CBA’s historic $700m penalty sets new quantum for enforcement cases

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By Nathan Lynch, Asia-Pacific bureau chief, financial crime and risk, Thomson Reuters

THE Commonwealth Bank’s A$700 million settlement with AUSTRAC over 53,750 anti-money laundering and counter-terrorism financing (AML/CTF) breaches has set a new benchmark for enforcement action in Australia. Regulatory officials and lawyers said the statement of agreed facts, although light on detail in some areas, would send shockwaves through boardrooms at Australia’s 14,000 reporting entities.

The penalty shows just how much the AML/CTF regime has matured in Australia since the 2015 FATF mutual evaluation, which decried AUSTRAC’s lack of enforcement presence. The case also sends a shot across the bows for lawyers, accountants and real estate agents as the country’s “tranche two” AML/CTF laws are being drafted.

The penalty of A$700 million eclipses anything seen before in Australia, in any area of regulation. The previous largest civil penalty was Tabcorp’s A$45 million settlement, which was also agreed with AUSTRAC to avoid a protracted court case over AML/CTF breaches.

The case also marks the first time an Australian regulator has secured a penalty that reverberated around the world. The A$700 million figure is very significant by international standards. To put it in context: the fine is 2.5 times higher than the largest AML fine handed down in the UK — the £163 million (A$286 million) settlement with Deutsche Bank.

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Global penalties: AUSTRAC hits the big league

For Australia’s anti-money laundering regulator, the CBA case represents a “coming of age”.

The final number is A$325 million higher than the A$375 million that CBA had set aside in its half-year results. Both parties will now approach the Federal Court seeking orders to approve the penalty. A hearing to determine whether the penalty is appropriate will be scheduled “in the coming months”.

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For CBA, the penalty is meaningful but manageable. At A$700 million it’s equivalent to 25 days’ profit for the bank, which raked in A$9.93 billion in profit last financial year. For shareholders the extra A$325 million (which has not been provisioned) represents around A$0.18 in “net book value” per share. The bank’s shares rallied on the news and closed up A$0.99 (1.44 percent), as is common when the uncertainty of litigation is resolved.

It’s important to remember, however, that AUSTRAC’s goal was never to destabilise the bank, punish shareholders, or extract the maximum figure possible for the sake of Commonwealth “budget repair”. Despite many citizens baying for banker blood over the past 12 months, AUSTRAC has never wanted to slake the nation’s thirst for financial services schadenfreude.

Instead, AUSTRAC is involved in an ongoing collaborative relationship with reporting entities. This is a crucial partnership that helps to protect Australia’s national and regional security. Initiatives such as the global Future of Financial Intelligence Sharing project (which is sponsored by Thomson Reuters) are dependent upon functional partnerships and trust between regulators and the private sector.

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In view of this, AUSTRAC’s goal was always to achieve a penalty that made the market sit up and take notice; that changed corporate behaviour; and had an impact on a bank with CBA’s balance sheet.

The regulator also did not want the case to drag on through the courts, with inevitable appeals, for years. This would have undermined the working relationship, created further market uncertainty, and diverted resources away from areas where they could have a meaningful impact on the battle against serious financial crime and terrorism.

The defendant and the plaintiff in this case both have a common interest in that regard. Fighting financial crime successfully will have a positive impact on CBA’s bottom line by protecting the bank and its customers from fraud, crime and other forms of financial abuse.

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“Significant issues”

Commonwealth Bank shareholders should be satisfied with the outcome, which is around the mid-point of the “A$500m to A$1bn” band that Regulatory Intelligence had predicted. The settlement of the AUSTRAC matter will now allow the bank’s management to focus on rebuilding stakeholder trust and dealing with the various other regulatory headwinds.

Matt Comyn, CBA’s new chief executive, described the AML/CTF action as “one of the most significant issues we’ve faced.” Comyn has been spotted personally doing the rounds of various Commonwealth regulatory agencies, including AUSTRAC, in a bid to rebuild regulatory relations in the wake of its compliance “issues”.

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The new CBA chief broke with the public line taken by his predecessor, Ian Narev, who had tried to downplay the significance of the AML breaches before falling on his sword earlier this year. Comyn, by contrast, expressed genuine contrition to regulators and the Australian public.

“While not deliberate, we fully appreciate the seriousness of the mistakes we made. Our agreement today is a clear acknowledgement of our failures and is an important step toward moving the bank forward,” he said.

Industry reaction

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Paddy Oliver, a financial crime consultant with AML Experts, said CBA’s claim that the breaches were “not deliberate” was of little comfort for financial crime regulators and law enforcement agencies.

The agreed facts noted that CBA is a “large and well-resourced entity” that should understand its obligations under the AML/CTF Act.

“This is especially true in circumstances where it was dealing with officers from the serious organised crime units of various law enforcement agencies, who were providing the bank with detailed information,” the documents said.

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The agreed facts said CBA filed at least 259 SMRs in relation to the 127 customers who were the subject of the SMR and customer due diligence breaches. It also filed at least 264 SMRs in relation to the 130 customers who were the subject of the proceedings.

Oliver said this raised serious concerns about the bank’s failure to close accounts associated with high-risk customers.

