Where do you start?
A total clean-out of the board and management of the Commonwealth Bank, a complete rethink of the role of our financial institutions, or a subjective investigation on the impact of new technology and whether it can replace human involvement?
There is no way to understate the extent of the latest allegations against the Commonwealth Bank of Australia; ignoring money laundering for drug syndicates, turning a blind eye to terrorism financing and abjectly ignoring statutory reporting responsibilities for more than three years on three quarters of a million accounts.
This is a deeply disturbing failure on an epic scale, one with the capacity to undermine national security.
So serious is it, that a scribe on one national newspaper last Friday suggested the unthinkable: that the bank should consider withholding bonuses to executives, action that would “send a strong message” to the community, authorities and those within the bank.
Let’s not be under any illusions about how and why this latest scandal has erupted. The CBA, like its competitors, has been on a mission for years to shave costs, shed staff and boost profits to feed the money-making machines that Australian banks have become.
Unlike other scandals that have swept Australian banking — on customer gouging, rorting and rigging markets — the CBA appears to be alone in this.
Certainly, on Friday, its rivals were keen to distance themselves from the scandal, but it’s possible they have avoided trouble, not so much because of rigorous oversight, but through a neat little trick. More on that later.
Consider for the moment the impact this will have on the Federal Government. Prime Minister Malcolm Turnbull has spent a huge amount of political capital, at the big banks’ insistence, to thwart calls for a royal commission.
From the Government’s viewpoint, that has not simply been a wasted effort — it is a strategy that will come back to bite it.
As for the banks, which count among the country’s biggest political donors, at least now we have an inkling about the extent of the malpractice they have desperately been trying to hide.
Fighting crime does not pay
For decades, governments and law enforcement agencies have relied upon banks to police the front line on corrupt payments. Any transaction over $10,000 must be reported to the federal agency Austrac within 10 days.
It worked well. Not only were the banks diligent in their duties for most of that time, they also perfected means to track down those deliberately trying to fly beneath the radar, those who repeatedly transferred cash amounts just below the reporting limit.
The laws were beefed up in 2006 and 2007, as criminal syndicates became ever more inventive when it came to money laundering, just as banks were introducing technology to provide more sophisticated and faster services to customers.
Regulatory concerns were heightened by the rising power of terrorist groups, many of which became adept at transferring huge amounts of wealth through the global banking network to finance their operations.
But there is no profit in regulatory oversight. It is a cost, and costs, particularly around staffing, have been a constant source of attack for banks keen to maximise shareholder returns since the financial crisis.
Each year for the past decade at their annual results, our banking overlords have boasted at how they have reduced staff costs per unit of revenue. It is unlikely CBA chief Ian Narev will do so this week when he unveils another whopping profit.
The bank, the feds and a drug syndicate
The Commonwealth’s allegations about the extent of the breakdown of CBA’s legal obligations are breathtaking.
Reading between the lines in the statement of claim, it would appear Australian Federal Police (AFP) investigating at least four money-laundering syndicates discovered Austrac had no transaction records on those they had under surveillance.
In August 2015, CBA provided authorities with details on two of those missing transactions. Clearly, that caused panic within the bank. For just a month later, it sent Austrac details of a further 53,504 transactions dating back three years where $10,000 or more had taken place.
At least 1,604 of those late filings related to criminal gangs. Even more alarming, a further six filings related to five customers the bank itself had identified as posing a terrorism risk. But, incredibly, it didn’t report them.
That is not the end of it. According to the statement of claim, the bank continued to facilitate transactions for drug syndicates even after being alerted by the AFP.
Even as late as January this year, 18 months after the breaches were first discovered, it is accused of failing to report suspicious transfers totalling $320,000 over five days.
Intelligent machines, not so smart management
The calamity is being sheeted home to the installation of whiz-bang new machines, intelligent deposit machines.
These accept cash or shares, count the money and then deposit it into a CBA account. From there, it can be sent almost instantly to anywhere in the world. And the neat thing, from a criminal or terrorist viewpoint, is that you do not have to be a CBA customer to do it.
Not only that, they would take up to $20,000 at a time. The machines may be intelligent but, sadly, no-one at the bank seemed to give a second thought to the reporting duties, either around the $10,000 limit or to look out for “structured” transactions — those attempting to fly just under the radar with slightly smaller amounts.
When they were first introduced in 2012, they proved popular. Almost $90 million went through in the first six months. That has since risen to around $1 billion a month.
CBA out on a limb
As the debacle unfolded last week, the other banks — all of which have introduced similar machines — were keen to distance themselves from the drama, even if ANZ boss Shayne Elliott lamented that all would suffer.
Each said they had removed “non-compliant machines”, whatever that means. For it is not the machines that are at fault. It is the oversight that has failed.
Interestingly, each of the CBA’s three main rivals were keen to emphasise that their machines would accept a maximum of $5,000. In effect, that means no single transaction would ever come close to the reporting limit, thereby letting them off the hook.
Commonwealth Bank chief executive Ian Narev is set to unveil a $9.8 billion profit. (ABC News: Marco Catalano)
Clearly, though, the rules around reporting suspicious activities still apply, particularly multiple transactions, and there is no suggestion from authorities of breaches.
Perhaps that is because the CBA, with a deposit limit four times the size of its rivals, was the institution of choice for terrorists and criminal syndicates.
The odds on a royal commission have now shortened dramatically, for the Turnbull Government’s resolve to resist one must now be spent.
Not only that, the banks have lost any moral ground they may have thought they had in opposing the Federal Government levy.
If recent history is anything to go by, the bank and its leaders merely will attempt to pretend it is all a media beat-up and it is business as usual.
There will be the usual contrite statements, the promises of improving systems to ensure there is no repeat, an internal inquiry no less, most likely as early as this week when Mr Narev unveils a $9.8 billion profit.
This time, however, the attack will not be so simply to parry. It is not an angry but disorganised customer base baying for blood. These are issues of national security and the prospect of a concerted legal assault by the Australian Government solicitor.
Hold the bonuses? The fallout is likely to be somewhat larger.