AUSTRAC commenced civil penalty proceedings against the Commonwealth Bank of Australia
On 3 August 2017, AUSTRAC commenced civil penalty proceedings against the Commonwealth Bank of Australia (CBA) alleging serious and systemic non-compliance with the Anti-Money Laundering and Counter-Terrorism Financing Act (Cth) (AML/CTF Act). Specifically, AUSTRAC's allegations included that CBA:
- failed to give 53,506 Threshold Transaction Reports (TTR) on time to AUSTRAC for cash transactions of $10,000 or more through its Intelligent Deposit Machines (IDMs);
- failed to comply with its own AML/CTF program and carry out a risk assessment in its roll out of IDMs;
- failed to conduct account monitoring of 778,370 accounts; and
- may be exposed to a civil penalty. (Contravening Conduct)
From the evidence that was later considered by Justice Yates in the class actions, senior executives at CBA were aware of the late filing of TTRs in August 2015, which arose as a result of a single IT coding error. Relevantly, in 2013 employees at CBA had discovered that some TTRs had not been filed with AUSTRAC, although the coding issue was not identified at that time, and the issue was not escalated internally. On 8 September 2015, CBA notified AUSTRAC about the late filing of TTRs and on 24 September 2015 CBA wrote to AUSTRAC informing it that the late TTRs had been lodged.
Throughout the period, CBA continued to work closely with AUSTRAC in responding to requests for information, and approximately two years after CBA reported the issue to AUSTRAC, civil penalty proceedings were commenced on 3 August 2017. CBA admitted to the late filing of 53,506 TTR of cash deposits through its IDMs, inadequate compliance with risk assessment requirements for IDMs on 14 occasions and to the late filing of 149 suspicious matter reports. CBA settled the civil penalty proceedings on 4 June 2018 for $700 million.
Class actions: Zonia Holdings and Philip Baron
On 9 October 2017 and 29 June 2018, Maurice Blackburn and Phi Finney McDonald (PFM) brought separate class actions against CBA on behalf of lead applicants Zonia Holdings and Philip Baron, respectively, who allegedly suffered losses due to CBA's share price drop after the civil penalty proceedings were announced. CBA sought a stay of the PFM class action, however in July 2019, Justice Yates ordered the class actions run concurrently, with duplication of work and resources to be avoided to the extent possible.
The class actions alleged that CBA was aware of its non-compliance with the AML/CTF Act, and CBA's failure to disclose the AUSTRAC investigation to the ASX amounted to misleading or deceptive conduct and a breach of its continuous disclosure obligations. The class actions contended that during the period 16 June 2014 to 3 August 2017, CBA should have made one or more disclosures regarding the alleged Contravening Conduct and, because the market was misinformed, CBA's shares were artificially inflated and CBA was therefore liable to pay damages for the losses suffered by investors.
Following the AUSTRAC announcement, CBA's share price fell from $84.69 on 3 August 2017 to $80.11 on 7 August 2017 (being a 5.4% decrease).
Key findings: CBA class actions
Continuous disclosure
ASX listed entities must comply with continuous disclosure obligations set out in s 674 of the Corporations Act and ASX Listing Rule 3.1. A listed entity must 'immediately' inform the ASX of any information that a reasonable person would expect to have a material effect on the price or value of its securities, once it becomes aware of that information
The class actions alleged that CBA failed to disclose information to the market, on 16 occasions during the period 16 June 2014 to 3 August 2017, prior to its announcement on 3 August 2017 that AUSTRAC had commenced civil penalty proceedings in relation to CBA's alleged non-compliance with the AML/CTF Act. The Applicants alleged that CBA had awareness of nine pieces of information, which arose from the Contravening Conduct, regarding the late filing of the TTRs, risk assessments (or lack thereof) of the IDMs, automatic transaction monitoring (or lack thereof) and the possibility of enforcement action by AUSTRAC which might result in CBA being ordered to pay a substantial civil penalty.
