Commonwealth Bank shares were down more than 3% on Friday afternoon as the money laundering claims from Austrac echoed around the market.
The shares were down to around $81.20- just after $2.30pm as it became clear that investors had underestimated the seriousness of the claims on Thursday afternoon.
That’s a fall of more than $4 billion in the bank’s market value – well over the maximum fine (around $2 billion) that many gloomy analysts say could be levied – and considerably less than the amount the optimists think (in the hundreds of millions) for the more than 53,000 contraventions of the money laundering rules and regulations.
Some investors are starting to worry about the impact of regulators taking a closer look and control of the CBA’s operations as a result of the money laundering claims from Austrac.
The CBA took until just after midday Friday to note the Austrac claims and said it would be filing a defence soon.
The money laundering claims against the Commonwealth Bank are now a massive test of character for the Federal Government – especially Prime Minister Turnbull and Treasurer Scott Morrison, for the Commonwealth Bank board and its newish chair, Catherine Livingstone and for the Business Council of Australia where the bank’s CEO, Ian Narev is a board member and one of five CEO’s, and for the country’s financial regulators.
The claims are also a test of the will for regulators such as The Reserve Bank, APRA, Federal Treasury and ASIC in making sure our financial institutions are cleaner than clean and beyond reproach.
If the Austrac claims are proven, then the CBA fails that test. The allegations have the potential to reinforce the Labor Party’s push for a Royal Commission into the banks. These are the most serious claims levied against a mainstream financial institution in years.
The most damaging of Austrac’s claims is that the CBA did nothing once the laundering had been established:
“Even after CBA became aware of suspected money laundering or structuring on CBA accounts, it did not monitor its customers to mitigate and manage … risk, including the ongoing … risks of doing business with those customers,” Austrac said in a statement yesterday and in a 528 page statement of claim.
This surely requires the financial regulators – APRA, ASIC and the RBA – to involve themselves in the story by imposing penalties against the CBA, Mr Narev, and members of the bank’s board over what is a massive failure of governance and oversight?
The claims from Austrac are the second against a major Australian company – in February Tabcorp was fined $45 million for 108 contraventions of the anti-money laundering and counter-terrorism law. That works out around $416,600 per contravention.
By that yardstick, the CBA, which Austrac claims was involved in 53,506 contraventions, is facing a fine $22 billion. The maximum fine for each offence is $18 million, to the theoretical maximum is $999 billion which is a fantastical amount and obviously won’t be levied.
Business commentators, such as Chanticleer in the Financial Review said Friday morning (http://www.afr.com/brand/chanticleer/cba-case-shows-all-thats-wrong-with-fighting-money-laundering-20170803-gxoxyi)
“It is hard to see a court imposing that level of penalty as it would only serve to destroy the institution. A fine of several hundred million would be manageable for a bank earning $9 billion a year.”
That’s why the shares hardly moved on Thursday afternoon – down 0.3%.Investors were regarding the Austrac claims as being an irritant for the bank, and not a biggie, whereas it is perhaps the most serious allegation against a mainstream Australian company for years.
Friday’s fall means that investors have woken up to the seriousness of the claims.
The CBA reports its 2016-17 financials next week and an $8 billion plus net profit is expected.
Will the bank take a hit by making a provision for possible fines and other costs associated with the Austrac claims. The bank hasn’t denied them, but says it is in discussions with Austrac. Clearly the bank wants the deal settled and the discussions are to do with the size of the fine and other punishments (such as forcing the bank to report every smaller amount or change the software in the ATMs.
The bank (and the regulators?) do not want the case to go to court so that the full allegations can be laid out in public – that could further damage confidence in the bank as the managerial incompetence is exposed.
So what will the CBA board do, especially newish chair, Catherine Livingstone who is a former chair of Telstra and Business Council heavy. This is a huge test for her – she has to protect the reputation of the bank which has been badly damaged by these allegations.
Once the case is settled, will Ms Livingstone impose penalties on the management and board for this failure of governance and oversight – by seeking their retirements and finding new blood?
And then there is Austrac which doesn’t have a good reputation for speedy handling of cases. Chanticleer pointed out Friday morning that:
"AUSTRAC, which is about to get a new chief executive, has moved with snail-like speed to bring CBA to account. That is not surprising given the cutting criticism that was made of the organisation by the Paris-based Financial Action Task Force (FATF) in 2015. FATF, which is an independent inter-governmental body that sets the standards for global anti-money laundering and anti-terrorism financing, concluded in a 200-page report that AUSTRAC had been ineffective in enforcing compliance by reporting entities. It found that AUSTRAC’s "graduated approach to supervision does not seem to be adequate to ensure compliance". At that time AUSTRAC had never issued a monetary penalty for non-compliance.”
Now it has two – Tacorp and now the CBA, the bluest of corporate blue bloods in the country. The biggest bank with the biggest set of money laundering allegations against it.
Offshore regulators haven’t been so slow to deal with money laundering offcenes. The largest single fine for breaches of anti-money laundering and counter-terrorism law is believed to be the $US8.9 billion fine in the United States against BNP Paribas in 2014. The bank pleaded guilty to two criminal charges for violating sanctions against Sudan, Cuba and Iran.
In 2014 alone, banks in the US and Europe paid about $US65 billion in anti-money laundering related fines. For example the huge HSBC was fined $US1.9 billion in 2012 over money laundering and is currently under a new investigation over its controls. BNP Paribas was fined $US8.9 billion in 2014 – a year when total fines levied on banks and other financial groups by regulators in the US and Europe (but not in Australia) totalled $US65 billion.
