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BFCSA: ASIC "may" pursue case alleging Commonwealth Bank directors breached duties

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ASIC may pursue case alleging Commonwealth Bank directors breached duties

Australian Financial ReviewAug 10 2017 11:45 PM

Anne Hyland


EXCLUSIVE  The Australian Securities and Investments Commission is considering pursuing a case against Commonwealth Bank of Australia directors that would allege they breached their duties to protect the company's reputation when responding to AUSTRAC warnings the institution was being used for money laundering.

ASIC declined to comment. However, it is expected outgoing ASIC chairman Greg Medcraft will focus on this issue when he fronts a parliamentary joint committee on corporations and financial services in Sydney today.

There is intense political interest in the allegations raised in a court case by financial intelligence agency AUSTRAC that CBA breached anti-money laundering rules more than 53,000 times by failing to disclose transactions of more than $10,000.

CBA chairman Catherine Livingstone was summoned to Canberra on Tuesday for meetings where she was told the federal government was prepared to "consider all options" when it came to further action against the bank, except a royal commission. The government is under pressure to impose a royal commission on the sector after a series of scandals within the major banks.

Treasurer Scott Morrison stepped up his criticism of CBA yesterday describing as an "epic fail" the bank's response to the money laundering allegations on ABC radio and stating there were "very troubling" issues of culture and governance at the bank. He has taken advice from ASIC and the Australian Prudential Regulation Authority in relation to the AUSTRAC case.

There is a view within Canberra that CBA sets the standards for the rest of corporate Australia, as the country's largest company by market capitalisation, and also because of its immense importance to the health and functioning of the financial system.

ASIC case

Lawyers suggested that ASIC might focus on three areas in pursuing a case against CBA.

Did directors weigh up the risks to the bank's reputation when deciding how to respond to AUSTRAC's allegations? Was there continuous disclosure to the sharemarket about the AUSTRAC allegations, and also accounting disclosure in regards to contingent liability?

If AUSTRAC succeeds in its court action against CBA then a fine could be imposed, which has been the subject of speculation that ranges from as low as $18 million to $500 million.

CBA has said it will argue the alleged failure to report 53,000 suspicious transactions that led to the action by AUSTRAC as a single error and therefore liable for a single $18 million fine.

CBA admitted, however, "it is not possible to reliably estimate the possible financial effect on the group".

A third area that ASIC might pursue is a discussion around the bank's financial licence and whether directors and management did everything required to ensure the services covered by its licence were provided efficiently, honestly and fairly.

Mr Medcraft leaves the role of ASIC chairman in November and in his 6½ years in the job he has been highly critical of what he sees as a failure in banking culture.

The reason for his criticism has been a number of scandals at the banks including CBA, which has had problems with CommInsure and its financial planning arm.

If ASIC pursues CBA directors, there have been court cases where judgments have been made on directors' duties to protect a company's reputation.

In 2016, Justice Edelman said directors duties included protecting a company's reputation. This was in the court case ASIC v Cassimatis, where the regulator alleged the directors of Storm Financial breached their duties of care and diligence. It won.

In his judgment, Justice Edelman wrote: "A corporation has a real and substantial interest in the lawful or legitimate conduct of its activity independently of whether the illegitimacy of that conduct will be detected or would cause loss. One reason for that interest is the corporation's reputation. Corporations have reputations, independently of any financial concerns, just as individuals do."

Justice Edelman continued: "I conclude that the foreseeable risk of harm to the corporation which falls to be considered in s 180(1) is not confined to financial harm. It includes harm to all the interests of the corporation. The interests of the corporation, including its reputation, include its interests which relate to compliance with the law."

Under section 180(1) of the Corporations Act a director or other officer of a corporation must exercise their powers and discharge their duties with the degree of care and diligence that a reasonable person would exercise if they were a director or officer of a company or had the same responsibilities within the corporation as the director or officer.

Ruling significant

Rosemary Langford, a senior lecturer at the University of Melbourne's law school, describes Justice Edelman's ruling as significant in a forthcoming paper in the Company and Securities Law Journal.

"Although stakeholder considerations that have a financial impact are more clearly within the ambit of the duty of care, Edelman J's inclusion of non-financial factors is significant," Dr Langford writes.

When CBA released a record $9.9 billion annual profit on Wednesday, Ms Livingstone, who became the bank's chairman in January, said in a statement that the board "acknowledges the significance of the allegations, recognises the high degree of public interest in this matter, and that this issue impacts the reputation not only of the bank but of the industry more broadly".

Another case ASIC might rely upon if it does pursue a case against CBA is ASIC v Healey, which was a case where executive and non-executive directors of the Centro companies were found to have breached their duty of care and diligence in relation to financial reporting obligations.

A CBA spokesperson yesterday said it was not aware that any regulator other than AUSTRAC was considering action against CBA.


Shareholders and governance experts have demanded more action from the bank over the money laundering scandal after CBA's board docked short-term bonuses from the executive team for the 2017 financial year, and also cut director fees by 20 per cent.

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