As previously reported in Governance News on 7 August, Australia's financial intelligence and regulatory agency, AUSTRAC has initiated civil penalty proceedings against the Commonwealth Bank of Australia (CBA) for 'serious and systemic non-compliance' with the with the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act). AUSTRAC's action alleges over 53,700 contraventions of the AML/CTF Act.

CBA response to the allegations

Cause of the alleged breaches

In a statement to the market, CBA have stated: 'AUSTRAC alleges that approximately 53,000 threshold transaction reports were lodged late. Late lodgement carries a penalty of up to $18m. However, these alleged contraventions could be considered to arise from a single course of conduct to the extent that they emanated from the same systems error'.

Non-disclosure

Banking Day writes that CBA CEO Ian Narev has reportedly defended the decision not to disclose problems with the bank's anti-money laundering reporting processes after directors were notified of systemic issues in August and September 2015: 'In a highly regulated environment you simply can't make disclosure every time you get a notice from regulators, or you'd be making disclosures every day' the article quotes Mr Narev as stating.

Current program to improve compliance

Banking Day reports that Mr Narev has 'confirmed to journalists the bank was still working to make its processes compliant: 'We're not saying every problem has been fixed' he is quoted as stating. In addition, CBA Chairman Catherine Livingstone has enumerated the actions the bank has taken (since becoming aware of the issues in 2015) and is taking to address the issues (the key points of her statement are summarised separately below).

Acknowledgement of impact on reputation of the bank

Banking Day reports that Mr Narev conceded that the bank had made mistakes and rejected suggestions that CBA had tried to account for the operational failures as the exclusive outcome of a software coding error on the Intelligent Deposit Machines. He also reportedly acknowledged that the controversy had damaged his and the bank's reputations: 'When the organisation has issues of reputation they reflect badly on the organisation and me personally as CEO of the bank' he said.

CBA Board announced to the market it has 'decided to reduce to zero' CEO and group executives' short-term variable remuneration incentives

In a statement to the ASX, the CBA board announced that the CBA CEO and group executives will not receive short term variable remuneration incentives: 'The board advises that it has decided to reduce to zero the short term variable remuneration outcomes for the CEO and group executives for the financial year ended 30 June 2017…In reaching this conclusion the overriding consideration of the board was the collective accountability of senior management on the overall reputation of the group. The Board also recognised that it has shared accountability and therefore has decided to reduce non-executive director fees by 20 per cent in the current 2018 financial year.'

CEO Ian Narev

CBA announced to the market that the CBA Board 'had decided to provide details of its planned Chief Executive succession process to ensure the market is fully informed and to provide certainty for the business. Managing Director and Chief Executive Officer, Ian Narev, will retire by the end of the 2018 financial year, with the exact timing dependent on the outcome of an ongoing comprehensive internal and external search process.'

Statement from the Commonwealth Bank of Australia Chairman of the Board regarding AUSTRAC allegations

The CBA Chairman, Catherine Livingstone has issued a statement regarding the AUSTRAC allegations the key points of which are summarised below.

• The CBA Board acknowledges the significance of the AUSTRAC allegations, recognises the high degree of public interest in this matter, and that this issue impacts the reputation not only of the CBA 'but of the industry more broadly'.
• Affirmed CBA commitment to working with AUSTRAC other agencies and law enforcement bodies.
• Enumerated the actions taken (and still in the process of being taken) by the CBA to strengthen AML/CTF policies and processes 'since the second half of 2015, when the alleged issues relating to Threshold Transaction Reporting (TTRs) in the Intelligent Deposit Machines (IDMs) were brought to the Board's attention'.
• Board Accountability: 'In terms of addressing accountability for the issues raised by the statement of claim, the Board's immediate action has been to reduce to zero the Short-Term Variable Remuneration outcomes for the CEO and Group Executives for the financial year ended 30 June 2017, as well as reduce fees for non-executive directors by 20 per cent 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'.
• Board will take an active role in addressing any further management accountability: As the Board considers the substance of AUSTRAC's claims, it will take an active role in addressing any further management accountability for the alleged actions or omissions. The Board notes that it has no reason to believe that the allegations arose from deliberate or unethical behaviour, or any commercial motive. The Board's actions reflect the focus we are taking on improving the trust among people, customers, businesses and communities that the Bank exists to serve.

