While profits continue to soar for Commonwealth Bank, a laundering scandal makes the case for a banking royal commission grow stronger. By Alex McKinnon.

Crime and terror in the banks

It was meant to be so different. Commonwealth Bank’s announcement of its latest full-year financial results, on the 20th floor of its Darling Park tower on Sydney’s Sussex Street, was supposed to be a victory lap – an assertion of the bank’s power and profitability from the safety of its own formidable, if not quite palatial, surroundings. A company announcing a yearly profit of almost $10 billion could stretch itself to spring for some sandwiches.

The report, presented by the bank’s chief executive, Ian Narev, contained numbers any self-respecting executive would talk your ear off about most days. Besides the headline $9.88 billion profit, the bank’s market share now includes a staggering 25.2 per cent of home loans, 24.3 per cent of credit card lending, and 28.8 per cent of house deposits.

But the gathered room of reporters did not want to talk profits, at least not in the way Narev hoped. Instead, Narev found himself reassuring reporters that the bank had “no evidence that we were assisting with any terrorist funding”. Six days before, the Australian Transaction Reports and Analysis Centre filed a civil action to sue Commonwealth Bank over 53,760 alleged breaches of the Anti-Money Laundering and Counter-Terrorism Financing Act.

According to AUSTRAC, drug smuggling rings, organised crime syndicates and convicted criminals routinely used the bank’s intelligent deposit machines, or “smart” ATMs, to deposit and launder large amounts of illicit cash, and Commonwealth Bank failed to properly monitor or halt these suspicious transactions and report them to authorities.

The agency’s statement of claim against the bank details the financial activity of dozens of accounts opened under fake names. A clear pattern emerges of how criminal enterprises used these accounts to move their money – multiple cash deposits of just under $10,000, made through smart ATMs, quickly followed by international money transfers of just under $50,000 to avoid triggering mandatory reporting thresholds.

AUSTRAC asserts the bank routinely neglected to inform authorities when it observed this pattern, despite constant warnings from its own anti-money laundering division that such behaviour constituted “excessive blatant structuring of cash deposits to avoid the threshold transactions reporting requirements”. The bank regularly let massive international money transfers go through despite being alerted to their likely nature by law-enforcement and financial regulators, only taking action when these prolific customers were arrested.

Even when money launderers deposited more than $10,000 at a time, the bank failed to send a mandatory threshold transaction report to AUSTRAC. While the bank introduced smart ATMs in 2012, AUSTRAC says “CommBank did not take any steps to assess” the machines’ money-laundering potential until mid-2015. By then, it had a backlog of 53,506 late threshold claims, more than 1600 of which pertained to transactions being investigated by federal police. Almost $9 billion passed through Commonwealth Bank smart ATMs before the bank conducted “any assessment” of their risks.

The bank’s negligence was so total it even worried its own staff. A Sydney branch manager complained in an email to the bank’s security division that the bank had “no standard operating procedure” for reporting suspicious transactions through smart ATMs. After looking into the accounts of customers acting suspiciously and finding they regularly “sent millions and millions overseas”, the branch manager wrote: “I am emailing to find out what we should do … I believe that there should be another security measure in place as this is crazy.”

The bank claims its failure to report suspicious transactions stems from a “coding error” in smart ATMs dating back to 2012. But even if a software glitch was letting suspicious behaviour go unflagged, basic oversight and accountability processes would have been enough to quickly pick up on the errors and move to correct them. Machines make mistakes, but it takes systemic human failings to compound them into something as serious as this. It took more than three years for the bank to send its late threshold transaction reports to AUSTRAC.

In total, AUSTRAC alleges Commonwealth Bank failed to adequately report on more than $77 million in suspicious transactions. The agency is withering in its final assessment of the bank’s behaviour, saying it has “resulted in lost evidence and intelligence” and “exposed the Australian community to serious and ongoing financial crime”.

Hence Narev’s ruined week. Rather than crowing about the returns for investors racked up by the bank under his tenure, he has spent it doing damage control. Not that he has shied away from the unpleasant task in front of him. Since the scandal broke Narev has been cropping up everywhere, gamely putting the case that the country’s largest bank breaching money laundering laws more than 50,000 times is not as big a deal as everyone’s making it out to be.

He has argued that, since most of the breaches stem from that coding error, they can only be viewed as a single instance of wrongdoing, exposing the bank to a relatively small maximum fine of $18 million. Narev casts this latest crisis as a one-off, unrelated to what he’s politely called “the other issues” that have turned Commonwealth Bank and its counterparts into widely loathed institutions. In fact, he’s tried to spin the money laundering charges as a positive, claiming the AUSTRAC suit proves the current regulatory environment is working so well there’s “no need for a royal commission” into the banking sector.

