Commonwealth Bank’s $700 million fine will end up punishing its customers

Sandeep Gopalan, Deakin University

The Commonwealth Bank of Australia (CBA) this week agreed to pay a record penalty to settle its violations of anti-money laundering and counter-terrorism financing laws. The A$700 million fine plus legal costs will become final upon the approval of the Federal Court.

The deal was met with market approval, and has allowed regulators to claim victory. Given the public’s current hostility to banks in the wake of revelations from the Banking Royal Commission, politicians also joined the bandwagon and applauded CBA’s loss.

What if the penalty is a sign of mob justice, rather than just deserts? And given the scale of the payout, will the fine also end up further punishing customers and shareholders?

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Answering these questions requires a close look at the case. CBA was alleged to have violated the Anti-Money Laundering and Counter-Terrorism Financing Act 2006, in several specific ways.

First, it introduced Intelligent Deposit Machines (IDMs) without conducting an independent risk assessment and/or instituting mitigation procedures to tackle money-laundering. Unlike older ATMs, IDMs process cash deposits and make the funds available for transfer immediately. Clearly, criminals could use these features to launder cash gained through crime. CBA wrongly believed that its existing ATM monitoring processes covered these risks.

Second, it was warned about these risks and could have minimised money laundering by imposing daily limits on accounts. CBA refused.

Third, CBA failed to provide transaction reports within 10 business days for cash deposits greater than A$10,000. This violation referred to 53,506 transactions totalling about A$625 million. The failure was due to a coding error – the software was not updated to pick up a new code created for IDM deposits.

Fourth, CBA failed to report transactions with a pattern of money-laundering – apparently misunderstanding its legal obligations.

Fifth, CBA failed to report suspicions about identity fraud – for example, in relation to eight money-laundering syndicates. Therefore, AUSTRAC and law enforcement were unaware of “several million dollars of proceeds of crime mostly connected with drug importation and distribution” that passed into accounts held by CBA.

Sixth, CBA was deficient in monitoring accounts despite warnings from law enforcement – 778,370 accounts were not monitored. CBA was slow to act even after suspicious accounts were terminated, facilitating money-laundering.

Clearly these are significant violations. However, the statement of facts agreed by AUSTRAC and CBA state that the bank did not deliberately or intentionally violate its legal obligations under the relevant laws.

Considering that CBA’s violations were inadvertent, due to technical glitches, and attributable to a mistaken belief about existing systems satisfying legal obligations, the A$700 million fine might be excessive.

International comparisons

By international standards, the fine seems to be very high. This week the UK Financial Conduct Authority fined the British division of India’s Canara Bank £896,100 (A$1.58 million) for “consistent failure” in its money-laundering controls, and for failings “affecting almost all aspects of its business”.

The FCA said the bank’s failings “potentially undermine the integrity of the UK financial system by significantly increasing the risk that Canara could be used for the purposes of domestic and international money laundering, terrorist financing and those seeking to evade taxation or the implementation of sanction requirements”.

In the United States, the Justice Department fined US Bancorp US$528 million (A$694 million) for criminal violations of money-laundering laws and for concealing its behaviour from regulators.

CBA’s fine is far higher than Canara’s punishment for similar violations, and roughly on a par with the sanction meted out to US Bancorp – albeit the latter was for more serious criminal wrongdoing. It is also comparable to the US$665 million (A$874 million) penalty imposed on HSBC (plus US$1.26 billion in sacrificed profits). Unlike CBA, HSBC was punished for “willfully failing” to maintain proper money-laundering controls.

Yet the proceeds from HSBC’s violations stretching back to the 1990s were staggering: at least US$881 million in laundered drug money; a failure to monitor more than US$670 billion in wire transfers and over US$9.4 billion in purchases of physical US dollars from HSBC Mexico; some US$660 million in sanctions-prohibited transactions; and evidence of deliberate sanctions violations by processing transactions to parties in Iran, Cuba, Burma, Sudan, and Libya.

A fair punishment?

The size of CBA’s penalty seems to be more in line with banks that have deliberately flouted money-laundering laws, rather than the smaller punishments handed to banks that did so unintentionally. It is tempting to conclude that this is influenced by the current prevailing mood to “send a message” to financial institutions.

What’s more, we cannot necessarily assume that the fine will act as a deterrent. The penalty is not paid by the CBA staff who acted wrongly; it is paid by the bank, ultimately by the shareholders.

