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Australian banks may get raked over coals after allegations CBA turned blind eye to money-laundering

The fallout from Australia’s latest banking scandal — allegations that Commonwealth Bank may have ignored money-laundering regulations — could spur serious pain for the sector.

Commonwealth Bank of Australia (CBA), the largest bank Down Under, saw its shares tumble on Friday, shedding nearly 4 percent by the close.

That followed the Australian government’s financial intelligence and regulatory agency on Thursday saying it was seeking civil penalties against CBA for “serious and systemic non-compliance” with anti-money laundering laws.

In a statement, CBA said it was reviewing the claim and would file a statement of defense.

Australia’s banks were already under a cloud.

Late last year, the chiefs of Australia’s big four banks made mea culpas to a Parliamentary inquiry over issues including insurance scandals, interest-rate rigging and outsized bonuses.

The opposition Labor party had pushed for a Royal Commission, or a public investigation authorized by an act of Parliament, into the sector, but banks have so far avoided that level of inquiry.

That may change, an analyst said.

“It’s going to be harder and harder to resist the calls for a Royal Commission in Australia and Commonwealth Bank will have been a big contributor to that overall cynicism towards the banks,” Brian Johnson, an Australia banking analyst at CLSA, told CNBC’s “Street Signs” on Friday.

Royal Commissions have previously dug deep.

In June, an Australian Royal Commission into institutional responses to sexual abuse of children found more than 4,000 allegations against Catholic authorities were made over 35 years. The inquiry resulted in charges against a top Vatican cardinal, George Pell, over historical sexual assault allegations.

Pell, the highest-ranked Vatican official to ever be charged in connection with sexual abuse, has denied the accusations.

The government has already used public disdain for the banking sector to its advantage.

In May, the government decided to use the banks’ large profits to help balance the budget, imposing a levy of 6 basis points on banks with liabilities in excess of 100 billion Australian dollars ($79.63 billion) in an attempt to raise more than A$6 billion over the next four years.

CLSA’s Johnson said he was negative on the sector as a whole and on CBA’s stock.

“When banks have delivered great returns for a long period of time, they start to do strategically challenging things, which destroys their returns in the longer term,” he said.

“CommBank trades at a significant premium to the other banks because it’s so profitable. And the way you make excess profit is obviously to do things slightly differently to the other banks. Perhaps this is part of that kind of ethos in the organization.”

The regulators’ allegations against CBA cited more than 53,000 questionable transactions.

The Australian Transaction Reports and Analysis Centre, or AUSTRAC, said CBA breached money-laundering laws by allowing its Intelligent Deposit Machines, or IDMs, to accept thousands of large cash deposits without monitoring user identities, even when deposits exceeded 10,000 Australian dollars ($8,000), which is the threshold for reporting the transaction to regulators.

The filing with the Federal Court of Australia said CBA didn’t make any effort to address IDMs’ money-laundering risks until mid-2015, three years after they were introduced, and even then the bank didn’t always comply with requirements.

The bank also didn’t monitor its customers to mitigate money-laundering risks even after it was brought to its attention by law enforcement or internal analysis, the filing said, citing several examples of syndicates, including a so-called cuckoo smurfing syndicate.

A cuckoo smurfing syndicate is a form of money-laundering which uses an innocent party seeking to transfer overseas funds into Australia, usually via an alternative remitter.

In the next part of the process, the alternative remitter, which is part of a money-laundering syndicate, provides details of the transaction and the account-holder to an Australia-based accomplice.

The accomplice would then deposit money to be laundered into the bank account of the customer waiting for the overseas transfer, before traveling overseas to the remitter to collect the funds.

Like the cuckoo, which lays its eggs in other birds’ nests, this process puts alternative funds with an innocent customer.

—CNBC’s Yolande Chee contributed to this article.

Source: cnbc china
Australian banks may get raked over coals after allegations CBA turned blind eye to money-laundering

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