Don't land behind (Mars) bars

The Mars cocoa fraud and why operational risk — not price risk — can sink companies.

Price risk often grabs the headlines when commodity prices go through periods of high volatility. But it's operational risk that often causes losses or worst-case, bankruptcy, at companies. Think Barings Bank - the 233 year old financial institution that was sunk by poor derivative dealing controls.

The sentencing of the former head of Mars cocoa price risk last year for fraud is another stark reminder of not forgetting about the unglamorous side of risk management.

The risk manager was sentenced to 63 months in prison after running a long fraud scheme that stole more than $28m from Mars. He exploited gaps created by complex commodity risk workflows and government-backed export credit programmes, especially where internal oversight was weak and responsibilities were concentrated in one senior role.

To mitigate this risk companies should give sufficient attention to controls and approvals processes. Spreadsheets are not controls' friend. To manage operational risk companies need robust, transparent systems with audit trails, permissioning, segregation of duties, and auditor sign-off. Automatic flagging through AI of unusual transactions should be considered.

Proper commodity risk management isn't just about prices, but also the price of poor controls. Don't land up behind (Mars) bars!

At Forge aHedge we help companies manage their commodity and fx hedging, with best practise risk management and an optional, comprehensive operational controls capability.

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