CASE STUDY ANALYSIS

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Ethical Analysis of The Commonwealth Bank Money Laundering Case

Case Facts

Commonwealth Bank of Australia (CBA), founded in 1911, is one of Australia’s leading

providers of ‘integrated financial services, including retail, premium, business and

institutional banking, funds management, superannuation, insurance, investment and

share-broking products and services’ (Commonwealth Bank of Australia 2018). In May 2012,

CBA introduced Intelligent Deposit Machines (IDMs) which accept deposits by both cash and

cheque (Ockenden & Parry 2017). Once deposited, funds are available for immediate

transfer to other accounts domestically and internationally (Chief Executive Officer of The

Australian Transaction Reports and Analysis Centre v Commonwealth Bank of Australia

Limited ACN [2017] FCA, para. 1). IDMs can accept up to 200 notes per deposit (up to

$20,000 per cash transaction), and there are no limits on the number of IDM transactions a

customer can make per day (AUSTRAC v CBA [2017] FCA, para. 2). IDMs allow for

anonymous cash deposits, as a card from any financial institution can be used; if a non-CBA

card is used, the details of the cardholder are unknown (Norton 2017; AUSTRAC v CBA

[2017] FCA, para. 3). Since their introduction in 2012, over $1 billion has been transferred

through IDMs (Ockenden & Parry 2017).

Under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006, s. 81, “The

Act”, CBA has a joint Anti-Money Laundering and Counter-Terrorism Financing program,

with procedures it failed to comply with from the beginning of IDM introduction to the

market in 2012 (AUSTRAC v CBA [2017] FCA, para. 5). The private sector has considerable

responsibility in the fight against criminal financing activities by monitoring and providing

intelligence to regulators (Norton 2017). Both prior and during the IDM rollout, CBA failed to

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carry out money laundering and terrorism financing risk assessment in response to the

suspicious rise in cash deposits through IDMs, and ignored alerts raised by internal

transaction monitoring systems (AUSTRAC v CBA [2017] FCA, para 6). All businesses with

obligations under The Act must be enrolled on The Australian Transaction Reports and

Analysis Centre’s (AUSTRAC) Reporting Entities Roll (AUSTRAC 2018). CBA is therefore

required to report to AUSTRAC any transaction involving a transfer or $10,000 or more

within 10 business days (AUSTRAC v CBA [2017] FCA, para. 9). CBA failed to report 53,506

transactions (94% of all threshold transactions (TTRs)) with a total value of around $624.7

million, to AUSTRAC on time between 2012 and 2015 (AUSTRAC v CBA [2017] FCA, para. 10).

CBA claim this was due to a technical issue caused by a software update (Yeates 2017).

1,640 of the late TTRS were found to be related to money laundering syndicates under

investigation by the Australian Federal Police, with six of the late TTRs related to customers

who had been evaluated by CBA as potential terrorism financing risks (AUSTRAC v CBA

[2017] FCA, para. 10).

In the syndicates identified between late 2014 and April 2016, several arrests were made

against money launderers, with two individuals sentenced to jail-terms in May 2015 for

their involvement in the first syndicate (AUSTRAC v CBA [2017] FCA, para. 16-34). CBA

became aware of suspicious activities associated with the first money laundering syndicate

in April 2015 (AUSTRAC v CBA [2017] FCA, para. 16). In transactions connected to this

syndicate, on 92 occasions CBA failed to comply with regulatory obligations to provide a

suspicious matter report (SMR) to AUSTRAC either on time or at all, as required by s. 41 of

The Act, nor did they monitor suspicious customers (AUSTRAC v CBA [2017] FCA, para. 13,

19). Where alerts were raised, CBA only partially disclosed their suspicions to AUSTRAC

(AUSTRAC v CBA [2017] FCA, para. 12).

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Ethical Issues

The ethical dilemma occurs after the money laundering syndicate court cases which saw the

conviction of two individuals, which would result in a request for further information from

AUSTRAC. The CBA board of directors are the party faced with the ethical dilemma in this

case, as they have knowledge regarding suspected money laundering transactions,

compliance failures, and can make business decisions on CBA’s behalf. At the time of the

dilemma, the board of directors are faced with several competing demands and pressures.

They are aware of CBA’s system failings, and their own job security is therefore at risk. They

must comply with reporting obligations to AUSTRAC so as not to face legal ramification from

a breach of The Act and receive a civil penalty. As a firm, CBA also have responsibility to act

in the interests of shareholders, both keeping them informed and maintaining profitability,

which partially relies upon maintaining a good reputation. There is pressure to consider

public welfare in relation to financial crime.

Ethical Dilemma

The ethical dilemma in this case is:

“To fully disclose money laundering information to AUSTRAC”

or

“Not to fully disclose money laundering information to AUSTRAC”

If the board of directors fully discloses money laundering information, it is reasonably

foreseeable that they will receive fines for monitoring and reporting failures as well as

failing to establish sufficient risk assessment procedures, as required by The Act. This will

create reputation damage and a loss of market share. Key executives will lose their jobs. If

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the board does not fully disclose money laundering information, they will receive a

significantly larger fine through a civil lawsuit from AUSTRAC when exposed for non-

compliance under The Act. CBA’s reputation will be severely damaged reducing market

share. Key executives involved in the decision-making process with lose their jobs.