Similarly, the cost of managing enhanced scrutiny and investing in additional compliance machinery will be passed on to customers in the form of higher charges and fees. Likewise, if banks become excessively cautious because of apprehensions about overenforcement, that will impact services and reduce profitability – again harming innocent people.

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The punishment must always fit the crime. Excessive punishment is counterproductive and creates additional victims.

If the purpose was really to tackle wrongdoing, the CBA staff who were responsible for the violations should have been identified and penalised.

The A$700 million fine is good for political posturing but will hurt customers and shareholders the most. Bank-bashing has a cost, and it is paid by ordinary people, not politicians.

Sandeep Gopalan, Pro Vice-Chancellor (Academic Innovation) & Professor of Law, Deakin University

This article was originally published on The Conversation. Read the original article.

Research shows the banks will pass the bank levy on to customers

Fabrizio Carmignani, Griffith University and Ross Guest, Griffith University

Studies of European countries show that bank taxes similar to the 0.06% bank levy introduced by the government in the 2017 federal budget will be largely borne by customers, not shareholders.

The levy could also make the banking system more, rather than less risky. The fact that a bank is asked to pay the levy is a confirmation that it is “too big to fail”. This could in turn encourage riskier behaviour. The levy might also trigger a higher probability of default by reducing a bank’s after-tax profitability

But it is difficult to say whether banks will pass the levy on to customers by increasing their loan rates, fees or both.

In its response to the levy, NAB confirmed it will not just be borne by shareholders:

The levy is not just on banks, it is a tax on every Australian who benefits from, and is part of, the banking industry. This includes NAB’s 10 million customers, 570,000 direct NAB shareholders, those who own NAB shares through their superannuation, our 1,700 suppliers and NAB’s 34,000 employees. The levy cannot be
absorbed; it will be borne by these people.

Aware of this problem, the government has asked the Australian Competition and Consumer Commission (ACCC) to undertake an inquiry into residential mortgage pricing. The ACCC can require banks to explain changes to mortgage pricing and fees.

When banks pass on these taxes

The bank levy is similar to taxes recently introduced by some G20 economies, including the UK. These had the dual purpose of raising revenues and stabilising the balance sheets of large banks in the aftermath of the global financial crisis.

An analysis of bank taxes in the UK and 13 other European Union countries shows that the extent to which taxes are passed on to customers depends on how concentrated the banking industry is.

The more the industry is dominated by a small number of banks, the greater the share of the tax that is passed on to customers and the less that is borne by shareholders. In more concentrated industries customers have relatively fewer alternative options and therefore tend to be less mobile across banks. This in turn gives the large banks greater market power to increase interest rates and fees without losing customers.

Australia’s banking industry is quite concentrated. In fact, we’re around the middle of the pack of OECD countries, much higher than the US, but lower than some European countries. From this we can surmise that at least some of the cost of the bank levy here will be passed on to borrowers through higher loan rates, fees or both.

An IMF study of G20 countries suggests that a levy of 20 basis points (i.e. 0.2%, approximately three times higher than the Australian government’s bank levy), could lead to an increase in loan rates of between 5 and 10 basis points. This means that the monthly repayment on a loan (assuming an initial rate of 5.5%) would increase by approximately A$6 for every A$100,000 borrowed.

The IMF also found that the bank levy doesn’t just hit customers. A 0.2% levy would reduce banks’ asset growth rate by approximately 0.05% and permanently lower real GDP by 0.3%.

The impact on customers

If the banks pass on the levy to customers then it becomes just another indirect tax, similar to the GST. The question then is whether this is regressive – does it have a greater impact on those on lower incomes than higher incomes.

Lower income earners are likely to borrow less than higher income earners. However, lower income earners are also less able to bear an interest rate increase. They are also more likely to be excluded from borrowing when the cost of borrowing increases.

In this sense, then, if the bank levy is passed on to customers it could become a barrier to home ownership for some lower income borrowers.

More generally, if the value of bank transactions is a higher proportion of low incomes than of high incomes, then the bank levy would operate as a regressive tax and contribute to sharpening (rather than smoothing) inequalities.

Both of these would be unintended, but undesirable, consequences of the levy.

Fabrizio Carmignani, Professor, Griffith Business School, Griffith University and Ross Guest, Professor of Economics and National Senior Teaching Fellow, Griffith University

This article was originally published on The Conversation. Read the original article.

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Pakistan’s ‘Blasphemy’ Laws Claim Three More Christians

Cafeteria worker, couple convicted without basis under widely condemned statutes.

