Introduction
The Federal Court’s decision in Zonia Holdings Pty Ltd v Commonwealth Bank of Australia Ltd [2024] FCA 477 provides valuable insights to the treatment of non-disclosures in respect of misleading and deceptive conduct. The case arose from allegations that the CBA misrepresented the strength of its compliance systems under the Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) Act. These claims, brought by investors of CBA, were ultimately unsuccessful.
CBA’s non-compliance with the AML/CTF Act
Between 2012 and 2017, CBA’s ‘Intelligent Deposit Machines’ allowed anonymous cash deposits of up to $20,000 without adequate monitoring or timely reporting of suspicious transactions to AUSTRAC. This led a financial penalty imposed by AUSTRAC in 2017.
Zonia Holdings, representing a class of investors, alleged that between 2014 and 2017, CBA misled the market by:
Claiming to have effective compliance systems in place, despite being aware of significant regulatory breaches.
Failing to disclose these breaches, which Zonia claimed artificially inflated CBA’s share price, leading to financial losses when the breaches were revealed.
Court’s findings
The court concluded that the information CBA failed to disclose was not material under the Corporations Act or ASX Listing Rules. For information to be material, it must significantly influence the decisions of reasonable investors.
The court found that the compliance failures, though serious, were isolated regulatory lapses rather than systemic issues that would materially impact CBA’s financial performance or attractiveness to investors. The breaches were identified to be administrative and technical breaches, with no immediate financial or operational consequences for CBA during the period in question.
The court also found no evidence that CBA’s public statements about its compliance systems were intentionally misleading or deceptive. While acknowledging compliance lapses, the court determined that these were isolated and did not contradict CBA’s general claims of robust compliance frameworks.
CBA’s argument that AUSTRAC’s investigation was speculative until formal proceedings began in 2017 further diminished the obligation to disclose preliminary inquiries earlier.
Key takeaways for financial services providers
The Zonia Holdings case emphasises the critical role of materiality in assessing misleading and deceptive conduct. In determining whether conduct is misleading or deceptive, the courts have determined that it must cause, or be likely to cause, someone to misunderstand or be misled about the facts (Weitmann v Katies Ltd (1977)). For financial disclosures, the concept of materiality becomes relevant when evaluating the significance of omitted information.
This case demonstrates that not all representations or omissions will meet the materiality threshold. While ASIC has increasingly focused on misleading and deceptive conduct as part of its regulatory agenda, materiality remains a crucial consideration in assessing whether information warrants disclosure.
If you have any questions in relation to the above, please contact the authors Andrew Mutton or Sandra Bejo.
This publication has been prepared for general guidance on matters of interest only and does not constitute professional legal advice. You should not act upon the information contained in this publication without obtaining specific professional legal advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication and to the extent permitted by law, Cowell Clarke does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting or refraining to act in relation on the information contained in this publication or for any decision based on it.