SYDNEY (Reuters) - Commonwealth Bank of Australia (CBA.AX) confirmed on Friday that its internal reporting had flagged shortcomings in its monitoring of offshore transactions as early as February, well before it was accused of facilitating illicit transfers.
The revelation shows Australia’s biggest bank knew it had major deficiencies in its anti-money laundering and terror financing protocols before regulators first informed it in July of suspected criminal activity on thousands of accounts.
In an unprecedented scandal that has shaken Australia’s banking sector, CBA is facing potentially billion of dollars in fines after it was sued by financial crime fighting agency AUSTRAC last month for alleged money-laundering breaches.
Investors are now worried that the A$130 billion ($103.17 billion) lender, which posted its eighth straight record cash profit on Aug. 9, could come under the scrutiny of foreign regulators for possible breaches across its global platforms.
“There are some legitimate concerns if overseas regulators get involved, other jurisdictions get involved,” said Rohan Walsh, a portfolio manager at Karara Capital which owns CBA shares.
“The penalties could be quite significant on a worst-case type of outcome.”
The revelations have also renewed criticism of the government for resisting calls for a powerful judicial inquiry into Australia’s banking system, following a series of scandals including insurance fraud and interest rate rigging.
“There’s only so long they can go without it,” said Omkar Joshi of Regal Funds Management, which owns CBA shares.
CBA shares closed 0.42 percent lower on Friday to A$75.48, while the broader market was up 0.17 percent. The stock is down 10 percent since AUSTRAC filed its suit on Aug. 3, wiping roughly A$14 billion off the company’s market capitalization.
The AUSTRAC case has triggered a landslide of bad news for CBA, with two other Australian regulators subsequently launching investigations and a major law firm threatening to file a class action on behalf of shareholders.
A key concern for regulators and shareholders alike is how much CBA executives knew of the suspicious transactions - more than 50,000 of them according to the AUSTRAC civil case - and whether they met their disclosure obligations.
CBA says it will defend itself in the AUSTRAC lawsuit and has blamed a software error for most of the alleged breaches.
It has also canceled bonuses for top executives and launched a global search for a replacement for embattled CEO Ian Narev, who announced he would step down in the wake of the scandal.
The confidential internal review presented to executives in February showed there was no or minimal transaction monitoring across a swathe of CBA’s businesses, Sky News Business reported earlier.
The lack of adequate oversight affected CBA’s dealings in debt capital markets, leasing, institutional lending in Australia and some of its international locations such as Singapore, Hong Kong, Shanghai, Tokyo, London and New York, it said.
CBA said in a statement the media report referred to a “working document, proposing technology enhancements as part of our ongoing program of action”. It gave no further comment, but has previously said it is boosting its monitoring systems.
Foreign governments are already watching developments at CBA, as some of the illicit funds cited in the AUSTRAC case were allegedly transferred to accounts in places like Hong Kong.
“It certainly seems to me that this situation could now be morphing offshore,” CLSA banking analyst Brian Johnson told Reuters.
(For a graphic on allegations against CBA, click here)
Reporting by Paulina Duran in Sydney and Anusha Ravindranath in Bengaluru; Editing by Byron Kaye and Stephen Coates