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