Tag: Senate

What I Said To The Senate On The Restrictions On The Use Of Cash Bill

I outline my submission made to the Senate Inquiry, which is open until next Friday 15th November 2019.

https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/CurrencyCashBill2019

Here is the full text of my submission.

Currency (Restrictions on the Use of Cash) Bill 2019

I have carefully reviewed the latest iteration of this legislation and am gratified that the Senate has chosen to review the proposals, which I strongly oppose.

Not only is the bill significantly eroding our civil liberties, but the conduct of Treasury needs to be called out by suggesting that 3,400 of the 3,500 submission they received during their brief 2 week exposure review submission period were part of a campaign “by the CEC, a political party”. While there was indeed a campaign to oppose the draft legislation, I have evidence that submissions were made by many concerned individuals and businesses with no links to the CEC. Indeed, my own submission, some of the contents I am using here again, is based on my own independent research and analysis.  I have no financial or political association with said CEC. I believe Treasury tried to play down the considerable opposition which exists within the community. This bill is, in my view toxic.

Digital Finance Analytics is a boutique research and analysis firm specialising in the financial service sector. We undertake primary research through our surveys, as well as deep research from the global literature relating to financial services. We publish regularly via our online channels at Digital Finance Analytics[1] as well as preparing reports on a range of related subject matters for our clients, and we collaborate with a number of academics.

My objections are centred around the following points.

  • Civil Liberties Are Being Eroded. Further public debate on these measures are warranted as they are fundamentally restricting personal freedoms. Today I can use and hold cash as I please. If passed, my freedom will be eroded. This is one in a series of measures which have been taken (including media freedoms) which are curtailing the hard-won freedoms Australians used to enjoy.  Public hearings should be held by the Senate to judge community reactions to the bill as part of the current review.
  • There Is No Cost Benefit. The stated objective of the bill is to close tax avoidance and money laundering loopholes. But there is no quantification of the potential “savings” – and this is also true of the earlier Black Economy Taskforce report. It appears that simply stating these desired objectives is seen as sufficient to justify the bill. What is the cost benefit of such a measure, bearing in mind that transactions which fall outside the exemptions would need to be tracked and examined? 
  • Increased Surveillance Will Be Required. In some form, monitoring of offending transactions would be required if the Bill were passed.  This is not explained, nor how it would be policed. Who would police them, at what cost?  Further, the bill proposed a draconian set of penalties designed to deter. Treasury admitted this in their FOI’d response.
  • Existing Laws Are Not Enforced. The true size of the black economy is much in dispute, but indications are that it is already falling. In addition, much of the tax leakage and avoidance would be covered by existing legalisation if it were being policed effectively. We support the view, recently aired by Andrew Wilkie in the debate on the floor of the house, that:

“There’s already a requirement to report transactions over $10,000. The problem is that those laws are not being implemented and enforced[2].”

