How criminal gangs ran rings around Commonwealth Bank culture

It was 9.39am when a huge electronic document slid out of secretive intelligence organisation Austrac into the Federal Court. It was to stun the corporate world.

Commonwealth Bank CEO Ian Narev.

It was 9.39am and 10C outside when a huge electronic document slid out through the encrypted walls of the secretive intelligence organisation Austrac and into the Federal Court of Australia. It ­landed with a loud crash.

The document would not only stun the corporate world, it also would up-end the Commonwealth Bank of Australia.

Austrac was just a small regulator with an acting chief executive. But its remit was to oversee anti-money laundering and terror financing laws.

Suddenly, after all the scandals that had enveloped the Com­monwealth Bank in recent years, Austrac had landed an ­extra­ordinary punch. The statement of claim it served on August 3 was as blinding as the sun on a hot day: the blue-chip bank allegedly had failed to report more than 53,000 trans­actions.

Moreover, the Australian Federal Police were on the same song-sheet as Austrac.

In a nutshell, by the middle of 2015 the police had been not just at the door but inside the Commonwealth Bank — pursuing criminal drug syndicates and suspected terror financiers who had taken ­advantage of the bank’s smart ATM machines that allowed double the deposits of other machines. Some Commonwealth Bank ­account holders had been jailed for their activities.

To all intents and purposes one of the world’s most prestigious financial institutions, CBA, ­appeared to be a bank of choice for money-launderers.

Somehow, the culture of prudential excellence expected of Australia’s banking system had given way to an almost 600-page-long document that specified in excruciating detail allegations of how drug syndicates burrowed through the Commonwealth Bank.

Lest there be any mistaking this, the prudential regulator, the Australian Prudential Regulation Authority, underlined the situation four weeks later by announcing a panel of inquiry to examine the issues “that have damaged the reputation and public standing of CBA Group”.

The Commonwealth Bank ­initially was dismissive of Austrac’s claims.

Chief executive Ian Narev told the media that there had been a fault and that it was simply a coding error in the bank’s software. This error, which disrupted the reporting of large transactions, was uncovered in June 2014 and rectified between September and ­November 2015.

But his explanation did not ­address the continuing activity by suspected drug and money laundering syndicates throughout last year and into this year.

It is this activity that has ­resulted in a comprehensive drubbing for the bank. Even APRA, which prefers backroom action, had something to say.

Whether or not it was pushed to establish a public ­inquiry, APRA demonstrated the same seriousness of purpose if not the colourful language of Scott Morrison — who had ­described the money laundering allegations as an “epic fail” by the bank.

Another regulator regarded as truly reticent came out with a hammer blow for CBA.

Reserve Bank of Australia governor Philip Lowe did not mince words before a parliamentary inquiry: “Banks should not be doing money laundering and they should know who is operating the accounts that they open; they are very important laws and they need to be respected.”

Lowe went on to say that there should be accountability, both ­internally at the bank and through the courts. “It’s very serious. We have these laws for a reason and they need to be enforced and people need to be held to account.”

RBA officials had thought carefully about the CBA matter. During a regular dress rehearsal — really a broadbased discussion — before parliamentary hearings, key staff and executives meet to consider issues that might be raised by politicians. These meetings include the governor, the deputy governor, the three assistant governors, the bank secretary and the head of communications.

On August 9, two days before the August 11 house economics committee met, this group discussed a range of matters, including the Austrac action. There was no discussion of attempting to bat it away. Lowe would decide himself what to say on the day.

In the boardroom of the Commonwealth Bank, Lowe’s views caused shudders. The board of the bank had already issued a statement over the name of chair­woman Catherine Livingstone acknowledging that software problems affecting the delivery of threshold transaction reports — which report transactions of $10,000 and above — had been brought to the board in 2015.

Almost immediately Livingstone also announced that Narev would be leaving the bank by the middle of next year. But nothing to date has ­explained why the bank failed to report suspicious transactions for so long.

Two case studies from Austrac’s statement of claim reveal that the failure to report transactions suspected of being related to money laundering ran well into this year.

In the case of Person 55, who opened Account 61 in October 2015 (a few weeks after CBA had started fixing its transaction reporting software), the AFP was quickly on his trail.

On December 17, 2015, eight weeks after Account 61 was opened, the AFP contacted the Commonwealth Bank to reveal that this account was connected to an investigation of serious criminal activity.

To date, there had been five transactions: two deposits and three transfers. The Commonwealth Bank would report one of those transactions to Austrac a year later.

The deadline for the Commonwealth Bank reporting after forming reasonable suspicions (such as through a police notification) was three days.

By early last year, activity in ­Account 61 took off with a roar: ­between February and August 2016, deposits of $1.66 million poured into the account.

The AFP executed a search warrant on the account on April 4 last year. In the four months following, $1.17m was transferred in dozens of transactions by the suspects out of Account 61.

The Commonwealth Bank’s money-laundering team then ­reviewed Account 61 on or about September 7 last year; it identified multiple large transactions indicating money laundering.

