Anyone unsure why they should care about the latest damning report into Australia’s corporate regulator can ask Andy Schmulow.
He points to a case five years ago in which Westpac was found to have contravened anti-money laundering laws more than 23 million times and which he reckons illustrates exactly what is wrong with the Australian Securities and Investments Commission.
Some of the $11 billion transferred overseas funded “what was at the time euphemistically termed child abuse”, says the associate professor of law at the University of Wollongong.
More accurately, Schmulow says, it was “pay-per-view, live-streamed sexual torture and assault of children and infants”.
Westpac had been warned repeatedly over the years by Australia’s anti-money laundering, counter-terrorism financing and financial intelligence agency, AUSTRAC, to watch for “red flags” indicating such activity. In 2019, AUSTRAC went after the bank.
“These contraventions are the result of systemic failures in its control environment, indifference by senior management and inadequate oversight by the board,” said AUSTRAC’s statement of claim to the Federal Court.
Yet the chief executive of Westpac at the time, Brian Hartzer, rejected AUSTRAC’s claim in the media, saying that, “at least at a senior executive level and board level”, Westpac had “absolutely not been indifferent on this topic”.
Hartzer blamed subordinates, promised to get “to the bottom of this” and claimed he had been unaware of the bank’s role in facilitating thousands of transactions relating to child sexual abuse – or, as he put it, its failure to undertake “appropriate customer due diligence on transactions to the Philippines and South-East Asia” – prior to AUSTRAC’s legal action.
How could the bosses at Westpac have been unaware of 23 million transactions? Not only had they been warned many times by AUSTRAC but less than two years previously, Commonwealth Bank had been fined $700 million for having contravened the same law, the Anti-Money Laundering and Counter-Terrorism Financing Act, on 53,750 occasions. “So they had 16 months to get their act together, before AUSTRAC took them to court,” says Schmulow.
Westpac wound up with a record penalty of $1.3 billion – about equal to the bank’s previous three months’ profit. Hartzer left in disgrace, but with a $2.68 million payout. None of the directors under whose watch it happened have faced court.
Why did the relevant regulator – not AUSTRAC but ASIC – not pursue them?
“It would have been ASIC’s responsibility to take to task the directors of Westpac for breach of a director’s duty. Section 180 and following of the Corporations Act requires that directors perform their function with due care and skill.
“Where is the due care and skill, when for 16 months you’ve looked out the window at a towering inferno, bright enough to light the night, and said to your minions ‘What’s that raging fire?’ Answer: ‘That’s the Commonwealth Bank, sir. They’ve breached money laundering 53,000 times.’
“Wouldn’t that have made them wonder, ‘they’re a bank, we’re a bank, they wear suits, we wear suits … have we got the same problems?’ ” Schmulow says.
That ASIC did not go after the directors, says Schmulow, is one example to show “if you’re a director of a large company, ASIC won’t go anywhere near you”, even in cases of “the most egregious breaches of the law”.
That’s one reason why, in his view, the regulator requires radical change, as recommended in last week’s report from the Senate’s Economics References Committee. The report was damning, as was committee chair, Liberal Senator Andrew Bragg, when he tabled it. He described the “dire state” of “an organisation without transparency, few prosecutions, and a litany of cultural, structural and governance issues”.
ASIC, the committee found, routinely failed to respond to reports of corporate misconduct, “and only a fraction of reports are investigated”.
“For the matters where ASIC proceeds to take enforcement action, the civil penalties imposed are often at odds with the scale of the offending, and few criminal sanctions are achieved. Further, ASIC’s investigation and enforcement decisions are opaque.”
There was much more in the same vein, and most of it was not new. Bragg said this was the third such inquiry in the past 30 years, “and if you read the transcripts of the last two, the one from the early ’90s, and then the one from last decade, it’s effectively identical”.
Indeed, there have been more than that. Schmulow ticks off three others in the past decade that have found ASIC’s performance “significantly deficient”: the 2014 Senate inquiry, the 2015 Treasury capability review, the 2018 Hayne royal commission.
They all said essentially the same thing: that ASIC is too timid, often pursuing what Schmulow calls “administrivia” rather than taking on big, hard cases.
Or, as the capability review report put it: “There is a perception that ASIC’s selection of cases for litigation can be risk-averse, tending to prefer cases with a higher probability of success, rather than selecting cases that … also allow ASIC to test the veracity of the law.”
In so doing, says Jason Harris, professor of corporate law at the University of Sydney, ASIC creates the illusion of being effective.
