0:05 welcome to the financial Integrity hub's
0:08 podcast the financial Integrity Hub Pion
0:10 research and explores how law and
0:12 governance strategies can be designed
0:14 implemented and enforced to support
0:16 anti-money laundering and
0:18 counterterrorist financing this podcast
0:21 is proudly sponsored by identity a r
0:23 Tech providing financial institutions
0:25 assurance that they are meeting ostra
0:28 reporting obligations the platform
0:30 allows regulated entities to gain
0:32 visibility over transactions improve
0:35 auditability automate manual processes
0:38 and reduce the risk of
0:40 non-compliance your host is Isabelle
0:43 Nicholas Isabelle is a researcher at the
0:45 financial Integrity Hub she teaches
0:48 Financial crime at mcari law school and
0:50 interviews Global and domestic experts
0:52 on Trends and Market insights for the podcast
1:02 welcome back to the financial Integrity
1:04 hubs podcast today I'm joined by
1:07 Professor Elizabeth Sheidy who teaches
1:09 risk measurement and management at MC
1:12 University Elizabeth is also an Advisory
1:14 Board member at the financial Integrity
1:16 Hub we dive deep into the topic of
1:19 director responsibility for AML we also
1:21 consider the indirect impact of
1:23 non-compliance Beyond fines and
1:25 Regulatory action Elizabeth shares some
1:27 powerful insights about what
1:30 reputational risk actually means for
1:32 non-compliant businesses we discuss the
1:35 link between AML non-compliance with
1:37 broader risk management failure thanks
1:39 to our listeners for tuning in you can
1:41 find our previous episodes by searching
1:43 the financial Integrity Hub at McCary
1:45 law school on LinkedIn or on mcquary
1:48 University's website Elizabeth Shey is
1:51 part of the financial Integrity hub's
1:53 leadership team she is a professor at
1:55 MCC University teaching risk measurement
1:57 and management within the master of
1:59 Applied Finance program she's done a lot
2:01 of re research on risk governance issues
2:04 including accountability remuneration
2:07 systems risk culture and ethical culture
2:09 Elizabeth was a keynote speaker at the
2:11 financial Integrity hubs end of your
2:12 event in
2:14 2023 it's great to have you back welcome
2:17 to the podcast oh thank you so much for
2:19 asking me Isabelle let's get right into
2:21 it Elizabeth in a recent paper that you
2:24 wrote with Dr donon goldash and support
2:26 from Arctic intelligence and Anthony
2:29 Quint you considered that amending the
2:31 AML regulatory framework to increase
2:34 director's responsibilities would
2:36 enhance compliance and mitigate risks
2:38 associated with non-compliance you
2:41 suggested moving away from a mere duty
2:43 of care to a more robust duty of
2:45 oversight could you tell me a little bit
2:47 more about this and why is the duty of
2:49 care not sufficient for keeping Senior
2:52 Management accountable yes so look my
2:53 response to that's probably going to be
2:55 a little bit convoluted first of all I
2:57 should make very clear I'm not a lawyer
3:01 I've never formally studied law at all
3:04 and I guess the the big issue for me is
3:07 that it's uh for risk governance to work
3:09 well it doesn't matter what the risk is
3:12 AML or any kind of risk what you need is
3:15 good accountability and that's a really
3:19 crucial issue to make it work and it
3:22 does seem to me that very often uh from
3:24 the cases that I've studied that
3:26 directors don't do a very good job of
3:29 imposing accountability on the executive
3:31 and you know there's a lot of really
3:34 poor directors around speaking frankly a
3:37 lot of lazy incompetent directors is the
3:40 problem so you know what do you do about
3:42 that I'm not really sure to be honest
3:46 whether changing the law is required
3:47 like this distinction between duty of
3:51 care versus duty of oversight hang on
3:53 isn't it the job of a director to
3:57 provide oversight okay so my point is
3:59 we've got to get the directors to do
4:00 their job
4:03 it's that simple I'm not sure as a
4:06 non-lawyer it's not clear to me whether
4:09 the existing law is fit for purpose or
4:11 not is it more a question that asek is
4:14 so hopeless okay so so that's the other
4:17 possibility that we've got a corporate
4:20 regulator that just doesn't seem to be
4:23 able to win any cases yeah so I guess uh
4:25 you as a bunch of lawyers are going to
4:27 have to help me out here in solving that
4:30 one but you know the the the key point
4:33 is there has to be real consequences for
4:37 senior Executives and for directors that
4:40 really don't do their job it seems to be
4:42 this argument oh the executive never
4:44 told us that there was a
4:47 problem it's not good enough it's got to
4:49 be up to the directors to look for
4:51 problems okay that that to me is what
4:54 good oversight would be you can't just
4:56 sit back and wait for problems to be
4:58 brought to you but it seems like asic's
5:01 not willing to chase after directors
5:04 unless there's clear evidence that they
5:06 were informed I'm sorry but usually when
5:11 people stuff up they don't go admitting
5:15 it so that's my perspective possibly
5:17 wasn't the answer you're expecting
5:20 Isabelle so Elizabeth what are the risks
5:24 then if we do heighten a responsibility
5:26 or accountability framework for
5:28 directors do you think there are any
5:29 risks involved with that or is that just
5:32 the best for to ensure that there really
5:36 is real accountability here risks you
5:38 get look I had the same conversation I
5:41 was the guest of the University College
5:43 Dublin law school a few months ago they
5:46 invited me to a uh presentation about
5:49 our new bear regime the banking SEC
5:51 accountability regime I had a question
5:54 from someone saying oh but what about
5:56 the protections for the directors hang
6:00 on the whole point is we don't want to
6:04 protect directors we want them to feel
6:07 scrutiny yeah so is there a fear that
