France urges more suspicion of fraud

PARIS, France (CNN) -- A French government report into the massive losses at Societe Generale says banks should have greater suspicion about employee fraud and do a better job of notifying the government when the issue arises.

Finance Minister Christine Lagarde said in the summary that her report will not assign blame or responsibility for the 4.82 billion euros ($7.2 billion) loss, which the bank has attributed to fraud by one of its traders, but will simply lay out the facts and make recommendations for the future.

Jerome Kerviel, who traded European index futures for Societe Generale, was charged last week for his role in the scandal, though he was not charged with fraud.

French Prime Minister Nicolas Sarkozy asked Lagarde to prepare the report after Societe Generale announced the trading losses last month. The report is unconnected to the continuing legal case against Kerviel. Watch more about Kerviel »

Lagarde's report recommends that banks should improve their procedures about fraud and strengthen the amount of suspicion they have about fraudulent activities.

According to an advance copy obtained by leading French financial newspaper Les Echos, Lagarde's report says members of Societe Generale's middle management failed to take action against Kerviel because he convinced them he was doing nothing wrong.

The managers should have been more suspicious of Kerviel because he never took vacations, he always wanted to run his own accounts, and he was always in the office at the end of the month when accounts were closed out, according to the copy obtained by Les Echos.

The official summary of the report says Societe Generale acted properly when it unwound Kerviel's trading positions in the days after it discovered the losses. But after reports that Sarkozy was furious at not being immediately notified, Lagarde's report urges bank to do a better job of notifying the government when such issues arise.

Banks should also reinforce their internal controls with regard to credit -- the amount of money traders are able to gamble with, the summary says. And banks should have a better idea of operational risks, to individuals, to the industry, and to the banks themselves, it says.

"Very clearly, certain mechanisms of internal controls of Societe Generale did not function, and those that functioned were not always followed by appropriate modifications," Lagarde told reporters after submitting her report, according to The Associated Press.

Lagarde also seeks to increase the penalties the banking commission may impose when a bank has violated commission rules.

Kerviel faces charges of abuse of confidence and illegal access to computers. The Paris prosecutor is still seeking a charge of fraud against the trader, who is free under judicial control while the legal proceedings continue.

Over the weekend, prosecutors interviewed two mid-level managers as part of their investigation.

Members of Societe Generale's board last week announced that a special committee would look into the causes and extent of the losses the bank incurred, as well as measures which could prevent a recurrence. E-mail to a friend

CNN's Jim Bittermann contributed to this report.

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