TABLE OF CONTENTS

Executive Summary
Introduction
Misconducts
Impact on Stakeholders
Reflection on the broader systematic Problems
CBA’s Response
CBA’s scandal for regulators or accountant
Resonate with social values, culture, religion, educational background and future career
Conclusion
Reference List
EXECUTIVE SUMMARY

In order to make sure that every company and bank globally has been operating ethically, the

institutions have been conducting enquiries. Due to the investigations;severalscandals involving

well known entities were brought to light. In last three decades numerous accounting scandals

have been exposed by Authorities, and these scandals have impacted the entire world

economically. Due to past misconducts by companies many institutions have become vigilant of

any unethical activities. Recently, an enquiry in the banking industry was held by Royal

Commission (Banking royal commission: all you need to know – so far, 2021). During an

enquiry the Australia’s big four banks Commonwealth Bank, National Australia Bank, Westpac

Bank, ANZ and other entities were exposed of conducting unethical activities, which benefited

certain group of internal and external stakeholders at the expense of customers. This report

focuses on the misconduct of Commonwealth Bank of Australia and its impact on the

stakeholders. The report analyzes how the reputed banks violated the codes of ethics and will

discuss on what actions were taken by different regulatory bodies to stop such reprehensible

behavior. The role of CBA’s culture in the downfall of CBA will be analyzed as well and

suitable recommendations are discussed to ensure that such activities can be stopped or avoided

in the future.
INTRODUCTION

Commonwealth bank of Australia is one of the largest multinational banks in Southern

Hemisphere. CBA started as a public institution, it was found in 1911 on 22 nd December by

Andrew Fisher Labor Government (Commonwealth Bank, 2021). CBA opened its branches in a

lot of countries and along the way it started merging or taking over other banks. From the year

1991 CBA started privatization meaning government “ceases to be the owner of the entity and

bank is taken over by few people” (The Economic Times, 2021). By 1996, CommBank

announced itself as a fully privatized institution. CommBank, NAB, ANZ and Westpac Bank

controls 80% of the nation’s financial planning industry. CBA offers range of services and

financial products such as funds management, superannuation, investment, share broking

products and services, retail, premium banking and other various banking services. Public trusts

banks to keep their hard-earned income safe or invest it in right place. People hold banking

industry in high regard, but recent discoveries have raised questions on the ethics and morals of

banking institution and their intentions regarding the interest of public. Royal Commission was

established on 14 December 2017 by Australian government to set a specific inquiry into any

misconduct in banking industry. It is an independent investigation body who discovered CBA’s

violation of codes of ethics in the year 2018 (Final Report: Volume 1, n.d.).Several articles have

been published in last decades regarding the unethical activities of CBA and one such article was

published in June 2013 by Sydney Morning Herald on how CBA covered up their unethical

activities for many years until an employer of very institute named Jeff Morris became a whistle

blower and exposed how the bank has been violating the code of ethics for the interest of certain

group of stakeholder (A Case Study on CBA – Business and Management Review, 2021).
However, no strict actions were taken until Royal Commission was formed explicitly for this

task.

MISCONDUCT

Ethics in every sector is very crucial and in banking industry ethics plays a very vital role as

ethics are involved in each aspect of banking function; for instance, ethical consumerism, ethical

investment, fair and true trade movement and corporate social responsibility. With evolving

methods of creative accounting – many entities have taken advantages to find loopholes in

regulations for their own selfish motives. With the use of creative accounting, they have started

doing unethical activities legally so that they can escape the legal litigations in case they get

caught by authorities. CBA may not have been involved directly in illegal activities, but they

have compromised their ethics and morals due to negligence and short-term profits. Below are

the details of misconducts which were acknowledged by CBA:

Money Laundering

In May 2012, Intelligent Deposit Machines (IDMs) were introduced by CBA. These machines

performed functions like ATM, but with larger amount of money and without the requirement of

human teller. The individuals or businesses could deposit or transfer large amount of cash

anonymously and could transfer around $20,000 on each transaction. The bank policies had no

limit on the number of transactions each day, thus leading to millions of cash being deposited or

transferred into anyone’s account immediately (CBA - The Million Dollar Money Laundering