KARACHI, Pakistan, March 10 (CDN) — A Christian couple was sentenced to 25 years in prison for violating Pakistan’s widely condemned “blasphemy” laws last week, and another Christian convicted without basis under the same statutes the previous week received the same sentence.

In Kasur, Ruqqiya Bibi and her husband Munir Masih were sentenced on March 3 to 25 years of prison under Section 295-B of the Pakistan Penal Code for defiling the Quran. They had been arrested by Mustafabad police in December 2008 for touching Islam’s sacred scripture without ritually washing.

Punishment for defiling the Quran is “life imprisonment,” which means 25 years in Pakistan.

Prosecution witnesses accused Ruqqiya and her husband of using the Quran as part of black magic, and that in the process Ruqqiya had touched it without it without ritual cleansing. They also claimed that the couple had written the creed of Islam, or Kalima-e-Tayyaba, on the walls of their house.

Tahir Gul, a lawyer of the Centre for Legal Aid Assistance and Settlement (CLAAS), told Compass that the Christian couple had not used the Quran for black magic. He said the matter arose out of a quarrel between Muslim and Christian children and turned into a clash of their parents. Because Pakistan’s blasphemy statues are so commonly used to settle such personal scores, they are widely condemned by human rights advocates and legislators around the world.

After police investigation, the couple was further charged under Section 295-C of the blasphemy laws, which criminalizes any derogatory remark – spoken, written or by visible representation – against Muhammad, the prophet of Islam. The minimum punishment for such remarks is also “life imprisonment” of 25 years, but the law also allows for the death penalty.

Gul said the court had absolved the couple of charges under Section 295-C, as no evidence was found of them blaspheming Muhammad. He said that when the crime report was initially filed, the couple was accused only of defiling the Quran and not of blaspheming Muhammad.

The attorney said the case would be appealed in the Lahore High Court.

In Karachi, the Additional District and Sessions Court on Feb. 25 sentenced another Christian, Qamar David, to 25 years in prison and a fine of 100,000 rupees (US$1,170) after he was convicted without basis of sending blasphemous text messages in May 2006.

David was convicted under Section 295-A of the blasphemy statues for “injuring religious feelings of any community,” and also under Section 295-C for derogatory remarks against Muhammad. Maximum punishment for violation of Section 295-A is life imprisonment, and for Section 295-C the maximum punishment is death, though life imprisonment is also possible. David received the sentence of life in prison.

His lawyer, Pervaiz Aslam Chaudhry, told Compass that the conviction was without basis as all 16 witnesses at the trial said that not David but the owner of the cell phone, who is also the subscriber to the SIM card through which they received the blasphemous messages, was guilty. The SIM card and the cell phone are owned by a Muslim, Munawar Ahmad, who was named with David, he said.

“In spite of these facts, the court has absolved him [Ahmad] of all charges,” Chaudhry said.

In May 2006, two First Information Reports (FIR) were filed against David in Karachi under sections 295-A and 295-C. The first was filed under both sections by Khursheed Ahmed Khan, a travel agent, at the Sadar Police Station in Clifton. David still awaits trial on the second FIR, also under sections 295-A and 295-C, filed by Hafiz Muhammad Hamid at the Azizabad police station in Gulberg Town.

David has never been granted bail since his arrest in 2006, and he is in Central Jail in Landhi. Chaudhry said that he would file an application in the Sindh High Court for a hearing on the second case, because no trial date has been given despite the lapse of three and a half years.

“I feel that Qamar will also be convicted in the lower court again, because we see no signs of impartiality,” he added.

David’s family members criticized the blasphemy laws and his conviction, holding a protest on Feb. 28 with the help of Save the Churches’ Property Welfare Association and the United Church of Christ. They said that David was innocent and that the court was biased.

Chaudhry said that David lived a harsh life in the jail, where he was often threatened and once attacked by fellow inmates. The attorney said his client has faced obstacles in pursuing his case, and that extremists accused him of being a supporter of “blasphemers” because he was a Christian.

“Muslims raised slogans of triumph of Islam outside the court premises on the day David was convicted,” Chaudhry said. “The judgment was expected against David due to pressure on the judge, Jangu Khan.”

David had worked in the cafeteria of a hospital in Karachi, where he served drinks and food to customers, before he was accused in May 2006 of sending blasphemous messages.

Report from Compass Direct News 

Unnamed Christians Accused after Muslim Attack in Pakistan

Armed Islamic assault following fruit stand scuffle leads to police round-up of Christians.

