Tony Locantro from Alto Capital shares some of his intellectual capital.
Disclaimer: The information contained in this video is general in nature and should not be considered investment advice. Tony Locantro has personal holdings in the companies mentioned along with commercial arrangements from time to time where he is paid fees for such services. Viewers are advised to seek their own financial advice to ensure what is right for their personal circumstances and risk tolerance.
Note: DFA has no financial or business relationship with Alto Capital.
Caveat Emptor! Note: this is NOT financial or property advice!!
Westpac’s chief executive Brian Hartzer will step down, with his resignation effective from December 2.
It comes after the bank was sued by the financial intelligence agency AUSTRAC for allegedly committing 23 million breaches of Australia’s anti-money laundering laws.
The bank’s chairman Lindsay Maxsted also confirmed he would bring forward his retirement to the first half of 2020.
The Victorian Liberal Party held their state council meeting in Ballarat where a motion was put forward calling on the Government to abandon their $10,000 cash transaction ban policy.
We discuss the implications of this move, with Steve Holland who is a member of the Victorian Liberal Party and who moved the motion at the State Council Meeting.
Afterpay breached money laundering law because of incorrect legal advice, according to an auditor. Via InvestorDaily.
The
buy-now, pay-later giant was the subject of an AUSTRAC probe over
allegations it breached the Anti-Money Laundering and Counter-Terrorism
Financing Act (AML/CTF).
But an independent auditor contracted by Afterpay has discovered that the breaches occurred because of incorrect legal advice.
“In
reaching these findings I have established that Afterpay’s compliance
with its AML/CTF obligations was, from the outset and over time, based
upon legal advice from top tier Australian law firms,” wrote Neil Jeans,
an anti-money laundering consultant who conducted the audit.
“I am of the opinion this initial legal advice was incorrect.”
The
unnamed law firms decided Afterpay was not providing loans to consumers
but instead providing factoring services to merchants. This advice “did
not reflect Afterpay’s business model” and led to the company focusing
its AML/CTF controls upon merchants rather than consumers.
“Despite
Afterpay having a compliance-focused culture, the consequences of being
provided with incorrect legal advice has resulted in historic
non-compliance with the AML/CTF Act and Rules,” Mr Jeans wrote in the
report.
However, the audit noted that Afterpay’s transaction
monitoring system is now “effective, efficient and intelligent” as a
result of greater resource allocation.
Mr Jeans also decided that
the nature of Afterpay’s service mitigates some money laundering and
terrorism financing risks, and noted that the company’s AML/CTF
compliance had “evolved and matured over time”.
Afterpay was quick to seize on the opportunities of the report in light of Westpac’s recent breaches of the same laws.
“Afterpay
reaffirms that it has not identified any money laundering or terrorism
financing activity via our systems to date,” the company said in a
statement accompanying the report.
But the ball is now in AUSTRAC’s court. The regulator will consider the report and decide whether to take further action.
Afterpay has pledged to continue its co-operation with AUSTRAC.
It’s the bank’s new computer model of the Australian economy, made up
of 147 equations working in concert. Some are quite simple, such as how
global oil prices affect domestic petrol prices, whereas others are
more complex, such as how a rise in the unemployment rate affects
household spending.
Unveiled in August in a discussion paper entitled “MARTIN has its place”,
the model is available for use by analysts outside the bank for whom it
can serve as something of a guide as to what the bank might be
thinking.
It provides useful insights into what the bank will do next, after it
has cut its cash rate as close to zero as possible and needs to
stimulate the economy further.
Economists use models like drivers use maps – to take a large and
complicated country and simplify it to its essential ingredients in the
hopes of providing a useful guide to navigating it.
A map doesn’t tell you everything about a route – that would be hard
to come to grips with – but it highlights important features or paths
you should watch for. Models do the same – simplifying the complex
Australian economy into the paths that matter.
But instead of breaking Australia down into rivers and roads, or
cities and states like a map might do, MARTIN divides the Australian
economy into different sectors such as households, firms and the
government with the 147 equations describing the ways they interlink
with each other.
This map is principally designed for two purposes.