Scandal You've Never Hear Of - KYC-Chain, 2021). In 2016, within a month over $1 Billion

went through CBA’s IDM machines. The thought process behind IDM was to make CBA

banking more convenient and less time consuming for customers. But CBA’s inventions posed a

huge risk for money laundering and financing terrorist activities because of its easiness to move
money without any limit or identification. Commonwealth Bank did nothing to assess the risk for

these machines rather they enjoyed the short-term profit they received from them. Around $8.1

Billion was deposited into IDM before the investigation started (CBA - The Million Dollar

Money Laundering Scandal You've Never Hear Of - KYC-Chain, 2021). CBA neglected to

investigate the source or use of huge amounts being deposited into machines thus creating

opportunities for unethical activities. Under Financial Transaction Report Act of 1988 (FTR Act)

all entities who deals with cash must create the Threshold Transaction Report (TTR) for

transactions of 10,000 Australian Dollars and present it to Australian Transaction Reports and

Analysis Centre (AUSTRAC) (CBA - The Million Dollar Money Laundering Scandal You've

Never Hear Of - KYC-Chain, 2021).

On 25 May 2015, Arsalan Shaffi and Salman Khan were arrested for the case of money

laundering; Police found around CBA IDM’s banking receipts for $3 million and half a million

laundered through 101 CBA accounts. Right after the arrest, Police department contacted CBA

to obtain details about transactions made by Shaffi and Khan, but according to Police, CBA

showed lazy behavior and did not comply with request on time (The Interim Report, n.d). Police

also arrested some drugs gangs from Hong Kong, who used CBA’s account to launder their

money and finance their drug supplies. After these arrests, CBA was required to present their

TTR files to AUSTRAC by ten business days. CBA did submit some TTRS, but reports for over

53,000 transactions were still not submitted to AUSTRAC as CBA claimed that their IDM

software was defective. After investigating suspicious transactions, Anti-Money Laundering law

asked CBA to submit Suspicious Matter report (SMR) to AUSTRAC within three working days.

After asking for these report 70 times, they were submitted after the deadline. which is breach of
law itself by the bank (CBA - The Million Dollar Money Laundering Scandal You've Never

Hear Of - KYC-Chain, 2021).

Due Diligence

Over 65000 people were granted credit plus insurance without verifying the employment history

of those customers. CBA acknowledges that those customers may not have met employment

eligibility criteria in the terms and conditions and may not have taken advantage of certain

benefits of the policy. Furthermore, CBA states that more than 20,000 clients had purchased their

‘Loan Protection’ products and again their employment eligibility criteria were not verified by

the bank. However, right after the Royal Commission was formed, CBA refunded $10 million to

credit card insurance clients and it also planned to refund $3.4 million to Loan protection

customers. It shows that to avoid legal implication CBA took this action to correct their unethical

activities (Interim Report, 2018, n.d).

Financial Advices

Commonwealth Financial Planning (CFPL) is a subsidiary of CBA and most of the misconducts

related to financial advices occurred in subsidiary. Financial Advisers of CFPL, were giving

wrong advices to clients by asking them to make investments which were not appropriate for

them in term of generating profits and involved high risks. The employers of CFPL also switched

products without clients’ permission and they forged client’s signature on documents. Due to this

misconduct, many clients lost millions of dollars. CBA had to compensate $20 million to clients

which were given unfitting financial advices from the financial advisors of CPFL (Interim report,

2018, n.d). Later it was discovered that there were more employers in the CBA as well who

conducted the similar unethical activity. In order to cover up their transgressions CBA initiated a

program ‘Open Advice Review Program’ for clients who were customers of CBA. The aim of
the program was to reform the deeds done by employers and to avoid any future lawsuits. CBA

paid $37.6 million more to compensate the customers who received wrong advices Interim

report).

Other Misconducts

CBA were also charging fees to customers who were already dead and employees knew about

the death of the account holder yet they continued to charge them for over a decade, around two

thousands accounts target of this activity. They also charge fees for services, which were not

provided at all. The bank had to compensate $118.5 million to its customers for the misconduct.

