Banking Bad

by Adele Ferguson

  Despite that clumsy mistake, the allegation shook me because whoever had done this clearly wanted to damage my reputation. I rang the Melbourne Michael Bates and he said a CommInsure lawyer he’d been dealing with had told him that ‘Adele from Four Corners’ had been ringing a claims manager with twenty years’ experience and threatening to subpoena her if she didn’t hand over information. I asked Michael to go back to the lawyer and ask the claims manager to put that in writing. When Michael spoke to the lawyer again, he was told it was a customer rather than a claims manager ‘Adele from Four Corners’ had called. When a Fairfax lawyer then wrote to CBA to let the bank know somebody was impersonating me, he didn’t receive a response.

  Around the same time, my husband and I noticed a van parked outside our house. It had been there a couple of days. It eventually dawned on me it might be surveillance. We went outside and stared at it for a few moments then walked back inside the house. By the time we looked out the window again, which would have been less than forty seconds later, the van had sped off. Coincidence or paranoia?

  Chapter 13

  Battle lines

  Labor gets onboard

  AFTER ‘MONEY FOR NOTHING’ was broadcast and published in The Age and the Sydney Morning Herald, I received a fresh flood of emails. Meanwhile Assistant Treasurer Kelly O’Dwyer took to the airwaves saying the story was, ‘very, very, very troubling and shocking’. But then, just as the Coalition government was attempting to keep a lid on the CommInsure scandal by getting ASIC to investigate it, it became the catalyst that put a royal commission firmly on Labor’s agenda. Sam Dastyari, who was close to Bill Shorten at the time, recalls, ‘There was a strong narrative inside the [Labor] Party: do it for the election, do it for the election.’ Trade unions had also become increasingly vocal about the need for a royal commission into the top end of town, after the Coalition had established one into trade unions.

  Shadow Federal Treasurer Chris Bowen asked Dastyari’s former staffer Cameron Sinclair to write a short paper on why a royal commission into the financial sector was needed. In early April 2016, Sinclair’s report was circulated among Labor’s federal leadership group. But before taking any radical steps Bowen wanted to exhaust all avenues. Calling a royal commission was a dramatic step because the banking sector was the lifeblood of the economy and Labor didn’t want to antagonise such a powerful group if it could avoid it.

  Bowen spoke to banking CEOs one on one, telling them that if there were any more scandals they needed to understand how thin the ice was getting. But the CEOs believed their own spin. According to Dastyari, they said to Bowen, ‘We have had twenty-seven years of growth in the banking sector. You can’t rip it apart.’

  Bowen then gave Dastyari the authority to sound out the CEOs of banks on financially backing a compensation scheme of last resort, a scheme that would be available to victims of misconduct who were ineligible for compensation because their financial adviser or financial services provider had refused to pay or had collapsed. The idea for such a scheme had come about after the Financial Ombudsman Service revealed that 18 per cent of its rulings against financial advisers and financial services providers, totalling more than $13 million, remained unpaid, with many more consumers unable to proceed because their advisers had disappeared.

  ‘I was told to go fuck myself,’ Dastyari says, describing how the bankers he spoke to kept using phrases like ‘moral hazard’ and warning that such a compensation scheme would only encourage small licensees to behave recklessly in the expectation that if something went wrong the scheme would pick up the tab. The bank CEOs also asked why they should have to pay for bad planners who hadn’t been part of their banks. The Labor Party argument that Dastyari conveyed to the banks was that the banks benefited more than anyone else from the health of the economic ecosystem and the compensation they’d be paying would only cost about $50 million a year. Dastyari was astonished by the CEOs’ responses. ‘The arrogance [of the CEOs] was incredible. That was when Bill [Shorten] and Bowen came on board about a banking royal commission.’

