Here’s what you need to know about AML and CTF laws if you invest in The Big 4 Banks

Nick Sundich, October 1, 2024

AML and CTF laws are particularly relevant to a handful of large companies, particularly the Big Four Banks as well as casinos. Here’s what you need to know about them.

What are AML and CTF laws?

In general terms AML (Anti-Money Laundering) and CTF (Counter-Terrorist Financing) are key regulatory frameworks designed to prevent financial institutions, including banks, from being used for illegal activities like money laundering and the financing of terrorism.

Anti-Money Laundering (AML) refers to laws, regulations, and procedures aimed at detecting and preventing the movement of illicit funds. Money laundering typically involves taking money from criminal activities (like drug trafficking or fraud) and disguising its origins to make it appear legitimate.

Counter-Terrorist Financing (CTF) is a set of measures aimed at stopping the flow of funds to terrorist organizations. Similar to AML, CTF ensures that banks and financial institutions aren’t being used as vehicles for financing terrorism.

In Australia, they fall under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 and are enforced by a specialist regulator, AUSTRAC (Australian Transaction Reports and Analysis Centre). The US and European equivalents are the US Financial Crimes Enforcement Network and the European Financial Supervisory Authority respectively.

Why Is It Important for Investors in Bank Stocks to know about?

Because a failure to comply with AML/CTF laws can result in severe penalties, fines, and reputational damage.

If a bank is found to have weak AML/CTF controls, its reputation can be severely damaged. This loss of trust can lead to a drop in stock price, as customers and investors may pull their funds or reduce their exposure to the bank.

This means banks need to invest in advanced technology (like AI-driven compliance tools) and hire specialists to monitor suspicious activities. Complying with AML/CTF regulations is costly and operationally complex. Any failure to manage these operations effectively can lead to financial and legal problems, reducing profitability and increasing operational risk, which may concern investors.

Banks caught violating AML/CTF regulations may face significant fines. For example, large banks have faced billions in penalties for AML violations. But don’t take our word for it. Take these examples.

Our Big 4 Banks have fallen afoul

1. Commonwealth Bank of Australia (CBA) — 2018

In 2018, CBA faced a massive scandal for breaching AML/CTF laws, primarily due to its Intelligent Deposit Machines (IDMs), which allowed anonymous cash deposits that could be transferred internationally without proper oversight. CBA failed to report over 53,000 suspicious transactions to the Australian Transaction Reports and Analysis Centre (AUSTRAC). The bank also failed to monitor accounts suspected of being used for money laundering and terrorism financing. The bank agreed to pay a record-breaking A$700 million fine to AUSTRAC, marking it as one of the largest financial penalties in Australian corporate history. The scandal led to a significant shake-up in the bank’s leadership and substantial reputational damage.

2. Westpac — 2020

Westpac was implicated in one of the largest AML/CTF scandals in Australia’s history, with AUSTRAC accusing the bank of 23 million breaches of AML laws. The violations were related to Westpac’s failure to properly report international funds transfers, some of which were linked to child exploitation risks. The bank failed to monitor and report on suspicious transactions and allowed these transactions to continue for years without action. Westpac agreed to pay A$1.3 billion in fines, the largest civil penalty in Australian history at the time. The scandal caused a leadership crisis, with both the CEO and Chairman resigning. Westpac’s reputation was severely damaged, and the case underscored the importance of robust AML/CTF compliance.

3. National Australia Bank (NAB) — 2021 (Ongoing)

NAB has also come under scrutiny for potential breaches of AML/CTF laws. While it has not faced penalties on the scale of CBA or Westpac, AUSTRAC has been investigating NAB over concerns that its systems for monitoring transactions were inadequate. NAB self-reported potential weaknesses in its compliance systems, leading to AUSTRAC’s investigation. This issue remains ongoing, and the outcome is yet to be fully determined. Although no massive penalties have been levied yet, the investigation has cast a cloud over the bank’s operational risk management.

4. Australia and New Zealand Banking Group (ANZ)

While ANZ has not faced large-scale AML/CTF penalties in recent years like CBA and Westpac, it has been under constant regulatory pressure from AUSTRAC, like all of the Big 4 banks. In 2021, it was revealed that AUSTRAC was monitoring ANZ for potential compliance issues. ANZ has been proactive in tightening its compliance framework and systems, learning from the mistakes of its peers. However, it remains under scrutiny by regulatory authorities to ensure its AML/CTF obligations are being met. No significant fines or penalties have emerged from ANZ in this area, but ongoing scrutiny reflects the continuous pressure on the Big 4 banks to maintain regulatory compliance.

The penalties imposed on CBA and Westpac are clear examples of how failure to comply with AML/CTF regulations can lead to massive financial liabilities. The scandals have led to leadership changes and reputational damage, which affects not only stock prices but also customer trust and business operations.

Casino stocks can be impacted too

Regulators do not just watch major banks. They watch minor banks and casinos too. SkyCity (ASX:SKC) was last week fined NZ$4.16m for historic breaches of New Zealand’s laws. and AML/CTF law breaches have been just one of many problems that Star Entertainment (ASX:SGR) had that got it into the mess it is in now. It was fined $150m in February 2023 for non-compliance.

Conclusion

AML (Anti-Money Laundering) and CTF (Counter-Terrorist Financing) laws are one of the biggest operational headaches for banking stocks, and breaches of them are amongst the biggest risks. It is important to be aware of this.