One thing that cannot be said for the Australian financial service industry, is that it is pedestrian and mundane. In another explosive week we have seen CBA confirm a monetary settlement with AUSTRAC for their anti-money laundering breaches, and ANZ (and others) steal the spotlight for rare, but significant, criminal cartel charges. 

CBA’s $700 Million Fine:

Following contraventions of the AML/CTF Act by a staggering 53,750 times between 2015-2017, a monetary settlement has finally been reached between CBA and AUSTRAC. By way of background, these breaches were facilitated by the banks failure to implement sufficient and appropriate risk-based controls to mitigate and manage any money laundering and terrorism financing activities posed by customers by allowing them to deposit vast amounts of cash without the necessary monitoring controls.  

One such criminal was Yuen Hong Fung who successfully deposited $670,420 into various accounts he opened using fake identities (in just one day) using CBA’s ”Intelligent Deposit Machines”. The money that Fung deposited came from the sale of methamphetamine which was being transferred to an account in Hong Kong – immediate international transfers being a key benefit of the IDMs.

In a move seen by shareholders as sensible (see the Sydney Morning Herald), Chief Executive of CBA Matt Comyn, negotiated a settlement figure with AUSTRAC in an attempt to draw a line in the sand, rather than fight a costly litigation battle. Although the fine needs to be approved by the Federal Court, coming in at $702 million, it will be the largest fine the industry has seen, dwarfing the previous chart-topper of $45 million issued against TabCorp for various AML/CTF breaches.

However, to put these fines into perspective, when you crunch the numbers CBA’s fine amounts to just 7% of its net cash profit for 2017, whilst TabCorp suffered a fine which equated to 25% of its net annual profits for the year, for arguably less-serious misconduct. 

Matt Comyn voiced his content at settling the outstanding claims by AUSTRAC and said ”while not deliberate, we fully appreciate the seriousness of the mistakes we made…[this settlement is] a clear acknowledgment of our failings…[and] I apologise to the community for letting them down”. AUSTRAC is equally as content with the outcome as they claim it sends a strong message to the industry that serious non-compliance with AML/CTF obligations will not be tolerated. 

Cartel Conduct Investigated by the ACCC and ASIC: 

In recent months, we have seen a steady stream of evidence of misconduct, poor compliance culture and ineffective risk management coming out of the Banking Royal Commission. However, this week saw another stain on the industry with criminal allegations made by the ACCC against ANZ, Citigroup and Deutsche Bank for alleged criminal cartel behaviour. 

The charges stem back to August 2014 when David Murray (who is expected to join the AMP Board as Chairman later this year), headed an inquiry into Australia’s financial system. The final report produced by Murray suggested that in order for Australian banks to hold their own in the global market, they needed to become ”unquestionably strong”. This suggestion had two aims: one was to support competition in the banking industry by reducing the big four’s advantage, the other was to reduce the leverage on the housing market by changing the risk weighting on mortgages. The latter would mean the banks would need to increase their capital levels by around $20 billion. APRA responded to the final report, and agreed to give the banks plenty of time to achieve this increase in capital requirements. However, the industry was littered with an unwritten desire not to be last man to cross the finish line. 

Between August 2014 and July 2015, NAB and Westpac successfully increased their capital whilst ANZ stood firm that this was not necessarily in their shareholders best interests. However, in July 2015, APRA released a statement that the banking industry would need $28 billion collectively to be among the top quartile of capitalised global banks, swiftly followed by a lift in mortgage risk weighting from 16 to 25 percent.

This was the push ANZ needed and its finance boss, Shayne Elliott, confirmed a $3 billion capital raise via an institutional placement and share purchase plan would be actioned (offered at 5% discount), underwritten by Citigroup, Deutsche Bank and JPMorgan. 

In August 2015, ANZ informed the market it had successfully disposed of all 80.8 million shares. But the method in which they disposed of those shares was not disclosed. The reality was that 25.5 million shares worth $789.2 million were an overhang from the placement which were subsequently taken up by the underwriters. 

There are no detailed charges yet, but the case appears to hinge on how the underwriters disposed of the 25.5 million shares. The ACCC is understood to be relying on the criminal cartel provisions which relate to ”controlling the output or limiting the amount of goods and services” available to consumers. The charges have been laid against ANZ, Citigroup and Deutsche Bank with JPMorgan being granted immunity for apparent whistleblowing. 

On Monday, the Australian Financial Review suggested that a video conference between ANZ and the underwriters appears to show the parties negotiating how the shares will be sold off in order to minimise any downside risk to ANZ’s share price. Notably, after the placement, ANZ Bank shares dropped 7.5 percent which was the biggest fall in almost seven years. 

In addition to the alleged Competition and Consumer Act breaches, ASX Listing Rule 3 requires all publicly listed companies to immediately disclose to ASX, any information concerning it that a reasonable person would expect to have a material effect on the price or value of their securities. Unfortunately for ANZ, it is not just the ACCC which is taking a close look at their conduct, ASIC are also concerned it has not met its obligations under the Listing Rules and is investigating a potential breach of the applicable disclosure laws. 

The financial services industry is struggling to appear connected with the regulators’ concerns over poor corporate culture and compliance. On recent evidence, the behaviour of some individuals within the industry seems to be widening the gap between expectation and reality.