Commonwealth Bank of Australia Money Laundering Case

Commonwealth Bank of Australia money laundering

By: Paxton DeRoma

Money laundering is a serious crime in most countries. Continuing bank involvement in this activity raises questions about the severity of punishment banks receive and if the reward of the criminal activity is greater than the risk of the punishment.

THE PLAYERS

Commonwealth Bank of Australia

The Commonwealth Bank of Australia (CBA or CommBank) was established in 1911 through the Commonwealth Bank Act and soon after began operations in 1912 (1). CBA was fully publicly owned until April 1991, when it began going through the steps of privatization. By July 1996 CBA was completely privatized (2).

Today, CBA is an international company with over 51,000 employees and 16.6 million customers in 11 countries, including the United States, New Zealand, the United Kingdom, Japan, and China. In 2017 the bank had a total revenue of nearly 45 billion Australian Dollars (A$) with a net profit of A$9.88 billion (1 AUD  ≈ 0.74 USD). CBA’s total assets of A$976 billion in 2017 makes it the largest Australian company by measure of both market capitalization and total assets (3). The company offers numerous financial services and products for both individuals and businesses as part of its business operations, including: derivatives, general insurance, general financial product advice, saving and investment accounts, forex, equity and debt securities, transaction accounts, funds transfers and payments, and more (4).

AUSTRAC

The Australian Transaction Reports and Analysis Centre (AUSTRAC) is the Australian financial intelligence agency in charge of regulating anti-money laundering and counter-terrorism financing (AML/CTF). AUSTRAC’s goal is to uphold the fairness of the Australian financial system and to help administer justice using its expertise on combating money laundering and terrorism financing (5). Australian businesses are required to provide AUSTRAC with reports on financial transactions and suspicious matters. Once AUSTRAC has the business reports they use experts to analyze the data and compile financial intelligence reports. The reports are subsequently shared with other government agencies to help counter financial crimes (6).

THE EVENTS

Money Laundering

CBA first introduced Intelligent Deposit Machines (IDMs) to their customers in May of 2012. IDMs are a type of advanced ATM that eliminates the need for a human bank teller to perform tasks like depositing or transferring large amounts of money. According to AUSTRAC, CBA’s IDMs allowed customers to anonymously deposit 200 notes per transaction, which can total all the way up to A$20,000 each transaction, and immediately transfer the money to another account. Bank policies did not limit the amount of transactions a day for a customer. This means a person could anonymously put millions of dollars through one of CBA’s IDMs in a single day. Between May and June 2016 alone over A$1 billion went through CBA’s IDMs (7). However, under the Financial Transaction Reports Act of 1988 (FTR Act) all cash dealers in Australia, including banks, must report all cash transactions of A$10,000 (or the foreign equivalent) or more to AUSTRAC as well as any other transactions that may be viewed as suspicious. These reports are known as Threshold Transaction Reports (TTRs). Cash dealers are also required to authenticate the identity of the signatory of each account and prevent any accounts being opened under a pseudonym (8).

On May 21, 2015 Arslan Shaffi and Salman Khan were arrested by New South Wales Police for money laundering. Police found over A$3 million in banking receipts in Shaffi’s and Khan’s homes, many of which were printed by CBA IDMs. The men used 101 CBA accounts to launder nearly A$1.8 million in 255 different transactions. Many of these transactions were used with a technique called ‘structured deposits’ where they would make a deposit of just under A$10,000 in order to avoid the transaction being reported to the Australian government. Shaffi and Khan were the first two suspects to be arrested in relation to the CBA money laundering scandal. After the arrests, the NSW Police contacted CBA to obtain information about the transactions made by Shaffi and Khan at their bank. According to the pleadings, CBA approached the requests made by authorities with what at times appeared to be apathy and laziness (9).

