An organization needs to be careful that it follows the law and does not suffer any suits, official inquiry penalties by the regulating authorities. However, when an organization neglects its duty to conduct due diligence, it will lead to severe consequences like the case of Commonwealth Bank of Australia which was rocked by fraud and money laundering scandals.
Commonwealth Bank of Australia was ordered to pay a fine of about 700 million dollars by the Australian Transaction Reports and Analysis Centre (AUSTRAC) in June 2018 due to contravening rules regarding money laundering. This was due to the failure of CBA to report over 53,000 suspicious transactions for three years. Banks and other financial institutions are required by law to report any transaction above $10,000 in a day to the authorities. This measure is meant to monitor and track down any suspected money laundering activity (Mcllroy, 2018, p.8).
CBA’s breaches relate to its intelligent deposit machines, introduced in 2012, which allows customers to conduct transactions of up to $20,000. The machines were alleged to have been used by four money-laundering syndicates with ties to drug trafficking. CBA failed to report transactions from the machines totaling over 600 million dollars to the financial agency for over three years. The bank claims its lack of disclosure was due to technical issues with the machines such as software or coding errors (Beck & Paton, 2018, p.351).
These scandals are an example of gross negligence on the part of CBA’s management, and they failed to be careful to report the numerous suspicious transactions for three years to AUSTRAC. In the process, they breached the law, which helps in tracking down money laundering activities. As a result, CBA suffered a significant financial loss. The organizational failures also led to the stepping down of its CEO, Ian Narev, who took responsibility for the scandals that have rocked the bank. Therefore, this paper is going to consider the behavioral issues that caused gross negligence on the part of CBA and led to the fraud and money laundering scandal (Schmulow & O’Hara, 2018, p. 30).
Behavioral factors that led to gross negligence by Commonwealth Bank
Let’s take a look at the following five annotated bibliographies that offers contemporary research that explain the behavioral issues within an organization that can cause gross negligence
Burke, W.W., 2017. Organization change: Theory and practice. Sage Publications.
The author explains that when individuals within an organization do not understand the severity or sensitivity of an issue they fail to be careful in their activities. The employees may not understand the long-term consequences an organization faces if it is not careful enough to follow laid down rules. They may show laxity in their approach and may not take any appropriate action in case of any alerts.
The strength of the article is how it serves to highlight the importance of the management team to stress on its staff the consequences of their actions and how the organization will suffer in case they neglect their duties. However, it does not mention the concrete measures an organization can take to address this problem.
In the case of Commonwealth Bank, system errors are blamed for the failures in reporting the significant number of suspicious transactions. Due to laxity by those in charge of the system, they were not able to take the matter as urgent and move with speed to correct the errors. If those individuals had been careful, the breaches would have been reported on time, and necessary action is taken (Levi, 2018, p. 280).
Allan, D.M., 2018. Insiders versus outsiders—alternative paths to criminogenic knowledge. Organised crime research in Australia 2018, p.35.
The journal highlights the need for the organization’s staff to understand the behavioral tendencies of criminals. When staff understands how the criminals behave and operate, the staff will be to identify, detect and track down any suspicious activity. This way, the staff can be able to take appropriate action and response. However, when they do not understand those intricacies, they will not be able to conduct due diligence as they will have limited information to identify any suspicious activity. For example, many banks and financial institutions fail to understand how money laundering works. They look at it as an individual transaction rather than a complex web of interconnected transactions.
The journal does well to encourage organizations to create awareness among staff about the behavioral tendencies of fraudulent individuals and how that knowledge can be useful to fight illegal activities. However, it did not highlight how criminals continue to evolve and invent newer and more potent methods to engage in their criminal activities.
If Commonwealth Bank’s employees had understood the behavioral tendencies of money laundering syndicates, they would have been cautious in following the numerous transactions. It would have possible for them to identify and link the multiple transactions that were done in a day in different locations as part of a more extensive network of individuals, rather than view them as an individual or isolated transactions (Bajada, 2017, p. 139).
Heracleous, L. and Werres, K., 2016. On the road to disaster: Strategic misalignments and corporate failure. Long Range Planning, 49(4), pp.491-506.
The article explains that when there is poor communication between the heads of departments in an organization, there is a slow relay of information. When suspicious activity is detected within the system, the concerned department is unable to quickly remedy the problem because of inadequate information regarding the issue. Because there is no follow up to check on any progress, the issue remains unresolved and may escalate to dangerous levels.
.The strength of the article is it emphasizes the importance of different departments within an organization to be in constant communication. This helps in dealing with a problem involving both of them and ensures follow-ups can easily be made to track progress. However, the article does not state the challenges a large organization such as CBA with many employees faces. Coordinating the lines of communication between various departments is difficult due to the significant number of personnel involved in slowing down communication channels.
