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Report on 'Shadow Ledgers'
and the provision of bank statements to customers
Background to action by the Parliamentary Joint Statutory Committee on
Corporations and Securities (PJSC)
On 21 June 2000 Senator Grant Chapman, the
Chairman of the PJSC, placed before the PJSC allegations which he had received
about alleged practices of the Commonwealth Bank in relation to its commercial
dealings with a group of rural and regional customers.
As a consequence the PJSC unanimously decided to
hold a one-off hearing, on 16 August 2000, into the following allegations:
that the bank failed to inform rural customers
that their debts had been written-off;
that the bank used a 'shadow ledger' system to
improperly claim tax benefits;
that the bank wrote off loans as bad debts while
still receiving interest payments to service those debts; and
that the bank refused to issue account
statements to customers.
The PJSC decided to invite as witnesses
representatives of the customers, the Commonwealth Bank, the Australian
Taxation Office and the Australian Competition and Consumer Commission.
In undertaking this inquiry the Committee
considered the allegations against the Commonwealth Bank in light of what is
regarded as the accepted commercial practice under which it is not
usual or even prudent for a corporation to inform its customers of the
different types of internal accounting entry which reflect the status of their
The PJSC is cognisant that there may be a number
of these entries, which are necessary to comply with accounting standards and
reporting for tax purposes but where it would not be commercially advisable for
a corporation to inform a customer that its debt had been written-off. The
Committee understands that commercial organisations in general do not inform customers
of internal accounting procedures.
The PJSC received 17 submissions in relation to
its hearing, a list of which is set out in Appendix 1. A list of witnesses at
the hearing is set out in Appendix 2. A set of questions on notice asked by
Senator Murray of the Commonwealth Bank are set out in Appendix 3.
Allegations against the Commonwealth Bank
Evidence from the complainants
At its hearing the PJSC heard evidence from Mr
Bruce Ford, Ms Wendy Murray and Mr Bernard Madigan about their experiences as customers
of the Commonwealth Bank. These witnesses spoke for two hours, giving very
detailed accounts of their individual dealings with the Bank, which they
claimed substantiated their allegations. The witnesses also tabled bank
statements from other customers. The PJSC is most grateful to those witnesses
for their assistance.
Mr Bruce Ford raised issues of concern in
respect to the treatment of his company’s loans with the Commonwealth Bank. In
particular Mr Ford was concerned that he had not been provided with statements
despite requests and that when statements were provided they contained
inaccurate information. Mr Ford described the statements as ‘fabrications’.
Mr Ford stated in his submission that there is a
lack of transparency and honesty in the bank’s practice of withholding
statements and that “when these issues are raised with the Commonwealth Bank,
the bank deliberately covers up its practice and engages in dishonest conduct.”
In order to gain information, Mr Ford alleges
that the Bank told him that he would need to litigate. Mr Ford stated to the
Committee that it was “an extraordinary situation where we need to sue them for
Mr Bernie Madigan advised the Committee that he
was currently in litigation with the Commonwealth Bank over a number of
matters, including bank statements.
Mr Madigan alleged that the Bank had refused to
provide him with a closing statement of his account, which it continued to
debit even though it had informed him that the account was closed.
Mr Madigan stated that the Bank continued to
keep the account open for improper purposes.
Evidence of the Financial Services Consumer Policy Centre
The most comprehensive material in relation to
the allegations against the Commonwealth Bank was submitted by the Financial
Services Consumer Policy Centre, a non-profit consumer research organisation.
The FSCPC advised that it had been assisting persons who were having difficulty
obtaining account statements. The basic position of the FSCPC was that
statements formed the cornerstone of the relationship between bank and
customer; full statements should always be provided, regardless of whether a
customer has fallen behind in payments.
The FSCPC advised that their research showed
evidence of a potential systemic difficulty involving farmers who have not
received bank statements from, in most cases, the Commonwealth Bank, and in
some instances from the National Australia Bank and the ANZ.
