Former CBA chief Ian Narev repeatedly warned over anti-money laundering systems before Austrac hit

Former CBA boss Ian Narev has told a Sydney court that regulators and auditors repeatedly warned the bank about its poor anti-money laundering systems.

Former CBA chief executive Ian Narev leaves court after giving evidence regarding his knowledge of money laundering under his watch. Picture: Jane Dempster

The Commonwealth Bank’s former chief executive, Ian Narev, has told a Sydney court that regulators and auditors repeatedly warned the company about its poor anti-money laundering systems before the bank was hit with a $700m penalty for the failures.

Mr Narev said CBA had attempted to address the issues, and did not accept that he and the bank had not done enough to ensure safeguards were in place.

A long-awaited Federal Court class action brought against CBA by Maurice Blackburn began last week, with the law firm alleging that the bank failed to inform the market about the risks it would faced once regulators were made aware of anti-money laundering and counter-terrorism financing failures at its then-new ATMs.

At the time, the $700m penalty was the largest ever civil fine in Australian corporate history and came after the bank admitted it had contravened AML/CTF laws on 53,750 occasions.

The bank also failed to monitor transactions on 778,000 occasions to check for laundering red flags, failing to notify authorities on other occasions. Many of the transactions passed through its new, smart ATMs which failed to flag those which exceeded the $10,000 limit as required.

While the penalty was agreed in June 2018, Maurice Blackburn argues that the CBA board knew of potential breaches as early as 2015 and failed to inform shareholders for two years. The transactions took place between 2012 and September 2015.

On Monday, Mr Narev, who led CBA from 2011 to 2017, faced questioning over his time as chief executive.

Jeremy Stoljar SC, acting for Maurice Blackburn, took Mr Narev to several documents, which revealed the bank’s parlous anti-money laundering systems prepared between 2013 and 2014.

The court heard one internal CBA report showed eight of the bank’s 10 financial crimes systems were deemed “end of life or out of support” in late 2013. Reading from the report, Mr Stoljar noted CBA management were warned the outdated systems were causing “poor end of use experience” and offered the bank “no ability to provide analysts and reports”.

The reports to management also warned the bank could be exposed to large penalties given recent experience in the US.

Mr Narev told the court the string of audits which highlighted anti-money laundering issues at the bank showed “very clearly aspects of the group’s compliance … were inadequate”. “The whole picture painted by the audit is unsatisfactory,” he said.

Mr Stoljar noted the bank was also warned about its anti-money laundering systems by PwC, who issued a “red finding” and escalated the issue to executive level.

But Mr Narev said the principal issues identified in the flurry of reviews focused on the bank’s Know Your Customer systems and not its ATMs. “I recall being told by the audit team the overall framework in the report was sufficient, that was something that was very important to me at the time,” he said.

Mr Narev said CBA passed on the reports which found holes in its anti-money laundering regimen to Austrac and the Australian Prudential Regulation Authority.

As a result, CBA was required to meet monthly with APRA and hand over detailed monthly reporting data to Austrac.

CBA first submitted suspicious matters reports to Austrac relating to transactions being made through the bank’s Intelligent Deposit Machines in 2014.

Maurice Blackburn is suing the bank on behalf of a suite of shareholders who claim a failure to inform the market show a large fall in the share price, when it slid 5.4 per cent in $84.69 in 2017 after the Austrac action was first made public. CBA shares closed down 0.7 per cent, or 71c, to end trade on Monday at $105.10.

In an earlier hearing before Federal Court judge David Yates, Mr Stoljar said the bank had convened a series of crisis meetings after being alerted to a failure of the bank’s ATMs to capture the large transactions but had still not warned investors.

Mr Stoljar lent on a string of emails presented to the court that showed the mobilisation of senior banking executives once the scale of the potential breach was brought to light.

Reading from an email chain sent by Matt Comyn, then head of the retail bank, to Mr Narev, Mr Stoljar noted a briefing paper had been prepared that dealt with the technical issues behind the breach.

“Mr Narev goes on, ‘it goes without saying we need to take this extremely seriously’,” Mr Stoljar said last week. “Mr Narev is telling Mr Comyn that he’s instructed one of the most senior officers in the bank and the chief risk officer that he must personally be in touch with Austrac.”

However, CBA has argued it did not need to tell investors about the potential for the fine as the bank itself did not know what kind of penalty it faced and had been assured by Austrac it would get notice of any potential adverse action.

Justice Yates, who is hearing the marathon six week case, has previously heard CBA was given 15 minutes notice the bank was about to be hit with charges by Austrac.

The bank was also ordered to hold an additional $1bn in capital on its books over several years after APRA found a “series of incidents” had damaged the bank’s public standing.