Apart from Shaffi and Khan, four other criminal syndicates were using CBA to launder money and commit criminal activity. One of the larger syndicates involved was a Hong Kong-linked syndicate that also had been using CBA to launder money. This syndicate reportedly laundered over A$21 million through CBA for criminal purposes. The syndicate was also involved in the biggest methamphetamine bust in Western Australian history when authorities found 321 kilograms of methamphetamine, also commonly referred to as ‘ice’, and roughly A$1.4 million in cash after multiple seizures in September of 2015. Most of the drugs and money from the syndicate were being moved to Cheng Fatt Chow, a major ring leader of the drug circle, and then distributed throughout Australia. CBA was responsible for enabling the syndicate’s criminal activity by allowing members to transfer large amounts of money quickly and anonymously while flying under the radar of the Australian government. Eight individuals linked to the syndicate were arrested and charged with crimes relating to laundering money through CBA (10).

The second drug syndicate was made up of three individuals who deposited roughly A$6 million into 12 accounts between 2014 and 2015. Once the money was in the accounts it was transferred domestically to others. The three individuals were arrested on January 19, 2015 and charged with dealing in proceeds of crime in connection with a drug importation syndicate (11).

The third syndicate using CBA to launder money was caught on August 24, 2015, when two men, Kha Weng Foong and Yuen Hong Fung, were arrested by Australian Federal Police. After police searched Fung’s possessions they found a total of A$720,000 in cash and 16 fake IDs. After further investigation police found that Foong and Fung and one other unidentified person had laundered A$21 million in nine months. The men did this through 427 transactions, many of them under the A$10,000 threshold, using multiple accounts and identities (12).

The fourth syndicate linked to CBA money laundering was caught when NSW Police arrested Mandeep Singh on January 28, 2015. Singh and his syndicate were linked to importing narcotics into Australia and then distributing them once there (13). Between 2014, when Singh opened up CBA accounts, and 2015 the syndicate was able to deposit A$27 million in cash into a single account, with individual deposits regularly amounting to over A$500,000, and then move the money to an offshore account through CBA (14).

Between November 2012 and September 2015 CBA either failed to deliver on time, or did not deliver at all, 53,506 TTRs that went through their IDMs to AUSTRAC. These IDM transactions, some of them over A$10 million, totaled to A$625 million. During this same time period CBA also neglected to monitor the transactions of 778,370 accounts they were supposed to under its anti-money laundering and counter-terrorism financing program. CBA failed to properly assess and manage risk around money laundering using their IDMs (15).

THE OUTCOMES

Penalties and Sanctions

In June 2018 CBA was fined a record-breaking A$700 million by AUSTRAC for its violation of AML/CTF laws. CBA was also fined an additional A$2.5 million to cover the legal fees for the court hearings. On top of the fine, the bank is also required to take extra steps to prevent future events like this from happening again. CommBank must keep a minimum of A$1 billion in reserve capital until it proves to government officials and regulators that it has more control and governance so it can avoid and prevent future violations (16). The bank must also keep an additional A$200 million in reserve for costs and compliance from the banking financial services royal commission and put A$100 million towards improving their lackluster AML/CTF systems (17).

On December 7, 2017, the Anti-Money Laundering and Counter-Terrorism Financing Amendment Act 2017 (AML/CTF Amendment Act) was passed by the House of Parliament in Australia and came into effect in April 2018. The AML/CTF Amendment Act aims to improve the Australian government’s ability to prevent and fight financial crime by expanding the power of the AUSTRAC CEO, increasing regulation of digital currencies (like Bitcoin and other cryptocurrencies), and allowing light deregulation of the industry (18).

How CommBank Reacted

By 2018 CBA announced that a total of four CBA directors and CEO Ian Narev would be leaving the company for undisclosed reasons. Two of the directors, Launa Inman and Harrison Young, left CBA in November 2017. Inman and Young were both a part of the board’s audit committee. Independent director Brian Long, who is also the chairman of the audit and risk committee, and independent director Andrew Mohl will be leaving together at some point soon after the 2018 CBA general meeting (19). Ian Narev was replaced as CEO and managing director by Matt Comyn on April 9, 2018. Comyn has been a part of CBA since 1999 and had been in charge of overseeing Retail Banking Services from 2012 until his promotion to CEO (20).