CBA showed carelessness when they lost 20 million accounts data in the year 2016 and did not

even bother to inform customers (CBA money laundering scandal: how it happened, 2021).

IMPACT ON STAKEHOLDERS

Commonwealth Bank was directly and indirectly involved in unethical activities and their

actions have caused harm to stakeholders in financial and non-financial ways. Money laundering

incident has risked the life of innocent people. Unknowingly CommBank has facilitated money

for drugs dealers and terrorist who could cause physical harm to people and it has also risked the

security of Australia. CBA created an easy pathway for criminals to carry out their illegal

activities through their IDM machines. Criminal were able to purchase weapons threatening the

life of people. Drugs is a weapon which destroys the future generation of country as it not only

does physical harm, but it also instigates a person to execute other criminal activities while under

its affect thus harming people who may not be under any drugs. CBA is partly to be blamed for

the harm caused to public as they provided opportunity for the lawbreakers to execute their lethal

plan with ease (Anonymous, 2021). Another stakeholder who was greatly affected by money

laundering scandal are shareholders of CBA. Shareholders who were oblivious to these activities
suffered a loss in monetary terms. Due to the inquiry set by ASIC and fine payment made by

CBA, around 800,000 shareholders suffered from the drop in share prices. The price of share

dropped from $84.69 to $80.11 within three days (A shareholder class action against the

Commonwealth Bank is going ahead, 2021). Reputation damage is another loss suffered by

shareholders. Employees must have suffered from mental stress and financial issues, as anyone

who refused to be part of misconduct must have been pressurized by the seniors or fired from the

job.

Last, but not the least – customers of CBA suffered greatly from this scandal as they had

to go through financial issues as well as non-financial issues. National Debt Hotlines is an

operated by the Financial rights legal Centre by Ms. Karen Cox. It is a community Centre

established to help public with their debt issues or any sort of financial problems and make them

understand their legal rights in these matters. Stated by Ms. Cox that in 2015/2016 her Centre

received approximately 25,000 calls for advices on credit card debt problems, home loans,

personal loans, car loans and energy debts (Interim Report, 2018, n.d). Karen Cox stated that

how the misconducts has affected the consumers. Some of the customers had to depend on

charity for basic needs such as food, some had to take loan from their family to repay bank loans

and some had to sell their jewelries. One of the customers had confessed to gambling problem

and he reached out to bank for ‘help’, but the bank offered him more credit despite knowing his

condition (Interim report). Consumer also had to suffer from anxiety and mental stress of

repayment of loan to the bank. All this could have been avoided if only employees of the bank

would have verified the ability of the loan takers to repay their loans and their employment

credibility.

REFLECTION ON THE BROADER SYSTEMATIC PROBLEM

CBA has been conducting delinquencies, by breaching laws and violating codes of ethics for

quite long time and despite being a huge entity, the accounting regulatory system couldn't detect

the fraud and no legal authorities raised questions. CBA scandal proves that there is a major

internal and external system fault, which needs acknowledgement. This reflects on how the

values and morals of corporate world dismisses all the ethical values. This shows that group with

power always prevails over the weak group. CBA were not vigilant about the risk IDM posed as

they were getting profits from those machines. It is disappointing to know that value of a life is

not important than the mere profits for company. In some cases, there were communication gaps

between the CBA system. When bank’s security team informed the internal fraud team about the

suspicious activities – the team did not adhere to their duty, not investigate or close any accounts

and this has happened several times. Integrity and accountability of CBA’s employees is also one

cause for this misconduct.

Role of every individual employee of company is to disclose fair and true information,

but employees of CBA prioritized their own jobs by compromising values and morals. On the

first hearing of Royal Bank Commission, all the misconduct took place in pursuit of profits.

