Class motion reopens ugly wounds of CBA scandal

It was early 2017 and behind the scenes at Australia’s largest financial institution, senior workers and attorneys had been arduous at work devising a secret communications technique.

The monetary intelligence company AUSTRAC had been sending notices to the Commonwealth Financial institution, requesting extra details about the financial institution’s discovery that greater than 53,000 giant money deposits in its ATMs had not been reported to the regulator, as was required by anti-money laundering and counterterrorism legal guidelines.

Then-CBA CEO Ian Narev, chairman Catherine Livingstone and Matt Comyn in April, 2018. Credit score:Peter Braig

Because the financial institution’s former chief government Ian Narev advised a court docket this week, CBA was involved about the best way the problem can be dealt with if it hit the media, “notably given the overall setting round banks on the time”.

“I believe you will need to perceive … if any of those eventualities had been to eventuate, the objective of this form of work is that, as selections are being made, we’re not ranging from scratch.”

Months after CBA started making ready, one of many worst eventualities predicted by Mission Harmony – the identify given to the work being finished by the financial institution to handle anti-money laundering breaches – got here to move.

At lunchtime on August 3, 2017, AUSTRAC introduced it will file a lawsuit towards CBA. Although it had cracked down on Tabcorp for breaching anti-money laundering and counterterrorism financing legal guidelines, this was the primary time AUSTRAC had moved towards a financial institution, and it despatched shockwaves by the monetary companies sector.

CBA ultimately agreed to pay a document $700 million tremendous to settle the case, the largest civil penalty imposed in Australian historical past on the time. AUSTRAC had managed to ship a transparent message to different firms of what was at stake.

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For the previous few weeks in a Sydney courtroom, a blow-by-blow account of one of many nation’s greatest company scandals has been performed out earlier than decide David Yates, offering an image of the inside workings of one among Australia’s largest monetary establishments because it was rocked by an unsightly episode.

This week, Narev spent virtually three days being taken by dozens of confidential reviews, briefing papers, inside audits and emails as he gave proof as a part of a category motion introduced by shareholders who misplaced cash when the financial institution’s share value fell after AUSTRAC’s announcement.

The shareholders say CBA knew in regards to the non-compliance a number of years earlier than the announcement, and it ought to have disclosed that info to the ASX. However the financial institution argues that when it first grew to become conscious of the breaches, it didn’t know that AUSTRAC would launch a lawsuit, and there was no value delicate info that required disclosure to the market.

‘Essential to me on the time’

Ian Narev grew to become boss of the Commonwealth Financial institution in December 2011, shifting from the top of enterprise and personal banking into the chief government position. Virtually instantly, the court docket was advised this week, he was made conscious of points with CBA’s anti-money laundering and counterterrorism processes.

It was a time when international regulators, together with AUSTRAC, had been paying rising consideration to those points: in 2012, HSBC had agreed to pay a $US1.9 billion tremendous after it failed to protect towards cash laundering that benefitted Mexican drug cartels, and Customary Chartered paid $340 million in 2012 after finishing up transactions for Iran in violation of US sanctions.

Narev advised the court docket he was conscious proper from the beginning of his CEO tenure that AUSTRAC was taking rising curiosity and a extra lively position in anti-money laundering regulation.

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In late 2013, an inside audit of CBA’s anti-money laundering framework got here again with a “crimson” ranking, indicating important considerations that wanted instant consideration from senior executives.

Narev acknowledged the image painted by the audit was unsatisfactory, however mentioned this week that he’d been advised that total, the framework coated all key necessities of the regime.

“I recall being advised by the audit staff that the general framework, and it’s within the report, was enough, that was one thing that was crucial to me on the time,” he mentioned this week.

However by February 2014, AUSTRAC had expressed concern in regards to the audit, the court docket heard. It requested month-to-month conferences and reporting and a detailed monitoring of progress. PwC was engaged to conduct high-level overview of root causes and make suggestions. The report from PwC additionally discovered a raft of points with CBA’s anti-money laundering and counter-terrorism processes.

