Regulating securities fraud: Evidence from unauthorised trading cases

Abstract

This paper summarises and evaluates the results of new empirical evidence serving as an input to the ongoing policy debate whose central objective is to design an efficient overall governance structure to reduce fraud in financial institutions. While the focus is exclusively upon unauthorised trading fraud, the findings have more general applicability. Fraud control procedures operating within financial institutions can be divided into two categories. First, internal operational risk control systems, both those designed by the institution and those mandated by third parties. Secondly, the disincentive effects attributable to the threat of legal sanctions once the fraud has been identified. The paper begins by critically evaluating the effectiveness of both classes of constraints. Recent attempts to identify empirically the degree to which losses from fraudulent activity can be associated with the breakdown of individual constraints are then summarised and evaluated. The evidence is based on the analysis of 37 case studies of unauthorised trading fraud drawn from financial institutions in eight countries. The findings suggest that internal controls present the primary defence against severe fraud losses. They also indicate that regulatory penalties imposed on senior supervisory management are crucial in ensuring efficient fraud loss mitigation in financial institutions. Finally, the implications of the results for regulatory policy are highlighted.

Citation

Bowe, M. and Jobome, G. (2001), "Regulating securities fraud: Evidence from unauthorised trading cases", Journal of Financial Regulation and Compliance, Vol. 9 No. 2, pp. 151-160. https://doi.org/10.1108/eb025070