On the last full working day before Christmas and the long summer holidays, the biggest Australian banks, known collectively as the Four Pillars, announced that their New Zealand subsidiaries had agreed with the NZ tax authorities to pay some A$1.7 billion to settle a dispute over transactions used by the banks to reduce their tax liabilities. The settlement came after an appeal by Westpac had been conclusively rejected in October by the New Zealand High Court, who concurred with the NZ Commissioner for Inland Revenue that the 'structured finance' transactions were 'tax avoidance arrangements entered into for a purpose of avoiding tax'.
Like spoilt teenagers, the banks claimed that someone else had encouraged them to do it; in this case, their lawyers.
Legal or not, in what bizarre, parallel moral universe could such business activities be considered even remotely acceptable?
Not content with making excess profits due to their domination of the NZ banking market, through local subsidiaries, the four banks attempted to generate even more money by picking the pockets of the New Zealand taxpayer. This is just pure, unadulterated greed.
In yet another example of the hubris that has become the hallmark of Australia's largest bank, Westpac even attempted to turn this disaster to its advantage by crowing that they had overstated the possible settlement in their last annual accounts, and would be able to 'write-back' some A$190 million next year. This is like a thief who steals your car then, taking pity, gives you your bus fare home - in the great scheme of things, hardly praise worthy?
But what is the Australian banking regulator, APRA, doing as regards the settlement?
Keeping very quiet, so far.
With some justification, APRA has received much praise for its part in keeping the Australian (and, by extension, New Zealand) banking system relatively safe during the Global Financial Crisis (GFC). Pleased with itself, APRA has been trumpeting its particular form of muscular 'meta-regulation'. Obviously, being accused of being asleep at the wheel as regards these unethical transactions would severely tarnish this newly won reputation.
In regulatory terms, the huge losses incurred in this settlement should be classified as an 'Operational Risk' event under new Basel II regulations. In a similar, but smaller, operational risk event in the FX department of the National Australia Bank (NAB) in 2004, APRA acted quickly: setting up an independent enquiry; engineering, or at least hastening, the ouster of the Chairman, CEO and several managers; and generally taking a big stick to NAB's internal risk management procedures. APRA gained a lot of kudos within the regulatory community for the promptness and effectiveness of these actions.
But where are the prompt actions in this case? APRA has had plenty of time to consider its response to any such settlement, since it has been anticipated for months. If they were not aware of it in advance, on the other hand, that would indicate a much more serious problem in their regulatory oversight. Nor can APRA slither into the murky jurisdictional crevices between itself and the NZ banking regulator, the local Reserve Bank, since, under new Basel II rules, regulators are supposed to 'exchange information on issues of interest' under so-called 'home host' provisions.
For a start, where is the much-vaunted improvement in corporate governance that was supposed to follow criticisms in the judicial inquiry into the spectacular failure of HIH Insurance in 2001? So far, not one of the directors of the four banks, or their subsidiaries, has had the courage to resign for failing to properly execute their oversight responsibilities. Obviously, for these over-paid glove puppets, accountability is merely a word in the dictionary somewhere between abuse and avarice. If they do not do so of their own volition, APRA should, at a minimum, insist that the chair of each bank's audit committee resigns for failing to protect their company's ethical reputation.
Was there no one in a position of authority in any of these large corporations who would ask the most basic question: 'we know it may be profitable, but is this the right thing to do'? While there is anecdotal evidence that some staff were uneasy about the legality/morality of these transactions, the banks, acting as a pack, just lost their moral compass.
In the words of Barack Obama - 'these bankers still don't get it'.
One bank CEO reportedly went so far as to claim that 'the length of the trial, clearly demonstrated the complexity of issues'. Far from it, all of the banks' arguments were comprehensively rejected by various courts and the prolonged trial reflects the fact that there appeared to be no limit to the amount of shareholders' funds that the banks were prepared to expend to cover their tracks. Not content with stealing (let's call it what it is) from the New Zealand taxpayer, the bankers wasted hundreds of millions of dollars of Australian pensioners' investment income in a vain attempt to hide their misdeeds.
But where is the outrage in the Australian investment community?
Is it merely a coincidence that the cynical PR exercise of burying the announcement of settlement happened just after the annual bank reporting season and while the parliaments were in summer recess.
While searching for scapegoats might prove an interesting blood sport, the activities of the banks in this case comprise a serious industry-wide breakdown of good ethical behaviour. The banks behaved like bullies and acted as they did just because they thought they could get away with it.
In the fall-out from the GFC, APRA, along with other regulators, are proposing new rules on bankers' remuneration, in particular, introducing mechanisms for deferring or even 'clawing back' bonuses paid on activities that subsequently went sour. If ever there was such a situation, this is surely it.
APRA should, immediately, direct each bank to set up an internal inquiry that first gets to the bottom of why this particular moral failure occurred within their firm and then makes specific proposals on this year's remuneration for the business lines involved. Having learned why firms committed such egregious ethical lapses, APRA can then make industry wide recommendations to remedy the situation to make sure it doesn't happen again.
If banks and regulators do not come clean, the clear message to all bank staff and customers will be that any type of unethical behaviour is acceptable, just provided you don't get caught!
Finally, it must be remembered that banking regulation is an arm of government and ultimately politicians must bear some responsibility. The Australian Prime Minister, Kevin Rudd, has recently published some cogent insights on the moral failures at the heart of the global financial crisis. Since this is much closer to home than the US subprime crisis, the government should recognize the regulatory failures and make an apology to the victims - the tax-paying public of their nearest neighbour.
There is an old proverb that 'Success has a 100 fathers, but failure is an orphan'.
Despite some success during the financial crisis, underpinned remember by taxpayer guarantees, someone in the Australian banking industry should have the guts to take responsibility for this completely unacceptable behaviour.
In any case, APRA cannot remain silent for long and must act to ensure that proper lessons are learned and that ethics are improved across the industry.