  *

  On 5 April 2016, the banks were back in the headlines when ASIC took Westpac to the Federal Court over alleged bank bill swap rate rigging. Bank bill swap rates (BBSWs) are benchmarks used to set interest rates on most business loans and on loans between banks. Before September 2013, when the alleged manipulation occurred, BBSWs were set daily by the Australian Financial Markets Association, the industry’s professional body, on the basis of interest rates quoted by up to fourteen banks. The process relied on the banks providing accurate, independent figures. The day after the news of the legal action against Westpac for manipulating its figures, Turnbull’s adviser rang me to tell me his boss was about to give the banks a spray at Westpac’s 199th birthday party. The speech was akin to a school principal admonishing naughty children without imposing any punishment. ‘Have our bankers . . . lived up to the standards we expect, not just the laws we enact?’ he asked the audience of bankers at a glitzy lunch in Sydney’s Walsh Bay. ‘We have to acknowledge that there have been too many troubling incidents over recent times for them simply to be dismissed.’1

  Turnbull’s lack of action, particularly after the CommInsure scandal, marked a turning point for Labor. On 8 April, Bill Shorten called me in the morning to thank me for my work and to let me know he was holding a press conference to announce Labor would call for a banking royal commission if the party won government. Bowen, meanwhile, rang the CEOs of each of the big four banks and told them about the decision.

  The battle lines were now clearly drawn.

  The Coalition had a bad track record when it came to protecting consumers. It had tried to water down the Future of Financial Advice (FoFA) reforms at the height of CBA’s financial planning scandal; it had taken the financial knife to ASIC’s budget despite the Senate’s damning 2014 report that ASIC was failing to regulate effectively; and it had gone soft on the misdeeds of Australia’s $44 billion life insurance industry. The government had also had a revolving door of assistant Treasurers and financial services ministers – from Arthur Sinodinos to Mathias Cormann (acting role) to Josh Frydenberg and Kelly O’Dwyer. This had done little for industry stability and continuity.

  To make matters worse, the Coalition was trying to push a multi-billion-dollar tax break for big business through parliament. It had tried to hose down public outrage by suggesting the banks front up to parliament once a year and be grilled by the Standing Committee on Economics. But that the banks should be given a massive tax break was a bridge too far for many Australians.

  *

  As Turnbull moved into pre-election mode in the middle of 2016, he peddled the line that Labor’s push for a royal commission was nothing more than a ‘populist campaign’ and a waste of time and money. Turnbull claimed a royal commission would ‘enrich the legal profession, cost hundreds of millions of dollars, take many years and end up, no doubt, recommending the types of measures that are already in this year’s budget’.2

  Scott Morrison, who was then Federal Treasurer, echoed his political master, saying, ‘It’s a well-regulated sector’, and ‘[the call for a royal commission] is nothing more than a populist whinge’. He accused Bill Shorten of ‘playing reckless political games with one of the core pillars of our economy’, which could ‘undermine confidence in the banking and finance system’. Morrison also claimed that the talk of a royal commission was doing irreparable economic damage abroad.3

  The government tried to present ASIC as a regulator that would come down hard on the banks. Realising nobody was buying that line, it decided to move ahead with a plan to release a package of measures to beef up the regulator’s powers and resources. The plan, which was the result of a capability review of ASIC the previous year, had been gathering dust on the desk of Kelly O’Dwyer, the Minister for Revenue and Financial Services, as the government worked out what to do with it. The final report included ASIC’s response to the review, but didn’t include an eight-page ‘aide
memoire’ that the review panel had written after reading ASIC’s response.4 O’Dwyer had received the aide memoire on 10 December 2015, but it had never been released publicly, although it had been widely circulated by the minister and by Treasury, with the recipients then passing it on to others. It was common knowledge the contents were damning of ASIC.

