Before the Hayne royal commission into the financial services industry, we heard a lot about bank culture.
As scandal after scandal emerged, and ever more flagrant cases of misconduct were made public, the prudential regulator APRA began talking about focusing its regulatory effort more on culture.
By 2015, corporate regulator ASIC and the Reserve Bank were also talking about banking culture.
In 2016, a full-blown culture war erupted, with former Commonwealth Bank CEO and banking inquiry chair David Murray attacking regulators for going off on a “culture tangent” and comparing cultural regulation to Hitler.
As Crikey noted in 2017, the focus on culture achieved little: banks were continuing to engage in the most egregious misconduct despite years of regulatory focus, talkfests, and commitments to do better. And that was before the royal commission, and before an independent report that shredded the Commonwealth Bank’s culture.
The Westpac money laundering scandal, in which Australia’s oldest bank was revealed as the financial institution of choice for paedophiles, suggests that, in 2019, banking culture is still as rotten as ever.
Earlier this year, the bank released a self-assessment report of its own culture, which it had handed to APRA last November. It found, inter alia, “there were a common set of behaviours across the Group, including: a lack of clarity on accountability and consequences; and, at times, Westpac was too slow to identify, prioritise, escalate and remediate issues”.
At its interim results presentation in May, Westpac claimed to have already commenced “a two year program overseen by the Board” to address its cultural problems, which included enhanced reporting of key risks to the board and executives, and efforts to “strengthen ‘Speak up’ culture, including adoption of a single whistle-blower approach across the Group, increase clarity of accountability and reduce collective decision making.”
By July, Westpac was claiming “around 20% of the recommendations have been implemented” from the culture review. In September, it was 33%. It’s supposed to be 50% by year-end.
But Westpac had been allegedly fixing its culture before that. In July last year, then-CEO Brian Hartzer claimed “more recently we have emphasised the need for a culture where people challenge decisions or processes that don’t seem right, and are empowered to fix things on the spot. We constantly encourage our people to speak up, and every single employee has the ability to raise suggestions or concerns with me directly through email or our internal social network”.
In October 2017, Hartzer told parliament’s economics committee that the “most important area of focus for us is culture — embedding a strong service ethos and behaving in ways that earn and retain trust.”
The reality would prove to be very different. Hartzer has now been dumped, the chairman is on the way out and another director as well, for millions of breaches of money laundering laws and a failure to effectively respond to AUSTRAC’s warnings about paedophiles using its systems. They didn’t go willingly, but had to be forced out by big investors who couldn’t stomach what had been revealed.
Another glimpse of the reality was afforded today by Amanda Wood, the former Westpac executive who oversaw money laundering compliance, in an interview with the Financial Review. Wood was moved out of her job after she alerted Westpac to the seriousness of its breaches — news that wasn’t welcome at senior levels.
How does Wood describe Westpac’s culture, one in which, according to Hartzer, executives “constantly encourage our people to speak up”?
“The thing that drives Westpac and the problem at the bank,” Wood says, “is the people at the top are driven by status, power and money and they don’t understand that the obligations have a social purpose … the attitude in the bank is: ‘how do I avoid blame?’ not ‘how do I fix it?’ Because if the blame is attached to me, my status and money is going to be impacted by that.”
According to Wood, “the response was at least partially about: ‘how we get ourselves out of this? How do we deflect attention from it?'”
After years of regulatory focus on culture and debate about how to improve it, and years of Westpac blithely asserting that culture was important and it was working to improve it, it seems nothing has changed.
This is one culture war where no one on any side has won anything at all.
What needs to be done to improve banking culture? Send your thoughts to boss@crikey.com.au. Please include your full name for publication.
I think the banking culture would change pretty quick smart if some of the absurdly highly paid executives and boards were given substantial prison sentences.
Send a few bank executives to jail. That would improve the culture overnight
The obsessive focus on the culture of banks ignores that probably the culture of corporate Australia is as bad, or worse than, that of the banks. It is corporate culture that is rotten and only that of the banks has been revealed.
Exactly. From the article:
“The thing that drives Westpac and the problem at the bank,” Wood says, “is the people at the top are driven by status, power and money and they don’t understand that the obligations have a social purpose … the attitude in the bank is: ‘how do I avoid blame?’ not ‘how do I fix it?’ Because if the blame is attached to me, my status and money is going to be impacted by that.”
“Status, power and money” explain the ridiculous salary packages that top executives receive while not bothering to, in some cases, pay their employees properly according to the law.
Like others, I think the banks, and other corporates, would change their behaviour quickly, if criminal penalties applied. While a corporation cannot be gaoled, fines can be. Like prison sentences, corporate fines should include elements related to exacting a punishment for society on the wrong-doing company as well as addtional fine as a general deterrence. But most importantly the fines exacted must, MUST, significantly impact on share price, otherwise it’s just business as usual with the usual totally meaningless platitudes our regulators and politicans fall for every time….’This was before my time’, ‘we promise to do better in the future’, ‘we take our regulatory obligations seriously’, ‘we will change our culture, introduce more rigorous compliance programs’ etc etc.
The very fact that Westpac share prices haven’t tumbled, and that there hasn’t been a run on the bank indicates that the ‘market’ expectation is it will be business as usual, and usual meaningless platitudes will be accepted again.
Shareholders risk their share value from their directors making poor commercial or business decisions. They may end up with totally worthless shares if the company goes bankrupt due to poor business decisions of their directors or changing markets etc, or indeed due to civil litigation. I can’t see why there is any reason shareholders should not similarly suffer significant and substantial financial loss because their company directors failed to ensure the company was complying with the regulatory resume. Shareholders could then be expected to be much more attuned at AGMs and board elections in ensuring their directors ensure regulatory compliance.