  • There are other more pressing areas of tax leakage and AML risk. According to the OECD report “Implementing The OECD Anti-Bribery Convention” released as part of the OECD Working Group on Bribery, Real Estate is identified as at “significant risk” of being used for money laundering. Among a raft of recommendations, is one saying Australia should be “Taking urgent steps to address the risk that the proceeds of foreign bribery could be laundered through the Australian real estate sector. These should include specific measures to ensure that, in line with the FATF standards, the Australian financial system is not the sole gatekeeper for such transactions”.  To date these loopholes, remain open, as do those relating the corporates and big business who, partly thanks to the assistance of the large international accounting firms are responsible for the lions share of tax leakage and AML activity. Our research suggests that Government, under heavy corporate and business lobbying is deliberately letting this slide, preferring to target in on a relatively inconsequential area of tax leakage relating to cash transactions.
  • The Legislation Would Be Ineffective. Beyond that, it is clear from our wider research of a range of sources that such a proposed cash ban would have very little impact on hard core tax leakage. For example, Professor Fredrich Schneider, a research fellow at the Institute of Labor Economics at the University of Linz, Austria, a leading international expert on the black economy has stated that there is a lack of empirical evidence that cash transaction bans will help reduce the black economy. Schneider published a paper in 2017[3]  “Restricting or Abolishing Cash: An Effective Instrument for Fighting the Shadow Economy, Crime and Terrorism” in which he made this specific point.
  • There Is Another Agenda. In addition, while the Bill is silent on the connection to implementing negative interest rates as part of unconventional policy, the link was made clearly in the 2016 Geneva Report by the International Centre Monetary and Banking Studies (ICBM) titled: What else can Central Banks do?[4]  This paper which was drafted by officials from international organisations such as the IMF/BIS and multiple central banks + commercial banks. In addition, within the original Black Economy Taskforce Report there was mention of the benefits of a cash transaction ban in relationship to monetary policy – yet this link was denied by Treasury in their recent FOI release.
  • The IMF Shows Why. The same thematic came through in recent IMF Blogs and working papers.  In April 2019, the IMF published a new working paper on how deeply negative interest rates work. In previous papers, the IMF has suggested that nominal interest rates may have to go deeply negative, for example, -3% – 4%.   First, they say “In summary, ten years after the crisis, it is clear that the zero-lower bound on interest rates has proved to be a serious obstacle for monetary policy. However, the zero lower bound is not a law of nature; it is a policy choice. We show that with readily available tools a central bank can enable deep negative rates whenever needed—thus maintaining the power of monetary policy in the future.” Next they declare “Our view is that, when needed, deep negative rates are likely to be worth the political cost. While the complete abolition of paper currency would indeed clear the way for deep negative interest rates whenever deep negative rates were called for, such proposals remain difficult to implement since they involve a drastic change in the way people transact.”
  • The Bill Is Connected to Negative Interest Rates. The connection is obvious in that in a negative interest rate environment households and businesses will be likely to withdraw funds from the banking system and transact in cash. If enough cash is extracted, negative interest rates will simply have no effect. We believe the measures proposed in the current Bill are truly about enabling negative rates, yet this is not mentioned within the Bill. This is misleading and deceptive. The true motivations should be on the record. But it explains the short time frames.
  • Households and Businesses Would Be Trapped In The Banking System. If such a ban was introduced households and businesses would be forced to use the banking system, meaning that bank charges could not be avoided, which benefits banks, not their customers. In addition, we have seen recent system and power failures which have caused disruption to the electronic payments systems. If cash is less available and restricted, a failure would be even more significant and inconvenient and could damage the economy. Once in the banking system, funds can be monitored and controlled (seen by the Taskforce as a positive move – we disagree), but such control could limit access to cash and transactions in general in a crisis. And we note from our SME surveys that many businesses, especially in rural and regional Australia regularly use cash as electronic alternatives are not available. Finally, offering cash for a discount, which is part of legitimate everyday business (because bank charges are avoided) would be removed.
  • The Structure Allows Change by Regulation Subsequently. The structure of the Bill enables parameters to be changed subsequently by regulation (not via Parliament). This opens the door to removing some of the concessions contained in the current drafting by agencies without full scrutiny. The bill is therefore open ended with regards to crypto, precious metals and other carveouts. In addition, we note surprisingly, government transactions, and cash transactions in Casinos are carved out, which again flags concerns about the structure and limitations of the bill.
  • A Reduced Limit Could Be Waived Through.  Whilst we note that the $10,000 limit would require Parliamentary approval, in practice this could be made without full debate – as illustrated by the passage on the recent APRA bill, or as part of an omnibus “procedural” bill which masks the true intent. It is important to note that where cash transaction bans have been introduced, the value ceiling has been lowered.  France has legally prohibited cash transactions above 1,000 euros, Spain has legally prohibited cash transactions above 2,500 euros, Italy has legally prohibited cash transactions above 3,000 euros, and the European Central Bank ended the production and issuance of its 500 euro note at the end of 2018.

In summary, my overriding concern is that Parliamentarians will only consider the narrow tax efficiency aspect of the Bill and vote it through without grasping the true intent and consequences. Civil liberties are being eroded, and the trap will be set to force households and businesses to transact within the banking system, thus facilitating experimental monetary policies, via the back door.

This Bill should not be allowed to pass.

[1] https://www.digitalfinanceanalytics.com/

[2] ABC News

[3] https://www.econstor.eu/handle/10419/162914

[4] https://voxeu.org/article/what-else-can-central-banks-do

Corrupt Canberra says your Freedom is Out of Scope

Economist John Adams and Analyst Martin North discuss the recent Treasury FOI response relating to the Cash Restriction legislation which was open (briefly) for public comment.

https://treasury.gov.au/sites/default/files/2019-11/foi-2580.pdf

https://www.adamseconomics.com/post/official-letter-of-compliant-against-the-australian-treasury

https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/CurrencyCashBill2019

Action Stations On The Cash Ban!

I discuss the latest with CEC’s Robbie Barwick.

With 2 weeks left to make a Senate submission, we explore some of issues people may want to touch on, to assist.

Final date is 15th November 2019.

https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/CurrencyCashBill2019

There is still time to make a submission, and stop this from becoming law. Our civil liberties depend on it.

