Table of Contents

1) What is Operational Risk? ................................................................. 2

What cause operational risk? ............................................................ 3

The consequences of operational risk ............................................... 3

Case of operational risk ..................................................................... 4

a) Case in foreign .......................................................................................4

i) Nick Leeson..................................................................................................4
ii) Bernard Madoff ............................................................................................6

b) Case in Viet Nam .................................................................................10

How to reduce operational risk?...................................................... 11

 1) What is Operational Risk?
 Operational risks arise from inadequate or failed internal processes, people and
systems, or from external events. They include: fraud, security failure, legal
breaches, physical (e.g. infrastructure failure) or environmental risks. Operational
risks affect client satisfaction, an organisation’s reputation and its relationship with
its stakeholders, and shareholder value. It increases volatility of operating costs and
earnings. Unlike credit and market risks, operational risks are usually not willingly
incurred nor are they revenue driven, and are notoriously difficult to pin down and
to quantify or measure reliably.
 Categorising “operational” risks helps. It makes sense of the potential harm and
helps creating the model structure and analytical framework necessary to assist
addressing the risks and – importantly prioritise management time. Operational risks
fall broadly into either internal or external event risks.

2
 Internal risks include:
 Systems & Process – including regulatory and legal compliance
 Health & Safety
 Environmental
 Fraud & Reputation
 Strategic Risk

 External event risks include:

 Accidental – Industrial accidents such as fires and explosions
 Intentional – Terrorism and sabotage
 Disease – Human (e.g. Pandemic Flu) or Animal (e.g. Foot & Mouth)
 Geological – Volcanoes, Earthquakes and Tsunamis
 Weather and environmental – Flooding, storms, drought, and heat-wave

What cause operational risk?

There are many causes of operational risks. It’s difficult to prepare an exhaustive list of
causes because operational risks may occur from unknown and unexpected sources.
Broadly, most operational risks arise from one of three sources.
 People risk: Incompetency or wrong posting of personnel and misuse of powers
 Information technology risk: The failure of the information technology system, the
hacking of the computer network by outsiders, and the programming errors that can
take place any time and can cause loss to the bank.
 Process-related risks: Possibilities of errors in information processing, data
transmission, data retrieval, and inaccuracy of result or output.

The consequences of operational risk

Operational risk can lead to a bank’s collapse:
 The fall of one of Britain’s oldest banks, Barings, in 1995, is an example of
operational risk leading to a bank’s collapse. It was mainly due to failure of its
internal control processes. One of Barings’ traders in Singapore, Nick Leeson, was
able to hide his trading losses for more than two years.
 Nick was able to authorize his own trades and enter them into the bank’s system
without any supervision due to weak and inefficient internal auditing and control
measures. His supervisors were alerted after the losses became too huge. By that
time, it wasn’t possible to keep the trades and the losses a secret. Operational risk
can lead to a bank’s collapse.

3
Operational risks affect client satisfaction, an organisation’s reputation and its relationship
with its stakeholders, and shareholder value. It increases volatility of operating costs and
earnings. Unlike credit and market risks, operational risks are usually not willingly incurred
nor are they revenue driven, and are notoriously difficult to pin down and to quantify or
measure reliably.

(*)Source
http://ainstyrisk.co.uk/operational-risk-management/
https://marketrealist.com/2014/09/operational-risk-risk-banking-transactions/
https://www.bain.com/insights/how-banks-can-manage-operational-risk/

Case of operational risk

a) Case in foreign
i) Nick Leeson
 General information:
Name: Nicholas Leeson
Birthday: Born 25 February 1967
Country: Hertfordshire, England, UK
Education: Nick Leeson comes from nothing that is convenient because his father is
just a mortar. He had no conditions to study by this level. However, it is not an important
factor to have a job at the bank then.
 Process
 Leeson attended high school in Watford, where he started working at Coutts &
Company. Two years later, Leeson made Morgan Stanley a business assistant.
This helped him gain a background in financial markets as it began to grow
toward the end of the 1980s.
 Leeson then joined Barings Bank and quickly made a strong impression on the
leadership. He was promoted to a trader on the floor and in 1990 became a
manager at the Singapore branch, where Leeson ran futures contract
transactions on SIMEX floor (Singapore International Currency Exchange).
 In a spirit of hard work, Nick Leeson has quickly become an outstanding person
on the SIMEX platform with derivative products. He is considered one of the
most influential people in the market.
 Jobs and results of Nick Leeson
 Since 1992, Leeson has begun to carry out illegal speculative transactions and
gave Barings Bank huge profits, 10% of Barings' profit in 1993 came from this

