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Standing Committee on Economics - 08/10/2012 - Reserve Bank of Australia annual report 2011

BATTELLINO, Mr Ric, Former Deputy Governor, Reserve Bank of Australia

CAMPBELL, Mr Frank, Assistant Governor (Corporate Services), Reserve Bank of Australia

STEVENS, Mr Glenn Robert, Governor, Reserve Bank of Australia

Committee met at 10 : 01

CHAIR ( Ms Owens ): I declare open this hearing of the House of Representatives Standing Committee on Economics and welcome representatives of the Reserve Bank. On 24 August, Mr Stevens appeared before the committee and responded to questions about the bank's knowledge of, and response to, allegations of corrupt activity at Note Printing Australia and Securency International. This hearing will provide further opportunity for the committee to question Mr Stevens, Mr Frank Campbell and retired deputy governor Mr Ric Battellino. I remind witnesses and members that there are ongoing criminal proceedings relating to the alleged activity at Note Printing Australia and Securency International. The committee is subject to the sub judice convention and therefore will not discuss or examine issues which could interfere with those legal proceedings. If necessary, during the hearing I will direct that lines of questioning be discontinued. If necessary, the committee can hold a short private meeting to deliberate on any matters arising. Although the committee does not require you to give evidence under oath, the hearings are legal proceedings of the parliament and warrant the same respect as proceedings of the House. The giving of false and misleading evidence is a serious matter and may be regarded as a contempt of parliament. Mr Stevens, would you like to make your opening statement before we proceed to questions?

Mr Stevens : Thank you for the opportunity to meet today with the committee, an occasion on which we can, I am sure, convey a good deal of information and answer some questions. In line with the commitment I made in August, we have provided a folder of documents which show the process that the board of Note Printing Australia and the Reserve Bank conducted in 2007 when concerns were raised inside NPA regarding that company's use of sales agents in some foreign jurisdictions. As you said, there are criminal prosecutions, and my understanding is that these matters have some time to run. It is very important that the bank does not say or do anything which would improperly impinge on any of those processes, particularly not in a public forum. There are accordingly documents which, my legal advice is, we should not table. Others are provided but have been redacted. A number of the individuals accused have expressed concerns regarding the possibility of publication of this material, and the bank has come to the view that we should not at this time publish it. But there is a list of documents which you have that are relevant. If, at some stage in the future the constraints were able to be lessened, then the committee would know what documents are relevant.

We have also provided a covering memorandum to which I am going to speak in a moment. That does several things. Firstly, it provides some background to two companies: Note Printing Australia, which prints bank notes, and Securency, which produces the polymer substrate on which the notes are printed. The history goes back to their respective establishments in the 1990s. For committee members, or members of the public who wish to have some general understanding of who the companies are and what they do, that may be helpful, though I am not proposing to speak to that material now. Secondly, the memorandum goes through, in detail, the sequence of events that began with the Reserve Bank board asking about the use of foreign sales agents by both the companies in April 2006. Thirdly, it gives an account of the way Securency, NPA and the Reserve Bank behaved after the allegations—initially only about Securency—were aired in the media in May 2009. The memorandum shows how the various documents we have been able to provide fit into that chronology. I would like to pick up now that chronology, and here I am drawing very closely on the memorandum that we provided.

The Reserve Bank board discussed the issue of the use of agents by the two companies at its meeting in April 2006. As a result of that discussion, the two companies were asked to provided the Reserve Bank board with their policies on agents. Mr Thompson, who was at that time, the chairman of the boards of both NPA and Securency, responded to that request in July 2006, and provided the policies and associated documents for both the companies. This correspondence noted that the companies had recently reviewed and strengthened those policies. Each company had its own policies and procedures but both articulated three key common themes. Firstly, the respective boards have reaffirmed the companies' policies against direct or indirect involvement in corrupt, unethical, or otherwise questionable practices and have asked management to ensure that all agents formally acknowledge and commit to that policy. The agency arrangements provided for termination when this commitment was breached. Secondly, a process was established to inform the respective boards about the appointment of agents, the applicable commission rates and payments made. Thirdly, a process of annual review of the polices was established.

The NPA board sought updates on implementation of its revised policies at the February 2007 NPA board meeting. On hearing management's responses, the NPA board requested that faster progress be made and that an information paper on the state of play with agents be prepared for the May 2007 NPA board meeting. The Reserve Bank, through Mr Campbell—who was a director of NPA, as well, at that time—also sought and received updates on the implementation of the policies from NPA's manager of corporate services in November 2006 and March 2007. No probity concerns were raised in response to those requests for updates.

During the course of implementing the revised agent policies at NPA, around mid April 2007, the NPA manager raised concerns with Mr Campbell about comments that had apparently been made by two of NPA's agents and about the conduct of certain NPA management. Mr Campbell encouraged the NPA manager to seek answers to the queries he had raised and to include his concerns in the May 2007 board paper on agents which had been requested by the NPA board. That paper, authored by the NPA manager as company secretary and the CEO, was presented at the 16 May 2007 NPA board meeting. It noted that two of three agents had yet to sign on to the new arrangements. The paper raised issues as to whether the management of NPA's agents was occurring in accordance with the strengthened policies put in place in 2006. It expressed the concerns about the two agents partly based on things that they had apparently said to the NPA manager. In one case, the agent had replied to questions in writing denying any improper conduct. In the other case, a verbal explanation had apparently been offered but there was no written response.

Some other irregularities were noted. The paper's recommendation was simply that 'directors note this paper'. The NPA board, in fact, expressed the concern as to the management of NPA's agency arrangements. The NPA board at that May 2007 meeting decided, among other things, to terminate the contracts of two agents and ask that a review of all agent files be undertaken by management. After the NPA board meeting, Mr Campbell advised me and the deputy governor of the NPA board's decision. After discussion, we formed the view that NPA's response could be strengthened if, rather than simply a review by NPA management being conducted, the Reserve Bank's audit department were asked to carry out an audit of NPA's use of agents. This was conveyed to Mr Thompson who agreed and made a request to the head of the audit department. The Reserve Bank board was advised that this audit was being carried out at its 5 June 2007 meeting. The draft audit report of NPA agents was received by the chairman, Mr Thompson, on 5 June. It was also received by Mr Battellino in his capacity as Chair of the Reserve Bank Audit Committee, which served as the Audit Committee of NPA. The draft report contained findings of poor business practice and controls and noted that the behaviours of some agents should have raised suspicions by NPA staff and management. Based on those findings, the draft report made a number of recommendations. Two key ones were that, firstly, the use of agents should be limited to the extent possible; and, secondly, NPA staff should be counselled on the risks associated with the use of agents in some countries. The draft report also contained a number of recommendations for tightening controls in relation to agents.

Mr Battellino, as Chair of the Audit Committee of NPA—that is, the Reserve Bank Audit Committee—discussed the draft audit report's recommendations with the head of the audit department and suggested that the recommendations should be strengthened to say that NPA should cease all use of agents and that the NPA board should conduct an urgent investigation on the role of management and staff in dealing with agents to ensure that there had been compliance with Australian law. These suggestions, and some other proposed drafting changes, were accepted.

Mr Battellino also asked that the NPA manager who had played a key role in preparing the May 2007 NPA board paper, who had assisted the audit and who had voiced concerns to Mr Campbell in April, be requested to come to the Reserve Bank's head office in Sydney and put any concerns that he had directly to the bank, and to do so in writing. The NPA manager agreed to do so but only on the condition that his visit be kept strictly confidential and having been assured that his statement would be read only by a very small number of people—the deputy governor and, perhaps, the governor; in the event the statement was not provided to the governor.

The meeting between the NPA manager and MR Battellino took place on 5 June, the same day as the draft audit report became available. At the request of the deputy governor on 8 June, the NPA manager supplied a written statement through his lawyer to the Reserve Bank's legal counsel on strict terms of confidentiality required by him. The deputy governor read it. The same document—with some very minor changes—was, at the bank's request, subsequently provided by the NPA manager's lawyer directly to the Freehills team who were engaged by the NPA board's sub-committee—about which I will speak in a moment—also on terms of strict confidentiality and on the basis that it be returned to the NPA manager's lawyer after having been read, which it was.

On 7 June 2007, Reserve Bank senior management discussed the draft audit report with Mr Thompson. It was agreed that the draft audit report contained serious findings and that the NPA board needed to meet and to put in place a detailed response to the matters raised. It was agreed that, in line with the audit recommendations, the NPA board should establish a subcommittee to investigate NPA management and staff in their dealings with agents. It was also agreed that a similar audit of the use of agents by Securency should be requested, pending which payments to Securency's agents would be suspended. The final NPA audit report, which contained the strengthened recommendations, was provided to the NPA board on 8 June. On that day, Mr Battellino sent to the Reserve Bank audit committee a copy of the audit report as well as a copy of the file note of the meeting with the NPA chairman the previous day.

In response to the audit, the NPA board met on 12 June. It decided to cease the use of agents. It also decided to establish an NPA board subcommittee to investigate the conduct of NPA management in the use of agents so as to implement the recommendations in the audit report. The subcommittee was to be chaired by Mr George Bennett, former KPMG managing partner and independent member of the Reserve Bank's audit committee. Other members were Mr Warburton—a non-executive director of NPA and a former Reserve Bank board member—and Mr Campbell. Since NPA had no legal counsel, the Reserve Bank's general counsel was appointed legal counsel for the NPA board for the purposes of the investigation. The Reserve Bank board's secretary, who was also the secretary of the Reserve Bank audit committee, served as secretary to the subcommittee.

A special meeting of the Reserve Bank's audit committee was convened on the 13 June to consider the audit report. The audit committee endorsed the decision taken by the NPA board. It also took the view that the terms of reference of the subcommittee should be widened to include an assessment of compliance with appropriate business standards and conduct, as well as with Australian law, and that independent legal advice should be sought. Minutes of that audit committee meeting were, as normal, provided to the Reserve Bank board at its next meeting, which was in early July. The Reserve Bank board was informed at that July meeting of the results of the audit and the steps that were being taken in response. It asked that the investigation be carried out quickly and that, if necessary, serious disciplinary action be taken. The Reserve Bank board was also informed that a similar audit at Securency had been commissioned.

The NPA board's subcommittee decided to engage Freehills to carry out an independent investigation into the question of whether Australian law had been breached and into NPA's business standards. The subcommittee had an initial meeting with the Freehills team on 18 June and subsequent meetings on 16 July, 25 July and 10 August. The Freehills engagement letter is shown in the material that we provided to you. The Freehills team had access to documents including the audit report, the NPA manager memo and a substantial volume of emails held at NPA, including materials that the auditors had not reviewed. It also interviewed several NPA management staff, including the manager who had provided the memo, the Chief Executive and others. Mr Bennett provided an update on the progress of the NPA board subcommittee's work to the Reserve Bank audit committee at its 30 July meeting.

The Freehills team provided their final report to the NPA board's subcommittee on the 10 August. The subcommittee considered the report. On 13 August, the subcommittee chair, Mr Bennett, provided the final report to the chairman of the NPA board, Mr Thompson, together with a cover note. Mr Bennett noted that the enquiry had not found evidence of a breach of Australian law but had found deficiencies of varying seriousness in relation to business practices. By this time, of course, the NPA board had already taken the decision to cease using agents. A copy of the subcommittee's report, including the Freehills report, was also reviewed by the Deputy Governor. At its 7 August meeting, the Reserve Bank board was briefed about the draft finding of the Freehills report. It was also informed about the results of the audit at Securency, which I discuss in more detail below.

Mr Bennett attended the NPA board meeting on 16 August to brief the NPA board on the subcommittee's findings. On 29 August the NPA board met again to discuss the report of the subcommittee in more detail. It concluded that, after an extensive investigation with assistance from external lawyers, the subcommittee had identified instances of weaknesses in controls and documentation, and in contract management, but it had found no evidence of illegality or impropriety by NPA managers and staff. The NPA board resolved that proper process meant that the NPA employees who had been interviewed as part of the subcommittee's investigation should be given the opportunity to read relevant parts of the Freehills report and to provide comments to the NPA board if they wished. Subsequently, extracts of the Freehills report were shown to those NPA employees. The NPA board met again on 13 September to consider the comments received from the employees.

A follow-up review of NPA agent arrangements was conducted by the Reserve Bank audit department late in 2008. That report concluded that NPA had implemented all the recommendations of the May 2007 NPA audit report.

I turn now to the audit of Securency. Given the results of the NPA audit and given that Securency also used agents, it was considered necessary to have a similar audit at Securency. Although Securency had its own external auditors, the senior management of the Reserve Bank agreed with Mr Thompson that, in his capacity as chairman of Securency's board, he would ask the Reserve Bank audit department to conduct the audit due to their experience in the NPA audit. Mr Thompson subsequently emailed the head of audit asking for that to be carried out, with the scope of the audit to be similar to the one at NPA. The Securency board met on 3 and 4 July and they noted that this had occurred. That board also endorsed a decision that the Securency management had taken to terminate the Malaysian agent. The same audit team that had conducted the audit at NPA conducted the audit at Securency. The audit began on 18 June. At the same time, Securency also suspended its payments to agents pending the result of the audit.

The Securency audit report was issued on 1 August. The conclusion was that Securency had 'good and robust process' in relation to the use of agents and that Securency's practices were consistent with the company's policy. The audit made a number of recommendations. The audit team supported Securency's termination of the Malaysian agency agreement, which took effect from 15 July. The Securency board was informed at its 11 and 12 September meeting that the audit recommendations had been implemented. The findings provided no basis to insist on the termination of Securency's other agents. The suspension of payments to agents was therefore lifted. A copy of the Securency audit report was forwarded by Mr Battellino to the Reserve Bank audit committee, and the results of the audit were also noted at the August 2007 meeting of the Reserve Bank board. The following year, in December 2008, a further audit of agent activity at Securency was undertaken. It reached similar conclusions to the 2007 Securency audit.

I turn now to the question of post-termination payments to agents. The NPA board considered what payments were due to agents who had been terminated. It sought legal advice on the question of payments to one agent in particular. After quite a lengthy process of legal advice, which concluded that the agent would likely succeed in a legal action claiming entitlement to commission, NPA management proposed at the 26 September 2007 NPA board meeting that a commercial settlement be sought. On the basis of the legal advice received, the NPA board approved the recommendation and further discussions took place through the respective lawyers of NPA and the agent. A settlement was finally agreed between the agent and the CEO—by this time a different CEO—of NPA and advised to the NPA board in May of 2008. Securency also sought legal advice from its external advisors on its obligations to the agent that it had terminated. On the basis of that advice, the Securency board at its 11 and 12 September 2007 meeting decided that the agent should be paid for work done prior to termination in terms of the contract.

I turn now to the 2009 allegations about Securency. On or about 20 May 2009, the Age sent Securency a number of questions regarding Securency's use of agents, which Securency responded to on 22 May. On 21 May, the chairman of Securency—now Dr Rankin—contacted KPMG to discuss conducting a review of Securency's agent policies and procedures. The Age subsequently indicated on 22 May that it was going to run a story on the matter. On 22 May, Dr Rankin contacted the Australia Federal Police regarding the matter and proposed that an investigation be conducted. On 23 May, the Age published articles regarding Securency's use of agents. Subsequent stories noted that NPA had discontinued the use of its agents in 2007. The same day, 23 May, Dr Rankin formally requested that the AFP conduct an investigation in connection with the allegations made in the media. Dr Rankin consulted with the Reserve Bank prior to making that request.

At his first meeting with the AFP on 26 May, Dr Rankin referred to the audit conducted at NPA in 2007 and the Freehills report, and made them aware of the documents. The AFP indicated that it will request those documents if and when they were required, and that they had a certain process to follow. Those documents were subsequently requested around January of 2010 and provided on 1 February 2010. At the meeting on 26 May 2009, Dr Rankin also raised with the AFP the prospect of Securency obtaining an independent review of Securency's agent policies and procedures by KPMG. At the request of the AFP, Securency did not immediately retain KPMG, so as not to hinder the AFP's initial access to documents. In early June 2009, the Reserve Bank board was provided with an update on Securency's referral to the AFP for investigation. The Reserve Bank board was informed that the AFP's investigation was is an assessment stage, during which they would determine whether a further investigation was necessary.

The AFP informed Securency around the end of June 2009 that the AFP would proceed with a full scale investigation and that it did not object to Securency engaging KPMG. Securency offered full cooperation to the AFP, as did NPA when the AFP inquiry was subsequently widened to include possible wrongdoing at NPA. In July 2009, with the AFP's agreement, the board of Securency approached KPMG and asked them to conduct an independent investigation of Securency's policies and procedures regarding agents. The Reserve Bank board was subsequently informed at its July 2009 meeting that Securency had engaged KPMG to conduct an independent review of Securency's agent policies and procedures.

In October 2009, KPMG informed Dr Rankin that they had discovered documents indicating that a former employee of Securency had raised concerns over the use of overseas agents in early 2007. A progress report was provided by KPMG to the Securency board in November 2009, which confirmed that their forensic work had discovered material which indicated concerns about possible corrupt payments had been raised in Securency by a former employee with Securency senior management in early 2007. These concerns had never been made known to the Securency board or the audit department when it conducted either the 2007 or 2008 audits. At the time, the CEO and CFO of Securency were stood down and the use of agents suspended pending further inquiry. The preliminary findings reported by KPMG also indicated that there had been failures to fully implement the procedures specified in Securency's agent policies and procedures. KPMG's final report was released publically by Securency in March 2010. You have that document. It contained a number of recommendations, which have been implemented.

Now to the charges: the charges were laid, as you know, against a number of individuals who were former employees of NPA and Securency from July of last year. The companies were also charged. Further charges were laid against Securency in August 2011 and NPA in September 2011. The charges alleged conspiracy to offer to pay or pay a benefit to a foreign official not legitimately due. They relate to a total of four foreign jurisdictions. Those jurisdictions are Malaysia, between October 2001 and December 2003, both companies were charged there; Indonesia, December 1999 to February 2001, both companies were charged there; Vietnam, January 2001 to September 2004, in this case only Securency; and Nepal, February 2000 to May 2002, in this case only NPA was charged. At this point, no individuals have been charged about Nepal. As you know, at this point these matters remain before the courts.

Finally, what is being done at the companies? I realise this is not necessarily a question for today. It is, however, worth recounting what steps have been taken to strengthen arrangements at both companies. I outlined a number of these in July 2011. Of course, the persons charged with wrongdoing are no longer with either company. The use of foreign and sales agents at NPA had ceased in 2007 as a result of the NPA audit at that time. NPA these days operates under a tighter charter to keep its focus more closely aligned with the bank's core objectives and risk tolerance. The bank has changed the composition of the board. The NPA's principle focus over the years ahead will include the production later this decade of a series of upgraded bank notes for Australia. In the case of Securency, the use of sales agents was discontinued after the KPMG report. Policies were overhauled, as recommended in that report. We have also announced our intention to exit our shareholding in that company. Both companies are continuing to cooperate with the authorities in resolving the issues.

The bank has continued to give a good deal of thought to its overall governance of the two companies. The Reserve Bank board has had discussion on these issues over the past year or so and has benefitted from advice provided by external experts on corporate governance. I am of course happy to provide any further information at any time the committee may wish on those matters. That, Madam Chair, was the process. I am sorry that it has taken me a long time to go through that, but I think that is important. That concludes what I would like to say. Thank you.

CHAIR: Thank you, very much. I would like to begin by going back to April 2006. I have noticed in your summary and in the documents that we have seen that there has been a change in pace, if you like, since April 2006, when the RBA board first asked for information on the management of agents by NPA and Securency. Usually it was requested on about three or four months notice. It was requested for July. The response was received in July. The board looked at it again. The NPA board looked at it six months later and asked for a review in May, several months later. There was a pattern that if the board of the RBA or NPA thought there was any issue there, their time frame was three or four months down the track for the next step in the reporting process or in the feedback. Then in April 2007, there was two months between April and June when the boards of both organisations were asking for reports in 10 days and having special meetings of the audit committee and special board meetings.

It slowed down again in June; I believe it coincided with the decision by NPA to cease the use of agents. Then there was a slightly slower process through to the end of the year and then it ceased altogether. I want to know from the RBA's perspective why there was that change in pace. I can probably find that in the documents, but—in April 2006 information was requested about agents. I would like to know why that process began. You asked for a response in July 2006 and you got it. The NPA board reported a lack of action on the changes in February 2007, but was wanting a report back then for May 2007. At that point, there seems that questions were being asked but there was no alarm.

Mr Stevens : I think it is a fair assessment that the pace changed. To answer the question why the Reserve Bank board asked the question in the first place—and I think we have covered this in earlier hearings—the background was that there had been the wheat board, there had been the Cole commission and so on, and it was not that the Reserve Bank board in particular had any particular reason to think there was something wrong, but they prudently said: 'There are agents out there. We should review the policies. We should see the policies.' That was very sensible. That request was made. The response from Mr Thompson, as I recall, came in between board meetings. When the response came in it was forwarded by mail to the RBA members—I think that is what occurred.

There are the policies, as revised and strengthened; that is the policy which we now have. Then you have got a question of implementation. The existing agents have to be put onto the new arrangements. I think towards the end of the year we were starting to ask, 'How is the implementation going?' That is a natural thing to do. My understanding at that stage was that we were told that it was proceeding and no particular problems were anticipated. I think that is the case—is it not, Frank?

Mr Campbell : Yes.

Mr Stevens : Then you have the February NPA board meeting where the board asks how things are going. Having heard the management's response and the time line that they were working to, the board said, 'Actually, we would like you to go faster, please, and we would like a paper by the May meeting on how things are going.' So that is a bit of an acceleration. Then things went from there.

At the May meeting, the board clearly was quite concerned about some things that the paper contained. That is when they have decided, initially, we better have a management review and that was subsequently strengthened to, 'We better have an audit and we better get on with that quickly.' So that did accelerate. Through this whole process as things emerged that caused people to have a potential concern, they have escalated the intensity of the work and the speed with which it was done. I would say that having reviewed this that intensity remained right through until probably August or September because you had the NPA audit and that was followed very quickly by commissioning the subcommittee, the committee doing its work, commissioning Freehills, Freehills reporting in early August and moving onto do the audit of Securency, which was done, I think, during August or July. I think that the evidence is that the pace did pick up, as you say, and it remained at a pretty high pace until people felt that they had understood what was going on and had satisfactory answers to the questions that were in their minds.

CHAIR: Staying back in July 2006 when the RBA board received the response from the NPA and Securency about the revised processes and guidelines, did the board ask what precipitated the revised processes and guidelines at that point?

Mr Stevens : I do not recall that there was further detailed discussion at the Reserve Bank board. I do not think that we have got anything here in the minutes that would show that. I would say that, the board having been advised what the policies were and the policies that are now in place, it seemed appropriate. So, no, I do not think that they asked that question. I know it is six years ago and obviously I cannot say what was in everyone else's minds, but I would think they were simply seeking assurance that there was a policy and that it looked like it would do what was needed. Then it is a matter for the policy to be implemented which is the responsibility of the two companies.