Utilitarianism Analysis

The stakeholders likely to be affected directly and indirectly by the ethical dilemma in this

case are: The Commonwealth Bank’s board of directors, shareholders, employees, money

launderers, law enforcement agencies, the Australian public, AUSTRAC, competitors and

customers. Both long-term and short-term consequences of the ethical dilemma will be

considered in the analysis.

Reasonably foreseeable consequences of fully disclosing details of money laundering

information to AUSTRAC:

• In the short-term, the board of director’s must arrange payment of fines for failing to

establish sufficient risk assessment and monitoring procedures as required by The

Act. As the board’s reputation will be damaged due to incompetency, key executives

will lose their jobs. Some customers will switch banks, reducing profits in the short-

term.

• Customers will view CBA as less competent, creating dissatisfaction.

• Competitors will gain some customers from CBA’s loss; their market share will grow.

• Shareholders will be dissatisfied with CBA’s incompetency. Share prices will fall in

the short-term and their profits will reduce.

• Individual employees involved in human-errors will be disciplined.

• Known money launderers will be prosecuted by law enforcement agencies.

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Reasonably foreseeable consequences of not fully disclosing details of money laundering

information to AUSTRAC:

• For the board of directors, the consequences of not offering full disclosure is that in

the short-term they will feel they have not upheld their regulatory duty and are

aiding money launderers. They will feel relief that their system failures are not

exposed. In the long-term, once exposed by investigation for not offering full

disclosure, key executives will suffer jobs loss due to deceitful behaviour and non-

compliance. CBA will receive a large fine due to breaching The Act, which the board

must manage. CBA’s reputation will be severely damaged. Many customers will

switch banks, reducing profits.

• Customers will view CBA as untrustworthy and incompetent, creating significant

dissatisfaction.

• Competitors will be disadvantaged as CBA is not operating with the same regulations

as them. In the long-term, once CBA is exposed, a royal commission will result in

investigation of the entire financial sector. Competitor’s will gain a significant

number of customers from CBA’s loss.

• Shareholders would not have access to all information they would want when

making investment decisions, creating dissatisfaction once CBA is exposed. CBA’s

share price will reduce when exposed, and therefore shareholder profits will reduce.

• Employees will be dissatisfied as they are working for an employer who is not

following regulatory obligations as required by law. Once exposed, some employees

will be laid off as CBA must make cuts due to substantial fines.

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• Not having full information will mean that AUSTRAC will be unable to regulate the

industry effectively as it’s autonomy is being ignored. In the long-term this will also

damage their reputation as regulators.

• Law enforcement agencies will have diminished capacity to investigate illegal

activity.

• The Australian public will be exposed to serious and perpetual financial crime. This

will create lost proceeds to crime within the economy.

The utilitarianism analysis concludes that the decision which creates the greatest good for

the greatest number in this case would be to fully disclose money laundering information to

AUSTRAC. While there is financial and reputational damage for either decision, it is

significantly worse for the board if they do not offer full disclosure. Further, the Australian

Public is indirectly disadvantaged when AUSTRAC and law enforcement agencies have

diminished capacity to perform their duties, this outweighs the minimal short-term benefits

to stakeholders. Many of the short-term benefits of not fully disclosing information are

negligible once the inevitable exposure of CBA’s non-compliance occurs.

Kantian Analysis

The primary duty in this case could be owed to either AUSTRAC as a regulator, or CBA’s

shareholders. As CBA operates with reporting regulations under The Act, they have

mandatory enrolment with AUSTRAC. In all decisions relating to disclosure of money

laundering information, the primary duty must be to AUSTRAC so that they are able to

regulate the industry. Under the assumption that there is no prima facie case, the maxims

for review are:

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“To always ignore autonomy”

or

“To never ignore autonomy”

Next, the Categorial Imperative must be applied to each maxim to determine if it passes as

an ethical law.

“To always ignore autonomy”.

1. Universalisable = No

The outcome would be that everyone would always ignore the autonomy of others. The

logical end point of which would be that all decisions are made based on deception,

coercion or manipulation. This is a self-defeating outcome.

2. Respect for rational beings = No

The sole intent of the decision-maker is to deny AUSTRAC’s right to autonomy to avoid

punishments. This is a selfish intent.

3. Respect for Autonomy = No

By always ignoring autonomy, the intent of the decision-maker is to deny AUSTRAC’s ability

to make free and informed choices. This is disrespectful of their autonomy.

The maxim fails all three Categorical Imperative tests; therefore, it is unethical.

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“To never ignore autonomy”.

1. Universalisable = Yes

The outcome would be everyone would always respect the autonomy of others. The logical

end point being that all decisions made are free of deception, coercion or manipulation. This

is a self-fulfilling outcome.

2. Respect for rational beings = Yes

By never ignoring autonomy, the decision-makers intent is to enable AUSTRAC to make free

and informed choices, despite punishments. This is a selfless intent.

