Commonwealth Bank: Transactions Monitoring Law Violations (2017)

 

Commonwealth Bank's Headquarters in Darling Harbour, Sydney

 Controversy

The ethics case in question is a series of allegations against an Australian financial giant - Commonwealth Bank. The allegations pertain to CommBank disregarding certain laws associated with requiring banks to monitor their transactions to ensure that criminals do not use their systems to launder ill-gotten gains. It is expected of Australian financial companies that money flowing through their systems be continuously monitored and any suspicious activity reported to regulatory bodies, in this case Australia's Transaction Reports and Analysis Centre (AUSTRAC) in line with the 
Anti-Money Laundering and Counter-Terrorism Financing Act of 2006 and the Financial Transaction Reports Act of 1998 (Australian Transaction Reports...). The case largely began mid 2012 when CommBank rolled out their IDMs (intelligent deposit machines) without conducting necessary risk assessments in advance as required by law. AUSTRAC alleges that criminal syndicates used the cash machines to anonymously deposit money into CommBank accounts since the machines did not require an identity as to who the person depositing the money is ("Commonwealth Bank Faces..."). Thus using a combination of fake names, offshore transferring schemes, and CommBank accounts (on those names), five criminal syndicates were able to launder their ill-gotten proceeds. Only in 2015 did CommBank conduct a risk assessment but nine billions dollars worth of money had already flowed through the machines. 

A Motivational CommBank Ad

On the other end, apart from conducting a risk assessment, laws required CommBank to continuously monitor transactions anyway and report suspicious transactions to AUSTRAC putting holds on accounts if necessary and further proceeding with due diligence. AUSTRAC claims that CommBank was negligent in these matters as well. Between October 2012 to late 2016, allegations include that CommBank had gaps in transaction monitoring on 778,370 accounts. Moreover, AUSTRAC alleges that between November 2012 and September 2015, suspicious transaction reports on 53,506 transactions were not filed, the value of those transactions being about 625 million Australian dollars. Apart from not filing, AUSTRAC alleges that CommBank did not adequately investigate those transactions and take further action when it was needed (Marsic). Overall, the case began in late 2011 and was distributed over the next six years until AUSTRAC filed suit in August 2017 ("Commonwealth Bank Accused..."). 

In response Commonwealth's CEO, Ian Narev, admitted to the media about mistakes being made, and plans were enacted regarding his resignation (Williams).

Ian Narev, CommBank's CEO 

The bank admitted to no risk assessment being done early on on the IDMs (Stewart). Although CommBank has admitted to some allegations, it considers that the scope was not eight unique violations of Australian regulations (Burgess). A long court battle lies ahead, Commonwealth's consolation being that in light of the allegations, compliance with AUSTRAC was still happening since over 400 million transactions were reported every year and the bank in general had invested about 210 million into monitoring ("Commonwealth Bank Faces...").

 

Stakeholders

The stakeholders in this case are those affected by this ethics case. First of all this includes the executives of CommBank as well as senior figures in the compliance/general counsel department - those people who could have avoided the whole scandal by wielding their influence to comply. Employees and customers of CommBank are also stakeholders since they are affected by the negative publicity surrounding the scandal. People want to work for and keep their money in companies that do the right thing. Shareholders are affected because this scandal is projected to negatively affect CommBank's earnings and thus stock price. 

Law enforcement was also affected by this scandal because if CommBank filed suspicious transaction reports on time, it would have been easier for officials to collect information and apprehend those criminal syndicates. In this regard, the people of Australia are also stakeholders because they have been exposed to money-laundering syndicates when compliance with law enforcement on behalf of CommBank could have reduced that exposure. The criminal syndicates are stakeholders because they wanted to take advantage and launder their money, being successful to some extent in this case. Finally, other competitor financial companies are also stakeholders because after this case, regulation could be increased overall.