The first is forecasting. Every three months the bank looks
inside its crystal ball to try and divine how the economy will evolve in
the years to come. MARTIN has become a key input into that process.
The second use is the ability to run “what if” simulations to see
how the economy would react in different scenarios. For example, what
would happen if the price of iron ore crashed tomorrow, or what would be
the impact if the government ramped up its spending on infrastructure?
What does MARTIN say about quantitative easing?
MARTIN will have been put to work pondering the implications of
deploying so-called “quantitative easing” after the Reserve Bank’s cash
rate gets too low to cut.
Quantitative easing involves the Reserve Bank buying financial
assets, such as government or mortgage bonds, in order to continue to
supply money to the economy after its cash rate has fallen to zero.
I have used MARTIN to model three different scenarios for quantitative easing in the Australian economy.
The first is what would happen if quantitative easing isn’t used at all.
The second is what would happen if the bank started a modest quantitative easing program in early 2020 lasting around a year.
The third is what would happen if the bank commenced an aggressive
quantitative easing program to simulate the economy for 18 months.
I assume the bank would purchase assets in a similar manner to how
the US conducted quantitative easing after the global financial crisis,
buying bonds to lower interest rates on two year and ten year government
securities.
MARTIN says quantitative easing would have two major effects on the
economy. First, it would lower the cost of borrowing for Australian
businesses. They would be expected to increase investment as more
projects become viable as the interest rates they were charged fell.
Second, the lower rate structure would weaken the Australian dollar
by as much as 5 US cents. A cheaper dollar would make our exports more
competitive and make foreign imports more expensive.
MARTIN thinks it could work
MARTIN predicts quantitative easing would boost manufacturing,
agriculture and mining exports relative to where they would be without
it.
The depreciation would also encourage Australian households to spend
more on local goods and less on what would be dearer imports. This
should lead to higher wages, increased household incomes and spending,
and improved economic growth.
In fact, MARTIN predicts that, by boosting economic growth,
quantitative easing would actually lead to higher interest rates as
inflation returns to the Reserve Bank’s target, allowing interest rates
to return to more normal levels.
Combining these two effects, MARTIN suggests a large quantitative
easing program would reduce unemployment by 0.3 percentage points,
equivalent to 40,000 extra jobs, and boost wages across the economy.
The output of any model is only as good as the information and data that are fed into it, but the output of MARTIN is why more and more economists expect the bank to quantitatively ease in the new year. Its brain says it should work.
On 19 November, the US Federal Reserve, the Comptroller of the Currency, and the Federal Deposit Insurance Corporation approved a final capital rule for the largest US banks that requires them to adopt the standardized approach for counterparty credit risk (SACCR).
The rule must be adopted by those US banks which are mandated to use the Basel III advanced approaches (i.e., advanced internal ratings-based); other US banks may voluntarily adopt it. The advanced approaches banks include the eight US global systemically important banks: Bank of America, The Bank Of New York Mellon, Citigroup, Goldman Sachs, JPMorgan Chase & Co, Morgan Stanley State Street Corporation, and Wells Fargo & Company, as well as Capital One, Northern Trust Corporation, PNC Financial Services Group, and U.S. Bancorp. Many of these entities are also benefitting from the Fed’s Repo operations, which are designed to provide additional liquidity.
Moody’s says as originally proposed, SACCR would have resulted in a modest increase in risk-based capital requirements for the largest US banks but a modest decline in their leverage ratio requirements. However, in the final rule US regulators made several revisions to the original proposal which we expect will reduce both capital requirements, a credit negative.
The final rule is effective on 1 April 2020, with a mandatory compliance date of 1 January 2022. In 2014 the Basel Committee on Banking Supervision adopted SACCR as an amendment to the Basel III framework and in October 2018 US regulators proposed requiring the largest US banks to use SACCR for calculating their derivatives exposure amounts. SACCR is a more risk-sensitive approach to risk-weighting counterparty exposures than the current method and also revises certain calculations related to cleared derivatives exposures, including the measurement of off-balance-sheet exposures related to derivatives included in the denominator of the supplementary (i.e., Basel III) leverage ratio (SLR).
