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The impairment of customer loans Submission (Dr) Evan Jones

The impairment of customer loans Submission (Dr) Evan Jones
Parliamentary Joint Committee on Corporations and Financial Services Inquiry

The impairment of customer loans

(Dr) Evan Jones
Department of Political Economy, University of Sydney, retired.
24 July 2015

Did you ever expect a corporation to have a conscience, when it has no soul to be damned, and no body to be kicked?
Attributed to Edward, Baron Thurlow, British Lord Chancellor 1778-92

1.    Introduction

This submission has a limited scope. I have made multiple lengthy submissions to previous cognate inquiries, most recently to the Senate Economics Committee Post-GFC Banking Inquiry (2012) and the same Committee’s Performance of ASIC Inquiry (2013).

The main object of this submission is to provide a background and context for the claimed events that led to the establishment of this inquiry and its particular terms of reference, and a context for the specific evidence provided by bank victims in their submissions.

This inquiry has been mounted with particular interest in an alleged process of constructive default by securities devaluation – pervasive following the CBA takeover of BankWest in late 2008.

But this means to ‘constructive default’ is one of many. That there is a wide range of possibilities developed by banks to readily dispose of SME/farmer borrowers should not detract from the salience of investigation into one particular means.

Rather, the existence of a range of means for pursuit of a common objective confers greater credibility on the claims made by victims of mass security devaluation – claims that, taken in isolation, may appear to the ‘innocent bystander’ to be somewhat frivolous.

Other means of ‘constructive default’ include:

•    changing unilaterally the terms of the contract;
•    verbal commitments by bank officers that are not kept;
•    changing the terms of facilities, especially bill facilities, upon rollover;
•    imposing less than optimal facilities in the first place, which prove to be dysfunctional;
•    tying all facilities to the borrower’s overdraft, repayable at call, and thus a means to comprehensive default;
•    claiming as additional security further assets of the borrower or related parties (especially guarantees for the latter) that have no contractual basis;
•    the siphoning off of funds from borrower accounts;
•    the discretionary imposition of fees on the borrower;
•    the imposition of unwarranted ‘consultant’ investigations into the borrower’s business, both at borrower expense and calculated to downgrade the borrower’s business prospects;
•    the discretionary imposition of usurious ‘penalty’ interest rates;
•    the abuse of farm debt mediation procedures, trapping the farm borrower into inevitable default and foreclosure;
•    predatory lending (often accompanied by inaccurate or forged documentation), involving a built-in likelihood of borrower failure;
•    the ready default of a customer with no pretext whatsoever.

Recognition of the wide range of means by which banks have engaged in ‘constructive default’ highlight that the practice is not a one-off or occasional affair (the CBA takeover of BankWest) but is deeply entrenched in the banking sector’s modus operandi.

2.    The importance of this inquiry

This inquiry is of the utmost importance.

The so-called ‘Post-GFC Banking Inquiry’ was established following pressure from the multitude of BankWest victims that ensued immediately from the CBA takeover of BankWest from HBOS. The public hearings heard from selective victims, and the Committee and its Secretariat received multiple submissions from BankWest victims.

In view of this evidence and these submissions, the representatives of senior management of the CBA and BankWest transparently dissembled to the Senate Committee members (I was present at the hearings), thus being in contempt of the Committee’s sanctity.

In spite of this background, the report that arose from this inquiry gave a prosaic coverage of the plight of the BankWest victims and bypassed the root causes of their victimisation – in effect, giving equal credibility to the CBA/BankWest’s claims and adopting a sanguine (but utterly unrealistic) view of how aggrieved borrowers might achieve justice.

No attention was paid to the terms on which the CBA bought BankWest, and the implications for its capital weightings, and the possible impact that these terms and implications had on CBA management’s decision to immediately clean out the BankWest loan book.