But the furious public reaction has already become about much more than the allegations in the AUSTRAC suit. This week, Commonwealth Bank chairman Catherine Livingstone, AO, announced the board would be cutting executive pay and bonuses in response to what she delicately termed “heightened public interest in executive remuneration”. Narev, who pocketed more than $12 million in wages and bonuses at the end of the 2015-16 financial year despite the bank’s share price falling 13 per cent, was forced to publicly swallow that medicine with a smile on his face.

It hasn’t been enough. Every media foray Narev has charged into so far has been bracketed by questions about whether he is resigning, or arguing that he should. Livingstone said: “Narev retains the full confidence of the board.”

If Narev does survive, it may be because he has so much practice with the unique blend of contrition, belligerence and disingenuousness that comprises the necessary skill set of a contemporary banking chief executive. The list of scandals that has dogged Commonwealth Bank in recent years is so long and varied it’s almost impressive. Like his colleagues at Westpac, NAB and ANZ, Narev is very good at apologising for his bank’s failings while simultaneously denying they represent a wider culture within the banking sector or that any external authorities should be empowered to ensure they’re not repeated.

Last year, Narev said he was “saddened and disappointed” by revelations that CommInsure, the bank’s insurance arm, had aggressively denied payouts to sick and dying customers. Two years before that, Narev apologised “unreservedly” to more than 1100 customers who lost hundreds of millions in savings after following fraudulent and misleading advice from the bank’s financial planners. In 2015, the Australian Securities and Investments Commission (ASIC) forced the bank to refund $80 million to 216,000 customers who were not given their promised benefits.

Commonwealth Bank’s talent for attracting disaster has sharpened in recent weeks to the point where whole new species of debacle are seemingly evolving just for them. In a world-first legal precedent, shareholders filed papers on Tuesday to sue the bank for failing to properly disclose the risks climate change poses to investors. And ASIC may yet rope CBA into its case against the other three major banks for allegedly attempting to rig benchmark interest rates in Asia. Last year, in a further indictment of its culture, the bank was forced to fire one of its traders over a chat group in which members made racist and derogatory comments about women.

When he’s not apologising deeply for something his bank has done, Narev’s endless insistence there is nothing to see here when it comes to Commonwealth Bank’s wider conduct is breathtaking in its audacity. Speaking in front of a parliamentary inquiry into the banking sector in March, Narev argued a royal commission would be “very damaging for the industry” – apparently without irony – and would tarnish “the unquestionably strong image of the banks”.

He may want to rethink that particular talking point. Nationals senator John Williams has used the episode to redouble his push for a royal commission, telling the ABC it was another example of the big banks “going from catastrophe to catastrophe”. Nick Xenophon has gone further, saying bank chief executives who display “a contemptuous disregard for the law” should face jail time to “sharpen their thinking”.

While it’s unlikely the government will be putting CEOs in handcuffs any time soon, there’s a question of how long they can run cover for the sector before it becomes a position too politically toxic to sustain. Narev might have been right when he described Scott Morrison’s bank levy as “policy concocted on the run”, but the fact that a Liberal government feels the need to introduce a great big new tax just so it can say it’s slugging the Big Four should be some measure of how deep community antipathy towards Narev and his contemporaries runs.

Partly fuelling that sentiment is the fact that, through it all, Commonwealth Bank has continued racking up gargantuan profits. The $9.88 billion haul announced on Wednesday is just the latest in a long list of ever-rising profit figures – $9.2 billion in 2016; $9.06 billion the year before; $8.6 billion the year before that.

And that may be what finally tips the scales. Commonwealth Bank shares dropped nearly 4 per cent when news of the AUSTRAC suit broke, cutting the company’s market value by about $5.7 billion. While there are few clear indicators of how much the bank could end up paying out, betting agency Tabcorp was fined $45 million in March for breaching money laundering laws 108 times over five years. AUSTRAC boasted at the time that the ruling was the largest civil penalty in Australian corporate history. Applying the same standard to the 53,760 breaches Commonwealth Bank is accused of would see it staring down the barrel of a $22 billion penalty.

Even if it avoids a fine of that magnitude, the saga has made the long-awaited banking royal commission that much more likely, with all the unknown implications it entails. It’s bizarre to say, but Commonwealth Bank has bigger problems than a money laundering scandal and an embattled chief executive on its hands.

This article was first published in the print edition of The Saturday Paper on August 12, 2017 as "Crime and terror in the banks".

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Alex McKinnon is Schwartz Media's morning editor.

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