In the case of CBA, investigations by AUSTRAC indicated that CBA’s anti-money laundering team had raised a red flag regarding certain transactions and forwarded to the bank’s security team to take appropriate action. However, instead of a quicker response, no measures were undertaken which paved the way for the continued structured deposits by the money launderers for a considerable period. The bank neglected its duty of following up on the transactions (Beck & Paton, 2018, p.351).
Bolman, L.G., and Deal, T.E., 2017. Reframing organizations: Artistry, choice, and leadership. John Wiley & Sons.
The book argues that organizations with many hierarchical structures outperform organizations with fewer hierarchical structures. This is because the latter leads to a complex set of structures within an organization. There are many levels of management making coordination between different functions or branches a significant problem. Its response to problems is hampered when many structures are involved.
The strength of the article is that it thoroughly draws from real-life comparisons of organizations with leaner and broader managerial structures. It explains how large organizations can be able to respond quickly to any failure in their processes when there is less bureaucracy. One weakness of the article is it does not offer some of the drawbacks of a leaner managerial structure.
Gross negligence was possible by management because Commonwealth Bank is a vast bank with many managerial structures. Every day millions of customers’ conduct transactions within its systems. The bank has automated transaction monitoring systems necessary in detecting money laundering activities. System and software errors are alleged to have caused the late disclosure of the numerous breaches. The bureaucracy poses a logistical challenge for a large organization to deal with analyzing its processes and systems and detect any fault (Schwarcz,Jones & Yan, 2018).
Comer, M.J., 2017. Corporate fraud. Routledge.
The journal explains how weak internal control systems within an organization causes negligence. When the management does not conduct risk assessments or check on whether all the departments are following compliance procedures it becomes easy for the staff to neglect certain aspects Failure to monitor or update procedures continually may lead to loopholes within the systems and fraudulent clients may exploit the organization’s carelessness.
The strength of the article is that it offers the immense benefits organizations experience when they conduct due diligence in their activities, particularly about their clients. It gives specific ways organizations can ensure they comply with the laws. A drawback of the article is that it does not state the logistical challenges of cost and time as a result of due diligence processes within the organization.
Commonwealth Bank may have failed to conduct due diligence on their customers and their accounts. Therefore, their bank transactions went unnoticed for a considerable period. Also, the compliance weaknesses in the organization meant that the money launderers could easily have exploited the systems and smoothly conduct their activities. The negligence the bank exhibited in not checking the performance of their systems led to the significant financial loss they suffered (Cranston, 2016).
In conclusion, we have seen how gross negligence leads to significant organizational failures. The paper highlights specific behavioral attributes within an organization that is from the managers and employees that causes gross negligence, and as a result, they suffer significant failures. The contemporary research from the five journals has highlighted how factors such as poor communication, complex managerial structures, weak internal control systems, inadequate staff competency, and attitudes lead to gross negligence in the performance of duties within the organization. It is, therefore, essential that every organization conduct due diligence in its operations to avoid suffering financial losses.
References
Allan, D.M., 2018. Insiders versus outsiders—alternative paths to criminogenic knowledge. Organised crime research in Australia 2018, p.35.
Bajada, C., 2017. Money laundering activities in Australia—an examination of the push and pull factors driving money flows. In The Changing Face of Corruption in the Asia Pacific (pp. 127-147).
Beck, J. and Paton, G., 2018. Corporate law: The Royal Commission: Corporate culture spotlight: Where is all this heading?. Governance Directions, 70(6), p.351.
Bolman, L.G. and Deal, T.E., 2017. Reframing organizations: Artistry, choice, and leadership. John Wiley & Sons.
Burke, W.W., 2017. Organization change: Theory and practice. Sage Publications.
Comer, M.J., 2017. Corporate fraud. Routledge.
Cranston, R., 2018. Principles of banking law. Oxford University Press.
Heracleous, L. and Werres, K., 2016. On the road to disaster: Strategic misalignments and corporate failure. Long Range Planning, 49(4), pp.491-506.
Levi, M., 2018. Punishing Banks, Their Clients and Their Clients’ Clients. In The Palgrave Handbook of Criminal and Terrorism Financing Law (pp. 273-291). Palgrave Macmillan, Cham.
McIlroy, J., 2018. Bank scandals fuel calls for completely new system: Why we should nationalise the big four under democratic control. Green Left Weekly, (1178), p.8.
Schmulow, A.D. and O’Hara, J., 2018. Protection of Financial Consumers in Australia. In An International Comparison of Financial Consumer Protection (pp. 13-49). Springer, Singapore.
Schwarcz, S.L., Jones, A. and Yan, J., 2018. Responsibility of Directors of Financial Institutions.
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