How one trader brought down Barings Bank: account 88888

Barings, a London bank founded in 1762, was brought down in a matter of weeks by one 28-year-old trader in Singapore, and the person responsible for checking his trades was himself.^[2][4] This case file covers how losses hid in an account numbered 88888, how the scheme collapsed in February 1995, and the one control that would have stopped it.

What happened

How it worked

Leeson's official job was low-risk arbitrage, buying on one exchange and selling on another to capture tiny price gaps. In reality he took large one-way positions in Japanese stock index futures, Japanese government bond futures and options, none of it approved.^[3]

What let him hide it was his second job. Because he ran both the trading desk and the back office that settled trades, he controlled the records that were supposed to check him. Official reviews found no real separation between the two in the Singapore unit, which let him alter the number and details of transactions and park losses in the error account.^[3]

Keeping the positions open required cash to cover margin, the deposits exchanges demand as prices move. Leeson kept asking London for more, and London kept sending it without asking hard questions. By late February 1995 the funding sent to the Singapore unit was twice the capital of the entire Barings group.^[3][5]

What it cost

Losses reached £827 million by February 27, 1995, and about £927 million once the positions were closed out, roughly 3 times the group's capital.^[3]

Leeson was arrested in Frankfurt on March 2, 1995, and extradited to Singapore on November 23.^[1] On December 2, 1995, after pleading guilty to 2 charges, one of them for deceiving the bank's auditors, with 9 more fraud and forgery counts taken into account, he was sentenced to 6 and a half years in prison.^[1][4] He was released on July 3, 1999, after serving about 3 and a half years.^[1]

Official reports faulted management as well. An internal audit in August 1994 had flagged many of the weaknesses in the Singapore unit's controls, but its recommendations were acted on slowly or not at all.^[3]

The missing control

The missing control: separating trading from trade settlement. The person who makes the trades must never be the person who records, reconciles and pays for them.

The Bank of England's review said plainly that clear segregation of duties is fundamental to any effective control system.^[3] With an independent back office, the 88888 account would have shown up in the first reconciliation that someone else performed, and requests for ever-larger sums from London would have been checked against trades that someone other than Leeson had confirmed. The losses were S$8.8 million in 1992. Separation would likely have caught them there, not at £827 million.^[1][3]

What to do in your business

• Split who spends from who reconciles. The person who places orders or pays bills should not be the one who reconciles the bank statement. In a tiny office, have the owner or an outside bookkeeper do the monthly reconciliation.
• Look inside the catch-all accounts. Suspense, error, "miscellaneous" and adjustment accounts should be reviewed monthly by someone other than the people who post to them. Ask what every entry is.
• Question star performance. Results that are unusually good, steady or unexplained deserve the same scrutiny as losses. Ask how the money is actually being made.
• Tie every cash request to evidence. Do not send more money to a branch, project or employee just because they ask. Require documents that someone independent can verify.
• Close out audit findings with dates. When an accountant or auditor flags a weakness, assign an owner and a deadline, and check it gets done.

Facts are drawn from court records, government reports, company statements and reputable reporting, listed below. People are named only where they were convicted, pleaded guilty or spoke publicly in an official role.