KARACHI, Pakistan, February 26 (CDN) — In the wake of an attack this week by 150 armed Muslims on a Christian colony in this city in Sindh Province, police have filed a false First Information Report (FIR) against 40 unnamed Christians and arrested five, Christian leaders said.

They said the 40 unnamed Christians in the FIR are accused without basis with beating Muslim men, abusing Muslim women and girls, ransacking Muslim homes and looting expensive items from Muslim homes. The false FIR is designed only to harass the Christian community, they said, adding that the five arrested Christians were visitors to the area – the only ones on the street available for police to summarily round up, as they were unaware of the FIR.

Some 150 armed Muslims assaulted the Christian colony of Pahar Ganj in North Nazimabad, Karachi, on Sunday (Feb. 21), damaging two churches, shooting at houses, beating Christians and burning shops and vehicles after a fruit stand vendor attacked a Christian boy for touching his merchandise.

Christian leaders said Muslim extremists helped gather and inflame the assailants, but they said the fruit stand vendor upset with the 14-year-old Christian boy for touching plums on his hand-pulled cart initially instigated the attack. The unnamed vendor reportedly had a previous conflict with the boy, whose name was also withheld, and in objecting to the teenager’s actions he slashed his hand with a fruit knife and threw an iron weight at him, Christian leaders said.

A Muslim eyewitness who spoke on condition of anonymity said the fruit stand was located at the entrance of the colony of more than 1,000 Christian homes. Eyewitnesses said that Christians struck the fruit vendor in the course of rescuing the boy from him.

Touching and even tasting fruit before buying is a common practice in Pakistan, according to Pakistan Christian TV, and the vendor called his fruit “defiled” not because the boy was a Christian – nearly all customers in that area were Christians – but because the vendor had a previous conflict with him and did not want to sell to him.

Social class evidently also played a role. Eyewitnesses said the Muslim fruit vendor yelled, “This Christian Bhangi untouchable has defiled my fruit.” The derogatory “Bhangi,” literally “sewer man,” is commonly used to denigrate Christians in Sindh Province. In the Sindhi language it signifies “unholy” or “untouchable,” with its Punjabi equivalent being “Choohra.”

The conflict quickly took on a religious tint. Bystanders tried to help resolve the conflict between the vendor and the boy, according to eyewitnesses, but the street seller riled up Muslims, mainly those of the Pathan clan, by saying, “My Muslim brethren, pay heed to me – that Christian Bhangi has defiled my fruit and made blasphemous remarks about the Quran.” Later that day, the Christian leaders said, the 150 armed Pathan men attacked the area Christians, who responded by pelting them with stones.

The Rev. Edward Joseph of St. Patrick’s Cathedral in Karachi said the furious Muslim mob of armed, mainly Pathan men, gathered at the entrance of the Christian slum and charged in, attacking homes and desecrating and vandalizing St. Mary’s Church of Pakistan and the Interdenominational Calvary Church. Noor Sahotra, a Christian in Pahar Ganj, said he sustained minor injuries in an effort protect St. Mary’s Church of Pakistan.

Anwer Masih, a Christian who witnessed the attack, told Compass that several shops owned and run by Christians were looted and then set on fire, reducing them to ashes and depriving Christians of their livelihood. The rampaging mob also burned vehicles and tires at the main entrance of colony, he said.    

Previously the Rev. Aashiq Pervaiz, head of Interdenominational Calvary Church, reportedly had said Christian leaders had decided not to file charges against the Muslim assailants – presumably to forestall the counter-charges that Muslims typically file as a defensive measure in such conflicts.

More than 200 Christians and Muslims reportedly gathered to resolve tensions on Monday (Feb. 22), with Pervaiz telling the throng that the Christians forgave the attackers and had not filed any charges against assailants.

Shahid Kamal, national director of the Pakistan Campus Crusade for Christ, told Compass that the FIR that Muslims filed against Christians was registered at Noor-e-Jehan road, North Nazimabad Pahar Ganj police station. He said Pahar Gangj police had arrested five Christian visitors to Christian families of the colony.

The Rev. Razzaq Mathews said Muslims have frequently leveled baseless charges of blasphemy against area Christians.

“In the sad Pahar Ganj episode, Christians were attacked for nothing,” he said. “A handful of Muslim extremists persuaded Muslims to assail the Christian residential area as well as to desecrate the holy churches and holy Christian books, including Bible.”

He said the attack lasted for almost two hours.   