 

Individualism

According to Friedman’s Individualism (also called the Economic Theory), it is required that businesses maximize profits but do so within the confines of the law. Otherwise they would be acting unethically because they would be operating outside of limits placed by laws, or on the other hand, if profits were not maximized within legal confines, the business would in essence be stealing from shareholders since the it would not be giving back to the shareholders as much as it could be (Desjardins).

Milton Friedman - proponent of
Individualism

In this case, AUSTRAC alleges in their court filing that CommBank did not operate within the confines of Australian law. In regard to not conducting the risk assessment, they “contravened section 82 of the Act [Anti-Money Laundering and Counter-Terrorism Financing Act of 2006] on 9 occasions”. In regard to misfiling TTRs, “CommBank contravened section 43 on 53,506 occasions”. The list goes on an on (Marsic). Since CommBank's CEO admitted that mistakes were made and it appears that CommBank will be making attempts to downplay the allegations (Williams, Stewart), it seems certain that CommBank was not operating within the confines of the law. CommBank's average net profit margin (a measure of profitability) averaged 34% which shows that CommBank profited in the past 5 years (Commonwealth Bank of Australia (CBA.AX)). It can be understood that part of those profits must have been from those transactions in question since a bank makes money off of transaction fees and having more money on reserve to lend out with interest. CommBank's actions were profitable but were against the law so from an individualism perspective, CommBank's actions were impermissible.

 

Kantianism

Emmanuel Kant - Proponent
of Kantianism

The Kantian ethics viewpoint concerns itself with whether an action is the right thing to do based on several formulations that define what doing the right thing entails and questions what are the motivations for any such actions. According to Kantianism any business action must be coming from the Goodwill. The Goodwill is the rational part of a human being that makes us do things for the right reason. To decide whether an action is coming from the Goodwill, it must be determined whether the action is the right action and whether it is motivated for the right reason. One of the tests to determine whether an action comes from the goodwill called the Formula of Humanity asks whether an entity such as a business is using their customer as a mere means to an end and yet another formulation asks whether the action can be universalized (Salazar, "Kantian Business Ethics"). In regards to the Formula of Humanity, the
allegations give the appearance that CommBank was not very concerned about all the transactions monitoring laws but rather about having people deposit more money at their bank - a means to make more money (the end). If they were concerned with how that money was made, some of those suspicious means would be further investigated and reported to AUSTRAC, even at the expense of losing out on gains. Clearly by the Formula of Humanity, CommBank's actions were not coming from the goodwill so the actions are impermissible. The Formula of Universal Law is also in agreement with this conclusion since universalizing CommBank's actions leads to universal inconsistency - if every bank were to evade transaction monitoring violations then financial crime would become rampant.

Utilitarianism

The utilitarian viewpoint on business decisions, unlike Kantianism, does not concern itself with what is the right thing to do based on ideas of what is defined as right or wrong, but rather on maximizing happiness, no matter the action. Thus, it is necessary to identify all the stakeholders involved and to evaluate how their happiness was affected or will be affected by the action – an imprecise task of course (Desjardins).It can be supposed that the happiness of the CEO and other executives/general counsel was higly decreased due to all of the bad publicity. Narev is resigning when he could have continued as CommBank's CEO for more years to come if the right thing was done. The happiness of regular employees and customers was decreased because they are now less proud of the organization that they may have previously trusted and were proud about. Shareholders are certainly not happy since CommBank fines are estimated to be in the millions of dollars (Stewart) which will negatively affect the financial condition of CommBank and already has negatively affected stock price with stock value falling by 14% since AUSTRAC released the allegations ("Commonwealth Bank Accused..."). Law enforcement is certainly very unhappy because the delay in filing suspicious transaction reports amounted to footage as well as other evidence being lost, making law enforcement a harder task (Marsic). As was already mentioned, this also reduced the happiness of the public because the realization is that the public was exposed to crime that could have been prevented/apprehended. The "happiness" of other financial institutions was reduced because now AUSTRAC could be eying other institutions supiciously which is unfair to those organizations who operating within the law. It appears that since this case brought so much unhappiness to everyone (except to the criminal syndicates who had an easier task to launder the money due to CommBank's actions) a utilitiarian would conclude that CommBank's actions were impermissible because they brought more unhappiness than happiness.