The events at the CBA have received wide media coverage

Holding the board to account

The AFR writes that CBA Chairman Catherine Livingstone's actions in imposing accountability on the CBA are 'rarely seen on Australian boards': 'The CBA board's decision to cut executive short-term bonuses and directors' fees was also startling simply because this level of accountability is rarely, if ever, seen on Australian boards. Certainly it's not been seen at CBA even though the bank has battled scandals over recent years' the article states. The article adds that her actions reflect the fact that there is potential for further reputational damage to the CBA and to the sector if the CBA 'is seen to be slow, incompetent or arrogant in its response' and comments that her actions demonstrate 'it's not just short-term financial performance that is important.'

In a separate article, The AFR quotes University of Sydney academic Jennifer Hill as stating: 'In the Australian context, directors individually do run the risk of breaching their duty of care and diligence in relation to corporate cultures that cause loss to the company and reputational harm….we will see a lot more boards stepping up and being responsible for organisational integrity, and taking actions such as cutting bonuses, although that's at the lower end of the moves they could take.'

Reasons for non-disclosure of actions 'unclear'

Banking Day writes the disclosures by the Chairman of the program of actions undertaken since 2015 but not previously disclosed to the market/shareholders is confirmation that the CBA had identified deficiencies in skill sets and compliance systems in the 2015/2016 financial year. However, the article adds, even though the risk management failures were judged important enough to require a 'dedicated, far-reaching and costly overhaul', CBA did not to disclose details of the program of action until now.

Banking Day comments that under ASX rules, listed companies are required to disclose most matters that could have a material impact on share price performance and that an argument could therefore be mounted that the bank had an obligation to include a contingent liability in its 2016 financial accounts to alert investors of its exposure to the possible legal penalties. The article adds that even if the bank had no legal obligation to enter a contingent liability in the accounts, it may have had a responsibility to alert shareholders to the potential exposure under its 'Vision and Values' principles.

Broader cultural issues and 'regulators asleep at the wheel'

Writing in The AFR, University of Canberra academic Milind Sathye suggests that the scale of the alleged 'lapses' by CBA raises broader questions about 'the way big banks, in particular, are approaching the compliance under the AMLCTF'. She argues that the attitude of the CBA (and among other large banks globally) to compliance, is indicative of a larger cultural issue. She also questions why the alleged breaches were not picked up by auditors or by APRA and suggests that this lack of oversight should also be investigated: 'Until such time the above issues are thoroughly investigated at all levels and actions initiated there is less likelihood of anything concrete happening.'

Royal commission into banking?

The Conversation writes the events at the CBA shows that regulators in Australia are 'asleep at the wheel' and 'too frightened to take action even when there is mounting evidence of illegality' and adds that that a Royal Commission into the banking industry is justified on the basis of the scale of the alleged breaches and the fact that they weren't addressed by regulators. A number of other media commentators including The AFR, The Australian and New Daily write that a royal commission is now more likely.

A separate AFR article states that the Treasurer has 'categorically ruled out' a banking royal commission, even though he's previously stated all options are open. The Treasurer is quoted as stating: 'I think it's an epic fail and incredibly serious, and at the end of the day the Commonwealth Bank — and particularly their board — have to assure the public about their confidence in the bank'. Reportedly Mr Morrison added that the government had already taken the kind of action that a royal commission would likely recommend including more funding for ASIC and greater accountability on executives.

Government reportedly taking advice on action against CBA

The AFR reports that the Treasurer has told Parliament that he was briefed by AUSTRAC regarding the allegations against the CBA and that he is taking advice from the Treasury Department, the Australian Prudential Regulation Authority and the Australian Securities and Investment Commission over the case.

The same article states that Prime Minister Turnbull has spoken with CBA Chairman Catherine Livingstone and said that 'all options to take action against the bank remain on the table'. The Prime Minister has also reportedly said that a Royal Commission into the financial sector (as 'demanded' by Labor) would put the AUSTRAC legal action against the CBA on hold.

CEO Ian Narev

In an article published before the announcement of Mr Narev's departure at the end of the 2018 financial year, The Australian wrote 'the last thing the market wants is his departure' as it will cause more uncertainty. The report comments however, that 'this time next year Narev is unlikely to be running the bank' as he will have been in the post seven years and the bank will be 'due a change'. The report adds that board changes at the next AGM are also likely. Harrison Young (who was head of the risk committee in 2015 when the bank became aware of the issues) may step aside. Mr Young has reportedly been on the board for 10 years already, and has already had a one year extension.

Senator Nick Xenophon argues for stricter penalties for directors and executives

Senator Xenophon has issued a media release stating that current penalties for breaches of the Anti-Money Laundering and Counter -Terrorism Financing Act 2006 (the Act) are 'anaemic, woefully inadequate and do not provide a sufficient deterrence' for banks who systemically fail to abide by the rules.