Every corporation’s vision is to pursue long-term advantages, which “entails preserving and

enhancing the reputation of the enterprise as engaging in the activities it pursues efficiently,

honestly and fairly” (Interim Report, 2018p.g. 54). But in order to do this, entity must obey law

and seek to do the ethical things. Due to the culture of bank, staff was so sales-driven that they

violated law and code of ethics. To gain short-term profits by increasing the number sales –

employees sold their credits card insurance, home insurance and other services to customers who

could not fit into employment credibility criteria. Every employee will believe in what entity

values most and CBA gave value to volumes and number of sales thus entailing entity values
selling. To secure their jobs, employees followed the culture and committed transgression

because of the pressure from seniors– regardless of however they achieve those profits. They

also corrupted the individual brokers who were independent. According to ASIC’s investigation

brokers were paid high commission if they could crack deals with customer who would pay high

interest rates for longer periods on larger loans (Interim Report, 2018p.g. 59). Remuneration is

one of the causes of misconduct, that even brokers who do not have binding contract with CBA

got involved in unethical activities. CBA’s culture in value and volume-based remuneration is

huge contributor to this scandal.

CBA is an example of market and manager driven enterprise. According to Positive

accounting theory – enterprises are nothing but nexus of contracts, which means each person is

working only to achieve personal motives without any regards for other stakeholders’ interest.

CBA is also the nexus of contract because the senior management was trying to achieve short

term profits at the cost of customer’s benefit without considering about the ethical issues. The

entire fault is not of the CBA, but also with the legal system which allowed CBA to continue

violation for many years and get away with so many crimes and fraud. It took authority three

years to take strict actions against CBA despite ex-employee - Jeff Morris complained to

Accounting Authorities regarding the indiscretions. Australian Prudential Regulation Authority

were aware of the misconduct before Royal Commission was formed. CBA continued with their

functions without reforming because no actions were taken to stop them, and deep-down CBA

were aware of the default in Regulatory system hence they had no fear it (Anonymous, 2021).

System was created to protect the rights of every stakeholders and to create a fair and true entity,

but CBA scandal only proves that even systems give privileges to people with power.

CBA’S RESPONSE
Despite breaching laws and violating ethics – initially CBA did not admit to their misconducts

and later when they admitted, they blamed the cause on “few bad apples’. CBA claims there is

no case of broader systematic concerns. CBA stated that misconducts were attributed to small

number of people or individuals whose work culture is poor (Interim Report, 2018 p.g. 85).

However, CBA forgets that each and every employee’s values and behavior reflects entity’s

culture. According to Australia’s bank code of ethics, banks are required to adequately train their

employees for professional performances, and Commonwealth bank failed to do this (Keating et

al. 2008). CBA also fostered sales-based culture and this lead to unethical acts by many financial

planners. Don Nguyen (financial planner) was suspended for one month in 2006 for his

misconduct, but later he was promoted to senior position. Jeff Morris stated that the compliance

team asked the management to fire Nguyen from the company, but they were warned not to

indulge in this matter (CBA whistleblower received death threats, 2021).

During the initial inquiry CBA’s CEO Ian Narev left the company anonymous reasons.

Also, two directors from audit committee; Launsa Inman and Harrison Young resigned from

their positions. Independent directors of audit committee also resigned from the job in 2018.

(Anonymous, 2021)Their accountability can be questioned here as they were running away from

the consequences of the negligence and violation of ethical code.Also, from this reaction of

CommBank, it is seen that they were aware of CBA’s unethical activities. When CBA became

the focus of inquiry, they started compensating consumers financially. They tried to cover their

delinquencies by indirectly bribing off the customers.

CBA’S SCANDAL FOR REGULATORS OR ACCOUNTANTS

CBA’s case can be used in positive or negatives ways by accountants and regulators. The case

analysis how creative methods were used for unethical activities by not breaching law. Strategies
and techniques used by company were only for their own interest at cost of client’s best interest.