  I lodged a Freedom of Information request for a copy of the aide memoire but received a heavily redacted version from Treasury on the basis that handing over the information would not be in the public interest. When I compared the redacted version with the unredacted copy I was quietly shown, I was shocked. The aide memoire didn’t put ASIC in a very good light. It challenged ASIC’s response to the report, particularly the part where ASIC said it agreed with most of the panel’s recommendations but that almost half were unnecessary, either because they were already ASIC’s current practice or were in the process of being implemented. The aide memoire rejected this response as ‘superficial’ and ‘disarmingly misleading’ and said, ‘The panel considers its recommendations to be necessary, as ASIC’s actions in such areas are mostly “too little too late” and more work is needed to lift ASIC to the required standard.’ It also noted that ASIC’s misapprehension was so great as to suggest it was possibly deliberate and pointed out that ‘the current [ASIC] leadership can’t understand, acknowledge or take responsibility for current shortcomings. As such it is unlikely they will make substantive changes.’ It was damning stuff.

  Yet on 20 April, just under a fortnight after Bill Shorten’s promise to initiate a royal commission, Scott Morrison called a press conference in Canberra where he described ASIC as a tough cop on the beat. He also extended ASIC chairman Greg Medcraft’s contract by eighteen months. ‘There is nothing that ASIC can’t do that a royal commission can do,’ Morrison said. ‘I mean, ASIC can do it all now and I think that’s the clear message to those who are proposing this [royal commission] arrangement: ASIC can do the job right now.’5

  In lock step, the Australian Bankers’ Association outlined a suite of reforms, including a review of products and commissions paid to sales staff, the standardising of whistleblower protection, and the improvement of complaints handling and dispute resolution.6 Mistakenly, they hoped these would be enough to reverse the growing public appetite for a royal commission.

  Chapter 14

  Banksters

  Money laundering with CBA

  IN SEPTEMBER 2016, Wacka Williams fulfilled a promise he had made to James Kessel during the CommInsure scandal to bring about a parliamentary inquiry into the $44 billion life insurance industry. It was conducted by the Parliamentary Joint Committee on Corporations and Financial Services. The terms of reference were broad, and the aim was to examine whether all insurers, not just CBA, were engaging in unethical practices to avoid paying claims. As the inquiry kicked off in early 2017, it became obvious the problems were industry-wide. Each hearing, which exposed misleading advice, mis-selling and the poor treatment of customers with mental health problems, strengthened Labor’s case for a royal commission – and made the government more resolute not to have one.

  Then out of the blue came an announcement that sparked a social media frenzy and caused a collective wail from the banking industry. At 12.26 pm on Thursday 3 August 2017, the country’s financial intelligence agency, the Australian Transaction Reports and Analysis Centre (AUSTRAC), tweeted: ‘@AUSTRAC today initiated civil penalty proceedings against CBA for serious non-compliance with AML/CTF [Anti-Money Laundering and Counter-Terrorism Financing Act].’1 It included a hyperlink to a press release with more juicy details.2

  Journalists around the country, including myself, were staggered to read that CBA was embroiled in yet another financial scandal. This time the bank was being accused of failing to report serious breaches in the use of its network of more than 500 intelligent deposit machines (IDMs). These had been rolled out in 2012 and accepted deposits of $20,000, with no limit on the number of transactions that could be made each day.

  Under the federal Anti-Money Laundering and Counter-Terrorism Financing Act 2006, banks must report all transactions in excess of $10,000 to AUSTRAC. In CBA’s case, AUSTRAC alleged there had been no fewer than 53,700 instances since 2012 when this threshold had been breached on its IDMs. What’s more, six of the breaches related to customers identified by the bank as having links to terrorism or terrorism financing. CBA had also failed in its obligations to monitor 778,370 accounts known as ‘affected accounts’ between 2012 and 2016. As AUSTRAC subsequently noted, ‘It is essential to the integrity of the Australian financial system that a major bank such as CommBank has compliant and appropriate risk-based systems and controls in place to deter money laundering and terrorism finance.’3

  These were astounding allegations. Essentially, AUSTRAC was saying CBA had let crime syndicates, drug dealers and terrorists wash hundreds of millions of dollars through IDMs, despite there being strict federal compliance rules in place to prevent such activities.