3. Respect for autonomy = Yes

By never ignoring autonomy, the intent of the decision-maker is to respect AUSTRAC’s

ability to make free and informed decisions. This is inherently respectful of their autonomy.

This maxim passes all three Categorical Imperative tests; therefore, it is ethical.

The maxim “to never ignore autonomy” can be considered an acceptable ethical law. If

everyone must never ignore autonomy, the board of directors therefore must, regardless of

any consequences, respect the autonomy of AUSTRAC so that it can perform its regulatory

duties. Therefore, Kantian analysis recommends the ethical decision to fully disclose money

laundering information to AUSTRAC.

Ethical Rights Analysis

The first stage of an ethical rights analysis is determining which rights are at play at the

point of the ethical dilemma. The following rights are relevant:

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• CBA board of director’s negative right to make business decisions, which obligates all

other rational beings not to prevent the board from making business decisions.

• AUSTRAC’s negative right to autonomy, which obligates all other rational beings to

refrain from acting deceitful, manipulative or coercive towards them.

• Shareholder’s negative right to autonomy.

• Law enforcement’s agencies negative right to autonomy.

There is a clash of rights between the board of director’s negative right to make business

decisions and AUSTRAC’s negative right to autonomy. This is the case as the board of

director’s is seriously considering not fully disclosing money laundering information to

AUSTRAC. According to the Hierarchy of Rights, autonomy is the more basic right, and

therefore must prevail. Without universal respect for the right to autonomy, the right to

make business decisions cannot be fulfilled. By not fully disclosing all known information

regarding money laundering transactions, the board are acting deceitful and ignoring

AUSTRAC’s right to autonomy and impeding its ability to regulate the financial industry.

Therefore, rights analysis concludes the ethical decision is to fully disclose money laundering

information to AUSTRAC.

Distributive Justice Analysis

Distributive Justice analysis begins with going behind the ‘Veil of Ignorance’ and identifying

the potential worst off parties affected by the ethical dilemma. The potential worst off

parties at the time of the ethical dilemma could be:

• The board of directors, as they are faced with a forced choice with undesirable

consequences.

• AUSTRAC, as their negative right to autonomy is being violated.

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• The shareholders, as their negative right to autonomy is being violated.

• Australian Federal Police, as their negative right to autonomy is being violated.

• The Australian public, as they are being exposed to perpetual financial crime.

At the point of the ethical dilemma, AUSTRAC is the worst off as their negative right to

autonomy is being violated. While other party’s autonomy is also being violated, the board’s

primary duty is to AUSTRAC, so it’s autonomy is priority in this decision. The board of

directors must therefore choose the outcome which best serves AUSTRAC. The alternative

outcomes are:

• To fully disclose money laundering information to AUSTRAC would have the outcome

that all autonomy would be respected.

• To not fully disclose money laundering information to AUSTRAC would have the

outcome that all autonomy would be ignored.

The only outcome that improves the worst off’s position is to fully disclose money

laundering information to AUSTRAC.

Final Recommendation

The case surrounds the primary duty owed to AUSTRAC and it’s right to autonomy,

necessary to regulate the financial industry. Based upon the above analysis, all four ethical

models arrive at the same conclusion. Therefore, it is recommended that the only ethically

justifiable decision is for the board of director’s to fully disclose money laundering

information to AUSTRAC. To minimise the punishments associated with this decision, the

board should consult with their lawyers to prepare for the inevitable lawsuit due to

improper risk assessment procedures and reporting failures, a breach of The Act. They

should collect all information detailing how and why systematic failures occurred in the risk

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assessment, monitoring and reporting processes to minimise fines. The board should

immediately release a PR statement explaining details of the failures and plans to establish

better risk assessment and reporting procedures adhering to anti-money laundering laws.

This would minimise reputation damage and loss of market share that would arise from

coverage in the media. The head of the board should resign to minimise overall job loss

within the board.

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Reference List

Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth)

AUSTRAC 2013, Enrolment and registration, viewed 1 May 2018,

<http://www.austrac.gov.au/enrolment-and-registration>.

Chief Executive Officer of The Australian Transaction Reports and Analysis Centre v

Commonwealth Bank of Australia Limited (2017) FDA.

Norton, S 2017, ‘Lessons from the CBA money-laundering scandal’, The Strategist, 15

September, viewed 2 May 2018, <https://www.aspistrategist.org.au/lessons-cba-money-

laundering-scandal/>.

Parry, Y & Ockenden, W 2017, ‘Commonwealth Bank: How smart ATMs and a coding error

caused a massive mistake’, ABC News, 8 August, viewed 26 April 2018,

<www.abc.net.au/news/2017-08-07/commonwealth-bank-how-smart-atms-and-coding-

error-caused-mistake/8781066>.

Yeates, C 2017, ‘’Mistakes can be made’: CBA blames software for scandal’, The Sydney

Morning Herald, 6 August, viewed 1 May 2018,

<https://www.smh.com.au/business/banking-and-finance/mistakes-can-be-made--cba-

blames-software-for-scandal-20170806-gxqiao.html>.