4
 activity. Leeson became a star in the organization, gaining absolute trust from
the London leadership. They rated Leeson as an almost perfect character.
 Leeson was only 25 years old at the time, but he had never dared to dream even
though he had worked for nearly 10 years. However, Leeson was soon at a loss
in transactions and was forced to cover up losses in a faulty account, He
explained that the account was opened for the purpose of correcting a mistake
made by an employee. experience in the team caused.
 At the same time, Leeson had hidden all documents from the bank's legal audit
and made Barings' internal control useless.
 At the end of 1994, his total losses amounted to 208 million pounds, nearly 50%
of Barings' capital. On January 16, 1995, with the aim of "removing the gauze"
of losses, Leeson opened a two-way stock contract short straddle (selling option
contracts and expecting stable prices, if the price fluctuates. or drastically
reduce losses and limit losses, on the Singapore Stock Exchange and Nikkei
Stock Exchange (Japan) with the expectation that the Japanese stock market
will not change much in the short term.
 The sudden seismic incident that happened the next day in the province of Kobe
smashed his strategy. The Nikkei fell 7% that week while Japan's economy
seemed to have recovered after 30 weeks of recession.
 Leeson tried to overcome the loss by accepting higher risks; He bet that the
Nikkei will quickly recover and believes he can move the market. But he lost
the bet and the loss amounted to $ 1.4 billion, double the bank's charter capital
and it broke Barings because the loss caused by Leeson was too high for
Barings' capital.
 Comment:
 When reviewing Leeson's losses and strategy, it was hard for anyone to think
of a big bank like Barings. There are many advantages for Leeson:
 Leeson, while working in Singapore, is quite comfortable and free, proving that
there is a lack of operational control as well as no risk prevention measures.
 Leeson works on both locations - trading floors and support offices. So he "just
hit the drum and blew the trumpet" - made his own transactions. That's why
Leeson can hide what he wants.
 Leeson's profits have generated trust from management, who lack experience
in financial markets as well as sophisticated trading tips. Therefore, they did
not doubt Leeson and did not seem to realize the risk to the bank.
 Leeson surpassed the local government by making false statements, allowing
him to accumulate losses and avoid being audited daily.

5
  Barings enjoys special offers from the Bank of England. Normally, a bank
cannot lend more than 25% of its charter capital to an entity - but Barings is an
exception.
 Finally, legal audits and internal scrutiny did not detect errors, despite Leeson's
concealment of the hole as well as counterfeiting of documents - actions that
should have been particularly noticeable. Thereby, the bank account control
process is really ineffective.

 Later:
 Realizing that the loss was too great and the bank was on the verge of crisis,
Leeson decided to run away, leaving only a message, "I'm sorry." He went to
Malaysia, Thailand and finally Germany, where he was arrested as soon as he
got to the airport and was extradited to Singapore on March 2, 1995.
 Leeson was sentenced to six and a half years in prison but was released in 1999.
In 1996, he released the "Rouge Trader" autobiography, which describes in
detail his actions leading to Barings bankruptcy. The book was later adapted
into a film starring Ewan McGregor as Leeson.

(*)Source
https://ndh.vn/quoc-te/nhan-vien-28-tuoi-nick-leeson-khien-ngan-hang-barings-sup-o-nhu-the-
nao-1237513.html
https://www.imdb.com/name/nm0498776/bio?fbclid=IwAR2wqvVh84LfiRcv3GAl0jgtM1X3OjM
KaIdplRCoKlzd9RtE1utZ9JFGO-Q
https://enternews.vn/nha-dau-co-nick-leeson-tham-vong-va-bi-kich-62947.html

ii) Bernard Madoff

For decades, Madoff was a respected Wall Street financier, generous with employees and
beloved by his family. Who went unchecked in creating a Ponzi scheme that not only
doomed his own Organization and its staff but also the finances of countless others around
the world. Serving 150 years in prison for running a multi-billion dollar Ponzi scheme.
Bernard Madoff's full name is Bernard Lawrence Madoff. He was born on April 29, 1938.
He married Ruth (Alpern) Madoff and had two sons that is Andrew and Mark. Graduating
at Hofstra University, B.A Political Science, 1960.

