Operational excellence is what the public deserves
Public sector institutions must learn from best practice in the private sector
Bangladesh Bank was the victim of an $81 million fraud
This month, we learnt what keeps John Scott, chief risk officer (CRO) of Zurich Global Corporate, awake at night. Perhaps betraying his background as a scientist, the insurance CRO's worries include the health effects of nanoparticles and the increasing prevalence and impact of cyber crime.
Ask most operational risk managers about their nightmares, and the answers are generally more prosaic. Some of them can be found in this article about op risk at US public pension plans, which amounts to a rogue's gallery of creaking processes, flawed systems and inadequate risk controls.
In one example, the Oregon State Treasury had no middle and back office until as recently as 2011, meaning it allowed trades to be initiated and settled by its traders. Similarly, Michigan's Office of Retirement Services has had recurring problems with IT, having suffered multiple daylong systems outages in the past couple of years.
Worst of all, the State Employees' Retirement System of Illinois used paper cheques to transfer billions of dollars between the state treasury and bank accounts used to pay retirement benefits. It also had no credible disaster recovery plan until 2008. "Our original backup plan was basically if we had a disaster and we had no backup equipment, they were going to buy equipment," explained Gerry Mitchell, the fund's chief information systems officer.
US pension funds are not the only public sector institutions that are behind the curve.
In February, cyber criminals managed to steal $81 million from Bangladesh Bank by hacking into its systems and requesting payments from a bank account held by the central bank with the Federal Reserve Bank of New York.
Although most of the requests were blocked, the New York Fed nonetheless transferred about $100 million to banks in the Philippines and Sri Lanka. The funds from Sri Lanka were later recovered, but $81 million transferred to the Philippines was smuggled out of the country and laundered through local casinos, which aren't subject to anti-money laundering (AML) legislation.
In a recent column for Risk.net, Megan van Ooyen of software vendor SAS described the theft as "a comedy of op risk errors". Authorities in the Philippines have since been considering whether to revise the scope of the country's AML laws, while the governor of Bangladesh Bank has resigned.
Fingers have also been pointed at weaknesses at the New York Fed – notably by Carolyn Maloney, a member of the US House of Representatives. On March 22, Maloney called for a "thorough investigation" of the "brazen heist", and released a letter to the New York Fed raising questions about how it was allowed to take place.
Every month, there are hundreds of millions of dollars in op risk losses at private sector firms. No doubt there are also shining examples of op risk management at public sector institutions. The State Employees' Retirement System of Illinois is among those trying to do better, including by enlisting the help of New York-based asset manager BlackRock and its Aladdin risk platform. But in general, it seems that factors such as stretched budgets, a lack of competition and an overly bureaucratic style often conspire to stifle robust op risk management in the public sector.
It is essential that this changes: public sector institutions must learn from best practice in the private sector and beyond. Otherwise, a comedy of op risk errors might easily turn into a tragedy.
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