$700m fine mid-table by global standards, but well below record $12bn settlement
The agreed statement between AUSTRAC and CBA doesn't point the finger of blame
Australia lags the world in extending laws to lawyers, real estate agents, accountants and small business
It is vastly bigger than anything meted out in Australia, absolutely obliterating the previous $45 million record of gaming giant Tabcorp for breaching the same laws.
So from Tabcorp's perspective it is a relief to lose that dubious distinction.
Did we learn what went wrong? Not really. Who was to blame? Nope.
But there are some things we did learn. AUSTRAC moves up global tables
It moves AUSTRAC up the global league tables in terms of financial outcomes.
It is more than double the biggest penalty — $290 million — extracted by the UK regulator, the Financial Conduct Authority, from Deutsche Bank last year over $13 billion worth of very dubious transfers to Russia.
The US fined Deutsche Bank $425 million for the same offences.
However it is well behind the clubhouse (or should be doghouse?) leader, France's BNP Paribas hit with an almost $12 billion settlement in 2014 for violating US sanctions against Iran, Cuba and Sudan.
So it shows the financial intelligence agency now has some clout, confidence and importantly, cash. EMBED: Notable AMLCTF penalties
CBA happy to settle
From CBA's point of view, it is about double the $375 million it set aside to dispose of the matter. But given it was a settlement, clearly the bank can live with it.
"For CBA, the penalty is meaningful but manageable," Nathan Lynch, Thomson Reuters' Asia-Pacific head of regulatory intelligence, said.
"At $700 million it's equivalent to 25 days' profit for the bank, which raked in $9.9 billion in profit last financial year," Mr Lynch said.
"It's important to remember, however, that AUSTRAC's goal was never to destabilise the bank, punish shareholders, or extract the maximum figure possible for the sake of Commonwealth 'budget repair'". Shareholders relieved
The market had factored in a fine of up to $1 billion. CBA's two-day rebound of almost 2.5 per cent reflects a sigh of relief from shareholders, and an expletive from short-sellers hoping for something far harsher. CBA vs AUSTRAC
The CBA still has plenty of other costs to factor in.
There's a $200 million provision set aside for costs and compliance from the banking and financial services royal commission.
CBA's lawyers missed the AUSTRAC matter by a factor of 100 per cent, so the Royal Commission provision could be on the optimistic side.
CBA also has $100 million set aside to fix up its completely deficient Anti-Money Laundering/Counter Terrorism Funding (AML/CTF) systems.
UBS bank analyst Jonathan Mott thinks the bank is dreaming if it thinks that one-off cost will fix things.
"International experiences indicate that this may be very optimistic, with regulatory and compliance spend tending to settle at many multiples of original estimates," Mr Mott said. $700m 'horse trading'
Mr Lynch said a close reading of the agreed statement of facts showed some significant "horse-trading" went on between AUSTRAC and the CBA.
"There was horse-trading in the statement about admissions of liability to protect the bank and its management from class actions," he said.
"It certainly pulls its punches over who was responsible and what happened; was it negligence, hubris or management disregarding its responsibilities," Mr Lynch said.
He said it was understandable that neither party wanted to go through a trial, but many in the industry were disappointed about the level of detail in the statement.
Mr Lynch said a defining element in regulatory settlements these days often reflected a business' concerns about exposures to class actions.
"We don't have any legal cases that have gone the distance, so there's no case law around.
"This legislation is crying out for clarification around the operation of the law."
If the CBA is using $700 million of shareholders' funds to cover up exactly who is to blame, it won't head off all the potential class actions. How CBA's ATMs caused a mistake
Those launched so far centre on continuous disclosure rules for ASX-listed companies and allege CBA executives and directors knew they were facing serious breaches of the law in 2015.
While the agreed statement doesn't seem to provide information about "who knew what, when", the size of the settlement will give the lawyers confidence to argue the breaches had a material impact on shareholders. Was it enough?
A benchmark is hard to find but, interestingly, the average amount paid by European banks in the US is about $660 million per fine —more than 10 times the average that US firms pay to US regulators, according to tech research firm Corlytics.
AML Solutions International chief executive Todd Harland says CBA's penalty was probably not harsh enough, but that is not surprising.
"Every enforcement around the world has been too light," Mr Harland said, adding the BNP Paribas settlement was perhaps the exception to that rule.
"Look at HSBC, it facilitated hundreds of millions [in money laundering] for drug cartels, terrorists and nations like Iran over many years. It got off lightly [$1.9 billion penalty in 2012]."
However, Mr Harland said the reality is the fine will do what it needed to do.
"It took AUSTRAC out of the shadows, the impact is beyond the banking sector and will make other businesses take notice." What now?
The whole idea of financial institutions being fined for non-compliance is not new. CBA could face lost decade
Since the GFC banks have been fined more than $420 billion for AML/CTF breaches.
The global regulatory technology business Kyckr says that will be closer to $525 billion in the next two years.
Kyckr managing director David Cassidy says judging by global experience, the number of cases AUSTRAC will uncover will accelerate now it has a proven track record, experience in handling big cases and perhaps even more significantly, more money.
"What we've seen once one [case] comes out, more follow," Mr Cassidy said.
Mr Cassidy insists the biggest impact wasn't on the CBA, but Australian banking in general which should be happy with the outcome.
"Counterparty banks overseas will be pleased because it shows them AUSTRAC is a serious regulator and [Australian] banks look like fixing their problems."
However, this not the end of the matter, rather the start from Mr Cassidy's perspective.
"Whatever the regulations are now, they'll increase exponentially as Australia is a net importer of regulations from Europe." Australia is falling behind
As a signatory to global conventions, Australia is obliged to keep up with AML/CTF rules.
Like the US, Australia hasn't.
The so-called Second Tranche of regulation, extending the rules to accountants, lawyers, real estate agents and small business is bogged down in a political quagmire.
It might be bi-partisan policy, but you'd never guess given the lack of progress to "capital L-A-W" law.
That may well be because the current AML/CTF net captures around 14,000 business.
The Second Tranche would rope in more than 100,000 small-to-medium businesses into some seriously expensive compliance rules.
Mr Harland said he has done work for companies on the new rules in developing economies, while the likes of Australia and the US do very little.
"On a global scale we're well behind," Mr Harland said.
"It's been around for 10 years, the legislation is there ready to go, but nothing is happening."
With a $700 million trophy in its cupboard, AUSTRAC may have now have the political clout to push for the laws to be extended outside banking, gambling and financial institutions.
On the other hand, the sheer number of votes that can be marshalled by small business means you wouldn't bet on change any time soon. Topics:banking, law-crime-and-justice, australia
First posted 6 Jun 2018, 4:38am
KYK Price at posting:
15.0¢ Sentiment: Hold Disclosure: Held
PHOTO: CBA's "not so beautiful laundrette" has cost it $700m, but it could have been worse. (ABC News: Michael Barnett)
