Commonwealth Bank of Australia (CBA) has agreed to pay a record penalty of $700 million to settle explosive money laundering charges brought by Australia's financial intelligence agency arising from alleged compliance breaches the bank initially blamed on a coding error.
The biggest financial penalty in Australian corporate history was almost double the amount CBA had set aside, signalling the tougher regulatory framework Australian banks face following revelations of widespread misconduct.
On 3 August last year, Australia’s financial intelligence and regulatory agency AUSTRAC initiated civil penalty proceedings in the Federal Court against CBA for alleged “serious and systemic non-compliance” with the Anti-Money Laundering and Counter-Terrorism Financing Act 2006.
Regardless of the resulting multimillion-dollar settlement, CBA shares were up 1.5 per cent in afternoon trade on 4 June, as investors breathed a sigh of relief that authorities had not pursued much larger fines, in a case that shocked the country and triggered an executive shake-up at the bank.
It is the second major case new CEO Matt Comyn, who replaced Ian Narev in the wake of the scandal, has settled with regulators in a month after admitting to rate-manipulation allegations.
Australia's biggest bank admitted it had breached money laundering and terror financing laws on 53,750 occasions, according to an statement of facts tendered in court by both parties.
Suspicious transactions were repeatedly not reported, and monitoring processes failed, it said.
"The money laundered through the CBA accounts included the proceeds of drug and firearms importation and distribution syndicates – predominantly involving methamphetamine," the court document said.
CBA also failed to adequately notify the regulator of transactions linked to several customers who posed "a potential risk of terrorism or terrorism financing".
CBA shares were up two per cent in a slightly positive market, even though the fine was by far the biggest in Australian corporate history and almost double the $375 million CBA had set aside to deal with the case.
Many of the breaches carried maximum penalties of up to $21 million each, exposing CBA to fines running into the billions of dollars.
"While we had not factored in a fine above $375 million given a wide variety of potential outcomes, we note that many in the market had expected a fine as large as $1 billion," UBS said in a note to clients.
The breaches were first revealed in August last year. CBA blamed them on a computer error – specifically, a coding error that occurred during a software update to its so-called Intelligent Deposit Machines (IDMs) in late 2012 – but the case triggered a share selldown and a board shake-up, with Narev announcing his retirement two weeks later amid a public outcry.
"While not deliberate, we fully appreciate the seriousness of the mistakes we made," new CEO Comyn said in a statement.
"Our agreement today is a clear acknowledgement of our failures and is an important step towards moving the bank forward."
Australian Treasurer Scott Morrison told reporters it was now time for CBA to "get on with the job of restoring trust".
A cleaner slate
As part of the settlement - which must be approved by the Federal Court - the bank acknowledged it did not take all the necessary steps to identify, mitigate and manage money laundering and terrorism financing risks.
The bank said it would book a $700 million provision in its fiscal 2018 results, to be released in August.
Last month, CBA was ordered to carry an additional $1 billion in reserve capital until it satisfies regulators that it has improved oversight to avoid similar breaches in the future.
The bank is still facing two separate class actions by shareholders linked to losses suffered from the money-laundering breaches.
The Australian government has pledged to boost oversight of the financial sector and increase penalties for corporate crimes in light of widespread misconduct revealed by an ongoing inquiry into the country's banks and wealth managers.
One of CBA's main rivals, Australia and New Zealand Banking Group, is facing criminal cartel charges, along with underwriters Deutsche Bank and Citigroup, over a $2.3 billion share issue.
(Reporting by Paulina Duran and Jonathan Barrett in SYDNEY; additional reporting by Rushil Dutta in Bengaluru; Editing by Stephen Coates; with ARN staff)