Potential Penalty in Australia Rate Cases Dwarfed by Bank Profitby
Civil penalties haven’t been revised since 2001 legislation
Hearings in rate rigging cases resume next week in Melbourne
Three of Australia’s largest banks face maximum potential penalties of A$231 million ($173 million) if they lose civil suits related to alleged rigging of an interest rate benchmark, a fraction of their combined first-half profits of A$10 billion.
The Australian securities regulator has filed separate legal actions against
Australia & New Zealand Banking Group Ltd., National Australia Bank Ltd. and Westpac Banking Corp., alleging the lenders profited by manipulating the bank bill swap rate, a key Australian interest rate benchmark. The lenders have denied any wrongdoing and vowed to defend the suits, which resume next week in Melbourne.
If they lose the cases, the maximum penalty would be calculated based on the regulator’s claim in court filings that the three banks tried to profit on a total of 110 separate occasions when traders allegedly attempted to manipulate the BBSW, according to a Pamela Hanrahan, a professor at University of New South Wales Business School and a former special counsel at the Australian Securities & Investments Commission.
The alleged offenses at the three banks happened between March 2010 and December 2012, according to the claim by ASIC.
The civil penalty for individual offenses of "unconscionable conduct" was A$1.1 million at the time of the alleged incidents, and up to A$1 million for each attempt at market manipulation, Cathy Armour, a commissioner at ASIC, said at a parliamentary hearing in March, which discussed oversight of the regulator. If found guilty of both offenses on all 110 counts, that yields the potential combined ceiling for the three banks of A$231 million, based on penalties set out in legislation 15 years ago which hasn’t been updated since.
“This case further emphasizes the need to significantly increase the civil penalties,” said Ian Ramsay, a Melbourne Law School professor and a former member of ASIC’s external advisory panel. “Criminal fines were increased in 2010. Revision of civil penalties are long overdue.”
Deutsche Bank AG alone agreed to pay a record $2.5 billion fine last year in a settlement of claims it was involved in rigging benchmark interest rates.
ANZ, National Australia Bank and Westpac together posted cash earnings of A$10 billion for the six months ended March, and are valued by the market at a combined A$250 billion.
Representatives at the three banks declined to comment, beyond the denials they have already made in connection with the ASIC suits. Matthew Abbott, a spokesman for ASIC, declined to comment.
The Australian penalties are limited in part due to ASIC’s decision to file civil suits rather than undertake criminal prosecutions, where fines are heavier but the burden of proof is higher, Ramsay said. The A$1 million civil penalty for individual cases of market manipulation was set in Australia’s Corporations Act of 2001, and hasn’t been increased since then, according to Ramsay. Unconscionable conduct provisions in the ASIC Act of 2001 have also remained unchanged, he said.
Potential fines in Australian criminal proceedings are at least A$8.1 million per count, a result of the increase in criminal penalties introduced in 2010.
The three lenders and Commonwealth Bank of Australia are already under fire after agreeing to compensate wealth management clients who received poor advice on their investments. That has led to investigations by ASIC, a promise of a special parliamentary inquiry by the Labor opposition as part of its election agenda, and government moves to boost the regulator’s powers.
ASIC filed the civil proceedings against the three banks earlier this year in the Federal Court in Melbourne, claiming that the banks contravened sections of both the ASIC Act and the Corporations Act. It is also seeking pecuniary penalties against the banks and an order from the court requiring the lenders to implement a compliance program.
Based on court filings, National Australia faces the biggest potential penalty if ASIC were to prove that the lender gained in all the 50 occasions it alleges the lender’s employees tried to manipulate the benchmark. ANZ follows with 44 alleged instances and Westpac with 16 alleged occurrences. The regulator brought the cases after combing through archives of instant messages, e-mails and recordings of telephone conversations over the past four years as part of its investigation into the setting of the BBSW, according to court documents.