Five pillars of financial crime (part 2)
By Dr George Venturini
Dr. E. Jones, a distinguished senior academic in the Department of Political Economy at the University of Sydney, had been an early critic of the Royal Commission. “The Terms of Reference were a motley collection of admirable and potentially limiting or diverting items,” wrote Dr. Jones. “Its preamble was a shocker of government self-delusion – a system “most stable”, “systemically strong”, “internationally recognised”, “world’s best”, and so on.
That and the ridiculous brevity of the Commission’s mandate looked like a Clayton’s Commission in the making. Thus the title of his series, as previously noted, on the backdrop to the Royal Commission hearings.
“The Commission’s early hearings were a surprise. There had been assertive questioning of the banking sector’s cosseted and overpaid leaders,” wrote Jones. The A.M.P., a financial services company in Australia and New Zealand providing superannuation and investment products, insurance, financial advice and banking products including home loans and savings accounts, possibly a fifth pillar of crime, had come crashing down. “Banking involvement in the corrupt franchise sector had been a revelation.”
“But much of the supposed shock horror exposures had already received good coverage in myriad Parliamentary inquiries and ongoing Fairfax media stories.
Beginning 21 May, the Banking Royal Commission devoted a cursory two weeks to small business lending. Cursory, because this sector has been long under the radar.” (E. Jones, ‘The Royal Commission falls from grace’, Independent Australia, 23 June 2018).
Ms. Kate Carnell, the Australian Small Business and Family Enterprise Ombudsman, Kate Carnell, rightly expressed dismay at the brief period allocated to small business.
Having been the regular recipient of bank victim accounts since 2000, Dr. Jones is atypically familiar with the banks’ modus operandi regarding its small business, and family farmer, borrowers. It is perennially ugly. He can attest that it is a sector rife with malpractice, indeed criminality.
Dr. Jones described an event with more than a whiff of malignity which was the takedown of close to a thousand Bankwest commercial property borrowers after the C.B.A. purchased Bankwest from HBOS Australia on 19 December 2008.
“Curious, then – he said – that Counsel Assisting, Michael Hodge QC, should open the small business session declaiming that the foreclosed customers got the story wrong regarding the C.B.A.’s motivation for this takedown.
The key alleged claims were that the C.B.A.’s ultimate purchase price could be reduced by default and foreclosure of select Bankwest borrowers (“clawback”) and/or that a desired enhancement of the bank’s tier one capital adequacy ratio could similarly be achieved by such foreclosures.
Mr. Hodge noted that these ulterior motives:
“… allow the convenience of avoiding grappling with the risk presented by a particular borrower or industry… They therefore avoid asking how a bank might or might not legitimately respond to its perception of increased risk in respect of a particular loan or lending in a particular industry.”
This characterisation could have been written by the bank itself.
The Hodge presentation was readily picked up by the Australian Financial Review and painted as the unvarnished truth and the last word.
Mr. Hodge’s summary of the supposed claims is inadequate, indeed inaccurate.
Bankwest victims were forced to make inferences from the fragmentary information publicly available. Two Parliamentary inquiries (Post-GFC Banking, Impairment of Customer Loans) were impeded for having no access to the documentation. A Royal Commission is supposed to get to the bottom of things.
It is indisputable that the C.B.A. tried to clawback a sizeable $47 million of resort developer Rory O’Brien’s loan but was denied by HBOS and its advisers. Some clawback was obtained with the ultimate price paid being $2.126 billion, compared to the agreed $2.428 billion. Moreover, HBOS’s book value for Bankwest at time of purchase was $3.676 billion. Has the takedown already been pre-ordained in the large-scale discount in the purchase price?
The injustice and the scale of the C.B.A. foreclosures [have] generated a resolve amongst foreclosed Bankwest borrowers that has led to numerous inquiries and, ultimately, to the Royal Commission itself. For this group to be crudely impugned is to threaten the integrity and reputation of what should formally be an august procedure.
The stakes involved in the C.B.A. takeover are enormous. Bankwest’s parent HBOS was ailing. The Government and the regulatory apparatus gave CBA carte blanche to acquire Bankwest (in a hurry) in the interests of system stability. The A.C.C.C. produced, to my mind, a questionable accommodating report, asserting that the takeover was not anti-competitive.
A superficial glance at a sample of Bankwest victims unearths familiar stratagems. The Global Financial Crisis did not universally wipe out values. Rather, there followed strategic devaluation of assets, promises not kept, arbitrary imposition of usurious fees and penalties, receivers rampaging through appropriated properties, customer assets sold ridiculously under value and fabricated residual debt.