The FSCPC indicated that a typical dispute
involved the bank sending bank statements less frequently or not at all. Bank
staff appear reluctant to provide statements and payout figures are difficult
to obtain and are often disputed. Where statements are provided they are often
in a changed format. In particular, the statement would show a zero balance,
although the bank claimed elsewhere that a large sum was due. As a result,
customers were unable to complete tax returns and some found it difficult to
budget and carry on business normally. Many experienced refinancing problems
and some faced insolvency. These difficulties were not related to legal
proceedings, with some customers receiving no statements for years, with no
court action commencing.
The FSCPC noted that the Commonwealth Bank did
not deny their use of 'shadow ledgers'. It is the view of the FSCPC that it
was formal bank policy not to provide statements once a shadow ledger is
opened, and that although the banks denied this, the bank has been inconsistent
in its defence.
The FSCPC then took issue with a number of
claims in relation to shadow ledgers which it attributed to the Commonwealth
The FSCPC disputed claims by the bank that
statements were only withheld after litigation had commenced, stating that
numerous complainants had reported not receiving statements despite no litigation
being in existence.
The FSCPC disputed claims by the bank that
statements were not issued because the Bank did not wish to inflame any dispute
and that in any event the Bank will always issue statements on request. The
FSCPC argued that the banks defence that providing statements could inflame a
dispute made no sense and gave evidence of instances where it was banking
policy not to provide statements once a shadow ledger was opened.
The FSCPC made eight recommendations in its
conclusions. These were that:
- A survey should be conducted to ascertain how
many customers have had problems receiving bank statements, and whether or not
the problem is limited to the CBA.
- A round table of legislators and regulators,
including ASIC, APRA and the ATO could consider whether legislation or
accounting procedures need to change, in order to prevent any need or incentive
for a bank not to issue statements.
- The Banking Code of Conduct should be amended to
require the provision of statements in all circumstances short of litigation,
and the provision of statements on request thereafter.
- Undertakings should be sought from the CBA that
its internal procedures, instruction manuals and staff training will be amended
to ensure that bank statements are issued regularly and on request.
- An independent arbitrator should be appointed to
consider relevant cases. The arbitrator should have the ability to obtain
statements for consumers, correct inaccurate entries and recommend compensation
- The terms of reference of the Australian Banking
Ombudsman Scheme, including its independence, needs to be examined to determine
why the scheme was unable to assist many of the complainants.
- A wider inquiry into rural finance should be
- Further inquiries about bank accounting
standards should be made.
The response of the Commonwealth Bank
At the PJSC hearing the Commonwealth Bank
circulated material and answered questions from members in relation to the
allegations made against it. The Bank advised that in relation to these matters
it continued to refute strongly any allegations of impropriety. The Bank stated
that the circumstances in question related only to the very small number of
customers who may have difficulty repaying their loans.
Mr Michael Ulmer, Group General Manager from the
Commonwealth Bank provided the following explanation of 'shadow ledgers'.
“Where the bank or, for that matter, any other
credit provider has formed the view that all or some of the debt owing will not
be repaid, it will, to ensure compliance with accounting requirements, make an
accounting entry to reflect provision for the possible loss or write off of
this amount as a bad debt. Clearly, just because a credit provider forms the
view that a debt is irrecoverable or bad does not extinguish the liability of
the borrower to repay the moneys owed under the loan agreement. This would
include interest that continues to accrue on the debt. In these instances, the
credit provider will need to keep a separate record of the legal debt owed
under the contract. It is this separate record that has been referred to as the
The response of the Bank to the specific
allegations is set out below:
- Allegation: The
Bank failed to inform some rural customers that debts had been written-off.
Response: The decision by a lender to write off all or part of a debt recorded
in its books is to enable compliance with generally accepted accounting
standards and regulatory requirements. A write-off does not reduce the amount
legally due and payable by the defaulting borrower.
- Allegation: The
Bank used a shadow ledger system to improperly claim tax benefits.
Response: The accounting system does not result in a taxation benefit, because
it merely records the debt legally due and payable. If a lender incurs a loss
on a loan, the taxation laws provide for an entitlement to a tax deduction. If
the defaulting borrower subsequently repays all or part of the loan, the lender
discloses the income in its accounts and pays tax in relation to it.
