Consider the trader who receives an urgent request from an unknown counterparty to enter into a sizable currency or derivatives transaction with the trader's bank. Surprisingly, the counterparty is unconcerned about price. But the deal is potentially lucrative, and no one appears to be breaking the law.

Does the trader pause, referring his or her suspicions upward, or proceed with the deal, brushing aside doubts that the counterparty may have something to hide and that the deal could well be tainted? The answer may depend on the effectiveness of the bank's operational-risk-management procedures.

This area of risk management is one that many financial players now recognize must be reviewed and perhaps radically reassessed, despite their increased spending to comply with new regulations such as Sarbanes-Oxley and Basel II. In recent years, losses incurred as a result of improper business practices, failed processes, and other operational risks have mushroomed across a range of industry sectors, including pharmaceuticals, oil and gas, and financial services. From 2001 to 2005, risk-related losses in financial services at the top 12 US banks represented 4 to 5 percent of their net income—and considerably more if unpublicized events are added to the total. In 2005 at least...