CHAIR: There is a bit of a confluence of a couple of streams around February 2007. The NPA board had heard from one of the NPA managers in November 2006 and March 2007 that the implementation was progressing and there were no probity issues. But the NPA board met in February 2007 and clearly thought there was a need for faster action there. Again, it was in that month or so that additional information seemed to be coming forward from other sources

Mr Stevens : I think I could get Frank to speak to the February 2007 meeting because he knows more about it than I. My sense, having reviewed the documents, was that the board wanted the management to be moving faster in the implementation than they seemed to be at that time.

Mr Campbell : That is right. The provision of information at that time was not unrelated to the fact that our board meeting was coming up at NPA in that month. So people were interested to find out what the state of play was. I think the intention was to give the management a bit of space. It was not a simple process of redesigning the policies and the agreements and getting the agents to sign up to them. The board was prepared to give what it regarded as a reasonable period of time for that to happen. But come February there was a sense that management really should be getting on with this. There was a sense of some stalling on the part of at least one of the agents. The board also took an independent step in relation to that agent. By that stage, the board felt that it was quite reasonable to say, 'Please get on with this, and get on with it on a faster path than you have been on up until now.' A marker was put out there to get formal feedback at the next meeting for them to let us know how it was going, in May.

CHAIR: Then in April one of the NPA managers had a conversation with you, I think, Mr Campbell.

Mr Campbell : Yes.

CHAIR: It was about some possible issues with one or more agents. Is that the first time there was the possibility that this was not just a case of slowness in developing the procedures? Is that the first indication that there might actually be something going on?

Mr Campbell : It was the first substantive example of something going on. There was an issue with one of the agents that arose in mid-2005. It really was not a probity issue; it was a contract management issue. That was resolved by the NPA board in February 2006. The board thought it was an acceptable arrangement. In relation to probity, the first issues really emerged around mid-April 2007. There was not so much a conversation; it was a flow of messages to me in an informal sort of way. I felt that the right way to approach this was in a more formal way—to take these concerns to the board and have the board discuss them quite transparently, and put them as comprehensively as they could be put. I understood the paper that was taken to the NPA board in May 2007 as being such a paper.

CHAIR: The concerns were raised with you in mid-April 2007 and the board met about three weeks later?

Mr Campbell : Yes.

CHAIR: Okay.

Mr Campbell : I am sorry. It was about a month later.

CHAIR: Yes. I would have to go back and have a look if it was the 7 May—

Mr Campbell : It was 16 May.

CHAIR: So maybe four weeks later. At that stage, how serious were these allegations, in your mind?

Mr Campbell : They were serious enough to warrant further investigation. The landscape changed quickly. We had been getting these assurances over a period of time that the process of implementing the new agreements with the agents could be managed. The landscape did change. I thought it should be exposed to the board for discussion at board level. I thought it certainly warranted that level of escalation and, if necessary, further investigation of the claims. I certainly did not dismiss these claims. I took them very seriously, as the board did when the paper was presented at the board in May.

CHAIR: Following that, there was requested another report within 10 days and a few other things. Then in June, Mr Battellino, you asked for that NPA manager to talk to you as well. Even though the NPA board had moved and acted and there was an audit going on, you felt the need to go back to that.

Mr Battellino : Yes.

CHAIR: Would you like to explain?

Mr Battellino : There has been a lot of interest in this statement that was given to the bank—or to me—and how that was handled. Let me just give you some background on that. I think the key to understanding the significance of this document is really in the first sentence of the document, because there Mr Hood says very clearly that I asked him to come and talk to me and I subsequently asked him to put his concerns in writing. The question is what led me to do that. I had never met Mr Hood before. I really did not know him. The reason I did that was that by then we had had the NPA board paper which raised these concerns. We had escalated that after the NPA board paper and got an audit done. The audit confirmed what was in the board paper and raised a lot of other issues, mainly about the management of agents. The auditors were very unhappy about the level of controls and the processes around which the company was managing agents.

So that had all been going on. In the course of that I had been told that there was tension between Mr Hood and the CEO of the company and also other managers. Because of that, I thought he might have been pressured not to be revealing all of the information. My understanding is that Mr Hood was largely the author of the NPA board paper and he had also played a very important role in the subsequent audit that had gone on. In my mind, I said, 'If there's tension there, there could be pressure.' I felt that it was important that he be given the opportunity to come to the bank—away from his NPA colleagues—and put his concerns directly to the bank. That is why I asked him to come up and see me. He agreed to do so, but on the condition of very strict confidentiality. He only wanted me to read his statement, and when it was read he wanted it returned to him after it had been used by the investigation that was going to happen. That is what happened. He was seen as a whistleblower and he was offered every protection as a whistleblower. He demanded secrecy around this. I can understand why he was concerned. The bank took every step to make sure that his concerns were met. So that is the background as to how that happened. He gave me that statement. That statement basically confirmed what was in the board paper and the audit. There was some additional information in there as well. I took all that and passed it on to the legal review, which at that stage was already going to be happening. That is basically how that happened, and that legal review subsequently spoke directly to Mr Hood as well.

CHAIR: It is very difficult to put ourselves back where you were at the time, because we now know stuff that has unfolded since. Hindsight is a very useless thing but we, unfortunately, have it. By the time you contacted Mr Hood and asked him to come to you, the NPA board had already decided to terminate its agents and the RBA board was aware of that as well. Were you looking for corruption, or did you suspect at that stage that there might actually be corruption, or were you looking at the management side of things?

Mr Battellino : The auditors had been in. They had found all these things. Most of it was about management controls. They also reaffirmed what was in the board paper: that there were suspicions that had been raised about a couple of the agents. Their view was that this should have been taken up by the management of the company and looked into. They did not think it was serious enough to take any further action than that. They did not recommend that the company stop using agents. They did not recommend any further investigation. They were measures that I suggested to the head of audit and that he subsequently adopted. My feeling was that there were important issues there that needed to be addressed. The auditors' view was that there was not strong evidence of any corruption that they could see. But I felt it needed to be looked at very carefully. That is why I said, 'I want another investigation done.' And they accepted that.

CHAIR: You chaired the audit committee?

Mr Battellino : Yes.

CHAIR: It is difficult to assess what actions the audit committee took in relation to this matter without seeing what actions the audit committee took in relation to whatever else may have been raised. But it looks like, on each occasion, the audit committee recommended stronger action than the NPA board did. You recommended, at one stage, that Securency be audited as well, that a committee of audit be set up. In each case, you seem to take a step further.

Mr Battellino : That is right. I think that you can see that constantly through the process. The NPA board initially, at the first meeting, decided on the day, 'Let's get the management to give us all the information they've got about agents.' Then, after Frank spoke to Glenn and me the next day, we decided, 'Well, hang on, it's better to get an independent group to have look at this. Let's get the auditors in.' So that was the first escalation. Then, when the auditors had been through doing it, they came up with the recommendations, which were that the staff should be cautioned about the dangers of dealing with agents, and to cut back on the use of agents in high-risk countries. As Glenn has said, I did not think that was strong enough, so I said, 'No more agents altogether, and we need to dig further to find out what's going on here.' That was the second escalation.

CHAIR: The audit committee reports to the board quite often, obviously. What is the audit committee's usual job in the RBA?

Mr Battellino : The audit committee does not report to the bank that often. The audit committee usually meets three or four times a year. What you see here are all very special, unusual happenings. As soon as that audit of NPA was commissioned, the board was informed of that. Now it is, again, very unusual for the board of the Reserve Bank to be informed at that point that an audit has started. Normally the board would hear about an audit when the results of that audit have been completed and they have received their report from the audit committee. The board were told straight up, 'There is an issue here.' They knew. They had actually raised this. They had asked the question 15 months earlier. They had an interest in this topic. As soon as there was an issue, the board were told that an audit had started here. So they knew about that. The audit had happened by the June meeting—I think that is right. Soon after that meeting, the audit had been completed. In between the June meeting of the RBA board and the July meeting, I called a special meeting of the audit committee. Normally that would not have happened. We had a special meeting of the audit committee to consider this audit because we regarded it as so important. That is when we sat down and talked about it. At that point the audit committee basically endorsed the decisions that had been taken by the NPA board. The new NPA board had met the day before the audit committee met. The only additional thing the audit committee said was to broaden the terms of reference of the inquiry to say it was an investigation into not only legal matters but also all the business control matters. Again, a lot of this predates my joining the audit committee; I only joined at the start of that year when I became Deputy Governor. The audit committee had had a history of dissatisfaction with NPA going back a long time. It was nothing to do with the probity of agents; in fact it was nothing to do with agents. It was all to do with matters of business controls, reconciliation and security. There had been ongoing issues. The audit committee felt that this was just the latest manifestation, that really the management down there were not adequately managing the company.

CHAIR: I want to ask about you as Deputy Governor in other areas, only because I could be an absolute cynic and say, 'Okay, Mr Battellino thinks there is something going on, so therefore he is going a bit further than usual,' or, 'Mr Battellino does this all the time.' If I was to look at other roles you played in the Reserve Bank, would I find that you take that extra step as a matter of course or is that something that was particularly happening here? The governor might actually be able to answer that.

Mr Battellino : I think Glenn could talk to that better than I.

Mr Stevens : I think that if Ric, being the sort of person that he is, thought about an area: 'There is something that I do not understand,' he would say, 'I am going to find out and satisfy myself that I have got a handle on it.' I must say that, in this matter, I would say it would be characteristic of him to be not quite satisfied with easy answers and to want to probe until he felt: 'Yes, I've got an understanding now and there is a proper process in place.' At that point: 'Good!' That is the sort of person he was.

Mr CIOBO: This whole issue—in terms of this committee—deals with the role of the RBA, from a corporate oversight perspective. In particular, I am interested in a number of aspects. Although they are linked, they are each discrete. I would like to find out more about the approach adopted by the RBA with respect to the appointment of directors, your expectations, their duties and any formalised process that is in place with respect to them raising concerns or anomalies that would be germane to the issues that we are discussing today.

Mr Stevens : The process of appointment stretches way back into time, before I had anything to do with either of the companies. I think that, as the history we gave would show, in the very early days of note printing there was a thought that the Deputy Governor—the then Deputy Governor—should chair the Note Printing board, but that the board should also bring in commercial expertise. The sense, I think, was that the company ought to operate with a certain degree of autonomy—not completely off doing their own thing, but with a degree of operational autonomy from the bank. I am not able to say what was in people's minds, but the background to all of that was the McKinsey work and so on. The thinking, I believe, was: 'We want some more commercial discipline and nous in this company. We don't want bank administrative officers, effectively, overseeing a manufacturing operation.'

So there always was—and is—intended to be a certain autonomy, within limits of course. It had a charter, as set out. Obviously, the Deputy Governor connection remained, right up until not that long ago: only five years ago for NPA. I cannot tell you what, if any, formal processes were gone through back then. I can say that, in the time that I was the Deputy Governor, we started working on things like having terms for the board members and actually making ourselves go through the decision every three years: 'Should we appoint or re-appoint Mr X or not?' We tried to get more, if you like, governance type things in place there, but the presumption generally was that the company should be overseen by the board. The board should report to the Reserve Bank periodically. There was a reporting arrangement for financial performance and operational performance on a six-monthly basis.

In response to the question of how things might be escalated, one would simply expect that, if there is a serious issue that requires the RBA's input, the chairman would call and seek a meeting, and so on. On occasion, if he had a matter of a strategic nature, that is what would occur. I am not sure that I have answered your question fully.

Mr CIOBO: That is all right; we will tease it out. With respect to decisions about audit committees that were engaged by the two subsidiaries, I note that the NPA used the RBA audit committee and Securency did not; they used an external audit committee, as a matter of general business. Were those decisions taken wholly by the subsidiary boards?

Mr Stevens : I might appeal to Frank here. My recollection is that, at least for NPA, the bank felt it was a good idea, at least in those days, for our audit committee to serve as NPA's with that.

Mr Campbell : That is correct. There was an exchange of letters in the late 1990s between the then Deputy Governor and the Chair of NPA in which the arrangement for the Reserve Bank's audit committee to remain NPA's audit committee was put in place. That was an agreement between the two entities. Securency had external auditors. Securency did not actually have an audit committee, although they have been asked to do so. So the external auditors provided advice directly to the Securency board. In that respect, I suppose you could regard the Securency board as an audit committee, because the reports of the external auditors went to the Securency board. Over time, the Reserve Bank internal auditors began a program of auditing Securency on the invitation of Securency's management. Those reports also went directly to the Securency board. The NPA board felt soon after the company was established that the most effective audit committee would be that of the Reserve Bank, because, I suspect, they regarded it as a small company and that it did not have quite the right expertise. Again, that changed, as the Governor said, in the past two or three years: NPA does have its own audit committee and Securency has a number of committees that deal with audit and compliance matters.

Mr CIOBO: So the decision for NPA to use the services of the RBA audit committee was an outcome requested by the NPA board or, rather, was an outcome the Reserve Bank board felt should be in place?

Mr Stevens : I think it was a mutually agreed thing.

Mr Campbell : Yes.

Mr CIOBO: Why was it a different decision to the decision taken by Securency?

Mr Campbell : The Reserve Bank has a more direct relationship as a subsidiary with NPA.

Mr CIOBO: Do you mean because of the structure—50/50 instead of 100 per cent?

Mr Campbell : That is right. Audit committees are committees of the board. For example, the Reserve Bank audit committee is established by the CAC Act. The CAC Act says: 'An organisation like the Reserve Bank requires an audit committee and it will be composed in the following way, and it is a committee of the board.'

The Reserve Bank makes all the appointments to the NPA board. In some sense, the Reserve Bank's audit committee can still be regarded as an audit committee of the board of the NPA. Securency's board structure is quite different. There are people on the board appointed by the joint venture partner and by the Reserve Bank. So the affairs of that board are considerably more arm's length from the Reserve Bank than are the affairs of the NPA board. If they wanted to establish an audit committee, that was in the first instance a matter for the Securency board.

Mr CIOBO: When you say more at arm's length, in what respect is that? Is it because of the independence of two of the directors of Securency or is it in terms of commercial arrangements? In what respect do you mean 'more at arm's length'?

Mr Campbell : It is more at arm's length because there is an interest in the affairs of Securency from a party other than the Reserve Bank. Those external directors had an interest in how the affairs of Securency were being conducted. The Reserve Bank could not dictate to that board. Ultimately, as the governor has said, the establishment of the NPA audit committee was one of mutual agreement. But the bank, as persuasive as it could be in discussions with the Securency board, cannot and could not dictate to the Securency board what its arrangements ought to be.

Mr CIOBO: It seems to me that implicit in your statement are ramifications on independence. I am not sure if that is where you are going, but that is how it sounds to me. Could you clarify that?

Mr Campbell : As a matter of principle, the Reserve Bank could influence the affairs of Securency through its appointments on the Securency board. There was a good degree of cooperation—a high degree of cooperation—between the Securency board and the Reserve Bank when the Reserve Bank expressed its views. I can remember no conflict. Nevertheless—and this did not happen in practice—I think it is fair to say that the Securency board ultimately had an obligation to serve the interests of Securency as a company and not the Reserve Bank as an organisation. That is a theoretical point, not a practical point in practice. Securency and the bank worked well together on the whole.

Mr CIOBO: Do you contrast that with the NPA's board?

Mr Campbell : NPA is a wholly owned subsidiary. The Reserve Bank, through its appointments to the NPA board, had greater control. The NPA charter basically required—and I do not remember precisely the words here—that the NPA board take account of what the Reserve Bank board was saying.

Mr CIOBO: With respect to the audits undertaken and the advice that was initially generated, I understand, from the Reserve Bank suggesting policies and procedures be reviewed with respect to the use of foreign agents, were there any special—I will use a lay term—writing instructions to the directors of the two companies about the way in which this information should be teased out, what specifically was to be assessed and what the focus should be?

Mr Stevens : I do not recall there being any such thing. I think it was just a straightforward request under the circumstances: 'Let's have a look at the policies.' That was clearly taken by both the companies, particularly in the case of NPA, as a signal that you had better make sure that you have a good policy. I think NPA probably had a little more work to do to be able to give that assurance. I am not sure whether you recall, Ric, whether we put out any kind of a template. To my recollection there was not.

Mr Battellino : It predates my term on the board as deputy governor, so I cannot really say. I think, as Glenn said before, the thing that triggered this was the Cole royal commission and the board saying, 'We want to be assured that the two companies have got good policies in dealing with agents,' and they wanted to see the policies. The policies were supplied and I think people felt they were pretty sound policies.

Mr CIOBO: In terms of cultures within the three organisations, did they view themselves as being separate entities? For example, were dealings between executives across the three organisations done via the board? Or, outside of relationships that were commercial in nature, was it common practice, or perhaps not irregular, for there to be contact between executives on non-commercial matters?

Mr Battellino : Frank is probably in a better position to talk about this than I am because he was on one of the boards and he knew more about the Securency board. But, from my experience as the deputy governor, the boards of the companies did not want any contact. A couple of times I tried to speak directly to the managers of the companies and the boards were not happy about that. Any communications with the companies should be through the boards. I think that is a reasonable corporate governance approach. I accept that. It was a formal approach. I do not know if at a working level there was some stuff going on at more junior levels, but clearly the boards wanted any views of the Reserve Bank to be made known to the company by the boards.

Mr CIOBO: If that was the prevailing culture, it would seem to me highly irregular, then, that an executive from NPA would have felt it appropriate to come directly to you, Mr Battellino.

Mr Battellino : That is right. It was my suggestion that he come up to me. That was very unusual. As I say, it was because I wanted to assure myself that within the company he was not being pressured to hold back information. His responsibility as a company secretary was to the board of NPA, and he met that responsibility. He helped draft that board paper. He helped the audit that was commissioned for that board. He did all the things that he had to do in response to that. While the public focus has been on this memo he gave to me, that really came at the tail end of events. At that stage he had already done all the work through the board paper of NPA and through the audit. That memo was simply me checking up to see if there was anything that needed to be put on the table. That request to come to the bank was put via Frank who was at that stage a member of the NPA board.

Mr CIOBO: In what respect did you satisfy yourself or did you attempt to obtain better clarity around corporate governance via the RBA's directors on the board?

Mr Battellino : I am not sure I understand the—

Mr CIOBO: You said you had concerns that this particular individual may have been pressured.

Mr Battellino : Yes.

Mr CIOBO: You understood there was some tension among management of NPA and that is why you took the unusual step of contacting this individual directly. Had you done any work prior or post, or had discussions with the RBA directors on the board of NPA, to satisfy yourself of the same issues?

Mr Battellino : Only through Frank Campbell, who was on the board.

Mr CIOBO: Were you dissatisfied with assurances or otherwise that Mr Campbell provided you?

Mr Battellino : Definitely, yes.

Mr CIOBO: Sorry, I said 'dissatisfied'.

Mr Battellino : Sorry?

Mr CIOBO: I said 'dissatisfied'. Were you dissatisfied?

Mr Battellino : No. There were assurances he gave me. From what I have learnt at the time and since, and also from the auditors, I think there was tension within that company. There was a lot of tension within the management of that company. That was correct.

Mr CIOBO: If you had opportunity through the RBA directors at Note Printing Australia with respect to these issues, I do not really understand if you were satisfied with the assurances Mr Campbell provided you on why you felt it necessary to effectively go outside of the formal channels?

Mr Battellino : No. There seems to be a misunderstanding here. When I say that I was satisfied, I was satisfied that what Mr Campbell and the auditors had told me about the tensions was correct. Having heard it from an NPA board member, and having heard it from the auditors, between us the three of us thought it was a good idea to speak directly to this gentleman. He volunteered to do so and he was happy to do so, but only on the basis that it be kept strictly confidential.

Mr CIOBO: When you say the three of you, which three is that?

Mr Battellino : It would have been Frank Campbell and the head of audit. They are the people who had group dealings in the weeks leading up to this.

Mr CIOBO: Mr Campbell, as a director of NPA—as you were at the time, weren't you?

Mr Campbell : Yes.

Mr CIOBO: And as a member of the RBA board—

Mr Campbell : No.

Mr CIOBO: Not a member of the RBA board?

Mr Campbell : No.

Mr CIOBO: Your direct report was with the RBA to whom?

Mr Campbell : I have a direct line to both the governor and the deputy governor. On administrative matters of this sort it would typically have been to the deputy governor.

Mr CIOBO: If there are concerns being raised about management tensions, obviously serious enough that the parent company—particularly Mr Battellino—felt it necessary to hold these meeting directly, can you explain why there does not appear to have been an issue of inquiry, action or activity within NPA by the board?

Mr Campbell : There was.

Mr CIOBO: Could you tell me more about that?

Mr Campbell : These concerns came to my attention—

Mr Stevens : Are we talking about the tension between the management here?

Mr CIOBO: Correct.

Mr Campbell : Can I make a general comment before I answer your question specifically? There were clear tensions. The relationships between management at NPA were very difficult. That was obvious. In my view they deteriorated over time. This was of concern to the NPA board, and to his credit the chief executive tried to address these issues through the course of 2005, 2006 and 2007. I personally intervened in these matters in March 2006 when I corresponded with the chairman of the company that the manager seemed to be becoming isolated. I regarded the job he was doing as being a good job. I thought that we could have more confidence in the quality of management at NPA as a result of this manager's presence and what he was doing than if he were not there. I thought that among the management group he was making one of the better contributions, and I expressed that to the chairman of the company. I think that assisted Mr Hood's position, at that time, in the management team.

The relationships ebbed and flowed, but at times they were very difficult. There was a consultancy established to address the relationships within the management team. Again, in principle that sounds like a very sensible thing to do; you have problems in the management team and you get an external party to come in and try to address the issues. However, Mr Hood felt that this was part of his marginalisation and his isolation in the organisation. I thought there was at least some basis for Mr Hood believing that and also the May 2007 board, when this consultancy made a presentation about the management team at NPA. I expressed the views basically that I had expressed to the chairman over a year prior and offered Mr Hood's support. It was not as if the board was uninformed about management relationships in the company. It was a case of how to improve them, and that was a very difficult thing to do.

Mr CIOBO: The reason I am asking about these relationships is that they go to the central element of governance of the organisations. That obviously was crucial with respect to Securency, although we are talking about Note Printing Australia. Given the on-paper compliance of both organisations, especially with respect to Securency, and then, where there was non-compliance, the termination of agency agreements, I am again trying to understand why you, Mr Battellino, as former Deputy Governor, would take the step of dealing directly with a senior manager from NPA when Mr Campbell has verified concerns that the board had about tension. I think you said to some extent you agreed that Mr Hood's feelings of isolation may have been warranted.

Mr Campbell : I had some sympathy.

Mr CIOBO: Having had that discussion, what action took place post that discussion with respect to informing either the directors that the RBA had appointed to NPA—and indeed you could even say Securency—or the RBA board? What further activity took place?

Mr Battellino : This meeting arose in the context of—as a follow up at the end of the audit that had happened. That was the thing that drove it. I became involved through the audit process, as head of the audit committee. We felt it was important that this gentleman be given the opportunity, if he had any concerns about the way the agents were being managed, to be able to put those directly to the bank away from his NPA colleagues, just to make sure that he was not feeling any pressure. When we had that discussion—I think you have seen his statement—the questions of management tensions were not really the focus of the discussion we had. The discussion we had was all about management of agents. It was in the context of the audit that had just happened.