Here’s how you make a submission: email economics.sen@aph.gov.au

Address to: Senate Standing Committees on Economics, PO Box 6100, Parliament House, Canberra ACT 2600

Some points to consider:

Civil liberties – cash is legal tender and you have the right to privacy and to not use a bank; you don’t want government and banks to “monitor and measure” everything you do.

Practical benefits of cash – power supplies and communications technology not always reliable; instant settlement of payments so can be better for commerce, good for discounts etc; whatever else.

Excuses for the law are false. Eliminating the black economy is a lie and won’t work: Australia’s black economy is small and shrinking, and cash restrictions have not reduced black economies in Europe, in fact the opposite.

Restricting cash won’t stop tax evasion, because the majority of evasion is done by large corporations and bank, assisted by the Big Four accounting firms – who want this ban. As Andrew Wilkie said, the government has enough laws to crack down on money laundering and the black economy – use them.

Real reason is to trap Australians in banks. This is explicit from the IMF: Cashing In: How to Make Negative Interest Rates Work. Won’t be able to escape negative interest rates, or bail-in.

Finally, government’s reassurances are fake, not guarantees. Treasury issued a fact sheet, which Melissa Harrison quickly refuted: exemptions aren’t contained in the legislation, just in the regulation that is easily changed.

Why Audit Needs Reform

Here is a show about my submission to the Senate Inquiry into Audit in Australia, where I focus in on the key issues, show some of the gaps in the current system and suggest reform. Submission close on 28th October if you want to have your say!

Just remember the many banks which passed audit in 2018 and then failed, as this Guardian article at the time highlights.

DFA Submission To Senate Inquiry On Auditing In Australia

On 1 August 2019 the Senate referred an inquiry into the regulation of auditing in Australia to the Parliamentary Joint Committee on Corporations and Financial Services for report by 1 March 2020.

Submissions close on 28 October 2019. DFA has made a submission.

Introduction.

We welcome the current inquiry and note the similar initiatives underway in several other jurisdictions. This is an important issue.

We believe there is a need to refocus the auditing practices which are currently deployed by the “big four” firms in particular and the industry more widely. We reach these conclusions, having analysed the financial sector for more than 30 years, as a consultant, financial firm employee and a partner within Arthur Andersen before its dissolution.

There are many threads to the argument, but, these large audit firms are in our opinion too close to management of large companies, as they both advise them on strategy and tax minimisation, and separately provide audit services. In addition, these big four firms are responsible for the evolution of accounting standards, including off-balance sheet minimisation, as well as providing advisory services to companies and Government, and they also offer auditing capabilities. Conflicts abound.

Whilst in theory audit practices should be separated from other commercial and advisory operations of the big four, I have seen examples when company account planning sessions have included cross discipline discussions, from advisory, consulting, services AND audit, to craft strategies to maximise the commercial benefits to the audit and consulting firm. This happened regularly at AA.

In addition, the audit of large companies are executed in a formulaic and superficial way, where the main test is the need to meet relevant accounting standards, not separately confirming independently that the business is functioning as advertised from a financial and compliance perspective.  Who audits the auditors?

Remember that in 2008 several banks failed, despite having been given an unqualified audit in the months prior. Others required substantial Government bail-out or were absorbed by other industry players. Nothing has changed (other than the quantum of debt and other exposures have increased substantially) since then.

A Financial Services Example.

To illustrate the limitations of audit, I will highlight four areas, where from my research and experience current banking sector audits are deficient.

Financial Derivatives Exposure.

According to recent RBA data Australian banks have some $48 trillion of gross derivatives exposures. This will include services to client, but also position taking on a trading basis within the bank’s treasury operations. Recent BIS research highlighted that in a low interest rate environment, banks will tend to lend less and trade more to try to bolster profits[i].  Plus, some window-dress their books for quarter end.[ii]

Derivatives gross exposures dwarf the capital and assets held within banks. This gross exposure is not reported clearly within the accounts, because most is held off balance sheet. Moreover, the true net-exposure which a bank may face will be determined by market movements and relative trading positions. But even net exposures are not adequately reported. We only get a glimpse of the true positions (and risks) when capital is applied under the Basel rules, but this does not tell the full story, yet are within current accounting standards, and off-balance sheet rules. We see no evidence of auditors picking through the derivatives book and validating or reporting these gross exposures. In a crisis this may well hit the financial position of an individual bank, and trigger the need for a restructure, bail-in or bail-out.  Current audit rules and approaches are designed to minimise disclosure and obscure the true risks.  APRA does not provide an alternative route to disclose such risks.

