Finance

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

Commonwealth Bank of Australia is so large and so profitable that it's often shrugged off matters that would damage a less formidable player.

There was that issue of the margin loans it offered that customers invested in its own managed funds via adviser Storm Financial, which collapsed during the 2008-2009 financial crisis. The bank settled that matter with Australia's securities regulator in 2012 for A$136 million ($108 million) and no admission of liability.

Or the sharp practice in its financial planning division, which resulted in an award-winning television expose in 2014. Or the reports last year of similar unconscionable behavior in its insurance arm

The Elephant in the Room
Commonwealth Bank has swept up the lion's share of consumer money over the past five years
Source: Bloomberg
Note: Compares December 2016 (CBA) and March 2017 (other banks) balance sheet totals minus totals five years earlier. NAB's low figures are partly explained by spin-off of Clydesdale.

Through all this, Commonwealth Bank just kept growing, extending its existing lead to take the largest share of new deposits and home loans in Australia over the past five years.

The latest claims by Australia's anti-money laundering agency Austrac take things to a whole other level. Austrac's court statement in its suit filed Thursday against the bank alleges a staggering lack of attention around the lender's so-called intelligent deposit machines, or IDMs -- ATMs that allow people to make anonymous cash deposits into Commonwealth accounts of up to A$20,000 each, multiple times a day.

Most countries require banks, casinos and other institutions vulnerable to money laundering to flag up cash transactions of more than US$10,000 or so to ensure they're not being used as a conduit for illegal funds. In Australia, that means informing Austrac within 10 business days of any deposit of notes greater than A$10,000.

Gold Rush
The volume of transactions through Commonwealth Bank's intelligent deposit machines has surged, according to the country's money-laundering regulator
Source: Austrac statement of claim

For more than three years, this didn't happen, according to Austrac's court filing. Some A$624.7 million in banknotes was deposited via Commonwealth Bank IDMs in 53,506 separate late-reported transactions between November 2012 and September 2015. All but two were flagged up only in a giant data-dump on Sept. 24, 2015, Austrac says.

That's just the tip of the iceberg. A full 1,640 of the transactions related to police investigations into money-laundering syndicates, according to Austrac. Six related to customers the bank itself had assessed as being risks around terrorism or terrorism financing. And that's not even getting into how smurfing -- deliberately breaking up large amounts of money into smaller so-called "structured deposits" that could fly under the A$10,000 limit -- was dealt with. According to the court claim:

Excerpt from Austrac statement

Initial filings like this are intended to present the best possible case for the plaintiff. Given the seriousness of the matter, the terse and circumspect nature of Commonwealth Bank's initial statements may just be prudent. The absence of any publicly stated justification for this behavior doesn't necessarily mean that no such justification exists.

The deposits were at least going into named accounts, even if the bank seemed to be turning a blind eye to what the account holders were doing with the cash, or indeed whether the names on the account were real or false:

Excerpt from statement of claim

Still, even people not trained in the arcane arts of compliance must understand that it's worth keeping an eye on people who make a habit of dealing in five-figure bundles of bank notes, and keeping the relevant authorities informed. On that front, Commonwealth Bank has fallen down on 53,506 separate occasions, according to Austrac.

Chief Executive Officer Ian Narev can't claim ignorance of what was going on. The IDMs were a central plank of his ambitions to use innovative technology to improve the productivity of the bank's branch network, and he was well aware of how much use they were getting. 

"We're seeing a very significant movement of the old over-the-counter transactions onto the intelligent deposit machines," he told investors in a Feb. 12, 2014 earnings call. Just six months ago on another earnings call he was promising to roll them out across the branch network by the end of this year.

Getting anti-money laundering right is one of the most basic things that banks need to do. Combined with Commonwealth Bank's series of ethical lapses in dealing with its customers, the apparent failure on this front speaks to glaring problems with the corporate culture of the bank as a whole. 

A board that claims to be committed to "the highest ethical standards" should not turn a blind eye to the litany of breaches that have happened on its watch. Six years after Narev was appointed to the top job, they need to consider whether it's time for him to go.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net