These details have effectively been treated as commercial-in-confidence, although the takeover was supported by the authorities (including, in my opinion, a corrupted approval from the ACCC) as being in the public interest. Given that the authorities had conferred on the CBA the status of a ‘para-state’ organisation, engaging in the takeover for the broader public benefit (inhibiting destabilisation of the banking sector), the authorities had and have a responsibility to ensure that any failure to serve the public purpose (as has occurred) be remedied to the benefit of the victims. Any proven malpractice by the CBA following its takeover of BankWest of necessity implicates the then authorities who approved that takeover.

In the meantime, BankWest victims get picked off one by one by the bank foreclosure industry, legitimised by the courts. Only Rory O’Brien has come out of the court process alive, and that from a judgement atypical given precedents (see below), and, moreover, only with a settlement that, by construction, remains confidential and thus of no utility for the broader public purpose whatsoever.


The report of the Senate Economics Committee’s ASIC inquiry similarly totally ignored the issue of bank malpractice against SMEs and family farmers, and ASIC’s complicity in that malpractice. Admittedly, ASIC’s complicity in the ongoing corruption within the financial advisory sector demanded attention, but ASIC’s incompetence and complicity ranges beyond that sub-sector.

Will this current inquiry, atypically and belatedly, get to the heart of the matter? The victims would sincerely hope so.

It is no small irony that the small business and family farmer communities are perennially held up as symbolising the root stock of the ‘’free’ and ‘enterprising’ Australian economy. As long as governments continue to leave bank malpractice against these communities unchecked (not to mention the predation from other corporate sectors), this symbolism will continue to not only lack substance but will be contemptibly hollow.

I concluded my submission to the Senate Economics Committee’s ASIC inquiry with the following:

The carnage wrought by major banks on small business and the family farm sectors in this country has been widespread and persistent. Thriving or sustainable businesses, product of risk-taking initiative, have been destroyed or stolen. Family homes have been stolen. Couples, once independent, have become dependent on the parsimonious goodwill of social services. Family relationships have been destroyed or imperilled. The mental and/or physical health of the victims has suffered, sometimes resulting in premature death.

Recent exposure, rare, of instances of farming foreclosures on the commercial media highlight that the carnage continues apace. I have also had emails recently from several CBA and BankWest victims, with overnight foreclosure threatened, which highlight that CBA and BankWest management continue unrepentant. They act as if they have the regulatory system and the political class in their pocket.

3.    The practices queried are not fanciful inventions of sore losers but are real

The claimed practices that have found their way into the terms of reference of this inquiry are not fanciful inventions of sore losers from the cut and thrust of commercial rivalry.

The practices are real, and they are entrenched. Their extent is hidden by the poor exposure by the media.

In particular, the character and implications of the CBA/BankWest foreclosures ought to be self-evident. Many hundreds of BankWest borrowers were defaulted en masse, and by similar means. The scale of the action provides prima facie evidence that something was amiss. Specific details provided by individual defaulted BankWest borrowers in their submissions to the Post-GFC Banking inquiry supplement the evidence and confirm one’s a priori inference. It was a scam, and on a large scale.

In particular, the default and foreclosure of Sean Butler and Rory O’Brien, their experiences much publicised, are so demonstrably criminal that bells should have been ringing with the regulators.

The police should have been sent in. All documents relevant to the takeover and to the mass takedown should have been subpoenaed.

Instead, CBA and BankWest senior management representatives were treated deferentially at the Post-GFC Banking inquiry hearings as if the central concern was the mysteries of the origins of the GFC itself, the causes and possible perpetrators being too diffuse and too remote to elicit any imperative for ready redress and punitive responses.

By default, the victims are thrown into an environment which treats their complaints in isolation and out of context, as in the ‘sore loser’ category. Notably the court system, which, regardless of the evidence, is heralded as an exemplary arena of non-partisanry. On the contrary.

Thus Hammerschlag J, in Neale v BankWest, NSWSC 1219, 19 August 2014, opines:

There is no logical or rational reason why SGOL [Secured Global Opportunity Limited] or the Bank for that matter would act to impair the value of their own security.

