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THE DROP

THE DROP

Like many backpackers, Yeuk Tung Kong travelled to Australia from Hong Kong in search of adventure and to learn English. The former fitness instructor arrived in Sydney in 2013 and had to take low-paid jobs because her English was poor. In 2015, Kong, then 27, applied for a student visa and moved to Perth, where she enrolled at a language school. Money was tight, and she began borrowing from friends to cover her expenses.

One of those friends told Kong she could earn extra money by making deposits on behalf of companies that ran massage businesses in the city. The friend introduced Kong to a man who gave her between A$30,000 (US$23,700) and A$60,000 to bank at a time.

Kong later told police she thought the money was legitimate because she was depositing it in company accounts. She did not think to ask the man, who was in fact connected to a Hong Kong-based crime syndicate, where the money came from or where it was going, according to court documents.

Over the winter of 2015 Kong was driven round Perth to different banks, depositing this cash in the accounts of Australian companies with Hong Kong directors. Within days of each drop, remittance businesses wired it offshore. In two and a half months, Kong laundered A$2.5m for the gang.

Australian police display drugs and cash seized from crime syndicates

She soon got in deeper than just depositing money. When she was arrested in October 2015, she was in possession of almost 2kg of ice, or methamphetamine, which the gang had smuggled into the country inside tea bags posted to her apartment in Perth. A friend in Hong Kong had told her the consignment was biscuits and tins of tea, but Kong later admitted to police she suspected the consignment contained drugs.

Kong was sentenced to seven and a half years in prison in September 2016 after pleading guilty to charges of money laundering and attempted drug possession. So far at least a dozen people, many of whom worked for Hong Kong gangs, have been convicted of laundering money through the Commonwealth Bank of Australia (CBA), the country’s biggest bank by assets.

The money laundering has created a scandal that has engulfed that business and cast a light on the behaviour of the nation’s banking sector and its links with the global drugs trade.
Ian Narev, chief executive of Commonwealth Bank of Australia, attends a hearing at Australia’s parliament

The bank’s problems started with convenience — more specifically, its rollout in May 2012 of intelligent deposit machines (IDMs), which facilitated anonymous cash and cheque deposits by individuals of up to A$20,000. The machines counted the cash and instantly credited the nominated recipient bank account. At the time, numerous transactions could be made on any given day.

The IDMs proved popular with owners of small businesses, who could avoid queueing in branches to make deposits. Between June and November 2012, about A$89m in cash was deposited through IDMs. This had surged to A$5.8bn between January and June 2016.

It was not long before criminals began exploiting the technology. Austrac, the Australian financial intelligence agency, alleges that crime syndicates laundered more than A$75m through CBA’s systems.

In a legal action launched in August 2017, Austrac accused CBA of 53,800 breaches of anti-money-laundering and counter-terrorism laws. “CBA did not take any steps to assess the money laundering/terrorist financing risk posed by IDMs until mid-2015, three years after they were introduced,” alleged Austrac in court documents. “About A$8.9bn in cash was deposited through CBA IDMs before it conducted any assessment.” The civil case is scheduled to go to court this year.

Austrac identified at least five criminal syndicates that took advantage of CBA’s rollout of IDMs. Some of these groups used the system to launder the proceeds of drug crime, including a syndicate that allegedly deposited more than A$21m in cash in 11 CBA bank accounts between February 2015 and May 2016. Eight individuals have been charged with dealing in proceeds of crime, with six of these already convicted, according to Austrac’s statement of claim.

Austrac had been aware of the potential for the country’s banking system to be used for money-laundering by Asian crime syndicates. The regulator “built up profiles that we think are inherently related to different money-laundering activities”, says Bradley Brown, Austrac’s acting deputy chief executive (international and policy). “We monitor the incoming transaction reports for these profiles and provide alerts to analysts, to enable them assess the information.”

One of National Australia Bank’s ATMs

Australia’s three other big banks — ANZ Bank, National Australia Bank and Westpac — had also introduced IDMs but maintained deposit limits below A$10,000. This is the level at which banks must send a threshold transaction report (TTR) to Austrac within 10 business days so the agency can scrutinise money flows for illegal activity.

Austrac alleges that CBA’s failure was broad and facilitated crime syndicates. Some syndicates were aware of the A$10,000 transaction reporting limits and deliberately attempted to organise their deposits through CBA’s IDMs to reduce the risk of detection. Under Australia’s money-laundering laws, banks must monitor for this type of activity — including for deposits under A$10,000 — and make a suspicious matter report (SMR) to Austrac within three business days, or 24 hours if terrorist financing is suspected.

