Commonwealth Bank Faces Prudential Inquiry

MELBOURNE, Australia--Commonwealth Bank of Australia Ltd. (CBA.AU) faces a broad ethics health-check by the industry regulator, as the fallout over alleged money-laundering compliance breaches compounded.

In an unusual step, the Australian Prudential Regulation Authority on Monday said it would establish an independent inquiry into the nation's biggest bank, focusing on governance, culture and accountability. The move follows a civil suit brought against the bank by the country's financial-intelligence agency and a review by the securities regulator into compliance by the board and senior executives.

Following a string of scandals, Commonwealth Bank has been a focal point for calls by opposition politicians for a judicial review of the banking industry, a move Prime Minister Malcolm Turnbull's government has deflected with annual parliamentary quizzing of bank executives and plans for a new consumer complaints authority and an accountability regime for executives.

Commonwealth Bank was among several financial institutions in the country to have faced claims of offering poor financial advise in recent years, and has also been accused of failing to honor insurance claims. Earlier this month, the Australian Transaction Reports and Analysis Centre filed a federal court suit alleging the bank contravened the Anti-Money Laundering and Counter-Terrorism Financing Act more than 53,700 times--each carrying a maximum penalty of 18 million Australian dollars (US$14.3 million).

The goal of APRA's inquiry is to identify possible organizational and cultural shortcomings that may have led to a string of scandals that have shaken public confidence, Wayne Byres, chairman of the regulator, said.

"The Australian community's trust in the banking system has been damaged in recent years, and CBA in particular has been negatively impacted by a number of issues that have affected the reputation of the bank," he said. "Given its position in the Australian financial system, it is critical that community trust is strengthened."

The inquiry has Commonwealth Bank's full support, Chief Executive Ian Narev said. "Over the last few years there have a number of highly publicized issues that have hurt public perception. We've been in the news for all the wrong reasons," he said.

The inquiry panel will take about six months to produce a report which will be made public, APRA said. Members of the panel have yet to be finalized, but the cost of the review will fall on the bank.

The inquiry wouldn't specifically address matters that overlap with legal proceedings or reviews by other regulators.

"Australia's banks are well capitalized, well regulated and financially sound. However, there have been too many cases and events that have damaged their reputation and standing in the eyes of many Australians, that warrants our regulators taking action now," Treasurer Scott Morrison said.

Mr. Morrison recently met with Commonwealth Bank Chairman Catherine Livingstone in the wake of accusations made by the Australian Transaction Reports and Analysis Centre, or Austrac, and made it clear the government would be considering all options to address the matter.

Days after Austrac's case was filed, Mr. Narev said he would step down by mid-2018. The CEO and senior bank executives lost out on short-term bonuses for the last year through June in the wake of the allegations.

Austrac's allegations center on the use of the bank's "intelligent deposit machines," which allow anonymous deposits of up to A$20,000 in cash at a time to be automatically credited to accounts. Austrac's allegations largely relate to a failure to provide timely reports on transactions above a A$10,000 threshold for over three years from 2012, as well as accusations it failed to report suspicious transactions on time or at all, and of not monitoring customers even after it became aware of suspected money laundering.

The bank has yet to file a response in court but has said a coding error introduced with a software upgrade accounted for the vast majority of reporting failures alleged by the agency.

With the lawsuit, the Australian Securities and Investments Commission has begun its own inquiries to determine whether the bank's directors and executives complied with their duties and if the bank had met licensing and disclosure obligations.

Write to Robb M. Stewart at

(END) Dow Jones Newswires

August 28, 2017 00:12 ET (04:12 GMT)