The Collapse of the State Bank of South Australia

The absence of sufficient internal control over the process amounted to a failure to meet the standards required for prudent management.

The State Bank of South Australia was formed on 1 July 1984 by the amalgamation of two banks owned by the State Government of South Australia - the Savings Bank of South Australia, and the former State Bank of South Australia.

The Bank could be best described as a thrift institution whose business was largely limited to retail banking activities and some smaller commercial lending, within South Australia.

It collapsed in 1992 causing one of Australia’s largest banking crisis.

At 1992 amounts the collapse cost the South Australian taxpayer $A970 million (later revised to A$3.1 billion in nominal terms).

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Upon its collapse the South Australian Government appointed a Royal Commissioner to investigate the Bank’s failings.

The Royal Commissioner was critical of many control weaknesses and in particular with respect to the Bank’s management of its credit risk. The management of credit risk denotes the processes of initiating, approving, controlling, and recovering, loans provided by the Bank to its customers.

The Royal Commission noted:

• Board papers which were required to be read by the Directors prior to Board meetings were deliberately voluminous. It was not unusual for the Board to receive documents which would stack in a pile to approximately four inches in height. It was the experience of most Directors that those papers took between eight and 12 hours to read carefully. The Directors expressed the view on several occasions that they felt they were "swamped with data". The papers were not only voluminous but often technical in nature.
  
  The Royal Commissioner noted: “I am satisfied that the former non-executive directors' lack of experience in relation to lending impeded them in the discharge of their responsibility to exercise the requisite independent judgment. This lack of experience was compounded by the manner in which information was presented to the Board. As often as not, lending submissions which reached the Board did not facilitate useful analysis.”
  


• The integrity of the decision-making process within the Board in relation to lending applications was adversely affected by usage of the "round robin" approval process.
  
  In the course of the Investigation, it became evident that on a number of occasions decisions had been made by the Directors via an informal method which was referred to within the Bank as a "round robin" consultation of Board members. A round robin was a vote on a lending or acquisition proposal in which a number of directors were circularised with a written proposal and requested by Bank officers individually to assess the merits of the proposal, to form a view on the proposal without attending a Board meeting, and to relay that view by telephone to a nominated Bank officer. The stated purpose of the process of round robin consultations was to provide a mechanism to enable the Board to make decisions quickly on urgent proposals.
  
  The round robin process was flawed.
  
  The Board failed adequately and properly to direct, supervise and control the affairs of the Bank. Further, the absence of either a sound legal basis for, or sufficient internal control over, the process amounted to a failure to meet the standards required for the prudent management of the Bank's affairs. The Board expressed its discomfort with use of the method of round robin consultation. Directors were aware that it did not conform, and it was not intended by them to conform, with sub-section 12(6) of the State Bank Act. Yet the Board did not direct that the practice be terminated.
  


• The composition of the Board Sub-Committee was fluctuating and unpredictable. Its meetings were short. It served no useful purpose. Its meetings were convened on short notice. Generally, members would have had an inadequate time in which to consider what were often complex lending submissions. Yet the business was transacted nevertheless.
  


• The charter of the Lending Credit Committee was not satisfactory. First, it did not precisely define the monitoring role to be undertaken by the Committee in relation to the Bank's loan transactions. Secondly, it did not clearly demarcate where, as between the Board, the Chief Executive Officer, and the Committee, responsibility for supervision and surveillance of the Bank's lending policies would lie.
  


• What was lacking from the Bank's credit approval structure, at Lending Credit Committee level and below, was a procedure under which lending decisions would be rigorously and objectively analysed by a person not having a commitment to asset growth for its own sake.
  
  There was no institution or procedure within the Bank which permitted or required lending decisions to be scrutinised by reference solely to prudential considerations. All officers of the Bank who participated in lending decisions at Lending Credit Committee level and below were motivated either wholly or partly by the corporate desire for growth in assets.
  


• Prior to establishment in late 1989 or early 1990 of the Credit Quality Section, there was no review of credit decisions by a source independent of the business unit which sponsored the loan application. Accordingly, no strictly independent review was formally required to be carried out of the credit judgments being made by managers.
  


• Given the size and complexity of the loans often handled by the Corporate Banking division, the one-page check list of settlement procedures was not sufficient to ensure that errors or omissions would not occur in this critical process.
  


• Prior to March 1988, Managers were not directed to monitor the performance of their customers. Instead, they performed an annual review of each customer, and otherwise examined only customers who exceeded approved credit limits. This approach did not enable timely identification of weakening credits in order to forestall potentially adverse consequences for the Bank.
  


• Whilst the Credit Policy Manual of September 1988 directed Managers to monitor the performance of their customers there was inadequate direction as to how this should be done. The lack of definition of responsibilities, and the lack of guidance as to methods of monitoring customer performance, had the consequence that the actual level of active monitoring of customers varied from manager to manager and was generally conducted haphazardly.
  


• Given that the Manager responsible for monitoring a particular loan was often the same Manager who had initially recommended the loan for approval - there was no separation of these responsibilities - there was often an unwillingness to recognise deteriorating situations and to take remedial action.
  