Accountants and regulators can learn a lot from the case, they can amend the loopholes in

regulations so that such incidents can be avoided in future. But it should also be noticed that this

is not the first scandal, where creative accounting has been used to manipulate the laws and

regulations for the selfish motives. In prior years, many accounting scandals have been

discovered by regulatory system for example, James Hardie case. It took years to discover James

Hardie fraud and yet the regulatory authority did not learn anything from that case. No matter

how many amendment ASIC or another regulatory authority makes, they have limited power,

they can only form rules and regulations for enterprises to follow, but they can not ask

individuals to adhere to their integrity and honesty assuming they have morals and ethical

standards. Many regulatory systems were also at fault in this case, because even if they believed

that entity was operating legally, they should have some internal accountability to verify that no

ethics are being violated by individuals of the company. And CBA’s financial planner who were

mostly involve in misconduct should understand their role of doing the right thing by keeping

their client’s trust by providing them with transparency, honesty and fairness. Regulators are not

given authority to take any legal actions on the companies as they have to consider certain

factors of the misconduct. This is a drawback or limitation for ASIC and most entity takes

advantages of this limitation. The government needs to develop seriousness in people to follow

rules and regulation and there should be serious consequences if those regulations are violated or

if any unethical activities take place in any company.

RASONATE WITH SOCIETAL VALUES, CULTURE, RELIGION, EDUCATIONAL

BACKGROUND & FUTURE CAREER

In every religion doing right thing is always encouraged. No religion or society would say

otherwise. Society and religion have great impact on every individual – it affects the way we live

or think. Being part of society instills values and social responsibility in us. CBA’s case can be

analyzed from the two perspectives on how it affects our societal values, as an employee of bank

and as an outsider. As an outsider or clients, we would want the bank to perform ethically, by

being fair and true to us. And as an employee of the bank, we would fear that bank’s values will

affect our own value in a negative sense. It will compel has to be selfish and prioritize personal

motives rather than considering community.

Our culture and religion are built into us from the day we are born and they both govern

they way we behave or react to life’s situations. It is well known fact that whatever CBA did was

unethical and wrong, but if we place ourselves in their shoes, it would be easy to understand that

no human is bad, but the internal banks culture can influence us and as a result we would end up

sacrificing our moral and ethics to save our jobs or to satisfy our needs. Humans are very

flexible; they can easily be influenced by other people or they can easily be dominated by

circumstances. In real world need is given more priority than ethics because it’s a fact that ethics

will not satiate the hunger, but money will, and money is everyone’s need. There may come time

when we have to compromise our ethics out of compulsion to save our jobs which is the only

source of income for us. And it is possible that employees of CBA went through such ethical

dilemmas.

Educational institutes are created to make us into capable human being, but the scandal of

Commonwealth Bank has shows us that some people use their academic knowledge to

manipulate the regulations for their own selfish motives. Knowledge is a power, but with power

comes responsibility. And most of the individuals can not take care of that responsibility and end
up walking on the paths which destroys their morals and ethics along with conscience.

Educational institutes have always taught us to do the right thing, they have encouraged students

to have critical thinking, but after seeing CBA’s misconducts we realized that real world is far

more complex. We have chosen this subject to have a career in accounting, but looking at the

complexity of this case, it has sowed a seed of doubt in our mind that weather we would

compromise our morals to save our jobs or we would be strong enough to withstand the storm

and “do right thing” as expected from our role as an accountant?

CONCLUSION

It is clearly seen that institutions such as banks also face ethical dilemmas. The financial

planners, who were involved in the misconduct were influences by their own ethical beliefs and

by the banks sales-focused culture. CBA also faced with conflicts of interest as the they were

paid commissions to sell product which would generate more profit rather than benefiting the

buyer. Along with agency theory, other factors such as remunerations schemes, leadership of

company also influence the individual’s ethical decision making. CBA failure to uphold their

ethics was due to combination of sales driven culture, lack of ethical leadership, lack of control

system and greed of individuals. In conclusion, despite conducting serious series or ethical

violation which put publics life at stake - CBA did not face any legal implications or

imprisonment. They were fined $700 million(Anonymous, 2021), which is not good enough

punishment in case of CBA. Authorities did not hold CBA’s executive accountable for the

course of actions, and this is disappointment to all the individual who fought to do the right thing

as ineffective system does not only encourage people to execute criminal activities, but it also

destroys the trust public has on entity.

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