In February 1998, John Howard's cabinet agreed to support American military action against Saddam Hussein. But three months later, in May, officials from Reserve Bank were secretly offering the Iraqi tyrant our unique plastic bank note technology.
This stupefying discovery was contained in the most recent Fairfax and Four Corners investigation, which aired last Monday night. Yes, the Reserve Bank scandal is worse if you put it in context.
Allegations that Reserve Bank subsidiaries used bribery to secure banknote contracts in foreign countries have been around for years. But bribery is one thing. This is something else. One arm of the Australian government — the central bank, no less — was trying to cut deals with a dictatorship that the rest of the Australian government was preparing to go to war with.
(At least the body at the centre of the last Iraq scandal, the Australian Wheat Board, was a private company. It did not travel on official passports. It did not represent the Australian government.)
Even more amazing — it was the Reserve Bank's responsibility to enforce financial sanctions against Iraq.
The Reserve Bank's actions in Iraq reveal a massive, endemic governance problem that goes beyond this scandal to the structure of the Australian regulatory state.
After the 1991 Gulf War and subsequent United Nations embargo, Iraq could no longer import its bank notes from printers in Britain and Russia. So the Central Bank of Iraq cobbled together its own printing equipment to do the job. The notes they produced were nicknamed "Saddam" bills — plastered with the tyrant's face, they were easily counterfeited, badly devalued, and so poorly made that the ink ran.
In the late 1990s, the Iraqi central bank started looking around for a supplier to replace its shabby currency outright. Saddam Hussein was shown polymer notes. He loved them. So representatives of the Reserve Bank's printing division popped over to Baghdad to spruik our merchandise.
Its trip had to be secret because, while they were there, 190 Australian troops were on the other side of the Kuwait border waiting for orders to attack.
The United States eventually passed the Iraq Liberation Act, and Bill Clinton ordered a bombing campaign in December that year.
The Reserve Bank is not just one of the most important government agencies. It is also the premier independent agency. It has been deliberately separated from the traditional Westminster lines of ministerial control. It does not take directions from elected representatives.
This governance structure is supposed to eliminate political interference in Reserve Bank decisions. But it also reduces accountability.
The two Reserve Bank subsidiaries involved in the scandal are even further removed from parliamentary oversight. Securency, which makes the high-quality plastic film, was a private firm founded in 1996 and 50 per cent owned by the Reserve Bank. (In damage control, the bank bailed out of Securency earlier this year.)
Note Printing Australia takes Securency's film and produces banknotes and passports. It was originally a division of the Reserve Bank itself but was corporatised — that is, spun off and converted into a commercial corporation, seeking a market rate of return, but still wholly owned by the central bank.
And when did this corporatisation happen? July 1998. That is, while the division secretly had outstanding business with the Ba'athist government of Iraq.
The scandal occurred at the very moment when all the responsible institutions were being granted further independence; that is, being reformed to be less directly accountable to our elected representatives.
The Reserve Bank itself had just passed a major milestone. In 1996, Peter Costello released a statement on the conduct of monetary policy which formally confirmed the central bank's independence from government. This was a big deal. It had been less than a decade since Paul Keating had bragged he had the Reserve Bank "in my pocket".
While most commentators have focused on the monetary implications of this institutional change, the Iraq scandal shows that the central bank believed it could act independently of Australia's foreign policy as well.
For the last few decades it has been fashionable to praise "independence" as a desirable attribute for regulators, bureaucracies and central banks.
The appeal is obvious. Politicians are venal creatures. The further we keep them away from government the better. The result of bureaucratic independence is — at its best — a technocratic rejection of politics.
But at its worst, independence fosters unaccountable bureaucratic fiefdoms pursuing their own agendas, backed by the full force of government but unconstrained by democratic norms like ministerial responsibility and public accountability.
In other words, exactly what we can see in the Reserve Bank scandal.
In its memo reporting back from the May 1998 Iraq trip, the Reserve Bank officials acknowledged that no banknotes could be delivered to Iraq until the United Nations embargo was lifted. But "nothing was stopping us to sign a contract and have products (banknotes, machines, etc) manufactured".
You can imagine them patting themselves on the back for such clever, disingenuous reasoning. The Department of Foreign Affairs and Trade was not as impressed.
So why are we only hearing about all this now?
The investigations so far have made much of the failure of the Australian Securities and Investment Commission to chase down the bribery allegations. Once again, context makes it worse.
ASIC is one of the big three mega-regulators, along with the ACCC and APRA. All are blessed with formal independence from government. And all were being reformed in the early Howard years.
ASIC only gained its current form in (you guessed it) 1998, when it was given a new suite of powers and responsibilities. It has since gained a reputation for being capricious and draconian. In its actions against AWB, the judge accused it of bringing justice into disrepute.
Yet it has let this scandal slide. But don't worry. According to ASIC, "the public can be completely and utterly confident in ASIC's actions."
We're supposed to take it on faith that one independent government agency has fully investigated possible wrongdoing by another independent government agency.
There is nothing in the Reserve Bank scandal that should make us comfortable with how Australian democracy functions.