Quite. There is seemingly no logical or rational reason why these practices are pursued. But they are, and they are not merely perennial but apparently an integral dimension of the foreclosure process against SMEs and farmers. The judiciary chooses to remain ignorant of how banks operate.

There is, however, a plausible explanation (or two) for the phenomenon of sale under value. Sale under value arbitrarily manufactures a residual debt of the foreclosed borrower, and thus facilitates pursuing bankruptcy of the aggrieved borrower, and preventing counter legal action by the latter and appropriating all of their assets in the bargain. On some occasions, sale under value is merely a means of handing over attractive assets at bargain price to one’s mates. The bank then diddles the tax payer by claiming a tax deduction for manufactured bad debt losses.

4.    Other examples of comparable default and foreclosure processes

Some other examples of comparable default and foreclosure processes beyond the CBA/BankWest 2008-09 phenomenon are offered here.

This section is reproduced from an unpublished document by John Salmon and Evan Jones, ‘Shadow Ledgers and the Default Process in the Australian Banking Sector’, April 2010. Supportive documentation is referenced in accompanying footnotes.

The default process can be utilised as a vehicle for sale ‘under value’ of a borrower’s (or third party guarantor’s) assets – a perennial practice.

In the NAB foreclosure of the McMinn Gold Coast family childcare centre,1. a 1996 registered valuer valuation put the expected value of the childcare complex (subject to completion of an addition) at over $2 million. After foreclosure, the McMinns obtained a contract of sale for $1.7 million which the receivers, acting for the NAB, refused to accept. The NAB sold the complex by closed tender for $1,180,000 in 2000.

In the case of a mid-1990s Commonwealth Bank foreclosure of businesses owned by Dr Robert John Cooke,2. the CBA sold the borrower’s assets for between $720-730,000, yet Cooke had obtained a registered valuer’s appraisal which placed value on the business of $10.8 million.3.

1.  The McMinn story is summarised in Evan Jones, ‘The Banks and Small Business Borrowers: case studies of adversity’, Working Papers, Political Economy Department, Economics & Political Science, University of Sydney, April 2004, p.11.
2.  Medical Practitioner Cooke created and operated three emergency medical centres attached to hospitals in Cairns, Brisbane and Sydney.
3.  Report of David McGrane & David Harland, FINH, 22 December 2003.

With NAB credit, and induced by a corrupt lending manager, the Somersets (company Kabwand) bought a strawberry farm outside Toowoomba in 1984 and were defaulted a year later. 4. Successive valuations were corruptly dramatically inflated for purposes of the banking hierarchy approving the loan, and give no indication of the worth of the property. The 2-acre property was sold in 1989 for $165,000. The sale price was significantly under value – not for farming purposes, but for the ensuing close subdivision as the property was brought within the expanding Toowoomba boundaries.5.

The NAB foreclosed on the Walter restaurant/brewery family business (company Palatinat) at Albury Wodonga in 2000, established at an approximate cost of $3.5 million. In 1998 the NAB placed a market value (for lending purposes) on the assets of $2.5 million. With the business not performing up to expectations, the NAB revalued the Walter security down to $2 million approximately 12 months later, recording that this lower figure was arrived at on a ‘fire sale’ basis. Subsequently the NAB’s appointed receiver/manager, D’Aloia Handberg, sold the land and improvements and restaurant infrastructure in March 2001 for $1,061,000.6.  7.  

The NAB foreclosed on the Troiani brickworks (company Wide Bay Brickworks) at Bundaberg in 1999. The brickworks and related properties were sold in March 2000 for $3.132 million. 8. 9.   It appears that the brickworks itself, on a 13.6 7 hectare site, comprised a mere $400,000 of that aggregated sale figure. Yet the 1996-97 financial accounts (the last audited accounts) have ‘property, plant and equipment’ of the brickworks valued at just under $27.5 million. WBB assets included a high quality clay pit that provided a ‘comparative advantage’ for WBB bricks.

