So what’s going on with the Commonwealth Bank?

So you will have seen the media about the proceeding commenced in the Federal Court by AUSTRAC about alleged failure by the Commonwealth Bank of Australia (“CBA”) to meet its disclosure obligations.  But what’s it all about?

 

Who is AUSTRAC?

AUSTRAC stands for Australian Transactions Reports and Analysis Centre.  It is a Commonwealth statutory body which was set up to monitor financial transactions for things such as criminal activity, money laundering and financing of terrorist activities.

 

How does AUSTRAC monitor financial transactions?

There is a piece of Commonwealth legislation called the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (the “AML-CTF Act”) which provides that certain financial transactions must be reported to AUSTRAC.  These include:

1. Threshold transaction reports (TTRs) – in short, where there is a deposit or withdrawal of physical currency (i.e. cash) or e-currency to the value of $AUD 10,000 or more, the transaction must be reported to AUSTRAC within 10 business days.  This includes a deposit of the threshold amount in a bank account.
2. International Funds Transfer Instructions (IFTIs) – this means an instruction by a person to transfer funds electronically into or out of Australia must be reported to AUSTRAC within 10 business days by the “ordering institution” (where money is sent out of the country) or “beneficiary institution” (where money is received into the country).  Typically, ordering and beneficiary institutions are banks, building societies and credit unions.
3. Suspicious matter reports (SMRs) – these typically occur where the reporting entity is, or is asked to provide, a “designated service” (such as a financial/banking service or provision of gambling services) and there is a suspicion that the person is not who they claim to be or the service is to be used for some criminal purpose such as money laundering, tax evasion, financing terrorism or dealing in the proceeds of crime.

 

What does AUSTRAC allege?

AUSTRAC has alleged that CBA failed to disclose to it 53,503 TTRs.

As a major financial institution in Australia,CBA provides what are defined in the AML/CTF Act to be “designated services”.  Therefore, it is a reporting entity for the purposes of the Act and may not provide a designated service unless is has an anti-money laundering and counter-terrorism financing program in place.

In 2012, CBA commenced using in its branches, a type of ATM referred to as an Intelligent Deposit Machine or IDM.  IDMs allow a customer to deposit cash or cheques where the deposited cash or cheques can be immediately counted and deposited in the user’s account.  IDMs can accept up to $20,000 in cash in one transaction.  The deposit may be anonymous – although a card must be used to facilitate the deposit, a card from any institution may be used and the depositor’s details will not be recorded.  However, the deposit must be made into a CBA account- holder’s account.

CBA has an anti-money laundering and counter-terrorism financing program in place which includes procedures for managing risk against money laundering and terrorism financing (“ML/TF”) but AUSTRAC alleges that the bank did not carry out a ML/TF risk assessment prior to rolling out the IDMs, nor introduce appropriate risk-based systems or control to mitigate the higher risks it faced by use of the IDMs.  AUSTRAC alleges that $8.91 billion was deposited through CBA IDMs before the bank conducted any assessment of the ML/TF risks associated with the use of IDMs.

Further, what has garnered most media attention is the allegation that on 24 September 2015, Commonwealth Bank lodged 53,504 TTRs (i.e. reports for cash deposits  -most of which were to its IDMs – where the cash deposit exceed $10,000) for the period between 5 November 2012 and 1 September 2015.  All of those transactions (plus two others) are alleged to have been late, i.e. outside the 10 business day requirement.

Perhaps I’m old fashioned but, personally, I find it staggering that people are depositing cash amounts of $10,000 or more in an ATM.  The fact that over 53,000 took place without being reported clearly raises concerns for the monitoring authority as there is a high chance a not insignificant proportion of the transactions will be related to criminal activity.

According to AUSTRAC,  1,640 of the late TTRs related to transactions connected to money-laundering syndicates and 6 transactions related to customers identified by CBA as posing a potential risk of terrorism or terrorist financing.

 

Fallout

CBA has been given until 15 December to file a defence in the proceeding.  The case may not be decided for quite some time.

However, there has been more immediate fallout for the bank.  Executive bonuses for the coming year have been scrapped.  Chief executive Ian Narev has announced his resignation (but will stay on for sometime yet) and two board members have resigned.  CBA’s share price has taken a battering in recent weeks (down by about 10%).

Further, law firm Maurice Blackburn and litigation funder IMF Bentham have indicated they will bring a class action on behalf of shareholders who bought shares between 17 August 2015 and 3 August 2017.  It appears the basis for the class action will be that CBA knew of the breaches of the AML/CTF Act and may have breaches its disclosure obligation under the Corporations Act.  Maurice Blackburn is still investigating the issues.

If and when a class action is brought, it will no doubt raise some interesting issues which may be the subject of a future blog post.