Five pillars of financial crime (part 1)

By Dr George Venturini

Five pillars of financial crime

On 5 May 2014 ABC TV Four Corners, in conjunction with Fairfax journalists, broadcast an exposé of a sales-driven ‘culture’ within the Commonwealth Bank of Australia financial planning division, which was described as profit at all cost. (A. Ferguson, ‘Banking bad’, Australian Broadcasting Corporation, 5 May 2014). This was in light of an account fraud scandal at the U.S. bank Wells Fargo.

The word ‘culture’ – pronounced as coltcher in the patois spoken by sub-tropical English, the Englanders, actually – has entered the everyday conversation instead of what Professor Evan Jones calls the landscape; and he defines it as ‘ethics-free’.

Conventionally, ‘corporate culture’ refers to the beliefs and behaviours which determine how a company’s employees and management interact and handle outside business transactions. Often, corporate culture is implied, not expressly defined, and develops over time from the cumulative traits of the people the company hires. A company’s ‘culture’ may be reflected in its dress code, business hours, office setup, employee benefits, turnover, hiring decisions, but also – and most importantly – treatment of clients, client satisfaction and every other aspect of operations.

“The landscape is ethics-free.” Dr. Evan Jones wrote in his three-part series titled ‘The Clayton’s Banking Commission’. (E. Jones, ‘The Clayton’s Banking Commission,’ 8 December 2017, independentaustralia.net).

Chaired by a Labor Senator, a subsequent Senate committee inquiry recommended a royal commission into the fraud scandal which left thousands of C.B.A. customers millions of dollars out of pocket. The committee reported on the performance of the Australian Securities and Investments Commission, A.S.I.C. Several days later, Mr. Ian Narev, C.B.A. chief executive, apologised unreservedly to customers who lost money in the bank’s financial planning scandal. Apologies are cheap – a few embarrassing moments, but no compensation. Mr. Joe Hockey, then Federal Treasurer, whose mother had fallen victim to the scandal, complained that the bank did not act quickly enough to address the problem.

The C.B.A. was subsequently embroiled in other matters including money laundering for drug syndicates, turning a blind eye to terrorism financing, ignoring statutory reporting responsibilities for more than three years on more than 750,000 accounts, (I. Verrender, “How the Commonwealth Bank laid the groundwork for a royal commission’. ABC News, 7 August 2017) and impropriety in foreign exchange trading. (J. Frost, J. Eyers, ‘CBA and NAB admit impropriety in foreign exchange trading’, The (Melbourne) Age, 21 December 2016).

In 2015 the National Australia Bank, N.A.B. was implicated in a series of scandals concerning financial planners; it was revealed that the N.A.B. quietly paid millions of dollars in compensation to hundreds of clients for what it considered was inappropriate financial planning advice by its staff between 2009 and 2015. A whistle-blower claimed that there was a volatile, toxic and scheming ‘culture’ within N.A.B. (A. Ferguson, R. Williams ‘Forgery, sackings and millions in compensation: NAB under fire over financial planners’, The Sydney Morning Herald, 21 February 2015) and S. Danckert, ‘Senior NAB financial planner banned for deceptive conduct,’ The Sydney Morning Herald, 26 April 2016).

The Australian Securities and Investments Commission banned N.A.B. staff who were previously licensed to provide financial advice. Subsequently, it was revealed that N.A.B. was also implicated in impropriety in foreign exchange trading.

Westpac Banking Corporation, more commonly known as Westpac, was implicated in allegations that it rigged one of Australia’s key interest rates, the bank bill swap rate and was sued under responsible lending laws for using an automated process to decide whether peoples’ home loan applications met lending criteria. (S. Long, ‘Westpac: Landmark Federal Court case over lending practices sends message to other banks’, A.B.C. News, 1 March 2017). Further, a Westpac banker was imprisoned for fraudulently lending millions of dollars to elderly pensioners. (E. Jackson, ‘Former Westpac banker David St. Pierre jailed over $4 million fraud’, news.com.au. A.A.P., 9 February 2017). Following A.S.I.C. investigations, Westpac was instructed to make a donation of AU$3 million to Financial Literacy Australia after A.S.I.C. found that the bank’s employees disclosed confidential details of their clients’ orders to other foreign exchange traders. Westpac refunded AU$65 million to 220,000 customers after it failed to pass on benefits they should have received under package deals, including home loans, credit cards and transaction accounts, offered by the bank. (C. Yeates, ‘Westpac refunds $65 m to 200,000 customers over discount error’, The Sydney Morning Herald, 19 October 2017).

The Australia and New Zealand Banking Group Limited, commonly called A.N.Z, was also implicated in the bank bill swap rate scandal and settled with A.S.I.C. prior to the commencement of legal proceedings. (D. Chau, ‘ANZ settles interest rate rigging case just before trial begins’, A.B.C. News, 23 October 2017).

The Macquarie Bank was implicated in the foreign exchange trading scandal and was instructed to donate AU$2 million to charity and to open up its foreign exchange arm to scrutiny after A.S.I.C. uncovered a series of breaches by its traders. (G. Wilkins, ‘Macquarie admits to misconduct inside its foreign exchange trading arm’, The Sydney Morning Herald, 19 March 2017).

Appearing before the House of Representatives Standing Committee on Economics, the chief executives of the A.N.Z., C.B.A., N.A.B., and Westpac advised that, despite consumer complaints, very few senior bank staff had been dismissed due to misconduct even though they had been responsible for the activity of more junior staff, who had been dismissed. (J. Eyers, ‘Big four banks sack few for misconduct’, The Australian Financial Review, 10 April 2016).