The lender can also facilitate sale under value by arbitrarily devaluing its customer securities prior to sale and providing a veneer of legitimacy to the ultimate sale. Of course, security valuation involves an element of discretion, subject to variation according to market conditions, but some devaluation cases lack rational explanation.

In the 1998 NAB foreclosure of the Lynton Freeman Queensland grazing property,10.  NAB records indicate an initial 1992 market value for lending purposes on its sole broadacre security at $2,000,000. In the space of four years from 1996, the bank decreased the market value to 

4.  The Somerset story is summarised in Jones, op. cit., p.18.
5.  The property sold under value was purchased by a party knowledgeable of the dispute.
6. The receiver declined to attempt the best outcome for the Walters by selling the complex as an ongoing business. The brewery equipment, costing $750,000, was discarded. An NAB file note, dated 18 January 2001, records discussion between a bank officer and a D’Aloia Handberg principal as to the implications of sale of the Walter assets at $1.5 million. The note acknowledges that sale at this price would result in a net surplus to the Walter account.
7.  The purchaser at auction subsequently leased the property to another party (on 10-year terms for $1 million), who in turn exchanged the lease for one on a Queensland grazing property. The purchaser’s lease sum was not significantly different to the price paid at auction. The sale price has allowed another party to henceforth enjoy rental income on a property in which he has no capital invested.
8.  Malleson Stephen Jaques, NAB solicitors, to Redchip Lawyers, 4 April 2000.
9.  The Troiani brickworks was purchased by a consortium of individuals intimately associated with the brickworks itself, the ownership devolving to the firm’s solicitor and one of the brickwork’s regional agents.
10. The Freeman story is summarised in Jones, op. cit., p.12.

$1,750,000, then to $1,500,000, to $1,400,000, to $1,260,000, then to $850,000, eventually selling its security for $770,000 after claiming $30,000 for selling costs.11.

The process can further be used to appropriate and hive off part of sale proceeds. In the Cooke case, the bulk of the (under value) sale proceeds were not conveyed to the Cooke accounts. Given that Cooke equipment assets were sold at net $704,000, 12.  an amount of only $34,452.26, representing roughly 5% of those proceeds, appears on the borrower’s shadow ledger record (labeled ‘Receiver’s Distribution’). 13.  14.

Driving a former customer into bankruptcy prevents that customer from taking legal action against the lender (for the critical subsequent 3-year period). Following the NAB’s sale of the Somerset property in September 1989, the Somersets served a writ against the bank (and the former owner) on 22 December. Immediately in the New Year, on 17 January, the NAB petitioned for bankruptcy of the Somersets, which was successful and which vitiated the Somerset writ. Bankruptcy status can be readily pursued if the customer is left with a residual debt after sale and realisation of assets. Sale of assets under value (or recording of less than sale value) is a ready vehicle for ensuring that a residual debt appears on the shadow ledger record. 15.

The operation is wholly under the control of the bank. The receiver/manager, regardless of who instigated the appointment, works in conjunction with the bank and not the customer. The bank’s leverage is ironically enhanced because the courts hold to the risible fiction that the receiver/manager is an agent of the borrower while acknowledging de facto mortgagee control (c/f Muirhead v CBA, QCA 241, 19 July 1996; NAB v Freeman, FCA 244, 12 March 2002). Any discretionary or unconscionable process undertaken by the receiver/manager will be supported or condoned by the bank, yet held to be the ultimate responsibility of the borrower.