6
 Timeline:

Event:
 1960 - The Launch of Bernard L. Madoff Securities
After graduating from Hofstra College and one year after marrying Ruth Alpern. Madoff
establishes his business with $5,000 saved from old jobs, including lifeguarding and
sprinkler installations. He works as accountant at Ruth's father's accounting firm in
midtown Manhattan.
 1962 - Investment Adviser
Madoff started managing investments channeled through his father-in-law.
 1970 - 1980 - A Growing Reputation
Madoff's trading business skyrockets.
 1983 - Client Recruiting
Frank Avellino and Michael Bienes decided to go full-time into recruiting clients for
Madoff.
 1989 - "This is a Ponzi Scheme"
Data was shown that Madoff was not hurt at all when the market goes down. This gave
reason to believe that he was running a ponzi scheme.
 1989 - Moving on to Bigger Money
People start investing more into Madoff
 1990 - Is This Fraud?
Investigators believe that the fraud started in the early 1990's.
 1990 -1999 - Madoff Continues Increasing Market Share
During the decade, Madoff's market-making operation was handling trades equaling 9
percent of all trading on the New York Stock Exchange. Moreover, he served as non-

7
executive chairman of Nasdaq from 1990 to 1993 and used the position to lobby
Washington.
 May 2000 - Markopolos Contacts the SEC
He submited an eight-page memo outlining his concerns to the SEC's Boston office. His
Boston contact was unable to persuade his superiors to investigate and suggests
Markopolos contact the SEC's New York office, which would have jurisdiction over
Madoff's firm.
 November 2005 - Markopolos' 21-Page Memo to the SEC
He gave details of more than two-dozen red flags about Madoff and it is titled, "The World's
Biggest Hedge Fund is a Fraud."
 December 2005 - "This Conversation Never Took Place."
Madoff coached FG General Counsel Mark McKeefrey and FG Chief Risk Officer Amit
Vijayvergiya on how to handle the SEC investigators.
 January 2006 - SEC Launches Investigation
In May 2006, Madoff was interviewed by the SEC but they ended up finding no evidence
of fraud.
 December 10, 2008 - Madoff Confesses To His Sons
He told his sons, Andrew and Mark, that the investment advisory business is a fraud and
that he was going to give himself up to the authorities.
 March 2009 - Madoff Pleads Guilty
He admited his guilt and apologizes to his victims, but didn't shed much light on how the
fraud occurred. Bernard L. Madoff was sentenced in June 2009.

Here' s how Bernad Madoff implementing his plan and conned his investors out of $65
billion without doubting for decades.
Ponzi scheme, which was ucalled by Madoff, attracts investors by bringing stable
profits. The name originated with Charles Ponzi, who promised 50% returns on
investments in only 90 days.
Bernard Madoff is a financial wizard. He's been investing for nearly 50 years and
he used to be a chairman of the NASDAQ. Anyone who's ever done business with him has
made a ton of money. So when he give suggestion about investing million dollars on the
stock market and it will grow about 1% every month, it means everybody does nothing,
just sit back and earn $10,000 every month, they agree to it fast. Because everyone knows
how famous Madoff was in financial and not easy to do business with him. So they trust
completely and this business can bring profits that nowhere can be done. Each year their
investment is doing exactly what he said it'll do and they looking over all these reports he
sent them and the stocks are doing great.