• Relevant information was sometimes not reported.
  
  In many cases, events associated with the on-going management of exposures were not reported to appropriate levels of management on a timely basis. Senior management were, therefore, unaware of certain potential problem loans until after they had become serious problems. The decisions in these circumstances were thus reactive rather than pro-active, in determining the course to be taken in managing these loans.

Siemens' Systemic Corruption

Corruption at Siemens was systemic in recent years. There was a cultural acceptance that bribery was the way to do business.

In the spring of 2003, auditors for a bank owned by Liechtenstein's royal family spotted an unusual flurry of money transfers involving a small offshore firm called Martha Overseas.

They discovered that Martha Overseas was controlled by Prodromos Mavridis, a top executive in Greece with Siemens, the German engineering giant.

Millions of Euros were pouring into the account from another offshore firm controlled by a different Siemens executive based at the company's Munich headquarters.

The bank auditors in the tiny Alpine nation, on the lookout for possible terrorist-financing transactions, had instead helped trigger what has turned into the largest known corporate bribery case.

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In October 2007, German prosecutors fined Siemens 201 million Euros (US$334.72 million) after tracing 12 million Euros in bribes to Nigeria, Russia and Libya. In November 2007, Siemens said it had identified 1.3 billion Euros in suspicious transactions worldwide between 2000 and 2006.

The scandal became public when German police raided Siemens offices in November 2006. Mr Mavridis, who was head of Siemens's telecom-equipment sales in Greece, left the company in April 2006.

A former Siemens executive, Michael Kutschenreuter, has told German prosecutors he heard from the head of Siemens's Greek unit that the company bribed public-sector officials to win a contract for the 2004 Olympics in Athens and paid off political parties ahead of parliamentary elections the same year.

In the spring of 2003 compliance officials at LGT zeroed in on a flurry of transactions between Martha Overseas, a Panama-based company controlled by Mr Mavridis, and Eagle Invest & Finance SA, a company based in the British Virgin Islands and controlled by a Siemens executive in Germany, Reinhard Siekaczek.

They noticed that 1 million Euros was paid into a Liechtenstein account before being withdrawn the same day and that half a dozen transactions involving 5 million Euros ricocheted through related accounts over a three-week period.

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Auditors at LGT grew suspicious because the payments were characterised as commissions paid by Siemens to the two executives.

The auditors wondered why Siemens would pay commissions to senior salaried employees and why the funds would be directed through offshore accounts with no ostensible ties to Siemens.

In November 2004, shortly after LGT filed a suspicious-transactions report to local authorities, Liechtenstein blocked 7.6 million Euros in funds that appeared to originate with Siemens.

The authorities alerted their Swiss and German counterparts, as well as Siemens. The chief compliance officer at Siemens reported the Liechtenstein case to the company's audit committee in January 2005.

In March 2005, Swiss prosecutors opened their own investigation after Germany's Dresdner Bank submitted a money-laundering report highlighting a longer string of suspicious payments that flowed through Switzerland and were tied to Siemens's Mr Mavridis. In August, Switzerland froze about 25.5 million euros that appeared to have been funneled into Mr Mavridis's accounts from Siemens.

In December 2005, Dresdner told Siemens about dozens of transfers to Mr Mavridis between 2001 and August 2005 totaling 37 million euros. Money flowed into his accounts from banks and small firms in Switzerland, Italy, London, Hong Kong and Dubai, among other places. The money also moved out of the accounts to offshore firms with names like Ursula Marketing and Prince Pacific.

The next month, Albrecht Schäfer, then the chief compliance officer at Siemens, forwarded the Dresdner report to Heinz-Joachim Neubürger, then the company's chief financial officer, according to an internal Siemens document. The company's audit committee was informed of the suspicious transactions a few days later.

Prosecutors in Bern, Switzerland, raided the offices of Intercom Telecommunications Systems, a Swiss subsidiary of Siemens, in March 2006. They uncovered further details of dubious invoices tied to Mr Mavridis, and he was questioned in March and June.

Siemens began liquidating Intercom in late May. That heightened Swiss prosecutors' suspicions.

In April 2006, Mr Mavridis left Siemens after the company agreed to pay him 300,000 euros in severance. Mr Siekaczek, the former Siemens manager in Germany who controlled accounts that had funneled money to Mr Mavridis, was arrested November 15, 2006.

Mr Siekaczek told prosecutors that he knew of bribery schemes earlier this decade in more than a dozen countries stretching from Brazil to Egypt. He said the Greek unit enjoyed wide latitude in nearby countries such as Cyprus, Bulgaria and parts of the former Yugoslavia. Mr Mavridis handled bribe payments in some of those countries, according to Mr Siekaczek.

Mr Siekaczek, a longtime executive in the telecom-equipment unit, was indicted in Germany in September on embezzlement charges. Mr Kutschenreuter, the former chief financial officer of Siemens's telecom-equipment unit, was also detained in late 2006 but later released.