- Allegation: The
Bank wrote off bad debts while still receiving interest payments to service
Response: Even where a lender has written off a debt, the borrower is still
legally required to make the interest payments under the loan agreement. Tax is
payable on any interest so received.
The bank advised
that its independent auditors Ernst & Young had specifically reviewed the
shadow ledger accounts and confirmed that the activity on those accounts is in
accordance with accounting requirements and taxation requirements.
- Allegation: The
Bank refused to issue statements to customers.
Response: The bank stated that “we are unaware of any circumstance where the
customer has continued to service their loans in accordance with the loan
agreement where the Commonwealth Bank has refused to issue statements, but when
dealing with an impaired loan, the relationship between the bank and the
borrower may be vexatious. The borrower may dispute the amount owed and the
Commonwealth Bank may cease to issue statements as in the past there had been
little purpose in providing information that the customer may perceive as
incorrect and may further inflame the dispute that may be in place between the
customer and the bank.” The bank went on to say, “in dealing with business
customers, we are aware of a small number of instances where officers of the
Commonwealth Bank Group have refused to issue statements on request to
borrowers who are in default of their loan obligations.”
At the hearing the
Bank advised the PJSC that it had already announced that it would provide the
very small number of affected customers with details of their account
indebtedness on request. The Bank also advised that it was now prepared to go
further and to issue statements on those loan accounts in accordance with the borrower’s
regular statement cycle until there is either a Court judgment or an agreement
between the parties, normally signified by a release document. The statement
would set out fully the account indebtedness of the borrower, including the
principal outstanding, interest, fees and costs, together with any interest
rate changes. The Bank would introduce this new arrangement on 1 January 2001,
or sooner if possible. Until that date the Bank would honour its commitment to
issue statements on request.
Evidence of the Australian Taxation Office and the Australian Competition
and Consumer Commission
The ATO provided the PJSC with a written
submission and in addition gave both public and in camera evidence. The
ATO advised that it was legally precluded from commenting on interaction with a
specific taxpayer or from providing details about ATO practice in relation to
bad debts. However, the ATO did confirm evidence received from the Commonwealth
Bank about writing off amounts considered to be bad debts. The ATO advised that
Tax Rulings TR 93/27, TR 92/18 and TR 94/32 covered the taxation of bad debts
of banks. The established practice of the ATO for financial institutions is to
examine whether the debt is bad, in whole or part. This requires more than a
mere writing off in the accounts of a bank. The ATO must be satisfied that the
amount is in fact bad; this is a commercial judgment looking at the
circumstances of each case. For instance, if a debt was fully secured then the
ATO would not accept a writing off as a bad debt.
The ATO advised that before a debt becomes bad,
it may become doubtful or somehow impaired and that there is a banking practice
of creating non-accrual line accounts, on which interest no longer accrues. The
net effect in tax terms is that once the judgment is made and assuming that it
was made on a reasonable basis, the accounting treatment for tax purposes
changes from interest being included as assessable income as it accrues over
the period of the loan to one where the interest is brought to account only
when it is received. In other words it moves from an accrual basis of
accounting to a cash basis of accounting. The reason for this is the judgment
that there is something impairing the collection of the interest amount.
The ACCC made written submissions and gave
evidence to the Committee, both in public and in camera. The ACCC told
the PJSC that it was investigating complaints alleging possible contravention
of the Trade Practices Act, but that this was still a work in progress. The
ACCC stated that it was heartened by the great start of the Commonwealth Bank
in that it would provide customer statements, but that the ACCC hoped that
solutions would be industry-wide.
In answer to specific questions the ACCC
representative advised that the problem was a consumer problem, which meant
ways of trying to get a better outcome for consumers. The ACCC advised that it
would not be shaming anyone, because the ACCC only did that if it concluded
that there was a breach of the law or that something wrong had been done.
Supplementary submissions by the FSCPC and Mr Bruce Ford
Following the hearing the FSCPS made a
supplementary submission to the Committee.