In the final rule, US regulators have made certain revisions to the original proposal, including reducing capital requirements for derivative contracts with commercial end-user counterparties and allowing for the exclusion of client initial margin on centrally cleared derivatives held by a bank on behalf of its clients from the SLR denominator.
Regulators explained that the reduction in capital requirements for exposures to commercial end-users is consistent with congressional and other regulatory actions intended to mitigate the effect of post-crisis derivatives reforms on the ability of such counterparties to manage risks. Additionally, the exclusion of client initial margin on centrally cleared derivatives is consistent with the G20 mandate to establish policies that encourage the use of central clearing. The revisions may also prevent cross jurisdictional regulatory arbitrage because they would align the US with regulations in the UK and Europe on this matter, which are key jurisdictions where many of the largest US banks operate.
Nevertheless, a reduction in capital requirements would allow firms to increase their capital payouts or add incremental risk in other businesses without needing to hold more capital. Regulators estimate that the final rule would result, on average, in an approximately 9% decrease in large US banks’ calculated exposure amount for derivatives contracts and a 4% decrease in their standardized riskweighted assets associated with derivative exposures. The final rule would also lead to an increase of approximately 37 basis points (on average) in banks’ reported SLRs. If all 12 US banks subject to this rule were to maintain their SLRs at current levels instead of letting them rise as they would under the final rule, it would lead to the removal of approximately $55 billion in Tier 1 capital from the US banking system.
Regulators also estimated that the final rule would lead to changes in individual banks’ SLRs, ranging from a decrease of five basis points to an increase of 85 basis points. Regulators did not identify which bank would receive the largest benefit. Moody’s estimate that if one of the six largest US banks is the beneficiary of an 85-basis-point increase in its SLR and the SLR was previously its binding capital constraint, allowing it to return to its shareholders an amount of capital equal to the entire benefit, it would lead to a reduction of between $9 billion and $25 billion in capital at just one bank.
In addition, on 19 November, US banking regulators published a final rule that amends the supplementary leverage ratio calculation to exclude custody bank holdings of central bank deposits. The change will only apply to The Bank of New York Mellon, State Street Corporation and Northern Trust Corporation.
Although the amended calculation is credit negative because it will allow custody banks to reduce capital and still meet one of their regulatory requirements, the practical effect is limited because other regulatory capital measures, specifically post-stress capital requirements, constrain the banks.
The final rule reflects the implementation of Section 402 of the 2018 Economic Growth, Regulatory Relief and Consumer Protection Act (EGRRCPA). Although EGRRCPA primarily aims to reduce regional and community banks’ regulatory burden, it also identifies central bank deposits held by custody banks as unique. In particular, custody banks maintain significant cash deposits with central banks to manage client cash fluctuations linked to custody and fiduciary accounts. Typically, these client cash positions are funds awaiting distribution or investment, but they can spike significantly in times of stress when custodial clients liquidate securities.
Under the final rule, only the Federal Reserve, the European Central Bank or central banks of Organization for Economic Cooperation and Development member countries that have been assigned a zero risk weight under regulatory capital rules are considered qualifying central banks. The rule also defines a custody bank as any US depository institution holding company with assets under custody to total assets of greater than 30:1. This ratio precludes other large custody providers also subject to the supplementary leverage ratio, such as JPMorgan Chase & Co., from excluding central back deposits in their capital calculation, because unlike the three qualifying firms they are not predominantly engaged in custody and asset servicing.
Looked at in isolation, the final rule would allow BNY Mellon, State Street and Northern Trust to reduce their Tier 1 capital by roughly $8 billion in aggregate – a significant 17% reduction – and still maintain the same supplementary leverage ratios. However, that ratio is just one of many capital requirements.
Indeed, regulators’ own analysis of the supplementary leverage ratio revisions, based on 2018 data, indicates that the final rule is unlikely to reduce Tier 1 capital for any of the three affected holding companies because other capital requirements are more binding.
Specifically, performance of the banks’ capital requirements under the Federal Reserve’s Comprehensive Capital Analysis and Review (CCAR) process has constrained them.
The future course of the custody banks’ capital positions is not yet clear because other aspects of the US regulatory capital framework remain in flux. In particular, regulators are developing a stress capital buffer, which we expect will be incorporated into the CCAR process. On balance, we anticipate that the custody banks are likely to face a capital regime that is less restrictive, though the extent of capital relief is still uncertain.