In its annual reports, he says, the regulator “trumpets” a record of winning up to 97 per cent of civil cases over the past 15 years. In his view, that is because ASIC, unlike the Australian Competition and Consumer Commission or the Australian Taxation Office, doesn’t bring hard cases. “It’s not running test cases. It does not seem to be trying to actually get guidance from the court about what the law actually is. It’s just running cases on the same sections over and over again.”
Some of those cases “are really important, about defrauding investors and misleading investment scams and these types of things … But there’s a whole lot of requirements in the Corporations Act that are just routinely not being complied with, and ASIC is absent.
“In my area of insolvency – if you’re a company and you’re breaking the law, you are highly unlikely to ever be prosecuted, either civilly or criminally. Liquidators tell me that they give ASIC briefs of evidence that show clearly there is widespread criminal fraud…and ASIC does nothing.”
Harris concedes that the law is “horrendously complicated and in many ways needlessly so”. “Our Corporations Act is 3500 pages long,” he says.
A large part of ASIC’s problem, says Harris, is that it is trying to cope with an impossibly broad remit. It is trying to regulate “almost everything that corporations are doing” while serving as a “dumping basket” for all manner of emerging business regulation issues, from cryptocurrencies to greenwashing.
As the Senate report noted, ASIC is supposed to regulate “over 95,000 entities of varying size and complexity, including 1841 public companies, 6288 financial services licensees and 1183 securities dealers” as well as “globally significant capital markets” including “the world’s fifth-largest pool of managed funds, totalling $4.75 trillion, and the fifth-largest pool of retirement savings, totalling $3.9 trillion”. All with fewer than 2000 staff.
It’s under-resourced and “just not a very effective structure”, says Harris. “The fact that we’ve had, I think, at least half a dozen internal restructures, just over the last 15 years, basically tells you that the structure and the internal governance is broken.”
Like Andrew Bragg, Andy Schmulow believes ASIC must be broken up.
The pity of it is that when ASIC was set up three decades ago, it seemed like world’s best practice. Australia was the first to adopt what Schmulow considers the best structure for regulating the financial sector, the so-called “twin peaks” model. One peak is a prudential regulator, focused on the financial safety and stability of institutions and the broader financial system. The other is focused on regulating the conduct of the institutions. Their roles are dedicated to ensuring, respectively, the wellbeing of the institutions and of those who deal with the institutions.
“Unfortunately, when we introduced the twin peaks model, we well and truly stuffed it up,” he says.
Schmulow also says ASIC’s remit is just too broad. “For the past 10 years, I and other scholars in the field, experts in financial system regulatory architecture, have been saying we need to have a dedicated financial industry conduct regulator. Which ASIC is not.”
And it needs special powers, because the finance sector is unlike any other. “The penetration of the financial industry is greater than the penetration of any other industry: 99.97 per cent of Australians over the age of 14 have a bank account,” he says.
Because it touches the lives of so many people, because it engages in so many transactions every day, and because financial products can mutate as fast as they can be regulated, he says, it is not enough just to have a system that punishes wrongdoers after the event.
“We need to have a regulator for that industry that takes a different approach, an approach which is pre-emptive, proactive and, if need be, intrusive. A regulator that can recognise where a product is likely to cause harm and step in before it does so.
“And then we need to have a standalone, dedicated prosecutorial service,” says Schmulow.
It’s far from clear whether we’ll get one, however. As previously noted, the same criticisms of ASIC have been made for years. The previous government stuck with the current model. Now the Liberal and Greens members of the economics committee favour splitting ASIC, but Labor has been noncommittal, choosing to criticise Bragg for releasing the committee report without giving it enough time to formulate a detailed response.
ASIC itself has responded only with a brief statement referring to its “strong enforcement record”.
Schmulow, who has advised several other governments on how they should structure their financial regulators, insists something has to be done, because the conduct of Australia’s financial industry “has been worse than pretty much any other jurisdiction I’ve looked at”.
He shares another case in point. A few years ago, before Russia invaded Ukraine, he was contacted by a senior official at the Bank of Russia, who told him they were looking at regulatory reform of that country’s insurance industry.
Schmulow told the Russian about the revelations from the Hayne Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry – about dead people being charged for life insurance premiums.
“He said to me, ‘we don’t even see that in Russia’.”
This article was first published in the print edition of The Saturday Paper on
July 13, 2024 as “A sick watchdog”.
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