“It’s a case of two strikes and you’re still not out,” he said.

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A line in the sand

On the plus side, the bank’s contrition and extensive steps to fix the problems mark a clear line in the sand for CBA, officials said.

Nicole Rose, AUSTRAC’s chief executive, said businesses such as CBA were the first line of defence in protecting the community and the financial system from criminal abuse.

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“It is critical for AML/CTF compliance and risk management to be embedded in business strategy and practices. I hope this result alerts the financial sector to the consequences of poor compliance, and reinforces that businesses need to take their obligations seriously,” she said.

Dr Andy Schmulow, a lawyer, consultant and academic in financial regulation, described the money laundering case as a “catastrophe, wrapped in a calamity, surrounded by a crisis.” He said AUSTRAC had emerged from the settlement as a “powerful and effective regulator”.

Schmulow said CBA’s failures had damaged Australia’s reputation as a well-regulated financial centre and may change the way that correspondent banks look at Australian institutions.

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“Based on the evidence available, I would dispute Matt Comyn’s remark that these transgressions were unintentional. There was at the very least constructive intention,” he said.

Class action law firms would be scrutinising the statement of agreed facts, he said, which had been worded accordingly.

Mammoth undertaking

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The Australian financial crime regulator was celebrating the landmark settlement today, which saw CBA admit to all 53,750 alleged breaches. It followed “exhaustive investigations into CBA’s AML/CTF compliance and risk management practices, particularly in relation to its intelligent deposit machines (IDMs).”

For AUSTRAC, this was always going to be a David and Goliath battle. The announcement of such a landmark settlement has come as a huge boost for morale and confidence at the agency. Staff at AUSTRAC love their organisation. They tend to be very passionate about their work and stay with the agency for extended periods; they see themselves as playing a critical role in combating some of the most serious forms of crime in Australia.

Today’s win will only strengthen the agency’s resolve and serve as fresh motivation for its 300-plus staff. This is a stark contrast to agencies such as ASIC, which are struggling with low morale as the Royal Commission wears on.

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The win will also raise AUSTRAC’s profile and standing within the new Home Affairs “super ministry”. Peter Dutton made it clear that AUSTRAC was a critical intelligence agency during his media briefing today.

Christian Porter, the attorney-general, commended AUSTRAC for achieving such a “successful and speedy” resolution of the matter.

The enforcement action against CBA has been a huge undertaking for AUSTRAC and its 300-odd full-time staff. The financial crime agency’s entire operating budget, at $68 million, is less than Commonwealth Bank will spend on consultants this year to fix the AML/CTF breaches. AUSTRAC has been relying on the Australian Government Solicitor, led by Sonja Marsic, to pursue the civil litigation on its behalf.

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CBA, meanwhile, has had access to an army of the best silks you can buy for $5,000 a day.

Despite the risks with major litigation, as opposed to enforceable undertakings, AUSTRAC believed this was an important case to pursue. It also went in armed with damning evidence collected by partner agencies such as the Australian Federal Police, the NSW Police Force and Western Australia Police.

Leadership test

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The CommBank enforcement action has continued through three leadership changes at AUSTRAC. The action was initiated under Paul Jevtovic, filed under acting chief Peter Clark, and finalised under the new chief executive Nicole Rose.

Sources had previously told Thomson Reuters Regulatory Intelligence the handling of the CBA case would be the first defining test of Rose’s leadership.

Yesterday, Rose delivered. She said the penalty would send a strong message to industry that serious non-compliance with the AML/CTF Act would not be tolerated. She stressed that AML/CTF breaches were not white-collar, victimless offences.

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“As we have seen in this case, criminals will exploit poor business practices to launder the proceeds of their crimes. This has real impacts on the everyday lives of Australians and puts the community at risk by increasing opportunities for terrorists to support attacks here and overseas, and enabling organised crime groups to peddle drugs to our families and friends,” the AUSTRAC chief said.

Light on detail

Industry experts said that although the settlement was a major result for AUSTRAC, the agreed facts document was lighter on detail than they had hoped. They said this wording reflected CBA’s concerns about its exposure to class action lawsuits, which these days is a defining element of all regulatory settlements.

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The release of the “agreed facts” document was designed to overcome criticism that Australia needed some legal scrutiny and case law to flesh out the AML/CTF legislation. The tendency to settle claims means the implementation of the AML regime has never been tested in court.

This has led to some uncertainty and inconsistency in application. The discretionary “course of conduct” defence, for instance, was applied in the Tabcorp case but it’s still unclear whether it has been been applied to CBA’s breaches.

CBA had argued, in its defence, that thousands of breaches were the result of a “single point of failure”. If successful, this could have reduced the fine to tens of millions, rather than hundreds of millions. As it transpires, nether party was keen to roll the dice before Justice David Yates.

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Oliver said the statement of facts was conspicuously quiet on the accountability of the board and senior management for the breaches. It also appeared to gloss over the underlying causes of the failures.

“There is a lack of detail in the statement about why the breaches occurred. Was it hubris or under-resourcing, or the profit motive, or all of the above?” he questioned.

In this respect, it’s likely that both AUSTRAC and CommBank’s upper echelons, will be popping champagne corks in the wake of the settlement.

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