ETHICS ANALYSIS

What CommBank Did Wrong and Why it Was Wrong

Causing Harm

The action of CommBank in facilitating money laundering for drug syndicates caused harm to people as well as to the national security of Australia. By allowing this illegal activity to go on through its banking system CommBank enabled criminals to move drugs and firearms in and through the country. Clearly, increased drug and firearms availability made it easier and increased the opportunity to get both, leading to likely harmful effects. CBA shares at least partial blame for everyone who was harmed as a result.

The act of causing harm to individuals is unequivocally unethical in both secular and religious moral systems. “Do no harm” is a first principle of Natural Law in Catholic moral theology. In Buddhist ethics, this principle is a core value and a reason why those in the clergy do not eat meat as it entails killing. In secular duty based ethics, the principle of “do no harm” also is fundamental. Norms such as, do not kill, do not steal and do not cheat fall under this broad guiding principle.

The Upshot: CommBank is responsible as a moral entity to avoid doing harm. Yet, it failed to meet this key ethics standard.

Failing to Meet Fiduciary Responsibilities

The management of CommBank has the fiduciary responsibility to shareholders and clients to act in their best interest. It did not do so when the bank failed to submit TTRs and SMRs.

A Threshold Transaction Report (TTR), as mentioned earlier, is a report that is required to be submitted to AUSTRAC by cash dealers within 10 business days of when a cash transaction of A$10,000 or a foreign equivalent is made by a customer. Each TTR must include information on the individual carrying out the transaction, the individual who receives the funds from the transaction (if different than the individual carrying out the transaction), and the amount and type of currency used in the transaction. AUSTRAC uses TTRs to monitor suspicious behavior and to prevent and fight against crime (21). CommBank admitted to not providing AUSTRAC with TTRs on time or at all in 53,506 separate instances but blamed the issue on a single system-related error and claimed it was not intentional (22).

A Suspicious Matter Report (SMR) is a report that must be submitted to AUSTRAC by a reporting entity, such as a bank, if the said entity believes it could have information that could be used to investigate an account or individual for financial or other crimes such as, fraud, tax evasion, money laundering, or terrorism financing. A SMR should be reported within three days after suspicion from an account has been aroused or if the case could involve terrorism financing then it must be reported within 24 hours. The report must include information and details on “the suspicious matter, the person/organization(s) to which the matter relates, and any transactions related to the matter” (23). CommBank admitted to purposely either not providing a SMR on time or at all in 69 different cases, even though law enforcement officials had asked numerous times for account details of customers for criminal investigation (22).

By not meeting its legal responsibilities, the management of CommBank placed the interests of its shareholders and customers in jeopardy. The fine of A$700 million and the increased reserves the bank must now hold will impinge on the profitability of the bank and therefore, on shareholder returns.

The Upshot: By ignoring its legal responsibilities, the bank also ignored its fiduciary responsibilities.

Was the Punishment Enough? (No)

In the end, no one from CBA was jailed, or even put to trial, and the bank itself was only fined A$700 million plus another A$2.5 million for court fees and hearings. CBA also had to reserve A$200 million for costs and compliance from the banking and financial services royal commission and another A$100 million to repair their AML/CTF systems. This A$700 million fine shatters the previous record for violating AML/CTF laws in Australia which was previously held by Tabcorp which was hit with A$45 million fine in 2017. The CBA fine also ranks in at the 4th biggest fine in the world for violation of AML/CTF laws with only Bancorp (US, A$805M), HSBC (US, A$1.9B), and BNP Paribas (US, A$12B) being ahead of them. Estimations in the financial markets had the fine going up all the way to A$1B while CBA had only set aside A$375 million in anticipation for the fine.

After the fine was announced CBA’s stock rose 2.5% within two days due to the fine being around 30% lower than expected from analysts. Nathan Lynch, the head of regulatory intelligence at Thomson Reuter for Asia-Pacific, said the objective of the fine was never to get the most money out of CBA and cripple the bank or harm the shareholders in the interest of the banks ‘budget repair’ (17). In 2017 CBA brought in a revenue of almost A$45 billion and a net profit of A$9.88 billion with assets totaling to A$976 billion (3). To the bank the A$700 million fine equates to less than 6 days of total revenue, less than 26 days of net profit, and 0.07% of their total assets.

