Bank penalties disguised as charitable donations

Photo by Eddie Jim/AAP: Commissioner Kenneth Hayne
Michael West describes the failure of the Australian Securities and Investments Commission (ASIC) to deal with bad behaviour of the banks, when it provided them with a way out from prosecution, by allowing them to make “charitable donations,” which could them be claimed back as tax deductions.

Here is a troubling fact that has largely escaped scrutiny during the banking royal commission: for the past 10 years, rather than being penalised for breaches, it appears the banks have been receiving tax deductions for their crimes and misdemeanours. Instead of paying fines, they have been making donations to charities – a “no fault” solution to dealing with financial offences. And in more than 70 per cent of cases, there is no record of where this money has gone.

The Australian Securities and Investments Commission’s (ASIC) decade of deals with the banks began in March 2009 when its then chairman, Tony D’Aloisio, struck an “enforceable undertaking” (EU) agreement with ANZ Banking Group.

ANZ had been a key player in the spectacular collapse of the financier Opes Prime, which went into receivership in March 2008 with an estimated $1 billion of debt. Instead of dragging the bank into court at great cost, D’Aloisio did a “no blame” deal with ANZ bosses, who agreed to “complete a program to remedy deficiencies in operational procedures”.

During the past 10 years, the corporate regulator has ramped up these “no fault” arrangements with the banks. Rather than prosecute them, ASIC agrees not to sue, and the banks agree to an enforceable undertaking in which they recognise ASIC’s “concerns” about their behaviour and make a “community benefit payment”.

Community benefit payments are often mistaken for penalties or fines. In reality, they are charitable payments. It appears that, for 10 years, the banks have enjoyed associated tax deductions for what should be punishments.

It also appears the banks play a role in determining who receives their community benefit payments.

An investigation of the EUs by and The Saturday Paper has found that of the $88.1 million in community benefits payments made by the banks over the past 10 years as part of EU agreements, $68.5 million has gone to unspecified parties.

Another $16.6 million has been paid to a company named Financial Literacy Australia Limited, $2 million to the Smith Family, and $500,000 to The Ethics Centre.

Since D’Aloisio’s ANZ deal, the regulator has struck a further 27 EUs with the banks. All the major banks – ANZ, Westpac, National Australia Bank and Commonwealth Bank – have agreed to EUs. As have Macquarie Bank and a slew of foreign banks, including J. P. Morgan, Goldman Sachs, HSBC and UBS.

Community benefit payments are often mistaken for penalties … In reality, they are charitable payments. it appears that, for 10 years, the banks have enjoyed associated tax deductions for what should be punishments.

Earlier this year, during the Hayne Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, senior counsel assisting, Rowena Orr, QC, put questions to ASIC senior executive Louise Macaulay about the regulator’s use of EUs. “To your knowledge are enforceable undertakings with ASIC heavily negotiated?” Orr asked. “Yes, they are,” Macaulay replied. “Is ASIC concerned about a public perception of ASIC negotiating and reaching consensus with financial services entities about appropriate sanctions for their misconduct?” Orr followed up. “Yes,” Macaulay admitted, “I’m aware of that public view.”

“The banks agree to the donation so they don’t get prosecuted,” says retired University of New South Wales accounting academic Jeffrey Knapp. “Instead of fines, which go to the government, ASIC and the banks decide where the money goes.

“The charities, at least the ones which have been identified, are real, they are good causes. The question is what has the Smith Family got to do with the manipulation of foreign exchange markets?”

The offences covered by the EUs ranged from the market-rigging scandal in bank bill swaps (BBSW) – a global scam that affected interest rates nationally – to fees-for-no-service rorts, selling dodgy financial products and providing dodgy financial advice to customers.

Between them, the Big Four banks now record more than $30 billion in profits each year, after tax. Despite the revelations of systemic fraud at the banking royal commission this year, not one executive has gone to jail. Not one director has been banned or even held legally accountable for the ripoff of hundreds of thousands of Australian bank customers. As the royal commission has shown, the illicit profits they have made by fleecing their customers must run into the billions. Against this, there were 28 EUs handed down by ASIC, which raised $88 million in community benefit payments.

Questions were put to ASIC and Financial Literacy Australia (FLA) regarding the scheme but, at time of press, there had been no response as to the destination of the $68.5 million in payments made to parties that had not been identified by ASIC or the banks.

According to FLA’s financial statements, $17.9 million has come in the door in donations since 2014. It has directed $6 million over four years in grants. This is a company with no full-time employees, two part-time employees and – at last balance date of December 31, 2017 – $12 million in cash.

Its directors – Robert Brown, Paul Clitheroe, Craig Dunn, Linda Elkins, Fiona Guthrie, Elaine Henry, Anthony Mackay, Ian Silk, Michael Smith (retired) – are well connected. Smith was formerly CEO of the ANZ and Dunn a former CEO of AMP. Media personality Paul Clitheroe and his partners sold their IPAC financial advice business to Commonwealth Bank, bought it back and then sold it to AMP. Fiona Guthrie heads up Financial Counselling Australia. Air Commodore Robert Brown is chairman of the Australian Defence Force Financial Services Consumer Council and Ian Silk is the CEO of Australian Super, the biggest superannuation fund in the country.