6:09 we'll never be able to attract good
6:11 directors we'll never be able to attract
6:14 senior Executives I call on
6:16 that you know you can't beat them off
6:18 with a stick there's so many people
6:21 wanting to be directors so when I hear
6:24 people in Industry screaming oh the this
6:26 guy is going to fall in we never no one
6:29 will want to be a director honestly I
6:30 just want to fall about laughing that
6:33 seems like the most ridiculous argument
6:36 I've ever heard that is fair enough and
6:37 I know that there are a lot of emotional
6:40 boardrooms with the uh changes on V
6:42 legislation so I can see where you're
6:44 coming from so thank you for that and
6:46 congratulations on the soon to be
6:48 publication for your article with Mish
6:50 University press I found it quite
6:52 insightful myself sure others will gain
6:55 value considering your insights as well
6:58 no worries I heard you speak at the
7:00 financial Integrity hubs end of year
7:02 event on the hidden consequences of
7:05 non-compliance with AML it was really a
7:07 really powerful message about the impact
7:09 of non-compliance beyond the already
7:11 significant fines that are issued by
7:14 ostra and by the courts can you give an
7:18 overview of the Hidden consequences for
7:21 non-compliance yeah yeah so look this
7:23 came up um because of conversation that
7:27 donon and I had about the uh civil
7:30 penalties on Westpac and at the the time
7:31 perhaps still is is the biggest civil
7:35 penalty that ostr had given 1.3 billion
7:38 I'm pretty sure so he was pretty excited
7:42 about that and my reaction was uh yeah
7:43 but that's just the tip of the iceberg
7:46 right in terms of the the real Financial
7:48 consequences I could see that he wasn't
7:51 really following what I meant so I with
7:54 the help of my PhD student we did some
7:57 quick analysis and that was what I
8:00 presented the other day so the the way
8:03 you can do this uh quite easily is you
8:06 can look at the share prices uh over
8:10 time and you can adjust them to see to
8:12 what extent changes in the share price
8:16 are due to Market movements in general
8:18 or is it unique to that company and so
8:21 that gives us then we're able to split
8:23 out what's going on is it the market
8:25 effect or is it things that are unique
8:28 to that company and so what we were able
8:32 to discover is that in the in the year
8:35 following the announcement uh about you
8:38 know the AML problems at Westpac the
8:42 market value of equity at Westpac fell
8:43 by about
8:47 27% that's after adjusting for General
8:50 market movements so that's a loss in
8:55 shareholder value of 16 billion okay and
8:57 and of course so that means that you
8:59 know the Civil penalties actually a
9:02 small proportion of that uh so it kind
9:05 of helps us to put it in context and I
9:08 think it highlights that the indirect
9:10 costs can actually be quite massive you
9:13 know the these so-called reputational
9:16 costs you know it involves loss of
9:18 market share uh and a whole bunch of
9:21 additional costs of doing business like
9:23 cost of debt cost of audit higher
9:25 insurance premiums High remuneration
9:28 costs it just becomes harder to attract
9:30 talent and you know there's a it goes on
9:32 and on uh in the case of Westpac there
9:35 was also an additional Capital penalty
9:38 of 500 million from AA so there was a
9:41 bunch of risk management failures at
9:43 Westpac at about the same time it's hard
9:47 to tease out exactly what proportion of
9:49 that was the AML because I mean what
9:51 typically happens when there's massive
9:55 AML failure is it it's it's actually a
9:57 symptom of a broader risk governance
10:00 problem so you would expect to see other
10:03 risk management issues as well it's a
10:06 broader Malay is is how I describe it
10:09 now if we look at the case of um Star
10:11 Entertainment now that's quite an
10:13 interesting one because to my knowledge
10:17 ostra still hasn't imposed a penalty so
10:19 we don't have any civil penalty from OST
10:23 trackers yet although they are under
10:26 investigation that whole story started
10:29 uh because of media inquiries
10:32 and uh at the time that those uh and
10:36 then that prompted the bill inquiry so
10:39 Star Entertainment is really in a great
10:40 deal of trouble because they've had
10:43 their license suspended so their market
10:47 value of equity has fallen by about
10:51 75% it's quite stunning uh and that's
10:53 before any schol penalty from ustra uh
10:56 it could and that I would imagine that's
10:59 a consideration for ALR because any
11:02 penalty could potentially you know blow
11:04 them blow them out of the water so it's
11:08 a business that is really looking on
11:11 very shaky ground and as I guess that
11:13 again highlights you know your
11:16 reputation is destroyed uh and your
11:19 license to operate is suspended uh you
11:22 know the business consequences can be
11:24 pretty massive yeah there was some
11:27 really wild figures and fascinating
11:29 insights and I guess it's it's true you
11:31 know the media headlines tend to focus
11:33 on the regulatory penalties that are
11:36 issued by the courts and and by oack and
11:39 we seldom about the hidden consequences
11:41 of non-compliance so thank you for that
11:43 and thank you so much for being on the
11:46 podcast oh that was uh that was my
11:55 fun the financial Integrity hub's
11:57 research equips Australia and the
11:59 International Community with the
12:01 knowledge tools and insights to
12:04 understand identify and disrupt elicit
12:06 Finance threats if you're interested in
12:08 seeing more from the financial Integrity
12:10 Hub don't forget to follow us on
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12:15 post a few times each week on breaking
12:17 news and the latest
12:20 research we would like to thank Dr Doren
12:22 goldb for his academic advice and
12:24 Isabelle Nicholas for hosting [Music]