However, the banks’ reduced supplementary leverage ratio requirement is an early indication of the likely trajectory.
The news that Australia’s anti money-laundering regulator has accused Westpac of breaching the law on 23 million occasions points to the prospect that powerful members of corporate Australia are still behaving badly. Via The Conversation.
Regulators are still struggling to find the right balance between
pursuing wrongdoers through the courts – an admittedly costly,
time-consuming and highly risky business – and finding other means to
punish and deter misconduct.
Australia’s anti money-laundering regulator, AUSTRAC, is seeking penalties against Westpac in the Federal Court.
Each of the bank’s alleged contraventions attracts a civil penalty of
up to A$21 million. In theory, that could equate to a fine in the
region of A$391 trillion.
In practice, it is likely to be a mere fraction of that sum.
Commonwealth Bank breached anti-money-laundering laws and faced a theoretical maximum fine of nearly A$1 trillion, but settled for A$700 million.
No doubt the reality that companies can minimise penalties is a factor in why breaches continue.
This impression is reinforced by revelations last week that financial services company AMP continued to charge fees to its dead clients despite the shellacking it received at the hands of the royal commission.
Last month a Federal Court judge refused to approve a A$75 million
fine agreed between the Australian Competition and Consumer Commission
and Volkswagen to settle litigation over the car company’s conduct in
cheating emissions tests for diesel vehicles. The judge was reported to
be “outraged” by the settlement, which meant Volkswagen did not admit liability for its misconduct.
The A$75 million is a drop in the ocean of the likely profits
obtained from this systemic wrongdoing and pales into insignificance
next to fines imposed in other countries.
Proposals for law reform
So business as usual, right?
Maybe not for long. The Australian Law Reform Commission has just released a discussion paper on corporate criminal responsibility.
It points out that effective punishment and deterrence of serious
criminal and civil misconduct by corporations in Australia is undermined
by a combination of factors.
These include a confusing and inconsistent web of laws governing the
circumstances in which conduct is “attributed” to the company. Similar
problems of inconsistency arguably also undermine other key areas, such
as efforts to give courts the power to impose hefty fines based on the profits obtained by the wrongdoing
The repeated attempts to come up with new and more effective
attribution rules arise because corporate wrongdoers are “artificial
people”. For centuries, courts and parliaments have struggled with how
to make them pay for what is done by their human managers, employees and
(both human and corporate) agents. All too often a company’s directors
disclaim all knowledge of the wrongdoing.
To fix this, the ALRC recommends having one single method to
attribute responsibility. It builds on the attribution rule first
developed in the Trade Practices Act 1974 (Cth) and now used, in various forms, across various statutes.
The ALRC proposes that the conduct and state of mind of any
“associates” (whether natural individuals or other corporations) acting
on behalf of the corporation should be attributable to the corporation.
This goes well beyond the traditional focus on directors and senior
managers and would provide some welcome consistency in the law.
Importantly, serious criminal and civil breaches that require proof
of a dishonest or highly culpable corporate “state of mind” can be
satisfied either by proving the state of mind of the “associate” or that
the company “authorised or permitted” the conduct.
A “due diligence” defence would protect the corporation from
liability where the misconduct was truly attributable to rogue “bad
apples” in an otherwise a well-run organisation. There would be no
protection in the case of widespread “system errors” and “administrative
failures” so pathetically admitted during the royal commission.
The ALRC also proposes that senior officers be liable for the conduct
of corporations where they are in “a position to influence the relevant
conduct and failed to take reasonable steps to prevent a contravention
or offence”.
This would place the onus on those in a position to change egregious
corporate practices to show they took reasonable steps to do so.
Removing the penalty ceiling
These recommendations, if adopted could prove a game-changer for
regulators asking themselves “why not litigate?” and corporations used
to managing the fall-out of their misconduct as simply a “cost of
business”.
The ALRC’s recommendations that the criminal and civil penalties
should be enough to ensure corporations don’t profit from wrongdoing
will be welcomed by many. Some academics have gone further and argued
that the law should be changed to make it clear that civil, not just
criminal penalties, should be set at a level that is effective to punish
serious wrongdoing.