Internal Risk Models

Major banks can use their own “internal risk models” to estimate the amount of capital applied to the business, under the Basel rules. These models are complex and “tuned” by the institutions to enables institutions’ to maximise their use of capital. However, we are not convinced these models are functioning as intended, and they are not subject to regular audit, either by external auditors, or APRA. Thus, the data is taken as accurate from the “black-box” and this may lead to higher risks in the business than are disclosed.  Again, the true position will not be exposed until a crisis hits.

Property Portfolio Revaluations

Large financial companies hold significant portfolios of mortgages backed by residential property. An initial valuation is used in the underwriting process. However, unless there is a material refinancing event, subsequent portfolio adjustments, (because for example property prices move down) are applied only at an aggregate level (for example state level). As a result, there is a significant risk the property portfolio is overstating the real current value of the underlying security, and this may translate to bigger risks in a downturn. In addition, the amount of capital held under Basel rules could well be understated. There may be offsetting benefits in a rising market, but the standard portfolio analysis is not very accurate. But once again external auditors will be not examining the operation practices of portfolio valuations yet will sign off on the accounts as true and accurate.

Household versus Loan Risks

Households often hold multiple loans across a lender or lenders. APRA only considers the status of individual loans. Reporting for audit purposes will be at a loan, not household level.  Indeed, there are cases when loans are deliberately split to reduce the overall loan to value results. Once again this is an area where auditors will not tread, but the risks in the system are higher than those reported in the accounts. Again, the true position will not be exposed until a crisis hits.

These are just examples of pain points which the current audit processes will not adequately examine. There are many others.

Final Observations

The role of an auditor should be more than just checking with the accounting standards and signing off. They should be seeking out material issues, independently from management. But in the four cases above the results are wanting.

The solution would be to create an independent audit function, perhaps within the Auditor General’s domain, to provide accurate and independent analysis of large financial players. In addition, we believe that the audit functions of major firms should operate as separate service businesses and should NOT be also be allowed to offer creative accounting and off-balance sheet techniques as part of their service suite. The conflicts and limitations are obvious and concerning.

However, the true impact of such deficiencies would only be revealed in a crisis, mirroring 2008, by which time it is too late. Changing management and audit practices as suggested would place our important financial sector companies on a firming footing. Such changes could well benefit other industry sectors as well.

Changes to audit practice and structure are essential!

Martin North

Principal Digital Finance Analytics[iii]

October 2019

[i] The Real Problem With Low Interest Rates – https://youtu.be/LLUfzna5iys

[ii] https://digitalfinanceanalytics.com/blog/bis-confirms-banks-use-lehman-style-trick-to-disguise-debt-engage-in-window-dressing/

[iii] Digital Finance Analytics is a boutique research and advisory firm. More details are available via our Blog. https://digitalfinanceanalytics.com/blog/

APRA’s Myopic On Housing Loans

APRA took a question on notice relating to the average size of mortgages from Senator Peter Whish-Wilson during Budget Estimates, and the answers have just been released.

The questions are sensible, the answers once again show how myopic the data APRA produces is. They only report the value of loans and number of loan accounts on the ADI’s books). Nothing about household exposure across multiple loans. Who then is, I ask?

Questions:

What method does APRA use to calculate the “average balance of housing loans” as provided in the publication Quarterly ADI Property Exposures?

How does APRA account for mortgage offset (redraw) accounts in its method?

How does APRA account for instances where there is more than one loan on a property (‘loan splitting’) in its method? Does APRA tally the total of all loans against a property; or does APRA tally individual loans, regardless of whether there is more than one loan on a property?

What is the extent of ‘loan splitting’? How many properties have more than one loan against them? How many properties have more than two loans against them?

What is the average value of loans where there is more than one loan against a property?

Where there is more than one loan against a property, what proportion is fixed interest and what proportion is variable interest?

Where there is more than one loan against a property, what is the average value of fixed interest loans and what is the average value of variable interest loans?

What is the extent of ‘loan splitting’ being undertaken by different ADIs? In particular: what is the extent of ‘loan splitting’ by the major banks?


Answer:

The average balance of housing loans in Quarterly ADI Property Exposures (QPEX) is a simple average calculated as the aggregate balance of all housing loans, gross of offsets and provisions, divided by the number of loans. It is important to note that QPEX reports data from the ADI’s perspective and not the customers (e.g. the value of loans and number of loan accounts on the ADI’s books).

APRA does not consider the average loan size to be a reliable indicator of risk. ADIs are required to assess the borrower’s ability to service each loan, and the amount of security against each loan taking into account all borrower liabilities. APRA’s expectations are set out in Prudential Practice Guide APG 223 Residential Mortgage Lending (APG 223). ADIs are
required to report to APRA on the value of new loans originated without fully meeting the ADI’s serviceability standards.