  Given the seriousness of the allegations, Treasury, ASIC and APRA organised a series of meetings to discuss the implications of the legal action. Bank PR departments across the country ran into crisis talks. I called CBA’s media team at about 4 pm and was told that the bank had been fully cooperating with AUSTRAC and didn’t understand why AUSTRAC had rushed off to court without warning. The conversation turned to the breaches, which the media person claimed had been caused by an innocent software-coding error that resulted in reports that should have automatically been sent to AUSTRAC on cash transactions of more than $10,000 not being sent. The upshot, according to CBA, was that it was only one breach, not the 53,000-plus breaches alleged by AUSTRAC. One breach of failing to report on cash transactions over $10,000 can incur a penalty of up to $18 million. For 53,000-plus breaches, the penalty was potentially billions of dollars.

  Talkback radio lit up with extraordinary stories about how the biggest bank in the country, which was about to report a record $9.8 billion profit, had facilitated the movement of illegal money. Callers reported bank tellers having told their superiors about suspicious-looking customers stuffing thousands of dollars in machines, and nothing being done. At CBA’s Leichhardt MarketPlace branch in Sydney’s inner west, the manager received an alert on his computer and rushed outside to find a middle-aged man shoving money into the IDM. When he questioned him, the man sped off in his car, later turning up at the Mascot branch to deposit his money.

  It was widely known that criminals liked IDMs because the cash could be deposited anonymously, automatically counted and instantly credited to a CBA account, from where the funds could be immediately transferred, even overseas. Gangs used this system to move illicit money right under the noses of law enforcement authorities.

  It became apparent from the number of breaches and the length of time it had gone on that CBA had set up its IDM system without proper risk assessments or controls. AUSTRAC estimated that $8.9 billion had been deposited through the machines before any risk assessment was made. This was despite a recent exponential rise in cash deposits through IDMs, in one month reaching almost $2 billion, and alerts from internal transaction monitoring services and the Australian Federal Police (AFP). One key flaw in the system was that CBA gave customers thirty days’ notice before closing their accounts, which gave criminals plenty of time to set up a new criminal account or transfer the money offshore before any action could be taken.

  AUSTRAC’s statement of claim and amended statement of claim were littered with shocking case studies. In one example, the AFP issued an order of notice to the bank on 18 May 2015, requesting information in relation to a specific suspicious account it had been investigating. No customer due diligence was carried out in response to this request. Another case related to Strike Force Bugam, a joint investigation between the AFP and the Australian Criminal Intelligence Commission into a drug- and gun-running operation based in Sydney. Ringleader Thi Lan Phuong Pham, who was arrested at Sydney airport in January 2017, had used
CBA’s IDMs since 2012 to launder millions of dollars, including $42 million laundered on behalf of other organised crime groups between March and August 2016. NSW Police alleged that Pham directed Australian nationals (the money mules) to collect large sums of cash from the organised crime groups and then feed them into the IDMs.

  CBA knew of the investigation because the Organised Crime Squad of the NSW Police had served the bank with a Notice to Produce Documents on 24 April 2017, to form part of a brief of evidence against one of the mules charged with money laundering. CBA produced the documents on 2 May. At that time, CBA should have sent suspicious matter reports (SMRs) to AUSTRAC – under the law, it had three days to do so. Yet, as the regulator noted, ‘At no time has CommBank given the AUSTRAC CEO an SMR in relation to the matters pleaded.’4

  Investors reacted to the scandal by dumping CBA shares, wiping $6 billion off the bank’s market value as speculation mounted that fines could cost the bank anywhere between $1 billion and $3 billion, not to mention reputational damage and possible overseas regulatory fines. In response to the falling share price, CBA issued an ASX announcement on Friday 4 August saying that it had noted ‘the media coverage of the civil penalty proceedings initiated yesterday by AUSTRAC for alleged non-compliance with the Anti-Money Laundering and Counter-Terrorism Financing Act 2006. The matter is subject to court proceedings. We are currently reviewing AUSTRAC’s claim and will file a statement of defence. We will keep the market informed of any updates.’