Another Austrac allegation is that CBA, having forgone the upper limit adopted by other banks, failed to provide the regulator with timely TTRs, for more than A$620m in deposits between November 2012 and September 2015 — a total that represented 95 per cent of all IDM transactions. This included reports relating to five customers who had been assessed by CBA as posing a potential risk of terrorism or terrorism financing.

The agency also alleges that CBA identified repeated, suspicious and connected patterns of structured cash deposits linked to this syndicate but failed to prevent the international transfer of about A$9m to accounts in Hong Kong.

Shayne Elliott, chief executive of Australia and New Zealand Banking Group, attends a hearing at Australia’s parliament

The bank has admitted some of the breaches, saying in court documents that it had not assessed the money-laundering risks of IDMs before their rollout. The bank blames a computer-coding error for its failure to adequately monitor 778,370 bank accounts and to send those 53,800 TTRs to Austrac. It admits failing to provide 91 suspicious matter reports on time to Austrac but denies 83 similar allegations. It admits 71 failures related to customer due diligence but denies 19 other allegations of this type.

In November 2017, CBA put a daily limit of A$20,000 on total IDM cash deposits. This February, CBA made a A$375m provision to cover potential legal penalties arising from the case.

Mr Narev is another casualty of the scandal: he has announced his intention to retire in April 2018.

The case has led to years in jail for launderers, a A$4bn fall in CBA’s market capitalisation and the government’s announcement of a public inquiry into misconduct by Australian banks, which held its first hearing in February. But the most striking cost of the international drugs trade is a human one.

Yu Tak-wai, a former ketamine addict in Hong Kong
Yu Tak-wai first took ketamine, which is illegal in Hong Kong and mainland China, while partying in the VIP room of a Chinese nightclub in 2003. Enjoying the feeling of deep relaxation, he continued to consume the drug on nights out but, as his usage increased, he found himself dependent. Ketamine is an anaesthetic generally used in horses that can lead to an out-of-body feeling when taken by humans.

“When I took ketamine I had a feeling of being safe and without it I felt insecure,” says Mr Yu, a 37-year-old former truck driver, over coffee in a Hong Kong café. “At the peak of my addiction I was taking half an ounce [14g] every two days. I would take ketamine to help me sleep at midnight and again first thing in the morning as I woke up.”

In 2014, he finally sought help, talking to a social worker and then being admitted to a Christian-run rehabilitation programme. “Religion helped me to learn wider values and stop being so selfish,” Mr Yu says of his six months in rehab.

He has been clean since then, but it took two years for his health to recover. After being reconciled with his mother, he lives with her in Tseung Kwan O, a densely populated area of Hong Kong, and is looking to become a social worker after completing a peer-counselling diploma. “Sometimes I dream of the old days of taking drugs,” he says, smiling ruefully. “And sometimes I also worry that I might start using again if I face some new problems in life.”

He hopes, however, that support from family and new friends will keep him on the right path. “I don’t want to lose them or this feeling of happiness,” he says.

Australian justice minister Michael Keenan examines gel bra inserts containing concealed crystal methamphetamine

Cross-border money laundering not only greases the wheels of the international drug trade but allows trafficking gangs to legitimise, store and invest the vast — and growing — proceeds of their criminal activities.

Southern China and south-east Asia are manufacturing hubs for methamphetamine and other popular synthetics, including ketamine, but traffickers work hard to export their product to developed markets such as Australia, Japan and the US, where it can fetch much higher prices. A kilogramme of meth, a stimulant, sells for $10,000 in Myanmar, compared with $200,000 in Australia, according to Jeremy Douglas, who oversees the south-east Asia and Pacific operations of the UN Office on Drugs and Crime (UNODC). Mr Douglas estimates — “conservatively” — that the regional market for synthetic drugs such as methamphetamine has grown from $15bn five years ago to $20bn today.

From buying the precursor chemicals needed to produce these synthetics to repatriating the profits from street distribution, organised crime gangs need to move huge amounts of money around Asia. That is where financial hubs such as Hong Kong come in, geographically close to the main production centres and some of the biggest markets for illegal drugs.

“Hong Kong is an important base for moving money,” says Mr Douglas, who is based in UNODC’s regional office in Bangkok. “Organised crime groups piggyback on places where banking services are easily available and there are high volumes of money already moving through the system.”

In addition to moving cash through Hong Kong, drug traffickers have capitalised on the territory’s port and airport — both among the busiest in the world — and its tariff-free status, to ship their products and serve the local market.

Australian law enforcement officials examine a kayak in which a gang was smuggling methamphetamine from China

One international law-enforcement official who works with the Hong Kong government says the territory’s laissez-faire economic policy makes it easy to set up companies, while banking secrecy rules make it hard for the authorities to monitor transactions. “Money launderers, drug gangs and others are always looking around the world to find these vulnerabilities,” he says.