Mr CIOBO: There is a clear linkage though isn't there? As I understand the concerns that were raised with respect to the management of agents—and correct me if I am wrong—the frustration there was born from the belief, accurate or otherwise, that the concerns being raised were not being acted upon and were being ignored and that it was thought that was a function of the tension that existed in the management team.

Mr Battellino : Yes.

Mr CIOBO: So, when you say they are unrelated, they are very much connected.

Mr Battellino : They are very much connected. The feedback to the board went back to the NPA board via the audit. That is when the NPA board were given the audit and, as a result of that audit, they took very severe action.

Mr CIOBO: The audit preceded your meeting didn't it?

Mr Battellino : The audit—by the time—

Mr Stevens : The draft audit was available [inaudible].

Mr Battellino : The audit had been largely completed.

Mr CIOBO: So your meeting was after the draft audit report and prior to the final report—is that correct?

Mr Battellino : Yes.

Mr CIOBO: The concerns that were raised though—again I go back to the issue about his frustration, as I understand it, that management was not acting upon the concerns that he was raising; indeed he considers himself a whistleblower. What subsequent action did you take, either with respect to the directors that the RBA had appointed to the board or directly with the RBA board itself, off the back of that meeting.

Mr Battellino : These concerns were all raised in the audit report. That report went back to the NPA board and, as a result of the report, the NPA board took very severe measures. They put in place all sorts of things to tighten up controls. In the end the, chief executive left the company. The chairman left the company.

Mr CIOBO: So in other words—and I am not trying to verbal you, so correct the record if I am wrong with this assertion—you felt that there was nothing new raised that was not already disclosed in the draft or final audit report.

Mr Battellino : Basically the board paper and the audit—more so the audit—had painted a picture that this was a company that had very poor controls over the use of agents. On top of that, there were those two issues that were raised about two of the agents that people regarded as suspicious, and they were being investigated. That has come through in the statement that I was given as well.

Mr CIOBO: Mr Hood appeared as a witness before the Parliamentary Joint Committee on the Australian Commission for Law Enforcement Integrity. I am not sure if you are familiar with the testimony that he provided.

Mr Battellino : I have not seen the testimony but I have seen reports of it.

Mr CIOBO: He made a comment, and I would just like to read this to you for you to respond to. The transcript reads:

CHAIR: Another senior Commonwealth Official, Rick Battellino, reportedly told you to never mention the overseas agent corruption concerns. Can you confirm whether that actually happened?

Mr Hood: Yes, it did, it was a comment made at my farewell. I had only ever met the Deputy Governor once, and that was the time in June 2007 when I gave him the briefing face to face and then followed up with a statement. He attended my farewell lunch, shook my hand and made that comment to me—that is, not to mention the matter.

Chair: What do you think he meant when he told you never to mention it?

Mr Hood: It was a pretty clear message and I took it literally that it was a sensitive matter, that it was confidential and that he wanted it to remain confidential. I guess he was emphasising confidentiality and the sensitivity of the matter and that he did not want me to say anything to anybody about it.

I seek your comments with regard to that.

Mr Battellino : My first comment is that I did not say that. Let me give you a bit of background to that lunch. We have moved on now to September 2008, which is fifteen months after all of this had happened. At that stage, Bob Rankin, another assistant governor of the bank had taken over as Chairman of NPA. He had been talking to Mr Hood, and in the course of that he came to believe that Mr Hood wanted to leave the company. Dr Rankin suggested to me that it would be a good idea if the bank were to host a lunch for Mr Hood, given the assistance he had given in the 2007 review. I fully agreed with that; I thought it was a very good idea. I had nothing but respect and goodwill towards the gentleman. I think the bank to this day remains very grateful for everything he did throughout 2007. I was very happy to host a lunch. At that lunch there were five other people, apart from Mr Hood and me, most of whom knew Mr Hood much better than I did. I had only met him the once. It was a very friendly lunch; we never spoke about any work matters. We mainly spoke about football, because Mr Hood had been a previous AFL umpire. That was the tone of the lunch. For me to make a comment like that would have been totally out of keeping with the goodwill and the friendship that was shown at that lunch. Second, it would have been an absolutely pointless thing to say because it was Mr Hood who had insisted on the secrecy around this. In fact, if I have one regret about all this it is the fact that the bank, or I, put his interest ahead of our own in keeping this secret. He was seen as a whistleblower. We offered him every protection. We never did anything to disclose that. In fact, I noticed that at the most recent committee hearing, Mr Smith asked the question of why I had not told the committee. The reason for that is of course that Mr Hood was entitled to protection as a whistleblower. We never said anything to anybody about it.

Having said that, the answers we gave did not mislead the committee because we said that he had provided us with assistance. It is true that most of the assistance he provided had been through the NPA board paper and the audit committee. But the fact is that it was Mr Hood who wanted secrecy around this. People who know me know that I am a very open and transparent person. I am not a person who keeps secrets. I am not a person who goes around telling people not to say things. So, no, I did not say that.

Mr CIOBO: That is all I have.

Mr Stevens : Mr Campbell was at the lunch.

Mr Campbell : I was at the lunch. I did not hear Mr Battellino make that remark. Mr Hood wrote to me late last year in relation to matters with the bank and referred to the remark that has been made. Mr Hood wrote in that letter to me that that comment was made in the RBA dining room in the presence of others. I did not hear that remark.

Mr Stevens : I have spoken to the other four—each individually—separately. They did not hear it.

Mr Battellino : In the interest of transparency, which I always value, it is important that the committee knows that this has all happened in the context of Mr Hood making a claim against the NPA and the bank, in addition to the payment he received when he left the company. That matter has been in discussion between the bank and Mr Hood now for over a year. There is nothing secret about it. Mr Hood has wanted to keep it secret. There is nothing secret about it. The bank is a public institution; there is public money involved. There is nothing wrong with his making a claim and there is nothing wrong with the bank trying to seek the information to settle that claim.

Mr Stevens : I think we should leave that matter there.

Mr Battellino : Yes.

Mr CIOBO: That is a nice segue into my next line of questioning. With respect to the briefings that you provided to the Treasurer's office about these issues. We know—I think you have indicated—that it was around mid-2009 that you first raised the issues with the Treasurer. Given the findings of, for example, NPA's audit report and given the decision to terminate agency agreements by both NPA and Securency, why was this matter not previously raised with the Treasurer, given it involved potentially corrupt payments via foreign agents.

Mr Stevens : The question of 2007: Securency dismissed one agent. They did not, at that time, dismiss the others. NPA dismissed three, or two.

Mr CIOBO: Two, I think.

Mr Stevens : That is all they had at the time. From where I was sitting, there is a serious issue here. Serious people are dealing with it. They have had a quite intense process and ultimately concluded, on the basis of the Freehills advice, there was no evidence of a breach of the law. At that point I was briefed on that outcome and I regarded that, at the time, as a satisfactory process. It did not cross my mind to go to the Treasurer that year to say that we have had an inquiry and it found no evidence of a breach of the law. Honestly, it did not cross my mind to do that at the time. In briefing the present government: there are things in the newspapers that they are going to read and they are going to want to know what those are about. So I gave them a briefing of who the companies are, what they do, what the allegations seem to be and how we are proposing to respond to that.

Mr CIOBO: You provided a briefing to both the Treasurer and the then Prime Minister about this matter. Is that correct?

Mr Stevens : I did. I spoke with the Treasurer's office. There happened to be a meeting already scheduled with the then PM that week, anyway, for other reasons. Naturally, it came up at that meeting because it was in the paper already.

Mr CIOBO: When you say the Treasurer's office, was it with the Treasurer or with other staff?

Mr Stevens : I honestly cannot recall whether I spoke to him. My recollection is that I gave his office a heads-up of what we understood was going to be coming in the newspaper. I have spoken with the present Treasurer on several occasions about this matter over the ensuing period, but I am not 100 per cent sure that I spoke to him that day versus one of his staff.

Mr CIOBO: It was the former Prime Minister was it not, the member for Griffith?

Mr Stevens : Mr Rudd, yes.

Mr CIOBO: Given Mr Rudd's tenacious pursuit of bribery scandals with respect to AWB, I find it quite incredible that the former Prime Minister did not seem to have any appetite—or perhaps he did and you could clarify this—to ascertain whether or not there was another government agency involved in making corrupt payments once you had informed them about media articles and Note Printing Australia having terminated the services of agents. Is that what took place?

Mr Stevens : My best recollection of the meeting is simply that he listened and did not express any particular view about what we were proposing to do at the time. What was in his mind on the other matter that you raise I cannot possibly know.

Mr CIOBO: So, despite the fact that Note Printing Australia and Securency suspended and/or terminated agency agreements, and despite the fact that there is compelling evidence raised in the audit report that indicated that although there was no evidence that corruption had taken place there was certainly assessment that there was a high risk of that taking place—hence the termination of the agency agreements—despite all of this information there was no instruction from the executive, that is, the Treasurer or the Prime Minister, to pursue this further.

Mr Stevens : I do not recall that I got any instruction. I simply explained the process as it was unfolding. This story has taken a number of twists and turns over the past three years, but when a significant thing appeared to be happening, or I knew it was going to happen, I would just alert them to what was going on. I do not think I have been given an instruction to do any particular thing, no.

Mr CIOBO: So, when the Reserve Bank was aware of the concerns that were raised, the board's decision was to pursue this matter through additional audit committees with respect to, for example, Securency, and for there to be compliance with a subsequent AFP request for involvement at cooperation. Were these matters sought by the then Prime Minister or the Treasurer as to whether or not law enforcement agencies would be involved? Or was that just information that you would provide subsequently?

Mr Stevens : Are you asking whether they had anything to say about whether the AFP should be called in in 2009?

Mr CIOBO: Correct.

Mr Stevens : No, that was a decision taken by Dr Rankin, who conferred with the Securency board. He conferred with myself and I agreed. We discussed that for a few minutes and he said, 'I think the right thing to do here is to call the police.' We discussed it for a few minutes and we concluded yes, that seemed right.

Mr CIOBO: It is pretty obvious, really. So the Securency board, along with yourself and others, said, 'There's a whiff of something fishy here—we should get the police involved'?

Mr Stevens : The thing to remember is that, unlike at NPA, where an internal process had triggered a concern being raised and there was an escalated process of responding to that which went until such times as the board of the company felt they had a satisfactory answer, we then had the Securency audit. It was obvious to ask the same questions of them, so that got done, and gave a very different answer, as we have said before. That having been so, these things then appeared in the media, which was completely contrary to everything we thought we knew about Securency. You would not then say, as had happened at NPA, 'We'd better have an audit,' because we had already done that. This was a very contrary indication to that, and that is why the first reactions that Bob Rankin had were, 'Should we get KPMG to come and do a sort of forensic audit of things, or do we call the police or, indeed, in the end, both?'

Mr CIOBO: It is difficult because I am not seeking to ask you to attribute motive to the actions of the Prime Minister and the Treasurer. What I am trying to ascertain is standard and what I would consider normal behaviour by both Securency and the Reserve Bank to say, 'Something doesn't seem right; let's undertake a forensic audit, let's ask more questions and let's get to the bottom of this.' There appears to me to have been a response from the Treasurer and the Prime Minister to simply ignore it and not direct the Reserve Bank to make further inquiries. Is that a fair statement?

Mr Stevens : Well they did not direct me to make further inquiries, but we were making them and they certainly did not object to that. From my recollections of my discussions I would explain what processes we were embarking on and they would note that and not raise any objection. I do not want to speculate on what they were thinking.

Mr CIOBO: And that is precisely my point, I am not seeking to have you attribute motive.

Mr Stevens : All I can say is they were advised from time to time on what the new issue was and how we were responding to it.

Mr CIOBO: Has there been only the one discussion with the former Prime Minister on this issue?

Mr Stevens : I clearly recall that one, and I am sure that it was a Saturday morning. I think these articles had appeared during that week, and the meeting had been scheduled for other reasons. Since it was all over the papers we naturally talked about it. To the best of my recollection I do not think I had a further discussion with Mr Rudd about that and I have never had one with the present PM about these matters.

Mr CIOBO: So you have never had conversation with the current Prime Minister about this issue?

Mr Stevens : No. I have not sought to have one.

Mr CIOBO: With respect to the regular briefings that were provided to the Treasurer's office, was that at your instigation—that is, the Reserve Bank's instigation—or was it at the instigation of the Treasurer's office?

Mr Stevens : It could be either. If they want to ask a question they just get on the phone, and that has always been the case. But, generally speaking, on occasions where I have felt there is some particular development that has happened or that I know may happen I simply let them know that it is around and keep them informed as to what processes we have going on in response. For the most part, these were largely moments where I felt it would be sensible to let them know.

Mr CIOBO: So it has been proactiveness on your part rather than on the part of the Treasurers' office.

Mr Stevens : I cannot say they never called about it—I really cannot remember—but the best of my recollection is that in periods when I felt there was something to say I would make a call.

Proceedings suspended from 11 : 43 to 12 : 00

CHAIR: We will resume. We will go to Dr Leigh.

Dr LEIGH: Thank you, Chair. Governor Stevens, I just wanted to ask some questions to get a better sense as to the way in which the problems arose. Why was Note Printing Australia using agents in the first place? It is a wholly-owned subsidiary of the Reserve Bank. It is dealing with other central banks. What was the rationale for using agents?

Mr Stevens : I cannot speak in detail about how it originally arose, but I think it is a reasonably common business model to use agents in foreign jurisdictions. In fact, I think the KPMG report on Securency, which was ultimately published in 2010, says that at one point. It is a reasonable business model. It carries certain risks. I think I would say that the company—it is a small company—was seeking to grow some export sales in some markets and it seemed to them reasonable to have such agents. In some other jurisdictions, they did deal directly with the central bank—not in every one. I think, really, I do not have any more background. Frank, are you able to add anything? That is my general sense.

Mr Campbell : I can only confirm what the governor has said. In terms of the traditional markets that NPA printed for—places like New Zealand, PNG and our near neighbours—those are longstanding relationships with a central bank. When exports became an objective of the company in the 1990s in new markets, it was regarded as a legitimate path to try and enter those new markets.

Dr LEIGH: I suppose I just cannot help feeling that a lot of these issues go back to McKinsey's 1990 recommendation that NPA behave like an entrepreneurial exporting firm rather than with the higher level of priority and due diligence that one might expect from a bank note producer.

Mr Stevens : I have had a look at the McKinsey report recently. It is a 1989, I think, document. To my mind, the idea that was coming through there was one of efficiency, and the note-printing branch was staffed at a much higher level than subsequently. I am not sure 'entrepreneurial' would have been a word they used—I cannot recall. But certainly it became somewhat more commercial in its culture than a typical Reserve Bank department would be. You can see the logic of why that might have been a sensible thing to say. We were going from a quite inefficient—probably, I think—over-manned branch, effectively, but a part of the Reserve Bank was trying to make this sharper, somewhat more commercial, more disciplined, more efficient.

Dr LEIGH: I understand the incentive problems that arise in using agents who were only paid if they secured a contract. Were there other aspects of the governance of NPA and Securency that led to what Mr Battellino has referred to as Securency management withholding information from the board? Did that have to do with the incentives that individuals within that firm faced to make profits?

Mr Stevens : It is very hard to be definitive about that question, I think. I do not have in my head much of the detail at all about the structure of the incentive payments, the incentive arrangements that the executives faced, but generally speaking I think they would have been linked to sales and profits and so on, which would not be uncommon in commercial entities. That said, though, incentives can create a problem, but that is not an excuse to act corruptly, if indeed that is what occurred. That is for the courts to decide, of course.

Dr LEIGH: To what would you attribute that culture within the two firms at the time of withholding information from the boards?

Mr Stevens : Has it been suggested that NPA withheld—

Dr LEIGH: My apologies—within Securency.

Mr Stevens : The specific instance that I think you are referring to—and I believe I referred to it in the opening—is that, when KPMG came and did a forensic audit in 2009, it was uncovered that some concerns had been expressed by people inside Securency a couple of years earlier. I am not going to speculate on why that information was not disclosed either to the board or the auditors. It was not, and it emerged two years later.

Dr LEIGH: The context in which the Reserve Bank board first asked Securency and NPA to look into their dealing with agents is minuted on the 4 April 2006 RBA meeting. That is occurring in a context in which the Cole inquiry is on foot, in which one of the key issues is the use of agents in dealing with the Iraqi government. It seems as though the impetus to check on agents comes from the RBA board and that the government of the time did not even ask you to look into this—is that right?

Mr Stevens : To my recollection we did not receive any instruction or request by that government. As I have said, in our account of this and on the documents we have, it is clear that this whole process we have been talking about through 2007 really did begin in April 2006 with that request by the Reserve Bank board. As I said, it was not that they thought there might be a problem; it was just that it was prudent to ask, 'What are the policies?' and to satisfy ourselves that the policies look good. It was, I think it is true to say, the Reserve Bank board that initiated it.

Dr LEIGH: I agree with your statement that it was a prudent decision, I am just surprised that, in the context of the time, with the Wheat Board scandal raging, the government of the day saw no need to look at the use of agents across the board.

Mr Stevens : I am not aware of any correspondence or instruction from the government of that time to do anything in particular on this matter.

Dr LEIGH: Thank you. I will go to an issue that this committee has gone to from time to time. I want to ask you one more time: in the context of the Cole inquiry, having handed down its report at the end of 2006, and the concerns around the use of agents, can you again speak to the decision to ask Freehills to conduct the inquiry rather than the Australian Federal Police? Wouldn't a lesson of the Australian Wheat Board scandal have been to call in the Australian Federal Police at that time?

Mr Stevens : I must say that was not a lesson that I had drawn and no-one had drawn it for me. I would view the decision that the NPA board made to commission Freehills as, in the circumstance of the time, a reasonable decision. By that I mean that there has been, as we were saying earlier, a process of escalating the response. I would think it quite a normal thing to do for any commercial organisation, even one that is publicly owned but operating in a commercial space, having heard concerns, to seek to have serious people look at it. There was a measure of independence in the subcommittee, because we had a person of unimpeachable integrity, an independent member of the RBA's audit committee—not on our payroll, not on NPA's payroll and no great admirer, one would have to say, of NPA's record in the audit space—to chair that. There were very independent, serious people on that committee. They engaged two senior practitioners with experience in the area from one of the country's leading firms. I think that would be quite a reasonable response in the eyes of most people who are experienced in these matters. I think that was a reasonable thing for them to do and to find out: 'Do we have evidence? What is it we have?' Then, of course, had they concluded something like, 'There is evidence of a breach of the law,' or, 'We think there are very strong suspicions that there may have been,' then I think there would have been a process where the NPA board would have felt, inevitably, 'We must now take this issue to the police,' but that was not the conclusion. I think it was reasonable for them to act that way: to have a process with independence, with a degree of urgency, with serious outside advice, and to act as they did. I did not feel at the time, nor actually looking back, that part of the process itself was deficient.

Dr LEIGH: You do not regret going to Freehills rather than to the—

Mr Stevens : I do not regret going to Freehills—no. I think that is a perfectly sensible thing to have done.

Dr LEIGH: Thank you.

Mr BUCHHOLZ: Mr Stevens, as Governor of the Reserve Bank, do you believe that, at any stage through this process, you have been derelict in your duties?

Mr Stevens : Let's get right to it. No, I do not. I think my responsibilities as the chief executive of the organisation is always to satisfy myself that issues that come up are being dealt with properly by the relevant people. At each point in this very, very long process, which has taken me the best part of half an hour to read, I felt that the people who reported to me or were my colleagues were actioning appropriately the information that came to their attention and escalating the steps as needed. In fact, in some respects, they certainly did more than the minimum they might be expected to do, really.

Mr BUCHHOLZ: Mr Battellino, I ask you a similar question. At your time at the Reserve Bank and in the capacity that you served, at any stage did you believe that you were derelict in your duties?

Mr Battellino : Definitely not. In this particular matter, I acted in good faith and with determination. I saw my role as making sure that the NPA board carried out an investigation of the matters that had been raised by its staff members. Where I thought the NPA board had not gone far enough I intervened on a number of occasions to escalate the matters. Having seen the advice they got and the process they had been through, I was satisfied that they had a run a very thorough process, had acted appropriately, had taken account of the advice and had made a decision that was sensible on the basis of that advice. I feel they could not have done more than they did on that particular matter.

Mr BUCHHOLZ: With reference to the appointments of Freehills, was there any other pre-existing relationship with that firm? How did the organisation come to appoint Freehills, given the amount of legal advice that was available on the market?

Mr Stevens : The way that the bank sourced its legal advice was that we had a general counsel—she had been a partner at Freehills earlier in her career—whose role on any particular issue where the bank needed outside advice was to know who we would go to. The bank has actually sought outside legal assistance from a number of different firms over the years depending on the issue. On this particular issue, I think it would have been her advice that the two individuals at Freehills were suitable people to carry out that work. I have got no basis now or had then to know better or to think that there was anything deficient there.

Mr BUCHHOLZ: Were you satisfied with the quality of the advice that you received from Freehills?

Mr Stevens : I did not receive it personally directly. It was provided to the NPA board subcommittee in order to help them fulfil their duties to the NPA board. I did not see it at the time. I have not really had a process of going back and saying: 'Was that advice right or wrong?' It was what it was. It was done by two professionals diligently. It is a very substantial document, as you would have seen. That was the advice. I think that process really was a strong process. I do not actually see much to gain from going back second-guessing whether they got it right or wrong.

Mr BUCHHOLZ: Mr Campbell, you were on the committee that received the advice from Freehills, I gather?

Mr Campbell : Yes.

Mr BUCHHOLZ: Did you find the information from or the recommendations from Freehills clear or slightly ambiguous?

Mr Campbell : I found the recommendations clear—quite clear. The process of getting to the report involved some meetings between the subcommittee and Freehills. Those meetings really went to the processes around compiling the evidence in the report and holding interviews with the staff. The two legal practitioners involved gave every indication of the experience that they had. They were very capable people. That was my impression. We appointed legal practitioners because we were in no position to judge the merits of the legal matters and we were reliant on suitably qualified people in providing the advice. I had no basis and I do not think it would have been appropriate to try to second-guess the advice that we were given.

Mr BUCHHOLZ: In summary, what were the findings that Freehills gave in their advice?

Mr Campbell : In summary, the main conclusion was that there was no evidence of breach of Australian law. That was the main conclusion. There were certainly deficiencies in the contract management and other business processes at NPA, which needed to be addressed. They were not trivial matters. The board subsequently addressed the NPA board, subsequently addressed those contract management matters and business processes.

Mr BUCHHOLZ: On the issue of commissions, can you help me understand what a commission was paid for and, in return, what services would you require for a commission to be paid?

Mr Campbell : Commissions were paid for the successful completion of a contract with a central bank with a customer. We would have expected—NPA would have expected—the agent to have been involved in explaining the merits of the polymer technology and, in the capacity of NPA, to deliver the product to the central bank concerned. Those were the key responsibilities.

Mr BUCHHOLZ: Similar to a salesperson or a broker or something?

Mr Campbell : I guess that is right. Within the country concerned they would have provided some secretarial services, some language services, some other services. But they were remunerated for success in achieving a sale. The companies themselves regularly made the point that that structure was by design. Retainer structures do not provide the right incentives—that was the argument—and they can be very costly because they are open-ended. So this was a way to contain costs and provide incentives to the agents to negotiate sales.