The ALRC also raises the question whether current limits on penalties should be removed. The Westpac scenario might be just the kind of case to make that option attractive.
Authors: Elise Bant, Professor of Law, University of Melbourne; Jeannie Marie Paterson, Professor of Law, University of Melbourne
As the term enters our everyday vocabulary, HR professionals and employment law specialists like me now face the age-old question: What happens if people start saying “OK boomer” at work?
Evidence of discrimination
A lot of the internet fights over “OK boomer” revolve around whether
the phrase is offensive or not. But when you’re talking about the
workplace, offensiveness is not the primary problem. The bigger issue is
that the insult is age-related.
Workers aged 40 and older are protected by a federal statute called the Age Discrimination in Employment Act, which prohibits harassment and discrimination on the basis of age.
Comments that relate to a worker’s age are a problem because older
workers often face negative employment decisions, like a layoff or being
passed over for promotion. The only way to tell whether a decision like
that is tainted by age discrimination is the surrounding context:
comments and behavior by managers and coworkers.
If a manager said “OK boomer” to an older worker’s presentation at a
meeting, that would make management seem biased. Even if that manager
simply tolerated a joke made by someone else, it would suggest the boss
was in on it.
Companies also risk age-based harassment claims. Saying “OK boomer”
one time does not legally qualify as harassing behavior. But frequent
comments about someone’s age – for example, calling a colleague “old” and “slow”, “old fart” or even “pops” – can become harassment over time.
Gen Xers are covered too
And it doesn’t matter if the target isn’t even a boomer.
Gen Xers were born around 1965 to 1979. That makes them older than 40 and covered by federal age discrimination law.
Yes, I get that the comment is a retort to “unwoke” elders
who cannot be reasoned with. The problem is that the phrase is intended
as a put-down that is based, at least partly, on age. If you say it at
work, you’re essentially saying, “You’re old and therefore irrelevant.”
Lumping Gen Xers into a category with even older workers doesn’t make it better. Either way, you are commenting on their age.
A lot of them were quite funny, like the hairdresser imitating a
customer who criticized her tattoos as unprofessional. She responded,
“OK boomer,” while appearing to lop off a huge swath of the customer’s
hair.
When I was an employment lawyer, I heard tons of hilarious stories of
things people said in the workplace. But that’s the point: The story
ended with a lawyer on the other end of the phone.
One of the most famous
age-discrimination cases – which made its way all the way up to the
Supreme Court – involved a manager who described an employee as “so old
he must have come over on the Mayflower.”
In other words, “it was just a joke” is an awful legal defense.
Tit for tat
To millennials who have suffered through years of being called
“snowflakes” by their elders, protests of age discrimination can seem a
bit rich. Why didn’t HR ban all those millennial jokes about avocado toast?
The Age Discrimination in Employment Act only kicks in for workers
who are 40 or older, which means millennials aren’t covered. For now.
The oldest millennials will turn 40 later this year. So fear not, the
millennial jokes may eventually become a legal problem for companies as
these workers age.
Also, a few states, including New York,
ban age discrimination for all workers over 18, and employers in those
states probably should have done something about the millennial jokes.
Boomers might seem really powerful, and yes, they might be your boss’s boss’s boss.
But older workers are more vulnerable than they seem. Older workers
are expensive – by the time they’ve worked their way up the corporate
ladder, their generous salaries start to weigh on the balance sheet. And
management may have trouble
envisioning spectacular growth and innovative ideas from them years
into the future, even if they are ready and willing to deliver.
That’s why Congress thought it was important to extend protections to those workers. It wanted employers to treat them as individuals who shouldn’t be dismissed out of hand because of their age.
And in many ways, that’s what young people seem to want as well: a little respect for what they bring to the table. After all, that meme didn’t make itself.
Author: Elizabeth C. Tippett, Associate Professor, School of Law, University of Oregon
The past week’s events have been deeply distressing.
The issue raised by AUSTRAC that weaknesses in our systems failed to detect criminal actions by customers is incredibly serious and unacceptable. This is not the company we aspire to be and I, again, apologise unreservedly.