Senator Xenophon adds that under the Act, the CBA could face fines of up to $18m for each alleged breach but 'no criminal sanctions apply to bank executives and directors where a failure has been reckless or systemic'. Senator Xenophon has said he will discuss with his colleagues, drafting legislation to force the issue to a vote if the Government fail to act.

CBA profits beat market expectations, reportedly may sell CommInsure

The SMH reports that in reporting its profits (cash earnings rose 4.6%) the CBA has flagged it may sell its life insurance business. The article comments that the CBA 'has the most work to do to satisfy regulations forcing banks to be better capitalised'. It's decision to offer a 1.5% discount on new shares issued under its dividend reinvestment plan is a move designed to help it raise capital at a faster pace according to The SMH.

The AFR writes that staff and managers at CommInsure are 'being instructed' to 'smooth over any concerns [from clients] about a potential sale of the division'. The article is reportedly based on an internal memo authored by CommInsure managing director which states that the bank would 'provide support materials to our customer facing staff to answer queries that may come from our customers.'

Other banks also implicated?

The AFR writes that at least half of the six money-laundering syndicates identified in AUSTRAC's statement of claim against CBAused other banks including ANZ and Westpac to 'wash major portions of their funds'. Reportedly the banks are not identified in the AUSTRAC claim, but CBA is reportedly expected to seek details through court discovery, and to query whether the rival banks made sufficient disclosure of the suspect trading.

According to the article, CBA chief executive Ian Narev raised comparisons with other banks when he told The AFR 'You know any CEO of a major bank anywhere in the world who says they definitely don't have any problems with financial claims compliance would be a very bold CEO.' The article states that both Westpac and ANZ have said that while they were legally restricted from commenting on AUSTRAC reports, they were confident they had reported all suspicious transactions.

Banking Day writes that 'rumours were aired by other media outlets that maybe ANZ's and Westpac's intelligent ATMs were also used by criminal gangs to wash cash before depositing and then exporting it' but notes that ANZ was 'quickly out of the blocks, with an extensive rebuttal of any links to the CBA case'.

The article adds that AUSTRAC reviewed ANZ's ATMs and intelligent deposit machines in late 2015 and advised ANZ in February 2017 that it found no evidence of non-compliance with anti-money laundering regulation, the ANZ note disclosed and that ANZ said it completed a thorough risk assessment prior to the introduction of its Smart ATMs in 2013, which saw deposits limited to A$5,000.

Asked to comment, 'Westpac was more circumspect' in its response 'While we don't comment on individual cases, Westpac has robust systems in place to detect and report suspicious transactions, including large transactions, deposit structuring and cuckoo smurfing.' The article notes that the maximum amount of cash that can be deposited into Westpac's Smart ATMs is $4,000. However, Banking Day comments that the statements from ANZ and Westpac 'may not close off the latest bank scandal'.

According to the article, a 'low-level money mule, initially pulled over for speaking on his mobile phone while driving, and found to have over $60,000 in cash, reportedly told police that he also used Westpac, NAB and St George ATMs'. The article concludes that 'AUSTRAC action against another big retail bank seems inevitable'.

CBA reportedly may face New Zealand investigation, The Hong Kong Monetary Authority also reportedly conducting its own review of AUSTRAC's claims

The AFR writes that CBA is facing questions from anti-money laundering regulators in New Zealand after 'revelations' that CBA's New Zealand subsidiary ASB Bank is under scrutiny over the use of its smart ATM machines similar to those exploited by criminals in Australia.

The CBA-owned ASB Bank rolled out a network of smart ATMs in December 2013 which allow its customers to deposit under $10,000 without any identification. A spokesman for the Reserve Bank of New Zealand, which supervises NZ banks for money laundering, is quoted as stating that 'smart ATMs will be on the agenda for regular anti-money laundering discussions that we have with our supervised institutions'. A spokesperson for ASB bank reportedly claimed that its smart ATMs were a different model and used a different operating system to the CBA's: 'ASB has processes and tools in place to ensure compliance to New Zealand's AML regime, including the reporting of suspicious transactions to the New Zealand Police Financial Intelligence Unit'.

In a separate article, The AFR writes that the Hong Kong Monetary Authority is conducting its own review of AUSTRAC's claims and may opt to take the matter further including levelling its own fines at CBA. The article notes that 'the bulk of the international transfers linked to drug syndicates, which were detailed in AUSTRAC's statement of claim against CBA, went to accounts in Hong Kong'.