The punishment handed to CBA for, what seems like deliberately, committing financial crimes and enabling criminal syndicates, and terrorists to launder millions of dollars seems relatively light, and CommBank probably knew it would be if it got caught. This light punishment seems like a common theme when it comes to violating AML/CTF laws around the globe. No bankers from BNP Paribas, HSBC, Bancorp, or CBA, the banks punished with the four highest fines for violating AML/CTF laws in global rankings, were sentenced any jail time or even put on criminal trial, even though many customers who were using these banks services to commit crimes did go on trial and often received jail sentences.

Executives in big banks must be held accountable and to the same standard as those who are using their services to assist them in committing major crimes. This does not mean that every C-suite executive of these banks should receive large jail sentences but there should be criminal investigations and trials for those who were involved and had knowledge of the situation that they cannot get out of for ‘complying’ with the government. Taking this extra step to criminally prosecute bankers instead of only fining the company a month’s worth of profit (especially when they likely made more than that by participating in money laundering and other crimes) would cause executives to be more vigilant of what is going on in the company and likely result in a  dramatic decrease in the ‘coding errors’ and apologies of ‘profoundly sorry’ executives.

 

Works Cited

  1. “History.” CommBank Foundation – CommBank,www.commbank.com.au/about-us/our-company/history.html
  2. “Privatisation (1991) and Subsequent Developments.” CommBank Foundation – CommBank, www.commbank.com.au/about-us/our-company/history/privatisation.html
  3. “Annual Report 2017.” Commonwealth Bank of Australia, Commonwealth Bank of Australia, 14 Aug. 2017, www.commbank.com.au/content/dam/commbank/about-us/shareholders/pdfs/annual-reports/annual_report_2017_14_aug_2017.pdf
  4. “Financial Services Guide.” Commonwealth Bank of Australia, Commonwealth Bank of Australia, 4 Aug. 2011, www.commbank.com.au/business/pds/ADB2684.pdf
  5. “Agency Overview.” AUSTRAC, AUSTRAC, 2013, www.austrac.gov.au/sites/default/files/documents/austrac-ar13-14-agency-overview.pdf
  6. “About AUSTRAC.” Australian Transaction Reports and Analysis Centre (AUSTRAC), Australian Transaction Reports and Analysis Centre (AUSTRAC), 13 July 2016, www.austrac.gov.au/about-us/austrac
  7. Parry, Yasmin, and Will Ockenden. “How CBA’s Smart ATMs and a Coding Error Caused a Massive Mistake.” ABC News, Australian Broadcasting Corporation, 7 Aug. 2017, www.abc.net.au/news/2017-08-07/commonwealth-bank-how-smart-atms-and-coding-error-caused-mistake/8781066
  8. “FTR Act.” Australian Transaction Reports and Analysis Centre (AUSTRAC), Australian Transaction Reports and Analysis Centre (AUSTRAC), 11 Dec. 2014, www.austrac.gov.au/businesses/legislation/ftr-act
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  10. “Commonwealth Bank of Australia : ATM Scandal Syndicate Linked to Record Meth Haul.” 4-Traders.com | Stock Exchange Quotes| Company News, SyndiGate Media Inc., 7 Aug. 2017, www.4-traders.com/COMMONWEALTH-BANK-OF-AUST-6492243/news/Commonwealth-Bank-of-Australia-ATM-scandal-syndicate-linked-to-record-meth-haul-24898661/
  11. “Concise Statement.” AUSTRAC, AUSTRAC, 8 Mar. 2017, www.austrac.gov.au/sites/default/files/20170803-concise-statement-cba-s.pdf.
