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How to Prevent Misconduct Through Proper Due Diligence



The Interim Report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry was tabled in Parliament on 28 September 2018. Often called the “Banking Royal Commission”, the work of Commissioner Hayne has so far shown there is misconduct by many financial services entities through their employees and representatives.

Round 1 of the public hearings took place in March 2018, and we have seen many individuals banned temporarily or permanently from providing financial services. As the Banking Royal Commission's public hearings continue into the last round (round 7 will take place 19-23 November 2018), below are some lessons we have learnt.

The first lesson that stands out is the real need to conduct proper due diligence on individuals' backgrounds who work for financial services providers. This has received much coverage by the media, such as The Guardian's report on AMP's admission that there was a failure of due diligence when hiring an adviser and its assurance that this would no longer occur.


A rogue Individual Can Ruin a Business' Reputation in Mere Minutes

The need to conduct proper due diligence is not just for the financial services industry, as wrong hires can cost businesses time, money, and their reputation. An article by Forbes in October 2018 reminded us of a famous quote by Warren Buffett: 

It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently.

And Forbes' tip? “Your reputation matters. Think before you act.” Indeed, businesses should think and act carefully before proceeding with any recruitment. In October, the ABC reported that in the last seven years, over 800 individuals have been banned from providing financial services or credit, and around 400 individuals have been banned from being company directors. Many businesses are likely to avoid hiring one of these individuals, especially for more senior roles.


What are the legal obligations?

Australian legislation imposes obligations on employers in relation to fraud committed by staff. For example, under the Anti-Money Laundering and Counter Terrorism Financing Act, a reporting entity must have procedures to determine if prospective or existing staff are suitable to be employed in a particular position in the business. 'Reporting entity' includes providers of financial services, those engaged in certain bullion-related activities, and those engaged in certain gambling service activities. AUSTRAC (being Australia's financial intelligence agency with regulatory responsibility for anti-money laundering and counter-terrorism financing) provides guidance on the why and how of setting up a due diligence program, including the use of screening to minimise any exposure to risk.

Another example is the obligation on credit and financial services licensees to conduct appropriate background checks before appointing new representatives. To meet the regulator's expectations in this regard, ASIC's guidance in Regulatory Guide 104 – Licensing: Meeting the General Obligationsis that licensees should consider including, among other things, a search of ASIC's Register of Banned and Disqualified Persons as part of their due diligence process.


SAI Global's Financial Regulatory Check – Your Due Diligence Tool to Help Manage Risk

Any business operator can reap the benefits of having completed due diligence properly without running tedious individual searches and then reviewing them manually. SAI Global's Financial Regulatory Check can be used to confirm whether a person has been involved in any activities that have lead them to become banned or disqualified, and therefore render them unsuitable for taking up a position in your business. It can also be used to re-screen existing employees where an employee is transferred or promoted to a role that has a higher propensity for financial risk, such as money laundering or terrorist-financing risk.


There are other things you can do to safeguard reputation and reduce financial risk

You may also require referee reports and conduct police checks. We covered this in a previous webinar, “Know Who You're Doing Business With – Are They 'Fit and 'Proper'? Your Practical Guide For Conducting Vendor Due Diligence”. Further, you can utilise Verification of Qualification services provided by educational institutions (to check the qualifications claimed by a person) and information on public registers to validate any details provided. Revisit our blog post for practical tips.

Whilst thinking through your due diligence processes, you may find it helpful to look at Australian Standard AS 4811-2006 Employment Screening, available from the SAI Global Store


The road ahead – banning and disqualification in the Government spotlight

Let us take a look at the road ahead. It would be fair to conclude that banning and disqualification of professionals is very much a focus of regulators.

  • The ACCC has stated that it considers the imposition of a disqualification order to be an important remedy, as it restricts a person from managing a company. Further, it sends a strong message to other potential offenders that there are consequences for misconduct.
  • In April 2018, the Government provided a response to the ASIC Enforcement Review Taskforce Report. It agreed with the Taskforce's recommendation that the grounds for exercising its power to ban individuals from performing roles in financial services and credit businesses should be expanded. It also confirmed the development of legislative amendments to implement this recommendation.
  • In May 2018, in its response to the Senate Economics Reference Committee inquiry into white collar crime, the Government noted that the Committee recommends ASIC to consider ways in which the accessibility and usability of the banned and disqualified register might be enhanced to create greater transparency regarding banning and disqualification orders.

It seems clear that the regulators agree on the value of banning and disqualification orders, and will continue to implement reforms that would enhance their effectiveness in combating individuals' misconduct. It is prudent for businesses to leverage information available through the likes of the Banned & Disqualified Register for peace of mind when wanting to fill a role with a “fit and proper” individual.