The FSCPC advised that when it conducted its
initial survey it had received 20 responses, but after media attention
following the announcement of the parliamentary inquiry , an additional 28
relevant matters had been raised with the group. Mr Chris Connolly stated, “in
my opinion I believe that numerous farmers and small businesses have been
affected by the withholding of statements, and that more than one hundred would
bring their matters forward to an appropriate process established to resolve
The FSCPC believed that the Commonwealth Bank
had missed the point in its evidence to the PJSC, with the Bank claiming that
the only allegations against it were that it had failed to inform customers
about written off amounts and failed to issue statements to customers who were
still servicing their debts. The FSCPC advised that in fact consumers suffered
loss as a result of the policy not to issue statements when a shadow ledger was
opened and of the generally unsympathetic attitude of the Bank.
The FSCPC raised concerns about whether or not
the accounting treatment of some monies resulted in the correct amount of tax
being paid to the ATO. Mr Connolly stated, “I am still not sure from CBA’s
evidence before the inquiry what tax treatment Tratzea repayments received and
how Tratzea should account for its repayments in its own accounting. I doubt
very much whether the two returns would match up when the ATO receives tax
returns from Tratzea and CBA.”
In addition to its eight recommendations
contained in its previous submission to the Committee, the FSCPC made a further
- That the Committee not ignore the allegations of
illegal activity raised in the inquiry.
- That the Committee call for an update on
activities resulting from the inquiry.
- That the Committee acknowledge the efforts of
bank customers who have been investigating and fighting this issue for many
Mr Bruce Ford also raised a number of issues in
response to the bank’s submission to the inquiry. In particular he raised
concern about whether the bank had declared $134,000 in respect to his loans as
interest income given the bank’s acknowledgement that applying interest only
payments to portion A of the debt was an ‘oversight’. He also raised concern at
what he believed to be the numerous contradictions in the bank’s own statements
to the inquiry stating, “the bank’s inability to explain to the Committee their
own process and provide clear answers as to how large sums of money simply
disappear from peoples accounts without plausible justification is unacceptable
Additional submission by the Commonwealth Bank
In response to the supplementary submission made
by Chris Connolly the Commonwealth Bank made a further submission in which they
advised the PJSC that due to the short time they had been given to respond,
they addressed only the major issues that were relevant to the Committee’s
terms of reference.
In limiting its response in this way, the Bank
advised the PJSC that it does not accept the wide ranging assertions and
allegations made by Mr Connolly which:
- By his own admission, are based on a survey that is not representative
nor of a size from which valid conclusions can be drawn. The ‘survey’ findings
are based on responses by 20 borrowers.
Fails to recognise the legitimate need for lenders to maintain a
continuing record of a borrower’s legal debt obligation.
- Ignores the regulatory and other safeguards such as the Farm Debt
Mediation Act in NSW, the Banking Ombudsman and the Consumer Credit Code, which
operates to protect borrowers.
1.37 With respect to the specific terms of reference,
the Bank stated clearly in its evidence (CS 36) that “the Commonwealth Bank
Group has over 600,000 business customers and the number of customers at any
one time where we may be looking at writing off all or part of their debt would
today be of the order of 100”. Thus the CBA concludes Mr Connolly is wrong
in his claim that the Bank admitted that perhaps 100 borrowers had been
affected by the withholding of statements. The reference quoted relates to an
estimate of the number of borrowers in default at any one time where a write
off is under consideration – not where statements have been requested and
withheld. To the best of the Bank’s knowledge, only 3-4 customers have had
requests for statements denied following a breach of their contractual
agreement with the Bank.
The Bank also claims that Mr Connolly has failed to acknowledge that the
customers to which he refers have had large sums of debt written off by the
Bank, typically in situations where the Bank has made numerous attempts to
assist the customers with their respective businesses. Thus Mr Connolly gives
no acknowledgment to the instances where the Bank has assisted borrowers who
are in default of their obligations, to return to financial viability.
The Commonwealth Bank Group also state that its books and records are
maintained in accordance with accepted accounting standards and other
regulatory requirements and have been subject to independent audit. The Bank
therefore rejects any assertion that there has been any impropriety on the part
of the Commonwealth Bank Group in any of the matters referred to.
The Committee believes that as a principle, all bank customers must be
able to accurately determine their financial position by receiving regular bank
statements. The provision of bank statements is important, not just to
customers who are meeting their loan obligations, but also to customers who are
in default on their loan obligations.
