At the meeting held on 15 January 2003, the members of the Council of the Croatian National Bank were presented with the final report on the losses in the foreign exchange transactions in Riječka Banka d.d. Rijeka. The reconstruction of transactions in the Foreign Exchange Market Division in the period from the beginning of 1998 to 7 March 2002 has shown that total losses amount to USD 97,345,502.63, that is to HRK 814,762,193.20 (according to the CNB mean rate on 15 March 2002). The mentioned losses were incurred through speculative sales and purchases of foreign exchange - so called exchange arbitrage transactions.
For the purpose of determining the final amount of the incurred losses and the way they were made, the central bank examiners had to conduct a comprehensive analysis of more than 48,000 forex transaction entries. The examination has shown that - in the period covered by the analysis - 16,773 arbitrage transactions were performed, out of which 8,739 were not entered. Total amount of all forex sales and purchases in Riječka banka exceeded USD 114 billion, out of which USD 73.6 billion were not entered.
The examination further revealed that transactions in the Foreign Exchange Market Division were performed in disregard of prescribed internal restrictions for authorized employees and that strict adherence to these restrictions was not controlled by the responsible managers and departments of Riječka banka. Moreover, precisely certain contracts signed by the bank managers with some foreign banks enabled the main dealer to trade above limits prescribed by the by-laws of Riječka banka. Inadequate organization of the bank has in many ways supported the cover-up of losses incurred through sales and purchases of foreign exchange. Access to complete documentation related to transactions was restricted in the wrong way. Also, correcting spotted discrepancies and answering to numerous complaints from foreign banks, regarding overdue settlement of arbitrage transactions, incorrect value dates and additional costs, was delegated primarily to the persons whose activities or negligence incurred the losses. The central bank examiners recorded 1,978 complaints in the form of SWIFT messages that reached Riječka banka from October 1998 to March 2002, with documents for eleven months of 1999 and four months of 2000 missing. In some months more than hundred complaints arrived, but the procedures applied to these complaints were such that complaints did not facilitate revealing more serious problems in the bank's forex trading.
The reports on the transactions of the Foreign Exchange Market Division and the results of these transactions submitted to the management board and other management of Riječka banka d.d. Rijeka were written by the main dealer himself, who largely also performed the transactions. His records did not conform to bookkeeping records. Additionally, no control mechanisms enabling the comparison of monthly reports on the bank's overall operation compiled in the bank's treasury and bookkeeping sector with the reports of the Foreign Exchange Market Division were put in place. The absence of such mechanisms facilitated the set up of desired results and cover-up of losses. The investigation, which is not within the fields of competence of the central bank, will show who knew or should have known of these losses even before March last year by virtue of their delegated responsibilities and powers in Riječka banka.
The analysis made by the central bank examiners has demonstrated that the incurred losses were largely covered up in the following ways:
- by recording nonexistent deposits with foreign banks in the bank's assets,
- by closing opened exchange arbitrage transactions through opening new ones,
- by overdue settlement of opened exchange arbitrage,
- by unauthorized taking of foreign exchange deposits in foreign banks,
- by recording transactions at incorrect value dates to reduce the amount of negative exchange rate differentials.
The insight into the documents available to the central bank examiners showed no financial transfers that were not based on business transactions, that is no financial transfers with fraud elements.
The completed report on the examination of Riječka banka d.d. Rijeka will be processed according to the Banking Law and the Decision on Conducting Supervision of Bank Operations. It will be made available to government bodies responsible for legal qualification and sanctioning of all illegal activities that jeopardized the existence of the third largest bank in Croatia. In order to be a warning to other financial institutions, the Croatian National Bank has decided to publish a shorter version of the report on its Internet pages (www.hnb.hr).