BMGT3001 Case Study: Money Laundering at Commonwealth Bank

This case study examines the Commonwealth Bank of Australia (CBA), a multinational bank, and its involvement in a money laundering scandal. The report delves into the bank's history, the details of the scandal involving AUSTRAC allegations of transaction gaps and failure to monitor suspicious acti...Read More

The Case Study of Commonwealth Bank 1
THE CASE STUDY OF COMMONWEALTH BANK OF AUSTRALIA
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Executive Summary
Commonwealth Bank of Australia is one of Australia’s multinational companies that mainly
provide a variety of services such as banking, fund management and many more. This bank was
formed in 1911 under the Act of Commonwealth Bank. The study seeks to examine the history
of Commonwealth Bank of Australia, the money laundering scandal case and the ethical decision
making approaches and theories it breached. In this study, different kinds of literature were used
to gather information about the bank. From the different kinds of literature, it was found the
CBA bank was involved in money laundering scandal case due to its negligence to monitor
transactions that flagged as suspicious.
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Table of Contents
Executive Summary.....................................................................................................................................2
Introduction.................................................................................................................................................4
Commonwealth Bank of Australia History..................................................................................................4
Money laundering scandal case...................................................................................................................6
Ethical Decision Making Approaches and Theories....................................................................................7
Conclusion...................................................................................................................................................8
References...................................................................................................................................................9
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The Case Study of Commonwealth Bank of Australia
Introduction
Commonwealth Bank of Australia (CBA) is a multinational bank in Australia that
conduct business in countries such as New Zealand, the United States, Asia and the United
Kingdom. The bank offers different services such as funds management, institutional, business,
superannuation, and retail banking as well as investments. According to Janda (2014, p.81), the
CBA Bank is the largest listed companies in Australia having brands such as Bankwest,
Commonwealth Insurance (Commissure), Colonial First State Investments and ASB Bank in
New Zealand. This bank was found in 1911 by the Government of Australia and completely
became private in 1996 (Moore, R.J. and Moore, R.J.2015, p.98). The headquarters of CBA bank
is located in Sussex Street in Sydney.
As much as Commonwealth Bank has played a critical role in improving the banking
services in Australia, it has also been involved in financing as well as profiting from destructive
activities. In 2018, it was reported that the bank had some allegations of deception, fraud, money
laundering, and other different crimes. This paper seeks to use the case of CBA bank to bring
into account some allegations against the bank of not following certain laws during its
operations. The Commonwealth Bank of Australia case is important because it will help people
to understand how breaching ethical law can cost banks.
Commonwealth Bank of Australia History
The CBA bank was established in 1911 under the Act of Commonwealth Bank and began
operating in 1912. The bank was developed to carry saving businesses as well as general
banking. The CBA bank was the first bank to be provided with a guarantee by Australia
government. Its first branch was opened in Melbourne in 1912. After a few months, it merged
with Tasmania bank and opened six branches across all Australia’s states (Black et al 2014,
p.302). The bank further supported the government of Australia in World War I. During this
time, the CBA bank accompanied the Australian Army in New Guinea and opened another
branch at Rabaul (Sathye 2016, p.76). In 1920, the bank was given the power to issue notes in
Australia. In the same year, it took over the Queensland Government Savings Bank.
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After 1920, the central banking role of the CBA started to expand gradually until
1931when the Labor government led by James Scullin disagreed with the board members of the
bank. This disagreement resulted after the chairman of CBA bank refused to expound credit in to
tackle the Great Recession (Otchere and Chan 2013, p.31). This conflict resulted to the fall of the
government. In 1942, the CBA decided to put to a halt its operation in New Guinea because the
Imperial Japanese Army had captured numerous towns that the bank operated. After two years,
the bank resumed its operation and opened new branches across Papua New Guinea in numerous
places such as Boroko, Port Moresby, Wau and many more. Apart from just opening these
branches, it maintained them to support local businesses, trade, small savers and the government.
After passing of the emergency legislation law during the World War II, the Commonwealth
Bank was given all the central powers of the bank (Lee 2012, p.459).
After this war, the bank utilized its power to start an immense expansion of the Australian
economy. The move of the bank was supported by the government which attempted to force
almost all Australia’s states to conduct their banking services with the CBA bank under the
banking Act of 1945. However, the move of the government was cut short when the High Court
in Melbourne blocked the move. After the government was blocked by the High Court in
Melbourne, it promptly expounded its programs of migration. To remain relevant, the bank
quickly formed a Migrant Information Service known as Australian Financial and Migrant
Information Service (AFMIS) that allowed the CBA bank to expand tremendously. In five years,
the CBA bank had opened hundreds of its branches across Australia. It also formed one of its
branches in Solomon Islands in 1951. In the 1960s, a new Commonwealth Development Bank
was formed which made the bank diversify business in areas such as travel and insurance.