Justice Yates clarified the recent reasoning of the Full Court in Worley in determining when it can be said that a company is in fact "aware" of information for the purposes of disclosure. Relevantly, whilst the test still incorporates either actual knowledge of information or a consideration as to whether the relevant person ought to have formed a particular opinion based on the facts available (i.e. "constructive knowledge"), that analysis cannot be tainted by after-the-event investigations which subsequently identified those facts.
The Applicants were held tightly to their pleaded case, and the majority of the Applicant’s case failed at this hurdle – the evidence did not suggest that the facts were known to employees at the bank at the relevant time, but came to light after the event. Here, his Honour drew a distinction between the awareness in 2013 by employees of a failure to file some TTRs, and the IT coding issue which was discovered in August 2015, which was subsequently escalated to senior management. The former did not result in an investigation which would have revealed the latter, however this failure to investigate was irrelevant to the assessment of CBA's "awareness". The employees were "many levels below 'officer' level," and what they could and should have done to detect the root cause of the issue (but did not in fact do) is not the right test to establish corporate knowledge. On this basis, his Honour held that this information was not known, or ought reasonably to have been known, by the bank at the relevant time. Instead, CBA's awareness was ultimately determined based on information which was known to officers of the bank in respect of the underlying IT coding issue, which was the ultimate cause of CBA's non-compliance in filing the TTRs in a timely manner.
For the remaining information which Justice Yates was willing to find that CBA was "aware" of, his Honour relied on ASX Guidance Note 8 to conclude that that information was not required to be released to the market in that form as it was incomplete, vague, imprecise, and in some instances, "would more likely confuse, rather than inform, investors".
While he was not strictly required to consider materiality, as the Applicants' case had failed, Justice Yates provided helpful commentary on the type of information that may be considered material and should be disclosed. Section 677 of the Corporations Act requires listed entities to disclose 'market sensitive information' that would, or would likely, influence investors' decisions to buy or sell the entity's securities. His Honour scrutinised the context in which the information was known, finding:
- Investors will be influenced by "concrete information", which address "significance and potential consequences".
- This information must convey "some real likelihood, as opposed to the mere possibility, that the information has financial consequences for [investors]."
- Absent the benefit of hindsight, there was no reason to believe that the commencement of civil penalty proceedings was AUSTRAC’s preferred position, in circumstances where AUSTRAC had a range of enforcement options available to it. Justice Yates assured that "certainly no sound prediction to that effect could have been made."
Misleading or deceptive conduct
The Applicants' case for misleading and deceptive conduct was underpinned by the information the class actions alleged should have been disclosed as part of their continuous disclose case. The class actions alleged that CBA was misleading in representing that:
- it had effective policies and procedures for ensuring regulatory compliance and that CBA would ensure appropriate reporting; and
- it had systems in place to ensure that material matters were reported to its CEO and the ASX and it would comply with its continuous disclosure obligations.
Fatally, the representations, as pleaded, involved absolute language, such that Justice Yates was unable to find that the representations had in fact been made. According to his Honour, it was "tolerably clear" that the use of the word 'ensure' was in reference to CBA's policies and systems, and not a guarantee that compliance would be achieved through these systems.
The judgment highlights that while investors expect financial institutions to take sufficient measures to mitigate their operational risks, investors should understand that financial institutions are not risk free.
Cleansing notice
As there had been no breach of s 674 of the Corporations Act, Justice Yates also found that a Cleansing Notice was not defective within the meaning of section 708AA(11), and CBA's compliance with the AML/CTF Act was not something investors would reasonably expect to find in a disclosure statement. His Honour surmised that a financial institution should not be expected to apprise the market with the "toings and froings" with regulators in respect of non-compliance on a daily basis, unless it has substantial and concrete information.
Causation and loss
Despite making no finding on liability, his Honour also concluded that even if the Applicants had established liability, they would have failed to establish causation and loss.
The need to properly plead a counterfactual disclosure:
The judgment further emphasises the requirement for an applicant to appropriately plead any counterfactual disclosure which it alleges a company ought to have made. Failing to do so will be harmful to its claim. Consistent with the commentary in previous authorities, the Court noted that a contravention of s 674(2) of the Corporations Act must be “finally and precisely” pleaded and the party making the allegation must “identify the case it seeks to make…clearly and distinctly”.
