NAB knew regulatory ‘risks were high for months’

The Australian 12:00am March 27, 2018

Ben Butler

National Australia Bank gave ­itself a “red”, or high, rating for regulatory and compliance risk for “many months” in 2015, according to bank board minutes released last night by the royal commission into financial services.

Minutes of the principal board risk committee meeting also reveal issues, including $780 million on loan to debt-laden Anglo-Swiss miner and commodities trader Glencore, findings of “non-compliance” against the bank by anti-money laundering and counter-terrorism finance watchdog Austrac and inadequate disaster recovery plans for its data centres.

The minutes of the meeting held at NAB’s Docklands headquarters in Melbourne at 8.10am on November 4, 2015, are among a cache of documents relating to a home loan bribery scandal among bank managers in western Sydney that was dealt with at the commission’s public hearings over the past fortnight.

NAB initially failed to hand the minutes over to the royal commission and produced them on March 14 after an executive realised the board had been told about the western Sydney scandal a month earlier than previously thought.

Chief risk officer David Gall told The Australian “any material items” in the minutes “have been disclosed in statutory reporting”.

The minutes show that during the meeting, NAB chairman Ken Henry told management that in a private session the risk committee had discussed “the risk appetite dashboard ratings for regulatory and compliance risk, which had been red for many months”.

“The chairman requested that a paper be presented in December covering expectations on risk management performance for FY16,” the minutes record.

“It was noted this topic has implications for incentives. As such, the paper should be presented to a joint meeting of the remuneration and risk committees.”

Group chief risk officer David Gall told the meeting analysts liked NAB’s moves to “de-risk the credit portfolio” and explained its lending to Glencore, the only customer named in the minutes.

The month before the meeting, Glencore CEO Ivan Glasenberg suddenly announced a debt retirement and capital raising program, saying the company needed to prepare for a “doomsday scenario”; that is, a crash in commodity prices.

NAB’s risk committee was “advised that the drawn exposure to Glencore was $780m and were provided with details on the structure of the exposure and how it compared to peers,” the minutes say.

Group operational risk and compliance general manager Niki Short also told the committee about the bank’s response to “findings of non-compliance identified by Austrac in its on-site compliance assessment conducted in April 2015”.

“Ms Short responded to questions from the committee on the extent to which Austrac follow up on the transaction data provided by NAB and the sharing of information between Austrac and other regulators.”

In November, after Austrac launched legal action against CBA alleging more than 53,000 breaches of AML-CTF laws, NAB used its annual report to admit to problems with Austrac.

The bank was investigating “certain weaknesses with the implementation of ‘Know Your Customer’ requirements and systems and process issues that impacted transaction monitoring and reporting for some specific areas”, it told investors.

The risk committee was also told the bank had proven disaster recovery capability “for only 48 per cent of assets”.

Head of business continuity and incident management Matthew Henderson told the meeting this was due to “test plans not being updated” to reflect moves from an East Melbourne data centre to one in Deer Park.

The committee decided no issue reported to the meeting required disclosure to the market.

Its meeting came amid intensifying pressure on the banks from regulators, who were themselves facing questions following a series of scandals in the sector.

“Management is spending an increasing amount of time on regulatory matters, including ­investigations relating to past conduct,” the minutes say.

“The expectations of regulators have also increased, with APRA indicating that system changes to meet its requirements be given the same priority as system changes to address product or customer requirements.”

Details of NAB’s home loan bribery scandal, which was raised at the meeting, are revealed in other documents released by the royal commission last night.

The rort involved introducers, who get a commission from the bank by referring mortgage customers, and a network of crooked bank managers who were taking bribes in return for approving shonky home loans.

An NAB task force set up to tackle the fraud found the bank’s “star sales” bonus scheme was “driving inappropriate behaviours”, a confidential bank report released by the commission last night shows.