Millions not billions: Analyst predicts CBA fine

  • By Elizabeth Fry

Investors have massively over-reacted to AUSTRAC's actions against the Commonwealth Bank, whose market value has fallen around $14 billion since proceedings were launched against it in August, acording to one broker.

"After assessing some key US and UK money laundering cases, we conclude that the most likely maximum penalty would be in the $1.2 billion to $1.3 billion range - way below the mooted $22 to $963 billion penalties, which would be ridiculously excessive relative to those imposed in the UK and US,” said Bell Potter banking analyst TS Lim.

“However, the unlikely involvement of the US Department of Justice would lift this by $1 billion to between $2.2 and 2.3 billion,” he noted.

In the absence of any published AUSTRAC methodology for calculating penalties, Lim reckons using a template from the UK’s Financial Conduct Authority (FCA) should provide a reasonable estimate of what CBA could expect to pay in fines.

The analyst also thinks the penalty would be more than covered by proceeds from the likely divestment or IPO of CBA's global asset management business Colonial First State Global Asset Management, which is valued at up to $4 billion.
 

Five steps

Using the FCA framework, there are five steps to calculating penalties including financial benefits, harm or potential harm caused by breach shown as a percentage (the more serious the breach, the higher the percentage) of the bank’s relevant revenue during the period of the breach, early cooperation efforts to aggravate or mitigate the problem and whether the net figure is a sufficient deterrent.

The exercise is made easier because five of the FCA’s recently imposed bank fines are related to financial crime, including the contravention of anti-money laundering laws.

Of these, the largest penalty was £163 million against Deutsche Bank in 2017 for failing to maintain an adequate anti-money laundering control framework and exposing the UK financial system to the risks of financial crime.

At the heart of the case were US$10 billion of transactions of unknown origin from Russia to offshore bank accounts including mirror and one-sided trades.

According to Lim, the £163 million penalty was after a 30 per cent discount (£229m gross) after a very cooperative Deutsche Bank agreed to settle early into the FCA’s investigation and after committing significant resources to a major remediation program.

The £163 million net penalty comprised a financial benefit element of £9 million (i.e. commission payments from the trades) and a fine of £154 million after considering the non-deliberate nature of the breach and willingness to engage with the authorities in “an open and co-operative manner".

Running through the steps, Lim concluded the benefits for CBA from the lender’s 53,506 threshold transactions, looked to be immaterial - less than $1.5 million with relevant revenue at an estimated $1.11 billion.

“Step three depends upon a range of aggravating and mitigating factors behind CBA’s contraventions," he said.

“Based on alleged failures to comply with the AML/CTF Act, provide timely threshold transaction reports, file suspicious matter reports and carry out ongoing due diligence, and the bank’s assertion the contraventions could be “considered to arise from a single course of conduct to the extent that they emanated from the same systems error” (while engaging AUSTRAC openly and in a co-operative manner), there would appear to be more aggravating than mitigating factors in the case."
 

Sufficient deterrent

As such, Lim is arbitrarily increasing the revenant revenue number by 10 per cent to $1.22 billion which in his view is sufficient deterrent for CBA.

“In the absence of any discount, we believe the potential civil penalty for CBA (should AUSTRAC choose the FCA’s line of reasoning) will be up to $1.22 billion.”

Across the Atlantic, BNP’s US$8.9 billion penalty and HSBC’s US$1.9 billion penalty are the largest bank fines for contravening US AML/CFT legislation in recent times

HSBC settled with the DOJ in 2012 on charges of allowing funds from Mexican and Colombian drug cartels to flow through accounts in the US and facilitating transactions over “some decades” with sanctioned countries: Burma, Cuba, Iran, Libya and Sudan.

In CBA’s case, Lim noted, AUSTRAC alleged the bank failed to monitor transactions through its intelligent deposit machines and to issue timely threshold transaction reports on 53,506 occasions.

“While we see some parallels between this and the DOJ’s case against HSBC, the extent of CBA’s contraventions and $625 million transaction value appear small relative to the above US examples," he said. "It is also highly unlikely CBA had been facilitating transactions with US-sanctioned countries through US-based financial institutions in our view.

"Should this be the case and if the DOJ’s reasoning was to apply to CBA, the maximum penalty could be up to $1 billion including asset seizures equivalent to the $625 million transaction value. We attribute a very low probability to this outcome in any case.”