Offset accounts are considered a deposit liability and do not reduce an ADI’s housing loan exposure.

APRA does not adjust for loan splitting in QPEX reporting. However, under APG 223 the ADI is expected consider the customers’ aggregate exposure in the serviceability calculation and available security when originating housing loans.

APRA does not collect information on loan splitting, by loan type, or across institutions. In addition the focus on the LOAN not the customer exposure.

An Open Letter to Australians: Only Glass-Steagall Can Save You from the Banks

Via Wall Street On Parade – Pam Martens: April 4, 2019

Dear Engaged Citizens in Australia:

As both the interim and final report from your Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry has confirmed, the good, decent, hardworking people of Australia are under attack from their own banking system in a manner reminiscent of an attack from a foreign invader that wants to destroy the will and financial resources of the citizens in order to gain absolute control of the country.

Americans, more than any other people in the world, can understand and relate to the precarious predicament in which you now find yourselves. The devious vices and devices of your banksters to transfer the meager savings of the common man and woman to their own greedy pockets have been laid bare by your Royal Commission. But just as happened here in the United States following the report of the Financial Crisis Inquiry Commission, no concrete measures to end the domination of the banks has occurred.

Australians, like Americans, remain on the road to financial ruin at the hands of predatory banking behemoths that are using their concentrated money and political power to attack each and every democratic principle that we cherish as citizens – from repealing consumer-protection legislation to installing their own shills in government to regulatory capture of their watchdogs to corrupting the overall financial system that underpins the stability of our two countries. Sadly, citizens at large do not understand that their own deposits at these mega banks are being used to accomplish these anti-democratic goals.

What has now occurred in Australia is precisely what has occurred in America. Last year Bob Katter, MP in your House of Representatives, introduced the Banking System Reform (Separation of Banks) Bill 2018 in the Australian Parliament. This year, Senator Pauline Hanson introduced a bill of the same name in the Australian Senate. The legislation is tailored after the 1933 legislation that was passed in the United States, the Glass-Steagall Act, to defang the banking monster that brought on the 1929 stock market crash and ensuing depression by separating commercial banks, which take in the deposits of risk-adverse savers, from the globe-trotting, risk-taking, derivative-exploding investment banks. (An unsavory group of bank shills succeeded in repealing the Glass-Steagall legislation in the U.S. in 1999 and then enriched themselves from the repeal. One year later the U.S. experienced the dot.com bust and eight years after that the country experienced the greatest financial crash since the Great Depression – what you call the GFC or Global Financial Crisis but U.S. bank lobbyists prefer to dub The Great Recession.)

U.S. Senator Elizabeth Warren, a Democrat, and the late Senator John McCain, a Republican, had been introducing the 21st Century Glass-Steagall Act for the past five years in the U.S. Congress. Just like the legislation proposed in Australia, it would have restored integrity to deposit-taking commercial banks by separating them from the predatory investment banks that financially incentivize their employees to fleece unsuspecting customers while using the deposits to engage in high-risk gambles that regularly implode. The powerful mega banks in the U.S. and their legions of lobbyists have worked hard to prevent this legislation from gaining momentum.

Despite the critical need for this legislation in both countries, mainstream media has not done its share to inform and educate the public about the pending legislation. We know this to be true in Australia because the Royal Commission received more than 10,000 submissions from the Australian public while the Senate’s request for public comment on the Glass-Steagall legislation has thus far received just 350 responses. The Senate Committee has elected to publish just a sliver of those responses.

You can submit your comments on the Australian legislation using an online form; or you can email your submission to economics.sen@aph.gov.au; or you can mail your submission to Senate Standing Committee on Economics, PO Box 6100, Parliament House, Canberra ACT 2600, Australia. The deadline for submissions is a week from this Friday, April 12, 2019.

It is already clear where Australia is heading without this legislation. Australia will become the plaything of a global banking cartel just as is occurring in the United States. See Goldman Sachs’ Top Lawyer Is Part of a Secret Banking Cabal as CEO Blankfein Denies One Exists; and Citigroup, Deutsche Bank Face Australian Court in Landmark Cartel Case; and Banking Fraternity Felons. Your children will become the debt slaves to the banks in order to get an education; the banks will carve out their own private justice system to hear customers’ claims against them, effectively closing the courthouse doors for bank fraud claims; and your country will end up with the greatest wealth inequality since the 1920s.

Or, you can mobilize to pass the Glass-Steagall Act legislation. The choice is yours. (Americans, I hope you’re listening too.)