In closing submissions, the Applicants' sought to deviate from their earlier position that the precise form of the information they contended CBA should have disclosed to the ASX was the "Information" as defined in their claim. The Applicants sought to argue that if the Court found that components of the Information were not apt to be disclosed, those components should in effect be carved out, and if further contextual information was necessary to make the pleaded information complete, it was not the Applicants' task to supply that information as part of its case under s 674(2), so long as the pleaded information was otherwise material.
Justice Yates disagreed, finding it remains the Applicants' onus to plead, completely, the information which, it says, the Respondent must disclose. Justice Yates was explicit that "the task of the Court is to adjudicate upon a pleaded case, not to plead the case itself." It is not the Court’s job, nor the respondent's task, to refashion an applicant's pleaded case to define, to its own liking, the information that should have been disclosed by the respondent.
Economic equivalence
The judgment emphasised the criticality of economic equivalence between: (a) the actual disclosure made to the market; and (b) the disclosures which the Applicants allege the company should have made.
Yates J criticised the Applicants because "the evidence appears to glide over important differences" between: (a) the information which the Applicants alleged the company should have announced; and (b) the actual information in the relevant corrective disclosure. This was also complicated in this case because the Applicants were relying on information released by a third party (AUSTRAC) as a basis for its allegations as to what CBA should have announced at an earlier time. His Honour was satisfied the information conveyed by the 3 August 2017 announcement was materially and significantly different to the information which the Applicants alleged the bank should have disclosed.
Failing to establish economic equivalence meant the event analysed by the Applicants’ expert (as part of his event study) was different than the event pleaded in the Applicants' claim. Therefore, the Applicants could not rely on the share price decline which followed the end of the claim period as a proxy for loss.
Market-based causation may not be available to all investors
It is clear from the judgment that the Court is aware that certain market participants who were not induced into buying the shares because of a company’s contraventions still sought to recover under market based causation. This is a difficulty with the doctrine. While no finding was ultimately made on this issue by the Court, his Honour expressed concern regarding the inclusion of market participants, who knew the shares were overpriced or were indifferent to that fact, being included as part of the class and found that the risk associated with such investors was not "illusory".
While no specific comment was made about short sellers, such an issue is directly relevant to such investors seeking to claim loss as part of a class action. A short seller relies on the market overvaluing a company's share price and bets on a correction at some point in time, allowing them to make a profit on their short position. Justice Yates' comments suggest that the inclusion of such investors as members of a class claiming loss and damage may not be appropriate, given they were not induced by the conduct or representations of the company.
Our analysis
A number of shareholder class actions have been impugned in recent years by respondent companies for either:
- not identifying precisely what information it is alleged the company should have said at an earlier stage; or
- tying the corrective disclosure – that is the ASX announcement the applicants say 'causes' a significant share price drop and triggers a class action – to that precise information.
In this judgment, Justice Yates was clear that Applicants need to clarify precisely what information it is alleged an entity should have disclosed, and vague allegations will not be enough.
Companies who interact with regulators will welcome this decision. Entities are only required to disclose concrete information that is known at the relevant time, and any announcement must be clear, precise and accurate. The Courts have recognised there is an understanding by investors that companies are exposed to risks, and sufficient measures should be taken to manage those risks.
However, the market does not need to be apprised of all instances of non-compliance or engagements with a regulator. An assessment into the nature, complexity, cause, significance and possible consequences is warranted, with only substantial and concrete information required to be disclosed. Here, his Honour found that CBA was not required to disclose the possibility of a penalty at an early stage until there was certainty, as a penalty from AUSTRAC was merely one potential outcome which CBA could not have predicted. Disclosing a contingent and inconclusive matter to the market would likely have prompted more questions than it answered. A copy of the judgment for both class actions is at Zonia Holdings Pty Ltd v Commonwealth Bank of Australia Limited (No 5) [2024] FCA 477.