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AUSTRAC's claims against Commonwealth Bank of Australia


On 3 August 2017, Australia’s financial intelligence and regulatory agency, AUSTRAC, initiated civil penalty proceedings in the Federal Court against the Commonwealth Bank of Australia (CBA) for serious and systemic non-compliance with the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Act).

The action alleges over 53,700 contraventions of the Act by CBA and follows an investigation by AUSTRAC into CBA’s compliance with the Act, particularly regarding its use of intelligent deposit machines (IDMs). The allegations include failure to assess the money laundering and terrorism financing risk of IDMs before their rollout in 2012 and for a period of three years after, as well as failure to provide certain transaction reports to AUSTRAC from November 2012 to September 2015. The total value of the claims is estimated to be up to approximately $1 trillion.

A summary of the AUSTRAC claims can be accessed here.

On 4 August 2017, CBA issued an ASX announcement noting that it was reviewing AUSTRAC’s claim and would file a defence. The announcement was extremely brief.

On 7 August 2017, CBA issued a statement indicating the allegations relate primarily to a coding error which following a software update to the IDMs in late 2012. The error meant that the IDMs did not create the reports needed. CBA indicated that it rectified the error within a month of discovering it in 2015 and notified AUSTRAC, delivered the missing transaction reports and fixed the coding issue.

On 8 August 2017, the CBA chairman Catherine Livingstone advised that the board has decided to reduce the short-term incentives for the CEO and group executives and that for FY17 they would be reduced to zero. The board also recognised that it has shared accountability and reduced non-executive director fees by 20% in the current 2018 financial year. The board noted that they had ‘full confidence’ in CEO Ian Narev.

On 9 August 2017, CBA reported a 4.6% rise in full year cash profit to $9.88 billion. Another statement from the chairman was also released which summarised the program of action being implemented to strengthen CBA’s policies and processes relating to the Act. A sub-committee of the board has been established to oversee the response to the AUSTRAC claim and the ongoing execution of the program of action. It is noted that as the CBA 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.

On 14 August 2017, CBA announced that the CEO will retire by the end of the 2018 financial year as part of orderly succession planning, noting that it was important for the board to deal with the speculation and questions about Mr Narev’s tenure. CBA also released its annual report and remuneration report, which included further detail about the impact of the AUSTRAC proceedings on remuneration outcomes for present and former executives. 

On 23 August, law firm Maurice Blackburn and ASX-listed litigation funder IMF Bentham launched a class action against CBA alleging failures to disclose to the market AUSTRAC's investigation of its anti-money laundering breaches. The case alleges that the fall in the CBA share price on the day, and day after, AUSTRAC's proceedings were announced show the regulator's allegations were material. As such, the law firm alleges that the board has breached its continuous disclosure obligations under the Corporations Act, arguing that the AUSTRAC investigation should have been made public at an earlier date, when the board and senior management first became aware of them in 2015. The board of CBA notes that the investigations became material when the court proceedings were launched by AUSTRAC at which time a disclosure was made to the market.

Separately, the Australian Securities and Investments Commission (ASIC) is investigating whether the CBA's board complied with continuous disclosure laws when it decided not to alert investors to AUSTRAC’s concerns over the banks’ breaches of anti-money-laundering and terror-financing laws.

On 28 August, the Australian Prudential Regulatory Authority (APRA) announced its intention to establish an independent prudential inquiry into CBA, focusing on governance, culture and accountability frameworks and practices within the group. It is anticipated that the panel will provide a final report to APRA around six months from the formal commencement of the inquiry, and that this report will be made public.

APRA said concerns regarding the frameworks and practices in relation to the governance, culture and accountability within the CBA group have damaged the bank’s reputation and public standing. Given that CBA is critical to the long-term health of the financial system in Australia, the overarching goal of the prudential inquiry is to strengthen community trust by providing CBA with a set of recommendations for organisation and cultural change, as required.


ASA position

The allegations by AUSTRAC are serious and suggest there are significant cultural issues at CBA which the board should seek to address and rectify as a matter of priority. It is surprising that CBA was unaware of the coding issue until after three years after the error became an issue. ASA also has concerns that the slowness of response to concerns raised by frontline staff and regulators indicates a bureaucratic culture which cannot deal with issues in a timely fashion.

ASA is pleased to see that the board has responded to concerns in a timely fashion on this occasion, and cut the short-term incentives of the CEO and senior executives for FY17. Given the significance of the allegations and previous instances of misconduct within its financial planning arm and CommInsure, it would be difficult for CBA to argue that senior executives should receive their incentive payments this year because of strong financial performance.

More significantly, we are pleased that the board has recognised its shared accountability and elected to have director fees reduced. This is fairly rare and confirms that the independent chairman and board recognises that that it is not just short-term financial performance that is important, but also reputational damage, which can also have serious financial impact.

ASA wanted to see the board undertake further accountability measures and the announcement of succession planning as being underway for the CEO role is welcome. The board acted quickly by cutting short-term incentives and reducing its board fees, and it is positive to see the board addressing the questions concerning CEO tenure. Previously the CBA board had been in a bunker mentality when a crisis hit, but so far the independent chairman Catherine Livingstone and the board are making timely decisions and keeping shareholders and stakeholders informed, and that brings a level of comfort to shareholders that they are managing this well. We would like to see this continue. We do not want to step into the board’s shoes and make decisions about who should come into the role of CEO, but whether it is an internal or external candidate, the board must have a strong focus on addressing the cultural issues at CBA. From a shareholder perspective, that is the issue we want to see resolved.

The use of the board’s power to adjust remuneration outcomes for former executives is also welcome and ASA would like to see more boards use such powers as appropriate. Even if the senior executives had not been directly involved in the issues arising from the AUSTRAC matter, the board is holding the senior management team accountable for what happened on its watch.

ASA is supportive of class actions in general, but notes that this action depends on the legal arguments on either side as to whether the disclosure was ‘material’ at an earlier date.

ASA welcome the APRA investigation, as it is appropriate that the prudential regulator should examine cultural issues within CBA and make recommendations in relation to governance, accountability and culture. ASA hopes that APRA works with ASIC, which is conducting a separate investigation. ASA also notes that the ongoing investigations and legal proceedings CBA is facing will be very time consuming for the board and management and a distraction from running the business. ASA would like to see the investigations and legal proceedings completed and or settled in a timely fashion.

Updated 28 August 2017


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