Media reports about alleged involvement of subsidiaries of Australia’s premier financial institution and regulator, the Reserve Bank of Australia, in bribery cases would disturb every right-minded Australian. After all, though independent, this prestigious arm of the Australian Government is a watchdog of the Australian financial system and is an agency responsible for maintaining financial stability. As a monetary authority, it performs important economic functions such as maintaining the value of the dollar, and controlling inflation through its interest rate policy.
Australians believed the RBA’s conduct would be above board. When Australia came out of the GFC relatively unscathed compared to other developed countries, along with the government, the RBA took credit for being an able financial institutions supervisor.
No wonder it surprised many when this august institution was in the news for all the wrong reasons.
In a joint Fairfax Media/ABC Four Corners investigation it is claimed that the RBA turned a Nelson’s eye to the bribes being given by its note printing subsidiaries, Note Printing Australia and Securency (which it sold in February), for securing contracts for supply of polymer notes. More shocking was the claim that the subsidiaries engaged in a business with Iraq in open defiance of international law that prohibited such dealings. Two whistleblowers claim they brought things to the notice of top executives of the RBA, but claim no action was taken to call in federal investigation agencies until it was uncovered by Fairfax Media.
RBA Governor Glenn Stevens has testified at a House of Representatives Standing Committee on Economics that he did not have any knowledge of what was going on in the RBA’s subsidiaries till media reports appeared in 2009. However, whistleblowers claim the RBA was informed as far back as 2007 about the scandal.
When the institutions that are supervised by central banks engage in such conduct, the central banks come down heavily on them. Late last year, HSBC was allegedly involved in laundering money. It agreed to pay a US$1.9 billion fine to US authorities. In accepting the fine, HSBC acknowledged that it failed to maintain an effective program against money laundering and for the lack of due diligence.
Media outlets reported in June this year that the Austrian central bank’s note printing unit won contracts from Azerbaijan and Syria between June 2005 and June 2011 after kickbacks were given to officials in these countries. The Deputy Governor of Austrian central bank was also a member of the supervisory board of the note printing subsidiary from 1998 and later became its Chairman in 2004.
While the Austrian Deputy Governor was put on immediate suspension after he was charged with a bribery scandal, in Australia, last night’s ABC Four Corners program claims senior executives of the RBA have remained “untouchables” so far.
Besides the ethical aspects, eroding of trust in central banks can have adverse impact on monetary policy. University of Passau researchers Johann Lambsdorff and Michael Schinke found “corruption among central banks induces distorted policies, leading to increased inflation. The credibility of anti-inflationary announcements is undermined by corruption among central bankers”.
What needs to be done now?
A number of issues arise. First, the incident points to the need for strong whistle-blower protection. People in positions of power can easily muzzle the voice of those who are lower in the hierarchy. A strong whistle-blower protection with suitable compensation would encourage people to come forward and bring any lapses on the part of the powerful in public domain. It will contribute to stemming corruption.
Second, it points to the risks of public-private partnership where the private partner may engage into questionable practices and the public organisation may get drawn into it unwittingly. Extra-vigilance is therefore called for in such cases.
Finally, the Australian Government needs to act expeditiously to restore public trust which has been severely eroded by prosecutions in relation to the RBA subsidiaries.
The IMF Code of Good Practices (2000) states:
Without trust in the financial probity and freedom from conflict of interest of the officials and staff of the central bank, the authority and ability of a central bank to perform its functions would be severely hindered.
The government needs to set up an inquiry as it did in the case of AWB to unearth the truth and to hold those responsible accountable. After all, Caesar’s wife must be above suspicion.