Mr BUCHHOLZ: On what basis were commissions structured? Was it a lesser commission on a higher volume of printing of notes? Was there any type of loose formula adopted in calculating commissions?

Mr Campbell : There was not—at least not at NPA, and I do not think there was at Securency. I should say management was requested on occasion to investigate the retainer model—the other model—and they were invited to make submissions to the board on what were reasonable commission rates. But there was no structure. I suppose what I would say, at least in relation to the agents with which I was familiar at the time, at least in Malaysia, is that the commission rate was reduced for the second order. That was a reasonable thing because there was a long gestation period. To get the first order was a high-risk activity—they might not convert to polymer. It is a very conservative industry. The substrate on which a central bank prints its banknotes is not a trivial question. If you have done it for a century on paper and someone is coming up with this new whiz-bang technology and saying it is better, it will take some convincing for the central bank to change its model, and they might not ultimately do it anyway. So there were risks, and it is not surprising that on initial orders the commission rate was higher than on subsequent orders, and that was certainly the case with Malaysia.

When the board asked NPA to review its policies in 2006, the board imposed tighter constraints on the company. The second Malaysian order was brought to the board for noting, but that was the only time that I recall it being brought to the board. After the review in 2006, the board imposed more constraints on management about where they could negotiate to, and it was very conservative. For any commissions above a certain level—I think it was five per cent—they had to bring that to the board and the board had to give approval. It became academic because we stopped using agents before another contract was negotiated.

Mr BUCHHOLZ: What was the range of commissions that you were aware of, from a percentage perspective?

Mr Campbell : From a percentage perspective, I think the lowest was about five per cent in Chile, and the highest was 17 per cent for the first deal in Malaysia. I think the Indonesian deal at the end of the 1990s—and I am happy to be corrected on this—was also about 17 per cent.

Mr BUCHHOLZ: There was a Bangladeshi—

Mr Campbell : It was 19.

Mr BUCHHOLZ: 19.9 per cent. Nearly 20 per cent.

Mr Battellino : Yes.

Mr BUCHHOLZ: With reference to the opening comments from the Governor: in his concluding remarks he spoke about the changes of the composition of the board and that the NPA these days operates under tighter character. Was the character of the composition of the board in question?

Mr Stevens : The character of the board? No. Do you mean the charter?

Mr BUCHHOLZ: The charter. Sorry, the charter of the board.

Mr Stevens : The NPA operated from 1990 until, I think, 2007 on the one charter. In 2007, separately to the agent things, we had been working on a refinement and a strengthening of that charter. I think a reasonable characterisation would be that it sought to narrow the scope down to be a bit more focused on our work, and that sort of thing. It has been tweaked a couple of times since then. My vision for NPA in the future is that it is not its job to try to expand the global market for polymer currency; its job is to print our notes. It can tender for some other overseas work directly with the central bank if it wants to, but it is a more narrowly, tightly defined business proposition for us. I think that is more in line with the RBA's risk appetite.

Mr BUCHHOLZ: With the composition of the board, are there sunset clauses in place? How does it rotate or find its fresh ideas?

Mr Stevens : We did introduce terms for board members during the mid-2000s, because up until then they had been appointed and there had not been any process of renewal, or otherwise. These days, I think, it is for three years, isn't it, Frank?

Mr Campbell : I think that is right, Governor.

Mr Stevens : That is appropriate because it makes us ask the question after three years—should this person remain or should we replace them?

Mr STEPHEN JONES: My first question is to you, Governor. You are a statutory officer. Mr Ciobo asked you previously about whether you had received any directions from either the Prime Minister or the Treasurer in relation to your functions. Could you just clarify something for me: does the Prime Minister or the Treasurer have power to direct you?

Mr Stevens : To tell you the truth, I am not honestly sure if there was a matter where they had some potential—'We wanted an investigation into corruption allegations,' or something—I do not actually know whether there is a legal device that would let them instruct. They would not have to instruct if the Treasurer, or the government, felt that something should be done. I cannot imagine that I would say, 'No, I refuse to do it,' at least on this matter. They are not allowed to instruct me on interest rates. That independence is within a clear framework.

CHAIR: I must say how disappointed we were that all the stuff on monetary policy was redacted from these documents.

Mr Stevens : That is already published.

CHAIR: I know.

Mr Stevens : That was one of the things we did.

CHAIR: Not in one large document.

Mr STEPHEN JONES: Mr Battellino, between 2007 and 2009 the agency arrangements were either terminated or suspended. Why did NPA do that?

Mr Battellino : That was a decision taken by the NPA board on the recommendation of that audit. From my perspective I did not have the confidence that management would ever be able to have a set of policies and procedures in place which met the very tight risk tolerance of the Reserve Bank. There had been a long delay from when the RBA board had first asked for policies. It had taken them a long time, as the chair has said, to get to the point of implementing those policies. As Glenn has said, from the Reserve Bank's perspective, the important thing is that this company be run mainly for the purpose of printing high-quality, low-cost notes for Australia.

Mr STEPHEN JONES: It is also true, is it not, that in 2007 you had received a report including observations about the behaviour of a certain group within the BDG group within NPA? It also had concerns about uncommercial rates being paid to agents. No doubt these informed the decision of the board.

Mr Battellino : Exactly; that was the background as to why the board took this decision.

Mr STEPHEN JONES: The board decided to appoint Freehills to conduct an audit or an investigation instead of going in the direction of advising the AFP. At any point in time did the Freehills investigators have access to the agents?

Mr Battellino : I do not think they did?

Mr Campbell : No, they did not; it was beyond the scope of their investigation.

Mr Stevens : They were asked to investigate the compliance of NPA's management and staff with Australian law and to advise on business practices by those people.

Mr STEPHEN JONES: I understand that, but presumably it would be very difficult to have an investigation into compliance with Australian law in the area of whether payments had been made for a bribery or an inducement unless you are having access to the agents who may be alleged to be making those briberies or inducements.

Mr Stevens : The concerns that arose were out of things that the agents had said. Some of them had been relayed through another party before the NPA manager had heard them. Certainly, in one case—I think it is in the paper—one of the agents responded in writing to those concerns denying improper conduct. I am not a lawyer but I would have thought that Australian law prohibits any person who works in NPA from offering a bribe or knowingly aiding someone else to do so. The investigation did not ask Freehills to go to other jurisdictions and see what was happening there. It asked for an investigation of all the documents and interviews to ascertain the question of whether the people in NPA were complying with the provisions of Australian law.

Mr STEPHEN JONES: But presumably the source of all this is whether bribes or inducements are being offered by agents in another country. I find it difficult to see how that investigation could have proceeded properly—whether it was Freehills, the AFP or anybody else—unless access was made available to those agents.

Mr Battellino : One issue there is that if Freehills felt that this would be a constraint on their ability to provide advice they would have said so. My understanding is that the advice was very clear and that they did not qualify it to say, 'Well, it's qualified because we haven't spoken to the overseas agents.' If they thought this was going to be a significant issue, I would have thought they would have reported that in their report.

Mr Campbell : There are a couple of obvious points to make, Madam Chair, but I think it would go to the legal processes that are currently underway.

Mr STEPHEN JONES: I am being very conscious not to go into that area. What I am getting to is what led the RBA and NPA and the board members of those respective organisations to make a decision between 2007 and 2009 to conduct an internal audit by Freehills or any other organisations—I make no cavil about the quality of that report—instead of going to the AFP. Why was it that you decided to go down that path?

Mr Stevens : The answer to that, really, is that you have concerns being raised and it is quite proper for the board of the company to say: 'We need an assessment of what evidence this is. What does it mean? Is it evidence?' As I said earlier, if the conclusions from the lawyers had been, 'Yes, it is evidence,' or, 'We can't quite tell, but possibly there is a breach,' then the company would have been on a different track, and things would have turned out differently.

It was not, to my knowledge, that the NPA board and certainly not the bank ever said 'Will we do an investigation using an outside law firm or will we call the police?' That was not the process. The process was that it got escalated until the point where we had a subcommittee of the NPA board chaired by a person independent of the company, but with knowledge of it, getting serious outside advice from highly qualified people until such time as they get an answer they think they can understand and rely on. If the answer had been different then I am sure it would have been down to the police. The answer was what it was, and so that question to the best of my knowledge did not arise in people's minds. It certainly did not arise in my mind.

Mr STEPHEN JONES: Was advice at any time provided to either NPA or the Reserve Bank that this was a matter that should be referred to the Australian Federal Police?

Mr Stevens : No, I am not aware. If you think about the people involved, they were experienced business people, experienced auditors, legal professionals and our own internal counsel. As far as I know none of those people, or the NPA board members, at any point gave any advice to me, to the bank or to the board that we must immediately refer this to the police. That advice was not put.

CHAIR: Can I just stay there for a bit. This is the really interesting bit between April 2007 and the ceasing of the agents in June 2007, that seven-week period. My understanding from the earlier statement is that by the time of deciding to bring in Freehills the use of agents had already ceased. Is that correct?

Mr Stevens : That decision was taken at the NPA board on—

Mr Campbell : Tuesday, 12 June 2007. The most cogent explanation I can give for that is the explanation that is contained in the minutes, which says the view was expressed that the Reserve Bank strongly supported the recommendation of ceasing the agents because the reputational risks associated with agents outweighed the benefits of any export sales.

CHAIR: So it was a risk management?

Mr Campbell : It was a risk-reward analysis. There was no suggestion that it was being done because the board was of the view that there had been corrupt activity.

CHAIR: I think you said earlier, too, that the board had been asking management to review the possibilities of using retainers.

Mr Campbell : That predates this. This was an endpoint, this was a decision to stop. Both in Securency and in NPA the question of the appropriate model for remunerating agents had been dealt with earlier, and the retainer question arose in that earlier evaluation.

CHAIR: Then again, my understanding is that Mr Battellino then suggested that the action should go further than the NPA board had suggested and that there should actually be a review of whether or not any criminal activity—

Mr Battellino : No, no. I think when the NPA board met on 12 June at that point they had the audit that was done.

CHAIR: Yes.

Mr Battellino : The difference was between the draft audit recommendations that had come from the auditors, which were available in early June—that is where the decision went from being just warned that the draft had said, 'Let's counsel staff. The company should counsel staff about the dangers of using agents.' That draft was changed to say that, as well as doing any of that, there should be further work done to investigate what is happening here. That is the decision that was taken by the NPA board at the 12 June meeting. The other change to the draft recommendation had said, 'Let's cut back. The company should cut back where possible on the use of agents.' That was changed to, 'The company should stop using agents all together.' The reason I suggested those changes was because, as Frank said, and as eventually reflected in the NPA minutes as well, the risk reward just was not acceptable to the bank.

CHAIR: Then you also decided to send in Freehills to investigate whether or not any Australian laws had been broken.

Mr Battellino : That is right.

CHAIR: If the decision to cease agents was a risk one, is that a precautionary action that you were recommending or an investigative action?

Mr Battellino : The auditors had said that there had been suspicions raised in the board paper. I felt they had not been dealt with enough and I wanted to understand exactly what was going on. That is why I said that there needs to be further investigation and expert legal advice sought here.

CHAIR: Thank you. Mr Smith?

Mr TONY SMITH: Thank you, Chair. I think we have got a lunch break at one, is that right?

CHAIR: Yes.

Mr TONY SMITH: Okay. I will not obviously get through everything before then. Could I follow up on the tone of some of the questioning, particularly from my colleague next to me Mr Buchholz. As you said, Governor, he got straight to the point when he asked whether you had been derelict in any way. Can I put it another way? I heard your answer and I have heard Mr Battellino's answer. In hindsight, what regrets do you have or lessons have been learned generally?

Mr Stevens : Hindsight is a great thing. People do not live their life in hindsight; they live it a day at a time in real time. If pressed on this, I would have to say that there should have been more scepticism and more questioning of the managements of both companies earlier than there was. I think it is hard to avoid that conclusion. It is with that viewpoint I would say that this is why, in thinking about the future, we want Note Printing Australia to have a much more narrowly defined role and a closer link to the degree of risk tolerance that the Reserve Bank has. We really in the medium term have no business being an owner of Securency. That is a successful company, but it no longer needs us. We have already said that we will be looking to exit that shareholding. I guess that is what I would generally say to your question.

Mr TONY SMITH: If I could perhaps go, firstly, to Mr Battellino and go to the meeting with the Note Printing Australia manager. You have answered a number of questions on this, so I will try not to repeat the questioning from earlier.

You have said that you first met him at that meeting on 5 June. Both you and Mr Campbell have given evidence this morning about how that arose. I just want to take you to some of that, and that day, in greater detail. You had become aware through Mr Campbell of his work through the audit, and you have outlined that in some detail. But, you wanted to hear directly from him, because you were concerned that there might be pressure. I think they are the words you used. Obviously, following a conversation with Mr Campbell, he was asked to come to Sydney. Did you contact him and ask him to come to Sydney, or did Mr Campbell contact him?

Mr Battellino : I think Mr Campbell did. I did not contact him. I think maybe Mr Campbell did.

Mr Campbell : I did.

Mr TONY SMITH: He came on the 5 June and had a fairly long meeting with you?

Mr Battellino : The day of the Reserve Bank board meeting was 5 June so, I was tied up all morning and through lunch with the board. I met with the manager at three o'clock.

Mr TONY SMITH: Yes.

Mr Battellino : I had another meeting to discuss an important document at 4:15, and I had to leave to read that document and prepare for that meeting before then.

Mr TONY SMITH: A bit over an hour?

Mr Battellino : The meeting would not have gone an hour because I needed time to prepare.

Mr TONY SMITH: So less than an hour?

Mr Battellino : That is my recollection.

Mr TONY SMITH: Okay. Obviously, during the course of that meeting the manager outlined the concerns that were subsequently contained in that written memorandum.

Mr Battellino : Yes.

Mr TONY SMITH: You asked him to put it in writing. You have spoken about the issue of confidentiality, which I will come back to. I will go to the Governor's statement of earlier this morning where it says on page four that the manager was assured that the statement which he would subsequently write would be read by only a small number of people—you and perhaps the Governor. He was told that at the time. Once you had—

Mr Campbell : May I clarify that? That statement about being read by the deputy governor, and perhaps the Governor, was a discussion in an exchange of emails between the manager and me because the manager felt under great stress. He wanted to provide assistance. I understood the pressures he was under and his reluctance to have the document distributed more widely. When we were having that conversation in the exchange of emails, I was not certain about who would read the document, but I understood, given the manager's concerns, that it would be very tightly held. It was my expression that it would be read by the deputy governor and perhaps by the Governor.

Mr TONY SMITH: Was that after the meeting?

Mr Battellino : I asked the manager to put his concerns in writing at the meeting.

Mr TONY SMITH: And then following the meeting—

Mr Battellino : Following the meeting, the arrangements by which that would happen were discussed through Mr Campbell.

Mr TONY SMITH: That is what Mr Campbell was referring to.

Mr Battellino : Yes.

Mr TONY SMITH: That is a reasonable assumption. His concern would have been that it be tightly held but, if it was going to go to the deputy governor, you would assume perhaps that it would also go to the Governor.

Mr Battellino : Perhaps.

Mr TONY SMITH: On that basis, he went away to write it. Following this meeting, did you have a new level of concern?

Mr Battellino : No, because the main message I took from that meeting was that he had confirmed the information that Mr Campbell had relayed to me about the NPA board—I had not seen the NPA board paper—and the information that the auditors had given me in the audit they had been running. For me, it was the same material coming forward.

Mr TONY SMITH: After speaking with Mr Campbell, he arranged the meeting. The manager came to Sydney. You had the meeting. Did you tell the Governor beforehand that you were having this meeting?

Mr Battellino : I cannot recall whether I told him beforehand. I certainly told him as soon I finished the meeting. We had a discussion that I had the meeting.

Mr TONY SMITH: Because that is what I was going to ask; I imagine your offices are very close by.

Mr Battellino : Yes that is right. I mean, Glenn and I had a very open and trusting relationship and we kept each other informed. He knew I was dealing with it, and that was fine.

Mr TONY SMITH: So on that very day you told the governor you had had this meeting and that a written memorandum was coming?

Mr Battellino : Yes.

Mr TONY SMITH: It says here in today's opening statement by the governor that whilst the manager was told it would certainly be kept to a small number of people, including yourself and perhaps the governor, that it was not provided to the governor. I am just wondering why that is the case.

Mr Battellino : The statement came in from the manager's lawyer to our lawyer a few days later—I think it was the 8th, or something like that. Our lawyer gave it to me to read. As per the arrangement, I read it and gave it back to our lawyer.

Mr TONY SMITH: With respect, you have talked a lot about things being escalated, and they have been escalated to a certain level but not escalated to the governor.

Mr Battellino : At that point, as I said, Glenn was aware that I was dealing with it. He knew the issues, he knew what was around and I think he was satisfied it was being dealt with properly.

Mr TONY SMITH: When you say he knew the issues; did you brief him on the contents of it?

Mr Stevens : I understood that he had had a meeting and that the matters were in the draft audit report which, as Ric says, are substantively the same matters. So I knew about those things, as you would expect. My concern was simply, 'Is there a process of dealing with this that is in place and being actioned?' The answer was yes.

Mr TONY SMITH: I can see that, but in terms of what actually occurred, Mr Battellino, you requested the memorandum, you told the governor that you had had a meeting, you cannot recall whether you told him in advance that you were having the meeting but certainly after the meeting you told him the meeting had occurred and that you had sought a written memorandum.

Mr Battellino : Yes.

Mr TONY SMITH: Once you got that, you did not provide the governor with a copy, as the governor said. Governor Stevens, can you confirm that you did not ask for a copy at any point?

Mr Stevens : I did not ask for a copy. The important thing to happen with the memo was that it go into the process of investigation, which it did. That is the important thing.

Mr TONY SMITH: I am just trying to establish the facts. So the deputy governor read it but you—

Mr Stevens : I did not see it, no.

Mr TONY SMITH: And did not request it at any point.

Mr Stevens : I did not request it. I felt I had enough knowledge of the general issues and the process that was underway to deal with them. I was satisfied with that.

Mr TONY SMITH: Okay. And have you read it only recently?

Mr Stevens : I have read it multiple times in the past period. I think you asked me last time when the first time was that I read it, but I do not remember. It was a document that, on request, was given back to the author, as far as we know. The version that the Freehills people were given, which was virtually identical but had a couple of very small changes, was also given back to the author. Such was his desire for confidentiality, and we fully respected that. It is not a document that has been lying around the place. I did not read it at the time and the copy that we have now is the copy associated with the police witness statement that the person concerned offered for the prosecutions.

Mr TONY SMITH: Would you accept now that people could understand why people below the deputy governor were not shown it, given that strict need for confidentiality, but not why, perversely, the need for confidentiality looks like it extended almost to you?

Mr Stevens : I do not agree with that at all. There is a five-page memo and the deputy governor has met with the man for some time—up to an hour, as I think we established earlier. There is the draft audit. I have been briefed on what this is about and what is now proposed to be done. I felt quite content that the process was in hand, that serious people were doing what was needed, and I moved on to my next problem.

Mr TONY SMITH: On to your next problem, did you say?

Mr Stevens : On to my next problem, whatever that was on the day.

Mr TONY SMITH: You do not think that, with hindsight and given you have read it multiple times recently, it would have been useful to have had it brought to your attention or for you to have requested this?

Mr Stevens : I do not think, even with hindsight, having read that document—well, without hindsight, I do not think that I would have proposed any different course of action to the one that was already in train had I read it.

Mr TONY SMITH: When you had the meeting, Mr Battellino, and then subsequently received the document, you obviously had the same thoughts. You did not at any point think, 'Are we pursuing the right course of action? Should we do something different other than just refer it to Freehills? Does the bank have a separate responsibility?'

Mr Battellino : No. As I say, the document, to me, was confirming information that had already become available. There were some new bits in it, but basically the broad picture was there and it was given to Freehills—

Mr Stevens : There is another point—if I may, Madam Chair—which is: there is a board of NPA whose job is to govern the company. Our responsibility is to be satisfied at all times that they are doing that properly. If we had a view that something should be done in addition or differently, we would put that view. Other than that, we are quite content to let them manage the company and oversee it. Personally, I think that what Ric did, in asking to see the author of this memo, was beyond the minimum he would be expected to do for an issue in a subsidiary company. He could actually have just let the NPA board process take its course, let the draft audit report remain the final one, and accepted that the NPA board decided, 'We will have a management review rather than an audit' in the first place. He did not do that. He actually added additional strength to the steps that the NPA board was in the process of taking. I think that is completely consistent with having a subsidiary board of a company whose job it is to govern the board, and where, on occasion, where we think, 'Actually, we'd like a bit more strength there,' we tell them. The rest of the time we let them do their job. I think that is perfectly sensible.

Mr TONY SMITH: I just want to get some precision, Governor, on one aspect of this. Mr Battellino has told us today that, when he had the meeting on 5 June, he told you about it pretty soon afterwards. We will not hold you to the hour, but, given you had a Reserve Bank board meeting, we can assume it was that afternoon. So you were aware the meeting had taken place—you were not aware it was going to take place, but you were aware it had occurred. And, whilst you did not see this written memorandum—I want to be very clear on this—you were clearly aware that it was coming—

Mr Stevens : Yes.

Mr TONY SMITH: and that it had been received?

Mr Stevens : I was aware that it had been asked for. I do not remember, whether, when it came—I think it was the 8th—somebody said to me, 'It has now arrived'. I do not remember—

Mr TONY SMITH: But you have a clear recollection that—

Mr Stevens : I knew that there had been a meeting and that it had been asked that these things be put in writing. Yes, I knew that.

Mr TONY SMITH: The reason I asked you that is because I want to take you back to February of this year when I asked you some questions. I am going to recount some of that from Hansard, where I asked:

So, just in answer to my question, those concerns were raised by an NPA staff member with NPA?

Mr Stevens: Yes.

And then I followed up:

And with the bank?

And your answer was:

I think the bank's senior management became aware of it because one of the assistant governors was a board member of NPA—

which would be you, Mr Campbell—

so he was involved in the process of the NPA board strengthening these things—

which we have spoken about—

I think he would have become aware of it there. If you are asking whether the person in question wrote a letter or something to the bank, I do not think that he did, no.

In fairness, I will point out I asked the question again in the dying minute, because my colleague Mr Buchholz finished a minute early at the time. When I asked that question again, your answer was:

I need to come back to that. I think I said that the bank was aware of that but that it was not in writing. Actually, that was not quite true. I have been reminded while we have been talking that, in fact, the deputy governor invited that person to put that in writing, which he did, and give it to the deputy governor. That written statement on the matter was available to the Freehills people—

et cetera—

So, whereas I said I thought that we were aware of it but that it was not documentary, in fact it was invited to be put in documentary form …

How do you explain your clarity now, when at the time, back in February when I first asked you, you did not seem to be aware that anything had been put in writing. You are only aware when you had been—

Mr Stevens : I knew that it had been put in writing. The question I thought I was being asked was: 'Did some process of a phone call or a letter from out of the blue come to the Reserve Bank about the matters at NPA?' The answer was: 'No, that didn't happen.' I had neglected to recall the fact that the person concerned had been asked to put it in writing. I was reminded of that via an email during the hearing. So I wanted to clarify that, yes, indeed, on request, the person concerned who had had these concerns had been asked to put them in writing. I wanted it to be clear, because we are committed to accuracy. I wanted to come back to that before we finished. That is what I did.