The Hong Kong police say that the government is “vigilant to the risk of being abused by criminals to launder proceeds of crime”. It works with financial regulators, the financial industry and foreign law-enforcement agencies to tackle the twin problems of money laundering and drug trafficking.

The government of Hong Kong, a semi-autonomous Chinese territory, implemented toughened anti-money-laundering regulations from March 1 to dispel concerns that it is lagging behind international standards.

Many global banks have been investing in their own financial crime investigation units after high-profile money-laundering cases involving entities from London-listed banking group HSBC to CBA. Mr Douglas says big banks “seem to be taking these issues relatively seriously”. But he adds that leading financial centres such as Hong Kong and Singapore “don’t want to be too heavy-handed because that would make them less competitive”.

Jeremy Douglas, who oversees the south-east Asia and Pacific operations of the UN Office on Drugs and Crime

A further hurdle is the many local and regional banks in developing Asia which face weaker regulations and put less focus on countering money laundering than their big global peers. Money launderers often make their initial deposits in these less regulated banks before transferring the funds into bigger, international banks. “There is a lot of work to be done to support capacity in the region and get governments to be serious about tackling illicit money flows,” says Mr Douglas.

The money-laundering controversy has posed some difficult questions for CBA and brought it unexpected risks, but it also has ramifications beyond this one company for the whole Australian banking sector.

Under Australian law, CBA could face a maximum penalty of A$18m for each of the alleged 53,800 breaches — linked to its alleged failure to notify Austrac about IDM transactions above A$10,000 — creating the possibility of a near-A$1tn fine.

But CBA argues that the breaches related to a single systems error, and therefore should be treated as a single contravention of the law — which would dramatically reduce any penalty imposed on the bank.

Meanwhile, a shareholder class action lawsuit against CBA alleges that the bank did not comply with its continuous disclosure obligations to inform shareholders about the Austrac investigation. The bank denies all allegations of liability in this case, saying it did not have any price-sensitive information until the regulator officially launched its legal action in August 2017.

“The money-laundering case at CBA suggests a possible lack of resourcing within the risk and compliance functions at the bank,” says Elizabeth Sheedy, associate professor in financial risk management at Macquarie University in Sydney.

“Senior management’s slow response to specific warnings from Austrac and law enforcement also hints at a culture within the institution that prioritises profit over compliance.”

Rejecting these claims, CBA says it has invested more than A$400m in anti-money-laundering and counter-terrorism financing systems. “We take our regulatory obligations extremely seriously and we remain committed to continuously improving our risk and compliance systems and processes,” it says, adding that it is spending an extra A$200m on compliance.

The money-laundering scandal is the latest in a series of public relations disasters for Australia’s banking industry. In November 2017, ANZ Bank and National Australia Bank paid A$100m in total in penalties to settle a case alleging they rigged Australia’s bank bill swap rate — the equivalent of London’s Libor. Westpac and CBA are fighting similar cases in the courts.

Austrac’s money-laundering case against CBA was a catalyst for the government to order a public inquiry into the entire financial services industry. This inquiry is forcing banks to review their past failings and how they have treated customers. It will make recommendations to government about potential legislative or regulatory changes that could strengthen compliance.

It is still unclear whether Austrac’s investigation will precipitate a long-term change in CBA’s behaviour, culture or governance, which will all come into the spotlight in a separate inquiry by the Australian Prudential Regulation Authority. The authority is due to issue a public report within weeks, which could criticise the senior management and board of CBA and recommend further remedial action to ensure a similar scandal does not happen again.

Matt Comyn (left), new chief executive of Commonwealth Bank of Australia, and his predecessor Ian Narev attend a hearing at Australia’s parliament

CBA says it has acted promptly in the wake of the scandal by scrapping bonus payments to executives and board fees for directors. Catherine Livingstone, CBA chairman, has also shaken up the bank’s board and overseen the early retirement of Mr Narev, the chief executive.

However, the bank’s decision to appoint an insider, CBA’s head of retail, Matt Comyn, as the new chief executive, rather than an outside candidate, has attracted criticism. Ms Livingstone has said Mr Comyn was not solely responsible for any failings: “We regard this as an organisation-wide matter for which we all take collective responsibility.”

She added that Mr Comyn had “taken full accountability for addressing the issues, identifying further issues and addressing them… demonstrat[ing] incredible leadership through that process”.

Prof Sheedy is not convinced. “This appointment has raised questions because Mr Comyn was in charge of the retail bank at the time when the money-laundering problems took place,” she says. “His promotion sends a message to staff that it doesn’t matter how much you screw up as long as you make a profit and top performers will be excused on risk and compliance.”

This article was first published by: https://ig.ft.com/
Last modified onTuesday, 17 April 2018 22:26

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