During this time, the bank developed a finance company and became more involved in
international banking as well as foreign currency trading.
Additionally, the CBA bank massively supported decimal currency initiation in 1966. It
drastically started converting its paper records into an electronic record system. In 1974, the
CBA bank developed the first credit card in Australia. In 1984, it developed MasterCard services
and later developed Visa Cards in 1993. Between 1983 and 1991, deregulation was experienced
in the bank. In these years, the bank acquired almost 75 per cent of the ASB Bank in New
Zealand and further acquired the underperforming Government of Victoria that owned the State
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Bank of Victoria (Schlagwein, Thorogood and Willcocks 2014, p.46). After deregulating some
banks, the government of Australia decided to completely privatize the Commonwealth Bank.
In 1991, it offered its first share at a cost 1,292 million dollars, followed by the second
share that valued 1,700 million in 1993 and finally, the third share was offered at the cost of
5,000 million dollars in 1996 (Tomasic, Bottomley and McQueen 2012, p.34). In 2000, the
Commonwealth Bank of Australia decided to merge with Colonial Limited. Over the recent
past, the bank has dramatically expanded throughout the world. In 2005, the CBA bank formed
strategic agreements with Hangzhou and Jinan City Commercial Bank, some Chinese banks. The
bank took 19.9 per cent and 11 per cent stake in Hangzhou and Jinan City Commercial Bank
respectively (Osborne 2014, p.52). In 2008, the bank bought St Andrew’s and Bankwest
Insurances and the acquisition was scheduled to be completed in 2009 after regulatory approval.
Money laundering scandal case
The Commonwealth Bank of Australia breached the ethical law as a result of its
ignorance. The Australian Transaction Reports and Analysis Center (AUSTRAC) alleged that
the CBA bank had many transactions gaps approximating to 778,370 accounts between 2012 and
2016. Even though the bank realized those transaction gaps, it neither invested in them nor took
action on it. Some syndicates took advantage of this error and deposited money in the bank using
fake names and offshore transferring schemes. As stated by Gollan (2017, p.67), the bank failed
to follow the law enforcement instructions to suspend accounts that were deemed as suspicious
or connected to criminal activity. Additionally, AUSTRAC accused Commonwealth Bank of
Australia of being responsible for more than 50,000 breaches of the law by failing to sufficiently
monitor transactions worth 625 million dollars on its network of intelligent deposit machines
(IDMs) for over three years (Giblin 2011, p.111). The bank also failed to sufficiently examine
risks that could be posed by IDMs use that was initiated in 2012. Instead of investigating the
IDM risks, it facilitated anonymous cash and cheque deposits of more than 20,000 Australian
dollars per transaction.
In addition to transaction monitoring failure, the bank also failed to sufficiently report
unusual transactions as well as monitoring suspicious customers despite being aware of possible
money laundering. Finally, the bank admitted of failing to file 53,506 transaction reports a move
that deprived the law enforcement some additional intelligence (Walmsley and Weinand 2017,
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p.87). The bank also admitted that it did not stick to the risk assessment requirements for IDMs
that were rolled out from 2012. However, the bank claimed that the IDMs introduced in 2012 did
not create the threshold transaction reports (TTRs) because of a coding error that could have
sensitized the bank of any suspicious activity. In 2017, the bank introduced daily limits but this
scandal led to the retirement of CBA chief executive officer, slashed remuneration for some bank
board members and executives. The bank also decided to perform serious reviews of its
procedures and culture. This money laundering scandal case affected the performance of the
bank and made the bank to pay some billions of dollars to its stakeholders.
Ethical Decision Making Approaches and Theories
One of the approaches of ethic that was used in this study is Friedman’s individualism
theory. According to Friedman’s Individualism theory, companies need to optimize their profits
but within the ethical laws. This simply means that a person must do whatever he or she feels
necessary to benefit his or her sustainable interests by following the law. This theory suggests
that the profits made by an organization ought to be confined within the law or else an
organization can steal from its stakeholders (Walter and Ross 2014, p.16).
Many individuals believe that Friedman’s theory of Individualism is the most
advantageous business philosophy. The theory does not require companies to spend time on
ethical issues such as environment, safety and customers but instead banks on companies
following laws in business. From the illustration in Friedman’s theory of Individualism, it is
clear that the Commercial Bank of Australia exercised its duties outside the confines of the law.