  12. Chenoweth, Neil. “How Drug Syndicates Turned Commonwealth Bank into a Money Pump.” Financial Review, Financial Review, 11 Aug. 2017, www.afr.com/business/banking-and-finance/austrac-case-how-drug-syndicates-turned-commonwealth-bank-into-a-money-pump-20170810-gxtnht.
  13. Chenoweth, Neil. “Westpac, ANZ Linked to Money Laundering Rings in CBA Case.” Financial Review, Financial Review, 8 Aug. 2017, afr.com/business/banking-and-finance/westpac-anz-linked-to-money-laundering-rings-in-cba-case-20170808-gxrpq0.
  14. Bethencourt, Dan. “Australian Banks Reassessing Risks amid Unprecedented Enforcement Action: Sources.” Artic Intelligence, 16 Aug. 2017.
  15. “AUSTRAC and CBA Agree $700m Penalty.” Australian Transaction Reports and Analysis Centre (AUSTRAC), Australian Transaction Reports and Analysis Centre (AUSTRAC), 6 June 2018, www.austrac.gov.au/media/media-releases/austrac-and-cba-agree-700m-penalty
  16. Barrett, Jonathan. “Australia’s CommBank Accepts Record Penalty in Money-Laundering Case.” ABS-CBN News, ABS-CBN News, 4 June 2018, www.news.abs-cbn.com/business/06/04/18/australias-commbank-accepts-record-penalty-in-money-laundering-case
  17. Letts, Stephen. “Was the CBA Really Taken to the Cleaners with Its $700 Million Money Laundering Fine?” ABC News, Australian Broadcasting Corporation, 5 June 2018, www.abc.net.au/news/2018-06-06/what-did-we-learn-from-cba-700-million-fine/9836016
  18. “New Anti-Money Laundering and Counter-Terrorism Financing Laws.” PricewaterhouseCoopers, PricewaterhouseCoopers, 30 Jan. 2018, www.pwc.com.au/legal/assets/legaltalk/new-anti-money-laundering-and-counter-terrorism-financing-laws-300118.pdf
  19. Yeates, Clancy. “CBA Pushes Ahead with Board ‘Renewal’ as Long-Serving Directors Retire.” The Sydney Morning Herald, The Sydney Morning Herald, 5 Mar. 2018, www.smh.com.au/business/banking-and-finance/cba-pushes-ahead-with-board-renewal-as-long-serving-directors-retire-20180305-p4z2u2.html
  20. “Matt Comyn.” CommBank Foundation – CommBank, www.commbank.com.au/about-us/our-company/management/matt-comyn.html
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  22. Eyers, James. “Money Laundering Scandal: What CBA Admitted to, and Why It Happened.” Financial Review, Financial Review, 4 June 2018, www.afr.com/business/banking-and-finance/financial-services/money-laundering-scandal-what-cba-admitted-to-and-why-it-happened-20180604-h10xm3
  23. “Suspicious Matter Reports (SMRs).” Australian Transaction Reports and Analysis Centre (AUSTRAC), Australian Transaction Reports and Analysis Centre (AUSTRAC), 27 Mar. 2018, www.austrac.gov.au/suspicious-matter-reports-smrs
  24. 24. Moore, Heidi, and Jill Treanor. “BNP Paribas Pleads Guilty to Criminal Charges in Sanctions Case.” The Guardian, Guardian News and Media, 30 June 2014, theguardian.com/business/2014/jun/30/bnp-paribas-pleads-guilty-criminal-charges-sanctions.
  25. Keefe, Patrick Radden. “Why Corrupt Bankers Avoid Jail.” The New Yorker, The New Yorker, 31 July 2017, www.newyorker.com/magazine/2017/07/31/why-corrupt-bankers-avoid-jail.
  26. McCoy, Kevin. “U.S. Bancorp Hit with $613M in Penalties Linked to Payday Lender Scott Tucker.” USA Today, Gannett Satellite Information Network, 15 Feb. 2018, www.usatoday.com/story/money/2018/02/15/u-s-bancorp-hit-613-m-penalties-lax-money-laundering-controls/340632002/.

 

Photo: ABC News Australia