The Star Entertainment Group (ASX: SGR) director Richard Sheppard has slammed the company's senior management for not escalating bad news to the board, telling an inquiry into the casino operator he was surprised "nobody put their hand up" over miscommunication to National Australia Bank (ASX: NAB).
Sheppard, the first board director to give evidence to an ongoing review from NSW's gaming regulator, said it was ‘extremely disappointing’ that under the group’s whistleblower framework nobody stepped forward to alert the board of shortfalls in risk management that have now been exposed by the review.
Sheppard, who is also chairman of property group Dexus (ASX: DXS) and a former CEO of Macquarie Bank (ASX: MQG), was particularly critical of the ‘seriously misleading’ and ‘extraordinarily surprising’ representations made by senior management in relation to the use of China Union Pay (CUP) credit cards for gambling at The Star’s casinos.
The ILGA review has uncovered a litany of failures in the oversight of The Star’s Chinese VIP junket operations that exposed the business to the risk of money laundering activities.
However, it was the cover-up by senior management of the true purpose of significant charges listed as hotel services racked up on CUP cards, one as much as $22 million, by high rollers that drew sharp criticism from Sheppard.
The management team has been implicated in acquiescing over many years to misleading communications with National Australia Bank (ASX: NAB), acting on behalf of CUP, as it sought assurances that the credit cards were not funding gambling activities in contravention of Chinese government regulations.
The Star's CFO Harry Theodore, chief NSW casino officer Greg Hawkins and chief legal and risk officer Paula Martin resigned last Friday after giving evidence to the review where former CEO Matt Bekier singled them and others out claiming they had failed to escalate to the board the risks identified within the casino’s junket operations.
However, Sheppard refuted a suggestion by counsel assisting the review, Naomi Sharp SC, that management at The Star was ‘rotten to the core’.
“I think rotten to the core is an overstatement,” Sheppard said, “but in relation to this (NAB communication), seriously misleading is an absolutely correct description.”
Sheppard told the review that the management team, in his experience, had been ‘honest and diligent to deal with’ across a range of matters but this was a ‘very serious breach of the code of conduct’.
“Possibly the management team convinced themselves they weren't doing anything wrong, and I find that hard to believe because I think these are deliberately deceptive communications. And I find it, as a director, incredibly disappointing - and indeed very surprising … that nobody, nobody put their hand up," Sheppard said.
“Notwithstanding that we had very specific procedures for regular representations to the board about compliance, and not withstanding that we had whistleblower procedures which we communicated widely around the company…these failures occurred.”
Sheppard noted this was not an ‘isolated example’ of senior management failing to send ‘bad news’ up the chain of authority.
“There has been a cultural issue affecting a significant part of the senior management team, which has caused them to make decisions to either try to address these things by themselves without escalating them, or to avoid escalating bad news to the board. So, I think based on that, that is a systematic cultural issue.”
Sheppard conceded in retrospect that the board was responsible for making ‘mistakes with appointments’, especially in combining the chief risk officer and the chief legal officer roles.
“This had been a team that had been together for a long period of time and I think, in retrospect, it would have been good to introduce some fresh eyes into the team.”
Earlier on in the NSW Independent Liquor and Gaming Authority (ILGA) inquiry, former chief risk officer Paul McWilliams said a 2018 KPMG report detailing failings in Star's anti-money laundering program had elicited an "allergic reaction" at a committee meeting, prompting Bekier to claim the report was "wrong" while chairman - and now executive chairman - John O'Neill had found the report's tone to be offensive.
McWilliams also claimed that at that same meeting Sheppard had asked if the KPMG reports had been finalised and whether it was too late for them to be amended.
"We just confirmed the report was final, that it was not open to being amended," McWilliams said.
Other people who attended that meeting were Sally Pitkin, Richard Sheppard, Katie Lahey, Zlatko Todorcevski, Gerard Bradley, Paula Martin, Chad Barton, and Tarnya O'Neil.
Tarnya O'Neil told the inquiry that the then chair of the audit committee, Todorcevski, was aware that KPMG would be in attendance in an anteroom and available to talk to the detail of the report, should the directors have any questions.
"But during the course of this particular agenda item, they were not invited by the chair or any other committee members to come in and talk to the report," she said.
The review, headed by Adam Bell SC, continues.
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