8
How did Bernard Madoff do to trick investors?
He' not the world's greates investor. When everybody handed over that million
dollars, he simply put the money into a bank account without buying any stocks. Those
reports he sent them about earnings that were completely fake. To avoid having too many
investors reclaim their rofits," Ponzi schemes encourage them to stay in the game and earn
even more money. The "investing strategies" used are vague and secretive, which schemers
claim is to protect their business. Then, they tell investors how much they are making
periodicall, but don't provide actually any real returns.
In Madoff's case, things began to worse off after clients requested a total of $7
billion back in returns. Unfortunately, he only had $200 million to $300 million left to give.
Another reason Madoff still can jog on the plan (despite multiple reports to the SEC about
suspicions of a Ponzi scheme) is Madoff was a well-versed and active member of the
financial industry. He began his own market maker firm in 1960 and helped launch the
Nasdaq stock market. He was a member of the board of National Association of Securities
Dealers and advised the Securities and Exchange Commission on trading securities. It was
easy to believe that 70-year-old industry veteran knew exactly what he was doing

Finally, Bernard Madoff, financial genius has been sentenced to the maximum 150
years in prison for masterminding a $65 billions fraud instead of making only $20 billions,
which wrecked the lives of thousands of investors.
The US district judge described the fraud as "staggering" and his guilty wasn't
tolerated because "breach of trust was massive". Therefor, there had been no letters
submitted in support of Madoff's character. Moreover, not only Bernard Madoff but also
five of Madoff's employees were found guilty for their partipate in the Ponzi scheme.
Include Madoff's accountant and lawyer is also facing up to 30 years in prison for his part.
The sentence, which means the 71-year-old fraudster will end his days in prison, was
handed down at an emotional hearing in a lower Manhattan courtroom where victims were
given the chance to express how the fraud had destroyed their livelihoods.

(*)Source
https://www.businessinsider.com.au/how-bernie-madoffs-ponzi-scheme-worked-2014-7
https://www.businessinsider.in/5-Years-Ago-Bernie-Madoff-Was-Sentenced-to-150-Years-In-
Prison-Heres-How-His-Scheme-Worked/articleshow/37604176.cms
https://www.bloomberg.com/news/articles/2018-12-11/the-bernie-madoff-ponzi-scheme-who-s-
where-now
https://www.theguardian.com/business/2009/jun/29/bernard-madoff-sentence

9
 b) Case in Viet Nam
The deputy director of Eximbank Ho Chi Minh City Branch fraudfully appropriated more
than 264 billion dong.
 General information
Le Nguyen Hung was born in 1971 in Dong Nai, a permanent residence in Binh An
Ward, Di An Town, Binh Duong Province is the former deputy director of Eximbank
Ho Chi Minh City branch.
 Process
 Le Nguyen Hung joined Vietnam Export Import Commercial Joint Stock Bank
(Eximbank) starting from December 1991. During the period from January 2012 to
March 2017, Le Nguyen Hung forged the signature of the owner. account to create
a fake account named Nguyen Thi Hong Le. After that, Le Nguyen Hung established
a fake authorization to authorize Ms. Chu Thi Binh to authorize Ms. Nguyen Thi
Hong Le and Nguyen Dang Phong to withdraw 11 savings books of Mrs. Chu Thi
Binh, a savings book of Mrs. Phung Thi Pham and 1 savings book of Ms. Le Thi
Minh Qui at Eximbank Ho Chi Minh City Branch.
 At the same time, Le Nguyen Hung deceived to create trust for employees including:
Cao Lan Phuong (born in 1980, former Deputy Head of Personal Customer Service
Department of Eximbank Ho Chi Minh City), Nguyen Thi Thi (born in 1978, former
controller of the Personal Customer Service Department); Ho Ngoc Thuy (born in
1986), Nguyen Thi Ngoc Tram (born in 1984), Tran Nguyen Xuan Lan (born in 1981)
are former transactors of the Personal Customer Service Department and Luong
Quoc Anh (treasurer) ) is the person responsible for making a power of attorney,
making money withdrawal and cash payment vouchers, but has failed to comply with
the functions and duties assigned and not in accordance with the regulations of
Eximbank regarding the order and procedure of making authorization. , make money
withdrawal vouchers and let customers withdraw cash. In total, Le Nguyen Hung
appropriated by Eximbank Ho Chi Minh City Branch more than VND 264 billion.
Currently Le Nguyen Hung has fled, was wanted by the Ministry of Public Security.
 Due to irresponsible behavior when improperly implementing regulations, enabling
Le Nguyen Hung to take advantage of withdrawing savings deposits in Eximbank's
system, the accused Ho Ngoc Thuy is responsible for more than 239 billion copper
that Le Nguyen Hung appropriated; Nguyen Thi Ngoc Tram is VND 15.3 billion;
Nguyen Thi Thi and Tran Nguyen Xuan Lan are VND 8.9 billion; Cao Lan Phuong
is 5.3 billion dong and Luong Quoc Anh is 3 billion dong.
 Consequences of fraud by appropriating Le Nguyen Hung's assets