11. The valuations for $1.5 million (December 1997), $1.26 million (July 2000) and $850,000 (March 2001) were performed by Herron Todd White. Discovered NAB document (annotated D1-48, dated 14 April 1998) provides strong evidence that the devaluation process was contrived. The finance newsletter The Sheet, dated 18 February 2008, included a segment titled ‘Property valuers pressured into inflating prices’. The author noted: ‘Full valuation property valuers are routinely pressured by lenders to inflate the value of the property to aid in the bank approving the loan. … Brendon Hulcombe, CEO of Herron Todd & White, agrees “Yes there are, of course”, when asked if any of his valuers are pressured. “Valuers are pressured quite routinely”.’ An inference that the reverse process occurs when a bank wishes to realise on a customer’s assets is not implausible.
12. Letters from receiver I R Hall of Coopers & Lybrand to CBA personnel, dated 7 August, 2 October & 16 October 1996.
13. Ref: Cooke Mantle Pty Ltd, Bills Matured Account, page 12, date of issue 1 May 1999.
14. ‘The ‘shadow ledger’ was a parallel accounting record system established by (at least) the CBA and the NAB following default of a customer, and on which all post-default  income and expenses (including any discretionary charges imposed by the bank) for the customer were registered. Shadow ledger account statements were withheld from the customer, leaving the latter in complete ignorance of the state of their ‘indebtedness’.
15. See n.6 regarding the sale of the Walter family brewery/restaurant.

5.    The background, context and analysis

i.    The long history of bank malpractice and official indifference

The plausibility of the practices pursued by the CBA/BankWest post-GFC is enhanced when one confronts the long history of bank malpractice discernible from the 1980s, following comprehensive and uncritical deregulation of the finance sector.

The NAB’s corrupt treatment of Ned and Joy Somerset’s Toowoomba-based semi-retired farming plans (dating from 1984) is Exhibit A for the new regime.

The CBA’s corrupt treatment of Tony Rigg’s Nowra-based steel frame manufacturing business (dating from 1985), and this while the CBA was publically-owned, is Exhibit B for the new regime.

System-wide, indicative of the new regime is the foreign currency loan debacle – originated in intemperance and hubris, driven by incompetence, and culminating in the universal attribution of blame for the calamity to the victims.

Democrat Senator Paul McLean (spokesperson for small business) became the accidental focal point for bank victim complaints. For his pains he was vilified by Senators from all three major Parties, and driven out of Parliament. Shoot the messenger.

I made a submission to the Post-GFC Banking inquiry. Almost 11,000 words in length, its object was to provide a background to the CBA mass takedown of BankWest borrowers – to highlight that this particular action was hardly a curiosity to be explained away but rather was consistent with a decades-long history of CBA malpractice against its customers.

I was duly informed by the Senate Economics Committee Secretariat (15 May 2012) that:

Due to the numerous adverse reflections and serious accusations it contained, the Committee does not wish to make your submission public at this stage. Your submission will be listed as ‘confidential’ on the Committee's webpage and the secretariat will not be providing your submission to anyone on request.

‘Adverse reflections and serious accusations’ indeed. The inquiry wouldn’t have been instigated if there had not been adverse reflections and serious accusations to be aired. Was this to be another investigation (as was the 1991 Martin banking inquiry) that was set up strategically to head off criticisms of the sector’s failings at the pass? The dilution of the inquiry’s terms of reference points to this likelihood.

Thus my submission to the Post-GFC banking inquiry was held in camera (designated no.10), my name was withheld, and the contents of my submission ignored. Many of my multiple submissions to Parliamentary inquiries have suffered the same fate. Shoot the messenger.

Honourable Members and Senators will continue to have their energies diverted into ephemeral inquiries on non-ephemeral subjects of significant social import because governments of all colours steadfastly refused to learn from the past.

ii.    From banker to money lender

Respected commentators on the evolution of the financial sector post-deregulation have failed to highlight a transformation of its character. The banks have become money lenders, with adverse implications for professionalism and integrity – attributes implicitly associated with the label of ‘banker’.

Terms of Reference 1 f., g. & i. presuppose the commitment of the bank lender to cooperation and collaboration for long term mutual benefit. That is an erroneous supposition.

Customary SME/farmer lending is on the basis of security over customer assets, perennially including the family home and all moneys personal guarantees. (Thus default and foreclosure has calamitous consequences.)

On such terms, the bank saves resources by declining to invest in adequate bank officer numbers, in bank officer training, and in ongoing productive collaboration. These are expensive commitments, preferably avoided. Add the development of the convention by which lending officer remuneration and status are linked to the size of the loan book, and there is an inbuilt tendency to neglect the long term prospects of the customer.