Regardless of these points, Narev says, on the time, he was assured the financial institution was working to repair them, with a number of remediation initiatives below manner. He met with then head of AUSTRAC, he advised the court docket, who he recalled had offered “very optimistic and constructive suggestions typically… to the set of points”.

CBA settled the case for $700 million in 2018.

CBA settled the case for $700 million in 2018.Credit score:Paul Jeffers

“The one factor a CEO can uniquely do with the top of one other establishment is type an total … view of the financial institution. I noticed that as a particularly necessary a part of my position and necessary in subsequent years,” mentioned Narev.

However by Could 2015, one other inside anti-money laundering audit report obtained a crimson ranking. In July, AUSTRAC advised CBA executives they’d critical considerations in regards to the newest audit, and, based on a file word of the assembly, it was contemplating if enforcement motion can be mandatory.

‘We have to take this extraordinarily critically’

It was in late 2015 that the total scale of the financial institution’s potential breach got here to mild.

Greater than 53,000 money transactions of over $10,000 made their manner by intelligence deposit machines – a sort of ATM that enables nameless money deposits – had not been reported to AUSTRAC over a interval of greater than two years.

The court docket heard inside emails between Narev and Matt Comyn, who was head of the retail financial institution on the time and is now the chief government, discussing the invention.

“It goes with out saying we have to take this extraordinarily critically,” Narev wrote on September 6, 2015. “I’ve let [chief risk officer] Alden [Toevs] know he ought to personally be in contact with AUSTRAC about this and supply up a dialogue with me. We have to undertake a equally senior posture with AFP.”

In his affidavit submitted to the court docket for the trial, Narev mentioned that on the time of studying in regards to the concern, it appeared to him that the instant reason for the problem had been recognized, a remedial program was below manner and the transaction reporting concern warranted investigation.

“The depiction of the problem,” questioned Jeremy Stoljar, SC, the lawyer for the plaintiffs, “is a type of injury management, I put to you. You’re minimising the importance of the problem”.

“I disagree strongly,” Narev responded.

“Years after the occasion, you may have sought to depict a response that’s merely at odds with contemporaneous paperwork. What do you say to that?”

“I strongly disagree with you,” Narev replied.

AUSTRAC takes motion

On August 3, 2017, AUSTRAC introduced it had filed civil proceedings within the Federal Court docket for systemic non-compliance by CBA.

Inside CBA, the motion wasn’t utterly sudden. Greater than a 12 months prior, it had obtained a discover from AUSTRAC below the anti-money laundering and counter-terrorism act requesting additional info and paperwork. The financial institution had by no means obtained this type of discover earlier than. One other arrived in September, and a 3rd in October.

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“It was clear to me at that time … there was prone to be some enforcement motion,” Narev mentioned on Tuesday.

What did shock Narev, nonetheless, was the best way through which AUSTRAC delivered the information. Regardless of an expectation that the financial institution would get advance discover from AUSTRAC, Narev says he obtained a name from the regulator quarter-hour earlier than it put out a media launch and filed court docket motion.

“That is precisely what you mentioned you wouldn’t to,” Narev says he advised AUSTRAC’s deputy CEO.

Narev then texted the chair of the financial institution, and knowledgeable the board.

“AUSTRAC’s claims appear precisely as anticipated,” he wrote in an e-mail to the board. “I needed you to know instantly since it is going to get instant media consideration.”

Whereas the view contained in the financial institution had been that the conduct amounted to a single contravention, leading to a attainable tremendous of $18 million, AUSTRAC alleged the financial institution had breached the act 53,750 occasions.

CBA settled the case for $700 million in 2018. Within the days following the announcement from AUSTRAC, Narev introduced he can be resigning the next 12 months (he’s now the chief government of SEEK). Inside months, a royal fee into the monetary companies was referred to as after successive scandals rocked the banking sector.

5 years on, the present class motion, which is anticipated to go for a number of extra weeks, is revisiting an unsightly chapter for CBA that it will moderately neglect.

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