The company’s website shows FLA has directed its donations to worthy causes, such as Brotherhood of St Laurence and Good Shepherd Australia New Zealand. The latter, according to FLA, “uses a small group and coaching model to build the financial capability of women who have experienced family violence, economic abuse and/or inter-generational poverty”.

The focus is on education and educating consumers in financial literacy. This has been a key regulatory focus of ASIC for the past 10 years. While tens of millions of dollars have been sunk into financial literacy, however, the systemic financial fraud has continued unabated.

This focus on education entails the presupposition the victims of financial crime are themselves to blame for not being educated enough. Further, that if they were educated, their financial institution might not be able to rip them off.

None of the money donated via the EUs, at least none that could be identified for this investigation, addressed the perpetrators of financial fraud, only its victims and potential victims.

ANZ, which has struck no less than five EUs with ASIC – for dodgy financial advice, fees for no service, forex market rigging, interest rate market rigging and Opes Prime – even picked up awards from Financial Literacy Australia in 2014, 2015 and 2017 for its MoneyMinded Online program and Money Business adult financial education program.

A new destination for EU funds was set up this year, only referred to in documents as A.C.N. 625 525 162 Limited. An ASIC search of this company number links to the “Ecstra Foundation”, an entity whose directors – in common with FLA – are Robert Brown, Paul Clitheroe and Elaine Henry. Its purpose, under its governing document of April 11, 2018, is described as “advancing education, advancing social or public welfare”.

Announcing the establishment of Ecstra earlier this month, Liberal MP Kelly O’Dwyer described the non-profit body as a “one-stop-shop to help Australians build their financial literacy and capability”.

According to Ecstra board member Paul Clitheroe, the body has thus far received “enforceable undertakings of $40 million, plus a specified grant of $10 million to assist with women’s financial capability”.

“A previous body (FLA) which I also chaired is being wound up and its assets to be transferred to Ecstra,” Clitheroe said. “The pro bono board of FLA have resigned, bar Robert Brown AM and Elaine Henry OAM and myself who will oversee the wind-up.

“As with FLA, Ecstra will distribute the funds it holds in the form of grants to effective community organisations working to improve financial capability. Ecstra will, however, play a broader role in communicating financial capability concepts and be commenting on a broad range of issues under the broad banner of ‘being better with money’.”

The Saturday Paper is not suggesting that any of the charities or their directors, or the directors of FLA or Ecstra, have engaged in any impropriety.

Again, the same names bob up on the Australian Government Financial Literacy Board, a non-statutory body, which “provides independent and strategic guidance to Government and ASIC on financial literacy”.

Members of the Australian Government Financial Literacy Board include Clitheroe, Robert Brown, Fiona Guthrie and Elaine Henry.

We attempted to contact these members through ASIC, and the institutions with which they are publicly linked. Save for Clitheroe, we were told nobody was available to respond to questions.

Other members of the Australian Government Financial Literacy Board include ASIC deputy chair Peter Kell and chairman James Shipton, whose former company, Goldman Sachs, agreed to an EU with ASIC in July this year for sharemarket transactions involving private hospital group, Healthscope. The Saturday Paper is not suggesting his role affected this EU in any way.

Throughout the Hayne royal commission, the corporate regulator has come under constant criticism for being too close to the banks and for failing to regulate them effectively. When Shipton gave evidence last week, during the final fortnight of hearings for the royal commission, he agreed with Counsel Rowena Orr that more could be done to arrest the eye-watering incidence of banking fraud.

“It’s part of human nature, isn’t it, Mr Shipton, that when we have a relationship with someone, it’s usually harder for us to do something that might harm that person’s interests?” asked Orr.

“That’s why I am emphasising the importance of having a professional relationship and, as I emphasised earlier, exercising the highest degree of professional judgement in relation to these interactions,” responded Shipton. “We’ve started with naming more names than we’ve named before in relation to the relative performance.”

“I want to be very clear, Mr Shipton – I put to you, you are not naming enough names,” Orr said.

“Well, I think you made a good point, Ms Orr,” replied Shipton.

There is a significant “upside” in favouring education of banking consumers over prosecution of banking perpetrators. It saves a lot of money.

Last year, the government awarded ASIC with $348 million for its budget. In return, ASIC collected $1.2 billion for the government – sharply up from $998 million the year before. The agency is a huge cash cow for the Commonwealth government. Spending money prosecuting banks would put this at risk.

As the EU deals with the banks have ramped up, so have performance bonuses for ASIC executives. Given the deluge of fraud and misconduct on display at the Hayne royal commission, however, the entire ASIC regulatory edifice and its philosophy of doing deals for tax-deductible donations must be on the chopping block.

Jeffrey Knapp believes “it is time for ASIC to be broken up so that law enforcement is not treated as exercise of deal-making and public relations triumphs on financial literacy initiatives.

“After all that has come to light in the banking royal commission,” he says, “the Australian public deserves an effective corporate regulator.”



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