August 9, 2017 5:53 pm JST

Australia's biggest bank dealing with reputational scandal

CBA failed to flag potential money laundering, terrorism financing, regulator says

GEOFF HISCOCK, Contributing writer

Commonwealth Bank Chief Executive Officer Ian Narev speaks on the Australian bank's interim results at the Commonwealth Bank headquarters in Sydney on February 15. © Reuters

SYDNEY - Australia's most valuable company and biggest bank, Commonwealth Bank of Australia, on Wednesday confronted government allegations that it failed to properly monitor more than 53,000 transactions potentially linked to money laundering and terrorism financing between 2012 and 2015. In theory, the bank faces fines of almost one trillion Australian dollars and a hit to its reputation that last week wiped billions of dollars off its market value.

The bank has tasked four directors with overseeing the bank's response to a Federal Court lawsuit, CBA's Chairman Catherine Livingstone said on Wednesday. The suit alleges that criminal syndicates had laundered millions of dollars through CBA accounts over several years.

The allegations, made by the government's financial intelligence and regulatory agency AUSTRAC, put a cloud over CBA's announcement of a better-than-expected 4.6% rise in full year cash net profit of A$9.88 billion ($7.82 billion).

On Wednesday morning, CBA Chief Executive Officer Ian Narev instead of exulting in the bank's strong results performance was forced to acknowledge failures in its computer software, anti-fraud and risk management systems.

The scandal unfolded after AUSTRAC on Aug. 3 initiated civil penalty proceedings in the Federal Court against the bank for what it alleged was "serious and systemic non-compliance" with anti-money laundering and counter-terrorism financing laws.

Hundreds of millions of dollars are believed to have been laundered by organized crime gangs which used CBA's cash deposit-accepting automatic teller machines - known as Intelligent Deposit Machines (IDMs) - to send money from Australia to Hong Kong and elsewhere. The same method is believed to have been used to send money to an overseas terrorist organization, according to the agency's investigations.

AUSTRAC alleged that between November 2012 and September 2015, CBA failed to provide 53,506 threshold transaction reports on time for cash transactions of $10,000 or more that went through the bank's IDMs. It says these reports had a value of almost A$625 million, and represented about 95% of all the threshold transactions that went through the bank's IDMs.

CBA has blamed the threshold reporting problem on a computer system error that removed the AUSTRAC automatic reporting code, following a software upgrade. Narev said the bank had "made mistakes," but that there had been no intent to deceive.

With a maximum penalty of A$18 million for each of the 53,000-plus breaches, theoretically the bank could face fines of more than A$960 billion. However, analysts at Morgan Stanley said the range would more likely be from A$50 million to an upper limit of A$2.5 billion, which would still be a significant financial hit for the bank.

CBA, which began life in 1911 as an Australian government-owned bank, was listed in 1991 and fully privatized in 1996. It is by far Australia's biggest bank, ahead of Westpac, National Australia Bank and Australia and New Zealand Banking Group (ANZ), with a market capitalization of more than A$140 billion ($111 billion) that puts it among the world's top 10 listed banks by value. In the Asia Pacific region, only the big Chinese banks are worth more. It has about a quarter of the Australian home mortgage market.

AUSTRAC's bombshell allegations have already caused substantial pain for CBA's 800,000-plus shareholders, and will see bonuses cut for CBA executives linked to the shortcomings of the IDMs. Narev, who has been CEO since 2011 and was contemplating standing down next year, has said he will stay on to deal with the case.

"We know that we've made mistakes," Narev said on Wednesday as he discussed the bank's full-year results. "We have fixed a lot of those mistakes and we will continue to work to make our business better."

The CBA executive widely seen as Narev's heir apparent, Matt Comyn, is head of retail banking, which includes responsibility for the IDMs.

Ahead of the results release, board chairman Livingstone said Narev "retains the full confidence of the board." She said that the board's immediate action has been to cut short-term bonuses to zero for the CEO and group executives for the financial year ended 30 June, 2017, and to reduce fees for non-executive directors by 20% during the current 2018 financial year.

"This reflects our view that the board, CEO and group executives take ultimate collective responsibility for the reputation of the Bank," Livingstone said.

One of AUSTRAC's allegations is that CBA failed to carry out any assessment of the money laundering and terrorism financing risk of its IDMs before their rollout in 2012. AUSTRAC said CBA took no steps to assess the risk until mid-2015, three years after the machines were introduced.

AUSTRAC also alleges that the bank failed to report suspicious matters either on time or at all, involving transactions totalling more than A$77 million.

It alleged that even after CBA became aware of suspected money laundering or dubious structuring on CBA accounts, it did not monitor its customers to mitigate and manage any likelihood of money laundering and terrorism financing, including the ongoing risks of doing business with those customers.

AUSTRAC acting CEO Peter Mr Clark said on Aug. 3 that action against CBA "should send a clear message" to all reporting entities about the importance of meeting their anti-money laundering and counter terrorism financing obligations.

In an initial response to the charges, CBA said on Aug. 3 it "would never deliberately undertake action that enables any form of crime. To that end, we scan billions of dollars of transactions daily, and report 4 million transactions a year to AUSTRAC."

CBA said the 53,000-plus breaches could be seen as originating from a single course of conduct - a computer system error that killed the AUSTRAC reporting requirement, following a software upgrade.

The CBA board said it had "no reason to believe that the allegations arose from deliberate or unethical behaviour, or any commercial motive."

The bank also said on Wednesday that it is in talks to sell its life insurance business, although no potential buyers have been named and the outcome of the talks was "uncertain," it noted.

In mid-afternoon trading on the Australian Securities Exchange, CBA shares rose by 1.1% to A$81.5 after the results announcement, ahead of the market's overall 0.33% increase.

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