As a long-time director, shareholder and customer of Westpac, I know we can – and will – do better for all stakeholders in meeting our Anti-Money Laundering and Counter-Terrorism Financing obligations. Being one of the country’s biggest financial institutions, we are alert to the critical role we play in helping law enforcement agencies such as AUSTRAC prevent criminals from carrying out illegal activity.
These build on several actions we have already been working on, including implementing a multi-year financial crime program, undertaking leadership changes in risk and financial crime and doubling the resourcing dedicated to financial crime to around 750 people, which we expect will further grow.
As a starting point, it’s important to note that we understand the gravity of the issues raised by AUSTRAC and the importance of – and focus on – accountability. To ensure we get all the facts and assess the issues fully, we will appoint an external expert to provide independent oversight of the process and will make the recommendations public. In the interim, all or part of the 2019 short term variable rewards for the full executive team and several general managers will be delayed, subject to the assessment of accountability.
We also understand the importance of urgently fixing the issues raised by AUSTRAC, lifting our standards, and doing this effectively. As a board, we treat our oversight responsibilities with the utmost seriousness.
Our response has been divided into three areas: immediate fixes, lifting our standards and protecting people.
Firstly, we need to step up to better assist law enforcement agencies in tracking and ultimately stopping payments that can facilitate wrongdoing. When we introduced our LitePay product in 2016, transaction monitoring was put in place to identify suspicious transactions. However, more advanced monitoring, including updated “typologies” from AUSTRAC regarding child exploitation were not put in place for LitePay payments to the Philippines until June 2018.
While the updated detection scenarios are now in place for the Philippines across the SWIFT payment channel, we accept this should have occurred earlier and was not handled appropriately.
As part of our range of immediate actions, we are now closing LitePay.
Where Westpac flags transactions that suggest potential child exploitation in high risk locations, these transactions are now prioritised for action and reported to AUSTRAC within 24 hours. This is faster than regulatory standards require.
We have re-reviewed the 12 customers highlighted by AUSTRAC and taken action and are working with authorities. We are also providing $18 million over the next three years to International Justice Mission, a global not for profit that protects vulnerable people from violence, to assist their critical work in Southeast Asia in relation to Online Sexual Exploitation of Children (OSEC).
On the separate issue of International Funds Transfer Instructions (IFTIs) – which make up the bulk of the 23 million alleged contraventions of the AML/CTF Act – we have closed the relevant Australasian Cash Management (ACM) product enabling these transactions with foreign banks and reported 99.99 per cent of all the relevant transactions to AUSTRAC with the remaining to follow shortly.
For context, the vast majority of the IFTIs we failed to report related to two overseas “correspondent” banks. These are relationships that we have with foreign banks and include them using our infrastructure to process payments, in this case predominantly foreign government pension payments to people living in Australia.
Again, we accept this problem, while unintended, should not have occurred and dates back to a series of human and technical errors in 2010-11.
In terms of the second area of our response, lifting our standards, we are establishing a dedicated Board sub-committee for financial crime, which will commission an external expert to independently review our financial crime program. We are also investing $25m to improve cross industry data sharing analysis capabilities, including via potential partnerships with industry and government partners.
But we understand banking affects real people, which goes to the heart of our belief that banking is a service business rather than a product business.
As such, we will convene an expert advisory roundtable and provide up to $10 million per year for three years on the subsequent recommended actions to support the prevention of online child exploitation. We will also match the Australian government’s funding for its SaferKidsPH partnership with Save the Children, UNICEF and The Asia Foundation, investing $6m over six years.
These initiatives and actions are just the start and the board will continue to provide updates, including on accountability, while working constructively with AUSTRAC and other agencies.
As the board of Australia’s oldest company dating back more than 200 years, we are committed to showing all our stakeholders we can – and will – address these issues so we can continue playing our critical role for the economy into the future.
This seems to me, too little too late, and an attempt to “manage” the PR aspects of the issue. Frankly, senior heads need to roll. They do not get how much their brand has been trashed, and this stems from a basic set of cultural norms which are not aligned to community expectations. Behaviours, which are unfortunately widespread across the sector.
