Australian banks show indifference towards AML/CTF rules

• AUSTRAC recently commenced action in the Federal Court of Australia against the Commonwealth Bank of Australia for alleged breaches of the country’s AML/CTF law
• CBA appears to have failed to understand their obligations under the Australian AML/CTF law and the criminal risks associated with the environment it operates in
• To avoid the issues that CBA is currently facing, banks need to change their culture, starting at the top, which must permeate down to all levels.

In Australia, law enforcement agencies have been frustrated by the indifferent attitude shown by many banks towards the detection and prevention of money laundering and have been equally annoyed at the lack of action by Australian Transaction Reports and Analysis Centre (AUSTRAC), Australia’s anti-money laundering (AML) regulator, to initiate action against a bank where compliance has been lacking.

Those frustrations were partly alleviated in August this year, when AUSTRAC commenced action in the Federal Court of Australia against the Commonwealth Bank of Australia (CBA), for alleged breaches of Australia’s Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) legislation. The claims are serious and numerous including: failure by CBA to comply with its own AML/CTF program; failure to carry out an ML/TF risk assessment prior to introducing intelligent deposit machines and during their operation, particularly when there was a significant increase in cash deposits through them (over $788.45 million or AUD$1 billion a month); failure to file 53,506 threshold transaction reports on time; failure to file suspicious matter reports (SMRs), even where it had identified suspicious activity, and failure to carry out ongoing customer due diligence including where accounts had been used in “cuckoo smurfing”. To add to CBA’s woes, Australian Securities & Investments Commission (ASIC), an Australian corporate regulator, is now undertaking an investigation into CBA’s lack of action in advising the market about its money laundering and financing of terrorism (ML/TF) issues with AUSTRAC.

CBA has yet to respond, and it would be wrong to jump to conclusions, as the bank has yet to present its case. Though, as the issues span several years, it would be fair to identify that a failure of governance at all levels was perhaps the primary cause as identified by Catherine Livingstone, chairman of the CBA board, who has become more directly involved with managing the fallout from the issue.

Banks and all reporting entities in Australia have treated their approach to AML/CTF as being solely a compliance issue. With AML/CTF compliance being achieved by meeting the minimum standards as prescribed by law. And if the law has been satisfied, then there is no reason to do anything more beyond that. No serious attempt is being made by many banks to understand how criminals launder money and whether their systems are effective in preventing the bank from being used to launder money. To implement an effective risk based approach to ML/CT compliance, understanding both the law and how organised crime launders money is essential. One cannot operate without the other. CBA appears to have failed to understand their obligations under the Australian AML/CTF law and the criminal risks associated with the environment it operates in.

Action by AUSTRAC and potentially by ASIC might not be the end of regulatory intervention. Australia has very tough and wide-ranging criminal money laundering laws. A person and a company can be convicted of money laundering if they deal with the proceeds of crime or an instrument of crime and in doing so are reckless or negligent. From the available information, it appears that CBA and some staff have been at least negligent. And while action by AUSTRAC might negate CBA being charged with criminal money laundering, its failure to submit suspicious matter reports (SMRs) has exposed its staff to being punished for dealing in the proceeds of crime.

Preventing a repeat of the issues CBA has been caught up in is not difficult. It will require a change in culture and that starts at the top which must permeate down to all levels. Though, if CBA adopts a compliance based approach and merely plugs the gaps identified by AUSTRAC, then more breaches by CBA are possible. The solution lies in board members, all managers and relevant AML/CTF staff undergoing intensive training in AML/CTF compliance, new & emerging payment technologies and money laundering techniques pursued by national & transnational organised crime groups. The latter is essential, if the board and bank staff are to have an understanding of the risks it faces from crime and to prevent a repeat of the issues it is now facing.

Chris Douglas is owner, financial crime consultant and trainer at Malkara Consulting. The views expressed herein are strictly of the author.