Malcolm Maiden Sydney Morning Herald Business Day October 10, 2012
RESERVE Bank governor Glenn Stevens' day-long appearance before the House of Representatives economics committee has produced the first end-to-end narrative from the central bank of the bribery scandal that engulfed its wholly owned note-printing subsidiary and another half-owned company, but there are still unanswered questions.
One of them is whether the events have been sufficiently well examined. Another is whether the Reserve Bank has reformed itself adequately to ensure that a debacle like this does not occur again. A third is who makes that call.
The banking regulator, APRA, intervened in 2004 to sin-bin NAB and force changes in the way it assesses risk and trades, in the wake of the bank's $360 million rogue currency trading scandal, but APRA, the Reserve and other regulators answer to Parliament and the government.
Parliament got up to speed on Monday when Stevens, former deputy governor Ric Battellino and senior Reserve bank executives made themselves available. The government itself has been passive, and the corporate regulator, ASIC, is missing in action.
The narrative that emerged during Monday's hearing was that in 2006 the Reserve moved
to upgrade its oversight of Note Printing Australia, a subsidiary that prints banknotes for Australia and other customer countries on polymer film supplied by Securency, a company half-owned by the Reserve.
In May 2007 an NPA board paper raised concerns about how overseas sales agents were being managed by NPA. Two NPA agents were terminated at that time, and in June an audit of NPA's agencies concluded that NPA should stop using agents entirely, and conduct an urgent review of its dealings with them to see if Australian anti-bribery and corruption laws had been broken.
The audit recommendations were strengthened at the insistence of Battellino in his capacity as chairman of the Reserve's audit committee, and at about that time Battellino also asked for and received a written report from NPA secretary Brian Hood. He had raised concerns about the use of agents early in 2007 - at NPA primarily, but also at Securency, which had employed the same agent as NPA had in Malaysia.
Emails, information and reports including Hood's report to Battellino (which was not read by Stevens) was provided to Australian law firm Freehills, and it reported in August 2007 that while weaknesses in controls and documentation existed at NPA, no evidence of illegality or impropriety had been detected.
The Reserve was concerned enough about Securency to commission internal audits of its agency arrangements as well, in 2007 and again in 2008. They concluded that Securency's processes were robust, and Stevens' comment in February last year to the same parliamentary committee that the first thing he and the Reserve knew about corruption and bribery allegations involving Securency was when this newspaper began reporting them in May 2009 is pegged to that timeline.
By May 2009 the Reserve knew all about similar claims surrounding NPA, and had had them internally and externally reviewed. It had accepted Freehills' conclusion that no laws had been broken (the companies and eight former executives were charged with bribery offences last year) but had ended NPA's use of agents and decided that it should not be in the cutthroat international banknote market.
It was a business that could not be run in a way ''that suited the risk-tolerance'' of the Reserve, Battellino said on Monday.
The Reserve's position, outlined to the committee on Monday, is that in May 2009 when this newspaper reported on bribery and corruption allegations at Securency, it did not have similar concerns about that company. The internal audits had found that Securency's supervision of agents was robust, and while Securency's Malaysian agency was terminated after the first audit report, other agencies were maintained until October 2009, when a KPMG report commissioned by Securency found that concerns about possible corrupt payments had been raised with Securency's management by an employee in early 2007.
The matter was finally referred to the Australian Federal Police in May 2009 after the newspaper reports, and Stevens said on Monday he still believed the decision to hire Freehills in 2007 to consider whether NPA or its officers had broken the law was the right one. With the benefit of hindsight the Reserve could have informed the police of its own investigations and been more sceptical about the management of the two companies, he said.
Nobody lives in hindsight, as Stevens also noted. The Reserve failed to find what it should have in 2007, however, and that raises questions. To what extent were the central bank's governance and oversight processes flawed, and to what extent were sound processes somehow compromised? Have reviews, organisational changes and personnel changes addressed the problems - and who delivers that verdict?
So far the government has been quiet. Stevens said on Monday that he briefed the then prime minister Kevin Rudd in May 2009 after the Securency allegations were reported, but Mr Rudd had not expressed a particular view. Prime Minister Julia Gillard had not requested a briefing, and while he had been briefing Treasury and the Treasurer as events dictated, he had not received directions.
That's got to change. Parliament and the government are the final arbiters of what happened and whether the Reserve's remedial work has been adequate. They also need to work out whether potential breaches of directors' duties have been fully explored: ASIC declined to formally investigate federal police evidence it was given, and has not explained why.