Mr TONY SMITH: Okay. So your clear recollection—even in February—was that something had been put in writing?

Mr Stevens : I was reminded that we had asked for this document.

Mr TONY SMITH: But you were reminded? Chair, I have got many more questions. I am happy to keep going.

CHAIR: I think we might break for lunch and come back—we are not going to do an hour, are we? Do you need an hour for lunch? Can we do it in half an hour? Half an hour. We will be back at 1.30 pm. Thanks.

Proceedings suspended from 13 : 01 to 13 : 32

CHAIR: We will resume with questions from Mr Smith.

Mr TONY SMITH: I want to go back to where we were with Mr Battellino. We were talking about the memorandum, all the circumstances surrounding the meeting relating to that, the writing of that memorandum and the provision of it through the bank ultimately to Freehills. I had asked a series of questions about whether the governor was advised of that at the time. I would like to move on, Mr Battellino, to the issue you raised this morning in response to some questions I asked in August, just a month or so ago. As you are aware, I asked questions to the effect that, in the interests of openness, wouldn't it have been better, since you had had this meeting, you had had the discussion, you had requested the memorandum to be prepared, if that had been volunteered earlier? I want you to enlarge on that a bit, noting to the committee members that, before the lunch break, you said briefly that, essentially, the reason for that was the confidentiality stipulation.

Mr Battellino : Yes, that is right. As we went through this morning, the manager had been very concerned about this approach to the bank. He wanted extreme confidentiality around it. We respected that, and we have always respected that. In some ways it goes against my nature, because people who know me know I am a very open and transparent sort of person; nonetheless that was a condition on which he gave his statement. Having said that, as I also explained this morning, I do not feel that anything I said earlier had misled the committee, because in my mind, and I think more generally in the bank, the significant contribution that Mr Hood had made was through the NPA board process and the audit process, and this memo that I asked him to prepare was a follow-up. I think I might have said that an employee of NPA had made these allegations, and I think that is an accurate statement. He made those allegations, and they had all been made well before that memo got to me. Nonetheless, the bank takes very seriously its responsibilities to protect people who have come forward with information. That is what he wanted and that is why we always kept it confidential.

Mr TONY SMITH: There are a couple of issues there that I would like to go to. I will give you the opportunity to respond. One is what you pointed out under whistleblower legislation. Obviously at the time, in 2007, his concern for confidentiality related to the fact that he was working at Note Printing Australia and how that would affect his job—is that fair?

Mr Battellino : I imagine so, yes.

Mr TONY SMITH: It is an obvious one in many ways. I suppose what I was drawing to was how, in your view, will that change—you are obviously more familiar with the legislation and the like—years down the track when he is no longer working there.

Mr Battellino : The main thing is that there had been an exchange of correspondence before he gave that memo, and that was very clear what he wanted done with it, the conditions under which he gave it, and basically that is what we respected.

Mr TONY SMITH: I will take you to August 2011—and I was not on the committee at that point. You were asked a series of questions by Ms O'Dwyer—who has joined us; I know she was held up this morning by some engagements—Mr Ciobo and Mr Bandt. This was in the days following some new revelations in the Age newspaper, and there have obviously been lots of stories since that first story in May 2009. After some questions from Ms O'Dwyer, Mr Bandt followed up and I refer to one of those. He was talking about the audit report on Note Printing Australia, and he made a number of statements and asked whether it was an accurate summary of the report. Your answer, as Hansard records it—and I was not there—was, firstly, 'I cannot recall'. We can provide this for you, if need be, but your answer was, firstly: 'I cannot recall' A range of issues were raised in there. Allegations had been made by one of the staff members that the agents had said certain things. The agents denied those. One of the agents had sought to mislead one of the central banks overseas about the exact size of his agency fee. There were a number of issues like that.' On my reading of it, that was the first time you were asked about these issues. Your point was that you were trying to preserve the confidentiality. Was that in your mind at that time when you were asked those questions?

Mr Battellino : Yes, definitely. You are referring to 'I cannot recall'. A lot has happened at the Reserve Bank in the five or six years that all of this has gone on.

Mr TONY SMITH: You would recall what was in the audit report, surely?

Mr Battellino : In very broad terms. If you are asking me: do I recall six years after the event, or whenever, everything that is in that audit report? I had a very—

Mr TONY SMITH: I think, if you look back at the media coverage in the lead up that prompted the questions, I would have thought that, if you had not recalled, you would have reminded yourself.

Mr Battellino : The broad understanding I had at that point was that the audit report had made all these allegations about business practices, and raised some suspicions.

Mr TONY SMITH: Given we are an oversight committee, you did not feel, at any point—if we accept you are trying to preserve confidentially—that, if you could not volunteer certain information, you did not want to add to the committee that there was certain matters—

Mr Stevens : Were we asked, Madam Chair, at some point: could we please have a blow-by-blow account of every piece of the process that happened in 2007? We were not being asked that. We have given that today. We have spent quite a lot of time in the last few weeks getting back across this. This was a very different setting.

Mr TONY SMITH: With respect, I will come back to you, Governor. I am asking Mr Battellino about his testimony.

Mr Battellino : Can I say that in every one of these meetings since the police investigation started in 2009, we have been very conscious that there is a police investigation going on, and you would be very careful not to compromise that in any way. Similarly, more recently, when the allegations have been made against, or a charge has been laid against individuals, there are court processes running. Before every meeting we were very careful not to cut across those legal issues. Having said that, there is certainly no attempt or wish to mislead the committee in any way.

Mr TONY SMITH: In August 2011, following a series of questions from Ms O'Dwyer and follow-up questions from Mr Bandt, you consciously felt that you could not volunteer this information because of confidentiality. Then, as I recounted before the break, the following February—that is in February this year—Mr Stevens was able to confirm the existence of the memo and the meeting. What changed between August and February?

Mr Battellino : I think that Mr Stevens was actually asked specific questions about the memo.

Mr TONY SMITH: Yes. That is true.

Mr Battellino : I was not asked specific questions. I was asked in general about the allegation that this person had made. As I say, those allegations were made mainly through the board paper and the audit and with this statement to me.

Mr TONY SMITH: If you had been asked, you would have answered? I thought that, if you had been asked, you would have said that you had to maintain the confidentiality.

Mr Battellino : It is an interesting question. What would I have done? I do not know. I would have had to answer to the committee. I really do not know. It did not come up.

Mr TONY SMITH: It was obviously in your mind at the time.

Mr Battellino : I have just been reminded, again. And I think you know this, that, basically as I said, allegations had been made by one of the staff members and agents had said certain things.

Mr TONY SMITH: I know. I just read that out.

Mr Battellino : Yes, that is right. It is not as if I withheld. That is an important statement that allegations had been made. I think the focus on this statement that the manager gave to me is a small part of that story, as we explained in the morning.

Mr TONY SMITH: A small part of the story?

Mr Battellino : Yes, because in our minds that was me following up information that had already been available to the NPA board and the auditors and through the bank.

Mr TONY SMITH: That is right. But the question, of course, is with respect to the audit report. Given all that, I was surprised back in August. You began your answer, 'I cannot recall what was in the audit report,' and then you say, 'Allegations have been made by one of the staff members,' et cetera. I am not going to read it for the third time. The fact was you had met with this person and you had commissioned a memorandum.

CHAIR: After the audit report.

Mr Battellino : Yes.

Mr TONY SMITH: That is right. I think we have covered the difference between August 2011 and February of this year. Could I go to the governor and ask a number of questions about 2009. I respect the fact that Mr Battellino might want to answer some of these but I will start with the governor, if I may. In your opening statement today on page 9, about half way down, you talked about what happened once the AFP were involved and the offer and provision of documents. I should also point out that you made a similar point in your opening statement back in August. Halfway down the page it says:

At his first meeting with the AFP on 26 May 2009, Dr Rankin referred to the audit conducted at NPA in 2007 and the Freehills report and made them aware of the documents …

that is, those two documents; the audit and the Freehills report.

Mr Stevens : Whether it was limited to those two documents, I cannot say, but Dr Rankin's account of this—which is what my remarks are based on—is what he advised.

Mr TONY SMITH: So you are not sure whether that includes the memorandum from the staff member at Note Printing Australia?

Mr Stevens : I am not sure that it would. I do not think that it would need to because the Freehills report had access to that material and was partly based on that, amongst other evidence.

Mr TONY SMITH: The only difference between your statement today and the one in August is that in August you talked about the documents being provided in a timely way and today you talked about those documents being provided in January and February.

Mr Stevens : After they were requested in January.

Mr TONY SMITH: So you were comfortable that Dr Rankin and Dr Rankin alone dealt with the Federal Police on these matters, and that there was not a need for anyone else within the bank to do so?

Mr Stevens : He was the chairman of the board of Securency. The allegations initially published were about Securency.

Mr TONY SMITH: Yes, that is quite right.

Mr Stevens : That board, I understand, discussed the matter about whether to call the police. He conferred with me as well and we agreed, 'Yes, that is the thing to do.' He did that. He met with them, I understand, on a few occasions. I saw no need for me to add to that at all. I think it was entirely proper for the company chair to engage with the police.

Mr TONY SMITH: You had obviously given that some consideration at the time, because I think you said a while back—and correct me if I am wrong here, I do not have every bit of paper in front of me, although it might look like it—that if Securency had not taken that action you would have asked them to at that time.

Mr Stevens : I cannot recall if I said that, but it is moot, isn't it? It was really Bob's view that we should. We discussed that briefly, as I said this morning, and agreed, 'Yes, that is right.'

Mr TONY SMITH: Okay. As you have indicated today and on previous occasions—and with everything you have said today with respect to Securency—when these stories broke on Securency, which were the first stories in middle to late May 2009, you were obviously quite shocked by them because your concerns had been about Note Printing Australia on the way through and not so with Securency. When that happened, apart from the shock of it, did it cause you to have doubt about everything that had occurred up until that point? I will be very clear where I am leading. At that point did you think: well we did not think there was a problem with Securency. There were some management issues at Note Printing Australia and there had been, to use your terms Mr Battellino and Mr Stevens, escalating concern. At that point, you did not think: look we should just talk to the Federal Police as well, even though it was about Securency, given there had been agents in common and the like?

Mr Stevens : Let's pick up a couple of things there. The articles were even a bit more surprising because we had actually asked the question at Securency. We had the audits—two of them in fact—

Mr TONY SMITH: Yes.

Mr Stevens : which is the background to me having said here before that I did not know about these particular matters before then because those were things that you might have thought the audit would find if they were there. That is one point. If your question is, 'Did I think that the Reserve Bank had an obligation separate to either of the companies to approach the police?', that did not cross my mind I must say. What I thought was appropriate was for Securency to do what they did and for there to be no doubt that the AFP would be told about the earlier matters at NPA. And Bob told them about that at a very early stage of the process. I do not see what I would have added with any separate process.

Mr TONY SMITH: So, what you are saying is that when these stories—obviously you had a little bit of notice in the days leading up—broke in the style they did, and given with Note Printing Australia that you knew things had been escalating—I suppose I am trying to simplify it here. As you just said, there had been audits of Securency which is why you were surprised. Given there had been audits of Securency that had raised no concerns and that story broke, it did not cause you to doubt Note Printing Australia, given you had had audits of Note Printing Australia and there had been concerns?

Mr Stevens : The thing is the audits had been—

Mr TONY SMITH: Yes, but you were not worried that they had not uncovered everything?

Mr Stevens : I had no reason to doubt—I do not think—that that process had been done properly, as we have been through in some detail. It was actually the NPA board, the audit, and then the subsequent subcommittee work, that addressed all these matters. Did I react to the allegations about Securency by thinking, 'Oh all of that was somehow invalid?' No, I did not.

Mr TONY SMITH: If I could just draw you back. You distinguish between the two, given they are separate companies, but given they are using agents in common—how many agent in common, Mr Battellino? Certainly one anyway.

Mr Battellino : There were two. The Malaysian one was the main one. I think the Chilean one had some overlap for a while as well as I recall.

Mr TONY SMITH: That in itself did not raise any alarms?

Mr Battellino : You are going back to 2007 now?

Mr TONY SMITH: Both, really: to 2007 and 2009.

Mr Stevens : In 2009, of course, that agent was not working for Securency anymore.

Mr TONY SMITH: Yes. What about back in 2007?

Mr Stevens : In 2007, that agent was terminated by NPA. He was also terminated by Securency shortly thereafter. As far as I know, that was not because of any specific allegation of impropriety on his part in acting for Securency, but simply because, as I understood it, they did not want to have an agent in any capacity about whom there were any probity concerns at all.

Mr TONY SMITH: I will just take you back to the provision of documents to the AFP. Dr Rankin was the only person who spoke with the AFP.

Mr Battellino : I will interrupt here and say that I had two conversations with the deputy commissioner as well.

Mr TONY SMITH: Oh, okay. When were they?

Mr Battellino : Sorry?

Mr TONY SMITH: Were they around the time of the story—in the immediate day or so--or?

Mr Battellino : I cannot recall when they were. We had a couple of conversations.

Mr TONY SMITH: You cannot recall whether they were on the day, or the day after, or around about that time?

Mr Battellino : No. I think it was some time after.

Mr TONY SMITH: Weeks after or days after?

Mr Battellino : I cannot recall. Sorry; I should have looked that up. I did not.

Mr TONY SMITH: Yes. Okay. We might be able to—

Mr Stevens : Dr Rankin called the police and then he facilitated the AFP talking to a number of people in the company and then, I think, also in NPA at the time that the investigation widened to include them.

Mr TONY SMITH: We are sure, given your opening statement today, that when he met with the AFP on 26 May 2009, he referred to the audit report for NPA in 2007 and the Freehills report. We are sure of that.

Mr Stevens : That is what he advises me happened.

Mr TONY SMITH: Not only did he advise the AFP; he said that they were available if and when they were required.

Mr Stevens : The AFP indicated that they would request them, if and when they were required.

Mr TONY SMITH: Yes, that is fine. But, we are not sure and we do not have an ability to find out today, whether that offer included the memorandum. I have taken your point that, in your view, it was not important. As a matter of fact, we are not sure whether the existence of that was advised by Dr Rankin.

Mr Battellino : I cannot recall whether Dr Rankin also mentioned that at the time. The police subsequently, I think it was in January 2010, asked for that information.

Mr TONY SMITH: For the memorandum?

Mr Battellino : No, for the audit report and the Freehills report. I think, as Glenn said, we gave it to them in February 2010. I think that at that time Bob Rankin also gave them any other documents that they wanted.

Mr Stevens : We do not know whether that included that particular memorandum.

Mr TONY SMITH: You don’t?

Mr Stevens : I do not know that.

Mr TONY SMITH: That is okay.

Mr Stevens : I will repeat the point though, which I think is important, that they had the audit report—which contains, in essence, the same things—and the Freehills work, which was based, in part, on the memorandum plus other material.

Mr TONY SMITH: Yes, you have made that point. You rightly pointed out in your opening statement that the existence of the audit of Note Printing Australia and the Freehills report was conveyed to the AFP on the 26 May and that the AFP indicated that it would request those documents if and when they were required. We do not know whether the existence of the memorandum itself was conveyed to them. I take your point on that. We can agree to differ on that. We do not know whether the existence of that was advised by Dr Rankin. Now Mr Battellino has disclosed that he met with the Federal Police on a couple of occasions. He cannot be exactly sure when. You cannot recall advising them that you had a meeting and asked for a written memorandum and that that had been passed on to Freehills?

Mr Battellino : I do recall at that first meeting that I discussed with him that we had had that review of NPA in 2007. He was aware of that at the time.

Mr TONY SMITH: So he was aware of the audit report, but you cannot recall whether you disclosed the fact that you had met with the manager from Note Printing Australia and asked for him to put his concerns in writing and convey those to Freehills?

Mr Battellino : I cannot recall whether I said that. Keep in mind that from our perspective that document came at the tail end. That was me following up.

Mr TONY SMITH: You have said that.

Mr Battellino : That is the mentality we had at the bank.

Mr TONY SMITH: So the likelihood is you did not mention it, I suppose?

Mr Battellino : I am not sure. I cannot recall what was in that conversation.

Mr TONY SMITH: Do either of you know when the police requested that memorandum?

Mr Battellino : I do not think that the police ever requested that from us as far as I am aware. To the extent that they had an interest in that memorandum they knew it existed from the Freehills report—it is referred to in the Freehills report—and they knew about the NPA manager.

Mr Stevens : He was one of the people that they spoke to.

Mr Battellino : He was one of the people they spoke to. My understanding is that they got that document from him.

Mr TONY SMITH: From the manager at NPA?

Mr Battellino : I do not know.

Mr Stevens : We do not know whether they actually ever asked for that from NPA.

Mr TONY SMITH: My point is you do not know whether that was provided by Dr Rankin.

Mr Stevens : I do not know that, nor whether the AFP, having read the other material, asked for it specifically. I do not know the answer to that. We know that they have it, but I cannot tell you exactly what the channel was.

Mr TONY SMITH: To summarise it with what Mr Battellino has said, you are pretty sure the bank did not provide it, because it was not asked for, but you are not sure whether Dr Rankin provided it.

Mr Stevens : The bank was not asked. I do not know whether Dr Rankin was specifically asked about that particular document.

Mr BANDT: Sticking with June 2007, I will read out a sentence from the audit report at tab 9: 'Notwithstanding, a policy introduced in 2006 discontinued the practice of using overseas agents.' I am reading from paragraph 2 on page 6. 'In countries where graft and corruption is known to occur it is difficult to be assured that payments made are not in contravention of laws relating to corrupt foreign payments.' That is really the principle that underlies all the reforms that happen thereafter.

Mr Battellino : I think so, yes.

Mr BANDT: I suggest, referring back to Mr Jones's questions before, that this is really the nub of it. One of the significant problems with making payments to overseas agents, especially in countries where graft and corruption is known to occur, is that once you make the payment it can be difficult for the person who has made the payment—who will be bound by Australian law—to find out where that payment goes. It could potentially be difficult for them or for any investigator to find out. Do you agree that in essence this is the principle underlying the concern that has arisen about payment of commissions to overseas agents?

Mr Battellino : Yes.

Mr BANDT: You said that you treated Mr Hood as a whistleblower.

Mr Battellino : A whistleblower is a very emotive term. I do not think that at the time the word whistleblower came to mind. Clearly, he is a person who had helped the board of NPA and the auditors, and we were seeking to follow things up with him. We were asking him to tell us what he knew.

Mr BANDT: You said he was helpful, and it turns out that there was some substance to the matters that he was bringing to your attention and to the attention of others.

Mr Battellino : Yes.

Mr BANDT: When you asked to meet him, he came and met with you. I am not sure if I heard an answer to your previous question correctly, but I think he said something along the lines of how you were aware of most of the things that he raised with you but there were some new things? Am I recalling correctly?

Mr Battellino : Yes, that is right.

Mr BANDT: What were the new things that he told you about?

Mr Battellino : These are things that I think are relevant to the court case; I do not know how much detail I can go into here.

Mr BANDT: Perhaps I shall ask it this way: the memo that he provided after the meeting was a summary of what was said during the meeting. Taking the meeting and the memo together as being the information that he provided to you, are you able to tell us what the most-without naming individuals-concerning allegations were that he put to you?

Mr Battellino : There are a number of allegations in there. Two were in relation to what agents had said, and they have been covered in the NPA board paper and in the audit. There was another allegation that had not been covered in those, which was some comments that one of the staff members from NPA had made, which had led the manager to think there was a possibility that the agents might have been paying bribes.

Mr BANDT: Again without naming individuals, are you able to say the kind of person to whom it was alleged those bribes might have been paid?

Mr Battellino : The manager believed it was in relation to customers of NPA.

Mr BANDT: Was it put to you in June 2007 that some of the commissions that had been used might have been used to make payments to politicians overseas?

Mr Battellino : No. What was put to me was that one staff member had said something which had led the manager to believe it, yes. I think the important thing here is that this was all then given to Freehills to look at and to follow up on.

Mr BANDT: When you refer to the matters that were put to you that were the subject of the audit report, does that go to the agent lying about having dual contracts? Is that what you are referring to? Or is it about seeking payment to a third party?

Mr Battellino : I think—and I cannot remember the exact words—but basically both agents had said things which the manager had regarded as suspicious.

Mr BANDT: Given all of that, and given what you may not have known at the time, but clearly that Mr Hood was not someone who was crying wolf but was genuinely trying to bring matters to the bank's attention, there are some very serious allegations that have been made about what has happened with public money.

Mr Battellino : Yes.

Mr BANDT: It has been said that public money has potentially—and I accept that it is on the basis that he is reporting a conversation—found its way to places that, if it had done that, might then have constituted an unlawful payment. Surely, at that point, the obligations is to ask an investigatory body, like the AFP, who has investigative powers available to it, to come in and investigate?

Mr Battellino : The agents had made these comments. As I think Glenn mentioned this morning, when that was followed up with the agent, the agent had offered an oral explanation. I think the other agent had written a letter in response to the issues that had been put to him, and denied what was said.

Mr BANDT: To refer back to something you said earlier about NPA, I think talking in generalities you said that ultimately you did not have confidence that they would put policies and procedures in place that would satisfy the level required within the RBA. That would extend, presumably, to NPA following up.

Mr Battellino : No, I do not think that. From the Reserve Bank's perspective, we are a very conservative institution and, from our perspective, with the risks the company was taking, it just was not effective for the Reserve Bank to be involved in this industry.

Mr BANDT: I am just wondering what the threshold is to notify something to the AFP. When someone comes and says, 'I have very real concerns that money is finding its way to people overseas in a way that would be unlawful' and when it subsequently transpires that the AFP decide that they want to pursue this and bring charges, why didn't you think it was appropriate at that stage, with such serious allegations, to immediately contact the AFP?

Mr Battellino : At that point, the auditors had been across this and their view was that the evidence was not strong enough. Remember, the auditors themselves did not think the evidence was strong enough to even warrant cessation of the use of agents, or to conduct further investigations.

Mr BANDT: Was it that you did not feel that what was being said to you was credible?

Mr Battellino : No. I have come up through the economic policy side of the Reserve Bank. I am not a commercial person. I am not a lawyer. My feeling was that these things, if they are said, even though the auditors did not take them to the point where they said something very serious had been done, had to be looked at further.

Mr BANDT: You did have concerns about it, and you did take further steps, as I think you have explained to the committee, to do something. Those further steps were to go to Freehills—and I will come to that in a moment—but those further steps were not to go to the police, even though there were very serious allegations. I am trying to understand why, when there was that fork in the road, for such a central institution as the Reserve Bank—which, one would argue, should be operating to even higher standards of governance than an ordinary company—the precautionary principle did not apply and why you did not go to the AFP. Was advice sought about whether to go to the AFP?

Mr Battellino : We went because of the conclusions the auditors had reached. The auditors had been across these issues, and that was their conclusion.

Mr BANDT: Freehills were engaged and were advising who—NPA? Is that who the client was?

Mr Battellino : Yes.

Mr BANDT: On page 15 of their report, which is tab 29, they recount some of the things they were looking at. One of those is the fact that an agent had requested that money be paid to a third party.

