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Anti-money laundering

Focusing on Australia’s money laundering problem

A scandal involving spotty compliance with anti-money laundering regulations might be the wake-up call Australia's financial institutions should have been expecting.

In August, Commonwealth Bank of Australia (CBA), the nation’s largest bank, came under fire for a massive breach of anti-money laundering regulations. The scandal and resulting fallout will have far-reaching implications, not just for CBA, but for the financial compliance and regulatory community at large. We spoke with Nathan Lynch, Asia-Pacific bureau chief for Thomson Reuters Regulatory Intelligence, who has been following events closely, to get his insights into this evolving story.

The roots of financial crime in Australia

To start with, what is the broader context around Australia’s money laundering problems?

Nathan Lynch: Australia has been dragging its feet for 10 years with its commitment to extend its anti-money laundering (AML) laws to cover so-called “designated non-financial businesses and professions” (DNFBPs). This would bring lawyers, accountants, real estate agents and jewelers within the AML/CTF regime. As I have discussed in recent articles and TV coverage, this is a major vulnerability for financial crime in Australia.

The big bombshell this month, however, was the announcement that AUSTRAC (the Australian AML regulator) had launched an unprecedented civil action against the country’s largest bank for extensive AML breaches. The regulator has alleged that Commonwealth Bank turned a blind eye to the laundering of drug cartel money and terrorist financing through its Intelligent Deposit Machine (IDM) network. The claim says that A$9.8 billion of cash moved through this channel without any basic controls in place.

CommBank’s IDMs allowed customers to deposit cash with no identity verification and no limits on cash deposits. Cartels were paying “smurfs” A$300 to A$400 a day to quite literally sit on milk crates at a Commonwealth IDM with a backpack full of drug money. They just fed notes into the machines until they were full.

Can you explain the alleged regulatory breaches at Commonwealth Bank, and what made them possible?

Lynch: The legal claim says CBA failed to submit 53,506 threshold transaction reports (TTRs) over a period of three years. These TTRs, involved A$624.7 million. In addition, the regulator has claimed that over a period of three years, CBA did not monitor transactions through a total of 778,370 accounts. AUSTRAC also alleges that the bank failed to report suspicious matters on time, or at all, for transactions worth A$77 million.

In essence, the breaches come back to the bank’s failure to manage the tensions between its commercial arms, its operations teams and financial crime compliance. When problems emerged they were glossed over and not reported to the board. At one stage a “software coding error” went undetected for three years. This meant that CBA failed to file more than 53,500 threshold reports.

The statement of claim details how brazen the launderers had become. When they discovered the vulnerabilities, criminal syndicates exploited them ruthlessly. To give you an idea, in the second half of 2012 a total of A$89 million in cash was deposited through CommBank IDMs. Two years later a total of A$3.35 billion in cash was deposited during the same time period.

Alarms went off inside branches. Staff reported their suspicions internally and even begged for help, but nothing was done.

Due to the lack of controls, CBA will never know how much of that A$8.9 billion represented the proceeds of crime.

How did these problems finally come to light?

Lynch: The problems really emerged during Australian Federal Police (AFP) surveillance operations. The AFP was monitoring overseas syndicates that sent armies of lowly-paid “smurfs” to launder hundreds of thousands of dollars each day through CBA’s smart ATMs.

In late 2015, AUSTRAC began a series of on-site inspections to look at the major banks’ smart ATM controls. CBA was found to be seriously deficient. The other three major Australian banks are understood to have passed AUSTRAC’s on-site reviews.

What happens next for AML in Australia?

You’ve said this scandal is a turning point for Australian financial crime compliance – how so?

Lynch: The crackdown on CBA signals a broader change in the way that Australian regulators will approach anti-money laundering non-compliance. The “gently, gently” supervisory phase has ended and now AUSTRAC will take resolute enforcement action in cases of repeated, negligent or flagrant non-compliance.

The scandal and its aftermath will also mean that boards take AML compliance a lot more seriously than they did in the past. This, in turn, is likely to lead to better budgets for financial crime compliance teams in Australia.

What will this mean for CBA and other Australian banks going forward?

Lynch: The other major banks will be further scrutinized to ensure they have not been laundering money for drug cartels and terrorists through their smart ATM networks. Sources said it was unlikely that the scandal would spread to other banks, but overseas regulators such as those in New Zealand, the U.S., Hong Kong and the UK may be interested in CommBank’s activities in those markets.

You’ve been called upon by numerous national and financial media outlets for an insight into the scandal and an analysis of what’s coming next in the regulatory environment. How have you (and Thomson Reuters) become such a trusted voice on the topic?

Lynch: To be honest, it’s a result of more than 10 years of writing about this field, presenting at industry events, speaking in the media, conducting training through industry associations and publishing regular articles on our industry-leading Regulatory Intelligence platform.

Thomson Reuters is the most respected brand in the world when it comes to Risk and Financial Crime Compliance, so this opens a lot of doors. We’ve also built incredible relationships with the local regulators, which is a result of the entire APAC team’s efforts – from events, to marketing to customer service. It’s easy making connections and inroads as part of the world’s most trusted information company. It’s incredible and something we should never take for granted. People have total faith that Thomson Reuters will treat them fairly and ethically – and protect them as sources – when reporting or analyzing these big developments.

Watch Nathan Lynch in this ABC segment on the “smart laundromat” scandal or read the transcript.

Learn more

Read Nathan’s insight piece on the CBA fallout: “Smart Laundromat: As Australian regulators circled, CommBank board was forced to take action.”

Listen to an ABC radio segment featuring Nathan on “The CBA, money laundering and who knew what.”

For more information on Thomson Reuters risk management solutions, visit our website.

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