They made profits through dubious ways but kept the profit for themselves (Edwards 2010,
p.363). The Commonwealth Bank of Australia did not also share its profits to their stakeholder.
In this regard, the bank was against Friedman’s theory of individualism. Instead of working
collaboratively with stakeholders, the bank sort to benefit itself perpetuating economic inequality
and political corruption that led to the fragmentation of the society.
Another ethical decision-making approach that was used in this study is the Kantian
theory. Kantian ethic theory suggests that the rightness and wrongness of an action do not rely on
their effects but rather depend on whether they satisfy their duty. The German philosopher
believed that there exists an exclusive principle of morality (Baron 2018, p.12 and Quiggin 2011,
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p.3). According to the Kantian ethic perspective, an organization should work on its goodwill.
However, the issue of goodwill was omitted by the CBA.
From my perspective, it is clear that the Commonwealth Bank of Australia did work for
the goodwill of its customers. As much as it was mandated to monitor people’s transactions, the
bank failed to monitor transactions on its intelligent deposit machines for over three years.
Linking both Kantian and Friedman’s theory of Individualism, it is true that the bank breached
ethical law due to ignorance. This is because it was aware of the unusual transactions but did not
report them until prompted by AUSTRAC.
Conclusion
From the case of the Commonwealth Bank, ethical issues are indeed significant aspects to
focus on while carrying any business. These ethical issues help the company to follow and abide
by the law. After the problems that the CBA bank experienced, the bank should follow the
stipulated laws and abide by them. Friedman’s theory of Individualism and Kantian theory must
be followed by the Commonwealth Bank of Australia. The Friedman’s theory of Individualism
required the Commercial Bank of Australia to maximize its profit while at the same time
following the law while the Kantian ethic theory required the bank to work on it goodwill for
sustainable growth.
It is, therefore, important for business bodies across the world to follow business ethics
for dramatic improvement in the world economy. If this is not followed, a negative impact on
stakeholders will be felt in different companies. Apart from the negative impact on stakeholders,
unethical behaviours can also be experienced in the workplaces of various organizations. The
Commonwealth Bank of Australia provides the best illustration of not following ethical laws. Its
negligence resulted in the loss of several billion dollars and the steepest decline in its share price.
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References
Baron, M.W., 2018. Kantian ethics almost without apology.2nd ed. New York, United States:
Cornell University Press.
Black, S., Kirkwood, J., Williams, T. and Rai, A., 2013. A History of Australian Corporate
Bonds. Australian Economic History Review, 53(3), pp.292-317.
Edwards, J., 2010. Australia after the global financial crisis. Australian Journal of International
Affairs, 64(3), pp.359-371.
Giblin, L.F., 2011. The growth of a central bank: the development of the Commonwealth Bank of
Australia, 1924-1945. 3rd ed. New York, United States: Cornell University Press.
Gollan, R., 2017. The Commonwealth Bank of Australia; origins and early history. Canberra,
ACT: Australian National University Press.
Janda, M., 2014. Commonwealth Bank Boss Ian Narev Says Sorry for Multi-Million-Dollar
Financial Planning Scandal. ABC News.
Lee, D., 2012. Australia, the British Commonwealth, and the United States, 1950–1953. The
Journal of Imperial and Commonwealth History, 20(3), pp.445-469.
Moore, R.J. and Moore, R.J., 2015. Making the New Commonwealth (pp. 199-204). Oxford:
Clarendon Press.
Osborne, P., 2014. Storm financial collapse plan outlined. The Age, 10.
Otchere, I. and Chan, J., 2013. Intra-industry effects of bank privatization: A clinical analysis of
the privatization of the Commonwealth Bank of Australia. Journal of Banking & Finance, 27(5),
pp.949-975.
Quiggin, J., 2011. The “People’s Bank”: the privatisation of the Commonwealth Bank and the
case for a new publicly-owned bank’. Australian Options, 25, pp.1-4.
Sathye, M., 2016. Internet banking in Australia. Available at SSRN 38222.
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Schlagwein, D., Thorogood, A. and Willcocks, L.P., 2014. How Commonwealth Bank of
Australia Gained Benefits Using a Standards-Based, Multi-Provider Cloud Model. MIS
Quarterly Executive, 13(4).
Tomasic, R., Bottomley, S. and McQueen, R., 2012. Corporations law in Australia. Federation
Press.
Walmsley, D.J. and Weinand, H.C., 2017. Is Australia becoming more unequal? The Australian
Geographer, 28(1), pp.69-88.
Walter, J.K. and Ross, L.F., 2014. Relational autonomy: moving beyond the limits of isolated
individualism. Pediatrics, 133(Supplement 1), pp.S16-S23.
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