Some Bankwest victims and families were disgracefully harassed. Where is the commercial imperative in this sadistic behaviour?
One’s initial fears of a Clayton’s Royal Commission are now rekindled with substance. It appears that there are forces greater than merely the CBA itself that want this large-scale borrower foreclosure removed from forensic examination, exposure and redress.
The C.B.A. has been exposed as a corporate blackguard regarding Storm Financial, Commonwealth Financial Planning, Comminsure, Dollarmite accounts, money laundering facilitation on a vast scale… Can we seriously believe that the C.B.A. has been driven by “commercial imperatives” in this wholesale cleanout of Bankwest’s commercial portfolio?
The foreclosed Bankwest borrowers have been sacrificial lambs for a process instigated for a broader public purpose. The C.B.A. appropriated that public purpose for a private end – with catastrophic results for many victims.
All documentation relevant to the purchase should be made public. The entire paper trail of the purchase and the C.B.A.’s foreclosure program should be exposed.
Retail banks, regardless of their private ownership, are para-state organisations. Their public role is fundamental – hence the need for commensurate regulation.
The 1981 Campbell Report – the bible and rule book of financial deregulation – got it wrong. The Report claimed that rudimentary prudential capital provisions and unrestrained competition would produce the goods. The Report’s authors declined to enlighten us on what “competition” in retail banking involved.
Campbell claimed there was no need for specialised or government-owned banks. Thus they were done away with. Of special relevance is the closure of the small business/farmer Commonwealth Development Bank in mid-1996, with the privatisation of its parent bank.
From day one of deregulation, the experience was anything but salutary — witness the foreign currency loans scandal and the orgy of crazy lending to dodgy corporates.
My interpretation of the 1991 Martin Banking Inquiry is that it was oriented not to dissecting and repairing the dysfunctionality of the de-regulated 1980s, but to diverting dissent — not least from the victims’ publicity conduit, Democrat Senator Paul McLean.
Post-Martin, the banks were granted self-regulation in the form of the banking ombudsman and the cynically-contrived privatised code of banking practice.
This is the backdrop to the current environment in which the banking sector treats selected borrowers savagely and with impunity. Thus has, in particular, the People’s Bank become the nemesis of the people.
The bank lender – small business/farmer borrower relationship is one of the most asymmetric of all commercial exchanges.
Nobody cares to examine the character of the relationship, least of all the complicit legal profession and the ill-educated courts. Banking law academics are silent. A contract is a contract, says the law.
Banks break the contract at will, but the courts see only borrowers’ indebtedness and obligation for repayment.
And what price the hallowed contract when a borrower’s contract with a lender is assumed by another when the lender is taken over, the new owner proceeding to change the terms of the contract? This issue is especially relevant when the borrower is a farmer with a loan with a specialist rural lender (Commonwealth Development Bank, Primary Industries Bank Australia, Landmark, Rural Finance Corporation of Victoria) that is taken over by a conventional bank.
Bank borrowers essentially have no rights, only obligations.
Banks perennially take customer security, especially the family residence and extended family guarantees, not to mitigate risk, but as a vehicle for ready predation. The strategic object ab initio is property theft. Armed with a banking license, it’s as easy as falling off a log.
The credit relationship is one of structured dependence, traditionally compensated by trust in professional expertise and integrity. But the banker has been replaced by the money lender. Trust is betrayed and the customer is disarmed from the beginning.
These issues have been laid out in my submission to the Royal Commission in late February. Commission staff have not seen fit to contact me, even given my evident broad exposure to the nature of the beast that is the subject of the Commission’s investigation.
The banks remain unrepentant. There is every probability that when the Commission runs its course the banks will carry on with their entrenched unlovely practices – indeed, with a new ferocity.
A.S.I.C. will continue to tell small business complainants to go away, in spite of its legislated responsibilities for unconscionable conduct in financial services. The Financial Ombudsman Service, soon to move unreformed into the Australian Financial Complaints Authority, will continue to destroy borrower hopes by deferring to the interests of the banks that provide its funding.
“Entrepreneurship” is touted as the root stock of a free enterprise economy. In this environment, anybody who takes that calling at face value is living in a fool’s paradise.” (E. Jones, ‘The Royal Commission falls from grace’, Independent Australia, 23 June 2018).