The CBA, then under David Murray, worked to dismantle and abolish the Commonwealth Development Bank, the specialist SME/farmer subsidiary, precisely because it did not generate ‘commercial’ returns on capital.
Profit mass and return on capital (preferably 15% plus) is the name of the game; customer success is an optional extra.

iii.    The banking sector is structurally unsuited to cater to SME/farmer needs

It is important to acknowledge that the current dominant banks, ‘allfinanz’ in their breadth of interests, have their origins as specialist trading banks. That is, they were institutions with a niche role – gathering short term deposits and issuing short term loans (the overdraft).

Although these banks’ scope has evolved from specialist to comprehensive, their cultures have not evolved commensurately. They have never learned the art of successful medium to long term lending, crucial for the SME/farmer sectors (the farmer sector in particular, with its dramatic instability of conditions).

Facilities offered to (imposed on) the SME/farmer sectors remain mostly short term (bank liabilities remain mostly short term). The bill facility, in particular, was introduced in the 1970s – supposedly to give the borrower more flexibility and more control. On the contrary. The typical SME/farmer borrower remains ill-informed on the character of the bill facility. Banks use this ignorance to manipulate customer bill facilities to their own advantage.

As I have argued elsewhere, the typical range of facilities available to the SME/farmer sectors are not fit for purpose. This problem, of course, is structurally determined, requiring complex solutions and with inevitable state involvement.

The problem in 1930s Britain was labelled ‘the Macmillan gap’, which subsequently acquired the status of a generic label. Pragmatic and partial means were developed to offset the ‘gap’ in the ensuing years, especially early Post-World War II. Financial deregulation has swept these means away in many countries, in Australia comprehensively – courtesy of the bible of the deregulators, the 1981 Campbell Report, driven by ideology and vested interests.

The ‘Macmillan gap’ (including the ‘sexy’ end typically labelled ‘venture capital’) remains entrenched in Australia.

iv.    Bank malpractice and its collaborators

Bank malpractice depends for its success on unconscionability across cognate sectors – the legal profession, valuers, receivers, some real estate agents. Indeed, the lack of integrity in the banking sector fosters the lack of integrity in these cognate sectors, not least because of the bank funding drip. The more do these ‘professions’ depend upon their income from banking sources, the more does an absence of integrity germinate and thrive.

The 2010 Senate Economics Committee Inquiry into Liquidators and Administrators examined one of these professions, but its report appears to have been ‘water of a duck’s back’.

Bank victims are caught in this cesspool of corruption. And nobody cares.

v.    Bank malpractice and the courts

Senator Paul McLean’s honourable Senatorial foes opined that the most suitable location for the resolution of bank-customer disputes was the courts. Ditto Treasury Deputy Secretary Jim Murphy, at the Senate Economics Committee’s Post-GFC Banking inquiry hearings, Canberra, 8 August 2012. Ditto ASIC in its formulaic replies to bank victims, replies in which its staff note that ASIC wants nothing to do with them.

All these proselytisers for the magnificent competence and impartiality of the court system are quite wrong. To be kind, one would have to infer that few to none among them have cared to examine samples of bank litigation.

Court transcripts, of course, are not publically available.

Moreover, perennially judgements themselves are not publically available – even in the age of State and Federal Court websites and of Austlii. The Trial hearing judgements against the Somersets/Kabwand (FCA Qld G65 of 1986, 29 September 1988) and Rigg (as below) are in this category. Ditto the summary judgement awarded against the Troianis (QSC 7759 of 2000, 22 March 2001). I would argue that the non-availability of these judgements, all three appalling, is not an oversight.

At worst, some judges appear to be complicit with bank malpractice in deciding for the bank in litigation. Perhaps sometimes subconsciously – after all, a not inconsiderable numbers of judges have been elevated to the bench after acting for banks. That, after all, is where the money is. The judge presiding over recent litigation between BankWest and a high profile CBA/BankWest victim had himself previously acted as energetic counsel for the very same Commonwealth Bank. In his latter day incarnation, he gave judgement for the bank.

