Money laundering probe exposes Australian banks’ compliance frailties

HONG KONG/SYDNEY, (Reuters) - A money laundering probe at Commonwealth Bank of Australia is the latest in a slew of scandals denting the reputation of Australian banks as simple, reliable lenders at the forefront in the battle against financial crime.

Australian banks have lagged their global peers in both their spending and their approach on anti-money laundering and know-your-customer systems as they pursued rapid growth in customer deposits, some banking officials and experts say.

“In the last few years, regulators and banks have been focused on changing the whole bank culture to get all levels of staff taking compliance seriously,” said Philippa Allen, CEO of ComplianceAsia, which advices on compliance issues.

“That is not as widespread yet in Australia,” she said. “Australian banks have not had the big fines imposed on them like their global peers have.”

Know-your-customer (KYC) and anti-money laundering (AML) processes became a key focus globally after HSBC Group and Standard Chartered were hit with hefty fines in 2012.

Major international banks are now spending between $900 million and $1.3 billion a year on financial crime compliance, according to analysis by corporate governance recruitment firm Barclay Simpson.

HSBC spent $1.6 billion on regulatory and compliance programmes in the first half of 2017, up 12 percent from a year ago.

In comparison, CBA’s spending on risk and compliance fell 7 percent to A$470 million ($371 million) in the year to June, according to the bank’s annual report.

CBA said the drop was a result of the “timing and completion of key phases of risk and compliance projects” in the prior year including rollout of refreshed teller machines.

The bank said it has hired more than 50 compliance professionals since 2015 and is strengthening its customer background check processes while upgrading technology used to monitor accounts and transactions for suspicious activity.

Rival National Australia Bank’s spend on compliance and operational risk was nearly unchanged at A$167 million in its first half-year.

The Australian Bankers’ Association estimates the country’s four major banks - CBA, NAB, Australia and New Zealand Banking Group and Westpac Banking Corp and three main regional lenders - have together spent A$1.73 billion in recent years on implementing regulatory changes including foreign account tax compliance act and anti-money laundering rules.

“There is an issue and the issue is the KYC/AML standards in Australia has lagged the global benchmarks for several years,” said a senior banker at one of Australia’s Big Four lenders.

A Thomson Reuters survey last year found that 62 percent of Australian financial firms had not made changes to meet the 2012 recommendations by the Financial Action Task Force (FATF), a global group of government anti-moneylaundering agencies. (http://tmsnrt.rs/2v7TcZ9)