The employee, who worked at BNP Paribas Private Bank, managed to transfer the cash haul out of client accounts in 13 separate fraudulent transactions between February 2002 and March 2005 using forged signatures and instructions and by falsifying change of address documents.

During its investigation, the FSA found that a flaw in the bank's IT system allowed the senior employee to by-pass normal middle office processes, which meant that basic authorisation and signatory checks were not carried out on internal cash transfers between different customer accounts.

Furthermore, BNPP Private Bank did not have an effective review process for transactions over £10,000 from clients' accounts. The regulator also found that the bank's procedures were not clear about the role of senior management in checking significant transfers prior to payment.

Margaret Cole, FSA director of enforcement, comments: "BNPP Private Bank's failures exposed clients' accounts to the risk of fraud. This is unacceptable particularly with the overall increase in awareness around fraud and client money risks. Senior management must make sure their firms have robust systems and controls to reduce the risk of them being used to commit financial crime."

The bank also failed to improve its procedures for monitoring large transactions or carry out remedial action on a timely basis, says the FSA, despite being aware that some procedures required improvement as a result of an examination of its anti-money laundering systems and controls in August 2002.

The FSA says this is the first time a private bank has been fined for weaknesses in anti-fraud systems but warns that it is "raising its game" against firms with lax controls.

"This is a warning to other firms that we are raising our game in this area and expect them to follow suit. We will not hesitate to take action against any firm found wanting," says Cole.