In a 2016 speech before the National Press Club, Mr. Bill Shorten, the Leader of the Opposition, outlined his plans for a royal commission into the banking sector, should Labor win government at the 2016 federal election. Support for a royal commission also came from a Liberal member of Parliament. For eight years, since 2008, a whistle-blower, Mr. Jeff Morris, who had been with C.B.A., documented what he called the industry’s “systemic bad behaviour.” (K. Vickery, ‘Whistleblower Jeff Morris says; ‘nothing will change’ without a Royal Commission into banks’, news.com.au. Australia, 9 June 2016).

Despite an attempt launched in April 2016 to protect consumer interests, increase transparency and accountability, and build trust and confidence in banks, amidst growing community concerns, in January 2017 twenty-five members of the Australian Banking Association launched Better Banking, an initiative aimed to provide improve products, service and ‘culture’, and to provide consumers with helpful information and resources. In April 2016 Mr. Stephen Sedgwick, a former senior Australian public servant, was commissioned to conduct a review into bankers’ pay and commissions; (S. Rose, J. Shapiro, ‘Bankers pay to be reviewed by former public service cop Stephen Sedwick’, The Australian Financial Review, 12 July 2016) and recommended the termination of bonus payments to retail bank employees who are linked to sales performance. (A. Uribe, ‘Stephen Sedgwick says bank culture can’t be regulated ‘from the outside’ ’, The Australian Financial Review, 29 July 2017) In March 2017 A.S.I.C. handed down a report on financial advice compliance in the sector; and in September 2017 the Turnbull government introduced legislation to establish the Australian Financial Complaints Authority, an external dispute resolution body aimed to simplify how customers resolve complaints with bank and other financial services organisations.

Over the preceding years, there had been widespread criticism of A.S.I.C.’s activities as a regulatory body, including its supervision of banks. (A. Ferguson, ‘ASIC needs more power over white-collar criminals, according to Senate’, The Australian Financial Review, 26 March 2017).

In late 2017 some Nationals members of Parliament threatened to introduce a private member’s bill calling for a commission of inquiry into the banking system. As planned, the bill was to have been co-sponsored by the Nationals, Labor, the Greens and Senate cross-bench parties. A Nationals Senator and two Liberal-National members of Parliament, together with the Greens, Labor, and Senate cross-bench parties, had enough numbers to force the Turnbull government’s opposition to a royal commission.

In the 2017 federal budget, the Turnbull government proposed the introduction of a bank tax (or levy) which was to apply to banks with liabilities of at least AU$ 100 billion. The levy came into effect on 1 July 2017. (P. Coorey, ‘Scott Morrison’s plan to deal the bank inquiry’, The Australian Financial Review, 24 November 2017).

With political pressure mounting, on 30 November 2017 Prime Minister Turnbull and his Treasurer, Scott Morrison, announced plans for a royal commission. (M. Grattan, ‘Grattan on Friday: Government’s misjudgement on banking royal commission comes back to bite it’, The Conversation, 19 April 2018).

The setting up of the royal commission was supported by Mr. Bill Shorten, the Opposition leader. However, Mr. Chris Bowen, the Opposition treasury spokesperson, stated that Labor disagreed with the terms of reference and wanted the Government to consult with consumer groups and those impacted by financial scandals. Meanwhile, the Greens sought to widen the Commission’s terms of reference. The Australian Banking Association, and some of its members, who initially opposed calls for a royal commission, supported the terms of reference.

On 1 December 2017 Prime Minister Turnbull announced the appointment of former Justice Kenneth Madison Hayne, AC QC as the sole Commissioner for the Royal Commission. On 14 December 2017 the Governor-General Sir Peter Cosgrove issued Commonwealth letters patent appointing the Commissioner and the Commission’s terms of reference. The Commissioner was directed “to inquire into and report on misconduct in the banking, superannuation and financial services industry.”

The Commissioner subsequently announced that he would be assisted by legal counsel including Rowena Orr QC, Michael Hodge QC, Albert Dinelli, Eloise Dias, and Mark Costello. The Royal Commission was due to table its final report on 1 February 2019, which – it was noted – was to be not long before the next Australian federal election.

Initial proceedings commenced on 12 February 2018. As at 28 September 2018 10,140 submissions had been received. Of them, 61 per cent dealt with banking, 12 with superannuation and 9 per cent with financial advice.

After 289-day hearings, of 27 witness statements, and two thousand hours of evidence, a three volume Interim Report from the Royal Commission was published and tabled on 28 September 2018. The Report covers policy related issues arising from the first four rounds of hearings.

The Report contains substantial findings against banks, insurance companies and financial planners. The Report was tabled by the Government on the same day: 28 September 2018. Public submissions in response to the Interim Report were open and to be submitted by 5pm on Friday, 26 October 2018. The Commission was also accepting written submissions on policy related issues on Round 6 (Insurance). Submissions could be made from the Public submissions page and were to be submitted by 12pm (noon) on Thursday, 25 October 2018. The following round of hearings (Round 7) was to focus on policy questions arising from the first six rounds. Round 7 was to be held in Sydney (19-23 November 2018) and Melbourne (26 – 30 November 2018). Details about topics and case studies to be heard were to be published prior to the hearings commencing. The Commission was required to conduct an inquiry. It cannot resolve individual disputes. It cannot fix or award compensation or make orders requiring a party to a dispute to take or not take any action. The final report was due to be submitted to the Governor-General by 1 February 2019.

Continued Wednesday – The five pillars of financial crime (part 2)

Previous instalment – The restoration of malpractice (part 4)

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Dr. Venturino Giorgio Venturini devoted some seventy years to study, practice, teach, write and administer law at different places in four continents.

 

 

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