Liechtenstein prosecutors transferred their money-laundering probe involving Siemens's telecom unit to counterparts in Germany and Switzerland earlier this year, but they continue to chase a money-laundering case involving a Siemens power unit. German prosecutors say they won't pursue further penalties against Siemens over the now-dismantled telecom unit but are continuing investigations of individuals and may look into other business units.

The Wall Street Journal noted in early March:

Siemens AG says it is making headway in identifying executives who were responsible for bribes-for-business schemes thanks to leads generated by an employee amnesty program.

The program, which was offered to all employees except 300 of Siemens's top executives and expired at the end of February, prompted about 110 employees to offer information about alleged wrongdoing.

Under an amnesty program introduced by Siemens this past November, lower-level managers and workers were encouraged to share evidence of wrongdoing without fear of reprisal from the company.

That evidence could lead investigators to decision-makers higher up the corporate ladder. "It has helped us figure out lines of responsibility.

Who said what to whom and when. It's certainly given us a clearer picture," said Mr. Solmssen – the newly appointed General Counsel of Siemens, adding that more than 40 individuals volunteered information in February alone.

Mr. Solmssen said many German employees initially were reluctant to act as informants because that evoked memories of the methods used by the Nazi and East German secret police in previous decades.

Gradually, Siemens workers recognized that "allowing crimes to persist is a form of aiding and abetting," he added.

A More Perfect Union

In the humble opinion of the blogger, this is one of the great modern day political speeches.

Barack Obama addressing the issue of race in the 2008 General Election at a speech at the National Constitutional Center.

The Ignored Whistle

The whistleblower e-mails specifically put the CEO on notice of significant fraudulent conduct.

There is no indication he reported these allegations or took any remedial action. From that point forward, he was in dereliction of his fiduciary duties to investigate and to disclose.


Dyadic International, Inc. is a Florida based biotechnology company that uses its patented and proprietary technologies to conduct research and development activities for the discovery, development, and manufacture of products and enabling solutions to the bioenergy, industrial enzyme and pharmaceutical industries.

A financial scandal at Dyadic offers a telling lesson about how whistleblower memos can come back to haunt the executives who ignore them.

Dyadic's internal dirty laundry first came to light at the company last April, when then-CFO Wayne Moor went to the company's Asian subsidiary to pick up the pieces after the unexpected death of an executive.

While there, he learned of accusations about tax fraud and kickbacks that had been made against other executives — allegations that a whistleblower had first presented in late 2003 and 2004 to founder and CEO Mark Emalfarb.

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In April 2007, Robert Smeaton, the managing director of the Company's wholly-owned Asian subsidiary, Puridet (Asia) Limited ("Puridet"), unexpectedly died of a heart attack.

Wayne Moor, then the Chief Financial Officer of the Company, flew to Hong Kong that same week to assist in finding a replacement managing director and to attend to related matters.

Shortly after the death of Smeaton and Moor's arrival in Hong Kong, the Company received a series of "whistleblower" email communications directed to Mark Emalfarb, the then Chief Executive Officer and Chairman of the Board of Directors (the "Board") of the Company.

The emails alleged certain fraudulent and improper activities that had been and were being perpetrated by Smeaton and other senior management of Puridet against Dyadic.

These emails made allegations that Puridet's Dong Guan factory was riddled with corruption, such as value added tax ("VAT") fraud, kickbacks, product theft and skimming.

Puridet's then largest customer, an entity called "Pui Shing," was in fact a dummy company, used by Smeaton and others to accumulate product sales to numerous small cash-paying Chinese customers who sought to avoid the required reporting obligations associated with the payment of VAT under the laws of China.

Pui Shing represented approximately 25% of Puridet's reported net sales for 2006 (of approximately $6.1 million) and approximately 33% of the Company's net accounts receivable at December 31, 2006 (of approximately $1.7 million).

Pui Shing was reflected on Puridet's books as a single customer (with the sales to the numerous Chinese customers reflected only on Pui Shing's books).

In reality, Pui Shing was run out of Puridet.

Its blank letterhead and envelope formats, as well as correspondence and certain of its financial statements, were all found on Puridet's computers.

In fact, Puridet's financial statements showed that an entity called "South Dragon," which previously had been Puridet's largest customer, stopped "buying" from Puridet in July 2004, the same month sales to Pui Shing began.

Prior to Pui Shing, South Dragon was another dummy entity similarly used to cover up numerous small cash sales from Chinese customers seeking to avoid the required reporting associated with Chinese VAT taxes.

Since 1998 (when Puridet was acquired), the Dyadic CEO was aware of and condoned financial improprieties, such as off-book transactions, and was later involved in structuring one of the "dummy" customer entities (South Dragon), which was used by Puridet as the nominal purchaser and seller of the Company's products to Chinese customers in a scheme designed to avoid reporting obligations regarding the payment of VAT under the laws of China on such transactions.

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By the end of the month, the Dyadic CEO Emalfarb took a leave of absence after the company realized that he had not shared with others at the company the initial emails that had been sent to him four years ago, alleging impropriety.

Emalfarb was fired in September 2007.