In the case of Westpac, it may be that the appropriate penalty (potentially trillions) would send it bankrupt and that this might not be in the interests of the country, ie. it is ‘too big to be allowed to fail’. If this is the case it could perhaps be broken up.
As to innocent shareholders suffering a loss, they could always sue the mal or misfeasant directors. Perhaps they could even insure against this risk.
“The very fact that Westpac share prices haven’t tumbled…”
Umm that would be about 20% in the past couple of months. Just a reminder of a few basics. The non compliant transactions were self reported. Child abuse is conducted by abusers not financial institutions and almost all abuse has nothing to do with international money transfers or payment of any kind. The vast bulk of these transactions had nothing to do with crime. The connection with abuse in a small number of transactions is alleged only. Cheap money transfers are essential for many poor people in poor countries. Onerous reporting costs and dangers of legal transgression have made these transfers unavailable to millions most in need.
The fines if applicable are extortion and make a mockery of the punishment fitting the crime. This whole obscene charade is a great smokescreen for the main problem being our inflow of laundered money and our refusal to update our money laundering laws.
For those who can drag themselves away from this public stoning, there’s a knowledgeable, non sensationalist article in today’s johnmenadue site by Jack Waterford. He draws lengthy attention to Austrac’s slackness and it’s diversionary grandstanding. He also points out the correlation with thin arguments and resorting to pedophilia accusations. He points out the various secondary markets long in use both for poor people’s remittances and other more dubious transactions.
He even makes suggestions about how we could make real change rather than sensationalist grandstanding.
Thanks Mark for the link to Waterford’s article which I shall read.
However bearing in mind Hayne’s scathing assessment of the “toothless” regulators, he fails as Adele Ferguson laments, to refer individuals on to the CDDP for prosecution, preferring instead to refer them to ASIC, one of the “toothless tigers”!
The Corporations Act was beefed up back in March with the maximum gaol term increased from 5 to 15 years.
The Act is there with the penalties increased and enhanced, use it !
http://aicd.companydirectors.com.au/membership/company-director-magazine/2019-back-editions/may/directors-counsel
Apologies – Commonwealth Director of Public Prosecutions ( CDPP).
Having just read Waterford’s somewhat long – winded and repetitive article, I offer the following comment.
I think it is fair to say that if the risk assessment and compliance management departments within corporations and AUSTRAC were allowed and encouraged to carry out their functions, instead of being ignored, stood over and whistle-blowers outed, we would not be in this position!
Paedophilia, money laundering and other illegal transactions would be picked up and reported and undoubtedly Westpac would not be in the position it is in, neither would the likes of Amanda Wood !
As I indicated in an earlier comment, with attached link. The time for pussy footing around on poor corporate governance has to end, the Corporations Act has been strengthened and with gaol terms of up to 15years as a deterrent, it needs to be used!
The way is there, the other ingredients are the will and the backbone.
I guarantee you will see the culture change when criminal charges are laid and prosecuted, with gaol time for some of the big fish!
Don’t forget, Fish rot from the head down!
Well wasn’t that the point; the non-compliance was not self reported. And sure, I’m well aware of the ‘innocent carriage’ argument, except it’s a croc. I recall all too well the telephone companies paying agents (nee premium line operators) to generate very profitable calls on their networks by selling unclassified pornography to minors and then claiming innocent carriage.
And are you saying that just because the money transfer is good for lots of poor people that this justifies a few beaches (nearly 30 million if you don’t limit yourself to the statue of limitations) including facilitating commercial child sexual abuse? Thalidomide provided plenty of benefits to lots of women experiencing bad morning sickness, but does that outweigh the damage it caused to a few new borns. I don’t think so.
I’m saying resorting to claims of child abuse and terror is the contemporary sign of the weak argument and diversionary tactics. The thalidomide ruse is a poor simile which reads as similarly clutching at straws.
I’m not saying Westpac did no wrong. I’m saying Austrac was equally remiss. I’m saying the unsupported accusations are just that. I’m saying that abusers commit abuse not banks. I’m saying the fines are an extortionate abuse of process and state power. I’m saying all sorts of secondary unregulated transfer operators do this stuffroutinely with no action or moral panicking.
I’m saying read the article I mentioned as the experienced professional author puts it much better and more detail than I can. If you prefer to stick with the state approved narrative then so be it.
“I’m saying the fines are an extortionate abuse of process and state power.”
So, what do you suggest?
Give them a verbal warning and let them get on with allowing money laundering?
So, are all fines an extortionate abuse of process and state power, or only those imposed on companies? Presumably then parking and speeding fines are to?
I agree the regulator’s abject failure in this case should mitigate the punishment. But I also think it’s not the community’s role to keep company directors behaving well. …that is the responsibility of the company members, ie. shareholders. When a company breaks the law the community should deal with the company, not directors or employees. Its different to when an individual commits a crime during employment (such as speeding, assault).
I don’t think my Thalidomide analogy was grasping at straws. It was drawing out the weakness of the argument you used that because Westpac’s money transfer service provided great benefit to many poor Philippino families that Westpac’s failure to report transactions that included ones facilitating money laundering and child exploitation was somehow justifiable.
Pretty weird that a bank under the capitalist mode of production values profit above all. Even stranger that people who rely on these profits to fund their extremely comfortable, idle lifestyles aren’t paragons of morality.
Well, I really must get back to my patrol. Must have been the wind.