What would Harvey Specter have said? To reveal your hand too early is just asking for trouble. Okay, so these aren’t legal negotiations, nor are these fictional characters on Suits, but CBA did not have much of a choice. In announcing its half-year results, it was obligated to disclose full details of its material financial contingencies. The accounting standards require that such disclosure is required if the contingency is probable and can also be reasonably estimated.
I now draw your attention to Exhibit A, whereby AUSTRAC has alleged that CBA has contravened the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (“the AML/CTF Act”) more than 53,000 times. Court case pending, what was CBA to do? It was unlikely that the charges would disappear, no matter if Harvey was lead counsel, so CBA correctly surmised that any civil penalty was entirely probable. Just how probable is up to Nostradamus, but in his absence, the bean counters and lawyers met by the water cooler not long after the oracle had been summoned.
How can one reasonably estimate a pecuniary penalty in a time of limited precedent? Referring to the largest ever civil penalty in corporate Australian history, one need only look back to last year, when the Federal Court of Australia imposed a $45 million fine on Tabcorp in regard to 108 contraventions of the AML/CTF Act over a 3 year period.
How would CBA quantify its own potential penalty - double, threefold, fourfold? The bean counters came up with a figure of $375 million. When you take into account that CBA’s half year cash net profit was $4.74 billion, the materiality becomes apparent.
Assuming the matter ends up in Court and CBA finds itself at the wrong end of a judgement, it is highly likely that the presiding Honour(s) would find this quantum an extremely useful indicator.
The financial statements also disclose a provision of $200 million for compliance work stemming from regulatory matters. These include the known knowns - that is, this current AUSTRAC matter, the upcoming Banking Royal Commission and APRA’s prudential inquiry focusing on CBA’s governance, culture and accountability frameworks. The balance of the $200 million will no doubt be required for the known unknowns and the unknown unknowns. As the former United States Secretary of Defence so succinctly observed - “it is the latter category that tend to be the difficult ones”.
This was confirmed by current CEO Ian Narev who stated that “there is a wide range of potential outcomes. We haven't sat down and taken a provision for absolutely every outcome we think might be likely - what we have talked about is some of the things that we think are those most likely.” In other words, the unknown unknowns.
All these issues might seem to be too big a job for Ariel & Associates, but we do have additional resources we can call upon to get the job done. Matt Comyn, happy to chat over a coffee….
Should you have any queries about ASIC or other issues involving compliance, licensing, or corporate governance, please contact Jeremy Danon, director of Ariel & Associates Pty Ltd on (02) 8223 3355 or at firstname.lastname@example.org.