Australia Grapples with its Monstrous Banks
Compliance failures at a system-wide level are the hardest to heal from. This article looks at the risks facing companies that are “too big to fail” in light of the recent Australian bank scandal.
Compliance failures at a system-wide level are the hardest to heal from. An isolated incident can be sealed and shut, the blame falling on a few under-resourced teams or untrained managers. But when a failure becomes bigger than one mistake, one team or even one business and the culture itself is toxic, the very fact of operating in an industry that’s too big to fail can be a risk in itself.
Commonwealth Bank was recently handed one of the largest fines in Australian corporate history, $700 million, for breaching anti-money laundering and counter terrorism financing laws which resulted in many millions of dollars being laundered to drug importers. AUSTRAC, the Australian financial intelligence agency, accused the bank of “serious and systemic failures to report suspicious deposits, transfers and accounts.” Hundreds of thousands of suspicious transactions were made through the bank’s intelligent deposit machines (IDMs), which allowed anyone to instantly and anonymously deposit up to $20,000 into any bank account, as many times a day as they wished. In May and June 2016 alone, over $1 billion in cash went through the IDMs. No one thought to put a limit into the code, or even cap the number of transactions that could be done in a day, regardless of clear regulations.
The proposed $700 million settlement is barely a fraction of what the fine could have been, as every failure to report carries an $18 million penalty. Theoretically, Commonwealth Bank faced a trillion-dollar fine that dwarfed its own market value.
But becoming the laundromat of choice for Antipodean drug gangs is not the only failing of Australian banking. Established in December 2017 after years of public pressure, a royal commission is exposing how the four big Australian banks; Westpac, ANZ, National and Commonwealth Bank, have engaged mob-like behaviour without consequence or oversight. Evidence of wrongdoing has been mounting with every hearing in Melbourne, with allegations stretching from bribery, forging documents, failing to conduct customer due diligence, mis-selling loans, lying to regulators, charging fees to dead clients, cheating small businesses, arbitrarily defaulting customers and subjecting people to “hugely unfair” treatment.
One executive of AMP Limited admitted he did not know how many times his company had lied to the regulator about charging customers fees without providing any services. Hundreds of millions of dollars have already been repaid to customers subject to pointless fees by Commonwealth Bank. The regulator has warned wrongdoers they could face jail.
What happened in Australian banking is like a petri dish experiment of an unregulated oligopoly – a state of limited competition where four goliaths dominated the financial market together as almost feudal overlords. They stole, lied and cheated their customers while swatting away the regulator like an annoying fly. All the while being buffeted and protected by the Australian government. Deposits were guaranteed, capital raising was guaranteed and wealth and power coalesced in an interlocking system that enjoyed 80 percent of the market share with a stamp of political approval. In short, the Australian banking system had become too big to regulate, with each constituent part far too important to fail.
“Too big to fail” is a theory that certain corporations and institutions, primarily financial institutions, are so interconnected and fundamental to the proper functioning of a system that they simply cannot be allowed to collapse. “Too big to fail” often means “too big to prosecute.” Former Obama Administration Attorney General Eric Holder testified before the Senate that the size of large financial institutions had made it difficult to bring charges against lawbreakers because it could threaten the existence of the bank and therefore precipitate a crisis.
Some have argued for breaking up the biggest banks, others for increased regulation and oversight, or even a special tax on “too big to fail” institutions. While global policymakers continue to test and try various options to cut some of these institutions down to size, the wood which emerges from the trees is that being part of a “too big to fail” system presents its own inherent risks.
The most obvious problem here is a lack of effective oversight, from the ride the Australian regulators were taken on by their banks to the inability of the U.S. Department of Justice to prosecute criminals, when the regulator isn’t able or willing to do their job.
In this area, risks are taken with the comfort of impunity because they can be. When the only thing that matters is the profit margin, there’s no need to worry about the rules or even the law. Why bother with compliance when you know nothing can or will happen? Actions came without consequence, so the banks pushed a little bit further, as evidenced by the testimony of the royal commission and the massive failure of anti-money laundering compliance by Commonwealth Bank because it didn’t even consider its reporting obligations at the most basic level.
In these circumstances, a $700 million fine seems like even less than a slap on the wrist. The problem was not isolated compliance failures, but a system-wide and even industry-wide practice a million miles from where the law required it to be. And with nowhere else to turn, consumers were trapped in a race to the bottom.
The risk of a system of “too big to fail” is that the system must be protected at all costs, even against the interests and desires of shareholders, voters and the wider economy. The risk of operating inside a system that’s too big to fail is that oversight is both not there when it needs to be and on like a spotlight when things go wrong.
If the system comes under too much pressure or something tips the scales of what will be blindly ignored, such as in the Australian banking system, “too big to fail” can quickly become “too bad to ignore.” Testifying in public, having your office subjected to a dawn raid or even facing criminal prosecution can be very real consequences of thinking you are too big to fail.
A guide to compliance for those working in industries that are “too big to fail:”
- Train yourself and your team on a solid understanding of the law and its requirements.
- Assess your internal policies and practices based on legal requirements. Don’t do something just because it’s “the way things are done here.”
- Collaborate with the regulator and others in your industry. Compliance is not a zero-sum game.
- Don’t let other parts of the business off the hook. If you know something is wrong, say something.
- Be aware of your own reporting obligations. Illegal activities should never be ignored.
- Keep notes and records of your efforts, especially where you confront problematic behaviour