By Robb M. Stewart
MELBOURNE, Australia--Commonwealth Bank of Australia Ltd.'s (CBA.AU) board has axed short-term variable remuneration for its chief executive and senior leadership in the wake of allegations that the country's largest bank breached money-laundering laws by failing in its reporting obligations.
Still, Chairman Catherine Livingstone in a statement said CEO Ian Narev retained the full confidence of the board.
A day earlier, Commonwealth Bank blamed a coding error for tens of thousands of instances of failing to report the required transactions made through its ATMs, accounting for almost all the alleged failures that the government's financial-intelligence agency said opened the way for money laundering by drug dealers and other syndicates.
The number of alleged breaches surprised analysts and investors and has raised the prospect of potentially hefty court-imposed fines and worries about the damage to the bank's brand.
Without directly mentioning the civil proceedings launched last week by the government's financial-intelligence agency, Ms. Livingstone said the board considered risk and reputation impacting the bank when considering remuneration for the just-ended financial year.
"The overriding consideration of the board was the collective accountability of senior management for the overall reputation of the group," she said.
In addition to reducing to zero executive's short-term variable remuneration, Ms. Livingstone said the board reduced nonexecutive director fees by 20% for the current 2018 financial year in recognition of the board's shares accountability.
The Australian Transaction Reports and Analysis Centre, or Austrac, last Thursday filed a civil suit against Commonwealth Bank, alleging it 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$14.2 million).
The allegations relate to the use of the bank's "intelligent deposit machines," a type of ATM that allows anonymous deposits of up to A$20,000 in cash at a time to be automatically credited to accounts. Austrac alleged the bank over three years from 2012 failed to provide timely reports on transactions above the A$10,000 threshold, failed to report suspicious transactions on time or at all and even after it became aware of suspected money laundering of not monitoring customers.
In its court filing, Austrac described several alleged money laundering syndicates that made use of the bank's ATMs. It said delayed reporting had hindered law enforcement and resulted in lost intelligence and evidence, further money laundering and the proceeds from crimes including drug dealing being lost.
Commonwealth Bank said the vast majority of the reporting failures alleged by the agency, about 53,000, relate specifically to a coding error inadvertently introduced in late 2012 with a software upgrade. It said the error became apparent in 2015, and Austrac was notified within a month of it being discovered and the missing reports were provided and the coding error fixed.
David Ellis, an analyst at investment-research firm Morningstar, said the bank would be able to cope with a financial penalty if found guilty in the federal court but reputation damage is meaningful and could reduce customer activity.
"CEO Ian Narev is front and center of management accountability and responsibility," he said.
Remuneration for Mr. Narev and the executives is made up of fixed pay as well as short and long-term variable remuneration that are based on performance against financial and non-financial measures. The bank's result for the year through June is due to be released on Wednesday, and the annual report next week. Mr. Narev received A$12.3 million in the 2016 financial year, including A$2.65 million fixed pay and A$1.43 million in short-term incentives.
Write to Robb M. Stewart at [email protected]