CBA appealed to global regulators before scandal broke
The Australian 12:00am August 14, 2017
Scott Murdoch
Commonwealth Bank held urgent talks with global regulators and central banks on the day it was served by Austrac, in a bid to calm concerns that money-laundering allegations could hurt the bank’s reputation and future fundraising prospects.
The bank, which is Australia’s largest home lender, refused to confirm which authorities were briefed by its top executives on August 3, when the Austrac claims were made. CBA is accused of allowing more than 53,000 suspect transactions to pass through its intelligent deposit machines, which could have funded crime gangs or terror.
CBA is under investigation by the Hong Kong Monetary Authority because most of the suspect cash washed through the machines is thought to have been sent to the territory. However, sources have told The Australian that CBA sought out regulators and played down potential terror-funding fears.
It is understood the briefings were likely to have been held with the US Federal Reserve, Department of Justice — because CBA is a signatory to the Patriots Act, which was created to crack down on terror funding sources following the September 11 attack — and the Office of the Comptroller of the Currency, which supervises foreign banks in the US.
The bank’s reputation in the US is of huge importance because of the number of debt-funding sources located there. The bank has raised more than $3 billion in US senior debt over the past few months, and money-laundering is considered the worst financial crime in the US.
CBA is believed to have also spoken to the Reserve Bank of New Zealand, Singapore Monetary Authority and Britain’s Financial Conduct Authority, which acts as a prudential regulator. CBA refused to reveal which agencies it spoke to and said it was in regular contact with regulators.
It comes amid growing expectation chief executive Ian Narev could soon be called to give account before parliament.
Anticipation of further pain to executive remuneration has also been building ahead of the release of the bank’s annual report today.
“Full details of the remuneration outcomes and the board’s full consideration will be disclosed next week in the annual report,” chairwoman Catherine Livingstone said last Tuesday.
The bank was last week asked by analysts whether the CBA culture was a problem after it emerged the bank ignored a number of staff warnings that the IDMs were being misused.
Citi analyst Craig Williams said the Austrac allegations showed banks had to be “accountable” organisations that maintained the trust of customers.
“CBA would acknowledge mistakes have been made in most cases,” Mr Williams said.
“Action and accountability must be more dramatic if the industry is to stave off this threat.
“This has become one of the key questions for the investment case of CBA and its peers looking forward.” Mr Williams said the bank’s future returns could be lower because of the increased government and regulatory focus on the sector as a result of major incidents over the past decade.
“This bank and its peers have had a litany of conduct and compliance issues over the last decade,” he said.
“It is increasingly apparent that senior management has not yet done enough to build a culture which listens to customers, staff and regulators when problems are raised.
“This raises the real risk of bank sector returns being damaged over time by a response from authorities.”
Investor reaction to the Austrac scandal has been mixed, with the share price enduring a volatile ride over the past seven trading sessions since the allegations emerged.
Mr Narev is due to meet fund managers in Sydney tomorrow and is expected to face calls for assurances in the wake of the Austrac claims, which are the latest in a series of scandals to break on Mr Narev’s watch.
Regal Funds Management analyst Omkar Joshi said Commonwealth Bank was already the worst-performing of the big four banks on total return last year, and there were concerns that the money laundering case would drag on performance, even after a record profit announced last week.
“Yes the result is OK, the numbers are OK, but this creates a lot of uncertainty,” Mr Joshi said.
“You don’t know how this situation is going to play out. There are a lot of scenarios here and none of them are really positive.”
Analysts have said for CBA the debt market reaction is more important than share price moves.
In a worrying sign for CBA, its credit default swap has started to rise, which indicates investors think the company’s risk is starting to increase.
The CDS — which for investors acts as the insurance policy for owning CBA debt — has ticked up slightly and sits higher for the first time in years compared to the other big three banks.
NAB’s CDS moved higher during the 2004 foreign exchange trading scandal, while ANZ’s shifted when the Chinese economy was thought to be on the brink of collapse.
CBA’s current scandal is expected to prompt a small increase in the cost when the bank next raises money in the offshore market. Mr Narev and chief financial officer Rob Jesudason leave shortly for briefings with major overseas investors, and the bank is expected to start marketing a European debt deal in the next six weeks.
Meanwhile, there is increasing speculation that the Royal Bank of Scotland’s chief executive, Ross McEwan, could return to CBA shortly.
Mr McEwan was formerly head of CBA retail banking services, but was passed over as CEO in 2011.