Another they recount is that an agent had a relationship with both Securency and NPA, when in fact that was prohibited under the policies. They summarise other parts of the evidence, and then at page 23 they get to the point of determining how this relates to an allegation that a foreign public official has been bribed. They say that there are relevant circumstantial facts that could give rise to that inference that there had been. They list those there. They talk about the high rates of commission, the detail, the request that a payment be made to a third party, a payment into an Australian bank account and, then again, a reference to political parties.

They then set out alterative explanations for those circumstantial facts. It goes through some of the explanations. With respect to the payment to pay a third party they say that this might be the alternative explanation—and this is the agent that is referred to in the report—as the identity of the person who requested to pay is unknown, it is equally possible that the person was a creditor or even a relative. Then, on the basis of that, and only that, they go on to conclude at the bottom of the page, 'We have not seen any direct evidence that there has been any payment or other benefit provided to a foreign public official.' Freehills had not interviewed the official in question, had they?

Mr Battellino : Which official are we talking about here?

Mr BANDT: The one that is referred to in this report.

Mr Battellino : The agents, you mean?

Mr BANDT: The Malaysian official.

Mr Battellino : You are talking about the agent?

Mr BANDT: The agent rather, yes. They had not interviewed the agent.

Mr Battellino : I do not think so.

Mr Campbell : No, they had not interviewed the agent.

Mr BANDT: They had not looked at the agent's bank accounts.

Mr Battellino : I am not sure about that.

Mr Campbell : I can say that they would not have looked at the agent's bank accounts because they had no power to do so.

Mr BANDT: The only basis that Freehills says to the board that this payment might be legitimate is that we do not know, effectively. They say, 'It is equally possible that it was paid to a creditor or even a relative,'—that third party payment. So, is the situation this, at its highest the Freehills report says, 'We have heard an allegation that it might have been made improperly to a third party, perhaps of a prohibited category. We do not know. It is equally possible that it was paid to a relative or a creditor. 50/50, equally possible.' On that basis they say, 'We can't know one way or the other and we haven't seen any evidence.' That is taken as conclusive proof that there has been no wrongdoing?

Mr Campbell : Can I clarify? If I am skating on thin ice, I would be grateful to know. The fact is, no payment was made on that request. The request was refused.

Mr BANDT: Yes.

Mr Campbell : By definition, it is certainly suggestive of a practice that should not occur, but no payment was made. The payment was refused. I think a little context is relevant here too. This request was first made in 2003 and it was made again in 2004. It was refused properly by NPA's management at that time. On that reading it is not unreasonable to say that it was actually reassuring about NPA's practices, because management would not do something that was improper.

Mr BANDT: But the concern has been raised about this individual agent and, as I understand it, a decision it made by the Reserve Bank not to go to the police, because instead we are going to hire lawyers to investigate.

Mr Campbell : I would characterise your characterisation of it as a fork in the road as not being quite right. There were allegations made. One could argue that it is a requirement of a board, when an allegation is made, that it should satisfy itself of the credibility of the allegations. In the process that we were following, it was not a fork. Going to Freehills did not preclude going to the Australian Federal Police. It was not a decision not to go to the Australian Federal Police. This was a decision to go to Freehills and see what the legal firm had to say and, as the governor has already said, if the conclusion had been different, there would have been no question about what the company would have done.

Mr BANDT: Let us accept that for the moment and explore what Freehills actually said—what questions they asked, who they spoke to, and what they then came back with and told the board. I am suggesting what they came back to the board with was not a clean bill of health, it was not a positive statement that there had been no wrongdoing. It was, in essence, speculation about the legitimacy of this individual in question and why certain thing might or might not have happened, and simply a bald statement that they had not seen any evidence of wrongdoing, when we know that they did not even interview the agent in question and they would not have had access to their bank accounts.

Mr Campbell : I can only repeat what the process was. Credible legal practitioners were asked for their views on the allegations that had been made and carried out an investigation on the information that was available to them. The board was reliant on the conclusions that the legal practitioners came to. We were not qualified to discount what they said and what their conclusions were.

Mr BANDT: I am not suggesting that they be discounted but I am suggesting that the board was nonetheless able to read the report and see that it was not a clean bill of health. It was just a statement that—given the investigation that they had undertaken, which did not include interviewing the agent, did not include looking at any bank records—they found no positive evidence of any wrongdoing. That is a different thing, is it not, when someone says, 'I'm concerned about this,' and then someone goes and looks and comes back and says, 'Well, I can't find any proof that they didn't, but had you looked at these things over there, you might have'.

Mr Campbell : Again, I am skating on thin ice. I think the agent would have said exactly the same thing to any questions, were they possible, as the response that the manager at NPA received to his email of 12 April asking very similar questions and which the agent gave the sort of reassuring answers that one would expect if one was doing business with him.

Mr BANDT: Might that partly be because when a law firm comes asking you questions you are under no obligation to respond and the law firm does not have investigative powers, whereas when the federal police or some similar body comes to ask you questions a different set of arrangements kick in all together?

Mr Campbell : I accept that the Australian Federal Police clearly have more extensive powers than a legal firm. As I said though, this was not a fork in the road; it was the part of a process. The process came to a conclusion with the Freehills report. If the conclusion had been different, the process would have continued further.

Mr BANDT: When does one reach the fork in the road and involve the AFP? What is the test?

Mr Campbell : I do not think that it is a fork in the road; as I say, it is a sequence.

Mr BANDT: When does one reach that limit and take the next step and call the AFP?

Mr Campbell : This is a hypothetical question, so I would like to answer it hypothetically.

Mr BANDT: It is not because, after the reports in the paper, the police were called. I am just trying to understand why, when it appears in the media, the police are called, but at no stage before that. I am wondering what the step is at which it becomes appropriate to call the police?

Mr Campbell : I think the governor has given the explanation this morning as to why the police were called in 2009. In this case—and it is a hypothetical question and I do answer it hypothetically—if the Freehills report had been more ambiguous or drawn a different conclusion, I think the police would have been called. I say 'I think' because it did not happen, so I cannot be certain.

Mr BANDT: Perhaps it is not ambiguous, but when they say, 'We don't have an answer as to why certain requests were made about payments to third parties and we can only speculate,' how is that conclusive and clear to the RBA's satisfaction?

Mr Battellino : Can I just come back there. I think at the end of the day, Freehills did give a very clear answer in their conclusion. They did not qualify it. If what you are saying was on their minds, they did not say it. They would have brought it to the attention of the subcommittee of the NPA. They did not say that. They did not say, 'We have not got anything but really, we have not had enough scope to do this work.' They did not qualify their answer in any way. There was no qualification to the answer.

Mr BANDT: I would suggest that that is something that can be readily inferred just from a plain reading of it, that there were limits as to what they did and who they spoke to. One does not need to be a lawyer to realise those limits.

Mr Battellino : I am not a lawyer, but as a client of a lawyer I would have thought if they felt there was any ambiguity in the advice they were giving they would have advised NPA.

Mr FITZGIBBON: Can I just say to the governor and to your colleagues, I have been on this committee for the large part of the last almost 10 years. Over that time, I have developed a very high regard and respect for you, Governor, and all of your colleagues who have appeared before the committee on various occasions. I think it is fair to say that anyone who listened to your testimony this morning would form a slightly different view about the various events that we have been discussing, compared with the view they might have formed reading various stories in Fairfax newspapers and the associated ABC links with those stories. I just want to ask you two questions: one is about resources and one goes back to a matter you raised earlier. I imagine, and it is fairly obvious to all of us, that since 2006 you have had to commit enormous resources to this issue and appropriately so—it is a very serious issue. But it seems to me that you have committed significantly more resources since mid-2009, when this issue became a very public matter. Can I just invite you to give me some sort of idea of how much of your time and that of your colleges is taken up dealing with this issue.

Mr Stevens : I have been coming to this for the 15 years the committee has been going and I have been to almost every meeting except two. Thank you for your comments. The change in approach in NPA was in 2007 as a result of the work that was done then. The way that company has been governed since then is much more Reserve Bank involvement in the board and so on in a narrower focus. We are still working through actually whether the optimal structure for the future has yet been achieved. That is a current issue for us. The changes in Securency were later, because of the way events unfolded. It is certainly true that we have had to put a lot of time into preparing our responses to these issues both for this committee—especially today, but not only today—and in the media. That is the way it is, but we have to do that to make a proper response to these very important questions, which will not really be concluded for some time yet in a legal sense. Yes, it is resource intensive. I have no choice but to facilitate that.

Mr FITZGIBBON: Can I just get some clarification on something I think Mr Battellino said earlier about Mr Hood. I am not exactly sure now, but I thought that you, Mr Battellino, made some reference to Mr Hood still looking to make some claims, or something to that effect?

CHAIR: I think that the governor decided that it was not wise to go further.

Mr Stevens : Yes, but these are matters that are legal in nature and, really, in respect to his privacy, we are a little bit constrained, I think—at least in a public hearing.

Mr FITZGIBBON: It appeared to me that reference was made in an honest attempt to explain the different versions of the conversation that took place.

Mr Battellino : No, it was not made in that attempt. I am concerned that, in dealing with this committee, we have put the requirements of Mr Hood for secrecy at the forefront. That has continued on under his claim for compensation. My sense is that this leaves the bank very exposed in the sense that people can make mischief of it. In the interests of transparency I want the committee to know that the process had been in train for quite some time and has been dealt with properly. That is the only reason I raised it.

CHAIR: I am just going to come back to a couple of issues. One is the way the two companies, and the activities that the two companies at two different times, have seemed to come together in the way we look at the earlier Note Printing Australia. The second one is the memo that appears, certainly in the media reports, to have been the instigation of everything, when actually it came quite late. I just want to deal with both of those two things. In 2009, when the media reports about events at Securency came to light, what were the circumstances at that stage in Note Printing Australia? The use of agents had been ceased. There had been a major review in the months following that.

Mr Stevens : As you say, the use of agents had been discontinued. There had been a change of CEO. There had been a change of a fair bit of the composition of the board. There had been, on our part, a desire to sharpen it and narrow its focus to be more in line with what we thought was appropriate in the era to which we are going. The new CEO came into the company in early 2008, from outside, I might add, with no baggage from the previous period at all, and has, I think, done quite a bit to try to reform the company and to improve the company's process efficiency and its general internal governance—things like security, management of spoils, and these kinds of things, which had been quite a problem through the earlier years. NPA has been on that quite different track since late 2007.

CHAIR: The question arises whether or not, with the actions that were taken in 2007 at Note Printing Australia, the board could have extrapolated from that what might have happened at Securency?

Mr Stevens : Which board are we discussing? The Securency board?

CHAIR: Whether the Reserve Bank board could have extrapolated from Note Printing Australia?

Mr Stevens : I think when the 2007 audit at NPA came up with the findings that it did, that was one of the first questions that occurred to Ric and Frank and me. Could it be the same there? We had better make sure the auditors go and look. That is the background to the audits that were done.

I think that was the relevant question to ask. It did not get to the bottom of issues that indeed, we subsequently found out, were there. They came to light only much later. I think the bank asked the obvious questions and sought the obviously sensible course of action to answer the questions, and the history is what it is.

CHAIR: Again, I am going to ask whether if the Securency story had not come to light that you think you would be satisfied now with what happened at Note Printing Australia in terms of the action that was taken?

Mr Stevens : That is very hypothetical, isn't it? It could have been in such a world that something else turned up at some point that might have caused us to go back and look. But as I said earlier, I think that the process that began with the RBA board asking a question went through a whole sequence of things that as you said earlier, Madam Chair, accelerated, and culminated in the Freehills work. I agree with Frank; I do not think there was a fork in the road there of AFP or Freehills. That decision tree was never in anyone's mind, I do not think. Really, as I look back on that process, I felt at the time I could see no obvious deficiencies; and even if a process ultimately comes to the wrong answer, the question really is: did the people who were there at the time act in a way that was reasonable? I felt myself that the answer to that was 'yes'. That is not to say that you might not do something a bit differently if you could replay your life, but there are a lot of things in my life I would do differently in that event.

CHAIR: Can I go back to—it is now just known as 'the memo'?

Mr Stevens : Yes.

CHAIR: I am sure there was more than one! Again, once that memo became the subject of media reports not so long back, it did become the centre of things. Mr Battellino, I was interested in what you were saying earlier, in that for you it was not at that point the centre.

Mr Battellino : No, it never was for us, because it was me following up information that had been given. The whole point of that memo was to say, 'Are we sure we have got everything on the table?' That is the point of the memo. That is why that was never at the forefront of our mind. As soon as somebody raised NPA agents, was that the thing that came to our minds? It was not. The thing that came to our minds was the NPA board paper and the audit.

CHAIR: Which came about because of a conversation with the manager—with you, Mr Campbell—back in April?

Mr Campbell : It came about because of a process that the Reserve Bank board and the NPA board initiated. The contents of the board paper certainly reflected things that the manager had uncovered just before the paper was brought to the board. That NPA board paper was always going to come, because the NPA board wanted that board paper and it wanted a candid account of what NPA was doing with agents.

Mr Battellino : Can I also add, in saying what I said, that I do not mean in any way to diminish the role of this manager and what he did.

CHAIR: I understand that. I am really just trying to get to whether the conversation with you, Mr Campbell, was the key memo incident, if you like, rather than the memo later on.

Mr Campbell : I think the catalyst was the fact that the board was impatient. The message to staff was, 'Get on with getting these better practice agreements and policies in place'. I think that brought a number of things to a head in terms of the relationships with the agents, and forced staff's hands to get on with it. In some respects, I was the point person for that exercise. I had been at the Reserve Bank board meeting in April 2006. I understood how seriously the Reserve Bank board regarded these things. I made it my business to make sure that the management of NPA delivered on what the Reserve Bank wanted. As has been referred to before, the audit history of NPA had not been good. I have been on the board from 2004, and there was a certain tendency for recommendations and views of the audit committee to be let quietly to subside. I was quite determined that that was not going to happen this time because, given the Cole Royal Commission, I regarded this as being an important issue for NPA. I approached this question with an open mind. I was not expecting to see what was contained in the board paper. I had no expectations of any of that. But to answer your question, the conversations between the manager and me—and there were others involved as well; the chairman was involved and the chief executive—in April were more of a trigger than the 5 June memo to the deputy governor.

CHAIR: Because it was about two months earlier. Mr Battellino, you also said that there were additional allegations in that memo, and the suggestion that a staff member had said something. As a result of that meeting with the manager, and the memo, you decided then to extend the inquiry process to include Freehills and look at legalities. Is that because of that meeting?

Mr Battellino : No. The decision to do further work was already in my mind before I met Mr Hood. It had come about from the conversation that I initially had with Frank, on the board paper, but more importantly, the audit people had kept me informed as they went about their audit, as to where they were getting to, and I was of the view, before we even talked to Mr Hood, that we really needed to do more work here. When we got that report, I said I wanted it in writing, and it had to be given to Freehills to evaluate. I did not feel I was in a position to make judgements about all these things. I thought the NPA board needed to look at it, do more work and get experts involved.

CHAIR: And you also said, I think, later that that memo was returned to the manager, so the Reserve Bank did not actually keep it.

Mr Battellino : The instructions that the manager's lawyer issued when that memo was being negotiated, were that it would be given to our lawyer, and returned once the investigation had been finished. Our lawyer gave it to me, I read it, and gave it back to her. I do not know what she did with it after that. I assume she did—

Mr TONY SMITH: Sorry to butt in Chair, and no doubt you will stop me—

CHAIR: I was asking it for you, because I thought it was your—

Mr TONY SMITH: Earlier on I asked some questions with respect to the governor's statement, about whether that memorandum was provided to the AFP. I will just go back to that statement. The point was you do not know whether the existence of it was offered up at the time and you were not sure of the circumstances. Are you saying that you asked for it, it was received, you read it, it was transmitted to Freehills, and the bank retained no copy?

Mr Battellino : There are two versions of the statement around. One version came from the manager's lawyers to the Reserve Bank's lawyers, and that is the version that I said she gave to me and I gave back to her. Subsequently—I cannot remember the exact time, but very soon after—another version was transmitted directly to Freehills, once Freehills had started work, and Freehills returned that copy when they finished with it.

CHAIR: So the manager gave it to Freehills, not the Reserve Bank?

Mr TONY SMITH: Are you saying the bank had no copy on its files?

Mr Battellino : We have not found a copy on the files. The only copy that the Reserve Bank has was when Mr Hood left the organisation and he had a copy down at NPA, and he said to Bob Rankin, who was then chairman of NPA, 'I do not want to put this on the files at NPA,' and Bob Rankin said as chairman, 'Give it to me and I will put it in my files as chairman.' I was not aware of that copy in the bank.

CHAIR: I asked the question because I could see in your line of questioning that there was confusion in the process. My understanding is that the manager gave it to the Reserve Bank lawyers, his lawyers gave it to your lawyers, you read it, you assumed the lawyer gave it back, you assumed it was returned, but you are not really sure. That was the agreement, so you would assume that was the case.

Mr Battellino : I do not know.

Mr Stevens : We are not certain of that.

CHAIR: Then the manager gave a copy to Freehills directly—

Mr Battellino : Yes, through his lawyers.

CHAIR: Through his lawyers—lawyer to lawyer—to Freehills and you are assuming that Freehills returned it as well. You noted that.

Mr Battellino : I do not know if we can confirm that. I think Freehills can confirm they actually did return it.

Ms O'DWYER: On the two separate statements—one made directly to the Reserve Bank and one made separately to Freehills—it appears from the testimony you have just provided that neither were kept by the bank. Do you think that is of concern, that as a matter of process you did not keep information of such significance, given the seriousness of the allegations that have been raised?

Mr Stevens : It is a matter of also respecting the conditions on which the document was given and that was the condition. From the process point of view, what is important is what was done with the document when it was available to the people that it was available to, and it was available to the Freehills' team that did the report. It was amongst the material that they had. It was dealt with appropriately, as we felt at the time, but also the conditions under which it was given, to the best of our ability, we had to respect.

Mr Battellino : This morning I did say, one of the things looking back through this period is, that I regret putting the interest of the whistleblower ahead of the interests of the bank and myself, because looking back at that period now, I would not have agreed to those conditions that he stipulated.

Ms O'DWYER: Regarding handing the information back?

Mr Battellino : Yes, how he wanted it handled.

Mr Stevens : It is a difficult situation, because clearly the person concerned wants to protect their anonymity, absolutely. We have to try to do that in order to hear what has to be said. Equally, what he says—and this goes to why you get external legal advice—has to be tested, because someone said, 'Another person said something to me that someone else had said.' That definitely has to be looked into, but you have to find a way of testing, at least with the people you can test with, what the accuracy is and you have to do that in a way that preserves confidentiality and so on.

Ms O'DWYER: On this point regarding confidentiality, the Reserve Bank is a very serious organisation and you are able to preserve confidentiality while keeping documents. The suggestion that somehow the Reserve Bank could not preserve the confidentiality of this individual and of this document seems like quite a strange suggestion, which is why I still cannot get my head around why you would give the document back.

Mr Stevens : It was not us saying that. We were not saying that we could not preserve it. The person, as I understand it at least, who was prepared to offer the document wanted to do so only on these conditions. It was not us saying that we were not able to keep it in a file securely. That was not the argument.

Ms O'DWYER: That is clearly the inference that the person who provided the information—

Mr Stevens : We do not know what was in his mind, other than presumably he was very concerned about anything getting back to the people in the company that he works in.

Ms O'DWYER: Moving on to the Freehills report and the testimony that has been provided today, and previously, regarding the reliance that was placed on that particular report, I suppose this is a question as to governance. Knowing that there have been a number of recent corporate law cases fairly recently and the fact that one cannot as a director rely on external advice to negate the obligations of directors, in hindsight would you have concerns about the process and the reliance that was placed on this report and the fact that, in reliance on this report, you did not pursue further independent investigations through the appropriate authorities, like the Australian Federal Police?

Mr Stevens : Directors cannot, I guess, put their duties onto someone else. At the same time, there are probably also things that tell them that they should seek external advice in a case where they do not have the expertise required. Again, I was not on the NPA board, so I am not saying I know what was in their minds, but this would appear to me to be an instance in which they felt it was wise—and indeed the Reserve Bank audit committee in its wisdom also stressed that you should get external legal advice. I do not think that that precludes additional steps after that if there was a conclusion from the earlier process that suggested that they might be necessary. It does not preclude that; it was not either/or. I was not a director, but that would be my observation on that question.

Mr Campbell : I think there is a duty on a director if they are not qualified in a particular area to get outside legal advice. That is the first point. I suppose in any given situation, the question to ask is, 'Was this exercise conducted frivolously or was it not conducted in good faith?' The process was taken very seriously and done in good faith. There were two very senior legal practitioners. The people on the NPA subcommittee—I excuse myself from this description—were senior and authoritative. Mr Bennett and Mr Warburton were expert in corporate governance. They knew how to think about these questions. They knew the framework in which we were operating. If we had approached this in a frivolous way, we would have been in breach of our directors' duties. But I certainly do not think we approached that in a frivolous way. It was taken very seriously.

Ms O'DWYER: I do not think anybody here is suggesting you should not have sought external advice if you felt external advice was required. My question was more regarding when it was appropriate to bring the Australian Federal Police in, given the seriousness of the allegations that have been raised over quite a substantial period of time. One question I have that may well have been answered slightly earlier today, so forgive me if I am asking something that you have already responded to. I am presuming that there were a number of discussions that took place with different people at different times as to when the Australian Federal Police ought to be called in to investigate these claims more thoroughly. I would be very keen to understand at what time those conversations took place, and with whom.

Mr Stevens : You say that concerns had arisen over a substantial period of time—I think that is what you said. Actually these things happened in a fairly short space of time, and there was a feeling in the company, and indeed in the Reserve Bank, that there should be an urgent response. On the question of whether there was a point at which people sat down and said, 'Now, will we call the police or not?', to my knowledge that was not a discussion that occurred. What occurred was that things were said and there was reason to test those, to follow-up, to seek more information and to escalate to get serious outside legal help. That was done and a conclusion was reached.

As far as I know—certainly not in a conversation I was in, and to my knowledge not amongst the senior business people, experienced auditors, the Freehills professionals, our own legal counsel—at no point did anybody in that group of people say, 'Actually we should be considering whether we call the police or not.' As far as I know, that did not occur.

Mr Battellino : No, it did not occur.

Ms O'DWYER: I was interested in asking some questions regarding the post-termination payments made in the case of Note Printing Australia in 2008, and in the case of Securency in 2007. Given the AWB scandal, and the fact that there was a substantial amount of publicity surrounding sensitivities to do with corruption and bribes, before making payments within the rules as stipulated in the documents you have provided already, there needed to be approvals granted. My question is more whether you can provide a little bit more context around the payments that were made at that time, and the process through which they occurred.

Mr Stevens : These are the post-termination payments?