Conclusions and Recommendations
The PJSC does not find that with regard to the
instances before it and with regard to the material provided to it, either
through written submissions or oral evidence, that a wrongful use of shadow
ledgers occurred or that the failure to provide bank statements could have
constituted unlawful behaviour.
The Committee notes that the Australian Tax
Office covers the accounting practice of operating shadow ledgers in its tax
ruling TR 94/32. This tax ruling allows that when banks classify a loan as non
accrural that any interest accruing thereafter will not be derived for income
tax purposes until it is received. The Committee concludes that it is unlikely
that a case could be made that the use of shadow ledgers by banks are not a
proper accounting function.
The Committee notes the bank’s advice that
independent auditors Ernst & Young had specifically reviewed the shadow
ledger accounts and confirmed that the activity on those accounts is in
accordance with accounting requirements and taxation requirements.
While the Committee is satisfied by the findings
of Ernst and Young, to ensure that any outstanding public concern is addressed
about the administrative errors admitted by the bank in relation to Tratzea’s
accounts, the Committee asks the CBA to confirm the taxation treatment of
monies in respect to Tratzea were correct.
The Committee concludes that the Commonwealth
Bank by not automatically issuing account statements to some customers who were
in default on their loan obligations exacerbated an already difficult situation
for the customers, making it difficult to for them to budget, re-finance loans
and submit taxation returns.
The Committee believes that the Commonwealth
Bank’s explanation that they did not provide bank statements to customers
because they did not wish to ‘inflame a dispute’ is poor banking practice.
Evidence presented to the Committee also demonstrated that the confusion
customers faced about the bank’s practices in respect to 'shadow ledgers' was
The PJSC therefore concludes that the management
practices of the Commonwealth Bank in relation to the non-provision of
statements albeit to a small number of customers who had fallen behind with
payments, were seriously flawed in terms of best practice customer relations.
The Committee acknowledges the efforts that
witnesses to the inquiry such as Mr Bruce Ford have made in order to have their
issues properly considered. The Committee notes that the need to hold an
inquiry into ‘shadow ledger accounts’ represents a failure of the Commonwealth
Bank to resolve some customer relation disputes internally.
The PJSC recognises that the commitment by the
Commonwealth Bank to provide full statements to customers in default is a step
forward. However, the Committee is
disappointed that this commitment did not eventuate until this Parliamentary
Inquiry was initiated.
While the Committee has investigated the
practice of the Commonwealth Bank in respect to the treatment of bad debts and
the creation of shadow ledger accounts it is evident that this practice is not
limited to the Commonwealth Bank. Indeed in its evidence to the Committee the
Commonwealth Bank stated that its practices are ‘industry standards’. If this
is indeed the case then it is appropriate that all banks commit to providing
statements to customers who are in default on their loans when requested by the
The PJSC believes that all financial
institutions which do not already do so should adopt the announced intention of
the Commonwealth Bank to provide full statements to all customers. Therefore
the PJSC recommends that the automatic issuing of statements of account in all
circumstances short of litigation, be considered for inclusion in the banking
code of practice.
The PJSC believes that the statement should set
out to the customer the total amount which the Bank believes that the customer
owes in respect of the account in accordance with the terms and conditions on
the account and should not reflect any write downs which the bank has made for
internal accounting or taxation purposes. The Committee will refer the matter
to the relevant parties undertaking the review of the banking code of practice.
The PJSC also notes that members of the
Committee believe that on the evidence presented it is not possible to
determine how many Commonwealth Bank customers have been affected by the bank’s
decision not to issue bank statements when loans are in default. The PJSC
recommends that mediation services be offered by the CBA to affected customers
Labor and Democrat members
believe that the Commonwealth Bank should appoint an independent mediator to resolve
any outstanding disputes. Labor and Democrat members also believe that the
appointment of the mediator should be advertised in the national press and the
Commonwealth Bank asked to report back on progress in resolving disputes.
recommends that all banks, if they do not do so already, clearly inform
customers about the procedures and processes which result in the case of
Senator Grant Chapman
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