Worse, some bank litigation judgements are so manifestly unsavoury that one infers that the complicity would have to be conscious. The absence of a register for judicial pecuniary interests facilitates potential complicity of this nature.

At best, the judiciary appears to be poorly educated. Legal education is steeped in the law of contract under common law, and the judiciary appears to be attracted to it as to a religion. The borrower had borrowed funds from the bank lender; the borrower owes those funds, plus interest and fees, to the bank lender, end of story. Summary judgement awarded to the bank, costs awarded against the borrower.

An early representative of this mindset is from Young J in Rigg v CBA, NSWSC 1544/89, 19 April 1989. But a contemporary and exceedingly relevant Exhibit A for this comfortable mentality is the judgement of McDougall J in BankWest v O’Brien, NSWSC 456, 2 May 2012.

Fortunately for Rory O’Brien, and rarely, the NSW Court of Appeal overturned the Trial judgement (O’Brien v BankWest, NSWCA 71, 11 April 2013). Said the three judges, the bank has a case to answer. And thus followed BankWest’s settlement with O’Brien, the bank declining to expose its dirty laundry to the public gaze of hundreds of other contemporary BankWest victims.

McDougall J had earlier applied the same rote learning in a summary judgement for the same bank, the CBA, in CBA v Clapham, NSWSC 41, 31 January 2012.

Few judges bother to augment their impoverished tertiary training with some self-education regarding the nature of the bank – SME/farmer borrower relationship. Such a relationship is complex but, above all, it is fundamentally asymmetric. The power and discretion of the lender over the borrower is significant.

I have tried, as a layman, to outline some elements of this asymmetric relationship in a March 2009 submission to the Senate Standing Committee on Legal and Constitutional Affairs’ inquiry into Australia’s Judicial System. That submission was held in camera and its contents ignored.

Given that the legal profession regulates itself, any enlightened reform in the near future in the domain under discussion is a dim prospect. But it is imperative that the profound flaw in this supposed bedrock of justice be acknowledged by the authorities.

vi.    Regulatory capture

My 7,000 word submission to the Senate Economics Committee ASIC inquiry (no.295, publically accessible) emphasised the scale and depth of regulatory inaction.

ASIC has possessed a legislative mandate to act against business to business unconscionable conduct since 2002 (s12 of the ASIC Act). Not only has ASIC never utilised this section in action against a bank predator against SMEs/farmers, ASIC has consistently claimed to victims that it has no such legislated power.

ASIC excels in complicity with bank predation through conscientious inaction. Worse, the Financial Ombudsman Service excels in complicity with bank predation through conscious collaboration. FOS is criminally complicit with bank predation.

As noted above, the report of the ASIC inquiry ignored the dimension of bank malpractice against SMEs/farmers. This meant a conscientious neglect of my and comparable submissions on this dimension, in spite of the substantive evidence from victims in this dimension, including evidence regarding ASIC’s wilful complicity in bank malpractice by its inaction.

vii.    The Corporations Act, etc., and ultimate responsibility for malpractice

Terms of Reference 2 d. states: “the adequacy of the legal obligations on lenders and external administrators (including s420A of the Corporations Act 2001) to obtain fair market value for the forced sale of property”.

Clearly, the situation remains transparently inadequate. What little law exists, as in s420A, is honoured in the breach. Receivers do the banks’ bidding, and appropriate more than ‘a little on the side’ at their own discretion. ASIC is conscientiously asleep on the job, giving the green light to receiver/liquidator predation.

The Commonwealth Criminal Code Act 1995 is currently 384 pages long. The component devoted to corporate crime (parts 2.4 (s12) and 2.5 (s13)) is a mere 6 pages long. Therein, the burden of proof of corporate crime is set at an impossibly high bar. These pages are a window-dressing insertion of no substantive import.

