Summary: In September 1995, Daiwa Bank, one of the largest multinational banks in the world, told the Federal Reserve that it had lost more than $1 billion because of illegal security trades that took place in one of its New York branches over an 11-year period. Internal control weaknesses, including inadequate segregation of trading and electronic funds transfer functions, had allowed an employee to trade illegally and hide his activities. Before the losses were reported, the Federal Reserve had apparently noted, but not fully appreciated, the seriousness of internal control weaknesses at the branch. In response to congressional concerns about possible risks to the U.S. financial system, this report (1) identifies U.S. supervisors' expectations for adequate internal controls and audits in branches of foreign banking organizations, (2) evaluates the extent of serious weaknesses in these branches' internal controls and the audits reported by U.S. supervisors during examinations, and (3) discusses U.S. supervisors' efforts to address these weaknesses.