 

Virtue Theory

Aristotle - Proponent of Virtue Theory

Virtue Theory unlike the previous theories seeks to examine a person's character to see if they are fulfilling certain virtues in life such as courage, honesty, justice, etc. If they are, then they are

fulfilling their role in life by becoming a better person. In this case such a person is virtuous. On the other hand if not, such a person is negatively affected by vices (the opposite of virtues) and such a person is not getting better overall. Specifically, Virtue Theory is based more on the person than the exact action, but any actions that go against the virtues would be considered unethical in a Virtue Theory context (Salazar, "The Case Manual"). In the case at hand, it appears that CommBank's actions to not report suspicious transactions, neglect risk assessment standards, and not carry out due diligence when it was needed go against the virtues of honesty, fairness, leadership, and prudence. If the law requires that something be done, it is dishonest to not file those reports making the appearance that everything is fine. It is not fair to operate outside of transaction monitoring laws when other competitor organizations do so thus making the playing field unfair. By Virtue Theory, being a financial giant and an icon of the Australian financial system, CommBank should have been the leader in doing the right thing and abiding by the law since other financial companies look up to them. Breaking the law was poor leadership and example for the whole Australian financial system. Finally, CommBank's actions were not prudent since they should have had the foresight to realize that they were not going to evade authorities and that eventually they would have to confront the issue of  not abiding by the transactions monitoring law. A prudent organization would look ahead and realize that in the long run breaking the law would not be worth it. By not abiding by the law, CommBank was not becoming a better organization overall but giving heed to vices such as short-term greed and dishonesty. CommBank thus was not fulfilling its purpose as a bank well, so their actions by a Virtue Theory perspective were impermissible. 

 

References

Australian Transaction Reports and Analysis Centre. n.d. 20 3 2018. <https://www.australia.gov.au/directories/australia/austrac>.

Burgess, Matthew. "CBA Admits Some Claims, Denies Others in Money Laundering Case." 13 12 2017. Bloomberg.com. 2 3 2018. <https://www.bloomberg.com/news/articles/2017-12-13/commonwealth-bank-admits-to-some-austrac-claims-contests-others>.

"Commonwealth Bank Accused of More Anti-Money Laundering Law Breaches." 14 12 2017. theguardian.com. 2 3 2018. <https://www.theguardian.com/australia-news/2017/dec/14/commonwealth-bank-accused-of-more-anti-money-laundering-law-breaches>.

"Commonwealth Bank Faces Fines Over Anti-Laundering Laws." 3 8 2017. bbc.com. 2 3 2018. <http://www.bbc.com/news/business-40810382>.

Desjardins, Joseph. An Introduction to Business Ethics. New York: McGraw-Hill, 2014.

Marsic, Sonja. "Concise Statement." 3 8 2017. AUSTRAC. 20 3 2018. <http://www.austrac.gov.au/sites/default/files/20170803-concise-statement-cba-s.pdf>.

Salazar, Heather. "Kantian Business Ethics." Vaidya, Anand, Fritz Allhoff and Alexander Sager. Business in Ethical Focus. Broadview Press, 2016.

Salazar, Heather. The Case Manual. n.d.

Stewart, Robb M. "Australian Regulator Deepens Compliance Case Against Commonwealth Bank." 14 12 2017. wsj.com. 2 3 2018. <https://www.wsj.com/articles/australian-regulator-deepens-compliance-case-against-commonwealth-bank-1513238373>.

Williams, Jacqueline. "Commonwealth Bank Chief to Quit Amid Money-Laundering Scandal." 14 8 2017. newyorktimes.com. 2 3 2018. <https://www.nytimes.com/2017/08/14/business/australia-commonwealth-bank-money-laundering.html>.