The Commonwealth Criminal Code Act has been ‘blown up’ recently with amendments formally designed to combat ‘terrorism’. Measures to combat corporate terrorism are non-existent because the phenomenon is not recognised in respectable circles.

The Corporations Act currently sits at over 2800 pages. Remarkably, there appears to be almost no coverage in all those pages of corporate fraud. Save for the extensive Chapter 5 (incorporating s420) that covers ‘External Administration’.

The Act covers company officer fraud against the company itself, but it does not recognise company / company officer fraud against the company’s clients.

As noted above, and as elaborated in my submission to the ASIC inquiry, regulatory action against business to business unconscionable conduct is mandated in the ASIC Act. This section was copied from the comparable provision in the then Trade Practices Act (s51AC), in turn a product of 1998 legislation arising from the 1997 Finding a Balance Parliamentary inquiry report. As also noted above, the section remains under wraps, unused.

Thus there is relevant legislation that is unused, ignored. But there remains a cavernous hole with respect to the pursuit of corporate crime, as evidenced by the vacuum in the Corporations Act.

Significant conceptual hurdles have long hampered progress in honing in on ‘corporate criminal liability’. The pragmatic granting of joint stock corporations the status of a person at law has accorded them massive privileges but without commensurate obligations. As legal academic Eilis Ferran notes simply: “A company is a legal person but it can only act through natural persons, hence the need for rules governing the attribution to companies of the acts and states of mind of individuals.” Thus the pursuit of ‘the directing mind and will’, with meagre long term results.

As a non-lawyer, I cannot grasp the nuances of the long philosophical contortions on this matter, But I can readily recognise the adverse implications for the lack of an adequate solution.

In Canada, and to a lesser extent in Great Britain, judgements and legal analysis have recently facilitated some progress in this domain. Not so in Australia, where there resides a near vacuum on the issue (in spite of the Esso Longford gas explosion disaster and the CSR and James Hardie asbestos saga).

In the meantime, bank senior management remain totally immune to the crimes perpetrated by the companies over which they preside. Where does the buck stop? The hierarchy of remunerations is evidently structured under the presumption that those at the top are most responsible for the ‘successes’ (i.e. profit-wise) of the company. Are then those at the top not most responsible for the company’s moral failures?

Some bank crimes against SME/farmer borrowers appear to originate at the top. Many bank crimes against such clients originate (whether through initial incompetence, hubris or malintent) under the initiative of individual lending officers. But the latter are perennially condoned ‘upstairs’ and given the full weight of the bank’s resources. I am not aware of a single instance to the contrary.

Even criminal conspiracies involving bank officers as part of a larger consortium are ultimately endorsed by senior management with the victims pursued by the full force of the bank’s resources – vide the Zaia Arthur & Associates scam (CBA, Victoria), the Mortgage House scam (NAB, NSW), and the scam involving a couple of individuals (one always inside a bank) and involving one Mario Girardo, gaoled for property financing scams (the personnel moving between several banks, latterly Westpac, Queensland).

Patricia Thirup has been a victim of the Mortgage House scam, with the court handing the NAB her family home (NAB v Thirup, Johnson J, NSWSC 911, 17 August 2011). A hapless minor Queensland property developer is currently being pursued by Westpac for a scam perpetrated by others.

The appropriation of responsibility by the bank as corporate entity for all failures and unconscionable or fraudulent actions by individual bank officers (Somersets/Kabwand as exemplar), regardless of seniority, is on full display when the bank litigates against the borrower for a breakdown of the ‘relationship’ attributable to the bank itself.

This is the state of play at the moment. It has been this way for 30 years. Criminality is entrenched across the banking sector. Senior management holds responsibility for this criminality? When are they going to be made accountable and pursued, personally, for these crimes?

The viability of the small business and family farmer sectors in Australia depends upon governments and the relevant federal bureaucracies and regulators belatedly confronting the character of the crisis and taking steps to ameliorate it.

Last modified onTuesday, 29 September 2015 04:24

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