It seems the disgraced Australian casino industry may have met its match in Federal Court Justice Michael Lee, who is at least attempting to apply a touch of rigour and verify the validity of Crown Resorts crying poor.
Lee was given the job of placing the court’s seal of approval on the settlement between Crown and the regulator, AUSTRAC. But the rubber-stamping exercise has not gone to plan.
In March, AUSTRAC declared it had agreed to a $450 million settlement with Crown as financial punishment for the casino’s egregious contraventions of money laundering and counterterrorism laws over several years. But there was a nifty bait and switch engineered as part of the outcome.
The switch, as we discovered this week, was allowing Crown to pay the penalty on an interest-free instalment basis – making the true value of the fine around $405 million. That’s a handy 10 per cent discount for Crown.
This “fine now, pay later” theme has become increasingly familiar in the casino sphere as Star and Crown have both suggested they need more time to deal with the regulatory onslaught, given their stretched financial positions.
Star said in April it had been in talks with NSW and Queensland governments about cutting a deal to pay $200 million in fines on an instalment basis.
However, Lee this week has been unwilling to accept this argument without some painstaking nitpicking of the agreement between AUSTRAC and Crown, delivering a lesson on the time value of money.
The judge has suggested that at $450 million the settlement was in the range of acceptable penalty – albeit at the bottom end. At $405 million, he wasn’t so sure it was appropriately large or a sufficient deterrent.
That was Crown’s cue to plead that the imposition of an upfront and payable fine of $450 million would be damaging to its financial position, and even flirt with the notion that it could be a company killer. This was based on an affidavit signed by Crown’s chief financial officer, which among other things asserted that it would post a loss of $390 million in the 2023 financial year.
But this loss – while not a piece of accounting trickery – is not representative of Crown’s ongoing trading result. It contains one-off adjustments for fines that it has paid to other regulators. Crown’s accounts last year had made provisions of $523 million to cover fines to various regulators (including the AUSTRAC expenses), but it seems they hadn’t provided enough.
When private equity group Blackstone sealed the acquisition of Crown last year with an $8.9 billion bid, it was aware big fines were coming down the line. The size of these fines was a risk that Blackstone was clearly prepared to take.
To be fair, Blackstone has cleaned up Crown and overhauled its management and its risk practices. But it acquired Crown with full knowledge of the legacy issues. So it feels strangely shrill for Crown’s new owners to now be crying poor.
Crown now says that if it is required to pay $450 million (rather than $405 million) it may need to tap shareholders for equity or raise debt, a measure that has been presented by the company as a perilous manoeuvre – but companies do this regularly when their balance sheets come under pressure, particularly for one-off reasons.
Indeed, Star passed the hat around to its shareholders and collected $800 million earlier this year to address balance sheet issues. Since then, it has gone even further, sacking hundreds of staff and entertaining the sale of its marquee asset in Sydney.
Meanwhile, Star is threatening a near existential event if the NSW government doesn’t back away from previous plans to increase gaming taxes.
There is nothing to stop Crown from selling an asset to pay a fine.
Meanwhile, Lee has raised the potential that AUSTRAC may have been played by Crown, during the protracted negotiations to hammer out a settlement. In his final judgment, Lee has left the door open for Crown to pay back the fine earlier than scheduled if and when its financial condition improves.
“This is a regulator who has never litigated a contested hearing or advocated for orders different to that proposed to contravener (Crown in this case) on final hearing,” Lee said.
He suggested, “A sophisticated contravener knows that the court will … generally accept the proposed penalty even if the court would prefer a higher (penalty)” and concluded that this gives rise to a moral hazard because Crown knows it can delay and hold out securely in the knowledge that the regulator doesn’t contest matters in court.
It’s a grim assessment that reflects rather poorly on the regulator, and perhaps not what it had in mind as it looked to cross the final hurdle on making Crown pay.
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Source: Thanks smh.com