Mr Campbell : In NPA's case, a bid was made at a tender in late April 2007 for the Malaysian business. The agent claimed that he had provided marketing and other services in relation to that. He had played an active role in that exercise. There was considerable discussion, which I was involved in, with the chairman and the management, about whether, because—this is terribly complicated; I apologise—it was a tender, the agent had any claim. There were differences of view on that question. This obligation came up before the agent was terminated, which was 19 May—that was the argument—there was an obligation there before he was terminated, but do we have to pay? The company took two sets of legal advice from its external legal advisers and basically—and I will not get the words absolutely right—the advice was that this agent will likely have a claim on you if you refuse to pay. I was disappointed by that advice. The bank's general counsel took separate independent legal advice on the bank's behalf, and that legal advice was much the same—it came from a different angle, but it was much the same legal advice. At the same time, Securency got a third set of legal advice that came to the same conclusion, that this obligation arose before the agent was terminated. He would probably successfully argue that he had provided services, and therefore he would probably be successful in a claim. The advice to NPA was that they should try to come to some negotiated commercial settlement. That was the advice that was taken to the board on 26 September 2007 by management and that the board accepted. Management was authorised, through NPA's legal advisers, to negotiate a settlement with the Malaysian agent.

As I said, and as has been referred to, the same agent was also Securency's agent in Malaysia, and on this contract Securency had also included a component for an agent's commission in its pricing to NPA. The reason for that was not to artificially inflate the price. It was a mark of Securency's success for this tender in Malaysia. It was not just Note Printing Australia that was bidding for the business on polymer. It was three other banknote printers as well, and Securency was obliged to include a component for commission in the prices for those other printers, because the agent would have had a claim on Securency if one of the other printers had been successful. In the interests of competitive neutrality, a common price for the four printers, including NPA, was included in Securency's price.

Incidentally, on the pricing—and this is a level of detail that a board member would not usually go to—I asked to see the pricing spreadsheets to confirm that what I was being told by Securency was true, and it was. I had originally been told by Securency that if NPA was successful at the tender, Securency would not have an obligation to pay the agent, and therefore there would be a windfall gain to Securency. I advised the auditors of that, I advised the chairman of Securency of that and I expressed my concerns about it. It has been claimed that at the 26 September 2007 board meeting some sort of approval was required from the NPA board for Securency to make that payment. That was not correct. The purpose of the chairman of Securency advising NPA that Securency also had an obligation was to correct the record. They were correcting the record that Securency was obliged to make a payment—they thought they were obliged to make a payment—because it was a piece of material information in NPA's negotiations with the agent.

So the long and short of it is that the three different sets of legal advice were that yes, because the tender occurred before the agent was terminated there was an obligation; the agent would likely be successful, and you could come to some sort of negotiated settlement, and that is what NPA did.

Ms O'DWYER: Was that advice as to the arrangement that had been come to—that an accommodation had been reached—provided to the RBA?

Mr Campbell : I do not remember the answer to that. I would have to take that on notice, I am sorry. I think not—except through me. I knew, and I understood what the commercial considerations were.

Mr Stevens : Is the question whether the legal advice per se was provided?

Ms O'DWYER: The question is whether there had been a notification to the RBA on a matter that is reasonably sensitive, such that, through lots of legal advice, it was obtained in order to make a final payment in these instances. I am asking whether that information was transmitted to the RBA.

Mr Campbell : There is no evidence to that effect. It was not conveyed to the Reserve Bank; it was a decision of the NPA board, based on the legal advice that it had been given.

Ms O'DWYER: And in relation to Securency?

Mr Campbell : That would be the same.

Ms O'DWYER: So on neither occasion was information provided to the RBA?

Mr Campbell : No. But when you say 'to the RBA', as I say, I am employed by the RBA, and I knew. I did not convey this advice, either to the governor or to the deputy governor.

Mr Battellino : But at the time the NPA payment was made, Bob Rankin was in charge, I understand. Is that right?

Mr Campbell : At the time the decision was made to pursue the commercial agreement, the commercial settlement, I was in charge. At the time the commercial agreement was eventually agreed, which I think was in May 2008, Bob was in charge.

Ms O'DWYER: In light of the information that has been provided—you know, hindsight being a wonderful thing—if you were to look back and make a decision with the knowledge you have today, do you think you would have called in the Federal Police a lot earlier than you did?

Mr Stevens : I have given some thought to that and I think it was technically properly a decision for the board of the company. I do not think this should be seen as either—as I said earlier—call Freehills or call the police, one or the other. You could have done both. As I said at the beginning, had the conclusion of the Freehills work been a different conclusion to the one it was then we would have had, I feel sure, the people associated with that process with the kind of experience and integrity that they do have saying, 'mmm, you've got to go to the police.' That was not the conclusion so that was not the outcome.

Were we to see that set of circumstances again, personally—older and more scarred and wiser now—I think it might be prudent to still do that whole process. But at the end, to be honest, no-one advised us at the time to say to the police: 'We've done this. This is our conclusion and we're not proposing further action but we're advising you just in case something comes up one day' or in case they have got any other suggestions to make. But if I review this in my own mind and contemplate whether we might ever see a parallel set of circumstances, I think that additional step would be prudent.

Ms O'DWYER: Was any advice provided by the Treasury in relation to these matters? Obviously the Secretary of the Treasury is on the RBA board.

Mr Stevens : I do not think we solicited any advice from them to the best of my recollection. But it is only recollection; I cannot recall the secretary making any comment to that effect at a board meeting.

Ms O'DWYER: In terms of discussions with the Treasurer or the Treasurer's office, were there any discussions that took place in relation to them?

Mr Stevens : In 2007? No, there were not. We covered that earlier and, no, there was not.

Ms O'DWYER: And subsequent to 2007?

Mr Stevens : As we went through before, there is some information in the bundle we gave on the kind of advice about what was going on and what we were doing in response which I have given to the Treasurer's office and to him over time. Unfortunately, and I know you asked this last time, I cannot tell you exactly which days they were.

Proceedings suspended from 15:05 to 15:25

CHAIR: We will resume with Mr Bandt asking questions.

Mr BANDT: I would like to ask some questions about Mr Hood. I do not want to traverse onto other legal matters, so please let me know if it is going too far. I am just wondering what ongoing interactions the bank or the board of NPA had with Mr Hood and this 'whistleblowing' after June 2007 and before he left employment. In particular, I note he said in June 2007 that he felt he was being pressured to soften the report he made to the board and repeated that, obviously, in meetings with you. Did he continue to contact either you, Mr Battellino, or anyone else within any of the three companies with concerns after June 2007?

Mr Battellino : No, I had no further contact with Mr Hood. The main friction, as I understand it—Frank should probably speak to this because he was closer to it at the time—was between Mr Hood and the CEO, and I think that, in about the September board meeting, the board made a decision that it would start to seek a new CEO.

Mr BANDT: September 2007?

Mr Battellino : September 2007. So the board acted very quickly to try to resolve some of these issues. My understanding is that the new CEO took up duties in early 2008.

Mr Campbell : February 2008 from my memory.

Mr BANDT: Are you able to tell us whether Mr Hood, under or over the old or the new CEO, continued to report complaints, either about how he was treated or about concerns he had about the goings-on within NPA or Securency?

Mr Campbell : There was a lot of dialogue between Mr Hood and I, post June 2007. There were a lot of issues discussed. Mr Hood and I were on good terms and remain on good terms. I do not recall fresh whistleblowing allegations being made after the episode in the middle of 2007. Mr Hood was invited to comment on relevant parts of the Freehills report in September 2007, and he did so. He said he concurred with the six findings, the six inclusions, that he had seen. He made some other comments, but, given that we were at the end of a very detailed process of trying to investigate his claims, I took it—and he did not correct me—that the concerns being expressed in his comments had already been dealt with in the Freehills report. I thought that was a reasonable place to get to. As I mentioned this morning, Mr Hood wrote to me in December last year and said there were a couple of other ongoing whistleblowing matters that he had raised. One of them was my response to Ms O'Dwyer's question earlier. The other one was that, in fact, one of the people at NPA had continued to discuss the Malaysian situation with the Malaysian agent. That was dealt with in the Freehills report. The Freehills report said that a protocol should have been put in place that dealt with that. I did not regard those as significant, new, whistleblowing claims.

As Mr Battellino has said, the board, in September 2007, decided that the company, to properly reform itself, probably required a new chief executive. So the board took a decision that, after an orderly transition, the chief executive should be replaced and the company would start out on a fresh footing and seek a new strategy. In the intervening period—as has also been reported—because we were still not paying the Malaysian agent what he thought he was due, the chair of the Malaysian agent's company wrote to me seeking payment. I gave that correspondence to Mr Hood, who was the company secretary, and asked him to prepare a response. The response was not met with a warm welcome by the Malaysian agent's chairman.

There were ongoing issues, but I regarded these as being normal, business interactions. I had replaced Graeme Thompson as the interim chair of NPA, the CEO was on the way out, and Mr Hood was my main point of contact with the company. The new CEO took over, as I said, in February. The new CEO had views about the strategy for the company—

Mr TONY SMITH: This is in February 2008?

Mr Campbell : February 2008, yes.

Mr TONY SMITH: Who was the new CEO?

Mr Campbell : Mr Bernhard Imbach, who was an executive of the Swiss note printing company and came with a very strong pedigree. Quite frankly, NPA was not a company that performed that well. Mr Imbach had views about how the performance of the company should be improved. He had a whole new set of views about what the values of the company should be. He undertook a restructure of the company, and that restructure included the responsibility for security at NPA being shifted out of Mr Hood's responsibilities into a dedicated position. That decision had nothing to do with Mr Hood having participated in the exercise related to agents in the middle of 2007.

It may not surprise anyone that an operation like NPA requires a very strong security function. The volume of finished bank notes held on those premises at any given time is in the billions of dollars. The chief executive came in, looked at it, determined that there should be a line of reporting from the person responsible for security to the chief executive. I had made it clear to Mr Imbach when he was appointed that Mr Hood had played a very valuable role in bringing the agent's issue to a head some months earlier. I did not share with Mr Imbach the memorandum that we have been discussing, because I did not have a copy of the memorandum. I would not have done so anyway because of the secrecy that Mr Battellino, in particular, has been talking about. Nevertheless, it is true that Mr Hood was unhappy, I think it is fair to say, that while the security function had been shifted out of his responsibilities, he retained the very important responsibilities of the CFO and the company secretary.

There was no diminution of his remuneration. He remained a member of the leadership team and an active participant in the management of NPA, I understand, but was not party to it, when Dr Rankin took over as Chairman of NPA in early April to mid-April 2008. I understand that Dr Rankin had discussions with Mr Hood about ongoing friction between Mr Hood and the business development manager and that Dr Rankin had asked Mr Imbach to keep an eye on it and try and manage the situation. When Mr Hood finally left the organisation, he made some remarks about how much healthier an organisation it was and about how his approach to doing his job seemed to be much more welcomed by the new chief executive than the previous chief executive.

Mr TONY SMITH: He made those comments to you?

Mr Campbell : He made those in a letter that only came to light, I have to say, some time later.

Mr BANDT: And—

Mr TONY SMITH: In a letter to you?

Mr Campbell : No, in a letter to Dr Rankin that I saw.

Mr TONY SMITH: Yes. I know.

Mr Campbell : Dr Rankin was the chairman.

Mr BANDT: In the second half of 2007, was there any specific investigation into Mr Hood's claim that he had been pressured to soften, in his words, the report to the board or did that feed in to the general discussions that led to the change in the CEO?

Mr Campbell : There were a lot of implicit things in the decision that led to the change of the CEO. I think the ones that were articulated were new strategy and building better relationships in the management team. I did not know then because I did not see the memo but Mr Hood at the time in the memo did say that, although there were attempts to soften the memo, he had refused to soften it.

Mr TONY SMITH: That is the audit paper?

Mr Campbell : The board paper—I apologise.

Mr TONY SMITH: No one else would have been aware of his memo.

Mr Campbell : I did not know that at the time.

Mr Stevens : His claim was that he had pressure to soften the board paper.

Mr Campbell : I am sorry. And he had refused to do so. The integrity of the board paper had been preserved. As the CEO was going to be leaving before long anyway, I do not think that there was any cause to hold the sort of investigation that you are suggesting. I should also say that, it was not widely shared that the CEO was going to move on because that would only have made him a lame duck. The board was very concerned that there be an orderly transition to a new CEO. It is true that Mr Hood did not know initially until about December, I would say, that the CEO was going. However, he seemed to approach his responsibilities with enthusiasm, at least in his dealings with me.

Mr TONY SMITH: I have a series of questions which to some degree are unrelated but, I might just start with one to you, Mr Campbell, given that you have been led into this line of questioning. What I am going to do is refer to the issue of the manager's job at Note Printing Australia and, in doing so, having heard everything you have just said, refer you to some evidence that he gave to another parliamentary committee last week, which is in the Hansard and on the public record that I have got before me. Obviously, as is always the case, you should only say what you want to say in response to it. I think you have taken us through some of that detail about the change in CEOs and subsequently the changes within the management strategy and perhaps some cultural change as well.

Mr Campbell : Yes, absolutely.

Mr TONY SMITH: At the time, of course, assistant governor Bob Rankin was the chair of NPA. He was asked—this is the former manager of Note Printing Australia—last week, in the other joint committee, about reports that, after whistleblowing, he was told his job was untenable and that he should take a redundancy. I have paraphrased there, but the ultimate question was: 'Did Dr Rankin explain what was meant by your position being "untenable"?' The response was, 'No, not exactly.' Is there anything additional you can add to what you have said, do you feel?

Mr Campbell : Clearly, I was not party to these conversations. However, I have seen the file, and Dr Rankin has given evidence in the recent court case and I would defer to what Dr Rankin had to say in his evidence. Having seen the file, Mr Hood's departure was really triggered by Mr Hood writing to Dr Rankin and saying he was unhappy with his performance appraisal, with Mr Imbach, and unhappy with his salary adjustment for the year; could he talk to Dr Rankin about this? Dr Rankin agreed to do so. I am going from memory here—

Mr Battellino : I think it is worth clarifying this point, Frank—that Mr Hood drafted a letter to Dr Rankin to this effect, and this is a letter that has been referred to in various places. To the best of our knowledge we never knew, when this claim came in from Mr Hood, what this was about because we had never received the letter. We checked all the emails. There was no evidence of it. At that point, the Reserve Bank kept a record of every item that came through its mail room. There was no record. We did not have that letter. We eventually tracked a copy of the letter down—well, I think it might have been the original—to a pile of papers that Mr Hood left with the head of HR when he left the organisation. So Bob Rankin never received that letter, though Bob did go down to Melbourne, in his capacity as head of NPA, soon afterwards, and they had a discussion, which was, from what Bob tells me, in effect the same as the letter.

CHAIR: Can I just say that I am not sure that there is any great value in this.

Mr TONY SMITH: I just wanted to ask about the Hansard. I have some other questions, if that is okay.

Mr Campbell : The bank's is a different account of Mr Hood's departure from what is contained in the Hansard.

Mr TONY SMITH: Why don't we go to his departure. Mr Battellino, you learn he is departing, and there is this farewell lunch that Mr Ciobo asked about a bit earlier. You have made some comments about that. They are the only two times you have met him, I suppose—is that right? Just to be absolutely clear: you met him when he came to Sydney—

Mr Battellino : Yes.

Mr TONY SMITH: on 5 June and then you met him at the farewell lunch again?

Mr Battellino : Yes.

Mr TONY SMITH: And that is it. There were, you said, four or five others present?

Mr Battellino : That is right.

Mr TONY SMITH: They included a mixture, I suppose, of Reserve Bank and Note Printing Australia staff?

Mr Battellino : All Reserve Bank staff.

Mr TONY SMITH: All Reserve Bank staff?

Mr Battellino : Yes.

Mr TONY SMITH: But not the governor, obviously?

Mr Battellino : Not the governor.

Mr TONY SMITH: When did that take place?

Mr Battellino : That would have been around the end of September 2008, I think.

Mr TONY SMITH: As he was about to finish.

Mr Battellino : Towards the end of his—

Mr TONY SMITH: And you said that the topic of discussion was about AFL refereeing, which I have corrected to be umpiring, of course.

Mr Battellino : That is right. It was a very friendly lunch because everybody there had a very high regard for Mr Hood. Frank, I think, had a very good working relationship—I think they were even beyond that; they were friends.

Mr TONY SMITH: To go back to a line of questioning without you feeling you have to re-answer questions you have already answered, but there has been talk of forks in the road, which remind me of all sorts of things: Governor, you have said in answer to Ms O'Dwyer's question that on reflection—you were asked this a bit earlier but specifically in answer to Ms O'Dwyer's question—if this all happened again, you would certainly do what you did with Freehills but, once you had that report, you might have referred that straight to the Federal Police at that time. My question, which follows up Mr Bandt and Ms O'Dwyer's questioning, is: There must have been a threshold—it must have been a difficult point—at which you would have referred matters to the Federal Police. I do not want to put words in your mouth but clearly neither of you reached that threshold. You are not saying, are you, that because you had the Freehills process in place it did not matter what information came before you, it was just going to be handled to Freehills? You are not saying that are you?

Mr Stevens : No. I do not think we have said that. What we have said is that there were some things said. These things needed to be tested, checked out, documents examined et cetera. It was a perfectly acceptable and proper process to do that by seeking an outside legal expert to do it.

Mr TONY SMITH: If I could take you, Governor Stevens, to another aspect of the evidence given last week to the other committee—this is so we can be absolutely crystal clear and there is no confusion—when the manager of Note Printing Australia was asked about his correspondence with you. The Hansard records that some of those were tabled, I think, in camera. The point I want to confirm is that the evidence was that he had written to you on 28 November 2011 and that that document included a time line of events.

Mr Stevens : There was a piece of correspondence. There has been more than one but the first one was from his lawyer, basically indicating that there was going to be the matter that we decided not to discuss further. We do not need to discuss that any further. There have been one or two others, that sounds about the right time. I do not have the exact state and the main thrust of that letter, to my recollection—I do not have it here so I should be careful of what I say. I was trying to find if I had it on my machine but I do not. This letter is basically about that other matter and his frustration that it is not being advanced quickly.

Mr TONY SMITH: And it included a time line, did it, as an attachment?

Mr Stevens : I do not have the time line here. I do not know whether I would have that. The sense that I have had in these attachments is that they basically—I should not be definitive but having just glanced—I think, seem to be a more elaborated version of the original memo.

Mr TONY SMITH: Okay. I was really just wanting to confirm—

Mr Stevens : I think , from recollection, that I have not responded to any of these letters because, since the correspondence was initiated through the lawyers, the lawyers are handling the matter. It is actually a matter with NPA, technically.

Mr TONY SMITH: Okay. On an unrelated matter with this line of questioning. We can come back to that if you need to at any point; we have got a little bit of time. I was really wanting to confirm that the letter included a timeline of events.

Mr Stevens : I really cannot remember that much about the attachment.

Mr TONY SMITH: Okay. You have said that you did not reply, that it was passed on to the lawyers.

Mr Stevens : Yes. He was essentially asking me to make them go faster. These are difficult matters that are in the hands of the legals.

Mr TONY SMITH: I am interested that there was an attachment with the timeline of events. I am not interested in the substance of the letter other than what you have said. I do not want you to say anymore than you feel that you can on that. I think you made that clear earlier. Have you had any discussions at all with ASIC at any point over any of these matters?

Mr Stevens : Have I had discussions with ASIC?

Mr TONY SMITH: Yes. You or—

Mr Stevens : When I read in the newspaper that the police had forwarded something to ASIC, I rang Mr Medcraft to ask whether that was true because I did not know that. He checked with his people and, yes, something had come in and they were processing it.

Mr TONY SMITH: He checked?

Mr Stevens : Yes.

Mr TONY SMITH: He did not know straight up?

Mr Stevens : He went and checked with his people as to what the story was.

Mr TONY SMITH: That is the only occasion you have had?

Mr Stevens : I have not asked him what it was. He did not offer that. I just confirmed with him that the story in the paper was, in fact, correct because that was the first I knew of any—

Mr TONY SMITH: Because you picked up the Sydney Morning Heraldprobably?

Mr Stevens : Yes.

Mr TONY SMITH: Fair enough. I can take it from that, ASIC has not contacted the bank at any point?

Mr Stevens : ASIC, to my knowledge, has not contacted us. They have not initiated any contact with us about wanting to talk to anyone, if that is what you mean. I do not know whether there has been any contact with any of the directors of the two companies; not to my knowledge.

Mr TONY SMITH: To the best of your knowledge the contact that has occurred is that, once some stories appeared in the Sydney Morning Herald and the Age with respect to ASIC, you sought to verify that.

Mr Stevens : Correct.

Mr TONY SMITH: Could I take you back to your correspondence. We touched on it only briefly today but I did ask you some questions about it back in February, but not in August. In answer to Ms O'Dwyer's questions—

Mr Stevens : This is the letter to the Treasurer?

Mr TONY SMITH: Yes. You can anticipate what I am asking. In May 2009, you confirmed that you obviously discussed the matter with the Prime Minister and, you thought, the Treasurer's office, but you were not sure whether you discussed it with the Treasurer at that point. I think you said that you had a pre-planned meeting with the Prime Minister, and it was on a Saturday. I think the story broke on a Saturday. It would have been—

Mr Stevens : My recollection is that is was a Saturday morning.

Mr TONY SMITH: That is right. Was the Treasurer in that meeting?

Mr Stevens : I do not believe that he was.

Mr TONY SMITH: Right. You have already said that you do not have a record, and you are not in a position to be specific about the dates of your discussions with the Treasurer's office or the Treasurer from that period on. It is fair to say that you did not have cause to discuss any of these matters with the Treasurer or his office in 2008 or up until May 2009?

Mr Stevens : That is right.

Mr TONY SMITH: When the story broke, it sounds like your initial discussion was with the Prime Minister, because the day that broke you were with the Prime Minister at a pre-planned meeting. Then, there were some discussions with the Treasurer's staff—

Mr Stevens : I do not recall the order in which those occurred—the discussion with the Treasurer's people versus the PM; I do not recall the order.

Mr TONY SMITH: I was just asking, because it was on a Saturday—unless I have the date wrong—that the story broke, and you said you were meeting with the Prime Minister on Saturday, so that is why I asked that. You have confirmed that you have had discussions with the Treasurer's office at various points after the story broke, and with the Treasurer himself. Then, on 2 June, you wrote a very substantial letter to the Treasurer—five pages in all—that ran through a lot of the history and many of the issues. This was released under freedom of information, and the letter ended with:

This letter is for information. No reply is expected or necessary.

I am, of course, available at any time to discuss any of these issues in more detail.

Obviously the Treasurer did not reply—is that right?

Mr Stevens : No.

Mr TONY SMITH: I just wanted to confirm that. I was assuming that. Did he take up the opportunity to discuss any of the issues in more detail?

Mr Stevens : To my recollection, he did not initiate a particular contact on that matter, but, of course, we had discussions about the issues at various times when I felt that would be important to do subsequently.

Mr TONY SMITH: Obviously, at a certain point in time, you decided that you were going to write to the Treasurer, and that was nearly 13 months after the Securency stories first broke. Had you been contemplating that for some time?

Mr Stevens : My recollection is that, some time not long before the letter, one of my senior colleagues said that there would probably be a case to put some of this in writing for the Treasurer, for the record. That sounded like a very good idea, so I set about doing it.

Mr TONY SMITH: So the idea for the letter was initiated wholly within the bank?

Mr Stevens : Yes. If your question was, 'Did someone ask for it?' no, it was initiated from inside the bank—that is right.

