent of around £50 million - which
the information now available indicates to be a spurious
transaction - required much more prompt and firm action by senior
management in London and Singapore than it received. 

13.32

There was clear understanding in London of what had actually
happened, but we were told that the matter was regarded at the
time as very unusual. On one version of events (known at least
to Broadhurst by the beginning of February 1995) Leeson appeared to
have involved BFS, in some way, in trading or broking an OTC
option transaction - which would have been an unauthorised activity
for BFS. On another version of events, known to Norris, Maclean,
Barnett and Ron Baker, among others, there had been an 'operational
error' (as it was called) within BFS, whereby a payment had in
December 1994 wrongly been made to a third party. It is the case
that the money was reported as having been repaid on 2 February
1995. But the potential implications were that BFS either had
engaged in an unauthorised activity (in the form of OTC option
broking or trading) or, at all events, had somehow been involved
in the erroneous payment of a very large sum. In operational terms
the matter was, on any basis, very serious; and there were obvious
risk and large exposure reporting implications. When Hopkins was
told of the matter on 6 February 1995 he expressed serious
concerns; and circulated a note on 10 February 1995 for MANCO,
including (among others) Norris, Barnett and Maclean, which
referred to error as being an incorrect payment relating to an OTC
option broked by BFS. But that note by Hopkins was not given the
attention which it deserved. It is the case that Tony Hawes went to
Singapore on 6 February 1995 to look into this matter, among other
things; but this was only part of the purposes for his visit and
neither he nor anybody else was requested to establish as a matter
of urgency exactly what had occurred. In consequence, Tony Hawes had
not concluded his report on the point prior to the collapse.

13.33

Because of the obvious seriousness of the matter, the confused and
unsatisfactory information available to management in London at the
time required an urgent and detailed investigation. Broadhurst and
Norris in particular, and also Ron Baker, Maclean and Barnett,
should have ensured that the necessary  urgent steps were taken to
ascertain precisely what had happened. 

13.34

As to management in Singapore, Jones and Bax should have taken more
effective steps than they did to ascertain the precise circumstances
of what they understood, by the beginning of February 1995, to have
been an unauthorised payment by BFS relating to an OTC option trade.

13.35

The appreciation by certain members of management that there were
very unsatisfactory features relating to this transaction is, we
consider, illustrated by the fact Broadhurst (at the request of
Norris, who had himself been so requested by Bax) asked C&L London
that no reference to this transaction be made in the auditors'
management letter for BFS. We consider that it was inappropriate
for Broadhurst, Norris and Bax to have caused such a request to be
made, which was done with a view to attempting to avoid potential
problems with the regulators of BFS in Singapore.

Market concerns in 1995

13.36

There were, therefore, by the beginning of February 1995, features
which should have alerted management to the existence of potential
problems within BFS. It was also the case that there were rumours
in the market concerning Barings' very large position on OSE, and
possible client problems, which were known to management in
London in January 1995. Indeed, queries were raised at a high level
from reputable sources, and even included a query on 27 January
1995 from the Bank for International Settlements in Basle. These
rumours persisted in February 1995. 

13.37

While management of BIB may initially have been justified in
taking no steps with regard to these market concerns, given their
perception that the positions in respect of the 'switching'
activities were fully matched, nevertheless we consider that at
the beginning of February 1995 it would have been appropriate for
steps to have been taken to investigate the foundation for them. 

13.38

By the beginning of February 1995 the incident of the SLK
receivable had been communicated to London - which at the least
suggested that there had been a serious operational error within
BFS and which remained unexplained. It was also the case that by 31
January 1995 the letter from SIMEX dated 27 January 1995 had been
sent to London; that indicated that SIMEX was seeking an assurance
of BFS's ability to fund margin calls at short notice if market
conditions should become adverse. Moreover, the fax of 3 February
1995 from Bax drew attention to the fact that Leeson was, in fact,
still in charge of both trading and settlements operations of BFS.
As Tony Hawes and Railton had gone out to Singapore and were there
by 6 February 1995, there was every opportunity to require them
to check whether there was any foundation for these market
concerns and whether (by reference to BFS's own records) the
positions on OSE were indeed fully matched. 

13.39

Given all this, we consider that the basis for the rumours should
have been more vigorously investigated at the time; and Norris, as
Chief Executive Officer, and Ron Baker and Walz as being in charge
of Leeson's proprietary trading, should have taken steps to verify
that the positions were indeed fully matched. 

Reporting to regulators

13.40

In consequence, to a considerable extent, of the lack of
understanding of BFS's trading activities, the lack of
reconciliation to client records of the funding provided by Barings
in London to BFS and the lack of verification of the (false)
information provided by BFS, there were deficiencies and
inaccuracies in large exposure reporting to the Bank. The 'top up'
payments to BFS were not included in the large exposure reports to
the bank. Concurrently, these 'top up' payments were not included
in the SARS returns submitted to the SFA (until the return for
January 1995, delivered just before the collapse). 

13.41

It appears that the question of whether the 'top up' account
should be reflected in the large exposure reporting to the Bank was
not internally discussed within Barings nor was its very existence
drawn to the attention of senior management. It is surprising that
it was not raised as an issue for discussion. For if the money was
considered to be paid as margin for (unidentified) clients, then it
should have raised questions as to whether there were large
exposures to particular clients whereas if the money was
considered to be paid in respect of house positions, then it should
have raised questions as to the large exposure position to BFS at
the solo consolidated level and to SIMEX at the consolidated level.
Equally, there is no clear explanation of why the 'top up'
account  (as substantially reflected in the account maintained by
Barings from February 1994 designated BSINGCOLL account) should
not, until 31 January 1995, have been reflected in the SARS
returns to the SFA, if it was indeed considered that these
payments reflected advances for client margin.

13.42

There was, overall, an inconsistency in Barings' approach to these
'top up' payments for regulatory reporting purposes. They were not
included in the large exposure reports to the Bank because,
apparently, they were considered to represent advances to a large
number of clients; but, at the same time, they were not included
in the  SARS returns to the SFA as advances to clients and, on the
contrary, were reflected in the balance sheets submitted to the
SFA as amounts due from affiliated companies. 

13.43

Barnett and Maclean were the members of senior management
principally involved in discussions with the Bank on the large
exposure reports. They must share responsibility with regard to
inaccuracies in them, even though they did not know of them.  Seal,
who, as Financial Controller of BIB from September 1994, signed the
reports, and before that, as Financial Controller of BB&Co from
November 1993, had responsibility for the BB&Co solo consolidated
large exposure reports, failed sufficiently to analyse the
information provided to her by BSL for this purpose and failed
sufficiently to consider whether the 'top up' payments (of which she
knew by the end of 1994) should be included. In addition Broadhurst
(to whom Seal reported), although he informed us that he did not see
the large exposure reports, should have apprised himself, as the
Group Finance Director of BIB, as to the reliability of the systems
and sources generating the information needed for such reports. He
was also responsible for the accuracy of the returns to the SFA,
which he did see. Tony Hawes, given the concerns which he had about
the payments to BFS (which had implications for risk and large
exposure reporting) failed sufficiently to apprise senior management
of his concerns for the purposes reporting to the Bank and to the
SFA. Norris, as Chief Executive Officer, must  bear ultimate
responsibility for the accuracy of the reports to the Bank and, as
Chief Executive Officer and nominated Senior Executive Officer under
the SFA's rules, for the accuracy of the returns to the SFA.