10
  Causing more than VND 264 billion of Eximbank's losses and dispersing assets
fleeing abroad.
 The amount of more than VND 264 billion which Le Nguyen Hung appropriated
Eximbank HCMC agreed to pay the entire amount of VND 245 billion and the
interest amount as prescribed is over VND 103 billion, excluding overdue interest
penalties for Chu Thi Binh.
(*)Source
https://baotintuc.vn/phap-luat/xet-xu-vu-an-nguyen-pho-giam-doc-eximbank-chi-nhanh-thanh-
pho-ho-chi-minh-lua-dao-chiem-doat-hon-264-ty-dong-20181122124425016.htm

How to reduce operational risk?

The impact of operational risk on financial institutions is more and more, developing in a
complex direction, causing loss of assets and people, seriously affecting the prestige and
brand of the enterprise. Therefore, the problem of how to reduce operational risks is always
a concern for many business owners. No business is the same, the risks they face will be
different, so we will give an overview of how to reduce operational risk. This will allow
you to reduce the impact of losses that your business may suffer as a direct result of risk.
Here are four basic steps to reduce operational risk:
Step 1: Managing Equipment Failures
No matter how good your technology in business is, the equipment you use to perform your
operations may still be damaged. Depending on the severity of the damage, you could face
major losses in revenue. The fact that technology has become intertwined deeply with
businesses, the digital world has reshaped the way we manage and operate our
organizations like never before, so the extra following steps must be taken:
 Information protection
 Ensure all equipment works properly
 Make sure replacement plans are implemented in case of failure
If your business dependent heavily on information technology (IT) infrastructure like a
computer network, then the question of how to reduce operational risk can be answered by
updating and protecting the hardware and programs by the best security.
If your company operate in manufacturing, transportation or any other industry that relies
heavily on machines with multiple moving parts, make sure that you will compliance with
regular maintenance and ensure that small problems are resolved quickly enough to not
become a big problem.
Step 2: Keep Strong Business to Business Relationships
Businesses exist depending on each other. Your business will not exist if another business
is not operating, otherwise, other businesses will also be affected when your business is

11
inactive. You rely on another company to manufacture, provide, transport, distribute, so
you must build and maintain good relationships with other businesses.
When talking about operational risks in this respect, the common risks that often occur are
misinformation, accounting errors, delivery failures, incomplete or lack legal documents
and supplier disputes. That's how business relationships can put your company at risk.
With this case of operational risk, you need to make sure that you and your vendors and
suppliers are always stay on the same page when it comes to your transactions and ensure
that invoices, quantities and aspects, another aspect of business to the business supply chain
are correct.
Doing these things can ensure a good relationship between your business and other
businesses as well as minimize the risks that may occur in your business operations.
Step 3: Having Adequate Insurance
You must ensure that, in case something happens, your business need to have appropriate
insurance to pay for it. It can be anything from personal injury to property damage, but
having an insurance policy covering something that can affect your business means the
difference between a small and large disruption in your business operations. In a way, when
you encounter a problem, if you don't have insurance, you will be in big trouble. If you
have insurance, the problem will be lessened.
When thinking about how to reduce operational risk when it comes to your insurance, take
a look at your existing insurance policies and ensure that all possibilities are covered. You
pay to consult with your insurance broker to make sure you have all the insurance you need.
There are several different types of insurance you can get to pay for your business. Make
sure you have all the necessary insurance coverage to limit your company's operational
risk.
Step 4: Know the Regulations
If you need to minimize operational risk, updating legal and government regulations related
to your business is a smart choice.
Whatever you do, make sure that all of your business activities are within the limits of the
land laws in which you operate. Things like health and safety standards, employee salaries,
licenses and certificates, taxes and licenses all affect how you run your business. Don't let
your ignorance of law affect your company's operations. Know the laws to minimize the
operational risk of your company.

(*)Source
https://portalcfo.com/how-to-reduce-operational-risk/#.XWIqKugzbIU

12