Sources told Compass that local politicians and clergymen from both sides were trying to broker a truce. They said Pakistani Prime Minister Yousaf Raza Gillani has taken notice of the incident and directed the deputy inspector general of Central Karachi district to investigate and submit a report.

Report from Compass Direct News 

ISRAEL: MESSIANIC JEW WINS SUPREME COURT BATTLE

Bakery owner had lost her Jewish dietary law certificate because of her faith.

JERUSALEM , July 15 (Compass Direct News) – For three long years a Jewish believer in Christ struggled to keep her bakery business alive after the Chief Rabbinate of Israel, the country’s highest religious governing body, annulled her kashrut (Jewish dietary law) certificate because of her faith.

Pnina Conforti, 51, finally gave a sigh of relief when the Israeli Supreme Court on June 29 ruled that her belief in Jesus Christ was unrelated to her eligibility for a kashrut certificate. While bakeries and restaurants in Israel are not required to obtain such a permit, the loss of one often slows the flow of customers who observe Jewish dietary laws and eventually can destroy a business.

Conforti said that the last three years were very difficult for her and her family, as she lost nearly 70 percent of her customers.

“We barely survived, but now it’s all behind us,” she said. “Apparently, many people supported us, and were happy with the verdict. Enough is enough.”

Conforti, who describes herself as a Messianic Jew, had built her Pnina Pie bakeries in Gan Yavne and Ashdod from scratch. She said her nightmare began in 2002 with an article about her in “Kivun,” a magazine for Messianic Jews in Israel.

“Soon after, the people of the Rabbinate summoned me and told me that my kashrut certificate was annulled because I do not profess Judaism,” she said.

Food prepared in accordance with kashrut guidelines is termed kosher, from the Hebrew kasher, or “fit,” and includes prohibition of cooking and consuming meat and diary products together, keeping different sets of dishes for those products, and slaughtering animals according to certain rules. News of the faith of the owner of the Pnina Pie bakery in Gan Yavne spread quickly, soon reaching extremist organizations such as Yad le’Achim, a sometimes violent Orthodox Jewish group.

“They spread around a pamphlet with my photo, warning people away from acquiring products from my business,” Conforti said. “One such a pamphlet was hung in a synagogue. However, I refused to surrender to them and continued working as usual.”

Four years later, in 2006, Conforti decided to open another patisserie in Ashdod, near her original shop in Gan Yavne, in southern Israel. The business flourished, but success didn’t last long.

“A customer of mine, an Orthodox Jew from Ashdod, visited his friends and relatives in Gan Yavne,” she said. “There in the synagogue he came across a pamphlet from 2002 with my photo on it. In addition to boycott calls, I was also described as a missionary. My customer confronted me, and I honestly told him I was a believer.”

Soon thereafter the Rabbinate of Ashdod withdrew the kashrut certificate from her shop there, she said.

“Pamphlets in Hebrew, English and French about me begun circulating around the town,” Conforti said. “They even printed some in Russian, since they saw that the customers of Russian origin continue to arrive.”

The withdrawal of the certificate from the shop in Ashdod in 2006 was a serious blow to her business. Conforti decided to take action, and her lawyer appealed to Israel’s Supreme Court. Judges Yoram Denziger, Salim Jubran and Eliezer Rivlin ruled that the Chief Rabbinate of Israel overstepped its authority.

“The Kashrut Law states clearly that only legal deliberations directly related to what makes the food kosher are relevant, not wider concerns unrelated to food preparation,” the panel of judges wrote.

In response, the Chief Rabbinate accused the judges of meddling in religious affairs.

Soon after she petitioned the Supreme Court, Conforti said, the Chief Rabbinate had offered her a deal by which it would issue her business a kashrut certificate but with certain restrictions, such as handing the keys of the bakery to a kashrut supervisor at night. Conforti declined.

Tzvi Sedan, editor-in-chief of “Kivun,” said the Supreme Court verdict was paramount.

“It’s important not only for Messianic Jews, but also for every other business owner who has to suffer from the arbitrariness of the Rabbinate,” Sedan said. “But I still want to see this decision implemented fully in reality.”

At press time Conforti still hadn’t received the certificate. She was waiting for a team of inspectors from the Rabbinate to inspect the business prior to issuing her the certificate.

A Jew of Yemenite origin, Conforti said she was raised in religious family but came to trust in Christ following her encounter with a Christian family during a visit to the United States.

“There I found Christ and embraced him as my personal Savior,” she said. “I do not engage in [evangelistic] activity, but if someone starts a conversation about my faith, I will speak openly about it.”

Report from Compass Direct News