Mr TONY SMITH: Was the Treasurer aware that he would be getting a letter?

Mr Stevens : I gave a 'heads up' to his office that they were about to get one, which is quite a common thing to do. 'We have got an important document that we want to send you. It is on the fax,' or in the email or however it is coming, 'so look out for it.' That is quite normal.

Mr TONY SMITH: I am aware of that. I am just interested that, once this idea was suggested to you, you decided that it was a good idea and that you would write to the Treasurer, and it is quite a comprehensive letter. I just wanted to clarify that. And you have confirmed that, once the Treasurer received the letter, you did not get a reply, and he did not specifically ask for any more detail. You did not write to the Treasurer with any other updates up to that point—this is in 2010?

Mr Stevens : As I think the material we gave you today says, there was a letter in September this year with the history since the first letter.

Ms O'DWYER: Can I just ask a very quick question, because I was just going through the materials and I recognise that I have come late. I was just wondering why we did not get a copy of the letter to the Treasurer included in the materials?

Mr Stevens : Sorry, we could have included that—it is a public document. We are happy to forward a copy if you—

Mr TONY SMITH: It is public now.

Mr Stevens : Is this the November 2011 one?

CHAIR: If it is a public document—

Ms O'DWYER: But for the purposes of a complete chronology, it would have been quite useful.

Mr TONY SMITH: It is the 2010 letter.

Mr Stevens : I have a copy here if you want it.

CHAIR: Yes, do you want to see it, Ms O'Dwyer?

Ms O'DWYER: I would not mind, if that is all right.

CHAIR: I just want to come back to what I see as the key question in all of this, which is whether or not it was a weakness of corporate governance that the Reserve Bank did not predict or know about what was happening at Securency. That is the crux of it: whether or not the steps you took were in the range of reasonable in terms of corporate governance. So, again, can we just walk through the steps for Securency and whether or not you think there were weak moments in it?

Mr Stevens : Are we talking about prior to 2009 or what we have done since?

CHAIR: Yes, it actually started back in April 2006. The RBA board asked both companies to provide updates on their guidelines in July 2006. Coming out of that, the two companies kind of diverged; Note Printing Australia had some issues that its own board identified in 2007 but Securency, from that moment, is the one I am interested in.

Mr Battellino : The two companies were both asked to supply their policies to the Reserve Bank. My understanding is that, whereas NPA had to make substantial revisions to its policies and improvements, Securency had already been through that process, so it was on a much better track.

CHAIR: So even in July 2006 there was a difference?

Mr Battellino : Yeah; I do not know when they had been through the policies but at that point they were already much more advanced. I think that is right, isn't it, Frank?

Mr Campbell : Securency, absolutely.

Mr Battellino : Yeah, absolutely. So when we went back and said, 'Yep; okay, that's fine', their policies were already on a reasonable track. The next step was in July-August when we said, 'Well, we want an audit done of Securency as well,' given what was found at NPA.

CHAIR: So in July 2006 the RBA board received the response from both companies and Securency was seen to be better managed, if you like.

Mr Battellino : Yes, better managed at that point.

CHAIR: And the board probably was going to leave them both alone, except the NPA board in February 2007 saw some slowness in the implementation.

Mr Battellino : That is right.

CHAIR: Okay. But the RBA board was not concerned about Securency?

Mr Battellino : No there were no problems at all with Securency. That was fine. And when the auditors went there to do the audit in July-August 2007 they came back with a very clean audit.

CHAIR: And the audit was done in 2007, I think, Mr Battellino, if I am right, because the RBA audit committee decided that it might be a good idea to audit Securency as well.

Mr Battellino : Yes, exactly. Given what we had found at NPA, there was a feeling that we had to at least look at doing an audit of Securency. I have to say, I probably had some expectation that they were going to find issues over there as well, given what we had found at NPA. The impression I had at the bank—and others can confirm this—was that people thought Securency was a better managed company than NPA. NPA, as we have said this morning, has had a history, going back through time—nothing to do with agents but just a history of issues. There had not been that history at Securency. So I was not expecting to see the same degree of problems, but probably some. The audit that came back was a very good audit. It said that they had very good policies and that the policies had been implemented. So, as I recall, when the audit was undertaken the company decided to suspend payments to agents, pending that audit. When that audit came back so clean there was no basis on which to continue the suspension, so the agents' businesses were reinstated. That continued on through the year; there were no issues. At the end of 2008 another audit was done. It was also very good. And then five months after, this incident blew up in the newspapers.

CHAIR: Okay, I will just go back to the audit, which I think was December 2008. I think I recall, in one of the RBA board meetings, and I cannot remember if it was April 2006 or July 2006, where the board stated that it planned to review the operation of these guidelines every year.

Mr Battellino : I think that the companies' boards were supposed to review the policies every year.

CHAIR: Other boards, not the RBA? Okay, my apologies.

Mr Stevens : The policies that they adopted included a requirement that the boards of the two companies—

CHAIR: Boards of the companies, not the RBA? Was there a reason why the RBA went back in for an audit in December 2008?

Mr Battellino : Just as a follow up. They did a follow up audit of NPA to make sure that the NPA recommendations had been implemented and, as Glenn reported, they found all had been implemented. Then they did a follow up of the Securency audit.

CHAIR: Okay, did you miss something? Obviously, you missed something.

Mr Battellino : Clearly.

CHAIR: Allegedly you missed something.

Mr Stevens : Why did the Securency audit not find—

CHAIR: Yes. Is there something you could have done differently?

Mr Stevens : That is one of the really interesting questions out of the whole thing.

Mr Battellino : KPMG went in and did their very detailed audit. It was very long running and probably went on for six months, Frank? It went for a long time. Even after all of that they concluded that the company did have adequate policies and those policies should have been capable of preventing corruption. The RBA audit had found two parts. The first part was that the company has good policies. The second part was that the practices are consistent with the policies. When KPMG went in, they confirmed the first piece. They looked at the policies and, you know, if you looked at the policies you would have to say that they seemed pretty reasonable. KPMG said that these policies should have been sufficient to prevent corrupt behaviour. What they found was that the level of implementation of those policies was a lot less than the RBA audit had found and that the RBA audit had been misled on certain matters.

CHAIR: That is Securency. Now, Note Printing. I am coming back to that seven weeks because, again, the issue for me, taking it down to a simple level, is whether or not the actions of the NPA board and the RBA board were in the range of good governance options that you would have had. There are a lot of options that would have been out of that range like do nothing, or do considerably less or whatever. They range through to the option of going to the Federal Police as well, so there are a range of options. Again, I would like to get it clear in my mind that the Reserve Bank and the NPA board were in that range. That is the crux of it for me. I know we have been here for a long time, but we still have not walked through that seven weeks. I would like to do that, if I can.

Mr Stevens : Okay.

CHAIR: They were clearly a very good seven weeks. I start the seven weeks in April 2007 but it probably started in February 2007 when the NPA board were concerned about the slow progress of implementation of the policies and asked for an update for May 2007. There was the beginning of an action before the seven weeks. Again, correct me if I am wrong.

Mr Stevens : I think that is fair, yes.

CHAIR: In April 2007, the NPA manager raised concerns with Mr Campbell. Mr Campbell, you said before that that was one of the triggers. Even though things were speeding up by then and there was more and more attention on it, that was one of the triggers for a greater level of concern. You asked him to put it in writing and include it in the May 2007 report, which the board had already asked for.

Mr Campbell : Yes.

CHAIR: Okay. At this stage, it is general concern that the progress has been too slow, which flows on from an ongoing concern that there was—

Mr Stevens : Am I right in saying, Frank, that at the February meeting the management were talking about giving you an update by August?

Mr Campbell : That is true. The annual report was due in August and at some stage along the way the expectation became that it would be May, so I think it is reasonable to say that the expectation by April was that there was going to be a report in May. There was ongoing conversation and I do not really want to interrupt the seven weeks.

CHAIR: That is okay. There was more than one seven weeks going on at the same time, I can tell you, and Mr Battellino had a slightly separate seven weeks going on as well. Feel free to interrupt, because I think that is—

Mr Campbell : I thought that every six months the NPA board and the Securency board provided a paper to the Reserve Bank board about the company's operations. There was no drafting of anything about agents in the April 2007 paper that had gone to the RBA board. But given my experience a year earlier, where the board was very interested in agents, I took it upon myself to ask the two companies again what was the state of play in relation to agents—this was in late March 2007. The message there was that there were still some outstanding issues but that they could be managed, so again it was a reassuring message. That is why I said earlier that the landscape changed very quickly and it was around that time when I said that they are still pretty slow. This was partly compounded—and I am sorry to introduce new facts at this late stage of the day—because the NPA board had said, 'Until the Malaysian agent signs up, withhold the last part of his payment.' They put it more delicately than that. But they said, 'Withhold the last part of his payment from the second contract until he signs up.' The payment was still outstanding, and I said at that time, 'I really think there should be a paper for the board in May.' So even though it was foreshadowed to be in August, I said, 'Let's do it in May, and deal with this issue with the Malaysian agent.' Then you get to mid-April and the trigger.

CHAIR: Up until that point, you knew that the management systems had a few gaps and there was one agent that had not conformed to the requirements.

Mr Campbell : Two had not conformed by that stage.

Mr Stevens : They had not signed up to the new policies.

CHAIR: Then in April 2007, which was the trigger, you asked for that to be put in writing and incorporated into the report for May, not August.

Mr Campbell : That is correct.

CHAIR: So it was moving forward a bit. Then in May 2007, the report went to the board of NPA, and there was a request for a report in 10 days.

Mr Campbell : Did you say the audit report?

Mr Battellino : At that board meeting, the NPA board agreed on the day to ask management—given what they had seen in the paper—for a full review of everything that was going on in the company about agents.

CHAIR: But the paper recommended that it just be noted.

Mr Battellino : That is right, yes.

CHAIR: But the NPA board went further than that—

Mr Battellino : They went further than that and said, 'We want to get more information.' So it asked management, 'Give us all the information.' So that was one step already. The recommendation to the board was, 'Note that this is where we are up to.' The board said, 'No, we need more information.'

CHAIR: And did the board decide to terminate the two contracts for the agents and ask for a review of all agent files?

Mr Battellino : Yes.

CHAIR: And then, Mr Battellino, you got in on it and went further.

Mr Battellino : Yes. Mr Campbell reported back to the governor and me the next day and we had a talk. We felt that, rather than have management do it, it would be better to have the auditors do it. So the auditors went in. And we communicated that to Mr Thompson, who was chairman of the company. On reflection, he was probably getting there himself, too, so he readily agreed with that and he wrote immediately to the auditors.

CHAIR: Okay. At this point—this is May 2007, so it is only four weeks into the seven weeks—it is not crossing your mind that there may be serious criminal activity here? You are still talking risk and safeguarding?

Mr Battellino : The bank's reputation. Yes. That is right.

CHAIR: 5 June 2007. At this point, all the agents are terminated?

Mr Battellino : The next step is: after that, the auditor started work immediately. By 5 June, or early June, they had come up with the draft report.

Mr TONY SMITH: So it was the same day that you saw—

CHAIR: It is the same day.

Mr Battellino : The same day.

CHAIR: So that morning they had come up with the draft report?

Mr Battellino : I cannot remember when during the day they came up with the draft report. They had been keeping me informed, because the audit department is on the same floor as I am, so people are walking backwards and forwards all the time. They were keeping me up to speed on where things were up to. So the draft audit report comes in, and I look at it and think, 'Really, I don't think this is enough,' where the auditors had said, 'There are suspicions around, but they are not serious enough to do anything, apart from warning the staff of NPA to be careful with agents,' and to say the company should probably cut back on use of agents in countries where they saw risks.

CHAIR: Okay.

Mr Battellino : That was the draft.

CHAIR: You got the draft before the RBA board meeting of 5 June? I am assuming that you saw the draft earlier?

Mr Battellino : I am not sure. I cannot recall when during that day I got the draft. I might have got it first thing in the morning; I might have got it at lunchtime. I cannot remember.

CHAIR: I have got RBA 5 June 2007, which for me is week 7. The decision to terminate all agents, to cease using agents, had been made at that date?

Mr Battellino : No. That was the day the recommendation in the draft audit was changed to 'terminate'. The draft audit that became available that day had said, 'Cut back on use of agents to the extent possible.' That was changed to say, 'Just stop the use of agents.'

Mr Stevens : It was 12 June, was it not?

CHAIR: 12 June. Yes.

Mr Battellino : Once that draft was done, that audit report was then circulated to Mr Thompson, as chairman of the company, and they went through a process of looking at it and, I think, the board of NPA met on 12 June to consider the final audit report, which had the stronger recommendations in it. They accepted those recommendations—terminated the use of agents then. So the decision to terminate was made, as I understand, Frank, on the 12th?

Mr Campbell : Yes.

Mr Battellino : Because that had to be made by the board.

Mr Campbell : That is right.

Mr Battellino : It was on the recommendation of the audit, which had been circulated a week or something earlier.

Mr Stevens : That is what the minutes of that meeting say.

CHAIR: So that is essentially the seven weeks from the trigger in April to the termination of all agents—the ceasing of using of agents?

Mr Stevens : At NPA—correct.

CHAIR: On 12 June. Then you went further again, Mr Battellino, recommending that an audit committee be sent in to fully investigate, and bringing in Freehills?

Mr Stevens : The subcommittee?

Mr Battellino : Yes, we said the board of NPA should undertake further work and that an independent subcommittee be set up. The independent member of the RBA audit committee is a gentleman called George Bennett. He used to be head of KPMG Australia for many years. He is very experienced in audit matters. In my opinion and understanding, he is a man of impeccable integrity, and I have to say, a person who, I knew, had been quite dissatisfied with the performance of NPA. So he had the background, that there were issues in this company. He was not going to be easily convinced, and, I think, we all felt that he was a good person to chair that group.

CHAIR: In parallel to that, you contacted Mr Hood via Mr Campbell, and met with him as well. There was a parallel, double-check process going on for some time.

Mr Battellino : Yes, that is right.

Mr STEPHEN JONES: At any stage during this seven-week period were background checks done on any of the agents that had been engaged by Securency or NPA?

Mr Campbell : After the process of signing the agents up in terms of the new contract, a firm endorsed by Austrade—it was not Austrade but it was a firm endorsed by Austrade—were asked to vet the agent in Malaysia and the agent in Nepal. I did not see the reports, but I was advised that there were no grounds for concern based on those two reports.

CHAIR: This is not the full story here. In the seven-week period you went from the trigger to ceasing the use of agents who may have been the cause of whatever illegal may or may not have happened. That is fine. I want to talk through what happened after that seven weeks, because there was the Freehills audit that went through until 10 August. Then there was the opportunity for staff to see the bits of the Freehills report that related to them. There was various cleaning up of management processes and stuff that went on. There has been a fairly rapid seven-week turnaround to the ceasing of the use of agents but then there was probably another four months of finding out all the details and cleaning up that went on. Can you go through those?

Mr Stevens : Probably. The Securency audit was completed on 1 August. The Freehills process finished a little after that, I think, by the time the people that the Freehills people had interviewed had the opportunity to see the relevant excerpts, respond, and so on. Then the board received those responses. That is up to the middle of September. That was about another three months from early June, I guess.

Mr Battellino : The other point that we probably should add here is that on 12 June, the NPA board met and agreed to implement the audit recommendations. On 13 June, I commissioned a special meeting of the audit committee, also to consider the audit report. We had an independent set of eyes looking over that audit report and to confirm whether we were on the right track. The audit committee accepted all the recommendations. They thought the audit recommendations were fine. The only thing they did was to widen the terms of reference for the subcommittee that was about to start work. Instead of just looking at the legal aspect of this, their terms of reference were widened to look more generally at business practices across the whole company as well.

CHAIR: I have two questions. Why didn't the NPA board or the RBA know about the potential problems before April 2007? Was there part of your process that should have been better then?

Mr Stevens : I think that Securency did have some policies in place prior to the RBA board asking for the information in mid-2006. I am not across the details of them. I do not think that NPA's were as elaborate. I can only add that I think—for my own part anyway; it is probably not just me—there was just not enough appreciation of the extent of risk that we might have been incurring here without realising it in using these people until the wheat board things flared up. It was that that triggered the RBA board's initial question—not because they knew something was wrong, but because they thought that they should check, given—

Mr Battellino : When I look at the policies that were adopted by the boards in the middle of 2006 now, I think that the boards would have been reassured by them. The management did not say to the boards, 'Yes, but there are issues here.' They were given a set of policies which you would think were reasonable policies for the board.

CHAIR: Okay.

Mr CIOBO: Gentlemen, at the tail end of batting it gets a little erratic, so we are very grateful for your generous use of time. The only real question that I have that has not been asked, among the hundreds if not thousands that have already been asked today, deals with the audit teams that went into Securency. Given that Securency on paper presented very well—I think the phrase was 'good and robust' from memory—in which aspect of the audit was it deficient not to pick up on the breaches that were taking place? And if it was not deficiency on the part of the audit team—I am talking about the RBA team not the KPMG team—is it the case that there was illegal or potentially illegal behaviour on the part of an employee or employees that misled the outcome of the audit team? Let me put a tail to that question in saying that I understand some of this could be sub judice, so I understand if you are not in a position to respond.

Mr Battellino : I think that is right. A lot of these matters are matters that really impinge on the trials of individuals that are going on at the moment.

Mr Stevens : I think that is right. It is clear from the KPMG work that emerged in November, I think—it is in my text from this morning anyway—that some information at that point emerged that, at least in principle, had the auditors known they might have reached a different conclusion. You can never be sure of that, of course, because it is an unobservable different baseline. Would they have reached a different conclusion? I do not know. There are other things but they go to the evidence in the hearings.

Mr CIOBO: The point I am trying to ascertain—and this is difficult given the legal considerations—is to put it in blunt terms: are you satisfied the questions that needed to be asked were asked, although the answers themselves may not have been accurate? Or were the questions not asked?

Mr Battellino : I am satisfied, because the terms of reference for the audit were exactly the same for both NPA and Securency. The audit team, at least at the very senior levels, was also exactly the same. I do not think there is any reason to assume that Securency got a lighter touch than NPA had gotten.

Mr Stevens : These things are hard to know, but from the high-level vantage point, the same team goes to ask basically the same questions and it is only a month or two later. I think you quizzed them when they came back: 'Are you sure this is right?'

Mr Battellino : Because the gap was so big.

Mr CIOBO: I find it interesting that KPMG in undertaking their audit uncovered material facts.

Mr Battellino : When I look at the KPMG report, they found a lot of small things that were not being implemented properly. But the thing that really changed their mind—as soon as they found this they immediately informed the board—was they found there had been a whistleblower within Securency in 2007. It was then that a staff member raised concerns and that person had been dismissed, as far as I understand. As soon as they saw that they realised there was an issue.

Mr CIOBO: I do not understand from a corporate governance point of view what the material differences would have been—again I respect the terrain so it is difficult. In essence I distil from this that two audit teams went in, one the RBA's and the other KPMG's, essentially talking to the same people. If I were to make the assumption that an employee or employees were giving and receiving information, that information should have been consistent for both audit teams. I find it interesting that the two teams came up with vastly different answers, but of itself this does not imply negligence or a dereliction of duty on the part of the board. But I do find it an interesting difference.

Mr Battellino : That is right, but there are a couple of points I would make in response to that. First of all, KPMG went in with the knowledge that there were some problems, because all of the stuff had been aired in the paper. So they were looking for problems. They had been told, 'There is an issue here and you had better find what it is.'

Mr CIOBO: But that is an audit team's job.

Mr Battellino : That is right; that is an audit team's job. But the other auditors went in and they did what would be regarded as a normal internal audit. As to the KPMG thing, you could not run an internal audit department at the same scale as the KPMG audit.

Mr CIOBO: So was it more forensic, in other words?

Mr Battellino : It was much more forensic. It went on for six months and it cost a fortune. There is no way, unless you thought there was a problem there, that you would be running that. You could not support an audit department at that level; that is the key thing.

Mr CIOBO: Sure. But for the media articles, sourced from wherever they were sourced, it all presented, on paper, in glowing terms—hence the board's belief that it was compliant.

Mr Battellino : Yes.

Mr CIOBO: Okay. Thank you.

Mr BANDT: Given that, in 2007, there was an agent, common to both Securency and NPA, subsequently in respect of whom things have gone much further, and given that there was a whistleblower in NPA, should there, at that time, been a more extensive audit into what was happening at Securency?

Mr Battellino : As I say, the terms of reference for the audits were exactly the same, and the audit team was exactly the same. They basically went about doing what they did at NPA.

Mr Stevens : I suppose what I would say is: at least as far as I know, the degree of intensity was supposed to be the same at the two, and it had turned up things in one and not the other. Then there was a follow-up a year later, which again found the same conclusions. So really there were two audits, and it took the forensic version by the KPMG people—which, as Ric said, was much more intensive than a normal audit could ever really be, unless you were really intent on drilling down—to uncover some of the key things.

Mr BANDT: I guess that is the point of my question: given the limitations of an internal audit, which would have been known at the time, and given that it was known that there was an agent common to both companies and that there was a whistleblower in at least one of them, should the decision have been made at the time to do something more extensive, knowing the limitations necessarily placed on the internal audit team?

Mr Stevens : The limitations of an internal audit at NPA being what they were, they still came up with some quite robust conclusions. It would not be obviously assumed that the same process at the parallel company would not, if they were there.

Mr BANDT: In the future, if someone internal to one of the companies or to the RBA came forward with allegations about allegedly corrupt payments being made, would there be an inclination to go to either the police or ASIC earlier?

Mr Stevens : I should be clear that there are still ongoing investigations in some of these areas, including in some jurisdictions where there have not been charges to date. There has been internal work done in Securency in regard to one of those, and the police have been informed of that. My understanding is that they are content for an internal process and then to be advised on the outcome of that in due course. I would say, as well, that it is pretty—I will not say common, as it does not happen very often, but, at the Reserve Bank, when we are faced with evidence that does seem very clear, the police are called straight away, and I can think of two instances of that in the past six months, which are not to do with agents; they are to do with—and there are current cases here too—what appears to be pretty clear wrongdoing in another part of the note area. The police have also been advised recently regarding the story that was in the newspaper the other day about the new note design. In both those instances—and there are others I can think of in the past—where the evidence seems obvious, that is what happens.

CHAIR: I think we are winding up.

Resolved (on motion by Mr Ciobo):

That this committee authorises publication, including publication on the parliamentary database, of the transcript of evidence given before it at public hearing this day.

Before I declare this public hearing closed, can I thank you all very much for coming along today, thank all the people who had to work very hard to get you here and thank our staff for coming in on a public holiday as well.

Mr Stevens : Thank you to the staff for coming in on their public holiday. I appreciate the opportunity to have had this day. I expected it to be a tough day but, as you know, we were quite willing to come for as long as needed and to give you every bit of documentation that we feel we can within the constraints that we are all under and I think we are all a bit clearer now on how hard that is to do. I hope this has been good to clarify this process in excruciating detail.

Mr CIOBO: On behalf of opposition members, thank you, Governor; thanks to the executive team and Mr Battellino for coming in and supporting the testimony today; and thanks to the staff also.

Committee adjourned 16:37