Dr. Jones had early made a submission to the Royal Commission (‘Submission to the Banking Etc Royal Commission,’ bankvictims.com.au, 6 March 2018).
Here is, in substance, the Executive Summary of the Interim Report.
“The Commission’s work, so far, has shown conduct by financial services entities that has brought public attention and condemnation. Some conduct was already known to regulators and the public generally; some was not.”
Commissioner Hayne asked two questions. “Why did it happen? What can be done to avoid it happening again? These are now the key questions.”
In the Interim Report these questions – ‘why’ and ‘what now’ – were asked with particular reference to banks, loan intermediaries and financial advice, with a view to provoking informed debate about both questions.
As for the first question, “Why did it happen?” the Commissioner said:
“Too often, the answer seems to be greed – the pursuit of short-term profit at the expense of basic standards of honesty. How else is charging continuing advice fees to the dead to be explained? But it is necessary then to go behind the particular events and ask how and why they came about.
Banks, and all financial services entities recognised that they sold services and products. Selling became their focus of attention. Too often it became the sole focus of attention. Products and services multiplied. Banks searched for their ‘share of the customer’s wallet’. From the executive suite to the front line, staff were measured and rewarded by reference to profit and sales.”
Australia’s banks built every part of their operations around selling, to maximise profits, at the expense of serving their customers’ needs.
The Interim Report noted:
“Selling became their focus of attention. Too often it became their sole focus of attention. Products and services multiplied. Banks searched for their “share of the customer’s wallet”. From the executive suite to the front line, staff were measured and rewarded by reference to profits and sales… How else is charging continuing advice fees to the dead to be explained?”
The Report reached damning conclusions about the management systems in place at the Commonwealth Bank and the National Australia Bank, saying that they were the only two organisations unable to furnish a proper list when asked about the misconduct they had been aware of over the previous five years: “Taken together, the course of events and the explanations proffered can lead only to the conclusion that neither CBA nor NAB could readily identify how, or to what extent, the entity as a whole was failing to comply with the law.
If that is right, neither the senior management nor the board of the entity could be given any single coherent picture of the nature or extent of failures of compliance; they could be given only a disjointed series of bits of information framed by reference to particular events.” (P. Martin, ‘Banking Royal Commission’s damning report: ‘Things are so bad that new laws might not help’, theconversation.com, 28 September 2018).
The Report clearly identified some forms of dishonesty and greed: charging for doing what one does not do is dishonest; giving advice which does not serve the client’s interests but profits the adviser is equally dishonest; and no matter whether the motive is called ‘greed’, ‘avarice’ or ‘pursuit of profit’, the conduct ignores basic standards of honesty; its prevalence and persistence require consideration of the issues of ‘culture’, regulation and structure.
“It is greed that has led Australian banks to steal from dead people” proclaimed Richard Denniss after reading the Interim Report.
And he went on: “Greed is good. Or so said Michael Douglas’ character Gordon Gekko in the 1980s hit film Wall Street. Gekko went further, stating “Greed, in all of its forms; greed for life, for money, for love, knowledge has marked the upward surge of mankind.”
But greed also leads Australian banks to steal from dead people.”
In handing down his Interim Report Commissioner Hayne was damning in his criticism of the behaviour of Australian bankers. It was not a lack of laws, guidelines or codes of conduct which led to the richest banks stealing from the poorest Australians, the Commissioner argued: it was simply greed.
Hollywood often makes bank robbers the heroes of its films, but until Gordon Gekko came along the bank robber was always the underdog. Since the 1980s – when the neoliberal value of self-interest replaced the traditional value of self-sacrifice – films, bankers and even elected representatives have been telling the plebs that not only is it alright for rich bankers to rob poor people, it is laudable.
As Denniss wrote: “The scale of fee-gouging, profiteering and the terrible treatment of customers should be no surprise to our regulators or politicians.
Australia’s big four banks are among the most profitable in the world. In fact, the profits of the big four banks account for 2.4% of gross domestic product. Think about that: of every $100 produced in Australia, $2.40 goes to the shareholders of the big four banks.”
Continued Saturday – The five pillars of financial crime (part 3)
Previous instalment – The five pillars of financial crime (part 1)
Dr. Venturino Giorgio Venturini devoted some seventy years to study, practice, teach, write and administer law at different places in four continents. He may be reached at George.firstname.lastname@example.org.
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This is deeper and more detailed stuff than is usual.
Yet none of this, along with reminders about several other really serious issues, has even been thought of let alone mentioned during the election run-up.