CBA accused of breaching money laundering act
Eleven people are in jail and dozens more have been arrested here and overseas for using the Commonwealth Bank of Australia's lax funds transfer systems for money laundering, drug dealing or being in receipt of the proceeds of crime.
The extraordinary scale and systemic nature of the problem at Australia's largest bank has been laid bare in a statement of claim that runs to 583 pages and details thousands of transactions that were either ignored by the bank or reported too late to stop funds being transferred overseas.
Commonwealth Bank shares plunged 3.8 per cent on Friday as the market digested the magnitude of the allegations, shaving close to $5 billion from the bank's market capitalisation.
Fund managers and industry observers questioned whether the reporting failures flowed from a culture lacking accountability and if CEO Ian Narev would survive the scandal.
Financial intelligence regulator AUSTRAC alleges CBA breached the Anti-Money Laundering and Terrorism Funding Act of 2006 more than 50,000 times by delaying or failing to report suspiciously large cash deposits in its network of more than 500 'intelligent deposit machines', which can accept deposits of up to $20,000 per transaction, higher than the level of rival banks.
The catastrophic reporting failure of its transaction monitoring program has been sheeted back to a software problem, described by CBA as a 'systems error', which was identified on June 16, 2014. But AUSTRAC says CBA did not resolve the systems error on all active affected accounts until November 30 of 2015, and it wasn't resolved on all inactive affected accounts until September 27, 2016.
Catherine Allfrey, from WaveStone Capital, said she did not believe the bank would deliberately enable any form of criminality, but if a systemic refusal to obey the rules could be proved, "that is a management and cultural issue and the board has to act".
Peter Morgan, a private investor and former head of equities at Perpetual and 452, said: "There's no accountability. It's Australia's biggest company, the largest holding in every equity fund in Australia. The arrogance in the banking sector has been building for a number of years and it's just got to stop. I hope over the weekend the board and the management are considering their positions."
Mr Narev said staff had every right to be disappointed by the accusations being levelled at the bank by AUSTRAC, and sought to reassure them in an email sent late on Thursday night. He told them the bank will be able to say more once its defence to the allegations if filed.
"Many of you who know how much attention we pay to these obligations have asked me how the alleged breaches could have occurred....I also know how disappointing it is for all of you when issues of this nature cast CBA in a poor light. It overshadows the outstanding work all of you are doing each day for people, business and communities. We will do our very best to work through this expediently, and in accordance with our values," Mr Narev said.
A rival bank CEO said the bombshell reflected poorly on banks as a whole.
ANZ CEO Shayne Elliott told ANZ staff in Adelaide that all banks were tarnished by claims that a bank looked the other way as money was anonymously funnelled to a series of CBA accounts using the machines' blindspots.
"We're an industry, and I don't take any pleasure in seeing one of our peers, you know, have incidents like that," Mr Elliott told reporters in Adelaide after an ANZ customer lunch.
"I don't know the details, I've only seen what I've read in the newspapers, so you know it was a surprise to see that."
CBA's three big rivals sought to distance themselves from the scandal on Friday saying their ATMs were fully compliant. ANZ and NAB both said their machines only accepted deposits of $5000 at a time or one quarter the amount of Commonwealth Bank's.
CBA's share price held up in early trading, falling broadly in line with the market, before capitulating as the overwhelmingly negative commentary from analysts and experts poured in.
Credit strategists at Deutsche Bank told clients they were shorting CBA's credit default swaps reflecting both a recent rally but also "uncertainty related to the allegations".
Mark Nathan, a fund manager from Arnhem Investment Management, said the market appeared to have overreacted by selling the shares down by $5 billion, far larger than any likely fine.
Although there was no evidence that the bank was benefiting financially Mr Nathan said there should be consequences for management.
"I have long been an advocate bonuses should reflect the performance of the management and this would have to be something at least factored into the equation," Mr Nathan said.
Andrew Martin, from Alphinity Investment Management agreed, saying" "I suspect shareholders will require at the very least management to also suffer from a monetary perspective."
The international ratings agency S&P; Global Ratings told global investors the issue may take some time to conclude. "As more information becomes available on this matter, we will assess whether it has any impact on CBA's credit profile due to any financial penalties, potential damage to the bank's reputation and franchise, or any indications of weaknesses in its governance and risk management framework," S&P; said.
Before the stock price slumped on Friday, Goldman Sachs banking analyst Andrew Lyons said the stock was trading at a 16 per cent premium to peers, and if it were to move to a 5 year peer relative valuation low "due to a potential hit to its reputation", the stock price could fall by 9 per cent.
Writing in AFR Weekend, financial system inquiry member Kevin Davis said the odds on a Royal Commission or further Parliamentary Inquiry into banking "have just shortened significantly".
However, a spokesperson for the Shadow Minister for Financial Services Katy Gallagher, said "we will await the conclusion of [the AUSTRAC] process before commenting any further on this specific case."