Later that day, the bank sent a suspicious matter report to Austrac. It covered nine transactions.

The account was stopped and closed in September last year.

In October last year, another SMR was sent by the Commonwealth Bank to Austrac; it ­reported a transaction from ­December 2015, 10 months earlier.

In July this year, the bank sent an SMR regarding a $20,000 deposit to Account 61 that had been ­deposited back in December 2015.

Austrac alleges that the Commonwealth Bank knew in December 2015 that this transaction was ­relevant to police investigating ­serious criminal offences ­because the AFP had notified the bank on ­December 17, 2015.

This was 19 months earlier and well outside the three-day deadline for CBA to report.

A further 46 suspicious transactions on Account 61 last year were never reported to Austrac ­according to the statement of claim.

Three weeks after the 19-months-late SMR, Austrac filed its statement of claim against the bank.

In another case, Account 64 was opened by Person 56 on ­December 29 last year. The ­account sprang to life in January this year.

Person 56 was a Chinese ­national on a visitor visa. Forty cash deposits totalling $320,000 were pumped into Account 64 from January 5 to 10. On the seventh day, $369,000 was transferred out of the account and Person 56 disappeared.

CBA examined the account on February 7 after questions raised by Austrac. The bank then reported 17 suspicious transactions. Three more transactions were ­reported in March.

By the time Austrac launched its civil action, 23 other suspicious transactions on Account 64 — ­including the flight of the $369,000 — had not been reported to Austrac.

All the regulators have now had their say about the criminals infesting CBA’s accounts.

Appearing before a parliamentary joint committee on corporations, on August 11, Australian ­Securities & Investments Commission boss Greg Medcraft said forcefully: “Basically it’s cleansing money that is dirty.”

The trails of this dirty money swished through the bank for two more years after errors in transaction reporting software were fixed. The money has been characterised by breathtaking transactions — fast, reckless, repeated hits on multiple branches.

ASIC has announced it is looking into whether there have been any breaches of directors’ duties in so far as protecting the reputation of the bank, continuous ­disclosure requirements, licensing obligations on ethics and honesty, and reporting of contingent liabilities.

The message from inside the bank since Livingstone grasped the scale of the problem has been, publicly, one of co-operation. Sotto voce, however, there has been plenty of media leaking from other sections of the bank attacking Austrac, suggesting the regulator should have settled things nicely behind the scenes.

Austrac has demonstrably ­assembled a highly detailed case, with the support of the AFP. An AFP spokesman told this newspaper: “The AFP and Austrac have a close working relationship and, where appropriate, share information to support each other in their duties. This includes the ­recent regulatory matter relating to the Commonwealth Bank of Australia.”

CBA, however, will have its ­opportunity to respond, and vigorously, to Austrac’s allegations when it files its defence in this most high profile of cases. The bank has said this could take as long as three months.

In circles around the bank — and amid horrified competitors — there has been plenty of concern that the big APRA inquiry now under way may lead to more blood spilled that damages the whole banking sector.

But APRA’s guidelines for the panel of experts make it clear that it is the Commonwealth Bank scandals that are under the microscope. Yesterday APRA chairman Wayne Byres reinforced this when he singled out Storm Financial, the financial planning scandal, Comminsure and Austrac as issues for examination, telling a parliamentary committee: “I don’t think there’s any doubt they’ve damaged the reputation of the bank.”

CBA has been exceptionally tough in fending off criticism of the earlier scandals in recent years. Whether there is any link between the bank’s aggressive posture and the reporting lines at CBA where­in all “communications” go through the general counsel may be a subject of the APRA “culture” investigation.

This reporting structure has meant the bank’s communication with the outside world is through a lawyer’s lens. Some observers of CBA say it is impossible to over-estimate the impact of having the bank’s top legal eyes also in charge of communications.

“CBA never admits wrong­doing, never admits a mistake, and never shows contrition,” one irate observer commented.

But in 2014, former general counsel David Cohen appeared before a parliamentary inquiry into CBA’s financial planning scandal (which saw retirees churned through investment products that delivered high commissions to planners but often lacked basic checks and balances). Many previously conservative bank customers saw their wealth crushed. Cohen told the committee: “We should have moved more quickly.” He assured the politicians “it would not happen again”.

By March this year, Narev was back ­defending the bank in the Comminsure controversy that saw medical definitions used to deny claims. The chief executive, with what now looks like hubris, said no ­executives would lose their jobs. He declared that APRA was happy with a review by Deloitte and said the regulator had called the report robust and independent. Whether APRA agreed with this sentiment was never known.

The Deloitte report had been given narrow terms of reference and involved no interviews with victims. It had the effect of ­immediately plunging CBA into another hurricane of fury from devastated customers: no ­admission, no contrition.

With CBA’s culture and reputation now under examination by ASIC, APRA and the federal government, the once-sleepy Austrac has revealed itself to be a serious player. After years of cocksure push-back and legal fencing from the Commonwealth Bank in the face of repeated controversy, Austrac was the one to land the ultimate cultural blow.